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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Security Capital Group Incorporated
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]
SECURITY CAPITAL
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Security Capital Group Incorporated ("Security Capital") at the offices of
Security Capital, 125 Lincoln Avenue, Santa Fe, New Mexico 87501, at 9:00 a.m.,
local time, on Friday, January 12, 2001.
The special meeting relates to our previously announced agreement with
Security Capital U.S. Realty ("U.S. Realty") to combine the businesses of
Security Capital and U.S. Realty. Under the terms of the agreement, Security
Capital will issue and shareholders of U.S. Realty will receive 1.15 shares of
Security Capital Class B common stock for each outstanding U.S. Realty share,
and Security Capital will acquire the assets and assume or provide the
necessary funds to satisfy the liabilities of U.S. Realty. In order to effect
the transaction, you will be asked at the special meeting to consider and vote
upon a proposal to approve the issuance of shares of Security Capital Class B
common stock in accordance with the terms of the transaction agreement.
We believe that the transaction should provide important benefits for you,
our shareholders, and your Board of Directors has determined that the terms of
the transaction agreement are advisable, fair to, and in the best interests of,
Security Capital and its shareholders. ACCORDINGLY, YOUR BOARD UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO ISSUE SHARES OF SECURITY CAPITAL
CLASS B COMMON STOCK IN THE TRANSACTION.
The accompanying notice of meeting and proxy statement explain the proposed
transaction and provide specific information concerning the special meeting and
the voting of your shares. Please read these materials carefully.
We cannot complete the transaction without the affirmative vote of at least
a majority of the votes cast by holders of Security Capital Class A common
stock, Security Capital Class B common stock and Security Capital Series B
preferred stock, voting as a single class, provided that the total votes cast
represent over 50% of the voting power of all shares entitled to vote on the
proposal. Whether or not you plan to be present at the special meeting, please
sign and return your proxy as soon as possible in the enclosed self-addressed
envelope so that your vote will be recorded. You can also authorize a proxy to
vote your shares of Security Capital stock through the internet or by
telephone.
Very truly yours,
/s/ William D. Sanders
William D. Sanders
Chairman and Chief Executive Officer
This letter, the notice of meeting and the joint proxy statement/prospectus are
dated December 8, 2000. We are first mailing these documents to shareholders on
or about December 12, 2000.
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[LOGO]
SECURITY CAPITAL
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 12, 2001
We will hold a special meeting of shareholders of Security Capital Group
Incorporated, a Maryland corporation ("Security Capital"), at the offices of
Security Capital, 125 Lincoln Avenue, Santa Fe, New Mexico 87501, at 9:00 a.m.,
local time, on Friday, January 12, 2001. At the meeting, we will ask you:
1. To approve the issuance of up to 86,116,552 shares of Security
Capital Class B common stock to Security Capital U.S. Realty ("U.S.
Realty") in accordance with the terms of the transaction agreement, dated
as of September 26, 2000, among U.S. Realty, Security Capital and a wholly
owned subsidiary of Security Capital (resulting in up to 51,154,616 new
shares being issued, since U.S. Realty would distribute 34,961,936 of the
shares it receives to subsidiaries of Security Capital that are U.S. Realty
shareholders, which shares will be cancelled upon receipt); and
2. To transact any other business as may properly come before the
special meeting or any adjournment or postponement of the special meeting.
We describe these matters more fully in the joint proxy statement/prospectus
accompanying this notice. We have attached a copy of the transaction agreement
as Appendix A to the joint proxy statement/prospectus.
You are entitled to notice of and to vote at the meeting or any adjournment
only if you were a shareholder of record at the close of business on December
8, 2000. If you are a registered owner and plan to attend the meeting in
person, you may request an admission ticket by marking the attendance box on
your attached proxy card. Beneficial owners whose ownership is registered under
another party's name and who plan to attend the 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: Lucinda G.
Marker, Vice President and Assistant Secretary, Security Capital Group
Incorporated, 125 Lincoln Avenue, Santa Fe, New Mexico 87501. We will admit
registered owners and beneficial owners who do not present valid admission
tickets at the meeting or who have not pre-registered only upon verification of
ownership at the registration counter at the meeting.
Whether or not you plan to attend the meeting in person, WE URGE YOU TO VOTE
YOUR SHARES BY MARKING, SIGNING, DATING AND RETURNING THE ATTACHED PROXY CARD
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. You may revoke your proxy at
any time before we vote it at the meeting, and sending your proxy will not
affect your right to attend the meeting and vote in person.
By Order of the Board of Directors,
/s/ Jeffrey A. Klopf
Jeffrey A. Klopf
Senior Vice President and Secretary
December 8, 2000
YOUR VOTE IS IMPORTANT, PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN YOUR PROXY
IN THE ENCLOSED ENVELOPE, OR SUBMIT YOUR VOTE BY TELEPHONE OR THE INTERNET.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION.............................. 1
SUMMARY.................................................................. 5
The Companies.......................................................... 5
Shareholder Approvals.................................................. 6
Recommendations to Shareholders; Fairness of the Transaction........... 7
Opinions of Financial Advisors......................................... 7
The Transaction........................................................ 8
Interests of Certain Persons in the Transaction........................ 10
Conditions to the Transaction.......................................... 10
Termination of the Transaction Agreement............................... 10
Regulatory Matters..................................................... 11
Appraisal Rights....................................................... 11
Income Tax Consequences to U.S. Realty Shareholders.................... 11
Accounting Treatment................................................... 11
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION.................. 12
Summary Selected Historical Financial Information...................... 12
Unaudited Selected Pro Forma Condensed Consolidated Financial
Information........................................................... 18
COMPARATIVE PER SHARE INFORMATION........................................ 19
Historical and Pro Forma Per Share Data................................ 19
Comparative Per Share Market Price and Dividend Information............ 19
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................ 22
RISK FACTORS............................................................. 23
Risk Factors Relating to the Transaction............................... 23
Risk Factors Relating to the Business of Security Capital and to the
Ownership of Security Capital Stock................................... 24
THE TRANSACTION.......................................................... 26
Background of the Transaction.......................................... 26
Recommendations of the U.S. Realty Special Committee and of the Full
U.S. Realty Board; Fairness of the Transaction........................ 31
U.S. Realty's Reasons for the Transaction.............................. 32
Opinion of Merrill Lynch, Financial Advisor to the U.S. Realty Special
Committee............................................................. 34
Recommendation of the Security Capital Board of Directors.............. 38
Security Capital's Reasons for the Transaction; Alternatives
Considered............................................................ 39
Factors Considered by the Security Capital Board of Directors.......... 40
Opinion of Security Capital's Financial Advisor........................ 41
Certain U.S. Realty Projections........................................ 48
Interests of Certain Persons in the Transaction........................ 50
Certain Agreements between Security Capital and U.S. Realty............ 51
Transaction Financing.................................................. 51
SECURITY CAPITAL SPECIAL MEETING......................................... 53
Date, Time and Place of the Security Capital Special Meeting........... 53
What You Will Vote On.................................................. 53
Shareholder Record Date for the Special Meeting........................ 53
Quorum................................................................. 53
Vote Required for Approval............................................. 53
Voting Your Shares..................................................... 54
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How to Revoke a Proxy.................................................. 54
Cost of Solicitation................................................... 55
U.S. REALTY EXTRAORDINARY GENERAL MEETING................................ 56
Date, Time and Place of the U.S. Realty Extraordinary Meeting.......... 56
What You Will Vote On.................................................. 56
Shareholder Record Date for the Extraordinary Meeting.................. 57
Quorum................................................................. 57
Vote Required for Approval............................................. 57
Voting Your Shares..................................................... 57
What You Must Do to Receive Cash Instead of Security Capital Class B
Common Stock.......................................................... 58
How to Revoke a Proxy.................................................. 58
Cost of Solicitation................................................... 59
THE TRANSACTION AGREEMENT................................................ 60
General................................................................ 60
The Purchase and Sale of U.S. Realty's Assets.......................... 60
The Liquidation of U.S. Realty......................................... 61
Treatment of U.S. Realty Debt.......................................... 62
Proxy Statement and Registration Statement............................. 62
Board Recommendations and Actions; Voting of Shares.................... 62
Representations and Warranties......................................... 63
Interim Business Operations............................................ 64
No Solicitation by U.S. Realty......................................... 65
Public Announcements................................................... 65
Efforts................................................................ 65
Indemnification; Directors' and Officers' Insurance.................... 65
Certain Litigation..................................................... 66
Listing of Security Capital Stock...................................... 66
Additional Covenants of U.S. Realty.................................... 66
Additional Covenants of Security Capital............................... 66
Treatment of Incentive Arrangements.................................... 67
Conditions to Completion of the Transaction............................ 67
Termination............................................................ 68
Expenses............................................................... 68
Governing Law.......................................................... 69
Amendment and Waiver................................................... 69
REGULATORY MATTERS....................................................... 70
United States Antitrust Compliance..................................... 70
Certain Netherlands Matters............................................ 70
Luxembourg Supervisory Authority....................................... 70
CERTAIN TAX CONSEQUENCES OF THE TRANSACTION.............................. 71
United States Federal Income Tax Considerations........................ 71
Luxembourg Income Tax Considerations................................... 74
German Tax Considerations.............................................. 77
The Netherlands Tax Considerations..................................... 79
ACCOUNTING TREATMENT..................................................... 80
DESCRIPTION OF BUSINESS OF SECURITY CAPITAL.............................. 81
General................................................................ 81
Policies With Respect to Certain Activities............................ 81
Properties............................................................. 83
Tax Treatment of Security Capital and Its Security Holders............. 83
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DESCRIPTION OF BUSINESS OF U.S. REALTY................................... 84
General................................................................ 84
Strategy............................................................... 84
Overview and Company Objective......................................... 84
Competition............................................................ 84
Overview of Strategic Investment Positions............................. 85
Operating Advisor...................................................... 87
Quarterly Financial Information (unaudited)............................ 88
Management's Discussion and Analysis of Financial Condition and Results
of Operations
of U.S. Realty........................................................ 88
Quantitative and Qualitative Disclosures About Market Risks............ 99
Sensitivity Analysis................................................... 100
Agreements with Strategic Investee Companies........................... 102
Certain Legal Information.............................................. 106
NO DISSENTERS' RIGHTS OF APPRAISAL....................................... 106
Security Capital....................................................... 106
U.S. Realty............................................................ 106
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION......... 107
OWNERSHIP OF U.S. REALTY SHARES.......................................... 117
DESCRIPTION OF SECURITY CAPITAL STOCK.................................... 118
General................................................................ 118
Authorized Capital Stock............................................... 118
Security Capital Class A Common Stock.................................. 118
Security Capital Class B Common Stock.................................. 118
Security Capital Series B Cumulative Convertible Redeemable Voting
Preferred Stock....................................................... 118
Preferred Share Purchase Rights and Series A Junior Participating
Preferred Stock....................................................... 120
COMPARISON OF RIGHTS OF SHAREHOLDERS..................................... 123
General................................................................ 123
Board of Directors..................................................... 123
Number of Directors.................................................... 123
Removal of Directors................................................... 123
Vacancies.............................................................. 124
Standard of Conduct for Directors...................................... 124
Power to Issue Additional Stock........................................ 124
Dividends and Distributions............................................ 124
Shareholder Rights Plan................................................ 125
Special Meetings....................................................... 125
Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals............................................................. 125
Inspection Rights of Stockholders...................................... 126
Amendments to Charter Documents........................................ 126
Amendments to Bylaws................................................... 126
Mergers, Acquisitions and Other Transactions........................... 126
Extraordinary Transactions With Interested Shareholders................ 127
Control Share Acquisitions............................................. 128
Liability Exculpation and Indemnification of Directors and Officers.... 129
Stock Ownership Limitations............................................ 130
Anti-takeover Effect of Certain Provisions of Maryland Law and Security
Capital Charter and Bylaws............................................ 130
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STOCK EXCHANGE LISTING AND DELISTING.................................... 131
EXPERTS................................................................. 131
LEGAL MATTERS........................................................... 132
SUBMISSION OF SHAREHOLDER PROPOSALS..................................... 132
Security Capital...................................................... 132
U.S. Realty........................................................... 133
WHERE YOU CAN FIND MORE INFORMATION..................................... 133
INDEX TO FINANCIAL STATEMENTS........................................... F-1
APPENDIX A The Transaction Agreement.................................... A-1
APPENDIX B Fairness Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................................... B-1
APPENDIX C Fairness Opinion of Goldman, Sachs & Co...................... C-1
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
Q: WHY ARE THE COMPANIES PROPOSING TO COMBINE THEIR BUSINESSES?
A: We believe that the transaction between Security Capital Group Incorporated
(which we refer to in this document as Security Capital) and Security
Capital U.S. Realty (which we refer to in this document as U.S. Realty) will
increase value for both Security Capital shareholders and U.S. Realty
shareholders through:
. the creation of a company with a simplified structure and a stronger
market profile for investors;
. the elimination of the complex structural relationship that exists
between the two companies and the transfer of all assets into a single
company, which should make it easier for investors to understand the
company;
. increased financial and operational flexibility for the combined
businesses and enhanced liquidity for the shareholders; and
. the enhancement of opportunities to improve shareholder value through
additional stock repurchases or future transactions that monetize or
consolidate existing businesses.
Q: WHAT ARE THE POSSIBLE DETRIMENTS TO THE TRANSACTION?
A: The number of shares of Security Capital stock that U.S. Realty shareholders
will receive for their U.S. Realty shares is fixed at 1.15. As a result, the
shares of Security Capital Class B common stock that U.S. Realty
shareholders may receive in the transaction may have a greater or lesser
value than the value contemplated at the time the transaction agreement was
signed because of fluctuations in the market price of shares of Security
Capital Class B common stock. Also, there is a risk that the benefits sought
in the transaction will not be obtained.
Q: WHAT WILL U.S. REALTY SHAREHOLDERS RECEIVE IF THE TRANSACTION IS APPROVED?
A: Unless you, as a U.S. Realty shareholder, vote AGAINST the transaction and
validly elect to receive cash instead of Security Capital shares, if the
transaction is approved and consummated, you will receive 1.15 shares of
Security Capital Class B common stock for each U.S. Realty share you own. We
will pay cash in U.S. dollars in lieu of any fractional shares of Security
Capital Class B common stock. If you, as a U.S. Realty shareholder, vote
AGAINST the transaction and validly elect to receive cash instead of shares
of Security Capital Class B common stock, if the transaction is approved and
consummated, you will receive an amount of cash in U.S. dollars equal to
1.15 multiplied by the average of the daily high and low per share sales
prices of the Security Capital Class B common stock on the New York Stock
Exchange during the fifteen trading days ending on January 5, 2001 (the
sixth trading day before the U.S. Realty extraordinary general meeting) for
each U.S. Realty share you own. We will subtract from the cash payment any
taxes that we must withhold under applicable laws. Your U.S. Realty shares
will be cancelled as part of the liquidation of U.S. Realty under the plan
of liquidation, as described below. Depending on your election, you will
receive either Security Capital Class B common stock or cash in the
transaction. You will not receive both except for cash in lieu of fractional
shares.
If the total amount of cash required for distribution to U.S. Realty
shareholders who vote against the transaction and validly elect to receive
cash instead of Security Capital shares exceeds $200 million in the
aggregate, Security Capital will not be required to complete the
transaction and may abandon the transaction entirely.
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Q: WHAT IF I HOLD U.S. REALTY AMERICAN DEPOSITARY SHARES INSTEAD OF DIRECTLY
OWNING U.S. REALTY SHARES?
A: If you hold American depositary shares, each of which represents one U.S.
Realty share, you will receive the same transaction consideration as holders
that hold U.S. Realty shares directly.
Except where we specifically state otherwise in this joint proxy
statement/prospectus, our discussion of matters relating to U.S. Realty
shares also applies to U.S. Realty American depositary shares.
Q: WHAT DO I NEED TO DO TO RECEIVE CASH INSTEAD OF SECURITY CAPITAL SHARES?
A: If you are a U.S. Realty shareholder, your proxy card contains a special box
that you must check if you wish to receive cash instead of Security Capital
shares. To make a valid election to receive cash, you must also vote AGAINST
the transaction in the portion of the proxy card where you specify your
vote. Alternatively, if you wish to attend the extraordinary general meeting
and are a record holder, you may make a valid cash election at the meeting
by voting "against" the transaction at the meeting and checking the
appropriate cash election box on your ballot.
In order to assure any necessary tax withholding and to verify the total
amount of cash consideration, if you validly elect to receive cash by
either of the above methods you must also complete and return the enclosed
letter of transmittal before or at the extraordinary general meeting and,
if you hold physical share certificates, attach your certificate(s) to the
letter of transmittal. We urge you to return the letter of transmittal (and
share certificates) at the same time as you return your proxy card.
Q: WHEN DO YOU EXPECT TO COMPLETE THE TRANSACTION?
A: We are working to complete the transaction as quickly as possible. We expect
to complete the transaction promptly following the required shareholder
approvals. However, we cannot assure you that we will then complete the
transaction.
Q: WHO IS ENTITLED TO VOTE AT THE SHAREHOLDER MEETINGS?
A: For Security Capital, only holders of record of Security Capital voting
stock at the close of business on December 8, 2000 may vote at the special
meeting. For U.S. Realty, only holders of record of U.S. Realty shares at
the close of business on December 8, 2000 may vote at the extraordinary
general meeting. In either case, if you own shares on the record date
through a bank, broker or other record holder, you may vote in person at
your shareholder meeting only if you obtain a proxy from the record holder
with respect to your shares.
If you hold U.S. Realty American depositary shares, the depositary will
vote your shares at the meeting. Please follow the instructions you have
received from the depositary and deliver your proxy and letter of
transmittal at least six days before the meeting to have your vote counted
or valid cash election made.
If you are a participant in Security Capital's 401(k) Plan, you may vote at
Security Capital's special meeting.
Q: WHEN AND WHERE IS THE MEETING?
A: Security Capital will hold its special meeting on Friday, January 12, 2001,
at 9:00 a.m., local time, at the offices of Security Capital, 125 Lincoln
Avenue, Santa Fe, New Mexico 87501.
U.S. Realty will hold its extraordinary general meeting on Tuesday, January
16, 2001, at 3:00 p.m., local time, at 12 rue Jean Engling, Grand Salon
Europe, 1466 Luxembourg.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in this
joint proxy statement/prospectus, please respond by completing, signing and
dating your proxy card and returning it in the enclosed envelope. If you are
a U.S. Realty shareholder and you wish to receive cash instead of shares of
Security Capital Class B common stock, you must vote AGAINST the transaction
and you must validly elect to receive cash on your proxy card or ballot. You
must also complete and return the enclosed letter of transmittal before or
at the
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extraordinary general meeting and, if you hold physical share certificates,
attach your certificate(s) to the letter of transmittal. If you are a
Security Capital shareholder, you may authorize a proxy via the internet or
by telephone to vote your shares instead by following the instructions set
forth on your proxy card.
Q: WHAT IF I DON'T VOTE?
A: Security Capital Shareholders: Except as described below, if you fail to
respond or if you respond and abstain from voting, it will have no effect on
the proposal to issue shares of Security Capital Class B common stock in the
transaction, so long as at least 50% of the votes entitled to be cast are
voted at the meeting, since the vote required to approve the proposal is
based on the number of votes cast. If you respond and do not indicate your
voting preference on the proxy card, we will count your proxy as a vote in
favor of the proposal to issue Security Capital shares in the transaction.
If you hold your shares in an account at a brokerage firm or bank, you must
instruct the firm or bank how to vote your shares. Your broker or bank will
vote your shares only if you provide instructions on how to vote by
following the procedures provided to you by your broker.
If you are a participant in Security Capital's 401(k) Plan and you do not
vote your Security Capital common stock held by the 401(k) Plan, the
administrator for Security Capital's 401(k) Plan will instruct the trustee
under the 401(k) Plan to vote your Security Capital common stock in
proportion to the votes received from other participants.
U.S. Realty Shareholders: If you fail to respond, it will have no effect on
approval or disapproval of the transaction agreement and the transactions
and matters contemplated thereby, so long as a majority of the outstanding
shares are otherwise present or represented at the meeting, since the vote
required is based on the number of shares present or represented. IF YOU
PROPERLY EXECUTE AND RETURN THE PROXY CARD AND DO NOT INDICATE YOUR VOTING
PREFERENCE ON THE PROXY CARD, WE WILL ASSUME YOU APPROVE AND VOTE YOUR
SHARES IN FAVOR OF APPROVAL OF THE TRANSACTION AGREEMENT AND THE
TRANSACTIONS AND MATTERS CONTEMPLATED THEREBY. If you respond and abstain
from voting, it will have the same effect as voting against approval of the
transaction agreement and the transactions and matters contemplated
thereby, since your shares will be counted as present but will not be voted
in favor of approval of the transactions and matters contemplated thereby.
If the transaction agreement and the transactions and matters contemplated
thereby
are approved, however, in each of the above circumstances, you will be
deemed to have elected to receive Security Capital Class B common stock
rather than cash.
Q: CAN I CHANGE MY VOTE AFTER I HAVE DELIVERED MY PROXY?
A: Yes, except that, as more fully described in the section entitled "U.S.
Realty Extraordinary General Meeting--What You Will Vote On," the form of
proxy we are soliciting from U.S. Realty shareholders provides that it may
not be revoked following the approval and consummation of the sale of U.S.
Realty's assets to Security Capital. Subject to this important aspect of the
transaction, you can change your vote at any time before we vote your proxy
at your company's shareholder meeting. You can do this in one of three ways.
First, you can revoke your proxy. Second, you can submit a new proxy. If you
are a record holder and choose either of these two methods, you must submit
your notice of revocation or your new proxy to the Secretary of Security
Capital or the Vice President of U.S. Realty, as appropriate, before we vote
your proxy as to any matters at the shareholder meeting. If you hold your
shares through an account at a brokerage firm or bank, you should contact
your brokerage firm or bank to change your vote. If you hold American
depositary shares, you should contact the depositary to change your vote, at
the address on the voting instruction card you have been provided by the
depositary at least six days before the meeting to change your vote. Third,
you can attend the shareholder meeting and vote in person if you are the
record holder.
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Q: WHOM SHOULD I CALL IF I HAVE QUESTIONS?
A: If you have questions about the transaction or how to submit your proxy, or
if you need additional copies of this joint proxy statement/prospectus or
the enclosed proxy card, you should contact:
. if you are a Security Capital shareholder:
Georgeson Shareholder
Communications Inc.
Banks & Brokers Call Collect:
(212) 440-9800
All Others Call Toll Free: (800) 223-2064
or
Lucinda G. Marker
Vice President and Assistant Secretary
Security Capital Group Incorporated
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Telephone: (505) 820-8209
. if you are a U.S. Realty shareholder:
Georgeson Shareholder
Communications Inc.
17 State Street, 10th Floor
New York, New York 10004
Banks & Brokers Call Collect:
(212) 440-9800
All Others Call Toll Free: (800) 223-2064
or (in Europe)
Georgeson Shareholder Communications Ltd.
In Germany call toll free: 0 800 1800 305 All others call collect: (+44)
20 7335 8703
or
Laura L. Hamilton
Security Capital U.S. Realty
25b, boulevard Royal
L-2449 Luxembourg
Telephone: (+352) (4637562008)
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SUMMARY
This summary highlights selected information about the transaction and may
not contain all of the information that is important to you. To understand the
transaction better, you should read this entire document carefully, as well as
those additional documents to which we refer you. See "Where You Can Find More
Information." Each item in this summary refers to the page or pages where we
more fully discuss that subject. References in this joint proxy
statement/prospectus to "$" refer to U.S. dollars, unless otherwise noted.
THE COMPANIES
SECURITY CAPITAL GROUP INCORPORATED (see Page 81)
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Telephone: (505) 982-9292
website: http://www.securitycapital.com
Security Capital is an international real estate research, investment and
operating management company. Security Capital operates its businesses through
two divisions: the Capital Division, which invests in high-growth real estate
operating companies, and the Financial Services Division, which provides
capital markets and capital management services primarily to Security Capital
and its affiliates. Security Capital is incorporated in the State of Maryland,
United States of America.
SECURITY CAPITAL U.S. REALTY (see Page 84)
25b, boulevard Royal
L-2449 Luxembourg
Telephone: (+352) (4637561)
website: http://www.sc-usrealty.com
U.S. Realty is a European-based real estate company that holds, through its
subsidiary Security Capital Holdings S.A. (which we refer to as SC-Holdings),
significant strategic positions in leading real estate operating companies
based in the United States.
U.S. Realty, which was incorporated in July 1995 in Luxembourg as a Societe
d'Investissement a Capital Variable (or SICAV) and converted to a Societe
d'Investissement a Capital Fixe (or SICAF) in June 1997, has the following
strategic investments:
. CarrAmerica Realty Corporation, a publicly held national U.S. company
focused on providing office space to leading companies.
. City Center Retail Trust, a private start-up real estate operating
company focused on shopping centers. City Center Retail Trust is
evaluating strategic alternatives, which could include the sale of a
portion or all of its assets.
. CWS Communities Trust, a private start-up company focused on acquiring,
developing and owning manufactured housing communities in selected
target markets throughout the United States.
. Regency Realty Corporation, a publicly held national U.S. company
focused on grocery-anchored neighborhood infill shopping centers.
. Storage USA, Inc., a publicly held national U.S. company focused on
self-storage facilities.
. Urban Growth Property Trust, a private start-up company focused on
acquiring, developing and owning strategically located parking
facilities in key urban infill locations in selected target markets
throughout the United States. Urban Growth Property plans to merge in
early 2001 with Interparking
5
<PAGE>
Incorporated, the property manager for Urban Growth Property's
operations, following which Urban Growth Property will no longer be a
REIT but should have greater control over its assets and the opportunity
to extend its activities into parking facility management. The combined
parking company will continue to be a subsidiary of SC-Holdings.
Security Capital U.S. Realty Management Holdings S.A., a Luxembourg
corporation and a wholly-owned subsidiary of Security Capital, acts as
operating advisor for U.S. Realty. As operating advisor, it provides U.S.
Realty with advice on all investment and operating matters and receives a fee
for those services.
Security Capital through its subsidiaries owns 40.6% of the outstanding
voting securities of U.S. Realty.
SHAREHOLDER APPROVALS (see Pages 53 and 57)
Approval of U.S. Realty Shareholders. U.S. Realty shareholders will vote on
approval of the transaction agreement and the transactions and matters
contemplated thereby, including the sale of U.S. Realty's assets described
below to a subsidiary of Security Capital, and the plan of liquidation for U.S.
Realty and appointment of SC Transaction Corporation as liquidator for the
liquidation of U.S. Realty. Approval of these matters requires the affirmative
vote of at least two-thirds of the U.S. Realty shares present or represented at
the extraordinary general meeting, provided that a quorum consisting of at
least a majority of the outstanding shares is present or represented. If that
majority quorum is not present at the time the extraordinary general meeting is
first convened, U.S. Realty will adjourn the meeting for at least 30 days and,
upon resumption of the meeting, there will be no quorum requirement.
As of the record date for the U.S. Realty extraordinary general meeting,
wholly-owned subsidiaries of Security Capital owned 30,401,683 U.S. Realty
shares (or approximately 40.6% of the total voting power of the U.S. Realty
shares entitled to vote at the extraordinary general meeting). Security Capital
has agreed in the transaction agreement to cause its subsidiaries to vote those
shares FOR the transaction agreement and the transactions and matters
contemplated thereby. As of the record date for the U.S. Realty extraordinary
general meeting, the directors and executive officers of U.S. Realty owned and
were entitled to vote 27,505 U.S. Realty shares (or approximately .04% of the
total voting power of the U.S. Realty shares entitled to vote at the
extraordinary general meeting).
Approval of Security Capital's Shareholders. Security Capital shareholders
will vote on a proposal to approve the issuance of up to 86,116,552 shares of
Security Capital Class B common stock in the transaction (51,154,616 net new
shares issued, after the cancellation of 34,961,936 Security Capital Class B
shares that U.S. Realty will distribute in the transaction to subsidiaries of
Security Capital that are U.S. Realty shareholders). Approval of the proposal
requires the affirmative vote of at least a majority of the votes cast by
holders of Security Capital Class A common stock, Security Capital Class B
common stock and Security Capital Series B preferred stock, voting as a single
class, provided that the total vote cast represents over 50% of the voting
power of all shares entitled to vote on the proposal. Each share of Security
Capital Class A common stock is entitled to cast one vote. Each share of
Security Capital Class B common stock is entitled to cast .005 of a vote. Each
share of Security Capital Series B preferred stock is entitled to cast .0641 of
a vote. Holders of Security Capital Class A common stock, Security Capital
Class B common stock and Security Capital Series B preferred stock together are
entitled to cast a total of 1,305,885 votes at the special meeting.
As of the record date for the Security Capital special meeting, the
directors and executive officers of Security Capital and their affiliates owned
and were entitled to vote 121,401 shares of Security Capital Class A common
stock, 367,439 shares of Security Capital Class B common stock and 257,642
shares of Series B preferred stock (or 10.7% of the total voting power of the
Security Capital shares entitled to vote on the proposal to issue shares of
Security Capital Class B common stock in the transaction).
6
<PAGE>
RECOMMENDATIONS TO SHAREHOLDERS; FAIRNESS OF THE TRANSACTION (see Pages 31 and
38)
U.S. Realty. The U.S. Realty board of directors believes that the terms of
the transaction agreement are advisable, fair to, and in the best interests of,
the shareholders of U.S. Realty (other than Security Capital and its
affiliates), and unanimously recommends that you vote FOR the transaction
agreement and the transactions and matters contemplated thereby.
In addition, because two members of the U.S. Realty board are or were
affiliated with Security Capital at the time the transaction was considered by
the U.S. Realty board, and because U.S. Realty's articles of incorporation
require the independent directors of U.S. Realty to approve any transaction
between U.S. Realty and Security Capital, the U.S. Realty board established a
special committee of three independent directors to review, evaluate and
negotiate the proposed transaction. See the description of the background of
the transaction under "The Transaction--Background of the Transaction." None of
the members of the special committee is affiliated with or employed by Security
Capital or U.S. Realty (except in their positions as directors), except that
each member is also a director of Security Capital European Realty, an
affiliate of Security Capital, one member beneficially owns 38,900 shares of
Security Capital Class B common stock, and another member beneficially owns
15.5 shares of Security Capital Class A common stock and approximately $12,500
of Security Capital debentures. The special committee, like the full U.S.
Realty board, believes that the terms of the transaction agreement are
advisable, fair to, and in the best interests of, the shareholders of U.S.
Realty (other than Security Capital and its affiliates). The special committee
negotiated and approved the transaction agreement and recommended that the full
U.S. Realty board approve the transaction agreement. You should also refer to
the factors that the special committee and the U.S. Realty board of directors
considered in determining whether to approve, accept and declare advisable the
transaction discussed under "The Transaction--Recommendations of the U.S.
Realty Special Committee and of the Full U.S. Realty Board; Fairness of the
Transaction."
Security Capital. The Security Capital board of directors believes that the
terms of the transaction agreement are advisable, fair to, and in the best
interests of, Security Capital and its shareholders. The Security Capital board
unanimously recommends that you vote FOR the proposal to issue shares of
Security Capital Class B common stock in the transaction.
OPINIONS OF FINANCIAL ADVISORS (see Pages 34 and 41)
Opinion of the Financial Advisor to the U.S. Realty Special Committee. In
deciding to approve the transaction, the special committee of independent
directors of the U.S. Realty board considered, among other matters, the oral
opinion confirmed in writing as of September 26, 2000 of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, that, as of the date of the opinion and based on
and subject to the various factors and assumptions stated in the opinion, the
consideration to be received by U.S. Realty shareholders (other than Security
Capital and its affiliates) pursuant to the transaction agreement was fair to
such shareholders from a financial point of view. THE OPINION DOES NOT
CONSTITUTE A RECOMMENDATION BY MERRILL LYNCH AS TO HOW SHAREHOLDERS SHOULD VOTE
OR AS TO WHETHER A SHAREHOLDER SHOULD VOTE AGAINST APPROVAL OF THE TRANSACTION
AND ELECT TO RECEIVE CASH FOR HIS SHARES. WE ATTACH THE FULL TEXT OF MERRILL
LYNCH'S WRITTEN OPINION, WHICH SETS FORTH THE VARIOUS ASSUMPTIONS AND
QUALIFICATIONS CONSIDERED, AS APPENDIX B TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. U.S. REALTY URGES ITS SHAREHOLDERS TO READ THE OPINION OF
MERRILL LYNCH IN ITS ENTIRETY.
Opinion of Security Capital's Financial Advisor. In deciding to approve the
transaction, the Security Capital board of directors considered, among other
matters, the oral opinion of Goldman, Sachs & Co. (subsequently confirmed by a
written opinion dated September 26, 2000), that, as of the date of the opinion
and subject to the matters set forth in the opinion, the consideration to be
paid by Security Capital in connection with the transactions contemplated by
the transaction agreement was fair from a financial point of view to Security
Capital. THE OPINION OF GOLDMAN SACHS DOES NOT CONSTITUTE A RECOMMENDATION AS
TO HOW ANY
7
<PAGE>
HOLDER OF SECURITY CAPITAL VOTING STOCK SHOULD VOTE WITH RESPECT TO THE
PROPOSAL TO ISSUE SHARES OF SECURITY CAPITAL CLASS B COMMON STOCK IN THE
TRANSACTION. WE ATTACH THE FULL TEXT OF GOLDMAN SACHS' WRITTEN OPINION, DATED
SEPTEMBER 26, 2000, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH
THE OPINION, AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. SECURITY
CAPITAL URGES ITS SHAREHOLDERS TO READ THE OPINION OF GOLDMAN SACHS IN ITS
ENTIRETY.
THE TRANSACTION (see Page 26)
In light of Luxembourg legal requirements, the transaction is structured as
a two-step transaction. Security Capital will first purchase assets from U.S.
Realty in exchange for shares of Security Capital Class B common stock and
cash. U.S. Realty will use a portion of that cash to satisfy and discharge the
Indenture under which U.S. Realty issued its convertible notes. Second, U.S.
Realty will be liquidated and as part of the liquidation will distribute to
U.S. Realty shareholders all of the Security Capital Class B common stock and
the remaining cash it received as consideration for the sale of its assets.
Subject to all of the conditions to closing described below, we expect to
complete both steps promptly following the required shareholder approvals.
THE PURCHASE AND SALE OF U.S. REALTY'S ASSETS
As the first step in the transaction, SC Realty Incorporated, a Nevada
corporation and indirect wholly-owned subsidiary of Security Capital, will
purchase in exchange for shares of Security Capital Class B common stock and
cash:
. all of the outstanding shares of SC-Holdings (other than one share,
which is owned by a subsidiary of Security Capital);
. U.S. Realty's interest in an agreement between U.S. Realty and SC-
Holdings under which U.S. Realty has made cash advances to SC-Holdings;
and
. any cash on hand.
The number of shares of Security Capital Class B common stock delivered to
U.S. Realty will be equal to the product of 1.15 multiplied by the number of
outstanding U.S. Realty shares (excluding those shares, if any, that a U.S.
Realty shareholder has voted against the transaction and as to which the
shareholder has made a valid election to receive cash instead of shares of
Security Capital Class B common stock). The amount of cash delivered to U.S.
Realty will be the cash required to pay the transaction consideration to U.S.
Realty shareholders who vote against the transaction and make a valid election
to receive cash, plus the cash needed to satisfy and discharge the Indenture
under which U.S. Realty issued its outstanding convertible notes. Security
Capital will not be obligated to proceed with the transaction if the total
amount of cash required for distribution to U.S. Realty shareholders who
validly elect to receive cash exceeds $200 million.
THE LIQUIDATION OF U.S. REALTY
As the second step in the transaction, after U.S. Realty satisfies and
discharges its convertible notes Indenture, U.S. Realty shareholders will
receive a distribution of either:
. a number of shares of Security Capital Class B common stock equal to
1.15 multiplied by the number of U.S. Realty shares they own, rounded
down to the next whole number, and shortly afterwards, a check for cash
in U.S. dollars in lieu of any fractional share; or
. if the U.S. Realty shareholder voted the shares "against" the
transaction, made a valid election to receive cash instead of shares of
Security Capital Class B common stock and timely returned all necessary
documents, an amount of cash in U.S. dollars equal to 1.15 multiplied by
the average of the
8
<PAGE>
daily high and low per share sale prices of the Security Capital Class B
common stock on the New York Stock Exchange during the fifteen trading
days ending on January 5, 2001 (the sixth trading day before the U.S.
Realty extraordinary general meeting), less any taxes we must withhold
from the payment. Following the close of trading on the New York Stock
Exchange on January 5, 2001, we will issue a press release announcing
the calculation of the amount of cash per U.S. Realty share that those
shareholders would receive, and will also publish that information in
newspapers of general circulation in Luxembourg, Amsterdam and New York.
SC Transaction Corporation, a subsidiary of Security Capital, will serve as
the liquidator, subject to approval by the shareholders of U.S. Realty. Under
Luxembourg law, the liquidator will remain liable for any remaining liabilities
of U.S. Realty following the completion of the liquidation.
The distribution by U.S. Realty of the proceeds of the sale to U.S. Realty
shareholders of record on the date of the U.S. Realty extraordinary general
meeting is expected to begin promptly following the approval of the
transaction. In order to assure any necessary tax withholding, to verify the
identity of such shareholders and to permit U.S. Realty shareholders who make
valid cash elections to receive cash, U.S. Realty shareholders will be provided
with a letter of transmittal by which each U.S. Realty shareholder would
surrender its shares, to be held, pending any further distributions, for
cancellation by the liquidator. There are not expected to be any further
distributions in light of the fact that all of U.S. Realty's assets will be
sold in the first step of the transaction.
As soon as possible under Luxembourg law, after the U.S. Realty
extraordinary general meeting, following completion of the purchase of U.S.
Realty's assets by Security Capital and the distribution to U.S. Realty
shareholders of the Security Capital Class B common stock and cash as described
above, U.S. Realty will hold an additional extraordinary general shareholder
meeting for the purpose of completing the final liquidation of U.S. Realty,
including receipt of the report of the auditor for the liquidation and approval
of the liquidator's report. A separate notice will be sent to U.S. Realty
shareholders with respect to the matters to be voted on at this final meeting.
Approval of this final step in the liquidation of U.S. Realty will require
approval only of a majority of the shares present or represented, without the
requirement of any quorum.
RELATED TRANSACTIONS
In accordance with the terms of the Indenture under which U.S. Realty issued
its outstanding convertible notes, at the time we complete the first step of
the transaction, U.S. Realty, Security Capital and SC Realty Incorporated will
enter into an agreement with the Indenture trustee providing for the
satisfaction and discharge of the Indenture. At that time, U.S. Realty will
deposit with the trustee funds sufficient to redeem the convertible notes on
the later of May 23, 2001 (the earliest permitted redemption date under the
U.S. Realty Indenture) and the thirtieth day after closing of the transaction,
at their then-accreted value, and to pay any accrued and unpaid interest on the
convertible notes through the date of redemption. As of September 30, 2000
there were $450 million in aggregate principal amount at maturity of
outstanding U.S. Realty convertible notes, with an aggregate accreted value at
that date of $399.4 million. SC Realty Incorporated and Security Capital have
agreed to indemnify the trustee for liabilities the trustee may incur in
connection with the performance of its duties under the Indenture.
In connection with the transaction, Security Capital will refinance U.S.
Realty's existing bank debt (which consists of an unsecured line of credit
under which SC-Holdings is the borrower) by providing SC-Holdings sufficient
cash to repay any outstanding amounts under the line of credit. As of November
30, 2000, approximately $62.0 million was outstanding under SC-Holdings' line
of credit.
9
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION (see Page 50)
Some of the directors and executive officers of U.S. Realty, including the
U.S. Realty directors who are members of the special committee, have interests
in the transaction that are different from, and/or are in addition to, the
interests of U.S. Realty's shareholders. These interests include the
acceleration and receipt by U.S. Realty independent directors of cash payments
under U.S. Realty's share option equivalent incentive arrangements, the right
of directors and officers to continued indemnification and insurance coverage
for acts or omissions occurring before the transaction, and existing ownership
of securities issued by Security Capital.
CONDITIONS TO THE TRANSACTION (see Page 67)
Completion of the transaction requires:
. approval by the shareholders of Security Capital of the issuance of
shares of Security Capital Class B common stock in the transaction;
. approval by the shareholders of U.S. Realty of the transaction agreement
and the transactions it contemplates, including the sale of U.S.
Realty's assets, and the plan of liquidation and the appointment of the
liquidator;
. the absence of any law or injunction preventing the transaction;
. approval by the New York Stock Exchange of the listing of the Security
Capital Class B common stock to be issued in the transaction;
. compliance in all material respects by Security Capital and U.S. Realty
with their transaction agreement covenants;
. the continuing accuracy of Security Capital's and U.S. Realty's
representations and warranties contained in the transaction agreement;
. receipt of authorizations, consents and approvals of governmental
authorities required to be obtained under the transaction agreement;
. the amount of cash to be distributed in the liquidation to U.S. Realty
shareholders who vote "against" the transaction and who validly elect to
receive cash instead of Security Capital shares totaling $200 million or
less;
. Security Capital having obtained sufficient financing for the
transaction under the commitment letter it received from its lenders or
otherwise on terms and conditions commercially available at the time of
funding and satisfactory to Security Capital; and
. the absence of any stop order suspending the effectiveness of the
registration statement of which this joint proxy statement/prospectus
forms a part or pending proceedings for that purpose.
TERMINATION OF THE TRANSACTION AGREEMENT (see Page 68)
Security Capital and U.S. Realty may by mutual agreement terminate the
transaction agreement at any time. In addition, either company may terminate
the transaction agreement if specified events do or do not occur. These
include:
. if a law, court order or other governmental action restrains or
prohibits the sale to Security Capital of U.S. Realty's assets or the
liquidation of U.S. Realty and can no longer be appealed;
. if either Security Capital or U.S. Realty fails to obtain its required
shareholder approval; and
. if Security Capital and U.S. Realty do not complete the transaction by
March 31, 2001 (which may be extended to no later than June 30, 2001 so
long as Security Capital's financing commitment is
10
<PAGE>
extended or replaced), unless the failure to complete the transaction
results from a breach of covenants contained in the transaction
agreement by the party seeking to terminate.
In addition, Security Capital may terminate the transaction agreement if the
required U.S. Realty shareholder vote is obtained at the U.S. Realty
extraordinary general meeting and the amount of cash required for distribution
in the transaction to U.S. Realty shareholders exceeds $200 million in the
aggregate.
REGULATORY MATTERS (see Page 70)
The applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 expired on October 30, 2000.
As provided under Luxembourg law, U.S. Realty will remain under the
supervision of the Luxembourg supervisory authority until the completion of the
liquidation.
U.S. Realty qualifies in The Netherlands as an investment institution within
the meaning of the 1990 Act on the supervision of investment institutions (Wet
toezicht beleggingsinstellingen 1990) and is licensed and supervised by the
Dutch Central Bank (De Nederlandsche Bank N.V.). Security Capital is not and
will not be so licensed or supervised, and accordingly shareholders of U.S.
Realty who become Security Capital shareholders will not have the benefit of
such licensing and supervision. In addition, the issue and offering by Security
Capital of Security Capital Class B common stock to the shareholders of U.S.
Realty residing in The Netherlands will require compliance with applicable
Dutch regulatory legislation.
APPRAISAL RIGHTS (see Page 106)
Holders of Security Capital securities are not entitled to appraisal rights
in connection with the proposal to issue shares of Security Capital Class B
common stock in the transaction. Under Luxembourg company law, there is no
established mechanism by which holders of U.S. Realty securities could seek any
appraisal or similar determination of the fair value of their shares by a court
in connection with the transaction or the liquidation.
INCOME TAX CONSEQUENCES TO U.S. REALTY SHAREHOLDERS (see Page 71)
United States
A U.S. holder of U.S. Realty shares generally will recognize gain or loss
for U.S. federal income tax purposes upon the receipt of Security Capital Class
B common stock and/or cash in the transaction equal to the difference between
the fair market value of the Security Capital Class B common stock as of the
date received and/or the amount of cash received and the U.S. holder's adjusted
tax basis in the U.S. Realty share.
Germany
Based upon the prevailing opinion of commentators, German resident
individuals who receive Security Capital Class B common stock and/or cash in
the transaction should be treated for German tax purposes as if they had sold
their shares. Any gain should not be subject to German tax unless the German
resident exceeds certain ownership thresholds in U.S. Realty.
Luxembourg
Luxembourg resident individuals should not be subject to Luxembourg tax upon
the receipt of Security Capital Class B common stock or cash in the transaction
unless they have held their shares for less than six months. Whether or not a
Luxembourg corporation will be subject to Luxembourg tax upon the receipt of
such consideration in the transaction will depend on its tax status.
ACCOUNTING TREATMENT (see Page 80)
Security Capital will account for the transaction using the purchase method
of accounting under U.S. generally accepted accounting principles ("GAAP"). See
"Unaudited Pro Forma Condensed Consolidated Financial Information."
11
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
SUMMARY SELECTED HISTORICAL FINANCIAL INFORMATION
SECURITY CAPITAL
The table below shows summary selected historical financial information for
Security Capital as of and for the years ended December 31, 1999, 1998, 1997,
1996 and 1995, which has been derived from the audited consolidated financial
statements of Security Capital. The information as of and for the nine months
ended September 30, 2000 and 1999 is derived from the unaudited consolidated
financial statements of Security Capital, and, in our opinion, includes all
normal and non-recurring adjustments necessary for the fair presentation of
results. This information is only a summary, and you should read it in
conjunction with Security Capital's historical financial statements and related
notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the annual reports, quarterly reports and
other information on file with the U.S. Securities and Exchange Commission. See
"Where You Can Find More Information" on page 133.
SECURITY CAPITAL GROUP INCORPORATED
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Equity in earnings
(loss) of
investees(1)........... $ 285,872 $ 58,376 $ 78,899 $ (71,950) $ 170,576 $ 168,473 $ 45,685
Property revenues....... 204,303 165,589 226,730 144,374(3) 58,397(4) 145,907 103,634
Financial Services
Division revenues...... 64,638 74,525 88,045 93,850 105,941 77,512 49,404
Total revenues.......... 684,568 307,615 409,945 165,477 367,704 398,122 200,534
Property expenses....... 86,688 74,053 101,795 63,339(3) 25,089(4) 58,259 40,534
Financial Services
Division expenses...... 51,574 66,458 87,026 76,093 87,190 79,296 56,317
General, administrative
and other expenses..... 32,730 46,023 56,349 62,774 54,940 32,617 20,197
Interest expense........ 88,462 101,333 133,454 82,203 104,434 117,224 103,804
Net earnings (loss)
attributable to Class B
Equivalent Shares(5)... 232,545 (126,848)(2) (116,996)(2) (157,104) 106,154(6) 32,067 (201,634)(7)
PER SHARE DATA:
Net earnings (loss) per
Class B Equivalent
Share(5):
Basic.................. $ 2.14 $ (1.05) $ (0.98) $ (1.29) $ 1.39 $ 0.61 $ (4.50)
Diluted................ $ 1.99 $ (1.05) $ (0.98) $ (1.29) $ 1.28 $ 0.57 $ (4.50)
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
--------------------- ---------------------------------------------------------------
2000 1999 1999 1998 1997(4) 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investments, at equity.. $2,464,768 $2,650,384 $2,659,398 $3,071,772 $2,658,748 $1,438,937 $ 930,043
Real estate, net of
accumulated
depreciation........... 987,198 1,130,376 1,073,474 1,164,869 716,882 1,365,373 865,367
Total assets............ 3,637,552 4,095,230 3,957,151 4,510,357 3,614,239 2,929,284 1,855,056
Long-term debt:
Security Capital....... 930,400 1,020,339 978,557(8) 937,010(8) 323,024 940,197 718,611
Majority owned
subsidiaries(9)....... 164,127 370,372 378,210 343,362 301,606 257,099 118,524
Total shareholders'
equity................. $2,280,540 $2,272,628 $2,180,787 $2,422,979 $2,548,873 $ 918,702 $ 528,539
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flow provided by
operating activities... $ 148,302 $ 101,635 $ 107,817 $ 140,728 $ 27,266 $ 34,591 $ 13,670
Cash flow provided by
(used in) investing
activities............. 104,111 237,718 255,397 (1,116,937) (1,161,125) (832,309) (493,918)
Cash flow provided by
(used in) financing
activities............. (234,922) (254,354) (345,856) 977,964 1,125,990 807,672 486,896
Reconciliation of net
earnings to earnings
before depreciation,
amortization, and
deferred taxes
(EBDADT)(10):
Net earnings (loss)
attributable to common
shares................ $ 232,545 $(126,848) $(116,996) $ (157,104) $ 106,154 $ 32,067 $(201,634)
Investee reconciling
items:
Real estate
depreciation.......... 122,051 140,491 187,796 162,476 76,307 59,276 32,413
Gain on sale of
depreciated real
estate................ (29,914) (27,343) (36,971) (25,503) (20,912) (18,339) (1,560)
Provision for loss on
real estate........... 71,000 -- -- -- -- -- --
Unrealized (gains)
losses................ (144,218) 66,603 59,564 220,612 (104,730) (96,866) 12
Loss on acquisition of
management companies.. -- -- -- -- 62,042 -- --
Other.................. 31,494 25,890 28,788 47,794 15,445 8,610 1,829
--------- --------- --------- ----------- ----------- --------- ---------
50,413 205,641 239,177 405,379 28,152 (47,319) 32,694
--------- --------- --------- ----------- ----------- --------- ---------
Security Capital
reconciling items:
Deferred tax (benefit)
expense............... 47,899 (23,245) (14,064) (54,488) 56,378 30,872 --
Gain on sale of
management companies.. -- -- -- -- (93,395) -- --
Other.................. (771) 13,384 12,142 19,640 11,813 27,545 184,399
--------- --------- --------- ----------- ----------- --------- ---------
47,128 (9,861) (1,922) (34,848) (25,204) 58,417 184,399
--------- --------- --------- ----------- ----------- --------- ---------
Total EBDADT............ $ 330,086 $ 68,932 $ 120,259 $ 213,427 $ 109,102 $ 43,165 $ 15,459
========= ========= ========= =========== =========== ========= =========
</TABLE>
--------
(1) The equity in earnings (loss) of Security Capital's investees includes
changes in unrealized gains or losses for U.S. Realty. These changes are
generated as a result of fluctuating market prices for the shares in its
underlying investments and are reflected in earnings due to U.S. Realty's
use of fair value accounting.
(2) In September 1999, Security Capital sold its entire ownership in
Strategic Hotel Capital Incorporated for net proceeds of approximately
$329 million, generating a loss of $55.2 million (which Security Capital
recorded in the second quarter of 1999). In the second quarter of 1999,
Homestead Village Incorporated recorded a special charge of $65.3 million
for write-downs of land held for sale, write-offs of costs of pursuing
other land parcels and the costs of severance of personnel.
(3) The number of operating properties at Homestead increased from 71 at
December 31, 1997 to 120 at December 31, 1998, resulting in increased
property revenues and expenses.
(4) Prior to 1997, Security Capital consolidated the accounts of Security
Capital Atlantic Incorporated. During 1997, Security Capital's ownership
of Security Capital Atlantic decreased to less than 50%. Accordingly,
Security Capital Atlantic was not consolidated effective January 1, 1997,
which resulted in lower consolidated property revenues and expenses, an
increase in Security Capital's equity investments and lower consolidated
real estate.
(5) Class B equivalent shares include the conversion of Class A common shares
into Class B common shares.
(6) Net earnings in 1997 include a gain of $93.4 million on the sale of
Security Capital's management companies to Archstone Communities Trust,
Security Capital Atlantic and ProLogis Trust.
(7) The net loss in 1995 includes a charge of $158.4 million relating to the
formation of Security Capital by the merger of two affiliated, but not
commonly controlled, entities.
13
<PAGE>
(8) In 1998, Security Capital issued $615 million of senior unsecured long-
term notes at an average interest rate of 7.29% and weighted average life
of 16.6 years. Security Capital issued an additional $85 million of
senior unsecured notes in 1999.
(9) Security Capital does not guarantee the debt of any of its consolidated
or unconsolidated operating companies.
(10) Management considers earnings before depreciation, amortization, and
deferred taxes, or "EBDADT," to be an additional measure of operating
performance for Security Capital and its affiliates, supplementing net
earnings as measured by GAAP. Among other things, GAAP net earnings
includes the impact of real estate depreciation. The value of real estate
assets generally changes in response to existing market conditions and
does not necessarily diminish in value predictably over time, as
historical cost depreciation implies. Therefore, consistent with real
estate industry practice, EBDADT adjusts GAAP net earnings by eliminating
real estate related depreciation. EBDADT also involves certain other
adjustments, the most material being the omission of changes in
unrealized gains and losses on real estate securities due to fluctuations
in market prices. You should not consider EBDADT as an alternative to net
earnings or any other GAAP measurement of performance or as an
alternative to cash flows from operating, investing, or financing
activities, or as a measure of Security Capital's liquidity.
14
<PAGE>
U.S. REALTY
The table below shows summary selected historical financial information for
U.S. Realty as of and for the years ended December 31, 1999, 1998, 1997 and
1996, and for the period from July 7, 1995, U.S. Realty's date of
incorporation, through December 31, 1995, which has been derived from the
audited consolidated financial statements of U.S. Realty. The information as of
and for the nine months ended September 30, 2000 and 1999 is derived from the
unaudited consolidated financial statements of U.S. Realty, and, in our
opinion, includes all normal and non-recurring adjustments necessary for the
fair presentation of results. This information is only a summary, and you
should read it in conjunction with U.S. Realty's historical financial
statements and related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this joint
proxy statement/prospectus. See "Description of Business of U.S. Realty--
Management's Discussion and Analysis of Financial Condition and Results of
Operations of U.S. Realty" and U.S. Realty's financial statements beginning on
page F-2.
SECURITY CAPITAL U.S. REALTY
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 7
SEPTEMBER 30, YEAR ENDED DECEMBER 31, THROUGH
------------------------- ----------------------------------------------------- DECEMBER 31,
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues(1)....... $ 110,882 $ 115,777 $ 161,043 $ 156,825 $ 102,917 $ 34,836 $ 588
Total expenses.......... 54,100 66,609 90,051 78,926 42,608 21,897 512
Net realized (losses)
gains on strategic
investment and other
positions.............. (83,436)(2) 1,420 (65,587)(3) 32,878 41,073 3,480 --
Net increase/(decrease)
in appreciation on
strategic investment
positions and other
investment
positions(4)........... 404,145(5) (163,265) (152,693) (642,372) 264,974 252,294 126
---------- ---------- ---------- ---------- ---------- ---------- -------
Increase/(decrease) in
net assets resulting
from operations........ $ 377,491 $ (112,677) $ (147,288) $ (531,595) $ 366,356 $ 268,713 $ 202
========== ========== ========== ========== ========== ========== =======
Increase/(decrease) in
net assets resulting
from operations, per
share.................. $ 5.01 $ (1.34) $ (1.79) $ (6.15) $ 5.56 $ 7.28 $ 0.06
STATEMENT OF NET ASSETS
DATA:
Strategic
investments(4)......... $2,679,790 $2,399,963 $2,374,825 $2,467,920(6) $2,376,044(7) $1,184,395(7) $53,000
Total Assets(4)......... 2,739,190 2,683,508 2,530,886 2,873,628 2,901,820 1,494,257 63,400
Long-term debt.......... 399,424 382,089 386,157 369,940(8) -- -- --
Total Net Assets
(Shareholders'
Equity)................ $2,244,285 $1,951,354 $1,894,878 $2,226,385 $2,758,420 $1,319,099 $63,148
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 7
SEPTEMBER 30, YEAR ENDED DECEMBER 31, THROUGH
------------------- ---------------------------------------------- DECEMBER 31,
2000 1999 1999 1998 1997 1996 1995
--------- -------- --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows provided by
operating activities... $ 65,056 $ 64,812 $ 26,130 $ 112,258 $ 110,988 $ 14,824 $ 322
Cash flows provided by
(used in) investing
activities............. 143,640 (20,945) 181,327 (595,961) (1,197,441) (1,123,565) (56,309)
Cash flows provided by
(used in) financing
activities............. (211,084) (87,357) (207,719) 484,727 1,033,466 1,156,738 62,946
Reconciliation of
increase (decrease) in
net assets resulting
from operations to
EBDADT(9):
Increase/(decrease) in
net assets resulting
from operations....... 377,491 (112,677) (147,288) (531,595) 366,356 268,713 202
Equity in strategic
investment positions'
EBDADT, net of
dividends............. 69,441 61,140 72,469 56,098 27,870 12,293 (7)
Net realized and
unrealized (gain)/loss
on strategic and other
investment
positions(5).......... (318,504) 163,265 83,473 642,372 (264,974) (252,294) (126)
--------- -------- --------- --------- ----------- ----------- --------
EBDADT................. $ 128,428 $111,728 $ 8,654 $ 166,875 $ 129,252 $ 28,712 $ 69
========= ======== ========= ========= =========== =========== ========
</TABLE>
--------
(1) Revenues include dividends from strategic investment and other investment
positions (net of withholding tax) and interest and other income. Due to
the timing of investment dates and dividend record dates, dividends
received on investments for a period of less than one year are not
necessarily indicative of dividends to be received for an entire year.
(2) In the first quarter of 2000, U.S. Realty sold its investment in Security
Capital securities for $96.9 million, resulting in a realized loss of
$68.9 million.
(3) In 1999, U.S. Realty sold its portfolio of other investment positions,
realizing a loss of $65.6 million.
(4) Investments are reflected at fair value in accordance with the U.S.
specialized industry accounting rules prescribed by the American Institute
of Certified Public Accountants Audit and Accounting Guide for investment
companies. As a result, in periods where real estate equity prices
generally increased (1996, 1997 and 2000) unrealized gains increased, and
in periods where they generally decreased (1998 and 1999) unrealized gains
decreased. U.S. Realty's investments in strategic investments also
fluctuated as the fair value of their underlying investments increased or
decreased.
(5) Net of a provision for deferred tax expenses of $29.4 million in the nine
months ended September 30, 2000.
(6) Although U.S. Realty recognized a $642.4 million decrease in unrealized
gains on its investment positions in 1998, its strategic investments
increased by $91.9 million due to $564.6 million of new strategic
investments and net operating income of $77.9 million.
(7) During 1996 and 1997, U.S. Realty invested $924.7 million and $857.6
million, respectively, in new strategic investees.
(8) In 1998, U.S. Realty issued $450 million aggregate principal amount at
maturity of 2% senior unsecured convertible debentures at an issue price
of $360.6 million.
(9) U.S. Realty reports earnings before depreciation, amortization and
deferred taxes (EBDADT), which U.S. Realty believes provides an
alternative measure of operating performance for U.S. Realty and its
strategic investees. EBDADT for U.S. Realty is (a) U.S. Realty's pro rata
share of the EBDADT of all its strategic investees, less (b) corporate
overhead and (c) interest expense and preferred stock dividends, other
than interest and dividends on convertible debt and all other convertible
securities that are anti-dilutive and (d) current tax expenses. In
general, EBDADT will be defined for U.S. Realty and its strategic
investees
16
<PAGE>
as: net earnings, computed in accordance with generally accepted accounting
principles, plus real estate depreciation (depreciation is not added back
for non-real estate assets whose value is declining over time), plus
amortization of non-cash items (e.g., goodwill), plus deferred tax expense,
plus any losses on the disposition of income-producing properties, plus
other non-cash, one-time expenses, plus unrealized losses, minus gain on the
disposition of income-producing properties, minus unrealized gains, minus
dividends received by U.S. Realty from its strategic investees. With respect
to investments in which U.S. Realty has less than a 20% interest and does
not have the ability to significantly influence management, U.S. Realty
includes only dividends or interest received in its EBDADT. EBDADT is not to
be construed as a substitute for net earnings in evaluating operating
results nor as a substitute for cash flow in evaluating liquidity.
17
<PAGE>
UNAUDITED SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
In the table below, we provide you with unaudited pro forma condensed
consolidated financial statements for Security Capital as if the transaction
with U.S. Realty had been completed on January 1, 1999 for statement of
operations purposes and on September 30, 2000 for balance sheet purposes. The
data set forth below give effect to the transaction using the purchase method
of accounting.
We prepared this information based upon currently available data. You should
read these unaudited pro forma condensed consolidated financial statements in
conjunction with the separate historical financial statements and accompanying
notes of Security Capital that we incorporated by reference in this joint proxy
statement/prospectus and of U.S. Realty, which we included in this joint proxy
statement/prospectus. The most significant change on a pro forma basis is that
historical cost accounting will apply to the combined company, whereas fair
value accounting applied to U.S. Realty. Specifically, changes in unrealized
appreciation of assets were reflected in U.S. Realty earnings, but are not
reflected in pro forma earnings for the combined company. Also, U.S. Realty
reflected asset values in its balance sheet based on public-market prices or
other valuation techniques, whereas assets will be reflected at cost for the
combined company. These changes mean that fluctuations in the trading price of
the shares of investees will not affect the combined company's financial
statements as they affect U.S. Realty's financial statements.
We have provided these pro forma condensed consolidated financial statements
for informational purposes only in response to requirements of the U.S.
Securities and Exchange Commission. We do not claim that they represent what
Security Capital's financial position or results of operations would actually
have been if the transaction had in fact occurred at such dates or that they
project Security Capital's financial position or results of operations for any
future date or period.
For further discussion of the pro forma adjustments and more detailed pro
forma financial statements, see "Unaudited Pro Forma Condensed Consolidated
Financial Information" beginning on page 107.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- -----------------
<S> <C> <C>
OPERATING DATA:
Equity in earnings (loss) of investees.. $ 210,277 $214,094
Property revenues....................... 530,062 621,231
Financial Services Division revenues.... 39,893 53,714
Total income............................ 935,429 869,925
Property expenses....................... 164,491 204,741
Financial Services Division expenses.... 51,574 87,026
General, administrative and other
expenses............................... 56,654 97,361
Interest expense........................ 197,525 258,241
Earnings (loss) from operations
attributable to Class B Equivalent
Shares................................. 149,000 (79,010)
PER SHARE DATA:
Earnings (loss) from operations per
Class B Equivalent Share:
Basic................................. $ 1.00(1) $ (0.49)
Diluted............................... 0.97(1) (0.49)
<CAPTION>
AS OF
SEPTEMBER 30, 2000
-------------------
<S> <C> <C>
BALANCE SHEET DATA:
Investments, at equity.................. $2,616,165
Real estate, less accumulated
depreciation........................... 4,763,777
Total assets............................ 7,783,117
Long-term debt.......................... 2,903,002
Total shareholders' equity.............. 3,044,805
</TABLE>
--------
(1) Reduction on a pro forma basis is primarily due to the adoption of
historical cost accounting which therefore eliminated U.S. Realty
unrealized gains for the nine months ended September 30, 2000.
18
<PAGE>
COMPARATIVE PER SHARE INFORMATION
HISTORICAL AND PRO FORMA PER SHARE DATA
In the table below, we provide selected historical and unaudited pro forma
per share data for Security Capital and historical and equivalent unaudited pro
forma per share data for U.S. Realty. The unaudited pro forma financial data
give effect to the transaction as if it had occurred on January 1, 1999. We
determined the unaudited pro forma equivalent per share data for U.S. Realty
based on the unaudited pro forma amounts per share for Security Capital,
multiplied by 1.15. The data set forth below give effect to the transaction
using the purchase method of accounting. You should read the information set
forth below in conjunction with the historical consolidated financial data of
Security Capital and U.S. Realty included or incorporated by reference in this
document and the Unaudited Pro Forma Condensed Consolidated Financial
Statements beginning on page 107.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
2000 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
SECURITY CAPITAL
Basic earnings per share from continuing
operations:
Historical.............................. $1.93 $(0.98)
Pro forma combined...................... 1.00(1) (0.49)
Diluted earnings per share from continuing
operations:
Historical.............................. 1.81 (0.98)
Pro forma combined...................... 0.97(1) (0.49)
Book value per share:
Historical.............................. 18.78 na
Pro forma combined...................... 18.80 na
Common dividends per share:
Historical.............................. -- --
Pro forma combined...................... -- --
U.S. REALTY
Basic earnings per share from continuing
operations:
Historical.............................. $5.01 $(1.79)
Pro forma equivalent.................... 1.15(1) (0.56)
Diluted earnings per share from continuing
operations:
Historical.............................. 5.01 (1.79)
Pro forma equivalent.................... 1.12 (0.56)
Book value per share:
Historical.............................. 29.97 na
Pro forma equivalent.................... 21.62(2) na
Common dividends per share:
Historical.............................. -- --
Pro forma equivalent.................... -- --
</TABLE>
--------
(1) Change in pro forma equivalent earnings per share from historical is due to
the application of historical cost accounting to the U.S. Realty operations
acquired, which eliminates unrealized gains/losses.
(2) Reduction in pro forma book value is due to the change from fair value
accounting used on a historical basis to cost accounting used on a pro
forma basis for the U.S. Realty operations. The primary difference between
the two methods is that under fair value accounting current values are used
to determine book value, whereas under historical cost accounting original
cost values are used to determine book value.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
The Class A common stock of Security Capital trades on the New York Stock
Exchange under the symbol "SCZ.A" and the Class B common stock of Security
Capital trades on the New York Stock Exchange under
19
<PAGE>
the symbol "SCZ." U.S. Realty's shares principally trade on the official
segment of the stock market of Euronext Amsterdam N.V. (into which the AEX
Stock Exchange in Amsterdam merged) ("Euronext Amsterdam") under ISIN-Code:
LU0060100673. U.S. Realty's shares also trade as American Depositary Shares (or
ADSs) on the New York Stock Exchange under the symbol "RTY."
The table below provides you with the high and low sale prices of (a)
Security Capital Class A common stock and Security Capital Class B common stock
and (b) U.S. Realty shares as reported on Euronext Amsterdam and, beginning in
the third quarter of 1999, on the New York Stock Exchange, in all cases based
on published financial sources. We have revised the prices for U.S. Realty
shares prior to June 18, 1999 to reflect the one-for-two reverse stock split
effective on that date.
<TABLE>
<CAPTION>
SECURITY CAPITAL U.S. REALTY
--------------------------- ---------------------------
CLASS CLASS CLASS CLASS
A A B B
COMMON COMMON COMMON COMMON SHARES SHARES ADS ADS
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998
First Quarter.......... $1,600 $1,472 $32.50 $29.50 $32.00 $26.20 -- --
Second Quarter......... 1,570 1,300 31.63 25.88 28.00 24.40 -- --
Third Quarter.......... 1,375 885 27.25 17.13 26.00 19.80 -- --
Fourth Quarter......... 810 600 18.00 11.88 21.20 16.00 -- --
1999
First Quarter.......... 733 594 14.94 11.63 19.60 15.40 -- --
Second Quarter......... 760 619 16.03 12.06 19.50 15.40 $18.56 $18.50
Third Quarter.......... 765 690 15.38 13.88 19.00 16.50 19.25 18.25
Fourth Quarter......... 740 600 14.69 11.88 17.00 13.20 18.31 13.62
2000
First Quarter.......... 695 600 14.69 12.00 16.00 13.60 16.50 14.12
Second Quarter......... 850 680 17.00 13.75 17.90 15.70 18.12 15.87
Third Quarter.......... 966 825 19.63 16.63 20.50 17.90 21.37 18.00
Fourth Quarter (through
December 7, 2000)..... 1,000 900 19.81 18.81 22.00 20.40 22.00 20.31
</TABLE>
The closing price for Security Capital Class B common stock on the New York
Stock Exchange was:
. $18.69 on September 25, 2000, the last trading day before we announced
the execution of the transaction agreement; and
. $19.19 on December 7, 2000, the last trading day before the date of this
joint proxy statement/prospectus.
The closing price for a U.S. Realty ADS on the New York Stock Exchange was:
. $19.06 on September 25, 2000, the last trading day before we announced
the execution of the transaction agreement; and
. $21.69 on December 7, 2000, the last trading day before the date of this
joint proxy statement/prospectus.
The equivalent per share price (which is the value U.S. Realty shareholders
who receive Security Capital Class B common stock in the transaction would have
received for each U.S. Realty share they own if the distribution had been
completed and they had received 1.15 shares of Security Capital Class B common
stock for each of their of U.S. Realty shares on the dates listed) was:
. $21.49 on September 25, 2000, the last trading day before we announced
the execution of the transaction agreement; and
. $22.07 on December 7, 2000, the last trading day before the date of this
joint proxy statement/prospectus.
20
<PAGE>
The amount of cash for each U.S. Realty share that a holder who votes
against the transaction and in respect of which the holder elects to receive
cash would have received, had the U.S. Realty extraordinary general meeting
been held on the date listed, was:
. $20.44 on September 25, 2000, the last trading day before we announced
the execution of the transaction agreement (based on the average high
and low per share sale prices of the Security Capital Class B common
stock during the fifteen trading days ending on September 15, 2000); and
. $22.18 on December 7, 2000, the last trading day before the date of this
joint proxy statement/prospectus (based on the average high and low per
share sales prices of the Security Capital Class B common stock during
the fifteen trading days ended on November 29, 2000).
Security Capital has not paid any dividends on the Security Capital Class A
common stock (since 1994) or the Security Capital Class B common stock. U.S.
Realty has never paid dividends on its shares.
As of December 8, 2000, there were outstanding 1,032,113 shares of Security
Capital Class A common stock, held by approximately 638 holders of record;
51,451,408 shares of Security Capital Class B common stock held by
approximately 119 holders of record; and 257,642 shares of Security Capital
Series B preferred stock held by one holder of record. As of December 8, 2000,
there were outstanding 74,883,958 U.S. Realty shares held by 94 holders of
record.
We urge you to obtain current market quotations before voting your shares.
The number of shares of Security Capital Class B common stock that U.S. Realty
shareholders will receive for their U.S. Realty shares will not change even if
Security Capital's Class B common stock or U.S. Realty's share prices change.
For this reason, the market value of the shares of Security Capital Class B
common stock or the amount of cash that holders of U.S. Realty shares will
receive in the transaction may vary significantly from the market value of the
shares of Security Capital Class B common stock or the amount of cash that U.S.
Realty shareholders would receive if the U.S. Realty extraordinary general
meeting were held and the liquidation were consummated on the date of this
joint proxy statement/prospectus.
Following the close of trading on the New York Stock Exchange on January 5,
2001, we will issue a press release announcing the calculation of the amount of
cash per U.S. Realty share that shareholders who vote against the transaction
and validly elect to receive cash would receive in the transaction. We will
also publish that information in newspapers of general circulation in
Luxembourg, Amsterdam and New York.
21
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Security Capital and U.S. Realty each make forward-looking statements in this
joint proxy statement/prospectus and in other documents filed with the U.S.
Securities and Exchange Commission to which we refer you. These statements may
include statements regarding the period following completion of the
transaction. For each of these forward-looking statements we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
Words such as "anticipates," "estimates," "expects," "projects," "intends,"
"plans," "believes" and similar words and terms identify forward-looking
statements. All forward-looking statements are management's present
expectations of future events and are subject to a number of factors and
uncertainties that could cause actual results to differ materially. These
factors and uncertainties include risks related to the businesses of Security
Capital and U.S. Realty as well as the factors relating to the transaction
discussed under "Risk Factors." Shareholders should not place undue reliance on
the forward-looking statements, which speak only as of the date of this joint
proxy statement/prospectus or the date of the document incorporated by
reference in this joint proxy statement/prospectus. Except for their ongoing
obligations to disclose material information as required by the federal
securities laws, neither Security Capital nor U.S. Realty is under any
obligation, and each expressly disclaims any obligation, to update or alter any
forward-looking statements.
For additional information about risks and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements, please see the annual report on Form 10-K that Security Capital has
filed with the U.S. Securities and Exchange Commission.
The cautionary statements described above also apply to all subsequent
forward-looking statements attributable to Security Capital or U.S. Realty or
any person acting on their behalf relating to the matters we describe in this
joint proxy statement/prospectus.
22
<PAGE>
RISK FACTORS
You should consider carefully the factors set forth below in evaluating the
transaction. The following list summarizes material risks related to the
transaction and risks related to the business of Security Capital and to the
ownership of Security Capital stock. This joint proxy statement/prospectus
contains forward-looking statements regarding the operations of Security
Capital, U.S. Realty and their combined businesses. Actual results could differ
materially from those set forth in the forward-looking statements. See
"Cautionary Statement Regarding Forward-Looking Statements."
RISK FACTORS RELATING TO THE TRANSACTION
SOME OF THE DIRECTORS OF U.S. REALTY HAVE A CONFLICT OF INTEREST
In considering the recommendation of the U.S. Realty board of directors,
U.S. Realty shareholders should be aware that William D. Sanders, the non-
executive chairman of the board of U.S. Realty, also serves as chairman of the
board of Security Capital and is Security Capital's chief executive officer;
and, at the time the transaction agreement was approved, Jeffrey A. Cozad
served as a director on U.S. Realty's board of directors and as U.S. Realty's
managing director, and also served as managing director of U.S. Realty's
operating advisor, which is a wholly owned subsidiary of Security Capital.
Officers of Commerzbank serve on the boards of directors of both Security
Capital and U.S. Realty, and Commerzbank is the primary lender to both U.S.
Realty and a subsidiary of Security Capital and is expected to participate in
the term loan to finance the transaction. In addition, certain members of the
U.S. Realty special committee beneficially own shares of Class B and Class A
common stock of Security Capital and Security Capital debentures, and each
member of the special committee is also a director of Security Capital European
Realty, an affiliate of Security Capital.
THE TRANSACTION CONSIDERATION TO U.S. REALTY SHAREHOLDERS IS FIXED DESPITE
POTENTIAL CHANGES IN RELATIVE STOCK PRICES
We will not adjust the number of shares of Security Capital Class B common
stock that U.S. Realty shareholders receiving stock will receive for each of
their U.S. Realty shares, or the basis for calculating the amount of cash that
U.S. Realty shareholders who vote against the transaction and elect to receive
cash will receive. The market prices of Security Capital's stock and U.S.
Realty's stock when the transaction is completed may differ from their prices
at the date the transaction consideration was determined, at the date of this
joint proxy statement/prospectus and at the date of the shareholder meetings.
These differences may be the result of changes in the business, operations or
prospects of Security Capital and U.S. Realty, market assessments of the
likelihood and timing of the transaction, general market and economic
conditions and other factors. At the time of the U.S. Realty shareholder
meeting, U.S. Realty shareholders will know the amount of cash they would
receive if they vote "against" the transaction and elect to receive cash
instead of shares of Security Capital Class B common stock, but will not know
the exact value of the shares of Security Capital Class B common stock they
would otherwise receive when the transaction is completed or the amount they
could sell those shares for in the market following completion of the
transaction. You are urged to obtain current market quotations for Security
Capital and U.S. Realty.
THE FAIRNESS OPINIONS DO NOT ADDRESS CHANGES IN THE RELATIVE VALUES OF THE
COMPANIES SINCE THE DATE THE OPINIONS WERE ISSUED
The fairness opinion obtained by the Security Capital board of directors and
the fairness opinion obtained by the special committee of independent directors
of the U.S. Realty board are each dated September 26, 2000 and speak only as of
that date. The Security Capital board and the U.S. Realty special committee do
not presently intend to obtain updated fairness opinions from Goldman Sachs or
Merrill Lynch. Changes in the operations and prospects of Security Capital and
U.S. Realty, including general market and economic conditions, may alter the
relative values of the companies. Therefore, the opinions of Goldman Sachs and
Merrill Lynch do not address the fairness of the transaction consideration at
the time of the shareholder meetings or the time the transaction is actually
completed.
23
<PAGE>
WE MAY NOT REALIZE OUR EXPECTATION THAT ANALYSTS AND INVESTORS WILL PERCEIVE
SECURITY CAPITAL'S POST-TRANSACTION STRUCTURE FAVORABLY
Security Capital and U.S. Realty expect that the transaction will create a
company with a simplified structure and a correspondingly stronger market
profile for investors. Achieving this better market profile will depend in
large part on the perceptions of the investors and analysts who will follow
Security Capital after the transaction. Although analyst reports and stock
price movements have been favorable since the announcement of the transaction,
we cannot guarantee that these parties will continue to view the transaction
as creating a stronger market profile.
THE COMPANIES HAVE EXPENDED RESOURCES AND CAPITAL PURSUING THIS TRANSACTION,
AND IF THE TRANSACTION DOES NOT OCCUR, THE COMPANIES WILL NOT BENEFIT FROM
THESE EXPENDITURES AND MAY INCUR ADDITIONAL PAYMENTS
We may not complete the transaction. If we do not complete the transaction,
Security Capital and U.S. Realty will have incurred substantial expenses for
which neither company will have received any ultimate benefit. Additionally,
in the event we terminate the transaction agreement, one party may be required
to reimburse the other party for documented out-of-pocket expenses, not in
excess of $2.1 million. See "The Transaction Agreement--Expenses." Among the
reasons that the transaction may not be completed would be a failure of
Security Capital to have obtained sufficient financing for the transaction.
While Security Capital has obtained a commitment letter for sufficient
financing, there can be no assurance that such financing or any other
financing will be consummated for the transaction.
THE RIGHTS OF SECURITY CAPITAL SHAREHOLDERS DIFFER FROM THOSE OF U.S. REALTY
SHAREHOLDERS
Luxembourg law applicable to corporations formed under the laws of that
country and U.S. Realty's articles of incorporation currently govern the
rights of shareholders of U.S. Realty. Upon completion of the transaction,
Maryland law applicable to corporations formed under the laws of that state
and Security Capital's charter and bylaws will govern the rights of
shareholders of U.S. Realty who receive shares of Security Capital Class B
common stock. The rights of shareholders of U.S. Realty differ materially from
the rights of shareholders of Security Capital and the rights of former U.S.
Realty shareholders in Security Capital may be less favorable in some respects
than their former rights as shareholders of U.S. Realty, even if more
favorable in other respects. See "Comparison of Rights of Shareholders."
RISK FACTORS RELATING TO THE BUSINESS OF SECURITY CAPITAL AND TO THE OWNERSHIP
OF SECURITY CAPITAL STOCK
SECURITY CAPITAL WILL RELY ON DIVIDENDS AND FEES FROM COMPANIES OVER WHICH IT
DOES NOT HAVE UNILATERAL CONTROL TO MEET ITS OPERATING EXPENSE NEEDS AND TO
SERVICE DEBT, AND ITS FLEXIBILITY REGARDING ITS INVESTMENT IN STRATEGIC
INVESTEES IS AND WILL BE LIMITED BY SIGNIFICANT CONTRACTUAL RESTRICTIONS
Most of Security Capital's and U.S. Realty's cash flow and earnings come
from real estate operating companies in which they own shares. Security
Capital and U.S. Realty are, and Security Capital after the transaction will
be, partially dependent on dividends and fees it receives from these companies
to meet its operating expense needs and to pay principal and interest on its
debt. Although Security Capital and U.S. Realty have influence over these real
estate operating companies because of their significant ownership interest and
contractual rights, Security Capital and U.S. Realty have a non-majority
ownership interest and the right to designate nominees for fewer than a
majority of the board seats in several of these companies and does not have
unilateral control. Decisions or actions of investee management could
adversely affect Security Capital. In addition, the ability of the companies
in which Security Capital and U.S. Realty invest to pay dividends depends on
the economic performance of those companies, the prior claims of creditors or
holders of preferred stock of those companies and their compliance with United
States federal tax laws.
In addition, Security Capital has agreed with the public companies in which
it and U.S. Realty hold large strategic investments to significant
restrictions on, among other matters, disposing of any of those investments as
a block or in certain distributions without the consent of the investees.
These restrictions, which currently
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apply to U.S. Realty as well, have the effect of limiting the liquidity of
those investments and could materially adversely affect Security Capital's
ability to monetize its investments in those companies if it chose to do so.
See "Description of Business of U.S. Realty--Agreements with Strategic
Investee Companies."
SECURITY CAPITAL IS SUBJECT TO RISKS UNIQUE TO THE REAL ESTATE BUSINESS THAT
COULD ADVERSELY AFFECT FUTURE PERFORMANCE AND RESULTS OF OPERATIONS
Security Capital is subject to the following risks unique to the real
estate business:
. changes in specific economic conditions or commercial patterns that
reduce demand for real estate (for example, a recession or change in
technology that reduces demand for real estate facilities or which
results in bankruptcy of tenants);
. changes in tax laws or market conditions that make real estate
investment less attractive relative to other investment opportunities.
Such changes would reduce the number of buyers for real estate and
adversely affect real estate asset values. Selling real estate assets
typically takes longer than selling other types of assets, so it is more
difficult to anticipate unfavorable changes by selling the affected
assets before the change;
. changes in tax laws or capital markets, which result in excess capital
flowing into new real estate development and excess real estate supply;
and
. when equity and/or debt capital is unavailable or expensive for real
estate companies (as has been the case since mid-1998), Security Capital
is adversely affected, primarily because fee-earning capital markets
transaction volume suffers, the value of assets under management, on
which fees are based, is lower, and the ability to pursue attractive
investment opportunities, including new start-up companies, is limited
(and investees in the start-up phase may need to reduce activities and
incur related charges).
SECURITY CAPITAL HAS SEVERAL AFFILIATED COMPANIES AND FROM TIME TO TIME
ENGAGES IN TRANSACTIONS WITH THOSE COMPANIES, CREATING POTENTIAL CONFLICTS OF
INTEREST
Transactions between Security Capital and its affiliates have occurred and
may occur in the future. Several of Security Capital's directors or senior
officers are directors or trustees of its affiliates, or own shares of its
affiliates. Those persons may have conflicts of interest in affiliate
transactions. Where Security Capital engages in these types of transactions it
has obtained or will obtain disinterested director approval or shareholder
approval, when necessary, for transactions in which directors may have a
conflict of interest. Neither Security Capital's charter nor its bylaws
contains any restrictions on interested party transactions.
SECURITY CAPITAL WOULD BE MATERIALLY ADVERSELY AFFECTED IF IT WERE REQUIRED
TO REGISTER AS AN INVESTMENT COMPANY UNDER THE U.S. INVESTMENT COMPANY ACT
Security Capital is not registered as an investment company under the U.S.
Investment Company Act of 1940, in reliance on an exemption provided by Rule
3a-1 under that Act. The Investment Company Act does not require Security
Capital to register as an investment company because Security Capital is
principally engaged in the real estate business through companies that it
primarily controls. To the extent Security Capital and its affiliates dispose
of some of their equity interest in investees or do not elect to participate
in future equity offerings by investees, or those investees issue substantial
additional equity securities in a business combination to unaffiliated
parties, Security Capital's ownership interest in and control over those
investees could diminish. Under those circumstances, Security Capital could
potentially be required to register, or to seek another exemption from
registration, as an investment company under the Investment Company Act.
Security Capital would suffer additional regulatory costs and expenses, and
might be required to discontinue some operations or investments, if the
Investment Company Act required it to register as an investment company.
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THE TRANSACTION
BACKGROUND OF THE TRANSACTION
At meetings of the board of directors of Security Capital held between
February 1999 and March 2000, the board reviewed with management Security
Capital's business, structure, relationships with its investees and ideas for
creating shareholder value. At these meetings, the board discussed concepts for
potentially restructuring U.S. Realty or Security Capital's ownership in U.S.
Realty. During this period, management and Security Capital's advisors
researched various ideas for potential transactions involving U.S. Realty.
In April 2000, Security Capital informed the U.S. Realty board that it
expected to make a proposal with respect to a transaction between Security
Capital and U.S. Realty. At a telephonic meeting on April 27, 2000, the U.S.
Realty board determined that, in view of possible conflicts of interest and the
requirement under the articles of incorporation of U.S. Realty that
transactions between U.S. Realty and Security Capital be approved by a majority
of the independent directors of U.S. Realty, it was advisable to form a special
committee of independent directors to consider and evaluate any proposals from
Security Capital. The U.S. Realty board identified directors who, in its
opinion, were independent and whose business expertise and experience would be
helpful in evaluating and negotiating any transaction proposed by Security
Capital. The U.S. Realty board understood that the special committee would hire
independent counsel who would assist the special committee in, among other
things, further analyzing the independence of each special committee member
under applicable standards.
The special committee which considered and evaluated the proposals from
Security Capital consisted of Jay O. Light, Professor of Business
Administration at Harvard University, Francois Moes, member of the executive
board of DEXIA Banque Internationale a Luxembourg and James Mauck, President of
R.R. Donnelley's European operations. The U.S. Realty board initially appointed
to the special committee three of the four members of the U.S. Realty board
determined by the board to be "independent directors" under U.S. Realty's
articles of incorporation, namely Erich Coenen (who later resigned from the
committee as described below), Jay O. Light, and Francois Moes. The special
committee appointed Mr. Light as chairman. Claude Kremer was not appointed to
the special committee because of his position as a partner at Arendt &
Medernach, which, in addition to serving as U.S. Realty's Luxembourg counsel,
had advised other affiliates of Security Capital. The U.S. Realty board also
appointed James Mauck (who at the time was not a director of U.S. Realty, but
who had served previously as a member of the U.S. Realty board and who had been
nominated for election to the U.S. Realty board at the next annual
shareholders' meeting) to serve initially as a non-voting, advisory member of
the special committee, and effective immediately upon his election as a
director of U.S. Realty, to serve as a full, voting member of the special
committee.
The U.S. Realty board authorized the special committee to consider and
evaluate the fairness and advisability to the U.S. Realty shareholders of a
potential proposal from Security Capital and to report its recommendation to
the full U.S. Realty board. The special committee also was empowered, if
required by its fiduciary duties, to initiate or solicit an alternative or
competing transaction to a potential proposal from Security Capital and report
its recommendation concerning any such alternative transaction to the full U.S.
Realty board. The special committee was authorized to conduct negotiations
regarding a potential proposal from Security Capital and any alternative
transactions, to review such information as it deemed appropriate, and to
retain legal, financial and other advisors to assist it in its consideration
and evaluation of a potential proposal from Security Capital and any
alternative transactions.
The special committee of U.S. Realty retained legal counsel. The special
committee and its legal counsel discussed the need to retain a suitable
financial advisor to assist the special committee in negotiating and evaluating
any potential proposals from Security Capital. On May 22, 2000, the special
committee engaged Merrill Lynch to serve as financial advisor to the special
committee.
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In late April and early May, representatives of Security Capital management
separately contacted the three public companies in which U.S. Realty holds
strategic positions to discuss the possible terms under which the companies
might agree to waive restrictions in their agreements with U.S. Realty against
transfers to Security Capital of the shares held by SC-Holdings in those
companies. Security Capital was able to reach an agreement with each of the
three investee companies enabling the transactions contemplated by the
transaction agreement with U.S. Realty to proceed. As a condition to their
agreement, each of the investee companies required, among other concessions,
elimination of various restrictions on their business operations contained in
those agreements and an extension of the period restricting actions by U.S.
Realty and SC-Holdings to become effective in the event of such a transfer. See
"Description of Business of U.S. Realty--Agreements with Strategic Investee
Companies."
On May 25, 2000, Security Capital's management and advisors presented a
proposal to Security Capital's board of directors to effect a transaction
between U.S. Realty and Security Capital. The board authorized management of
Security Capital to make a proposal to and enter into negotiations with U.S.
Realty.
During the period from June 5 to 8, 2000, C. Ronald Blankenship, Vice
Chairman and Chief Operating Officer of Security Capital, and Paul E. Szurek,
Chief Financial Officer of Security Capital, met with the U.S. Realty board
members for the purpose of giving a presentation on the proposed transaction.
On June 13, 2000, Security Capital sent a letter to the board of directors
of U.S. Realty proposing a specific transaction between Security Capital and
U.S. Realty. The proposed transaction was a transaction in which the
shareholders of U.S. Realty would receive in exchange for each share of
outstanding U.S. Realty stock, 1.10 shares of Security Capital Class B common
stock. First, Security Capital would acquire all of U.S. Realty's assets
(consisting mainly of U.S. Realty's interest in SC-Holdings) in exchange for
1.10 shares of Security Capital Class B common stock for each outstanding share
of U.S. Realty plus sufficient cash to repay U.S. Realty's convertible notes
and to pay cash to U.S. Realty shareholders electing to receive cash in lieu of
stock. Second, following the transfer described above, U.S. Realty would
voluntarily liquidate and distribute the Security Capital Class B common stock
and cash to its shareholders. The proposal was conditioned on the aggregate
amount of cash to be distributed to cash-electing shareholders not exceeding
$150 million. Security Capital stated in its proposal that it was not
interested in selling its interest in U.S. Realty or participating in any other
business combination or extraordinary corporate transaction involving U.S.
Realty.
On June 18, 2000, Mr. Light, as Chairman of the special committee of U.S.
Realty, delivered a letter to Security Capital stating that the special
committee had received the June 13 proposal and was reviewing the proposal with
the assistance of its legal and financial advisors.
On June 27 and 28, 2000, the special committee of U.S. Realty met in
Luxembourg with its legal and financial advisors. The special committee
determined that its actions were governed by Luxembourg law, which generally
requires directors to act in the best interests of the company and its
stockholders. In addition, the special committee determined to govern itself to
the extent practicable in accordance with the principles established by the
laws of the State of Delaware, which is generally recognized in the United
States as having the most developed case law dealing with corporate fiduciary
matters, including the interpretation of standards concerning the conduct of
special committees and their independence and which imposes well defined
standards on boards of directors and board committees. Finally, because U.S.
Realty's securities are traded on the NYSE, the rules of the NYSE, including
those describing independence, also were applicable.
U.S. Realty's articles of incorporation contain an express requirement for
approval of all transactions with Security Capital and its affiliates by a
majority of the independent directors of U.S. Realty. Although there is no
express requirement for the establishment of a special committee under Delaware
law, Delaware case law suggests that the establishment of a special committee
of independent directors is a mechanism which is appropriate, and can
demonstrate that a board of directors has satisfied its fiduciary duties, in
considering and approving a transaction with a significant shareholder such as
Security Capital.
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For purposes of U.S. Realty's articles of incorporation, an independent
director is "a person other than an officer or employee of [U.S. Realty] or
Security Capital Group or its subsidiaries or any other individual having a
relationship which, in the opinion of the board of directors, would interfere
with the exercise of independent judgment in carrying out the responsibility of
a director." Delaware courts look to the actual circumstances of the director
serving on the committee to determine whether any of his possibly conflicting
interests are sufficiently material to impugn the discharge of his duties to
the committee. Thus, the issue before the special committee was whether any of
the independent directors nominated for the special committee would likely be
unable to perform his fiduciary duties in analyzing the transaction in light of
any relationship he might have with Security Capital and U.S. Realty.
Accordingly, the special committee, together with its legal counsel,
discussed any relationships that its members might have with Security Capital
that could call into question each member's independence. After reviewing Mr.
Coenen's relationship with Commerzbank AG and the relationships of Commerzbank
AG with U.S. Realty, for which Commerzbank is the main lender, and Security
Capital and its other affiliates, Mr. Coenen and the special committee mutually
decided that it would be in the best interests of U.S. Realty, its shareholders
and the U.S. Realty board if Mr. Coenen were to resign from the special
committee. Accordingly, Mr. Coenen resigned from the special committee. None of
the other members of the special committee is employed by or affiliated with
U.S. Realty (except in their capacities as directors) or Security Capital or
any of its affiliates, except that each member is also a director of Security
Capital European Realty, an affiliate of Security Capital. In addition, Mr.
Light beneficially owns 38,900 shares of Class B common stock of Security
Capital and Mr. Mauck beneficially owns 15.5 shares of Class A common stock of
Security Capital and approximately $12,500 of Security Capital debentures. The
special committee determined that the ownership interests of Messrs. Light and
Mauck in Security Capital were not substantial enough to impair their ability
to act independently. The value of the equity interests of Messrs. Light and
Mauck in Security Capital, in light of their respective economic circumstances
(including their equity interest in U.S. Realty as described in "The
Transaction--Interests of Certain Persons in the Transaction" and "Ownership of
U.S. Realty Shares"), were not considered to be material to the financial
position of either Mr. Light or Mr. Mauck, and that the experience of Messrs.
Light and Mauck in business, financial and transactional matters made their
presence on the special committee of value to U.S. Realty and its shareholders.
Therefore, based on the analysis of applicable independence standards by the
special committee, with advice of its legal counsel, the special committee
confirmed the U.S. Realty board's determination that Messrs. Light, Mauck and
Moes were independent and able to satisfy their fiduciary obligations under all
applicable laws.
Also at the meeting of the special committee, legal counsel to the special
committee advised the special committee of its legal responsibilities regarding
actions taken by the special committee with respect to the Security Capital
proposal. Thereafter, the special committee discussed with its legal counsel,
and adopted, certain procedures to be followed in analyzing the Security
Capital proposal and any alternative proposals that might be received by U.S.
Realty. Merrill Lynch reviewed with the special committee certain public
information regarding the relative valuations of U.S. Realty and Security
Capital. The special committee directed Merrill Lynch to perform additional due
diligence regarding the relative valuations of U.S. Realty and Security Capital
and to work with Goldman Sachs, financial advisor to Security Capital, in
gathering such information. The special committee then directed its legal
counsel and Merrill Lynch to consider alternatives to the Security Capital
proposal and to analyze the business and legal issues related to any such
alternatives.
At the conclusion of the meeting on June 28, 2000, the special committee of
U.S. Realty delivered a letter to Security Capital advising that it was
continuing to review the June 13 proposal.
From June 29, 2000 through July 12, 2000, Mr. Light, as chairman of the
special committee of U.S. Realty, and the advisors to the special committee
discussed and reviewed several alternatives, including full and partial
liquidation of U.S. Realty. Arendt & Medernach, U.S. Realty's Luxembourg
counsel, informed the special committee that any extraordinary corporate
transaction would require the approval of two-thirds of a quorum consisting of
a majority of the outstanding shares and, thus, Security Capital, with its
approximately 40% ownership stake in U.S. Realty, effectively could block any
alternative extraordinary transaction.
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The special committee of U.S. Realty held a telephonic meeting on July 13,
2000 to discuss several alternative transactions. Merrill Lynch suggested that
the most viable alternative, from a financial perspective, would be the
liquidation of U.S. Realty, accomplished in the following manner: first,
selling U.S. Realty's interests in its privately held investees to Security
Capital in exchange for shares of Security Capital Class B common stock and
cash; second, repaying outstanding debt; and then, liquidating U.S. Realty. In
the liquidation, U.S. Realty shareholders would receive distributions of U.S.
Realty's interests in its publicly held investees, shares of Security Capital
Class B common stock, and cash. Any additional cash required in the
distribution would be raised from registered offerings of shares of publicly
held investees. The special committee discussed with its legal counsel certain
legal issues surrounding this alternative, including the fact that the proposal
could be consummated only with the approval of Security Capital and U.S.
Realty's publicly-traded investees. On July 19, 2000, the special committee
submitted a letter to Security Capital setting forth this alternative proposal
and requesting that Security Capital and its advisors meet with the special
committee and its advisors to review the alternative proposal.
Security Capital responded in writing to the July 19, 2000 letter from the
special committee on July 20, 2000, explaining that Security Capital was not
interested under any circumstances in pursuing the alternative transaction.
Security Capital reiterated that it was only interested in pursuing the
proposal set forth in its June 13, 2000 letter and that, regardless of whether
or not an agreement was reached concerning the Security Capital proposal, it
would not agree to pursue the proposed alternative transaction or any similar
transaction. Security Capital stated its belief that the interest of U.S.
Realty's shareholders would be best served by participating on an ongoing basis
in a combined Security Capital/U.S. Realty. The letter emphasized the inclusion
as a part of the proposed transaction of an option for U.S. Realty shareholders
to receive cash for their shares.
The special committee of U.S. Realty held a telephonic meeting on July 25,
2000, to discuss Security Capital's rejection of the alternative transaction.
In light of Security Capital's rejection of the proposed alternative
transaction and U.S. Realty's inability to complete the proposed alternative
transaction without Security Capital's approval, the special committee
determined to discuss further with Security Capital its June 13 proposal. On
July 26, 2000, the special committee delivered a letter to Security Capital
setting forth its counterproposals. In particular, the special committee
proposed that the consideration to be received by the U.S. Realty shareholders
be based on a ratio of 1.20 shares of Security Capital Class B common stock for
each outstanding U.S. Realty share rather than the 1.10 Security Capital shares
that Security Capital proposed. The special committee further proposed that the
condition relating to the maximum cash to be paid by Security Capital to
dissenting U.S. Realty shareholders be raised from $150 million to $200
million.
From the beginning of August through September 13, 2000, Merrill Lynch and
Goldman Sachs met on several occasions to exchange information and discuss the
relative valuations and net asset values of U.S. Realty and Security Capital.
The special committee of U.S. Realty and its advisors met on August 8, 2000 and
September 8, 2000 via telephone conferences to obtain updates from Merrill
Lynch on its discussions with Goldman Sachs and from counsel to the special
committee on discussions with respect to the draft transaction agreement
provided to the special committee by counsel to Security Capital.
On August 16, 2000, at a regularly scheduled meeting of the Security Capital
board of directors, members of senior management reviewed with the board the
status of the discussions between Security Capital's representatives and the
special committee's representatives.
On September 15, 2000, the Luxembourg supervisory authority advised that it
would not object to the transaction structure proposed in the June 13 letter.
From September 19 through September 25, 2000, Merrill Lynch and Goldman Sachs
held several discussions via telephone and a meeting to negotiate the effective
value exchange ratio and the maximum aggregate amount of cash Security Capital
would be willing to pay for U.S. Realty shares held by shareholders electing
cash. During this period, counsel to the special committee of U.S. Realty and
counsel to Security Capital worked at the direction of their clients to resolve
the remaining open issues in the transaction agreement.
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On September 19, 2000, at a special meeting of the Security Capital board of
directors, members of senior management reviewed with the board the status of
the negotiations between Security Capital's representatives and the special
committee's representatives, and the board reviewed and approved the financing
arrangements for the transaction.
The special committee of U.S. Realty and its advisors held a telephonic
meeting on September 22, 2000. Mr. Light reported that Security Capital had
offered an effective value exchange ratio based on 1.15 shares of Security
Capital Class B common stock for each outstanding U.S. Realty share and a
maximum aggregate cash amount of $200 million. Mr. Light noted that this offer
was subject to satisfactory resolution of outstanding open issues under the
transaction agreement. Mr. Light further noted that representatives of Security
Capital told him that Security Capital was unwilling in any event to agree to
any higher exchange ratio; that any higher exchange ratio would result in
earnings dilution to Security Capital in excess of that to which Security
Capital was prepared to agree. Based on the special committee's knowledge of
the respective businesses of U.S. Realty and Security Capital and the reports
and advice of its professional advisors, including but not limited to the
preliminary relative valuations presented by its financial advisor, the special
committee tentatively approved the 1.15 effective value exchange ratio and $200
million on aggregate cash maximum. The special committee and its counsel
discussed the remaining open issues on the transaction agreement as well as
Security Capital's position on these terms. The special committee directed its
counsel to test further whether Security Capital would consider waiving its
conditions to these terms and otherwise to finalize the terms and conditions of
the transaction agreement.
From September 22, 2000 to September 24, 2000, counsel to the special
committee of U.S. Realty and counsel to Security Capital further discussed the
remaining open points in the transaction agreement at the direction of their
respective clients.
On September 24, 2000, the special committee of U.S. Realty, together with
legal counsel to the special committee and Merrill Lynch, met in Amsterdam, The
Netherlands. A copy of the proposed final draft of the transaction agreement
and related analyses and other materials had been delivered to the special
committee prior to the meeting. The special committee discussed with its
advisors the terms of the proposed final draft of the transaction agreement.
Mr. Light informed the special committee that neither he nor legal counsel to
the special committee had been able to persuade Security Capital to agree to
any further contractual concessions. Then Merrill Lynch presented an analysis,
outlined in the materials distributed to the special committee prior to the
meeting, of the consideration to be received by shareholders of U.S. Realty and
delivered its oral opinion to the effect that such consideration was fair, from
a financial point of view, to the shareholders of U.S. Realty (other than
Security Capital and its affiliates). The special committee discussed the
consideration to be received in detail and questioned Merrill Lynch regarding
certain aspects of its valuation methodology and analysis. Based on the factors
described below in "--Recommendation of the Special Committee of the Board of
Directors" and subject to (A) receipt of a final fairness opinion from Merrill
Lynch and (B) the requisite approval of the Security Capital board of directors
of the proposed transaction, the special committee unanimously determined (1)
that the sale to Security Capital of all of the shares and other equity
interests in SC-Holdings held by U.S. Realty, the subsequent liquidation of
U.S. Realty, the transaction agreement and the transactions and matters
contemplated thereby were advisable, fair to, and in the best interests of,
U.S. Realty and its shareholders and (2) to approve and recommend that the U.S.
Realty board approve, accept and declare advisable the sale to Security Capital
of all of the shares and other equity interests in SC-Holdings held by U.S.
Realty, the subsequent liquidation of U.S. Realty, the transaction agreement
and the transactions and matters contemplated thereby and recommend to the U.S.
Realty shareholders that they approve the sale to Security Capital of all of
the shares and other equity interests in SC-Holdings held by U.S. Realty, the
subsequent liquidation of U.S. Realty, the transaction agreement and the
transactions and matters contemplated thereby.
After the special committee meeting on September 24, 2000, all of the
members of the U.S. Realty board held a telephonic meeting to receive the
report of the special committee. At the board meeting, Mr. Light presented the
report of the special committee advising the U.S. Realty board that the special
committee unanimously found the sale to Security Capital of all of the shares
and other equity interests in SC-Holdings
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held by U.S. Realty, the subsequent liquidation of U.S. Realty, the transaction
agreement and the other transactions contemplated thereby to be advisable, fair
to, and in the best interests of, U.S. Realty and its shareholders and
recommended that the U.S. Realty board approve, accept and declare advisable
the sale to Security Capital of all of the shares and other equity interests in
SC-Holdings held by U.S. Realty, the liquidation of U.S. Realty, the
transaction agreement and the other transactions contemplated thereby and
recommend to the U.S. Realty shareholders that they approve the sale to
Security Capital of all of the shares and other equity interests in SC-Holdings
held by U.S. Realty, the liquidation of U.S. Realty, the transaction agreement
and the other transactions contemplated thereby, subject to (1) receipt of a
final fairness opinion from Merrill Lynch and (2) the requisite approval of the
Security Capital board of the proposed transaction. Legal counsel to the
special committee summarized the terms of the transaction agreement and the
negotiations regarding certain significant terms. Merrill Lynch summarized its
presentation given earlier in the day to the special committee. After hearing
and discussing the report and recommendation of the special committee, the U.S.
Realty board, subject to (A) receipt of a final fairness opinion from Merrill
Lynch and (B) the requisite approval of the Security Capital board of the
proposed transaction, unanimously (i) determined that the sale to Security
Capital of all of the shares and other equity interests in SC-Holdings held by
U.S. Realty, the liquidation of U.S. Realty, the transaction agreement and the
other transactions contemplated thereby were advisable, fair to, and in the
best interests of, U.S. Realty and its shareholders and (ii) recommended that
U.S. Realty shareholders approve the sale to Security Capital of all of the
shares and other equity interests in SC-Holdings held by U.S. Realty, the
liquidation of U.S. Realty, the transaction agreement and the other
transactions contemplated thereby.
The Security Capital board of directors held a special meeting in the
afternoon on September 25, 2000. Security Capital management and its legal and
financial advisors made presentations to the board concerning the proposed
transaction agreement and the status of the negotiations with the U.S. Realty
special committee. Goldman Sachs made a financial presentation to the board of
directors and gave its oral opinion (subsequently confirmed in writing) to the
board as to the fairness to Security Capital, from a financial point of view,
of the consideration to be paid by Security Capital under the transaction
agreement. Legal counsel to Security Capital described the terms and conditions
of the draft transaction agreement and other related matters. After discussion
and consideration, the Security Capital board approved the transaction
agreement and determined to recommend that shareholders of Security Capital
approve the issuance of shares of Security Capital Class B common stock in the
transaction. The board also resolved to reclassify a number of authorized
shares of Class A common stock and Series A preferred stock to provide for
additional authorized Class B common stock to complete the transaction.
On September 26, 2000, Merrill Lynch delivered its opinion to the effect
that, based upon and subject to certain factors and assumptions stated in its
opinion, as of such date the consideration to be received by the U.S. Realty
shareholders (other than Security Capital and its affiliates) was fair, from a
financial point of view, to such shareholders of U.S. Realty. On September 26,
2000, after Security Capital's and the U.S Realty special committee's legal
counsel had finalized the transaction documents, Security Capital, SC Realty
and U.S. Realty entered into the transaction agreement. Prior to the opening of
the New York and Amsterdam stock exchanges, Security Capital and U.S. Realty
issued a joint press release announcing the transactions and the execution of
the transaction agreement.
RECOMMENDATIONS OF THE U.S. REALTY SPECIAL COMMITTEE AND OF THE FULL U.S.
REALTY BOARD; FAIRNESS OF THE TRANSACTION
The U.S. Realty Special Committee
Because two members of the U.S. Realty board of directors are or were
affiliated with Security Capital, and because U.S. Realty's articles of
incorporation require the independent directors of U.S. Realty to approve any
transaction between U.S. Realty and Security Capital, the U.S. Realty board
appointed a special committee of three independent directors to evaluate the
proposed transaction. None of the members of the U.S. Realty special committee
are officers or employees of U.S. Realty (except in their capacities as
directors) or directors,
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officers or employees of Security Capital or any of its affiliates (other than
U.S. Realty and its affiliates), except that each member is also a director of
Security Capital European Realty, an affiliate of Security Capital (although
Mr. Light beneficially owns 38,900 shares of Security Capital Class B common
stock and Mr. Mauck beneficially owns 15.5 shares of Security Capital Class A
common stock and approximately $12,500 of Security Capital debentures).
The members of the U.S. Realty special committee have not received any
special compensation for their services on the committee, other than a one-time
payment to the chairman of the special committee of $6,000 and to each other
member of the special committee of $5,000 and other than regular meeting fees
of $1,000 to each member per meeting in connection with their service on the
special committee. Members of the U.S. Realty special committee, however, will
be entitled to indemnification rights and to directors' and officers' liability
insurance under the transaction agreement and acceleration and receipt of cash
payments under U.S. Realty incentive arrangements. (See "--Interests of Certain
Persons in the Transaction.") The U.S. Realty board of directors and the
special committee believe that the foregoing arrangements do not affect the
special committee's independence or impartiality.
Recommendations of the U.S. Realty Special Committee and the Full U.S. Realty
Board
The special committee unanimously determined (1) that the sale to Security
Capital of all of the shares and other equity interests in SC-Holdings held by
U.S. Realty, the subsequent liquidation of U.S. Realty, the transaction
agreement and the other transactions and matters contemplated thereby were
advisable, fair to, and in the best interests of, U.S. Realty and its
shareholders (other than Security Capital and its affiliates) and (2) to
approve and recommend that the U.S. Realty board of directors approve, accept
and declare advisable the sale to Security Capital of all of the shares and
other equity interests in SC-Holdings held by U.S. Realty, the subsequent
liquidation of U.S. Realty, the transaction agreement and the other
transactions and matters contemplated thereby and recommend to the U.S. Realty
shareholders that they approve the sale to Security Capital of all of the
shares and other equity interests in SC-Holdings held by U.S. Realty, the
subsequent liquidation of U.S. Realty, the transaction agreement and the other
transactions and matters contemplated thereby. The U.S. Realty board of
directors unanimously (1) determined that the sale to Security Capital of all
of the shares and other equity interests in SC-Holdings held by U.S. Realty,
the subsequent liquidation of U.S. Realty, the transaction agreement and the
other transactions and matters contemplated thereby were advisable, fair to,
and in the best interests of U.S. Realty and its shareholders and (2)
recommended that U.S. Realty shareholders approve the sale to Security Capital
of all of the shares and other equity interests in SC-Holdings held by U.S.
Realty, the subsequent liquidation of U.S. Realty, the transaction agreement
and the other transactions and matters contemplated thereby. ACCORDINGLY, THE
FULL U.S. REALTY BOARD UNANIMOUSLY RECOMMENDS THAT U.S. REALTY SHAREHOLDERS
VOTE IN FAVOR OF APPROVAL OF THE TRANSACTION AGREEMENT AND THE TRANSACTIONS AND
MATTERS CONTEMPLATED THEREBY.
U.S. REALTY'S REASONS FOR THE TRANSACTION
Matters Considered by the U.S. Realty Special Committee
In reaching the conclusions described above, the special committee
considered a number of factors, including but not limited to the following:
. the opinion of Merrill Lynch, dated as of September 26, 2000, to the
effect that, based upon, and subject to certain factors and assumptions
set forth therein, as of such date, the consideration to be received by
the U.S. Realty shareholders (other than Security Capital and its
affiliates) pursuant to the transactions described herein is fair to
such shareholders from a financial point of view, see "--Opinion of
Merrill Lynch, Financial Advisor to the U.S. Realty Special Committee";
. various valuation analyses employed by Merrill Lynch in making its
determination as to the fairness of the consideration to be received by
the U.S. Realty shareholders including selective publicly-traded
comparable companies analysis, selected comparable acquisition
transaction analysis, discounted cash
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flow analysis, and net asset valuation. See "--Background of the
Transaction" and "--Opinion of Merrill Lynch, Financial Advisor to the
U.S. Realty Special Committee";
. the fact that the terms of the transaction were determined through
arm's-length negotiations between Security Capital and the independent
special committee and their legal and financial advisors, and the
judgment of the special committee that, based upon the negotiations that
had transpired, it was unlikely that an effective value exchange ratio
higher than 1.15 could be obtained;
. the exchange ratio represented a market premium for U.S. Realty
shareholders of 12.7% on the day immediately preceding the date of the
announcement;
. the fact that Security Capital's consent which would be required for
U.S. Realty's proposed alternative transaction and Security Capital's
response that it would not support the alternative transaction or
similar transactions for reasons including a desire that all
shareholders have the opportunity to continue ownership in the combined
company;
. the strong financial commitment that Security Capital received from its
lenders and the belief that Security Capital has the financial resources
necessary to consummate the transaction;
. the ability of U.S. Realty shareholders under the transaction to
continue to participate in any potential growth of the combined company
while permitting shareholders who desire to receive cash the option to
do so (subject to the $200 million maximum);
. the fact that U.S. Realty shareholders will own shares in a combined
company with significantly greater assets and a simpler structure with
no external advisor;
. the increased market capitalization of the combined company should
provide substantially improved liquidity to current shareholders of U.S.
Realty; and
. the combined company will have a larger and more diversified portfolio
of investments.
The special committee noted that approximately 40.6% of the outstanding
U.S. Realty shares are held by Security Capital and its affiliates. The
special committee also considered that the obligation of U.S. Realty to
complete the transaction is not conditioned upon the favorable vote of a
majority of the shareholders who are not affiliated with Security Capital. In
spite of the absence of this voting requirement, the special committee
believes that the procedure that was followed in determining the amount of
consideration that U.S. Realty shareholders will receive in the transaction,
the methodology for calculating the amount of cash to be received by the U.S.
Realty shareholders who vote "against" the transaction and who elect to
receive cash instead of Security Capital shares, and the other terms and
conditions of the transaction agreement were fair to the U.S. Realty
shareholders who are not affiliated with Security Capital.
Matters Considered by the U.S. Realty Board of Directors
The U.S. Realty board of directors consists of seven directors, three of
whom served on the special committee. At the September 24, 2000 meeting of the
U.S. Realty board of directors, the special committee, with its legal and
financial advisors participating, reported to the other members of the U.S.
Realty board on its review of the transaction agreement and the factors taken
into account by the special committee in reaching its determinations and
recommendation. Accordingly, the full U.S. Realty board of directors took into
account the same factors considered by the special committee. In addition, the
full U.S. Realty board considered the conclusions and recommendation of the
special committee and believes that these factors supported the U.S. Realty
board's fairness determination. Furthermore, the U.S. Realty board considered
the fact that the amount of consideration that U.S. Realty shareholders will
receive in the transaction, the methodology for calculating the amount of cash
to be received by U.S. Realty shareholders who vote "against" the transaction
and who elect to receive cash instead of Security Capital shares, and the
other terms and conditions of the transaction agreement were the result of
arm's-length negotiations among the special committee and Security Capital and
their respective advisors.
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The foregoing discussion of the matters considered by the U.S. Realty
special committee and the U.S. Realty board includes all of the material
factors considered by each of the special committee and the board in reaching
its determinations and recommendation but is not meant to be exhaustive. In
view of the variety of factors considered in reaching their determinations, the
special committee and the board did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered in reaching their determinations and recommendation. In addition,
individual members of the special committee and the board may have given
different weights to different factors.
OPINION OF MERRILL LYNCH, FINANCIAL ADVISOR TO THE U.S. REALTY SPECIAL
COMMITTEE
The special committee of the board of directors of U.S. Realty retained
Merrill Lynch to act as its exclusive financial advisor in connection with
consideration of Security Capital's proposal and the transaction entered into
with Security Capital. On September 24, 2000, Merrill Lynch delivered to the
special committee its oral opinion, later confirmed in writing, to the effect
that, based upon and subject to certain factors and assumptions stated in its
opinion, as of such date, the consideration to be received by shareholders of
U.S. Realty, other than Security Capital and its affiliates, pursuant to the
transaction contemplated by the transaction agreement was fair from a financial
point of view to the holders of U.S. Realty shares, other than Security Capital
and its affiliates.
THE FULL TEXT OF THE MERRILL LYNCH OPINION, DATED SEPTEMBER 26, 2000, WHICH
SETS FORTH A DESCRIPTION OF THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED,
FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AS APPENDIX B. U.S. REALTY SHAREHOLDERS
ARE URGED TO READ THE MERRILL LYNCH OPINION CAREFULLY IN ITS ENTIRETY,
ESPECIALLY WITH REGARD TO THE ASSUMPTIONS MADE AND FACTORS CONSIDERED BY
MERRILL LYNCH.
The Merrill Lynch opinion was provided to the special committee of the board
of directors of U.S. Realty for their information and is directed only to the
fairness from a financial point of view of the consideration to be received by
shareholders of U.S. Realty, other than Security Capital and its affiliates,
pursuant to the transaction, and does not address (a) the merits of the
underlying decision by U.S. Realty to engage in the transaction, (b) the
equivalency or desirability of the different elections that holders of U.S.
Realty shares can make pursuant to the transaction agreement or (c) the price
or trading range at which U.S. Realty shares or Security Capital shares will
trade following the announcement or consummation of the transaction. The
Merrill Lynch opinion does not constitute a recommendation to any shareholder
as to how such shareholder should vote on the transaction or as to whether such
shareholder should vote "against" the transaction and elect to receive cash for
his or her U.S. Realty shares.
The summary set forth below does not purport to be a complete description of
the analyses underlying the Merrill Lynch opinion or the presentation made by
Merrill Lynch to the special committee. The preparation of a fairness opinion
is a complex analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the applications of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to partial analysis or summary description.
Accordingly, Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all of
its analyses, would create an incomplete view of the underlying Merrill Lynch
opinion. In arriving at its opinion, Merrill Lynch did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch or U.S. Realty. Any estimates contained in the analyses performed by
Merrill Lynch are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the value of businesses or securities
do
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not purport to be appraisals or to reflect the prices at which such businesses
or securities might actually be sold. Accordingly, such analyses and estimates
are inherently subject to substantial uncertainty.
No company, transaction or business used as a comparison is identical to
U.S. Realty or Security Capital as of September 22, 2000 or the transaction
contemplated by the transaction agreement. Accordingly, an examination of the
results of those analyses necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that could affect the transaction or the public trading or other
values of the company or companies to which they are being compared.
Mathematical analysis (such as determining the average or median) is not in
itself a meaningful method of using comparable acquisition or company data.
In arriving at its opinion, Merrill Lynch, among other things:
. reviewed certain publicly available business and financial information
relating to U.S. Realty and Security Capital that Merrill Lynch deemed
to be relevant;
. reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
U.S. Realty and Security Capital;
. conducted discussions with members of senior management and
representatives of U.S. Realty and Security Capital concerning the
matters described in the two preceding clauses;
. reviewed the market prices and valuation multiples for U.S. Realty
shares and Security Capital shares and compared them with those of
certain publicly-traded companies that Merrill Lynch deemed to be
relevant;
. reviewed the results of operations of U.S. Realty and Security Capital
and compared them with those of certain publicly-traded companies that
Merrill Lynch deemed to be relevant;
. compared the proposed financial terms of the transaction with the
financial terms of certain other transactions that Merrill Lynch deemed
to be relevant;
. participated in certain discussions and negotiations among
representatives of U.S. Realty and Security Capital and their financial
and legal advisors;
. reviewed the potential pro forma impact of the transaction;
. reviewed the transaction agreement; and
. reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary, including Merrill
Lynch's assessment of general economic, real estate, market and monetary
conditions.
Merrill Lynch was not authorized by U.S. Realty or the special committee of
the board of directors to solicit, nor did it solicit, third-party indications
of interest for the acquisition of all or any part of U.S. Realty. In addition,
although Merrill Lynch considered the possible liquidation of U.S. Realty,
Security Capital is in a position to block such liquidation and Merrill Lynch
has been advised and has assumed that Security Capital would not permit the
liquidation of all or any portion of U.S. Realty nor would it consider any
transaction other than the transaction.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, discussed with or reviewed by or for Merrill Lynch, or publicly
available, and Merrill Lynch did not assume any responsibility for
independently verifying such information, did not undertake an independent
evaluation or appraisal of any of the assets or liabilities of U.S. Realty or
Security Capital or any direct or indirect subsidiary of U.S. Realty or
Security Capital and was not furnished with any such evaluation or appraisal.
In addition, Merrill Lynch did not assume any obligation to conduct any
physical inspection of the properties or facilities of U.S. Realty or Security
Capital. With respect to the financial forecast information furnished to or
discussed with Merrill Lynch by U.S.
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Realty or Security Capital, Merrill Lynch assumed that they were reasonably
prepared and reflected the best currently available estimates and judgment of
U.S. Realty's or Security Capital's management as to the expected future
financial performance of U.S. Realty or Security Capital, as the case may be.
The Merrill Lynch opinion is necessarily based upon market, real estate,
economic and other conditions as they existed and could be evaluated on, and on
the information made available to Merrill Lynch as of September 26, 2000, the
date of its opinion. Merrill Lynch also assumed that in the course of obtaining
necessary consents or approvals for the transaction, no restrictions, including
any divestiture requirements or amendments or modifications, will be imposed
that will have a material adverse effect on the contemplated benefits of the
transaction.
The following is a summary of the material portions of the financial and
comparative analyses performed by Merrill Lynch in connection with its
preparation of the Merrill Lynch opinion.
Merrill Lynch calculated a range of implied valuations for U.S. Realty and
Security Capital by utilizing the following four valuation analyses:
1. Selected Publicly-Traded Comparable Companies Analysis. A publicly-
traded comparable companies analysis reviews a business's operating
performance and outlook relative to a group of publicly-traded peer
companies to determine an implied unaffected market trading valuation
multiple.
2. Selected Comparable Acquisition Transaction Analysis. A comparable
acquisition transaction analysis provides an implied valuation multiple
based upon financial information of companies which have been acquired in
selected recent transactions and which are in the same or similar
industries as the business being valued.
3. Discounted Cash Flow Analysis. A discounted cash flow analysis
provides insight into the intrinsic value of a business based on the
projected earnings and capital requirements and the net present value of
the subsequent cash flows anticipated to be generated by the assets of the
business.
4. Net Asset Valuation. A net asset valuation provides an implied value
per share by subtracting accounts payable, accrued expenses, indebtedness
and preferred stock from the current value of all investments held by the
business.
Merrill Lynch then compared the valuations of U.S. Realty and Security
Capital obtained by utilizing the valuation analyses described above. Merrill
Lynch also noted that, for those shareholders who do not wish to receive shares
of Security Capital Class B common stock in the transaction, an amount of cash
which is intended to have a value equivalent to the Security Capital shares
will be made available, on a limited basis.
Selected Publicly-Traded Comparable Companies Analysis
Using publicly available information, including growth rate estimates
obtained from First Call Corporation, Merrill Lynch reviewed the stock prices
as of September 22, 2000 and market multiples of the common stock of companies
that Merrill Lynch believes hold investments that are generally comparable to
those of U.S. Realty and Security Capital.
With respect to U.S. Realty, Merrill Lynch reviewed information for 13
companies which primarily own office properties, 12 companies which primarily
own retail properties, 5 companies which primarily own mobile home properties,
14 companies which primarily own shopping centers and three companies which
primarily own storage facilities. Merrill Lynch then weighted the data from
each type of company to conform to the percentage of investments which are held
by U.S. Realty in each type of property.
With respect to Security Capital, Merrill Lynch reviewed 21 companies which
primarily own apartments and seven companies which primarily own industrial or
distribution facilities. Merrill Lynch then weighted the data from each type of
company to conform to the types of properties owned by Security Capital, while
also taking into account Security Capital's interest in U.S. Realty.
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Merrill Lynch analyzed the multiples obtained by dividing the market
capitalization of the common stock of each of the comparable companies by (x)
the earnings before depreciation, amortization and deferred taxes ("EBDADT") of
each of the comparable companies for its current fiscal year and (y) the
projected EBDADT for each of the comparable companies for next year. Such
multiples were then applied to the corresponding market capitalization of U.S.
Realty and Security Capital, to derive valuation estimates. Using this
methodology, Merrill Lynch arrived at weighted multiples for U.S. Realty
ranging from 7.0x to 9.0x for the current fiscal year and 6.0x to 8.0x for next
year, yielding an estimated per share valuation for U.S. Realty shares of
$15.47 to $20.80, and weighted multiples for Security Capital ranging from 8.0x
to 10.0x for the current fiscal year and 7.0x to 9.0x for next year, yielding
an estimated per share valuation for Security Capital Class B common stock
ranging from $18.34 to $23.70.
Selected Comparable Acquisition Transaction Analysis
Using publicly available information, Merrill Lynch reviewed the purchase
prices and multiples paid in 11 completed acquisitions in the real estate
industry (the "Comparable Acquisition Transactions"). Merrill Lynch valued U.S.
Realty shares and shares of Security Capital Class B common stock by means of
comparison to (x) the premium paid in the Comparable Acquisition Transactions
over the market price of the target stock (ranging from 9.0% to 17.0%) and (y)
multiples of the acquisition price in the Comparable Acquisition Transactions
divided by (i) the current fiscal year EBDADT (ranging from 9.0x to 12.0x) and
(ii) the projected next year EBDADT (ranging from 8.0x to 11.0x). Utilizing
this methodology, Merrill Lynch derived estimated per share valuations for U.S.
Realty shares ranging from $19.89 to $28.60 and estimated per share valuations
for Security Capital Class B common stock ranging from $20.96 to $28.82.
Discounted Cash Flow Analysis
Merrill Lynch performed discounted cash flow analyses of U.S. Realty and
Security Capital on a stand-alone basis using a set of forecasts provided by
the managements of U.S. Realty and Security Capital. Utilizing such forecasts,
Merrill Lynch calculated the theoretical unlevered discounted present value by
adding together the present value of (x) the projected stream of unlevered free
cash flow through the fiscal year 2004 and (y) the projected terminal values of
U.S. Realty and Security Capital at the end of fiscal year 2004. The terminal
values were calculated based upon EBDADT multiples ranging from 7.0x to 9.0x
for U.S. Realty and 8.0x to 10.0x for Security Capital. The unlevered after-tax
discount rates used in the discounted cash flow analyses ranged from 8.0% to
12.0%. Utilizing this methodology, Merrill Lynch derived estimated per share
valuations for U.S. Realty shares ranging from $16.23 to $25.55 and shares of
Security Capital Class B common stock ranging from $14.70 to $24.82.
Net Asset Valuation
Merrill Lynch calculated the net asset value of U.S. Realty and Security
Capital by (i) adding the public market value of all publicly owned securities
held in their respective portfolios as of September 22, 2000, (ii) adding the
cost of all investments in privately held companies, (iii) adding certain other
investments, accounts receivable and cash, (iv) subtracting all accounts
payable, accrued expenses and indebtedness, and (v) in the case of U.S. Realty,
subtracting the capitalized value of a management fee paid annually to Security
Capital, estimated at $31 million per year, capitalized at 8.0x. The implied
per share valuation derived from this calculation is a range of $26.21 to
$29.52 for U.S. Realty (varying based only on the management fee) and $24.75
for Security Capital.
Relative Valuation Analysis
Merrill Lynch compared the implied per share valuations for U.S. Realty and
Security Capital determined by each of the foregoing methods, and in each case
determined a ratio of U.S. Realty share value to Security Capital share value.
The respective ratios are .84x to .88x for the public comparable companies
analysis, .95x
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to .99x for the comparable acquisition transaction analysis, 1.03x to 1.10x for
the discounted cash flow analysis and 1.06x to 1.19x for the net asset
valuation. Merrill Lynch considered these ratios favorably compared to the
consideration of 1.15 shares of Security Capital Class B common stock per U.S.
Realty share to be received by shareholders of U.S. Realty pursuant to the
transaction with Security Capital. The fact that the proposed consideration to
be received represents a premium over the midpoint of each of the relative
valuation ratios described above supported Merrill Lynch's view that the
consideration to be received by shareholders of U.S. Realty pursuant to the
transaction was fair to shareholders of U.S. Realty.
The special committee retained Merrill Lynch because of its experience and
expertise as an internationally recognized investment banking and advisory firm
which, as a part of its investment banking business, regularly is engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The special committee did not
impose any limitations on the investigation made or the procedures followed by
Merrill Lynch in rendering its opinion.
In the past, Merrill Lynch has provided financial advisory and financing
services to U.S. Realty and Security Capital and may continue to do so, and has
received, and may receive, fees for the rendering of such services.
Furthermore, in the ordinary course of its business, Merrill Lynch may actively
trade the equity securities of U.S. Realty or Security Capital for its own
account and for the accounts of it customers and, accordingly, may at any time
hold a long or short position in such securities.
Pursuant to the engagement letter, dated as of May 22, 2000, between the
special committee, on behalf of U.S. Realty, and Merrill Lynch, U.S. Realty has
agreed to pay Merrill Lynch (i) a fee of $500,000, payable upon execution of
the engagement letter, (ii) an additional fee of $1 million, payable upon the
rendering of the opinion, and (iii) a transaction fee equal to .55% of the
aggregate "purchase price" paid in a business combination, if (a) a business
combination is completed within two years (except in the case of Security
Capital, within six months) after the period during which Merrill Lynch is
retained by U.S. Realty, provided that Merrill Lynch identified the other party
to the transaction or advised U.S. Realty with respect to such transaction
during the term of its engagement, or (b) U.S. Realty enters into a definitive
agreement for a business combination during the period described in clause (a)
which contemplates and subsequently results in a business combination. The
transaction fee shall be reduced by the amount of the fees paid pursuant to
clauses (i) and (ii) above. "Purchase price" shall mean an amount equal to the
sum of the aggregate fair market value of any securities issued and any other
non-cash consideration delivered, and any cash consideration paid, to U.S.
Realty or its security holders (other than to Security Capital for U.S. Realty
securities owned by Security Capital), in connection with a business
combination and the amount of all indebtedness of U.S. Realty or a subsidiary
of U.S. Realty, which is assumed or acquired by a purchaser or retired or
defeased in connection with such business combination. If the business
combination is with an existing shareholder of U.S. Realty, the purchase price
will be calculated based only on the portion of U.S. Realty not already owned
by such shareholder.
U.S. Realty has also agreed to reimburse Merrill Lynch for its reasonable
out-of-pocket expenses incurred in connection with its engagement (including
reasonable fees and disbursements of its legal counsel) and to indemnify
Merrill Lynch and its affiliates from and against certain liabilities,
including liabilities under the federal securities laws, arising out of its
engagement.
RECOMMENDATION OF THE SECURITY CAPITAL BOARD OF DIRECTORS
The Security Capital board of directors unanimously approved the transaction
agreement and the transactions it contemplates, including the issuance of
shares of Security Capital Class B common stock and delivery of cash in
consideration for the assets of U.S. Realty. The Security Capital board has
determined that the transaction agreement and the transactions it contemplates
are advisable, fair to, and in the best interests of, Security Capital and its
shareholders. THE SECURITY CAPITAL BOARD RECOMMENDS THAT SECURITY CAPITAL
SHAREHOLDERS APPROVE THE PROPOSAL TO ISSUE SHARES OF SECURITY CAPITAL CLASS B
COMMON STOCK IN THE TRANSACTIONS.
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SECURITY CAPITAL'S REASONS FOR THE TRANSACTION; ALTERNATIVES CONSIDERED
Security Capital has determined to enter into the transaction agreement
because it believes that the proposed transaction between Security Capital and
U.S. Realty will increase shareholder value for Security Capital shareholders
through the following expected benefits:
. the transaction should reduce investor confusion by clarifying and
simplifying the complex structural relationship between Security Capital
and U.S. Realty;
. the transaction will eliminate a tier of ownership between Security
Capital and the investees of U.S. Realty by eliminating the intervening
publicly-traded holding company, which should reduce the discount at
which Security Capital trades to the value of its ultimate underlying
net asset value ("NAV");
. the transaction will result in a larger, more liquid combined company;
. the transaction will result in better diversification of real estate
holdings and eliminate restrictions inherent to U.S. Realty's current
structure on capital redeployment;
. the transaction should free the combined company from structural
constraints on the way it conducts business with and through its
strategic investees;
. following the transaction, the combined company can deploy its
significant unrestricted cash flow wherever it makes the most economic
sense and will not be limited by the legal divisions which currently
exist between Security Capital and U.S. Realty; and
. the transaction permits shareholders of both U.S. Realty and Security
Capital to own interests in the combined company.
The companies structured the transaction between U.S. Realty and Security
Capital as an acquisition of U.S. Realty's assets for stock and cash in the
context of a liquidation of U.S. Realty to comply with the requirements of
Luxembourg law, to enable U.S. Realty to satisfy its obligations to its debt
holders and, subject to the limitations contained in the transaction agreement,
to provide U.S. Realty shareholders who do not wish to maintain a continuing
interest in Security Capital an opportunity to receive cash for their U.S.
Realty shares.
Security Capital undertook this transaction at this time because other
actions to improve the market price of U.S. Realty over the last 18 months had
not been effective in reducing the discount to net asset value per share at
which U.S. Realty's shares have traded. These actions taken by U.S. Realty have
included listing U.S. Realty's ADS's on the New York Stock Exchange to improve
their visibility to U.S. shareholders, selling its cross-holdings in Security
Capital in early 2000 to reduce potential investor confusion, buying back $215
million of its shares in open market purchases, reducing its non-core
investments and focusing its capital on core investments expected to generate
improved growth, and increasing its investor relations activities. It became
clear to Security Capital in the first quarter of 2000 that these actions were
not materially changing the discount to its published NAV at which U.S. Realty
was trading, and so at that time Security Capital began to review other
alternatives. By May of 2000, Security Capital's management had completed
sufficient analyses to recommend the proposed transaction to its board and to
receive authorization to make an offer to U.S. Realty, which occurred in June
2000.
Security Capital considered several alternatives for eliminating the complex
structural relationship between Security Capital and U.S. Realty. These
alternatives included:
. distributing the publicly-traded securities held by SC-Holdings to U.S.
Realty's shareholders;
. liquidating U.S. Realty without first selling U.S. Realty's assets to
Security Capital; and
. purchasing U.S. Realty shares in open market transactions.
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<PAGE>
The foregoing alternatives were not pursued by Security Capital for the
following reasons:
. Distributing the public securities to U.S. Realty shareholders would
involve costs of liquidating large portions of these securities first to
pay off U.S. Realty's debts and commitments (approximately $555 million
in total). These costs would include underwriting discounts and other
transaction costs, potential market discounts from attempting to sell
such large amounts of securities in the U.S. REIT market and taxes.
Additionally, the distribution of the remaining securities would have
required the consent of the publicly-traded strategic investees of U.S.
Realty (which consent could have been withheld based on the potential
impact of a distribution on their market prices). Certain European
shareholders of U.S. Realty would also have experienced significant
adverse tax consequences from such a distribution. Finally, in light of
its significantly reduced capital strength and cash flow, U.S. Realty
would have been forced to liquidate its private investees.
. A sale of all of U.S. Realty's assets would involve similar costs and
uncertainties as a distribution of the public securities, except the
risk of market discounts on sales would have been increased because of
the need to sell a much larger pool of assets and securities. Security
Capital believed the market and timing risks of such an approach,
coupled with the inevitable transaction costs and taxes, made this
alternative unattractive.
. Purchasing U.S. Realty shares in the open market had several
disadvantages. Security Capital's ownership could not exceed 50% without
causing U.S. Realty to become a controlled foreign corporation under
U.S. tax law, causing significant adverse tax consequences for Security
Capital. Additionally, this approach appeared to require Security
Capital ultimately to pursue the same transaction it is currently
proposing.
FACTORS CONSIDERED BY THE SECURITY CAPITAL BOARD OF DIRECTORS
In approving the transaction agreement and the transactions it contemplates,
and recommending that Security Capital's shareholders approve the issuance of
Security Capital Class B common stock in the transaction, the Security Capital
board of directors considered the following factors:
. the matters discussed above under "Security Capital's Reasons for the
Transaction; Alternatives Considered";
. the opinion of its financial advisor, Goldman Sachs, that as of
September 26, 2000, and subject to the matters set forth in the opinion,
the consideration to be paid by Security Capital under the transaction
agreement is fair from a financial point of view to Security Capital;
. the relative current and past trading prices of U.S. Realty shares and
Security Capital Class B common stock;
. the impact of the transaction on Security Capital's future earnings
prospects;
. the impact of the transaction on Security Capital's NAV, as calculated
by securities analysts and investors who follow the company, as a result
of eliminating the discount to NAV at which U.S. Realty trades; and
. the relative contribution of the two companies to the combined company's
EBDADT and NAV per share.
The foregoing discussion of the information and factors considered by the
Security Capital board includes all of the material factors considered by the
Security Capital board in reaching its determinations and recommendation but is
not meant to be exhaustive. In view of the variety of factors considered in
reaching its determinations, the Security Capital board did not find it
practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered in reaching its determinations and
recommendation. In addition, individual members of the Security Capital board
may have given different weights to different factors.
40
<PAGE>
OPINION OF SECURITY CAPITAL'S FINANCIAL ADVISOR
On September 25, 2000, Goldman, Sachs & Co. delivered an oral opinion to the
board of directors of Security Capital, subsequently confirmed by delivery of a
written opinion, dated as of September 26, 2000, that, subject to the matters
set forth in the opinion, as of that date, the consideration to be paid by
Security Capital in connection with the transactions contemplated by the
transaction agreement was fair from a financial point of view to Security
Capital. This consideration consists of:
. a number of shares of Security Capital Class B common stock equal to
1.15 multiplied by (1) the number of U.S. Realty shares outstanding at
the completion of the transactions less (2) the number of U.S. Realty
shares for which U.S. Realty shareholders validly elect to receive cash,
"cash electing shares";
. an amount of cash equal to the number of cash electing shares multiplied
by the product of 1.15 and the average of the high and low sale prices
of Security Capital Class B common stock on the NYSE for the 15 full
trading days immediately preceding (but not including) the date that is
five business days prior to the date of the U.S. Realty shareholders
meeting; and
. an amount of cash equal to, at Security Capital's election, either (1)
the accreted value of U.S. Realty's outstanding 2% senior unsecured
convertible notes, due 2003, plus all interest owed on those notes, on
the later of May 23, 2001 and thirty days after completion of the
transactions, or (2) an amount sufficient to purchase U.S. government
securities with face amounts and maturity dates to provide the funds
necessary to redeem those notes on their redemption date and to make
interim interest payments.
In exchange for this consideration, Security Capital will receive (1) all of
the outstanding equity interests of SC-Holdings owned by U.S. Realty, (2) all
of U.S. Realty's interests under an advance agreement between U.S. Realty and
SC-Holdings and (3) any cash U.S. Realty has on hand at the completion of the
transaction.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED SEPTEMBER 26,
2000, WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY GOLDMAN SACHS IN
CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX C AND IS INCORPORATED BY
REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. SECURITY CAPITAL
SHAREHOLDERS ARE URGED TO, AND SHOULD READ, THE OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things:
. the transaction agreement;
. annual reports to shareholders and annual reports on Form 10-K of
Security Capital for each of the three years ended December 31, 1999;
. annual reports to shareholders of U.S. Realty for each of the three
years ended December 31, 1999 and the annual report on Form 20-F of U.S.
Realty for the year ended December 31, 1999;
. various interim reports to shareholders and quarterly reports on Form
10-Q of Security Capital;
. various interim reports to shareholders and reports on Form 6-K of U.S.
Realty;
. various other communications from Security Capital and U.S. Realty to
their respective shareholders; and
. various internal financial analyses and forecasts for Security Capital
and U.S. Realty prepared by the management of Security Capital,
including forecasts prepared on a pro forma basis that reflect cost
savings, operating synergies and other transaction-related adjustments
projected by the management of Security Capital to result from the
transactions.
Goldman Sachs also held discussions with members of the senior management of
Security Capital regarding their assessment of the strategic rationale for, and
the potential benefits of, the transactions and the
41
<PAGE>
past and current business operations, financial condition and future prospects
of Security Capital and U.S. Realty. In addition, Goldman Sachs:
. reviewed the reported price and trading activity for the equity
securities of Security Capital and the shares and the American
depositary shares of U.S. Realty;
. compared financial and stock market information for Security Capital and
U.S. Realty with similar information for other companies the securities
of which are publicly traded;
. reviewed the financial terms of recent business combinations in the real
estate industry specifically and in other industries generally; and
. performed other studies and analyses Goldman Sachs considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information that was discussed with or reviewed by it, and
Goldman Sachs assumed the accuracy and completeness of this information for
purposes of rendering its opinion. Goldman Sachs assumed, with the consent of
Security Capital's board of directors, that the financial analyses and
forecasts for Security Capital and U.S. Realty prepared by the management of
Security Capital were reasonably prepared on a basis reflecting the best
available estimates and judgments of Security Capital and that the pro forma
forecasts will be realized in the amounts and time periods as contemplated.
Goldman Sachs did not make an independent evaluation or appraisal of the
assets and liabilities of Security Capital or U.S. Realty or any of their
subsidiaries and was not furnished with any evaluation or appraisal. Goldman
Sachs assumed that all material governmental, regulatory or other consents and
approvals necessary for the completion of the transactions will be obtained
without any adverse effect on Security Capital or U.S. Realty or on the
contemplated benefits of the transactions. With the consent of Security
Capital's board of directors, Goldman Sachs relied upon the advice Security
Capital received from its legal counsel and tax advisors as to all legal and
tax matters in connection with the transaction. Goldman Sachs provided its
advisory services and opinion for the information and assistance of the board
of directors of Security Capital in connection with its consideration of the
transactions contemplated by the transaction agreement, and the opinion does
not constitute a recommendation as to how any holder of voting stock of
Security Capital should vote with respect to those transactions.
The following is a summary of the material financial analyses presented by
Goldman Sachs to Security Capital's board of directors on September 25, 2000 in
connection with the rendering of its opinion. It does not purport to be a
complete description of the analyses performed by Goldman Sachs. The order of
the analyses described, and the results of those analyses, do not represent the
relative importance or weight given to the analyses by Goldman Sachs. In
connection with its opinion and following analyses, Goldman Sachs reviewed, and
made certain assumptions with respect to, among other things, internal
financial analyses and forecasts relating to Security Capital and U.S. Realty
which were prepared by Security Capital management prior to the delivery by
Goldman Sachs of its opinion to the board of directors of Security Capital. In
the ordinary course of its business practice, Security Capital management
updated certain of those analyses and forecasts subsequent to that date. For
further information, see "Pro Forma Transaction Analysis" below.
THE FOLLOWING SUMMARIES OF FINANCIAL ANALYSES INCLUDE INFORMATION PRESENTED
IN TABULAR FORMAT. YOU SHOULD READ THESE TABLES TOGETHER WITH THE TEXT OF EACH
SUMMARY.
Exchange Ratio Analysis
Goldman Sachs calculated (1) the implied exchange ratio based on the closing
price of the U.S. Realty shares to the closing price of the Security Capital
Class B common stock for each trading day during the twelve month period ending
September 22, 2000 and the average of these closing ratios over each of the
one, three, six and twelve month periods ending on September 22, 2000; and (2)
the implied premium of the exchange
42
<PAGE>
ratio of 1.15 to (A) the closing ratio of September 22, 2000 and (B) the
average closing ratio for each of the one, three, six and twelve month periods
ending on September 22, 2000. The results of these calculations follow:
<TABLE>
<CAPTION>
CLOSING RATIO OR PREMIUM OF EXCHANGE RATIO
AVERAGE CLOSING OF 1.15 TO CLOSING RATIO
DATE/PERIOD RATIO OR AVERAGE CLOSING RATIO
------------------------------ ---------------- -------------------------
<S> <C> <C>
At September 22............... 1.00x 15.0%
Over one month ending
September 22................. 1.06x 8.5%
Over three months ending
September 22................. 1.06x 8.8%
Over six months ending
September 22................. 1.06x 8.0%
Over twelve months ending
September 22................. 1.11x 3.1%
</TABLE>
Goldman Sachs also calculated the implied exchange ratio based on estimated
earnings before depreciation, amortization and deferred taxes, or EBDADT, per
U.S. Realty share for 2000 and 2001 to the estimated EBDADT per share of
Security Capital for the corresponding year. The 2000 and 2001 estimates of
EBDADT per share used by Goldman Sachs to calculate these ratios were based on
estimates furnished to Goldman Sachs by management of Security Capital. Goldman
Sachs also calculated the implied EBDADT ratio for 2001 using an adjusted
estimate for U.S. Realty EBDADT per share. The adjusted 2001 U.S. Realty EBDADT
estimate reflects the mark-to-market of the interest expense on U.S. Realty's
existing convertible notes. Currently, U.S. Realty incurs interest expense of
6.75% per annum on its existing convertible notes (this interest expense
consists of cash interest of 2%, with the balance being non-cash accretion of
the original issue discount); the adjustment reflects a step up in rate from
the current 6.75% per annum to 8.5% per annum.
Based on the estimated per share EBDADT of both Security Capital and U.S.
Realty for 2000 and 2001 and the adjusted EBDADT per share for U.S. Realty in
2001, Goldman Sachs calculated the implied premium of the exchange ratio of
1.15 to the three implied EBDADT exchange ratios calculated as described in the
prior paragraph. The results of these calculations are as presented in the
following table:
<TABLE>
<CAPTION>
PREMIUM OF EXCHANGE RATIO
IMPLIED EBDADT OF 1.15 TO IMPLIED EBDADT
ESTIMATED EBDADT EXCHANGE RATIO EXCHANGE RATIOS
---------------- -------------- -------------------------
<S> <C> <C>
2000............................. .93x 23.4%
2001............................. .99x 16.3%
2001 (with adjustment)........... .95x 21.4%
</TABLE>
Goldman Sachs calculated the ratio of the net asset value per U.S. Realty
share to the net asset value per share of Security Capital securities
(consisting of Security Capital's Class A and Class B shares outstanding, in-
the-money options and warrants to purchase Class A and Class B shares and other
convertible securities that have a dilutive effect), based on each company's
publicly reported net asset value as of June 30, 2000, an assumed net asset
value for each company as of September 22, 2000 and the net asset value as of
December 31, 2000 projected for each company by Security Capital management.
Goldman Sachs derived each company's assumed net asset value as of September
22, 2000 based on its publicly reported balance sheet as of June 30, 2000,
adjusted to reflect (1) the closing prices as of September 22, 2000 of each
company's publicly-traded investments and (2) publicly announced transactions
that occurred after June 30, 2000. In addition, Security Capital's management
projections for December 31, 2000 assumed that each company's publicly-traded
investments would have the same value as on September 22, 2000.
Based on the net asset values attributable to each share of Security Capital
and U.S. Realty, Goldman Sachs calculated the discount of the exchange ratio of
1.15 as compared to each implied net asset value exchange ratio. The results of
these calculations follow:
<TABLE>
<CAPTION>
DISCOUNT OF
EXCHANGE RATIO OF
IMPLIED NET 1.15 TO IMPLIED
ASSET VALUE NET ASSET VALUE
NET ASSET VALUE EXCHANGE RATIO EXCHANGE RATIOS
--------------- -------------- -----------------
<S> <C> <C>
As reported as of June 30, 2000......... 1.27x -9.7%
Assumed for September 22, 2000.......... 1.18x -2.6%
Projected as of December 31, 2000 based
on Security Capital management
projections............................ 1.19x -3.4%
</TABLE>
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<PAGE>
Implied Transaction Premium/Discount Analysis
Goldman Sachs compared the historical price per U.S. Realty share to the
premium/discount implied by the transaction for the period beginning on
September 23, 1999 to September 22, 2000. This analysis showed a range of
implied discounts/premia of -15.8% to 15.4%.
Selected Companies Comparison
Goldman Sachs reviewed and compared selected financial information, ratios
and multiples for Security Capital and U.S. Realty to corresponding financial
information, ratios and multiples for four real estate companies (Vornado
Realty Trust, Equity Office Properties Trust, Equity Residential Properties
Trust and Simon Property Group Inc.) and five affiliated companies of Security
Capital and U.S. Realty (Archstone Communities Trust, ProLogis Trust,
CarrAmerica Realty Corp., Storage USA, Inc. and Regency Realty Corp.).
The multiples, ratios and other financial information calculated by Goldman
Sachs were calculated using the closing price on September 22, 2000 for the
U.S. Realty shares, Security Capital Class B common stock and the shares of
each of the selected companies, and were based on the most recent publicly
available information. The estimates of funds from operations, or FFO, per
share for the four selected companies and the five affiliated companies used by
Goldman Sachs were based on median estimates provided by the Institutional
Brokers Estimate System, or IBES, for subsequent periods. Estimates for EBDADT
per share of Security Capital and U.S. Realty were based on First Call
estimates which were consistent with estimates prepared by Security Capital
management for subsequent periods. Goldman Sachs' analysis of the four selected
companies and the five affiliated companies compared the following to the
results for Security Capital and U.S. Realty:
. the September 22, 2000 closing share price as a percentage of the 52-
week high share price;
. the annual dividend yield (based on the most recently reported
dividend);
. the ratio of net debt (total debt less cash) to total market
capitalization (the equity market value as of September 22, 2000 plus
net debt and preferred equity);
. the multiple of the closing share price on September 22, 2000 to
estimated FFO per share for 2000 and 2001 for the four selected
companies and the five affiliated companies and to estimated EBDADT per
share for 2000 and 2001 for Security Capital and U.S. Realty;
. the growth rate of 1999 actual to 2000 estimated FFO per share for the
four selected companies and five affiliated companies and of 1999 actual
to 2000 estimated EBDADT per share for Security Capital and U.S. Realty;
and
. the ratio of (1) the multiple of estimated 2001 FFO per share for the
four selected companies and five affiliated companies and estimated 2001
EBDADT per share of Security Capital and U.S. Realty represented by
their respective closing share prices on September 22, 2000 to (2) the
growth rate calculated as described in the preceding bullet.
The results of these analyses for Security Capital, U.S. Realty and the four
selected companies are summarized as follows:
<TABLE>
<CAPTION>
SECURITY U.S.
CAPITAL REALTY HIGH MEDIAN MEAN LOW
-------- ------ ----- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C>
September 22, 2000 closing share price
as a percentage of 52-week high share
price................................ 97.8% 96.8% 99.7% 92.9% 93.0% 86.5%
Annual dividend yield................. -- -- 8.7% 6.6% 6.9% 5.3%
Ratio of net debt to total market
capitalization....................... 27.0% 23.2% 57.1% 42.3% 46.0% 38.6%
Multiple of closing share price to
estimated FFO/EBDADT per share for
the year 2000........................ 8.1x 8.7x 11.1x 9.6x 9.2x 7.0x
Multiple of closing share price to
estimated FFO/EBDADT per share for
the year 2001........................ 7.2x 7.3x 10.0x 8.9x 8.5x 6.5x
Estimated rate of growth from 1999
actual, to 2000 estimated, FFO/EBDADT
per share............................ 21.0% 19.6% 10.9% 10.2% 10.0% 8.8%
Ratio of (1) the multiple of 2001
estimated FFO/EBDADT per share
represented by the September 22
closing share price to (2) the
estimated 1999-2000 FFO/EBDADT per
share growth rate.................... 0.3x 0.4x 0.9x 0.9x 0.8x 0.7x
</TABLE>
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<PAGE>
The results of these analyses for Security Capital, U.S. Realty and the five
affiliated companies are summarized as follows:
<TABLE>
<CAPTION>
SECURITY U.S.
CAPITAL REALTY HIGH MEDIAN MEAN LOW
-------- ------ ----- ------ ----- ----
<S> <C> <C> <C> <C> <C> <C>
September 22, 2000 closing share
price as a percentage of 52-week
high share price.................... 97.8% 96.8% 100% 96.8% 95.6% 90.1%
Annual dividend yield................ -- -- 9.4% 6.0% 5.1% --
Ratio of net debt to total market
capitalization...................... 27.0% 23.2% 47.2% 34.1% 33.7% 23.2%
Multiple of closing share price to
estimated FFO/EBDADT per share for
the year 2000....................... 8.1x 8.7x 11.6x 8.7x 9.5x 8.1x
Multiple of closing share price to
estimated FFO/EBDADT per share for
the year 2001....................... 7.2x 7.3x 10.8x 7.6x 8.6x 7.2x
Estimated FFO/EBDADT rate of growth
from 1999 actual to 2000 estimated
FFO/EBDADT per share................ 21.0% 19.6% 21.0% 8.9% 11.5% 5.1%
Ratio of (1) the multiple of 2001
estimated FFO/EBDADT per share
represented by the September 22,
2000 closing share price to (2) the
estimated 1999-2000 FFO/EBDADT per
share growth rate................... 0.3x 0.4x 1.5x 1.0x 0.9x 0.3x
</TABLE>
Selected Transactions Analysis
Goldman Sachs reviewed 14 selected transactions in the real estate industry
since 1998. These selected transactions include the following:
TARGET
ACQUIRER
Cornerstone Properties Inc.
Equity Office Properties Trust American Health Properties Inc.
Health Care Property Investors Inc. Lexford Residential Trust
Equity Residential Properties Trust Weeks Corporation
Duke Realty Investments Inc. Meridian Industrial Trust Inc.
ProLogis Trust Storage Trust Realty
Public Storage Inc. Merry Land & Investment Company
Equity Residential Properties Trust Inc.
New Plan Realty Trust Excel Realty
Security Capital Pacific Trust Security Capital Atlantic
FelCor Lodging Trust Inc. Incorporated
CapStar Hotel Co. Bristol Hotel Co.
Bay Apartment Communities Inc. American General Hospitality Corp.
Kimco Realty Corp. Avalon Properties Inc.
Meditrust Acquisition Co. Price REIT Inc.
LaQuinta Inns, Inc.
Goldman Sachs analyzed and compared financial information relating to these
transactions to similar information for the proposed transaction, including:
. the ratio of the target equity value to the equity value of the combined
entity (in U.S. Realty's case, its equity value net of Security
Capital's ownership in it);
. the implied offer premium to the closing price of the target's shares on
the day prior to announcement of the transaction;
. the multiple of the target's closing price per share on the day prior to
the announcement of the transaction to the estimated FFO per share for
the target at the time of the announcement (based on median estimates
provided by IBES);
. the multiple of the acquirer's closing price per share on the day prior
to the announcement of the transaction to the estimated forward FFO per
share for the acquiror at the time of the announcement (based on median
estimates provided by IBES);
. the transaction FFO multiple calculated as the multiple of the implied
offer price per share to the estimated FFO per share for the target at
the time of the announcement of the transaction; and
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<PAGE>
. the transaction FFO multiple calculated as described in the preceding
bullet point as a percentage of the acquirer's multiple calculated as
described in the second preceding bullet.
In comparing the selected transactions to the proposed transaction, with
respect to the proposed transaction, Goldman Sachs used Security Capital's
management estimates of EBDADT rather than the FFO estimates used in the
analysis of the selected transactions. In addition, this analysis, with respect
to the proposed transaction, assumed an exchange ratio of 1.15 and that $200
million in cash consideration will be paid to the U.S. Realty shareholders who
validly elect to receive cash. The results of this analysis are summarized as
follows:
<TABLE>
<CAPTION>
SELECTED TRANSACTIONS
PROPOSED ---------------------------
TRANSACTION HIGH MEDIAN AVERAGE LOW
----------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Ratio of target equity value to
equity value of the combined
entity.............................. 25.8% 61.7% 27.3% 28.6% 3.6%
Implied offer premium to target's
closing price on day prior to
announcement........................ 15.0% 28.4% 9.1% 8.4% -12.6%
Target's estimated FFO/EBDADT per
share............................... 2.60 4.06 2.27 2.53 1.15
Multiple of target's closing price to
estimated FFO/EBDADT per share...... 7.3x 12.6x 9.7x 9.5x 5.9x
Multiple of acquirer's closing price
to estimated FFO/EBDADT per share... 7.2x 21.9x 11.7x 11.9x 8.0x
Transaction FFO/EBDADT multiple...... 8.4x 24.3x 11.1x 11.4x 5.1x
Transaction FFO/EBDADT multiple as a
percentage of the acquirer's
multiple............................ 116.3% 255.4% 96.1% 103.2% 48.0%
</TABLE>
Pro Forma Transaction Analysis
Goldman Sachs analyzed the financial impact of the transaction on Security
Capital based on management's projections and assumptions for Security Capital
on a stand-alone basis and the combined company on a pro forma basis by
comparing various financial information for Security Capital on a stand-alone
basis to similar information for the combined company on a pro forma basis.
This information included:
. the estimated 2001 EBDADT per share;
. estimated 2001 cash flow per share;
. the net asset value per share (calculated using share prices of public
companies held by Security Capital and U.S. Realty as of September 22,
2000 and Security Capital's management projections as of December 31,
2000 for the remaining assets and liabilities of Security Capital and
U.S. Realty);
. the interest coverage ratio (calculated as the ratio of cash income
(dividends and interest, financial services revenue, and interest and
other income), less cash operating expenses net of depreciation and
amortization, to cash interest expense); and
. the fixed charge coverage ratio (calculated as the ratio of cash income
less operating expenses as described in the preceding bullet, to cash
interest expense and convertible preferred share dividends).
Goldman Sachs performed this analysis separately assuming (A) that $200
million in cash consideration will be paid to the U.S. Realty shareholders who
validly elect to receive cash and (B) that no U.S. Realty shareholders will
validly elect to receive cash and, therefore, no cash consideration will be
paid. In addition, the interest coverage ratio and fixed charge coverage ratio
information for the combined company on a pro forma basis reflected the mark-
to-market of the interest expense on U.S. Realty's existing convertible notes.
As noted above, currently, U.S. Realty pays a current cash interest expense of
2% per annum on its existing convertible notes; the pro forma coverage ratios
reflect a step up in rate from the current 2% per annum to 8.5% per annum.
46
<PAGE>
Goldman Sachs also assumed that Security Capital would not make any further
share repurchases over and above the amount purchased in connection with the
$100 million share repurchase program announced and completed prior to the
announcement of the proposed transaction. The results of this analysis as of
September 25, 2000 are as follows:
<TABLE>
<CAPTION>
ASSUMING $200 MILLION IN CASH IS PAID TO
U.S. REALTY SHAREHOLDERS
-----------------------------------------
STAND-ALONE PRO FORMA % INCREASE/DECREASE
----------- --------- -------------------
<S> <C> <C> <C>
2001E EBDADT per share................ $ 2.63 $ 2.55 -2.9%
2001E Cash Flow per share............. $ 1.19 $ 1.37 15.7%
Net Asset Value per share............. $25.32 $27.80 9.8%
Interest Coverage Ratio............... 3.50x 3.76x 7.6%
Fixed Charge Coverage Ratio........... 2.76x 3.20x 16.0%
<CAPTION>
ASSUMING NO CASH IS PAID TO U.S. REALTY
SHAREHOLDERS
-----------------------------------------
STAND-ALONE PRO FORMA % INCREASE/DECREASE
----------- --------- -------------------
<S> <C> <C> <C>
2001E EBDADT per share................ $ 2.63 $ 2.46 -6.3%
2001E Cash Flow per share............. $ 1.19 $ 1.35 14.2%
Net Asset Value per share............. $25.32 $27.29 7.8%
Interest Coverage Ratio............... 3.50x 4.55x 30.1%
Fixed Charge Coverage Ratio........... 2.76x 3.75x 35.9%
</TABLE>
As noted above, in the ordinary course of its business practice, Security
Capital management updated certain of its analyses and forecasts following the
delivery by Goldman Sachs of its opinion to the board of directors of Security
Capital and prior to the date of this joint proxy statement/prospectus.
Specifically, Security Capital management estimates that share repurchases made
by Security Capital between the announcement of the proposed transaction and
November 3, 2000 will have an accretive effect on management's internal stand-
alone projection for Security Capital's 2001 EBDADT per share. This accretion,
together with an increase in Security Capital management's forecasts for 2001
EBDADT at certain of U.S. Realty's investees, would have the effect of
increasing the estimated 2001 pro forma EBDADT per share set forth above. In
addition, based on revised assumptions on the timing of certain asset sales and
other factors, Security Capital management has reduced its internal, stand-
alone estimate of 2001 cash flow per share for U.S. Realty. These updates are
not reflected in the analyses set forth above.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all these analyses and did not
attribute any particular weight to any analysis or factor considered by it. No
company or transaction used in the above analyses as a comparison is directly
comparable to Security Capital or U.S. Realty or the contemplated transactions.
The analyses were prepared solely for purposes of providing an opinion to
the Security Capital board of directors as to the fairness from a financial
point of view to Security Capital of the consideration to be paid in connection
with the transactions. The analyses do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may
be sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by these analyses. Because these analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors, none of
Security Capital, U.S. Realty, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those
forecasted.
As described above, the financial analysis presented by Goldman Sachs to the
Security Capital board of directors was one of many factors taken into
consideration by the Security Capital board of directors in making its
determination to approve the transaction. The foregoing summary does not
purport to be a complete description of the analyses performed by Goldman
Sachs.
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Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with Security Capital having provided investment banking services to
Security Capital from time to time, including having acted as:
. co-manager for Security Capital's initial public offering of 22,569,710
shares of Class B common stock in September 1997;
. co-manager of Security Capital's offering in June 1998 of 6.95% notes
due 2005 in the aggregate principal amount of $200 million, 7.15% notes
due 2007 in the aggregate principal amount of $100 million and 6.70%
notes due 2028 in the aggregate principal amount of $200 million;
. a named dealer with respect to Security Capital's medium-term note
program in the aggregate principal amount of $200 million;
. financial advisor to Security Capital in connection with its merger with
an affiliate in August 1994; and
. having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to, the transaction
agreement.
Goldman Sachs also has provided investment banking services to U.S. Realty
from time to time, including having acted as:
. lead manager of U.S. Realty's initial public offering of 22,244,420
shares in June 1996;
. lead manager of U.S. Realty's offering of 16,233,800 shares in November
1996;
. joint lead manager of U.S. Realty's offering of 11,808,367 shares in
December 1997; and
. lead manager of U.S. Realty's offering of 2.0% Senior Unsecured
Convertible Notes due May 2003 in the aggregate face amount of $450
million in May 1998.
In addition, Security Capital and an affiliate of Goldman Sachs invested in
a joint venture entity formed for the purposes of acquiring and owning hotel
properties. Security Capital sold its investment back to that entity in June
1999. Goldman Sachs provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold positions in securities, including derivative
securities, of Security Capital or U.S. Realty for its own account and for the
accounts of customers.
Pursuant to a letter agreement, dated May 16, 2000, Security Capital
exclusively engaged Goldman Sachs to act as its financial advisor in connection
with the possible acquisition of all or a portion of the stock and assets of
U.S. Realty. Pursuant to the terms of this letter agreement, Security Capital
was required to pay Goldman Sachs a fee of $250,000 on May 16, 2000. In
addition, Security Capital has agreed to pay Goldman Sachs, upon consummation
of a transaction, a fee of $8 million less the $250,000 fee Security Capital
previously paid. However, if a transaction is consummated more than 18 months
from the date of the letter agreement, the $8 million fee will not be so
reduced. Security Capital also has agreed to reimburse Goldman Sachs for their
reasonable out-of-pocket expenses, including attorneys' fees, and to indemnify
Goldman Sachs against certain liabilities, including certain liabilities under
the federal securities laws.
CERTAIN U.S. REALTY PROJECTIONS
In the ordinary course of U.S. Realty's business planning and budgeting
process, U.S. Realty's management and financial advisors develop and present to
the U.S. Realty board of directors projections of the future performance of
U.S. Realty.
In connection with the negotiation of the transactions described herein,
U.S. Realty and its financial advisors developed the projections set forth
below, based upon three-year projections prepared by U.S. Realty for internal
planning purposes only. The management of U.S. Realty is responsible for the
projections. The
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underlying facts have changed as described in the second paragraph after the
chart below. U.S. Realty is not including these projections in this joint proxy
statement/prospectus to influence your vote with respect to the transaction,
but because these projections were utilized by the U.S. Realty special
committee and board of directors in reaching their decision to recommend the
transaction. You should not regard the projections as facts or rely upon them
as accurate representations of future results. The projections are based on
numerous estimates and assumptions which themselves are based upon events and
circumstances that have not taken place and are inherently subject to
significant financial, market, economic and competitive uncertainties and
contingencies which are difficult or impossible to predict accurately and are
beyond U.S. Realty's and Security Capital's control. The projections are
inherently imprecise and we cannot assure you that the projected results can be
realized. Therefore, we expect there will be differences between the actual and
projected results and that the actual results may be materially higher or lower
than those projected. U.S. Realty did not prepare the three-year projections on
which these projections were based in contemplation of the transaction and,
therefore, they do not reflect any benefits or costs that could result as a
consequence of consummation of the transaction. You should not regard the
inclusion of the projections set forth below as a representation by Security
Capital or any of its affiliates or representatives or by U.S. Realty or any of
its affiliates or representatives that the projected results will be achieved.
Although we believe U.S. Realty had a reasonable basis for these projections
when they were prepared, U.S. Realty did not prepare the projections set forth
below with a view towards public disclosure or complying with published
guidelines of the U.S. Securities and Exchange Commission, guidelines
established by the American Institute of Certified Public Accountants or
generally accepted accounting principles. Security Capital's and U.S. Realty's
independent auditor has neither examined nor compiled the projections, and
accordingly they have not expressed an opinion or any other assurance on them.
The PricewaterhouseCoopers (Luxembourg) SARL report included in this joint
proxy statement/prospectus relates to U.S. Realty's historical financial
information. It does not extend to the prospective financial information and
should not be read to do so. Except to the extent required by applicable
Luxembourg law or the U.S. federal securities laws, U.S. Realty does not intend
to make publicly available any update or other revisions to the projections to
reflect circumstances existing after the date of preparation of the
projections.
The projections developed by U.S. Realty and its financial advisors show the
following financial information (in millions, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $272.6 $284.6 $310.6 $339.1 $370.2
Expenses.................................. 101.5 96.5 101.3 89.5 85.1
EBDADT.................................... 171.1 188.1 209.3 249.6 285.1
Shares Outstanding........................ 75.0 68.5 60.6 60.6 60.6
EBDADT per share.......................... $ 2.28 $ 2.75 $ 3.45 $ 4.12 $ 4.70
</TABLE>
You should note that the projections have been prepared using a different
basis of accounting than that used in the preparation of the audited financial
statements of U.S. Realty, as the projections focus on EBDADT, not net
earnings, based on historical cost accounting instead of fair value accounting.
For example, in calculating revenues from investees, the projections reflect
U.S. Realty's share (based on its percentage equity ownership of each investee)
of the EBDADT of its investees, not the dividends received by U.S. Realty from
such investees. For purposes of U.S. Realty's projections, EBDADT represents
net income computed in accordance with generally accepted accounting
principles, plus real estate depreciation, amortization of real estate related
non-cash items, deferred tax expense, losses on disposition of income-producing
properties and other non-cash, one-time expenses, less gains on the disposition
of income-producing properties. U.S. Realty believes that EBDADT provides the
best measure of its operating performance, but should not be construed as a
substitute for net earnings in evaluating operating results, nor as a
substitute for cash flow in evaluating liquidity.
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Projections for 2000 through 2002 were prepared by management of U.S.
Realty, with results for 2003 and 2004 extrapolated by U.S. Realty's financial
advisor based on U.S. Realty's historically implied growth rate. The increase
in revenues each year is generally related to increases in equity in EBDADT
from five investees, partially offset by the impact of a sale of a substantial
portion of properties by City Center Retail Trust. The projections do not
consider the projected transaction between U.S. Realty's investee, Urban Growth
Property Trust, and its property manager, InterParking Incorporated, which
would reduce 2001 EBDADT from $2.75 per share to $2.42 per share. The reduction
is primarily due to the amortization of goodwill and other intangibles
reflected on InterParking's books as a result of its acquisitions of other
parking facility operators. Overall expenses decrease in 2001 due to lower
interest expense as a result of the reduction of the line of credit with
proceeds received from City Center Retail Trust on the sale of properties.
General and administrative expenses increase in each period relative to revenue
increases, offset by lower interest expense in 2003 and 2004 as excess cash is
used to retire U.S. Realty's 2% senior unsecured convertible debentures,
thereby lowering interest expense accordingly. The projections assume stock
repurchases in 2000, 2001 and 2002 which would not take place as a result of
the proposed transaction.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
When considering the recommendation of the U.S. Realty board of directors,
you should be aware that U.S. Realty's directors and executive officers may
have interests in the transaction that are different from or in addition to
yours, arising from:
Acceleration of Vesting and Cash Payments Under Share Option Equivalent
Incentive Arrangements
U.S. Realty granted share option equivalents ("SOEs") to its independent
directors as described below. The share option equivalent represents the right
to receive a restricted cash payment equal to the excess, if any, of the market
price of 25,000 U.S. Realty shares on the date of exercise over the market
price of 25,000 U.S. Realty shares on the date of the grant. The terms of the
grant require the director to apply the restricted cash payment to the purchase
of the relevant number of U.S. Realty shares in the open market at the market
price as of the date of exercise of the share option equivalent. Directors were
granted a vested right to exercise one-half of their share option equivalents
at the date of the grant with the other one-half of their share option
equivalents vesting on the fourth anniversary of the grant. A director
generally will forfeit all rights to the second half if he resigns or is
removed as a director prior to such fourth anniversary. The right to exercise
any share option equivalent will expire on the fifth anniversary of the grant.
The following chart shows information as of September 30, 2000, for the share
option equivalents held by directors of U.S. Realty:
<TABLE>
<CAPTION>
TOTAL CASH
PRICE UNREALIZED UNREALIZED PAYMENT DUE
ON TOTAL VALUE OF VALUE OF IF VESTING
GRANT NO. OF VESTED VESTED UNVESTED UNVESTED IS
DIRECTOR DATE SOES SOES SOES SOES SOES ACCELERATED
-------- ------ ------ ------ ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. Erich Coenen (1).... $17.20 25,000 12,500 $ 41,250 12,500 $41,250 $ 82,500
Mr. Claude Kremer (1)... 19.60 25,000 12,500 11,250 12,500 11,250 22,500
Dr. Jay O. Light
(1)(2)................. 13.46 25,000 25,000 176,000 -0- -0- 176,000
Mr. James Mauck
(1)(2)(3).............. 12.30 25,000 25,000 205,000 -0- -0- 205,000
Mr. Francois Moes (1)... 17.20 25,000 12,500 41,250 12,500 41,250 82,500
</TABLE>
--------
(1) Adjusted for reverse stock split.
(2) Adjusted to reflect amendment of SOEs from net asset value to market price
exercise basis.
(3) Mr. James Mauck exercised his SOEs in full on October 20, 2000 immediately
prior to their expiration and received $207,500 which he used to purchase
7,500 U.S. Realty ADSs and pay withholding taxes.
The transaction agreement provides that at the time of the sale of U.S.
Realty's assets to Security Capital, the restricted cash payments displayed in
the chart above will be vested (whether or not then vested), will be deemed to
be exercised as of the last full trading day before such sale, will be due and
payable, and will be paid to the holder of the share option equivalent. The
transaction agreement further provides that the director receiving the payment
will have no obligation to use the cash payment for any particular purpose.
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Indemnification and Insurance
Security Capital has agreed in the transaction agreement to continue in full
force and effect, and not to take any action for six years that could
materially reduce, the rights to indemnification or exculpation existing in
favor of the directors and officers of U.S. Realty and its controlled
subsidiaries as provided in their respective articles, certificates, charters
or bylaws or otherwise in effect as of the date of the transaction agreement
for matters occurring prior to the completion of the transactions contemplated
in the transaction agreement. Security Capital has also agreed to advance
expenses in connection with such indemnification.
The transaction agreement further provides that for six years following the
completion of the transaction, Security Capital will maintain the policies of
the directors' and officers' liability and fiduciary insurance most recently
maintained by U.S. Realty (or may substitute policies of at least the same
coverage containing terms and conditions which are no less advantageous to the
beneficiaries so long as any substitution does not result in gaps or lapses in
coverage) for matters occurring prior to the completion of the transaction. In
no event will Security Capital be required to expend more than 150% of the
amount expended by U.S. Realty as of the date of the transaction agreement to
maintain or procure such insurance coverage.
Ownership of Securities of Security Capital
In addition to the members of the special committee, other U.S. Realty
directors also own securities issued by Security Capital, and have the other
interests in U.S. Realty and Security Capital noted above in "Risk Factors--
Some of the directors of U.S. Realty have a conflict of interest".
Compensation of Special Committee Members
The members of the U.S. Realty special committee have not received any
special compensation for their services on the committee, other than a one-time
payment to the chairman of the special committee of $6,000 and to each other
member of the special committee of $5,000 and other than regular meeting fees
of $1,000 to each member per meeting in connection with their service on the
special committee.
CERTAIN AGREEMENTS BETWEEN SECURITY CAPITAL AND U.S. REALTY
The description of the agreement dated July 1, 1997 between U.S. Realty and
Security Capital U.S. Realty Management Holdings S.A., a wholly-owned
subsidiary of Security Capital, regarding the provision of advisory services to
U.S. Realty, included on page 19 of Security Capital's definitive proxy
statement filed with the U.S. Securities and Exchange Commission on April 10,
2000 is incorporated in this joint proxy statement/prospectus by reference.
TRANSACTION FINANCING
Security Capital will finance the transaction with a $530 million term loan,
$86 million from the proceeds of a security sale and the balance under its line
of credit. The Chase Manhattan Bank and Wells Fargo Bank, N.A. provided an
underwritten commitment and have syndicated the loan to the broader bank
market.
The loan will be renewable for an additional year at the option of Security
Capital, subject to minimum amortization of principal of 20%. The interest rate
(at Security Capital's current credit rating, which has been affirmed by
Moody's, Standard and Poor's and Fitch) will be based on the London Interbank
Offered Rate (LIBOR) plus 1.3%. The loan is also subject to certain financial
covenants including limitations on leverage, minimum required coverage ratio
and limitations on secured debt.
Conditions to close the loan include (i) no material adverse change in the
business or operations of Security Capital, (ii) satisfactory completion of due
diligence by Chase and Wells Fargo, (iii) no material adverse change or
disruption in the banking or financial markets which would impair syndication
of the loan, and (iv) no pending material litigation against Security Capital
which could impair its ability to repay the loan.
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Sources and uses for the financing are as follows (in millions $):
<TABLE>
<CAPTION>
SOURCES USES
------- ----
<S> <C> <C> <C>
Term Loan............... $530 Retirement of U.S. Realty liabilities... $400
Proceeds of sale of Cash payment to U.S. Realty shareholders $200(/1/)
Archstone electing cash..........................
shares................. $ 86
Line of credit.......... $ 9 Transaction costs, taxes and other...... $ 25
---- ----
Total................. $625 Total................................... $625
</TABLE>
--------
(1) This represents the maximum cash payment to U.S. Realty shareholders under
the transaction agreement. If the total required to be paid to U.S. Realty
shareholders who elect cash is less than $200 million the difference will
be used for general corporate purposes, including potential share
repurchases, or not borrowed.
To the extent there are outstanding balances under the U.S. Realty line of
credit at the closing, those balances will be repaid from drawings under the
Security Capital line of credit.
Security Capital expects to repay the loan with cash from operations and
asset sales. A portion of the loan may be refinanced with long-term debt, if
market conditions permit.
Although there is no expectation that the primary repayment and refinancing
plan described above will not come to fruition, Security Capital will have
significant capacity available on its $470 million corporate line of credit to
apply to refinancing of the loan if necessary.
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SECURITY CAPITAL SPECIAL MEETING
We are furnishing this joint proxy statement/prospectus to Security Capital
shareholders in connection with the solicitation of proxies by the Security
Capital board of directors for use at the Security Capital special meeting. We
are first sending this joint proxy statement/prospectus to shareholders of
Security Capital on or about December 12, 2000. You should read this joint
proxy statement/prospectus carefully before voting your shares.
DATE, TIME AND PLACE OF THE SECURITY CAPITAL SPECIAL MEETING
The Security Capital special meeting is scheduled to be held as follows:
Friday, January 12, 2001
9:00 a.m., local time
Security Capital Group Incorporated
125 Lincoln Avenue
Santa Fe, New Mexico 87501
WHAT YOU WILL VOTE ON
At the Security Capital special meeting, we will ask you to consider and
vote upon the following items:
1. To approve the issuance of up to 86,116,552 shares of Security
Capital Class B common stock to U.S. Realty in accordance with the terms of
the transaction agreement (resulting in up to 51,154,616 new shares being
issued, since U.S. Realty would distribute 34,961,936 of the shares it
receives to subsidiaries of Security Capital that are shareholders of U.S.
Realty, which shares will be cancelled upon receipt).
2. To transact any other business as may properly come before the
special meeting or any adjournment or postponement of the special meeting.
SHAREHOLDER RECORD DATE FOR THE SPECIAL MEETING
Security Capital's board of directors has fixed the close of business on
December 8, 2000 as the record date for determination of Security Capital's
shareholders entitled to notice of and to vote at the special meeting. On the
record date there were 1,032,113 shares of Security Capital Class A common
stock entitled to notice of and to vote at the special meeting held by
approximately 638 holders of record, 51,451,408 shares of Security Capital
Class B common stock entitled to notice of and to vote at the special meeting
held by approximately 119 holders of record, and 257,642 shares of Security
Capital Series B preferred stock entitled to notice of and to vote at the
special meeting held by one holder of record.
QUORUM
In order to have a quorum, holders of record of shares of Security Capital
Class A common stock, Security Capital Class B common stock and Security
Capital Series B preferred stock having a majority of the votes entitled to be
cast must be represented in person or by proxy at the special meeting.
Regardless of whether a quorum is present or represented, shareholders
represented in person or by proxy and entitled to vote, voting a majority of
the votes cast by such shareholders, will have the power to adjourn the
meeting from time to time to a date not later than 120 days from the original
date.
VOTE REQUIRED FOR APPROVAL
Approval of the proposal to issue shares of Security Capital Class B common
stock in the transaction requires the affirmative vote of at least a majority
of the votes cast by holders of Security Capital Class A common stock,
Security Capital Class B common stock and Security Capital Series B preferred
stock, voting as a single class, provided that the total vote cast represents
over 50% of the voting power of all shares entitled to
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vote on the proposal. Each share of Security Capital Class A common stock is
entitled to cast one vote. Each share of Security Capital Class B common stock
is entitled to cast .005 of a vote. Each share of Security Capital Series B
preferred stock is entitled to cast .0641 of a vote. Holders of Security
Capital Class A common stock, Security Capital Class B common stock and
Security Capital Series B preferred stock together are entitled to cast a
total of 1,305,885 votes at the special meeting.
As of the record date, the directors and executive officers of Security
Capital and their affiliates owned and were entitled to vote 121,401 shares of
Security Capital Class A common stock and 367,439 shares of Security Capital
Class B common stock and 257,642 shares of Security Capital Series B preferred
stock (or 10.7% of the total voting power of the Security Capital shares
entitled to vote on the proposal to issue Security Capital Class B common
stock).
VOTING YOUR SHARES
We will vote all shares of Security Capital Class A common stock, Security
Capital Class B common stock and Security Capital Series B preferred stock
represented by properly executed proxies received before or at the Security
Capital special meeting in accordance with the instructions indicated on those
proxies, unless the proxies are revoked. If you do not indicate any
instructions on a properly executed proxy card, we will vote the shares
represented by the proxy FOR approval of the proposal to issue Security
Capital Class B common stock in the transaction. We urge you to mark the box
on the proxy card to indicate how to vote your shares.
We will count properly executed proxies marked "Abstain" for purposes of
determining whether there is a quorum, but we will not vote any of the shares
represented by these proxies at the Security Capital special meeting. If you
hold your shares in an account at a brokerage firm or bank, you must instruct
the firm or bank on how to vote your shares. If an executed proxy card is
returned by a broker or bank holding shares which indicates that the broker or
bank does not have discretionary authority to vote at the special meeting, the
shares will be considered present at the meeting for purposes of determining
the presence of a quorum, but will not be considered to have been voted. Your
broker or bank will vote your shares only if you provide instructions on how
to vote by following the information provided to you by your broker. If you
are a participant in the 401(k) Plan and you do not vote your Security Capital
common stock held by the 401(k) Plan, the administrator for the 401(k) Plan
will instruct the trustee to vote your Security Capital stock in proportion to
the votes received from other participants. Except for the effect on
determining whether a quorum is present as described above, and except for
shares held in the Security Capital 401(k) Plan, abstentions, failures to
respond and broker non-votes will have no effect on the proposal to issue
Security Capital shares in the transaction so long as 50% of the total votes
entitled to be cast are voted, since the vote required to approve the proposal
is based on the number of votes cast.
We do not expect any matters other than those mentioned above to be brought
before the Security Capital special meeting. If, however, other matters are
presented, the persons named as proxies will vote in accordance with their
discretion with respect to those matters, unless authority to do so is
withheld in the proxy.
HOW TO REVOKE A PROXY
You may revoke your proxy before we vote it at the Security Capital special
meeting in one of three ways:
. notifying the Secretary of Security Capital in writing;
. submitting a subsequently dated proxy; or
. appearing in person and voting at the special meeting if you are a
holder of record. Attendance at the special meeting will not in and of
itself constitute revocation of a proxy.
If you choose either of the first two methods, you must submit your notice
of revocation or your new proxy to the Secretary of Security Capital before
your proxy otherwise is voted the special meeting. If you hold
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your shares through an account at a brokerage firm or bank, or through the
Security Capital 401(k) Plan, you should contact your brokerage firm or bank
or, in the case of the 401(k) Plan, the plan trustee, to change your vote.
COST OF SOLICITATION
Security Capital will bear its own costs of solicitation of proxies, except
that Security Capital and U.S. Realty will share equally the expenses (other
than attorneys' and accountants' fees) incurred in connection with the
preparation, printing and mailing of this joint proxy statement/prospectus.
Security Capital has retained Georgeson Shareholder Communications Inc., for a
fee of $7,500 plus additional charges related to telephone calls and other
services, to assist in the solicitation of proxies. Security Capital and
Georgeson will also request banks, brokers and other intermediaries holding
Security Capital shares beneficially owned by others to send this joint proxy
statement/prospectus to, and obtain proxies from, the beneficial owners and
will reimburse the holders for their reasonable expenses. Security Capital may
supplement its solicitation of proxies by mail through solicitation by
telephone, telegram and other electronic means, advertisements and personal
solicitation by the directors, officers or employees of Security Capital.
Security Capital will not pay any additional compensation to directors,
officers or employees for any such solicitation.
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U.S. REALTY EXTRAORDINARY GENERAL MEETING
We are furnishing this joint proxy statement/prospectus to U.S. Realty
shareholders in connection with the solicitation of proxies by the U.S. Realty
board of directors for use at the U.S. Realty extraordinary general meeting. We
are first sending this joint proxy statement/prospectus to shareholders of U.S.
Realty on or about December 12, 2000 (approximately 30 days before the U.S.
Realty extraordinary general meeting). You should read this joint proxy
statement/prospectus carefully before voting your shares.
DATE, TIME AND PLACE OF THE U.S. REALTY EXTRAORDINARY MEETING
The U.S. Realty extraordinary general meeting is scheduled to be held as
follows:
Tuesday, January 16, 2001
3:00 p.m., local time
12, rue Jean Engling, Grand Salon Europe
1466 Luxembourg
WHAT YOU WILL VOTE ON
At the U.S. Realty extraordinary general meeting, we will ask you to
consider and vote upon the following agenda:
1. To approve the transaction agreement, dated as of September 26, 2000,
among U.S. Realty, Security Capital and a wholly-owned subsidiary of
Security Capital and the transactions and matters contemplated thereby.
These transactions and matters include:
. the sale by U.S. Realty to a subsidiary of Security Capital of all
of the outstanding shares and other equity interests in SC-Holdings
owned by U.S. Realty, U.S. Realty's interest in an agreement between
U.S. Realty and SC-Holdings and cash on hand, in exchange for shares
of Security Capital Class B common stock and cash;
. the subsequent liquidation of U.S. Realty in accordance with the
plan of liquidation attached as an exhibit to the transaction
agreement, in which (1) all of the shareholders of U.S. Realty
(other than those who vote "against" the proposal and who validly
elect to receive cash instead of Security Capital shares) will
receive 1.15 shares of Security Capital Class B common stock for
each U.S. Realty share they own and (2) shareholders of U.S. Realty
who vote "against" the proposal and who validly elect to receive
cash instead of Security Capital shares will receive an amount of
cash in U.S. dollars equal to 1.15 multiplied by the average of the
daily high and low per share sale prices of the Security Capital
Class B common stock on the New York Stock Exchange during the 15
trading days ending on January 5, 2001 (the sixth trading day before
the U.S. Realty extraordinary general meeting), net of any taxes we
must withhold from the payment; and
. the appointment of SC Transaction Corporation, a subsidiary of
Security Capital, as liquidator for the liquidation of U.S. Realty.
2. To transact any other business as may properly come before the
extraordinary general meeting or any adjournment or postponement of the
extraordinary general meeting.
In order to comply with Luxembourg law, and to ensure that (1) the
liquidation does not go forward unless the sale of U.S. Realty's assets to
Security Capital under the transaction agreement has first been completed, (2)
the sale of U.S. Realty's assets to Security Capital under the transaction
agreement is not effected unless it is expected that immediately thereafter
U.S. Realty will be able to effect the distribution of the shares of Security
Capital Class B common stock and cash received from Security Capital in the
sale, and (3) the satisfaction and discharge of the Indenture under which U.S.
Realty has issued its convertible notes is completed prior to the liquidation
of U.S. Realty, the following procedure will be employed at the extraordinary
general meeting.
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First, it will be determined if sufficient shares are represented and have been
voted in favor of the transaction to allow both the sale and the subsequent
liquidation to proceed. If that is the case, the sale will first be approved,
and the course of the extraordinary general meeting suspended for a short
period of time to allow the sale to then be consummated. Following the
consummation of the sale, the extraordinary general meeting will continue, with
the liquidation then being considered and, if approved, the distribution of the
transaction proceeds to U.S. Realty shareholders as described above will be
commenced. The form of proxy we are soliciting from U.S. Realty shareholders
provides that it may not be revoked following approval and consummation of the
sale, and the sale will not be consummated unless sufficient votes have been
obtained to approve the liquidation.
SHAREHOLDER RECORD DATE FOR THE EXTRAORDINARY MEETING
U.S. Realty's board of directors has fixed the close of business on December
8, 2000 as the record date for determination of U.S. Realty's shareholders
entitled to notice of and to vote at the extraordinary general meeting. On the
record date there were 74,883,958 U.S. Realty shares entitled to notice of and
to vote at the extraordinary general meeting held by approximately 94 holders
of record.
QUORUM
In order to have a quorum, holders of record of U.S. Realty shares having a
majority of the votes entitled to be cast must be present or represented at the
extraordinary general meeting. If that majority quorum is not present at the
initial meeting, we will adjourn the meeting for at least 30 days and, upon
resumption of the meeting, there will be no quorum requirement.
VOTE REQUIRED FOR APPROVAL
Approval of the transaction requires the affirmative vote of at least two-
thirds of the U.S. Realty shares present or represented at the extraordinary
general meeting, provided that at least a majority of the outstanding U.S.
Realty shares are present or represented. Each U.S. Realty share is entitled to
cast one vote in compliance with Luxembourg law and U.S. Realty's articles of
incorporation.
As of the record date for the U.S. Realty extraordinary general meeting,
wholly-owned subsidiaries of Security Capital owned 30,401,683 U.S. Realty
shares (or 40.6% of the total voting power of the U.S. Realty shares entitled
to vote on the transaction). Security Capital has agreed in the transaction
agreement to cause its subsidiaries to vote those shares "for" the transaction.
As of the record date for the U.S. Realty extraordinary general meeting, the
directors and executive officers of U.S. Realty owned and were entitled to vote
27,505 U.S. Realty shares (or .04% of the total voting power of the U.S. Realty
shares entitled to vote on the transaction).
VOTING YOUR SHARES
U.S. Realty will vote all U.S. Realty shares represented by properly
executed proxies received before or at the U.S. Realty extraordinary general
meeting in accordance with the instructions indicated on those proxies, unless
the proxies are revoked. If you do not indicate any instructions on a properly
executed proxy card, the shares represented by the proxy will be voted "for"
approval of the proposals described in the notice of meeting. U.S. Realty urges
you to mark the box on the proxy card to indicate how to vote your shares.
U.S. Realty will count properly executed proxies marked "abstain" as present
for purposes of determining whether a majority of the outstanding shares are
present or represented at the meeting. To make a valid election to receive
cash, you must vote "against" the transaction proposal in the portion of the
proxy card where you specify your vote and elect to receive cash.
Alternatively, if you wish to attend the extraordinary general meeting and are
a record holder, you may make a valid cash election at the meeting by voting
"against" the transaction at the meeting and checking the appropriate cash
election box on your ballot. In order to assure any necessary tax withholding
and to verify the total amount of cash consideration, if you validly elect to
receive
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cash by either of the above methods you must also complete and return a letter
of transmittal marked to elect cash before or at the extraordinary general
meeting and, if you hold physical share certificates, attach your share
certificate(s) to the letter of transmittal. If you hold your shares in an
account at a brokerage firm or bank, including if you hold American depositary
shares, you must instruct the firm or bank or depositary on how to vote your
shares. If an executed proxy card is returned by a broker or bank holding
shares which indicates that the broker or bank does not have discretionary
authority to vote at the extraordinary general meeting, the shares will not be
considered present at the meeting and will not be voted. Your broker or bank
and the depositary will vote your shares only if you provide instructions on
how to vote by following the procedures provided to you by your broker. Except
for the effect on determining whether a majority of the shares are present or
represented, failures to respond will have no effect on the vote as to the
transaction agreement and the transactions and matters contemplated thereby,
since the vote required is based on the number of shares present or
represented.
If you hold U.S. Realty American depositary shares, the depositary will vote
your shares at the meeting. Please follow the instructions you have received
from the depositary and deliver your proxy and letter of transmittal at least
six days before the meeting to have your vote counted or valid cash election
made.
If you are a holder of record and you wish to be represented at the
extraordinary general meeting, you will be able to complete a proxy form and
fax it to the attention of Laura L. Hamilton, Vice President, Security Capital
U.S. Realty, Fax. +352 46 37 56 5550 (from the U.S. dial 011 352 46 37 56
5550).
The proxyholder will be authorized to make any statement, cast all votes,
sign all minutes of meetings and other documents, do everything which is
lawful, necessary or simply useful in view of the accomplishment and
fulfillment of the proxy granted by the shareholders, even if not formally
mentioned in the proxy or this joint proxy statement/prospectus, and to
proceed, in accordance with the requirements of Luxembourg law, to any
registration with U.S. Realty's registrar.
We do not expect any matters other than those mentioned above to be brought
before the U.S. Realty extraordinary general meeting. If, however, other
matters are presented, the persons named as proxies will vote in accordance
with their judgment with respect to those matters, unless authority to do so is
withheld in the proxy.
WHAT YOU MUST DO TO RECEIVE CASH INSTEAD OF SECURITY CAPITAL CLASS B COMMON
STOCK
If you are a holder of record your proxy card contains a special box that
you must check if you wish to receive cash instead of Security Capital shares.
To make a valid election to receive cash, you must also vote "against" the
transaction proposal in the portion of the proxy card where you specify your
vote. Alternatively, if you wish to attend the extraordinary general meeting
and are a record holder, you may make a valid cash election at the meeting by
voting "against" the transaction at the meeting and checking the appropriate
cash election box on your ballot. In order to assure any necessary tax
withholding and to verify the total amount of cash consideration, you must also
complete and return a letter of transmittal marked to elect cash before or at
the extraordinary general meeting and, if you hold physical share certificates,
attach your share certificate(s) to the letter of transmittal. Failure to
follow these steps will result in an effective election to receive Security
Capital Class B common stock.
HOW TO REVOKE A PROXY
If you are a holder of record, you may revoke your proxy before we vote it
at the U.S. Realty extraordinary general meeting in one of three ways:
. notifying the Vice President of U.S. Realty in writing;
. submitting a subsequently dated proxy; or
. appearing in person and voting at the extraordinary meeting if you are a
holder of record. Attendance at the extraordinary general meeting will
not in and of itself constitute revocation of a proxy.
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If you choose either of the first two methods, you must submit your notice
of revocation or your new proxy to the Vice President before, but not after,
any vote is taken at the extraordinary meeting. If you hold your shares through
an account at a brokerage firm or bank, you should contact your brokerage firm
or bank to change your vote. If you hold ADSs, you should contact the
depositary to change your vote.
COST OF SOLICITATION
U.S. Realty will bear its owns costs of solicitation of proxies, except that
Security Capital and U.S. Realty will share equally the expenses (other than
attorneys' and accountants' fees) incurred in connection with the preparation,
printing and mailing of this joint proxy statement/prospectus. U.S. Realty has
retained Georgeson Shareholder Communications Inc., for a fee of $50,000 plus
additional charges related to telephone calls and other services, to assist in
the solicitation of proxies. U.S. Realty and Georgeson will also request banks,
brokers and other intermediaries holding U.S. Realty shares beneficially owned
by others to send this joint proxy statement/prospectus to, and obtain proxies
from, the beneficial owners and will reimburse the holders for their reasonable
expenses. U.S. Realty may supplement its solicitation of proxies by mail
through solicitation by telephone, telegram and other electronic means,
advertisements and personal solicitation by the directors, officers or
employees of U.S. Realty. U.S. Realty will not pay any additional compensation
to directors, officers or employees for any such solicitation.
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THE TRANSACTION AGREEMENT
We believe this summary describes the material terms of the transaction
agreement. However, we recommend that you read carefully the complete agreement
for the precise legal terms of the transaction agreement and other information
that may be important to you. The transaction agreement, attached as Appendix A
to this joint proxy statement/prospectus, is incorporated herein by reference.
GENERAL
Because of Luxembourg legal requirements, the transaction is structured as a
two-step transaction in which (1) Security Capital will first purchase the
assets of U.S. Realty described below in exchange for shares of Security
Capital Class B common stock and cash, followed by the satisfaction and
discharge of the Indenture under which U.S. Realty issued its convertible notes
using a portion of the cash and (2) U.S. Realty will commence a liquidation in
which U.S. Realty shareholders will receive Security Capital Class B common
stock and remaining cash received by U.S. Realty as consideration for the sale
of U.S. Realty's assets.
The transaction agreement then provides that the closing of the purchase and
sale of U.S. Realty's assets and the distribution to U.S. Realty shareholders
will take place as promptly as practicable after satisfaction or, if permitted,
waiver of the conditions to the transaction contained in the transaction
agreement.
THE PURCHASE AND SALE OF U.S. REALTY'S ASSETS
As the first step in the transaction, on the closing date of the
transaction, SC Realty Incorporated, a Nevada corporation and indirect wholly-
owned subsidiary of Security Capital, will purchase in exchange for shares of
Security Capital Class B common stock and cash all of U.S. Realty's assets
listed below:
. all of the outstanding shares of SC-Holdings (other than one share,
which is owned by a subsidiary of Security Capital);
. U.S. Realty's interest in an agreement between U.S. Realty and SC-
Holdings under which U.S. Realty has made cash advances to SC-Holdings;
and
. any cash on hand.
Before the purchase of U.S. Realty's assets at the closing, U.S. Realty will
transfer any assets to SC-Holdings other than those described above, and, will
assign to SC-Holdings all of U.S. Realty's liabilities other than those
relating to U.S. Realty's outstanding 2% Senior Unsecured Convertible Notes due
2003 (the "Convertible Notes") issued under the indenture dated as of May 22,
1998 between U.S. Realty and State Street Bank and Trust, as trustee (as
supplemented, the "U.S. Realty Indenture"), and U.S. Realty's liabilities, if
any, under the SC-Holdings advance agreement.
The stock portion of the purchase price paid to U.S. Realty will consist of
a number of shares of Security Capital Class B common stock equal to the
product of (a) 1.15 multiplied by (b) the number of U.S. Realty shares
outstanding as of the closing date less the number of U.S. Realty shares, if
any, which shareholders of U.S. Realty have voted against the transaction at
the U.S. Realty extraordinary meeting and for which the holders have made valid
elections to receive cash instead of shares of Security Capital Class B common
stock.
The cash portion of the purchase price paid to U.S. Realty will equal the
sum of:
. the number of U.S. Realty shares, if any, the holders of which have
voted against the transaction at the U.S. Realty extraordinary meeting
and for which the holders have made a valid election to receive cash
instead of shares of Security Capital Class B common stock, multiplied
by the product of (a) 1.15 times (b) the average of the high and low per
share sale prices of the Security Capital Class B common stock during
the regular trading sessions on the New York Stock Exchange for each of
the
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15 full trading days immediately before (but not including) the fifth
trading day before the date of the U.S. Realty extraordinary meeting;
plus
. an amount of cash (the "Notes Payoff Amount") either (a) equal to the
accreted value of the Convertible Notes on the later of May 23, 2001 or
the date that is 30 days after the closing of the transaction (the
"Redemption Date") plus any interest required to be paid on the
Convertible Notes after the closing date of the transaction through and
including the Redemption Date (the "Redemption Amount") or (b)
sufficient on the transaction closing date to purchase securities backed
by the full faith and credit of the United States of America with face
amounts and maturity dates to provide funds, on the Redemption Date,
equal to the Redemption Amount.
Security Capital will not be obligated to proceed with the transaction if
the total amount of cash required for distribution to U.S. Realty shareholders
making valid cash elections exceeds $200 million.
THE LIQUIDATION OF U.S. REALTY
As the second step in the transaction, on the closing date, after U.S.
Realty satisfies and discharges its convertible notes Indenture, U.S. Realty
shareholders will receive a distribution of either:
. a number of shares of Security Capital Class B common stock equal to the
product of (a) 1.15 multiplied by (b) the number of U.S. Realty shares
owned by the shareholder, rounded down to the next whole number; or
. if the U.S. Realty shareholder voted the shares held by such shareholder
"against" the transaction and made a valid election to receive cash
instead of shares of Security Capital Class B common stock, an amount of
cash equal to such number of shares multiplied by the product of (a)
1.15 multiplied by (b) the average of the high and low per share sales
prices of the Security Capital Class B common stock during the regular
trading sessions on the New York Stock Exchange for each of the 15 full
trading days immediately before (but not including) the fifth trading
day before the date of the U.S. Realty extraordinary meeting, less any
taxes required under applicable law to be withheld from the payment.
In accordance with the plan of liquidation, U.S. Realty shareholders
receiving Security Capital Class B common stock in the liquidation will
receive cash in lieu of any fractional share of Security Capital Class B
common stock. Promptly following the closing date, the liquidator will sell,
at prevailing market prices on the New York Stock Exchange through one or more
member firms, the shares of Security Capital Class B common stock received by
U.S. Realty in the transaction that the liquidator does not distribute to U.S.
Realty shareholders as whole shares, as described above. The liquidator will
as promptly as practicable distribute the cash proceeds of those sales to U.S.
Realty shareholders in respect of any fractional shares of Security Capital
Class B common stock that the shareholder would otherwise have received. The
liquidator will aggregate all U.S. Realty shares held by a U.S. Realty
shareholder for purposes of determining the number of whole shares the
shareholder will receive, and in no event will any U.S. Realty shareholder
receive cash in lieu of more than one share of Security Capital Class B common
stock.
As required by the transaction agreement, following the close of trading on
the New York Stock Exchange on January 5, 2001, we will issue a press release
announcing the calculation of the amount of cash per U.S. Realty share that
shareholders who vote against the transaction and validly elect to receive
cash would receive in the transaction. We will also publish that information
in newspapers of general circulation in Luxembourg, Amsterdam and New York.
SC Transaction Corporation, a wholly-owned subsidiary of Security Capital,
will serve as the liquidator. Under Luxembourg law, the liquidator will remain
liable for any remaining liabilities of U.S. Realty following the completion
of the liquidation.
The plan of liquidation, which is Exhibit A to the transaction agreement
(which is attached as Appendix A to this joint proxy statement/prospectus) is
incorporated herein by reference. We urge shareholders to read the plan of
liquidation carefully.
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TREATMENT OF U.S. REALTY DEBT
Immediately before the distribution to U.S. Realty shareholders on the
closing date, U.S. Realty will satisfy and discharge the U.S. Realty Indenture.
In connection with the satisfaction and discharge, U.S. Realty will deposit
with the trustee the Redemption Amount and will enter into an agreement with
Security Capital, SC Realty and the trustee providing for the redemption of the
Convertible Notes on the later of May 23, 2001 (the earliest permitted
redemption date under the U.S. Realty Indenture) and the 30th day after closing
of the transaction. SC Realty Incorporated has agreed to indemnify the trustee
for liabilities the trustee may incur in connection with the satisfaction and
discharge of the U.S. Realty Indenture and the redemption of the Convertible
Notes, and Security Capital has agreed to guarantee SC Realty Incorporated's
obligations.
In connection with the transaction, Security Capital will refinance U.S.
Realty's existing bank debt (which consists of an unsecured line of credit
under which SC-Holdings is the borrower) and will provide SC-Holdings
sufficient cash to repay any outstanding amounts under the line of credit. See
"The Transaction--Transaction Financing."
PROXY STATEMENT AND REGISTRATION STATEMENT
Security Capital and U.S. Realty agreed in the transaction agreement that
they would:
. as promptly as practicable prepare and file with the U.S. Securities and
Exchange Commission a proxy statement relating to the special meeting of
Security Capital's shareholders to be held in connection with the
transaction and the extraordinary meeting of U.S. Realty's shareholders
to be held in connection with the transaction; and
. as promptly as reasonably practicable convene meetings of their
respective shareholders for the purpose of considering and taking action
upon the issuance of Security Capital Class B common stock in the
transaction at the Security Capital special meeting and the approval of
the transaction agreement at the U.S. Realty extraordinary meeting.
In addition, Security Capital agreed in the transaction agreement that it
would as promptly as practicable prepare and file with the U.S. Securities and
Exchange Commission a registration statement on Form S-4 with respect to the
shares of Security Capital Class B common stock to be distributed to U.S.
Realty shareholders in the transaction. Furthermore, Security Capital and U.S.
Realty agreed to use their reasonable best efforts to cause the registration
statement to become effective as promptly as practicable and to remain
effective as long as necessary to complete the transaction, and to have the
joint proxy statement/prospectus cleared by the Luxembourg supervisory
authority.
BOARD RECOMMENDATIONS AND ACTIONS; VOTING OF SHARES
Each of Security Capital and U.S. Realty has agreed in the transaction
agreement:
. to take all lawful action to solicit its shareholders' approval of its
respective shareholder proposal;
. that its board of directors will not, subject to its legal and
regulatory duties under applicable law (including in the case of the
U.S. Realty board, the duty to act in the best interests of the U.S.
Realty shareholders), withdraw, modify or materially qualify in any
manner adverse to the other party its recommendation that shareholders
vote in favor of its respective shareholder proposal, or take any action
or make any statement in connection with its shareholder meeting
materially inconsistent with the board's recommendation; and
. to take all reasonable steps within its control to exempt the
transaction from any anti-takeover law that purports to apply to the
transaction or the transaction agreement.
Security Capital has agreed in the transaction agreement to cause its
subsidiaries that are U.S. Realty shareholders to vote the U.S. Realty shares
owned by them in favor of the transaction at the U.S. Realty extraordinary
meeting.
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REPRESENTATIONS AND WARRANTIES
Security Capital and U.S. Realty made customary representations and
warranties to the other in the transaction agreement in each case relating to,
among other matters:
. organization and corporate authority;
. subsidiaries;
. capitalization;
. consents, approvals and licenses;
. conflicts;
. Securities and Exchange Commission reports and financial statements;
. absence of certain changes or events;
. contracts;
. properties and leases;
. litigation;
. compliance with applicable laws;
. insurance;
. brokers;
. lack of undisclosed liabilities;
. the required shareholder vote in connection with the transaction;
. the accuracy of statements made in this joint proxy
statement/prospectus;
. board authorizations;
. the opinion of its financial advisor; and
. applicability of statutory anti-takeover provisions.
Security Capital made additional customary representations and warranties to
U.S. Realty in the transaction agreement relating to:
. environmental matters;
. taxes;
. employee benefits matters;
. financing for the transaction; and
. knowledge regarding breaches by U.S. Realty.
U.S. Realty made additional customary representations and warranties to
Security Capital in the transaction agreement relating to:
. title to SC-Holdings shares;
. tax consequences of the transaction; and
. the availability of dissenters' rights for U.S. Realty shareholders.
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INTERIM BUSINESS OPERATIONS
The transaction agreement obligates U.S. Realty, SC-Holdings and their
controlled subsidiaries, from the date of the transaction agreement until the
closing of the transaction, to conduct their businesses in the ordinary and
usual course in accordance with past practices and to use all reasonable
efforts to preserve the businesses of SC-Holdings and its wholly-owned
subsidiaries intact, to preserve the goodwill of customers, suppliers,
employees and others having significant business relationships with SC-Holdings
and its wholly-owned subsidiaries, to retain their key employees and to
maintain insurance. The transaction agreement also contains specific
restrictive covenants as to activities of U.S. Realty, SC-Holdings and their
controlled subsidiaries prior to the closing without the prior written consent
of Security Capital relating to, among other matters:
. issuances or sales of their securities;
. changes in issued and outstanding shares;
. repurchases or redemptions of securities;
. compensation of directors, officers, and employees;
. amendments to their articles of incorporation or similar organizational
documents;
. dividends or other distributions;
. indebtedness;
. material acquisitions or dispositions of assets;
. creation of encumbrances;
. incurrence of liabilities;
. new investments;
. changes in accounting methods;
. capital expenditures;
. material contracts;
. reclassification of assets or liabilities;
. taking actions that would cause U.S. Realty's representations and
warranties to be inaccurate or that materially adversely affect the
business, assets, financial condition or results of operations of SC-
Holdings and its subsidiaries; and
. tax elections and tax returns.
Actions taken upon the advice or recommendation of, or agreement by, U.S.
Realty's operating advisor that would otherwise result in breaches of these
restrictive covenants will not constitute breaches by U.S. Realty under the
transaction agreement.
The transaction agreement also contains specific restrictive covenants as to
activities of Security Capital prior to the closing of the transaction without
the prior written consent of U.S. Realty relating to, among other matters:
. issuances or sales of its securities;
. changes in issued and outstanding capital stock;
. repurchases or redemptions of its securities other than in open market
transactions or negotiated third party transactions;
. amendments to its charter; and
. dividends or other distributions.
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NO SOLICITATION BY U.S. REALTY
The transaction agreement provides that U.S. Realty will not, and will not
permit SC-Holdings or its wholly-owned subsidiaries to:
. solicit any inquiries or proposals for, or enter into or continue or
resume any discussions or enter into any negotiations or agreements
relating to, the sale or exchange of any shares of SC-Holdings or any
shares of U.S. Realty or any of its subsidiaries, or all, or a
substantial part, of the assets of U.S. Realty, SC-Holdings or any of
its subsidiaries; or
. furnish any non-public information concerning the business and
operations of U.S. Realty, SC-Holdings or any of its subsidiaries to any
person or entity, other than in the ordinary course of business
consistent with past practice, or as required by applicable law
(including applicable laws relating to the duties of the U.S. Realty
board of directors).
PUBLIC ANNOUNCEMENTS
Security Capital and U.S. Realty have agreed in the transaction agreement to
consult with each other before issuing any press release or, to the extent
practicable, making any public statement regarding the transaction or the
transaction agreement, unless otherwise required by applicable law or
obligations under any listing agreement with or rules of any securities
exchange.
EFFORTS
Security Capital and U.S. Realty have agreed to use all reasonable efforts
to take, or cause to be taken, all actions necessary, proper or advisable to
consummate and make the transaction effective as promptly as practicable,
including to:
. obtain all waivers, consents and approvals from other parties to loan
agreements, leases, mortgages and other contracts necessary for the
completion of the transaction;
. make required filings, registrations and submissions of information
with, and obtain required consents, approvals and authorizations from,
governmental authorities;
. lift or rescind any injunction, restraining order, decree or other order
adversely affecting the ability of the parties to complete the
transaction;
. fulfill all conditions to the transaction contained in the transaction
agreement;
. prevent the entry, enactment or promulgation of any threatened or
pending preliminary or permanent injunction or other order, decree or
ruling or statute, rule, regulation or executive order that would
adversely affect the ability of the parties to complete the transaction;
and
. exempt the transaction from or, if necessary, challenge the validity or
applicability of any anti-takeover law or regulation which appears to
apply to the transaction or the transaction agreement.
Security Capital and U.S. Realty also have agreed in the transaction
agreement to promptly file or cause to be filed with the Antitrust Division of
the U.S. Department of Justice and the U.S. Federal Trade Commission all
requisite documents and notifications in connection with the transaction, and
to endeavor in good faith to comply with any requests for additional
information from these governmental authorities.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
Security Capital has agreed in the transaction agreement to continue in full
force and effect, and not to take any action for six years that could
materially reduce, the rights to indemnification or exculpation existing in
favor of the directors and officers of U.S. Realty, SC-Holdings and its wholly-
owned subsidiaries as provided in their respective articles, certificates,
charters or bylaws or otherwise in effect as of the date of the transaction
agreement for matters occurring prior to the completion of the transactions
contemplated in the transaction agreement. Security Capital has also agreed to
advance expenses in connection with such indemnification.
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The transaction agreement further provides that for six years following the
completion of the transaction, Security Capital will maintain the policies of
the directors' and officers' liability and fiduciary insurance most recently
maintained by U.S. Realty (or may substitute policies of at least the same
coverage containing terms and conditions which are no less advantageous to the
beneficiaries so long as any substitution does not result in gaps or lapses in
coverage) for matters occurring prior to the completion of the transaction. In
no event will Security Capital be required to expend annually more than 150% of
the amount expended by U.S. Realty on an annual basis as of the date of the
transaction agreement to maintain or procure such insurance coverage.
CERTAIN LITIGATION
The transaction agreement provides that Security Capital will have the right
to conduct, in consultation with U.S. Realty and the U.S. Realty special
committee, the defense or settlement of any action or claim brought by
shareholders of U.S. Realty which challenges or seeks to restrain or prohibit
the transaction or seeks to obtain material damages. U.S. Realty has agreed not
to pay or settle any such claim or action without Security Capital's consent.
The U.S. Realty special committee would have the right to participate in any
such defense or settlement. Security Capital has agreed not to settle any such
claim that names as a party any member of the U.S. Realty board of directors
without the director's consent, which the director will not unreasonably
withhold.
LISTING OF SECURITY CAPITAL STOCk
Security Capital has agreed to promptly prepare and submit to the New York
Stock Exchange a supplemental listing application covering the shares of
Security Capital Class B common stock to be issued in the transaction, and to
use all reasonable efforts to cause those shares to be approved for listing on
the New York Stock Exchange, subject only to official notice of issuance, by
the closing of the transaction.
ADDITIONAL COVENANTS OF U.S. REALTY
U.S. Realty has agreed in the transaction agreement:
. to promptly provide Security Capital copies of financial statements or
financial reports of U.S. Realty, SC-Holdings and its wholly-owned
subsidiaries prepared in the ordinary course of business and to provide
promptly any other financial information that Security Capital may
reasonably request;
. to take procedural steps necessary to satisfy and discharge the U.S.
Realty Indenture; and
. at the request of Security Capital and subject to the satisfaction of
the conditions to closing contained in the transaction agreement, to
make a capital contribution to SC-Holdings of up to a specified portion
of the amounts owing to U.S. Realty under an agreement under which U.S.
Realty has made advances to SC-Holdings and/or to cause SC-Holdings to
pay a cash dividend to U.S. Realty of such amounts owing; and to cause
SC-Holdings and its wholly-owned subsidiaries to take similar actions in
respect of similar advance arrangements between them, in each case prior
to the sale of U.S. Realty's assets to Security Capital's subsidiary at
the closing.
ADDITIONAL COVENANTS OF SECURITY CAPITAL
Security Capital has agreed in the transaction agreement:
. to use all reasonable efforts to obtain the financing necessary to
complete the transaction on the terms contained in the commitment letter
received by Security Capital from its lenders or on other terms as may
be commercially available at the time of funding;
. to file articles supplementary with the Maryland State Department of
Assessments and Taxation reflecting the reclassification of 4,456,988
shares of Security Capital Class A common stock and
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139,000 shares of Security Capital Series A cumulative convertible
redeemable voting preferred stock as 4,595,988 shares of Security
Capital Class B common stock, which filing occurred on October 2, 2000;
and
. to indemnify and hold U.S. Realty harmless from, and to pay when due,
any taxes for or to U.S. Realty arising from any pre-closing dividends
or capital contributions that Security Capital may request U.S. Realty,
SC-Holdings or their subsidiaries to make relating to the advance
agreements discussed above.
TREATMENT OF INCENTIVE ARRANGEMENTS
The transaction agreement provides that at the time of the sale of U.S.
Realty's assets to Security Capital, the rights of the independent U.S. Realty
directors to receive restricted cash payments under existing share option
equivalent agreements will be vested (whether or not then vested), will be
deemed to be exercised as of the last full trading day before such sale, will
be due and payable, and will be paid to the holder of the share option
equivalent. The transaction agreement further provides that no director
receiving the payment will have any obligation to use the cash payment for any
particular purpose. See "The Transaction--Interests of Certain Persons in the
Transaction."
CONDITIONS TO COMPLETION OF THE TRANSACTION
The respective obligations of Security Capital and U.S. Realty are subject
to the satisfaction or, where permitted, waiver of each of the following:
. approval by the Security Capital shareholders of the issuance of shares
of Security Capital Class B common stock in the transaction;
. approval by the shareholders of U.S. Realty of the transaction agreement
and the transactions it contemplates, including the sale of U.S.
Realty's assets, the plan of liquidation and the appointment of the
liquidator;
. the absence of any law, or any effective temporary restraining order,
preliminary or permanent injunction or other order issued by a court or
other governmental authority of competent jurisdiction, making the
transactions contemplated by the transaction agreement or the plan of
liquidation illegal or otherwise prohibiting them (this condition may
not be asserted by a party if its failure to fulfill its obligation
described above under "--Efforts" was the cause of, or resulted in, the
order or injunction);
. approval of the Security Capital Class B common stock to be issued in
the transaction for listing on the New York Stock Exchange, subject only
to official notice of issuance;
. compliance in all material respects by the other party with its
transaction agreement covenants;
. the continuing accuracy of the other party's representations and
warranties contained in the transaction agreement other than
inaccuracies which would not have a material adverse effect on the
business and operations of such other party;
. termination or expiration of the waiting period and any extension of the
waiting period applicable to the transaction under the U.S. Hart-Scott-
Rodino Antitrust Improvements Act of 1976;
. receipt of all other consents, approvals and actions of, filings with
and notices to any governmental authority required of Security Capital,
U.S. Realty, or any of their subsidiaries to consummate the transaction
if the failure to obtain the consent or approval would reasonably be
expected to have a material adverse effect on the business and
operations of Security Capital or U.S. Realty (this condition may not be
asserted by a party if its failure to fulfill its obligation described
above under "--Efforts" was the cause of, or resulted in, any such
failure to obtain the required consent or approval); and
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. the absence of any stop order suspending the effectiveness of the
registration statement filed by Security Capital relating to the
distribution of the Security Capital Class B common stock in the
transaction of which this joint proxy statement/prospectus forms a part.
Security Capital's obligations to complete the transaction are subject to
the satisfaction or waiver of the following additional conditions:
. the amount of cash to be distributed in the transaction to U.S. Realty
shareholders who vote "against" the transaction and who validly elect to
receive cash instead of Security Capital shares totaling $200 million or
less; and
. Security Capital having obtained sufficient financing for the
transaction under the commitment letter it received from its lenders or
on otherwise commercially available terms at the time of funding and
satisfactory to Security Capital.
TERMINATION
Security Capital and U.S. Realty may by mutual agreement terminate the
transaction agreement and abandon the transaction at any time before the
closing (notwithstanding receipt of any approvals at the companies' shareholder
meetings). In addition, either party may terminate the transaction agreement:
. if any governmental authority of competent jurisdiction issues an
injunction, restraining order or decree that restrains or prohibits the
consummation of the transaction, and the injunction, restraining order
or decree is final and nonappealable;
. if Security Capital shareholders or U.S. Realty shareholders fail to
give the requisite approvals at their respective shareholder meetings;
or
. if the closing has not occurred by March 31, 2001 (which date will be
extended to no later than June 30, 2001) so long as Security Capital's
financing commitment is extended or Security Capital has replacement
financing in place (as extended, the "Outside Date"), unless the failure
by the party seeking to terminate to comply with its covenants and
agreements has caused the closing not to have occurred by that date.
Security Capital may also terminate the transaction agreement if the
required U.S. Realty shareholder vote is obtained at the U.S Realty
extraordinary meeting and the amount of cash required for distribution in the
transaction to U.S. Realty shareholders exceeds $200 million in the aggregate.
EXPENSES
Except as described below, the parties will bear their own costs and
expenses incurred in connection with the transaction. Security Capital and U.S.
Realty will share equally the expenses (other than attorneys' and accountants'
fees) incurred in connection with the preparation, printing and mailing of this
joint proxy statement/prospectus. Security Capital will pay the filing fee
required under the Hart-Scott-Rodino Antitrust Improvements Act.
If either party terminates the transaction agreement based on the failure of
the closing to occur by the Outside Date, and the failure of the closing to
occur by that date was caused by the other party's failure to perform its
covenants and agreements in the transaction agreement, the non-terminating
party will reimburse the terminating party for its documented out-of-pocket
expenses, not in excess of $2.1 million. In addition, Security Capital will
reimburse U.S. Realty for those expenses if either party terminates the
transaction agreement on or after the Outside Date, and on the Outside Date all
conditions to the parties' obligations have been satisfied or waived, other
than Security Capital's condition that it have obtained the necessary
transaction financing, the delivery of officers' certificates as to compliance
with representations, warranties and covenants
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and any condition that has not been or cannot be satisfied as a result of
Security Capital's failure to perform its covenants and agreements.
GOVERNING LAW
The transaction agreement is governed by Maryland law, except that
Luxembourg law will govern all questions of Luxembourg corporate or securities
law (including questions relating to the legal and regulatory duties of the
directors of U.S. Realty) and interpretations of those laws.
AMENDMENT AND WAIVER
Security Capital and U.S. Realty may agree to amend the transaction
agreement at any time. Security Capital and U.S. Realty may waive the
compliance by the other with any term or condition of the transaction
agreement. Any such waiver will not be interpreted as a waiver of the liability
of the other party for any breach occurring before the waiver.
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REGULATORY MATTERS
UNITED STATES ANTITRUST COMPLIANCE
The U.S. Antitrust Division of the Department of Justice and the U.S.
Federal Trade Commission scrutinize the legality under the U.S. antitrust laws
of transactions such as the proposed transaction. At any time before or after
completion of the transaction, the Antitrust Division or the Federal Trade
Commission could take any action under the antitrust laws of the United States
it deems necessary or desirable in the public interest, including seeking to
enjoin the transaction or seeking divestiture of substantial assets of Security
Capital or U.S. Realty. Private parties (including individual states) may also
bring legal actions under the antitrust laws of the United States. Security
Capital and U.S. Realty do not believe that the completion of the transaction
will result in a violation of any applicable antitrust laws. However, we cannot
assure you that a governmental agency or private party will not challenge the
transaction on antitrust grounds, or if they make a challenge, what the result
will be. The applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 expired on October 30, 2000.
CERTAIN NETHERLANDS MATTERS
U.S. Realty qualifies as an investment institution within the meaning of the
1990 Act on the supervision of investment institutions (Wet toezicht
beleggingsinstellingen 1990) and is licensed and supervised by the Dutch
Central Bank (De Nederlandsche Bank N.V.). Security Capital is not and will not
be so licensed or supervised, and accordingly shareholders of U.S. Realty who
become Security Capital shareholders will not have the benefit of such
licensing and supervision.
In addition, the issue and offering by Security Capital of Security Capital
Class B common stock to the shareholders of U.S. Realty residing in the
Netherlands falls within the scope of the 1995 Act on the supervision of the
securities trade (Wet toezicht effectenverkeer 1995), and compliance with which
requires Security Capital to apply for an individual dispensation from the
offering prohibition thereunder with the Securities Board of the Netherlands
(Stichting toezicht effectenverkeer), which would be based on the fact that
this joint proxy statement/prospectus will be made available to the
shareholders of U.S. Realty residing in the Netherlands.
Security Capital will apply to the Securities Board of the Netherlands for
an individual dispensation from the provisions of the 1995 Act on the
supervision of the securities trade. The issue and offering of Security Capital
stock to shareholders of U.S. Realty residing in the Netherlands depends on the
relevant dispensation from the Securities Board of the Netherlands.
LUXEMBOURG SUPERVISORY AUTHORITY
Pursuant to Luxembourg law, U.S. Realty will remain under the supervision of
the Luxembourg supervisory authority until the completion of the liquidation.
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CERTAIN TAX CONSEQUENCES OF THE TRANSACTION
Summaries of the principal United States federal income tax consequences and
the principal Luxembourg and German tax consequences of the receipt of the
Security Capital Class B common stock and/or cash (the "Liquidation Proceeds")
in consideration for U.S. Realty shares in the liquidation of U.S. Realty (the
"Liquidation") and the ownership and disposition of Security Capital Class B
common stock acquired in the Liquidation are set forth below. All holders of
U.S. Realty shares, and in particular those holders who are resident in, or
subject to taxation by, countries other than the United States, Luxembourg or
Germany, should consult with their own tax advisors.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
TO U.S. REALTY SHAREHOLDERS
The following is a summary of the principal United States federal income tax
consequences that may be relevant with respect to the receipt of Liquidation
Proceeds in consideration for U.S. Realty shares in the Liquidation and the
ownership and disposition of Security Capital Class B common stock acquired in
the Liquidation. For purposes of this summary, a "U.S. Holder" is a beneficial
owner of U.S. Realty shares, who or that, for United States federal income tax
purposes, is: (i) a citizen or resident of the United States, (ii) a
partnership or corporation created or organized in or under the laws of the
United States or any state thereof (including the District of Columbia), (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source or (iv) a trust if such trust validly elects
to be treated as a United States person for United States federal income tax
purposes or if (a) a court within the United States is able to exercise primary
supervision over its administration and (b) one or more United States persons
have the authority to control all of the substantial decisions of such trust. A
"Non-U.S. Holder" is a beneficial owner of U.S. Realty shares, who or that is
not a U.S. Holder. In general, holders of ADS's will be treated as owners of
the U.S. Realty shares represented by those ADS's, and references in this
discussion of United States Federal Income Tax Considerations to the U.S.
Realty shares should also be understood as references to the ADS's unless
otherwise stated.
This summary does not contain a comprehensive description of all of the
United States federal income tax consequences of the exchange of U.S. Realty
shares for the Liquidation Proceeds in the Liquidation and the ownership and
disposition of Security Capital Class B common stock. In particular, this
description applies only to U.S. Holders who hold U.S. Realty shares as capital
assets at all relevant times and does not address tax considerations applicable
to holders that may be subject to special tax rules, such as financial
institutions, insurance companies, real estate investment trusts, regulated
investment companies, grantor trusts, dealers or traders in securities or
currencies, tax-exempt entities, persons that hold U.S. Realty shares as part
of a "hedging" or "conversion" transaction or as a position in a "straddle" for
United States federal income tax purposes, persons that have a "functional
currency" other than the United States dollar, expatriates of the United
States, holders who own directly, indirectly or by attribution, currently or
during the past five years, 10% or more (by voting power or value) of the
shares of U.S. Realty, persons that hold U.S. Realty shares, or receive
Security Capital Class B common stock pursuant to an employee benefit or
incentive compensation plan. Moreover, this summary does not address the U.S.
federal estate and gift tax, alternative minimum tax or U.S. state and local
tax consequences of the exchange of U.S. Realty shares for the Liquidation
Proceeds and the ownership and disposition of Security Capital Class B common
stock.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), United States Treasury Regulations and judicial and administrative
interpretations thereof, in each case as in effect and available on the date of
this document. All of the foregoing are subject to change, which change could
apply retroactively and could affect the tax consequences described below.
U.S. Realty believes that it is not, has never been and will not be treated
as a passive foreign investment company (a "PFIC") for United States federal
income tax purposes, but such determination is made annually
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and could change. The discussion below assumes that U.S. Realty will not be
treated as a PFIC. If U.S. Realty were treated as a PFIC, a U.S. Holder would
be subject to certain adverse tax consequences.
Each holder of U.S. Realty shares should consult its own tax advisor with
respect to the United States federal, state, local and foreign tax consequences
of the Liquidation and the ownership and disposition of Security Capital Class
B common stock.
CONSEQUENCES OF RECEIPT OF LIQUIDATION PROCEEDS
A U.S. Holder generally will recognize gain or loss upon the receipt of
Security Capital Class B common stock and/or cash in exchange for such Holder's
U.S. Realty shares in the Liquidation equal to the difference between (a) the
fair market value of such Security Capital Class B common stock as at the date
of receipt and/or the amount of cash received and (b) the U.S. Holder's
adjusted tax basis in the U.S. Realty shares. Such gain or loss will be capital
gain or loss. In the case of a noncorporate U.S. Holder, the maximum marginal
United States federal income tax rate applicable to such gain will be lower
than the maximum marginal United States federal income tax rate applicable to
ordinary income if such U.S. Holder's holding period for such U.S. Realty
shares exceeds one year. Gain or loss, if any, recognized by a U.S. Holder
generally will be treated as United States source income or loss for United
States foreign tax credit purposes. The deductibility of capital losses is
subject to limitations. A U.S. Holder's initial tax basis in the Security
Capital Class B common stock will be the fair market value of such Security
Capital Class B common stock on the date such Security Capital Class B common
stock is received.
Subject to the discussion below under "Backup Withholding Tax and
Information Reporting Requirements," a Non-U.S. Holder generally will not
recognize gain or loss upon the receipt of Security Capital Class B common
stock and/or cash in exchange for such holder's U.S. Realty shares in the
Liquidation unless (i) such gain is effectively connected with the conduct by
such Non-U.S. Holder of a trade or business in the United States, or (ii) in
the case of any gain realized by an individual Non-U.S. Holder, such holder is
present in the United States for 183 days or more in the taxable year of such
sale or exchange and certain other conditions are met.
TAXATION OF OWNERSHIP OF SECURITY CAPITAL CLASS B COMMON STOCK
DISTRIBUTIONS. Although Security Capital has not previously paid dividends
on its Class B common stock, and has no current plan to pay dividends on its
Class B common stock, in general, the gross amount of any dividends that may in
the future be paid by Security Capital on its Class B common stock would be
includible in income by a U.S. Holder as dividend income to the extent such
distributions are paid out of the current or accumulated earnings and profits
of Security Capital as determined under United States federal income tax
principles. The amount of any distribution of property other than cash in
respect of shares of Security Capital common stock will be the fair market
value of such property on the date of distribution.
Subject to the discussion below under "Backup Withholding Tax and
Information Reporting Requirements," dividends paid to a Non-U.S. Holder of
Security Capital Class B common stock will generally be subject to U.S.
withholding tax at a 30% rate of the gross amount (or lower rate prescribed by
an applicable income tax treaty) unless the dividends are effectively connected
with the conduct by such Non-U.S. Holder of a trade or business in the United
States. Dividends effectively connected with such a U.S. trade or business
generally will not be subject to U.S. withholding tax if the Non-U.S. Holder
files certain forms, including Internal Revenue Service Form 4224 (or any
successor form), with the payor of the dividend, and generally will be subject
to U.S. federal income tax on a net income basis, in the same manner as if the
Non-U.S. Holder were a resident of the United States. A Non-U.S. Holder that is
a corporation may be subject to an additional branch profits tax at a rate of
30% (or such lower rate as may be specified by an applicable income tax treaty)
on the repatriation from the United States of its "effectively connected
earnings and profits," subject to certain adjustments. To determine the
applicability of a tax treaty providing for a lower rate of withholding under
the currently effective Treasury Regulations (the "Current Regulations") and
published Internal Revenue Service
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positions, dividends paid to an address in a foreign country are presumed to be
paid to a resident of that country absent knowledge to the contrary. Under
Treasury Regulations issued on October 6, 1997 (the "Final Regulations"), and
generally effective for payments made after December 31, 2000, however, a Non-
U.S. Holder (including, in certain cases of Non-U.S. Holders that are entities,
the owner or owners of such entities) will be required to satisfy certain
certification requirements in order to claim a reduced rate of withholding
pursuant to an applicable income tax treaty.
SALE OR EXCHANGE OF SECURITY CAPITAL CLASS B COMMON STOCK
A U.S. Holder generally will recognize gain or loss on the sale or exchange
of Security Capital Class B common stock equal to the difference between the
amount realized on such sale or exchange and the U.S. Holder's adjusted tax
basis in the Security Capital Class B common stock. Such gain or loss will be
capital gain or loss. In the case of a noncorporate U.S. Holder, the maximum
marginal United States federal income tax rate applicable to such gain will be
lower than the maximum marginal United States federal income tax rate
applicable to ordinary income if such U.S. Holder's holding period for such
Security Capital Class B common stock exceeds one year. The deductibility of
capital losses is subject to limitations.
Subject to the discussion below under "Backup Withholding Tax and
Information Reporting Requirements," a Non-U.S. Holder of Security Capital
Class B common stock generally will not be subject to United States federal
income or withholding tax on any gain realized on the sale or exchange of such
Security Capital Class B common stock unless (i) the gain is effectively
connected with the conduct by such Non-U.S. Holder of a trade or business in
the United States (in which case the branch profits tax discussed above may
also apply if the Non-U.S. Holder is a corporation); or (ii) the Non-U.S.
Holder is an individual and is present in the United States for 183 days or
more in the taxable year of such sale or exchange and certain other conditions
are met; or (iii) Security Capital is or has been a U.S. real property holding
corporation (a "USRPHC") for U.S. federal income tax purposes (which Security
Capital does not believe that it has been, currently is, or will likely become)
at any time within the shorter of the five-year period preceding such
disposition and such Non-U.S. Holder's holding period. Even if Security Capital
were or were to become a USRPHC at any time during this period, gains realized
upon a disposition of Security Capital Class B common stock by a Non-U.S.
Holder that did not directly or indirectly own more than 5% of the Security
Capital Class B common stock during this period generally would not be subject
to U.S. federal income tax, provided that Security Capital Class B common stock
is "regularly traded on an established securities market" (within the meaning
of Section 897(c)(3) of the Code). Security Capital believes that Security
Capital Class B common stock would presently be considered to be "regularly
traded on an established security market."
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING REQUIREMENTS
United States backup withholding tax and information reporting requirements
generally apply to certain payments to certain noncorporate holders of
securities. Information reporting generally will apply to payments of dividends
on Security Capital Class B common stock and to proceeds from the sale or
redemption of Security Capital Class B common stock by a payor within the
United States to a holder thereof (other than an "exempt recipient," including
a corporation, a payee that is not a United States person and that provides an
appropriate certification and certain other persons). A payor within the United
States will be required to withhold 31% of payments of dividends on Security
Capital Class B common stock and of any payments of the proceeds from the sale
or redemption of Security Capital Class B common stock within the United States
to a holder (other than an "exempt recipient") if such holder fails to furnish
its correct taxpayer identification number or otherwise fails to comply with
such backup withholding tax requirements.
United States Treasury Regulations issued on October 6, 1997, as amended,
would modify certain of the rules discussed above generally with respect to
payments on Security Capital Class B common stock made after December 31, 2000.
In particular, a payor within the United States will be required to withhold
31% of any payments of dividends on Security Capital Class B common stock, or
proceeds from the sale of shares of Security Capital Class B common stock
within the United States to a holder (other than an exempt recipient
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such as a corporation or a payee that is not a United States person and that
provides an appropriate certification) if such holder fails to furnish its
correct taxpayer identification number or otherwise fails to comply with, or
establish an exemption from, such backup withholding tax requirements. In the
case of such payments by a payor or middleman within the United States to a
foreign simple trust, a foreign grantor trust or a foreign partnership (other
than payments to a foreign simple trust, a foreign grantor trust or a foreign
partnership that qualifies as a "withholding foreign trust" or a "withholding
foreign partnership" within the meaning of such United States Treasury
Regulations and payments to a foreign simple trust, a foreign grantor trust or
a foreign partnership that are effectively connected with the conduct of a
trade or business in the United States), the beneficiaries of the foreign
simple trust, the persons treated as the owners of the foreign grantor trust or
the partners of the foreign partnership, as the case may be, will be required
to provide the certification discussed above in order to establish an exemption
from backup withholding tax and information reporting requirements. Moreover, a
payor or middleman may rely on a certification provided by a payee that is not
a United States person only if such payor or middleman does not have actual
knowledge or a reason to know that any information or certification stated in
such certificate is incorrect.
THE FOREGOING DISCUSSION DOES NOT ADDRESS ASPECTS OF UNITED STATES TAXATION
OTHER THAN FEDERAL INCOME TAXATION. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND OTHER TAX
CONSEQUENCES OF OWNING AND DISPOSING OF SECURITY CAPITAL CLASS B COMMON STOCK.
TO SECURITY CAPITAL SHAREHOLDERS
For U.S. federal income tax purposes, shareholders of Security Capital will
not recognize any income, gain or loss in connection with the transaction with
respect to their current ownership of shares of Security Capital.
LUXEMBOURG INCOME TAX CONSIDERATIONS
The following is a summary of the principal Luxembourg income tax
consequences that may be relevant to Luxembourg resident and non-resident
individual and corporate shareholders of U.S. Realty with respect to the
receipt of the Liquidation Proceeds and the ownership and disposition of
Security Capital Class B common stock acquired in the Liquidation. This summary
is based on Luxembourg tax law and Luxembourg tax treaties and relevant
interpretations in effect on the date of this prospectus. This summary is not
binding on any tax authority, regulator, court or government agency. Advance
agreements regarding the tax consequences have not been requested. Changes in
tax law or treaties or interpretations thereof could materially alter the
Luxembourg tax consequences of U.S. Realty shareholders and no responsibility
is taken to update this summary for changes in law or fact. Luxembourg resident
and non-resident shareholders should consult their own tax advisors regarding
the particular consequences the liquidation of U.S. Realty may have with
respect to them.
TO U.S. REALTY SHAREHOLDERS WHO ARE LUXEMBOURG RESIDENT INDIVIDUALS
This summary assumes that the Luxembourg resident individuals own the shares
in U.S. Realty as private investments and not business assets.
CONSEQUENCES OF RECEIPT OF LIQUIDATION PROCEEDS
The Liquidation Proceeds are treated as capital gains under Luxembourg
domestic law. Accordingly, the shareholders of U.S. Realty who receive
Liquidation Proceeds in the form of shares and/or cash are considered to have
sold their shares in U.S. Realty and consequently will be deemed to have
realized either a capital gain or a loss. No dividend withholding tax is levied
at the level of U.S. Realty, since the Liquidation Proceeds do not constitute a
payment of a dividend to the shareholder.
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Assuming that no individual Luxembourg resident shareholder owns more than
25% of U.S. Realty's outstanding share capital, any capital gain with respect
to the disposal of U.S. Realty's shares will be exempt from tax, provided the
remittance of the Liquidation Proceeds takes place, at the earliest six months
after the acquisition of U.S. Realty's shares by the shareholder. Likewise, any
capital loss will not be deductible when computing the shareholder's taxable
income for the year.
If the shares in U.S. Realty have been acquired within six months of the
remittance of Liquidation Proceeds to the shareholder, an eventual capital gain
will be subject to tax at ordinary progressive tax rates. An eventual capital
loss may only be compensated with taxable capital gains of the shareholder, any
capital loss which may eventually not be compensated with other capital gains
(either because of there being no capital gains or because the capital gains
are insufficient) will be disregarded for tax purposes.
Capital gains or losses are calculated by measuring the difference between
the fair market value of the Liquidation Proceeds received by the shareholder
and his acquisition cost of the U.S. Realty shares, less any directly related
expenses incurred by the shareholder in connection with the Liquidation.
TAXATION OF LUXEMBOURG RESIDENT INDIVIDUALS OF OWNERSHIP OF SECURITY CAPITAL
CLASS B COMMON STOCK
Luxembourg shareholders that will receive Security Capital Class B common
stock as Liquidation Proceeds of U.S. Realty and who subsequently decide to
dispose of these shares will not be subject to tax in Luxembourg when realizing
a capital gain, unless the shares of Security Capital Class B common stock are
disposed of within a six-month period of their acquisition. Likewise, any
capital loss will not be deductible when computing the shareholder's taxable
income for the year.
If the shares of Security Capital Class B common stock are sold within six
months of their acquisition, an eventual capital gain will be subject to tax at
ordinary progressive tax rates. An eventual capital loss may only be
compensated with taxable capital gains of the shareholder, any capital loss
which may eventually not be compensated with other capital gains (either
because of there being no capital gains or because the capital gains are
insufficient) will be disregarded for tax purposes.
Capital gains or losses are calculated by measuring the difference between
the sale price of the Security Capital Class B common stock actually realized
by the shareholder and the acquisition cost of the Security Capital Class B
common stock, less any directly related expenses incurred by the shareholder in
connection with the Liquidation. The acquisition cost of the Security Capital
Class B common stock will be equal to its fair market value at the time when it
is remitted to the shareholder in the course of the Liquidation of U.S. Realty.
TO U.S. REALTY SHAREHOLDERS WHO ARE LUXEMBOURG RESIDENT CORPORATIONS
The tax consequences will differ depending upon the tax status of the
corporation.
THE LUXEMBOURG RESIDENT CORPORATION IS A TAX EXEMPT CORPORATION
There are a certain number of situations whereby a corporation that has been
set up under the laws of Luxembourg is not subject to corporation tax in
Luxembourg. The corporate shareholder should consult with his own tax advisor
in order to determine whether he qualifies for such an exemption from
corporation tax. The two most common corporation tax exemptions relate to
investment funds ("fonds commun de placement," "societe d'investissement a
capital fixe," "societe d'investissement a capital variable") and companies
that have elected for the tax exempt status under the law of July 31, 1929
("holding 1929 companies").
If the shareholder is a tax-exempt corporation, the capital gain will not be
subject to tax in Luxembourg, nor will an eventual capital loss be deductible.
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Luxembourg tax exempt corporate shareholders that will receive Security
Capital Class B common stock as Liquidation Proceeds from U.S. Realty and who
subsequently decide to dispose of these shares will not be subject to tax in
Luxembourg when realizing a capital gain, irrespective of the period of their
holding (short term vs. long term holdings). Likewise, any capital loss will
not be deductible.
THE LUXEMBOURG RESIDENT CORPORATION IS A TAXABLE CORPORATION
If the corporation does not benefit from a specific exemption from tax, the
following tax consequences will arise.
The remittance of Liquidation Proceeds is treated as dividend income under
Luxembourg domestic law. Although no dividend withholding tax will be levied at
the level of U.S. Realty, the corporation will report the Liquidation Proceeds
as taxable income for domestic tax purposes in the year in which the proceeds
will have accrued to the shareholder. That moment in time may be ahead of the
date of actual remittance of the Liquidation Proceeds and will depend upon the
actual facts and circumstances governing the plan of liquidation. The dividend
will be subject to tax at ordinary corporate tax rates (37.45% for year 2000
and presumably year 2001).
When computing its taxable income, the corporation will determine the amount
of dividend that is taxable by measuring the difference between the fair market
value of the Liquidation Proceeds received by the corporation and its
acquisition cost of the U.S. Realty shares, less any expenses incurred by the
corporation in connection with the Liquidation.
If the above difference is a negative figure, such negative figure will
reduce by the same amount the taxable income of the corporation in the year in
which the difference will have accrued.
Luxembourg taxable corporate shareholders that receive Security Capital
Class B common stock as Liquidation Proceeds of U.S. Realty and who
subsequently decide to dispose of these shares will as a matter of principle be
subject to tax in Luxembourg when realizing a capital gain. Likewise, any
capital loss will be deductible when computing the shareholder's taxable income
for the year.
This general principle however is set aside if the Luxembourg taxable
corporate shareholder has met certain conditions with respect to its holdings
of Security Capital Class B common stock. If the shares that are sold have been
held throughout the accounting period which precedes the year of the disposal
and if the shareholder either owns 25% of the Security Capital Class B common
stock or has a cost base for these shares amounting to at least 250 million
Belgian (Luxembourg) francs, the capital gain will be exempt from tax, unless
the shareholder has funded the shares through debt financing. In such a case,
the gain would be taxable up to the aggregate amount of interest finance costs
suffered by the shareholder when owning the Security Capital Class B common
stock, the remainder if any of the capital gain will be tax exempt.
TO U.S. REALTY SHAREHOLDERS WHO ARE NOT LUXEMBOURG RESIDENT SHAREHOLDERS
This summary is based on Luxembourg Income Tax law as well as applicable tax
treaties.
CONSEQUENCES OF RECEIPT OF LIQUIDATION PROCEEDS
The Liquidation Proceeds are treated as capital gains under Luxembourg
domestic law and under its double tax treaties. Accordingly, the non-resident
shareholders of U.S. Realty who receive Liquidation Proceeds in the form of
shares and/or cash are considered to have sold their shares in U.S. Realty and
consequently will be deemed to have realized either a capital gain or a loss.
No dividend withholding tax is levied at the level of U.S. Realty, since the
Liquidation Proceeds do not constitute a payment of a dividend to the
shareholder.
Under Luxembourg's standard tax policy in respect to double tax conventions,
the right to tax capital gains resides with the country of residence of the
shareholder. Hence, in the case of a shareholder residing in a
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country with which Luxembourg has entered into a double tax treaty with,
Luxembourg may not seek to tax the shareholder's capital gain in respect to the
Liquidation Proceeds.
If the non-resident shareholder does not reside in a country with which
Luxembourg has signed a double treaty with, or actually resides there but is
exempt from tax in that country, Luxembourg will retain its right to tax the
capital gain. Such taxation may only arise if two conditions are cumulatively
met: the non-resident shareholder must have owned more than 25% of U.S.
Realty's outstanding share capital; he must also have been a resident in
Luxembourg at some time within 5 years of the realization of the capital gain.
In the unlikely event of the capital gain being taxable in Luxembourg, the
taxable income will be determined by measuring the difference between the fair
market value of the Liquidation Proceeds received by the shareholder and his
acquisition cost of the U.S. Realty shares, less any directly related expenses
incurred by the shareholder in connection with the liquidation.
TAXATION OF NON-LUXEMBOURG RESIDENT INDIVIDUALS OF OWNERSHIP OF SECURITY
CAPITAL CLASS B COMMON STOCK
Non-Luxembourg resident shareholders that will receive Security Capital
Class B common stock as Liquidation Proceeds of U.S. Realty and who
subsequently decide to dispose of these shares will not be subject to tax in
Luxembourg when realizing a capital gain, since the taxation of capital gains
realized by non-resident shareholders is limited to sales of shares in
Luxembourg corporations.
GERMAN TAX CONSIDERATIONS
The following is a summary of the principal German income tax consequences
that may be relevant to German resident individual shareholders of U.S. Realty
with respect to the receipt of the Liquidation Proceeds in consideration for
U.S. Realty shares or U.S. Realty ADS's in the Liquidation and the ownership
and disposition of Security Capital Class B common stock acquired in the
Liquidation. This summary is based on German tax law and German tax treaties
(conventions for the avoidance of double taxation) and relevant interpretations
in effect on the date of this prospectus. This summary is not binding on any
tax authority, regulator, court or government agency. Rulings have not been
requested. Changes in tax law or treaties or interpretations thereof could
materially alter the German tax burden of U.S. Realty shareholders, and no
responsibility is taken to update this summary for changes in law or fact.
German shareholders should consult their own tax advisors regarding the
particular consequences the liquidation of U.S. Realty may have with respect to
them. Since no specific provisions exist under German tax law and no clear
precedents are available regarding the German tax treatment of a liquidation of
a non-German company, any comments made below are based upon our understanding
of current German tax law and commentaries.
The following summary does not address all possible tax consequences
relating to an investment in U.S. Realty and does not address the tax
consequences applicable to all categories of shareholders (e.g., corporations,
tax exempt shareholders), some of which may be subject to special rules. In
particular, this summary does not address the tax consequences to any
shareholders under non-German tax laws. U.S. federal income tax aspects of a
disposal of Security Capital Class B common stock are described above under
"United States Federal Income Tax Considerations."
TO U.S. REALTY SHAREHOLDERS WHO ARE GERMAN RESIDENT INDIVIDUALS
This summary is based on the German Income Tax Law as well as applicable tax
treaties. Both of the foregoing are subject to change, which could apply
retroactively and which could affect the tax consequences described below. It
assumes that the German resident individuals own the shares in U.S. Realty and,
post-liquidation, the Security Capital Class B common stock as private
investments and not business assets. It is noted that, according to a ruling
from the "Bundesaufsichtsamt fur das Kreditwesen," U.S. Realty is not a foreign
investment fund within the meaning of Sec. 1 para. 1 Aus/InvestmG (German
Foreign Investment Fund Law).
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CONSEQUENCES OF RECEIPT OF LIQUIDATION PROCEEDS
Regardless of the application of the Tax Treaty between Germany and
Luxembourg, Germany has the right to tax the Liquidation Proceeds received by
German shareholders in the transaction.
The prevailing opinion regarding the liquidation of non-German corporations
is that shareholders who receive liquidating proceeds are treated for German
tax purposes as if they had recognized a capital gain/loss from the disposal of
shares. Accordingly a German shareholder that receives Liquidation Proceeds
from U.S. Realty will realize capital gain or loss, respectively.
German shareholders that do not exceed the participation threshold
referenced below should not be subject to German income tax on their receipt of
the Liquidation Proceeds. The German income tax should not apply even if the
shareholder had a holding period of one year or less with respect to the U.S.
Realty shares.
Shareholders that realize a capital gain on receipt of the Liquidation
Proceeds will be taxed if the shareholder (or its predecessor(s) in interest
from whom it received the shares without consideration) has had a direct or
indirect 10% (or more) interest in U.S. Realty at any time during the five year
period that precedes the Liquidation. The German Tax Reform Act
("Steuersenkungsgesetz"), generally effective January 1, 2001, will reduce the
relevant participation threshold from 10% to 1%. Furthermore, according to the
Tax Reform Act, a capital gain from the sale of shares will be subject to
taxation on 50% of such gain. It is presently unclear whether the portion of
the German Tax Reform Act dealing with capital gains arising from the sale of
non-German shares will be effective January 1, 2001 or alternatively January 1,
2002. It is expected that the German Federal Ministry of Finance will issue a
decree with regard to this issue. Any taxable capital gain will be included in
the calculation of the shareholder's taxable income and will be subject to tax
at the shareholder's applicable marginal tax rate. The top rate for 2000 is 51%
and for 2001 it is 48.5%. A solidarity surcharge is levied at a rate of 5.5% of
an individual's income tax liability and church tax, if applicable, is 8% or 9%
of income tax liability.
Taxable capital gains or losses are calculated by measuring the difference
between the fair market value of the Liquidation Proceeds received by the
shareholder and the shareholder's acquisition cost of the U.S. Realty shares,
less any related expenses incurred by the shareholder in connection with the
Liquidation. In the case where only 50% of the capital gains will be taxed
depending on the deemed effective date for portions of the German Tax Reform
Act, the deduction for related expenses will be limited to 50% of costs.
Shareholders who realize a capital loss on the receipt of the Liquidation
Proceeds will only be permitted to deduct the loss for German income tax
purposes if the receipt of a capital gain would have been subject to tax, i.e.,
if the shareholder has met the participation threshold referenced above.
However, even if allowable, only 50% of the capital losses could be offset and,
then, only (in the same or future years) against corresponding taxable capital
gains from the sale, liquidations, or capital redemptions of other Luxembourg
corporations.
Should the Liquidation Proceeds, for whatever reasons, be considered as
dividends (by the German tax authorities or tax courts) instead of capital
gains/losses, such dividend would be subject to German income tax. Should the
transaction be qualified as an exchange of shares or exchange of shares against
cash, such transaction would be a deemed sale of shares. Hence, such sale would
be subject to German income tax if the German shareholder either realizes a
short-term capital gain (within a one year holding period) or exceeds the
participation threshold referenced above.
TAXATION TO GERMAN RESIDENT INDIVIDUALS OF OWNERSHIP OF SECURITY CAPITAL CLASS
B COMMON STOCK
The prevailing opinion of commentators is that German shareholders should
not be subject to German tax on a subsequent sale of Security Capital Class B
common stock provided that the shareholder's combined U.S. Realty and Security
Capital stock holding period exceeds one year and that the shareholder owns
less than the participation threshold discussed below and Security Capital
stock was received as Liquidation Proceeds.
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German shareholders that will own 10% or more of Security Capital will be
subject to tax on the sale of their Security Capital Class B common stock. The
applicable participation amount that will subject German shareholders to German
income tax on their sale of Security Capital Class B common stock will change
to 1% or more after the effective date of the non-German corporation capital
gains portion of the German Tax Reform Act. Then, however, only 50% of the gain
will be taxable.
Shareholders who realize a capital loss on the sale of their Security
Capital Class B common stock will only be permitted to deduct the loss for
German income tax purposes if the receipt of a capital gain would have been
subject to tax, i.e., if the shareholder has met the participation threshold
referenced above. Unless Security Capital or its subsidiaries are engaged in
the active conduct of certain kinds of trade or business, a capital loss could
only be offset (in the same or future years) against corresponding taxable
capital gains from the sale, liquidation or capital redemption of other U.S.
corporations.
THE NETHERLANDS TAX CONSIDERATIONS
The following is a brief summary of the principal Netherlands tax
consequences that may be relevant with respect to the receipt of Liquidation
Proceeds for U.S. Realty shares in liquidation and the subsequent ownership of
Security Capital shares. This section addresses certain tax consequences with
respect to holders of shares of Security Capital or of U.S. Realty who are
resident or deemed to be resident in the Netherlands, and is based upon
Netherlands tax laws in effect at the date of this document and which may be
subject to change, perhaps with retrospective effect. This section does not
purport to present a comprehensive or complete picture of all aspects of
Netherlands tax laws which could be of relevance to holders of shares of
Security Capital or of U.S. Realty. Prospective holders of shares of Security
Capital, including current U.S. Realty shareholders, should therefore consult
their tax advisers regarding the tax consequences of any purchase, ownership or
disposal of shares of Security Capital.
CONSEQUENCES OF RECEIPT OF LIQUIDATION PROCEEDS
The cash or shares in Security Capital proceeds from the liquidation of U.S.
Realty will in whole or in part be qualified as a dividend for Netherlands tax
purposes, rather than as a capital gain.
TAXATION OF DIVIDENDS ARISING FROM THE OWNERSHIP OF SECURITY CAPITAL SHARES
Individual holders of shares of Security Capital who are resident or deemed
to be resident in the Netherlands are generally subject to personal income tax
at the progressive rate (up to 60%) on dividends and other revenues received
from shares of Security Capital.
Corporate entities that are resident in the Netherlands and are subject to
Netherlands corporate income tax will have to report dividends received as
taxable income unless such entity is eligible for application of the
participation exemption with respect to the shares of Security Capital.
Corporate income tax is levied at a rate of 35% (the first NLG 50,000 of
taxable profit is taxed at a rate of 30%).
TAXATION OF CAPITAL GAINS ON THE SALE OF SECURITY CAPITAL SHARES
A holder of shares of Security Capital who is resident or deemed to be
resident in the Netherlands will generally not be subject to Netherlands income
tax on capital gains realized on the disposal, transfer or alienation of shares
of Security Capital, unless such holder is:
(i) an individual who has an enterprise or an interest in an enterprise
to which the shares of Security Capital are attributable; or
(ii) an individual who has a substantial or deemed substantial interest,
as purposed by paragraph 20a of the Dutch Personal Income Tax Act 1964, in
Security Capital; or
(iii) subject to Netherlands corporate income tax and such capital gain
is not exempt under the participation exemption.
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GIFT AND INHERITANCE TAX
Generally, Netherlands gift and inheritance tax will be levied on the
occasion of the acquisition of a share of Security Capital by way of gift by,
or on the death of, a holder of shares of Security Capital who is resident or
deemed to be resident in the Netherlands for the purpose of the relevant
provisions at the time of the gift or his death.
PROPOSED NETHERLANDS TAX LEGISLATION INCOME TAX ACT 2001
1. In the Netherlands, the Income Tax Act 2001 ("Wet inkomstenbelasting
2001") and related legislation have recently been adopted by the Netherlands
legislative authorities. This legislation will become effective on January 1,
2001. The Income Tax Act 2001 will substantially change the taxation of holders
of shares of Security Capital.
2. The Income Tax Act 2001 will, among other things, affect the taxation of
income and capital gains derived by holders from shares of Security Capital who
are resident or deemed resident of the Netherlands. Netherlands resident and
deemed resident individual holders will generally be taxed at a flat rate of
30%, on benefits ("voordelen') deemed derived from their investments assets
(which may include shares of Security Capital), determined at 4% of the average
of their "yield basis" ("rendementsgrondslag') at the beginning and end of each
calendar year, to the extent that this average exceeds the applicable personal
allowances. The aforementioned fictitious yield will apply irrespective of
actual income or capital gains derived from investment assets. The existing net
wealth tax will be abolished.
3. The amendments to the Netherlands tax system as per January 1, 2001 are
mentioned as examples only. It is not intended to provide an exhaustive
discussion, or summary, of the amendments to the Netherlands tax systems as per
that date and the implications thereof for holders of shares of Security
Capital.
ACCOUNTING TREATMENT
Security Capital will account for the transaction using the purchase method
of accounting under U.S. generally accepted accounting principles. Purchase
accounting requires that the purchase price and costs of the acquisition be
allocated to all of the assets acquired and all of the liabilities assumed
based on their relative fair values. See "Unaudited Pro Forma Condensed
Consolidated Financial Information."
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DESCRIPTION OF BUSINESS OF SECURITY CAPITAL
GENERAL
Security Capital is an international real estate research, investment and
operating management company. Security Capital operates its businesses through
two divisions: the Capital Division, which invests in high-growth real estate
operating companies, and the Financial Services Division, which provides
capital markets and capital management services primarily to Security Capital
and its affiliates. The principal offices of Security Capital and its directly-
owned affiliates are in Amsterdam, Atlanta, Brussels, Chicago, Denver, El Paso,
Houston, London, Luxembourg, New York, and Santa Fe.
The Capital Division allocates capital to real estate operating companies
that are positioned to generate high internal earnings growth rates through
superior operations as well as property development and significant customer
service income. Its strategy is to focus on a select number of high-performance
businesses that can create brand value and ultimately be a leader in their
respective niche. Its objective is to hold significant ownership positions in
companies that meet these criteria. The Capital Division provides operational
and capital deployment advice to these companies and generates earnings for
Security Capital from its ownership in these affiliates. At September 30, 2000,
the Capital Division had direct and indirect investments in 16 real estate
operating companies focused on apartment communities, corporate extended-stay
lodging, corporate office, distribution and logistics, manufactured housing
communities, infill retail centers, parking, self-storage and senior assisted
living communities. These operating companies had a combined total market
capitalization of $26.3 billion as of September 30, 2000.
The Financial Services Division generates fees principally from capital
management and capital markets activities. The Global Capital Management Group
manages capital invested in real estate companies or securities for investment
entities and separate accounts. The Capital Markets Group provides capital
markets services to various affiliates, including operating companies and
investment entities and third party managed capital. In addition, Security
Capital also provides shared services to its affiliates in order to generate
economies of scale. The Corporate Services Group provides administrative,
processing, and technology infrastructure and related services. The Real Estate
Research Group conducts proprietary real estate, research and provides analyses
of short-term trends and long-term market conditions.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of Security Capital's policies with respect to
investment, financing, and certain other activities. These policies are
determined by Security Capital's board of directors 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 deploys its capital through the direct and indirect
ownership of public and private operating businesses with highly focused
strategies which are engaged in real estate activities.
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 (Archstone,
ProLogis, Homestead and Belmont Corp.) and its indirect investees (CarrAmerica,
Storage USA, Regency, City Center Retail, CWS Communities, InterParking and
Urban Growth Property Trust through U.S. Realty, and Interparking S.A., Access
Self-Storage Holdings S.A., Akeler Holdings S.A., City & West End Property
Holdings S.A., Bernheim Comofi S.A., Millers Storage Holdings S.A. and London
and Henley S.A. through Security Capital European Realty) (collectively,
"operating businesses"). On November 8, 2000, Archstone, at Security Capital's
request, filed a registration statement covering the resale of Security
Capital's shares of Archstone. On December 5, 2000, Security Capital completed
the sale of 3,750,000 shares of Archstone to an institutional investor, thereby
reducing Security Capital's interest in Archstone to 25.933%. In addition,
Security Capital manages or advises capital invested in focused funds which
invest in securities of real estate operating companies (Security Capital
Preferred Growth Incorporated, Security Capital U.S. Real Estate Shares
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and Security Capital European Real Estate Shares (collectively the "Funds"))
and through separate accounts. The operating businesses are each focused on
specific types of real estate. The operating businesses are expected to acquire
additional similar properties and where appropriate, subject to applicable REIT
qualification rules, have sold and expect to sell certain of their properties.
Existing and future Operating Businesses may acquire additional properties in
existing markets or new markets targeted by the management of those businesses.
Future investments by Security Capital in companies which are engaged in real
estate activities, however, 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 the securities of 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. Except as described below, Security
Capital does not invest directly in real estate mortgages and its operating
businesses have not invested substantial amounts in mortgages or similar
interests in properties. Security Capital owns mortgages in its direct
investee, Homestead. Certain operating businesses 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 business
upon completion or convertible mortgage loans to affiliates in which the
operating business owns a substantial economic interest, or convertible
mortgage loans where the board of the operating business believes that such
loans are in the best interest of the operating business.
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. Security Capital does not expect 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 are
registered under the Investment Company Act. See "Risk Factors--Risk Factors
Relating to the Business of Security Capital and to the Ownership of Security
Capital Stock."
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
Capital's proposed term loan to be used to finance this transaction, its line
of credit, and the indentures under which its long-term notes were issued
impose limitations on indebtedness. Security Capital intends to comply with
such limitations. The proposed term loan is described in "The Transaction--
Transaction Financing." Security Capital uses its $470 million floating rate
line of credit mainly for the purpose of facilitating investments and for
working capital. Security Capital currently has long-term, fixed rate
convertible subordinated indebtedness aggregating $231 million which is due
2016. Security Capital currently has unsecured, fixed rate long-term notes
aggregating $700 million due between 2003 and 2028. Security Capital does not
intend to incur long-term floating rate debt. Security Capital may also
determine to issue securities senior to the Security Capital Class B common
stock, including preferred stock and debt securities (either of which may be
convertible into the Class B common stock). Security Capital's financing
policies are to replace line of credit borrowings with the proceeds of asset
sales, retained cash flow, equity offerings or unsecured long-term, fixed rate
debt with staggered maturities. From time to time, Security Capital may also
issue equity securities, but expects to be very selective in doing so. The
proceeds of any borrowings by Security Capital may be used to provide working
capital, to pay existing indebtedness, to finance investments in or expansions
of new business initiatives, and to fund stock repurchases.
Security Capital has issued options to purchase Class A common stock and
Class B common stock and restricted stock unit awards for the Class B common
stock to employees and directors and intends to issue additional options and
restricted stock unit awards under its long-term incentive plans and outside
directors plan.
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POLICIES WITH RESPECT TO OTHER ACTIVITIES
Security Capital may make investments in addition to those previously
described. Security Capital's board of directors has authority to reclassify
unissued shares into senior securities, to offer shares or other securities
and, subject to certain restrictions under Maryland law, its line of credit,
proposed term loan, and its indentures, to repurchase or otherwise reacquire
shares or any other securities. Security Capital has on occasion repurchased
its debt and equity securities and expects to 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
broker-dealer affiliate, Security Capital Markets, has engaged in and intends
to continue to engage in trading, agency distribution or sales of securities of
Security Capital and its affiliates.
Security Capital makes annual and quarterly reports to shareholders. The
annual reports contain audited financial statements.
PROPERTIES
Security Capital does not own any properties. For a general description of
the properties leased by Security Capital or owned by its affiliates, see Item
2 of Security Capital's Annual Report on Form 10-K for 1999 which is
incorporated by reference. None of the properties owned by any of Security
Capital's affiliates constitutes more than ten percent of the total
consolidated assets of Security Capital or provides more than ten percent of
the gross consolidated revenue of Security Capital. In the opinion of
management of Security Capital the properties of its affiliates are adequately
covered by insurance.
TAX TREATMENT OF SECURITY CAPITAL AND ITS SECURITY HOLDERS
See "Certain Tax Consequences of the Transaction."
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DESCRIPTION OF BUSINESS OF U.S. REALTY
GENERAL
U.S. Realty is a research-driven real estate company focused on taking
significant strategic investment positions in value-added real estate operating
companies based in the United States. U.S. Realty's primary capital deployment
objective is to take a pro-active ownership role in businesses that it believes
can potentially generate above-average rates of return. U.S. Realty believes
there are significant value creation opportunities in the multi-trillion dollar
U.S. real estate industry, as investors shift from traditional, direct, private
forms of ownership to indirect ownership through real estate investment trusts
or REITs whose securities are traded on major stock exchanges. As of September
30, 2000, its strategic investments had a combined market capitalization of
approximately $9.2 billion.
U.S. Realty's offices are located at 25b, boulevard Royal, L-2449
Luxembourg, and its telephone number in Luxembourg is (+352) (4637561).
STRATEGY
U.S. Realty seeks to maximize its shareholders' returns primarily by
acquiring and managing significant strategic investment positions in real
estate operating companies based in the United States. U.S. Realty seeks to
identify potential strategic investment positions by focusing rigorous
fundamental research on the U.S. real estate industry, business niches and
specific companies. By investing substantial capital and obtaining a
combination of various board and board committee representation, consultation
rights, approval rights and other rights, it seeks to influence and oversee the
development and implementation of a long-term focused operating strategy and
value-added operating system for each of its strategic investment positions.
While U.S. Realty's objective is to have substantially all of its assets
invested in strategic investment positions, historically it also owned non-
strategic investment positions in real estate operating companies where its
research has identified attractive intermediate-term investment opportunities.
OVERVIEW AND COMPANY OBJECTIVE
U.S. Realty is a research-driven real estate company focused on the U.S.
real estate industry as it continues to move towards greater securitization.
U.S. Realty's research-driven operating strategy is to take significant
strategic investment positions, with board representation, consultation and
other rights, in value-added real estate operating companies which are based in
the United States. U.S. Realty was established as a SICAV on July 7, 1995.
U.S. Realty's primary focus will be on achieving growth for its existing
strategic investment positions and identifying other real estate operating
companies in well-researched business niches which would be suitable strategic
investment positions for it.
COMPETITION
There are numerous developers, operators, real estate companies and other
owners of real estate that compete with U.S. Realty's strategic investees. U.S.
Realty's strategic investees compete on a regional and national basis with no
individual market being material to it as a whole. All of the properties of its
strategic investees are located in developed areas where there are a number of
competitors. The number of competitive properties could have a material adverse
effect on one or more of U.S. Realty's strategic investees and therefore on the
rents charged by them. U.S. Realty's strategic investees may be competing with
other entities that have greater resources and whose officers and directors
have more experience than the officers, directors and trustees of its strategic
investees.
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OVERVIEW OF STRATEGIC INVESTMENT POSITIONS
In accordance with U.S. Realty's investment strategy, as of December 31,
1999, it has funded a total of $2.6 billion at cost of equity capital to six
U.S. real estate operating companies, representing approximately 95.9% of the
total amount it committed to strategic investment positions. This capital has
been, or U.S. Realty expects it to be, deployed by these companies primarily
in the acquisition of assets consistent with their highly focused operating
strategies.
The following table reflects U.S. Realty's funded investments in each of
its strategic investment positions:
AS OF DECEMBER 31, 1999
(IN THOUSANDS $, EXCEPT FOR %)
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF STRATEGIC
U.S. REALTY'S INVESTEE'S
STRATEGIC INVESTMENT TOTAL ASSETS COMMON
POSITIONS(1) COST VALUE BY VALUE EQUITY(2)
-------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
CarrAmerica.............. $ 699,905 $ 604,247(3) 23.9% 42.8%
City Center Retail....... 304,132 304,132(4) 12.0 99.9
CWS Communities.......... 236,488 236,488(4) 9.3 94.2
Regency.................. 759,807 685,465(3) 27.1 60.2
Storage USA.............. 394,362 355,911(3) 14.1 41.8
Urban Growth Property.... 188,582 188,582(4) 7.4 98.8
---------- ---------- ----
Total strategic
investment positions.... $2,583,276 $2,374,825 93.8%
========== ========== ====
</TABLE>
--------
(1) All strategic investment positions are of common stock or common shares.
(2) On a percentage of outstanding common shares or common stock basis. On a
fully diluted basis, the percentage interest of each strategic investee's
common equity was 38.4%, 99.9%, 77.9%, 55.0%, 37.0% and 98.8%,
respectively.
(3) Value for this publicly traded investment has been derived using its
closing stock price on the NYSE.
(4) As more fully described in Note 2A to the U.S. Realty Consolidated
Financial Statements value for this private company investment has been
reflected on the basis of the probable net realization value estimated in
good faith by our board of directors. All of U.S. Realty's private company
investments have been reflected at cost as an approximation of fair value
for these recent investments.
The operating companies in which U.S. Realty has strategic investment
positions are described below.
OFFICE: CARRAMERICA REALTY CORPORATION
CarrAmerica is a self-administered and self-managed, publicly traded REIT
which owns, develops, acquires and operates office properties. CarrAmerica's
office properties are located primarily in 14 suburban markets across the
United States. CarrAmerica has created and developed a national operating
system that provides corporate users of office space with a mix of products
and services to meet their workplace needs at both the national and local
level.
As of December 31, 1999, reflecting recent sales of non-strategic
properties, CarrAmerica owned interests in 275 operating properties containing
approximately 23.7 million square feet of office space located in 14 markets,
22 properties under construction that can contain approximately 1.3 million
square feet of office space at an expected cost at completion of approximately
$200.1 million, and land and options to acquire land that can support the
development of up to 5.3 million square feet of office space. As of December
31, 1999, the operating properties owned by CarrAmerica were 97.4% leased and
the average rent per leased square foot was $19.63. None of such properties,
on an individual basis, is materially important to CarrAmerica or to U.S.
Realty. CarrAmerica serves over 2,000 different customers.
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CarrAmerica's experienced staff of over 700 employees, including
approximately 450 on-site building employees, provides a broad range of real
estate services. CarrAmerica continues to recruit key personnel to further
develop its National Operating System.
SELF-STORAGE: STORAGE USA, INC.
Storage USA was formed in 1985 to acquire, develop, construct, franchise,
own and operate self-storage facilities throughout the United States. Storage
USA is the second largest owner and operator of self-storage space in the
United States.
Storage USA acquired over $300 million of existing self-storage facilities
in 1996, $353 million in 1997, $279 million in 1998 and $91 million in 1999,
expanding its target markets to locations in 31 states and the District of
Columbia. Storage USA's strategy is to acquire properties that are under-
managed and under-rented in markets with positive fundamentals for self-
storage. Storage USA repositions these properties in their respective markets
through state-of-the-art renovation and management training programs. As of
December 31, 1999 Storage USA had 30 facilities under construction or in
planning, totaling approximately 1.1 million square feet, at an estimated cost
of $78.7 million. An additional 13 developments with a projected cost of $64.7
million are to be transferred to a recently formed joint venture. As of
December 31, 1999 the average physical occupancy of the 405 facilities owned by
Storage USA was 80.7%.
At December 31, 1999 Storage USA owned 405 facilities containing 27.3
million net rentable square feet and managed for others or in joint ventures
102 facilities containing an additional 6.8 million net rentable square feet in
31 states and the District of Columbia. None of such properties, on an
individual basis, is materially important to Storage USA or U.S. Realty. As of
December 31, 1999 Storage USA employed approximately 1,940 employees, of whom
approximately 330 were employed part time at fewer than 30 hours per week on a
regular basis.
GROCERY-ANCHORED NEIGHBORHOOD INFILL SHOPPING CENTERS: REGENCY REALTY
U.S. Realty's extensive research over nearly two years showed protected
grocery-anchored neighborhood infill shopping centers to be an attractive
retail niche. In 1995 U.S. Realty recognized the opportunity to form Pacific
Retail, a private start-up company that focused on becoming the leading owner,
operator and developer of grocery-anchored neighborhood infill shopping centers
in selected high-growth markets of the western United States. Shortly
thereafter, U.S. Realty identified Regency, a NYSE-listed company headquartered
in Jacksonville, Florida, as an attractive operating platform to focus on
becoming the leading owner, operator and developer of grocery-anchored
neighborhood infill shopping centers in selected high-growth markets of the
eastern United States. On February 28, 1999 Regency merged with Pacific Retail
in a tax-free transaction.
Regency's portfolio as of December 31, 1999 comprised 216 neighborhood
infill shopping centers, 24.8 million square feet, in its target markets.
Regency is building a critical mass of properties and developing its management
team and value-added retail operating system. As of December 31, 1999 the real
estate portfolio was 92.4% leased. None of such properties, on an individual
basis, is materially important to Regency or U.S. Realty. As of December 31,
1999 Regency employed approximately 340 people.
Regency performs renovations and/or improvements to its properties in
accordance with tenant lease terms and when considered necessary due to market
conditions. As of December 31, 1999 Regency had 50 centers which are either in
the process of being completed or are undergoing development or redevelopment
with an anticipated total cost of approximately $406 million on a completed
cost basis.
URBAN INFILL RETAIL: CITY CENTER RETAIL TRUST
In the second quarter of 1997, U.S. Realty established City Center Retail, a
private start-up real estate operating company which is taxed as a REIT. City
Center Retail was created to provide high quality customer
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service on a national basis to top U.S. and international retailers in
attractive downtown and urban infill markets for retail throughout the United
States.
City Center's remaining portfolio consists of five properties, with a total
expected cost upon completion of development and stabilization of approximately
$249.4 million. Management of City Center Retail is evaluating strategic
alternatives, which could include the sale of a portion or all of its assets.
MANUFACTURED HOUSING COMMUNITIES: CWS COMMUNITIES TRUST
In December 1997, U.S. Realty established CWS Communities Trust, a private
start-up real estate operating company which is taxed as a REIT. CWS
Communities acquires, develops and owns manufactured housing communities in
selected target markets throughout the U.S. U.S. Realty's objective is to focus
CWS Communities on becoming the leading national developer, owner and operator
of manufactured housing communities in the United States.
CWS Communities is one of the largest private owners, operators and
developers of manufactured housing communities in the United States. As of
December 31, 1999, CWS Communities owned and operated or had under contract to
acquire or develop a total of 39 communities with over 14,400 spaces in nine
states for a total estimated cost of approximately $360 million. None of such
properties, on an individual basis, is materially important to CWS Communities
or to U.S. Realty.
All property titles are held by CWS Communities L.P., or in wholly owned
subsidiaries, in fee simple. All properties are either currently operating or
are to be developed into manufactured housing communities. CWS Communities will
from time to time purchase manufactured homes for resale. The homes may be
leased out on a temporary basis. CWS Communities' primary business is to lease
the space/pad where a manufactured home is located. Most leases are one-year
leases. CWS Communities has some leases that are as short as month-to-month and
as long as five years. Generally, it is expected that substantially all of CWS
Communities' leases will expire and renew annually.
URBAN INFILL PARKING: URBAN GROWTH PROPERTY TRUST
In April 1997, U.S. Realty established Urban Growth Property Trust, a
private start-up real estate operating company which is taxed as a REIT. Urban
Growth Property is focused on acquiring, developing and owning strategically
located income-producing land, primarily parking lots or car parks, in key
urban infill locations in selected target markets throughout the United States.
In May 2000, Urban Growth Property acquired 11 parking properties in five
cities for approximately $180 million. As a result of this purchase, Urban
Growth Property owns 38 properties in 12 cities with 28,000 parking spaces.
Urban Growth Property plans to merge in early 2001 with InterParking
Incorporated, the property manager for Urban Growth Property's operations,
following which Urban Growth Property will no longer be a REIT but will have
greater control over its assets and the opportunity to extend its activities
into parking facility management. The combined company will continue to be a
subsidiary of SC-Holdings.
OPERATING ADVISOR
U.S. Realty's Operating Advisor, Security Capital U.S. Realty Management
Holdings S.A., is a Luxembourg societe anonyme, headquartered in Europe, and is
a wholly owned subsidiary of Security Capital. U.S. Realty's Operating Advisor
advises it on strategy, investments, finance and certain other administrative
matters affecting it.
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QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information for U.S. Realty for 2000, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30
--------- -------- ------------
(IN THOUSANDS $)
<S> <C> <C> <C> <C>
2000:
Total revenues.................. $ 37,444 $ 36,227 $ 37,211
--------- -------- ---------
Net operating income............ 16,508 18,704 $ 21,570
Realized gain/(loss) on
investments.................... (83,556) 497 (377)
Unrealized increase/(decrease)
in appreciation on
investments.................... 68,639 274,120 90,830
Deferred income tax expenses.... -- -- (29,444)
Increase/(decrease) in net
assets resulting from
operations..................... $ 1,591 $293,321 $ 82,579
========= ======== =========
Net operating income per share.. $ 0.22 $ 0.25 $ 0.29
--------- -------- ---------
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1999:
Total revenues.................. $ 33,178 $ 39,122 $ 43,477 $ 45,266
--------- -------- --------- --------
Net operating income............ 13,152 15,579 20,438 21,824
Realized gain/(loss) on
investments.................... 580 1,040 (199) (67,007)
Unrealized increase/(decrease)
in appreciation on
investments.................... (236,666) 263,629 (190,224) 10,568
--------- -------- --------- --------
Increase/(decrease) in net
assets resulting from
operations..................... $(222,934) $280,248 $(169,985) $(34,615)
========= ======== ========= ========
Net operating income per share.. $ 0.15 $ 0.18 $ 0.26 $ 0.28
--------- -------- --------- --------
1998:
Total revenues.................. $ 35,301 $ 38,025 $ 43,251 $ 40,247
--------- -------- --------- --------
Net operating income............ 20,964 20,142 18,546 18,246
Realized gain/(loss) on
investments.................... 17,186 13,376 2,200 116
Unrealized increase/(decrease)
in appreciation on
investments.................... (92,837) (120,068) (388,143) (41,325)
--------- -------- --------- --------
Increase/(decrease) in net
assets resulting from
operations..................... $ (54,687) $(86,549) $(367,396) $(22,963)
========= ======== ========= ========
Net operating income per share.. $ 0.24 $ 0.23 $ 0.21 $ 0.21
--------- -------- --------- --------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF U.S. REALTY
You should read this section in conjunction with the information contained
in "Selected Historical and Pro Forma Financial Information--Summary Selected
Financial Information" and U.S. Realty's Consolidated Financial Statements.
Historical results and percentage relationships set forth below and in
"Selected Historical and Pro Forma Financial Information--Summary Selected
Financial Information" and U.S. Realty's Consolidated Financial Statements are
not necessarily indicative of U.S. Realty's future operations.
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INTRODUCTION
U.S. Realty was incorporated in July 1995 and has since funded the following
strategic investment positions:
<TABLE>
<CAPTION>
INITIAL
FUNDING TOTAL COST AS OF TOTAL VALUE AS OF
COMPANY DATE SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------- ------------- ------------------ ------------------
(IN MILLIONS)(1) (IN MILLIONS)
<S> <C> <C> <C>
CarrAmerica................ April 1996 $ 700 $ 865(2)
City Center Retail......... April 1997 176 176(3)
CWS Communities............ December 1997 269 269(3)
Regency(4)................. July 1996 760 786(2)
Storage USA................ March 1996 394 359(2)
Urban Growth Property...... April 1997 189 189(3)
------ ------
Total...................... $2,488 $2,644
====== ======
</TABLE>
--------
(1) See "Capital Deployment Activities" for additional information regarding
commitments.
(2) Based on the closing price on the New York Stock Exchange of common shares
held on such date.
(3) Private REIT or real estate operating company. See Note 2A to the December
31, 1999 Consolidated Financial Statements for the methodology utilized to
assess the value of investments in private entities.
(4) Includes the investments in Pacific Retail Trust, which merged with Regency
on February 28, 1999. See Note 3A to the December 31, 1999 Consolidated
Financial Statements for more information.
In addition to its six strategic investment positions, as of September 30,
2000, U.S. Realty had invested $39.3 million in two private investment
positions, both of which are U.S. real estate operating companies, and the
value of these investment positions represented approximately 1.5% of U.S.
Realty's total assets.
On March 15, 2000, U.S. Realty announced the sale of its investment in the
common shares and convertible subordinated debentures of Security Capital for
$96.9 million.
On March 29, 2000, U.S. Realty announced the completion of an additional
$100 million of share repurchases. U.S. Realty also announced that its board of
directors authorized an increase in U.S. Realty's share repurchase program by
$50 million to a total of $250 million. As of September 30, 2000, U.S. Realty
had repurchased 11,677,914 shares at an aggregate cost of $212.3 million,
representing approximately 13.5% of U.S. Realty's shares outstanding prior to
implementing the initial program on May 5, 1999.
On May 18, 2000, U.S. Realty announced that Urban Growth Property purchased
11 parking properties in five cities for approximately $180 million. The
acquisition was funded by Urban Growth Property predominantly through
internally generated capital and secured financing with an institutional
lender. U.S. Realty invested $12.5 million, which formally completes U.S.
Realty's total debt and equity investment commitment to Urban Growth Property
of $201 million.
During the nine-month period ended September 30, 2000, City Center Retail
sold 23 properties for approximately $208.2 million. Net proceeds to City
Center Retail from the sale, after debt repayment and closing costs, were
$116.8 million, of which approximately $112.0 million was distributed to U.S.
Realty as a return of capital. City Center Retail's remaining assets consist of
five properties with a total expected cost upon completion of development and
stabilization of approximately $249.3 million.
During the nine month period ended September 30, 2000, U.S Realty deployed
an additional $32.2 million in CWS Communities, including an advance of $12.0
million. As of September 30, 2000, U.S. Realty had outstanding contractual
obligations of $31.6 million to CWS Communities.
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<PAGE>
OPERATING RESULTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net operating income increased by $7.6 million, or 15.5%, to $56.8 million
for the nine months ended September 30, 2000 as compared to $49.2 million for
the nine months ended September 30, 1999. The increase is mainly attributable
to a decrease in interest expense on the line of credit. Line of credit
interest decreased $8.5 million, or 58.6%, to $6.0 million for the nine months
ended September 30, 2000 as compared to $14.6 million for the nine months ended
September 30, 1999 due to decreased levels of borrowings.
Net Operating Income
The following table sets forth information regarding U.S. Realty's net
operating income, representing the difference between total income and total
expenses, during the nine-month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
------------------------------
2000 1999
-------------- --------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(IN THOUSANDS $, EXCEPT %)
<S> <C> <C> <C> <C>
Total income................................. $110,882 100.0% $115,777 100.0%
Total expenses............................... 54,100 48.8% 66,609 57.5%
-------- ----- -------- -----
Net operating income......................... $ 56,782 51.2% $ 49,168 42.5%
======== ===== ======== =====
</TABLE>
The net operating income margin increase in 2000 over 1999 is primarily due
to a lower interest expense on the line of credit and also due to a reduction
in taxes other than income taxes described below.
Total Income. The following table sets forth information regarding U.S.
Realty's total income during the nine-month periods ended September 30, 2000
and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
---------------------------------
2000 1999
--------------- ---------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(IN THOUSANDS $, EXCEPT %)
<S> <C> <C> <C> <C>
Gross dividends from strategic
investment positions
CarrAmerica.......................... $39,687 35.8% $ 39,687 34.3%
City Center Retail(1)................ -- -- -- --
CWS Communities...................... 10,934 9.9% 5,579 4.8%
Regency.............................. 49,353 44.5% 42,086 36.4%
Storage USA.......................... 24,355 22.0% 23,649 20.4%
Urban Growth Property(1)............. -- -- 7,262 6.3%
-------- ----- -------- -----
Subtotal........................... 124,329 112.2% 118,263 102.2%
Gross dividends from other investment
positions(2).......................... -- -- 8,176 7.1%
-------- ----- -------- -----
Total gross dividends.............. 124,329 112.2% 126,439 109.3%
Interest income from Security Capital
debentures............................ 745 0.7% 2,681 2.3%
Interest and other income.............. 4,403 4.0% 3,160 2.7%
-------- ----- -------- -----
Total gross income................. 129,477 116.9% 132,280 114.3%
Withholding tax on dividends received.. (18,595) (16.9)% (16,503) (14.3)%
-------- ----- -------- -----
Total income....................... $110,882 100.0% $115,777 100.0%
======== ===== ======== =====
</TABLE>
--------
(1) In order to more efficiently fund ongoing operations, the respective boards
of directors of City Center Retail and Urban Growth Property determined
that a dividend will be paid in the fourth quarter of each year.
(2) During the first quarter 2000, U.S. Realty completed the sale of its public
other investment positions' portfolio.
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<PAGE>
As the table indicates, most of U.S. Realty's total income during 2000 and
1999 were derived from dividends from its strategic investment positions. The
increase in CWS Communities' dividends is attributed to increased investment in
shares in 2000 versus 1999 and a period to date aggregate dividend rate of
$0.45 per share in 2000 versus $0.39 in 1999. The increase in Regency dividends
is attributed to period to date aggregate dividend rate of $1.44 per share in
2000 versus $1.38 in 1999.
"Interest income from Security Capital debentures" represents interest
earned on U.S. Realty's $55 million aggregate principal investment in Security
Capital's 6.5% convertible subordinated debentures due 2016 ("Security Capital
Debentures"). U.S. Realty sold its investment in Security Capital in March
2000.
Total Expenses. For the nine months ended September 30, 2000, total expenses
amounted to $54.1 million, of which $23.4 million, or 43.3%, represented fees
paid to Security Capital U.S. Realty Management Holdings S.A. (the "Operating
Advisor"), a wholly-owned subsidiary of Security Capital, and $28.3 million, or
52.3%, represented (i) interest on the 2% Senior Unsecured Convertible Notes
due 2003 ($450 million aggregate principal amount at maturity)(the "Convertible
Notes") issued in May 1998, (ii) interest on the line of credit and (iii)
related expenses. For the nine months ended September 30, 1999, total expenses
amounted to $66.6 million, of which $25.0 million, or 37.5%, represented fees
paid to the Operating Advisor and $36.3 million, or 54.5%, represented (i)
interest on the Convertible Notes, (ii) interest on the line of credit and
(iii) related expenses. The decrease in interest expense is due to decreased
average borrowings on the line of credit. The other significant decrease in
expenses was in withholding taxes which in third quarter 2000 reflect a
$3.1 million reversal of accrued tax payable on interest payments between SC-
Holdings and U.S. Realty.
Net Realized Losses or Gains on Strategic Investment and Other Investment
Positions
During the nine months ended September 30, 2000, one of U.S. Realty's
private strategic investees, City Center Retail, sold 23 properties for
approximately $208.2 million. Net proceeds to City Center Retail from the sale,
after debt repayment and closing costs, were $116.8 million, of which
approximately $112.0 million was distributed to U.S. Realty. City Center
Retail's remaining assets consist of five properties with a total expected cost
upon completion of development and stabilization of approximately $249.3
million. U.S. Realty realized a loss of $16.4 million in relation to this
return of capital.
During the nine months ended September 30, 2000, U.S. Realty sold its
investment in common shares of Security Capital and Security Capital Debentures
for $96.9 million, realizing a loss on disposal of $68.9 million.
In June 2000, CarrAmerica, a public strategic investee, announced its
closing on a transaction that merged its executive office suites affiliate, HQ
Global Workplaces, Inc. ("HQ Global"), with Vantas Incorporated. U.S. Realty,
on a direct basis, had invested approximately $2.5 million in HQ Global between
August 1997 and February 1999. Upon the closing of the merger, U.S. Realty sold
its investment in HQ Global and realized a $2.2 million gain on the sale of
these securities.
Historically, other investment positions were investments in publicly traded
REITs, which were generally held for an intermediate term of 12 to 18 months,
although the sale of such positions could occur sooner or later, depending on
the market or business conditions and on whether the return objectives had been
realized. The objective of these other investment positions was to realize
attractive total returns through dividends and share price appreciation and to
provide U.S. Realty with an efficient method of maintaining a portion of its
assets in relatively liquid investments (which assets could be redeployed on
relatively short notice). During the year ended December 31, 1999, all of the
publicly traded other investment positions, except for the investment in
Security Capital, were sold. Net realized losses during the year that ended
December 31, 1999 were $65.6 million. During the nine months ended September
30, 1999, net realized gains on other investment positions were $1.4 million.
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Increase/(Decrease) in Appreciation of Strategic Investments and Other
Investment Positions
During the nine-month periods ended September 30, 2000 and 1999, the
principal factor behind the movement in net assets resulting from operations
was the change in the unrealized appreciation of U.S. Realty's strategic
investments and other investment positions.
During the nine months ended September 30, 2000, the largest part of the
increase of $433.6 million in the unrealized appreciation was attributable to
the increase in the appreciation of U.S. Realty's investment in CarrAmerica
($261.0 million, or 60.2% of the total increase), followed by Regency ($100.7
million, or 23.2%), and the other investment positions ($69.0 million, or
15.9%).
During the nine months ended September 30, 1999, the largest part of the
decrease of $163.3 million in the unrealized appreciation was attributable to
the decrease in the value of the investment in CarrAmerica ($59.0 million, or
36.2% of the total increase), followed by a decrease in the value of the
investment in Storage USA ($56.7 million, or 34.7%) and Regency ($42.9
million, or 26.2%).
The increase in the unrealized appreciation of the strategic investments in
2000 versus 1999 is the result of the increase in the stock prices of the
investments principally due to the general improvement in the "REIT" market to
date in 2000.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net operating income decreased by $6.9 million, or 8.9%, to $71.0 million
for the year ended December 31, 1999 as compared to $77.9 million for the year
ended December 31, 1998. The decrease is mainly attributable to an increase in
interest expense on the Convertible Notes issued in May 1998. U.S. Realty also
experienced a higher interest expense due to increased levels of borrowings on
its $400 million unsecured line of credit. On December 30, 1999, its line of
credit was replaced by the new SC-Holdings line, which is guaranteed by U.S.
Realty. U.S. Realty will sometimes refer to its old line of credit and the new
SC-Holdings line of credit as the Lines of Credit. Interest on the Convertible
Notes increased $11.8 million, or 79.1%, to $26.6 million for the year ended
December 31, 1999 as compared to $14.8 million for the year ended December 31,
1998. This is due to the Convertible Notes being outstanding for the full
year. Interest on the Lines of Credit increased $1.6 million, or 8.7%, to
$20.0 million for the year ended December 31, 1999 as compared to $18.4
million for the year ended December 31, 1998.
Net Operating Income
Net operating income represents the difference between U.S. Realty's total
revenues and total expenses.
The following table sets forth information regarding U.S. Realty's net
operating income during the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(IN THOUSANDS $, EXCEPT %)
<S> <C> <C> <C> <C>
Total Revenues.................................. $161,043 100.0% $156,825 100.0%
Total Expenses.................................. 90,051 55.9 78,926 50.3
-------- ----- -------- -----
Net Operating Income............................ $ 70,992 44.1% $ 77,899 49.7%
======== ===== ======== =====
</TABLE>
The net operating income margin decreased to 44.1% during 1999 from 49.7%
in 1998. This is primarily due to higher interest expense on (i) the
Convertible Notes and (ii) the Lines of Credit.
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Total Revenues. The following table sets forth information regarding U.S.
Realty's total revenues during the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998
--------------- ---------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(IN THOUSANDS $, EXCEPT %)
<S> <C> <C> <C> <C>
Gross dividends from strategic
investment positions
CarrAmerica........................... $ 52,916 32.9% $ 51,999 33.2%
City Center Retail.................... 6,990 4.3 -- --
CWS Communities....................... 9,057 5.6 4,783 3.0
Regency(1)............................ 57,852 35.9 56,422 36.0
Storage USA........................... 31,532 19.6 29,934 19.1
Urban Growth Property................. 10,160 6.3 4,338 2.8
-------- ----- -------- -----
Subtotal............................ $168,507 104.6% $147,476 94.1%
Gross dividends from other investment
positions.............................. 8,925 5.6 20,908 13.3
-------- ----- -------- -----
Total Gross Dividends................. $177,432 110.2% $168,384 107.4%
Interest income from affiliate.......... 3,575 2.2 3,575 2.3
Interest income from non-affiliate and
other
income................................. 4,188 2.6 1,132 0.7
-------- ----- -------- -----
Total Gross Revenues.................. $185,195 115.0% $173,091 110.4%
Withholding tax on dividends received... (24,152) (15.0) (16,266) (10.4)
-------- ----- -------- -----
Total Revenues........................ $161,043 100.0% $156,825 100.0%
======== ===== ======== =====
</TABLE>
--------
(1) The merger between Pacific Retail and Regency was completed on February
28, 1999. In order to align the dividend record date of the former Pacific
Retail shareholders with the dividend record date of Regency, Pacific
Retail paid a pro-rated dividend to its shareholders in the first quarter
of 1999. As a result, Pacific Retail shareholders only received 42 days
worth of dividends in the first quarter of 1999. See Note 3A to the
Consolidated Financial Statements for more information.
As the table indicates, most of U.S. Realty's total revenues during 1999 and
1998 were derived from dividends from its strategic investment positions.
"Interest income from affiliate" represents interest earned on U.S. Realty's
$55 million aggregate principal investment in Security Capital's 6.5%
convertible subordinated debentures due 2016. U.S. Realty purchased the
debentures in April 1996 ($11 million aggregate principal amount) and in March
1997 ($44 million aggregate principal amount), which debentures were
convertible into shares of Class A common stock of Security Capital at U.S.
Realty's option. Please read Note 3B to the Consolidated Financial Statements
for more information.
"Interest income from non-affiliate and other income" consists of interest
earned on cash balances and convertible debt of other investment positions. The
increase in this item between the year ended December 31, 1999 and the
corresponding year in 1998 is attributable to higher interest earned on the
increased level of convertible debt U.S. Realty held during 1999.
Total Expenses. For the year ended December 31, 1999, total expenses
amounted to $90.1 million, of which $32.5 million, or 36.1%, represented fees
paid to the Operating Advisor and $47.8 million, or 53.1%, represented:
. interest on the Convertible Notes,
. interest on the Lines of Credit, and
. related expenses.
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During the year ended December 31, 1999, general and administrative expenses
were approximately $3.6 million, or 4.0% of total expenses, taxes were $4.6
million, or 5.1% of total expenses, and amortization of Convertible Notes
deferred costs was $1.6 million, or 1.7% of total expenses.
For the year ended December 31, 1998, total expenses amounted to $78.9
million, of which $35.2 million, or 44.6%, represented fees paid to the
Operating Advisor and $35.9 million, or 45.5%, represented:
. interest on the old $700 million secured line of credit of Holdings,
which was replaced by U.S. Realty's line of credit in December 1998,
. interest on U.S. Realty's line of credit,
. interest on the Convertible Notes, and
. related expenses.
During the year ended December 31, 1998, general and administrative expenses
were approximately $4.4 million, or 5.6% of total expenses, taxes were $2.4
million, or 3.0% of total expenses, and amortization of Convertible Notes
deferred costs was $1.0 million, or 1.3% of total expenses. Interest expense
increased as a result of a full year of interest payments on the Convertible
Notes.
Net Realized Gains or Losses on Public Special Opportunity Positions
Historically, U.S. Realty's public special opportunity positions were
investments in publicly traded REITs, which were generally held for an
intermediate term of 12 to 18 months, although the sale of such positions could
occur sooner or later, depending on market or business conditions and on
whether the return objectives had been realized. U.S. Realty's objective was to
hold these public special opportunity positions to realize attractive total
returns through dividends and share price appreciation and to provide it with
an efficient method of maintaining a portion of its assets in relatively liquid
investments (which assets could be redeployed on relatively short notice).
During the year ended December 31, 1999, U.S. Realty sold all of the
publicly traded special opportunity investments, except for the investment in
Security Capital. During the year ended December 31, 1999, its net realized
losses on public special opportunity positions were $65.6 million and during
the year ended December 31, 1998, its net realized gains on public special
opportunity positions were $32.9 million.
Decrease/Increase in Appreciation of Strategic Investment and Other Investment
Positions
During the years ended December 31, 1999 and 1998, the principal factor
behind the movement in net assets resulting from operations was the change in
the unrealized appreciation of U.S. Realty's strategic investment and other
investment positions.
During the year ended December 31, 1999, the largest part of the decrease of
$152.7 million in the unrealized appreciation was attributable to the decrease
in the appreciation of U.S. Realty's investment in CarrAmerica ($82.3 million,
or 53.9% of the total decrease), followed by Regency ($77.1 million, or 50.5%),
and Storage USA ($24.4 million, or 16.0%). This decrease was partly offset by
an increase in the appreciation of U.S. Realty's investment in other investment
positions ($31.1 million, or 20.4%).
During the year ended December 31, 1998, the largest part of the decrease of
$642.4 million in the unrealized appreciation was attributable to the decrease
in the appreciation of U.S. Realty's investment in CarrAmerica ($215.3 million,
or 33.5% of the total decrease), followed by Regency ($171.3 million, or
26.8%), the other investment positions ($169.6 million, or 26.5%), and Storage
USA ($87.9 million, or 13.7%). In both years, the decrease in the unrealized
appreciation of the strategic investments is the result of the decrease in the
stock prices of the investments principally due to the general decline in the
REIT market.
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Although the reduction in stock prices of U.S. Realty's strategic investment
and other investment positions for the years ended December 31, 1999 and 1998
does not affect its net operating income, it does adversely impact U.S.
Realty's net assets resulting from operations on its Consolidated Statement of
Operations. U.S. Realty cannot predict the future stock prices of its strategic
investment and other investment positions. Additional reductions in such stock
prices would continue to reduce net assets resulting from operations and, as a
result, could have a materially adverse impact on U.S. Realty's Consolidated
Statement of Operations.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net operating income increased by $17.6 million, or 29.2%, to $77.9 million
for the year ended December 31, 1998 as compared to $60.3 million for the year
ended December 31, 1997. U.S. Realty attributes this increase mainly to an
increase in dividends derived from a higher level of fundings to strategic
investees. Gross dividends from strategic investment positions increased $48.6
million, or 49.1%, to $147.5 million for the year ended December 31, 1998 as
compared to $98.9 million for the year ended December 31, 1997. Fundings to
strategic investees increased by $564.6 million at cost, or 29.3%, to $2.5
billion as of December 31, 1998 as compared to $1.9 billion as of December 31,
1997.
Net Operating Income
Net operating income represents the difference between total revenues and
total expenses.
The following table sets forth information regarding U.S. Realty's net
operating income during the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(IN THOUSANDS $, EXCEPT %)
<S> <C> <C> <C> <C>
Total Revenues............................... $156,825 100.0% $102,917 100.0%
Total Expenses............................... 78,926 50.3% 42,608 41.4%
-------- ----- -------- -----
Net Operating Income......................... $ 77,899 49.7% $ 60,309 58.6%
======== ===== ======== =====
</TABLE>
The net operating income margin decreased to 49.7% in 1998 from 58.6% in
1997. This is due to a higher interest expense resulting from increased levels
of borrowing on the old SC-Holdings line of credit that U.S. Realty guaranteed
and its line of credit which SC-Holdings guaranteed, which replaced the old
line of credit in December 1998, as well as interest expense on the Convertible
Notes issued in May 1998. These increases were partially offset by lower
interest rates on the old SC-Holdings line of credit and U.S. Realty's line of
credit.
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Total Revenues. The following table sets forth information regarding U.S.
Realty's total revenues during the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997
--------------- ---------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(IN THOUSANDS $, EXCEPT %)
<S> <C> <C> <C> <C> <C>
Gross dividends from strategic
investment positions
CarrAmerica........................ $ 51,999 33.2% $ 41,412 40.2%
CWS Communities.................... 4,783 3.0 -- --
Regency (1)........................ 56,422 36.0 33,017 32.1
Storage USA........................ 29,934 19.1 24,497 23.8
Urban Growth Property.............. 4,338 2.8 -- --
-------- ----- -------- ----- ---
$147,476 94.1% $ 98,926 96.1%
Gross dividends from other investment
positions........................... 20,908 13.3 17,594 17.1
-------- ----- -------- -----
Total Gross Dividends............ $168,384 107.4% $116,520 113.2%
Interest income from affiliate..... 3,575 2.3 2,896 2.8
Interest income from non-affiliate
and other income.................. 1,132 0.7 805 0.8
-------- ----- -------- -----
Total Gross Revenues............. $173,091 110.4% $120,221 116.8%
Withholding tax on dividends
received............................ (16,266) (10.4) (17,304) (16.8)
-------- ----- -------- -----
Total Revenues................... $156,825 100.0% $102,917 100.0%
======== ===== ======== =====
</TABLE>
--------
(1) On February 28, 1999, Regency merged with Pacific Retail. See Note 3A to
the Consolidated Financial Statements.
As the table indicates, most of U.S. Realty's total revenues during 1998 and
1997 were derived from dividends from its strategic investment positions. The
increase is mainly attributable to an increase in dividends derived from a
higher level of average fundings to strategic investees as well as increased
REIT dividend requirements from improved operating results at the strategic
investees.
"Interest income from affiliate" represents interest earned on U.S. Realty's
$55 million aggregate principal investment in 6.5% convertible subordinated
debentures due 2016 issued by Security Capital. The debentures were purchased
by U.S. Realty in April 1996 ($11 million aggregate principal amount) and in
March 1997 ($44 million aggregate principal amount) and were convertible into
shares of Class A common stock of Security Capital, at the option of Holdings.
Please read Note 3B to the Consolidated Financial Statements for more
information.
"Interest income from non-affiliate and other income" consists of interest
earned on cash balances and convertible debt. The increase in this item between
the year ended December 31, 1998 and the corresponding year in 1997 is
attributable to interest on convertible debt held by U.S. Realty in 1998 and
during the second half of 1997.
Total Expenses. For the year ended December 31, 1998, total expenses
amounted to $78.9 million, of which $35.2 million, or 44.6%, represented fees
paid to the Operating Advisor and $35.9 million, or 45.5%, represented:
. interest on the Convertible Notes,
. interest on the old Holdings line of credit,
. interest on U.S. Realty's line of credit, and
. related expenses.
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<PAGE>
During the year, general and administrative expenses were approximately $4.4
million, or 5.6% of total expenses, taxes were $2.4 million, or 3.0% of total
expenses, and amortization of the Convertible Notes deferred costs were $1.0
million, or 1.3% of total expenses.
For the year ended December 31, 1997, total expenses amounted to $42.6
million, of which $24.6 million, or 57.8%, were accounted for by fees paid to
the Operating Advisor and $13.6 million, or 31.9%, were accounted for by
interest on the old Holdings line of credit and related expenses. During the
year, general and administrative expenses were $2.5 million, or 5.9% of total
expenses, and taxes were $1.9 million, or 4.4% of total expenses.
The increase in fees paid to the Operating Advisor over the prior year is
primarily a result of the increased level and value of fundings to strategic
investees. Interest expense increased as a result of new borrowings under the
Convertible Notes and an increased average balance on the old Holdings line of
credit and U.S. Realty's line of credit, the proceeds of which were utilized to
fund a portion of the new investments. These increases in interest expense were
partially offset by a decline in the average interest rates on the old Holdings
line of credit and U.S. Realty's line of credit.
Net Realized Gains on Public Special Opportunity Positions
Historically, U.S. Realty's public special opportunity positions were
investments in publicly traded REITs, which were generally held for an
intermediate term of 12 to 18 months, although sales of such positions could
occur sooner or later, depending on market or business conditions and on
whether the return objectives had been realized. The objective was to hold
these public special opportunity positions to realize attractive total returns
through dividends and share price appreciation and to provide U.S. Realty with
an efficient method of maintaining a portion of its assets in relatively liquid
investments (which assets could be redeployed on short notice).
During the years ended December 31, 1998 and 1997, net realized gains on
special opportunity positions were $32.9 million and $41.1 million,
respectively. In both cases, these gains were derived exclusively from the
disposition of certain publicly traded special opportunity positions.
Decrease/Increase in Appreciation on Strategic Investment and Other Investment
Positions
During the year ended December 31, 1998, the largest part of the decrease of
$642.4 million in the unrealized appreciation was attributable to the decrease
in the appreciation of U.S. Realty's investment in CarrAmerica ($215.3 million,
or 33.5% of the total decrease), followed by Regency ($171.3 million, or
26.8%), the other investment positions ($169.6 million, or 26.5%) and Storage
USA ($87.9 million, or 13.7%). This decrease in the unrealized appreciation of
the strategic investment and special opportunity positions is the result of a
decrease in the stock prices of the investments principally due to the general
decline in the REIT market.
During the year ended December 31, 1997, the main factor behind the increase
of $265.0 million in the unrealized appreciation of U.S. Realty's strategic
investment and other investment positions was the increase in the appreciation
in its investment in Regency ($143.4 million, or 54.1% of the total increase),
followed by Carr-America ($75.8 million, or 28.6%), Storage USA ($24.0 million,
or 9.1%) and the other investment positions ($23.6 million, or 9.1%).
Although the reduction in stock prices of U.S. Realty's strategic investment
and other investment positions for the year ended December 31, 1998 does not
affect its net operating income, it does adversely impact U.S. Realty's net
assets resulting from operations on its Consolidated Statement of Operations.
U.S. Realty cannot predict the future stock prices of its strategic investment
and other investment positions. Additional reductions in such stock prices
would continue to reduce net assets resulting from operations and, as a result,
could have a materially adverse impact on U.S. Realty's Consolidated Statement
of Operations.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
U.S. Realty's total indebtedness as of September 30, 2000 was approximately
$455.4 million and the value of U.S. Realty's total assets was $2.7 billion. As
of September 30, 2000, the closing share price on Euronext Amsterdam was $20.50
and the closing price of the American Depositary Receipts on the NYSE was
$21.375. U.S. Realty expects its principal sources of liquidity to be from its
receipt of dividends from strategic investments and fundings from the Line.
U.S. Realty expects that these sources will enable it to meet both its short-
term and long-term cash requirements for its funding commitments, working
capital and debt repayment for the next 12 months.
As of September 30, 2000, $56.0 million was drawn and outstanding under the
Line. The earliest date on which the Line will expire is December 1, 2001.
Borrowings under the Line (and the three-year term loan, if applicable) bear
interest at (a) the sum of (x) the greater of the federal funds rate plus 0.5%
per annum or the United States prime rate and (y) a margin of 0% to 0.85% per
annum (based on U.S. Realty's current senior unsecured long-term debt rating)
or (b) at SC-Holdings' option, LIBOR plus a margin of 1.00% to 1.85% per annum
(also based on U.S. Realty's current senior unsecured long-term debt).
Additionally, there is a commitment fee of 0.15% to 0.20% per annum (based on
the amount of the line which remains undrawn). All borrowings under the Line
are subject to covenants that U.S. Realty must maintain at all times,
including: (i) unsecured liabilities may not exceed 40% of the market value of
a borrowing base of owned securities, (ii) shareholders' equity must exceed the
sum of $1.5 billion and 75% of the net proceeds of sales of equity securities
after December 30, 1999, (iii) a ratio of total liabilities to net worth of not
more than 1:1, (iv) a fixed-charge coverage ratio of not less than 1.5:1, (v)
an interest-coverage ratio of not less than 2:1 and (vi) secured debt may not
exceed 10% of consolidated market net worth. As of September 30, 2000, U.S.
Realty was in compliance with these covenants.
Average daily borrowings under the Line were $105.0 million for the nine-
month period ended September 30, 2000. Average daily borrowings under a
previous line of credit were $295.0 million for the nine-month period ended
September 30, 1999. The weighted average interest rates for these same periods
were 7.7% per annum and 6.5% per annum, respectively. The weighted average
stated rate of interest on borrowings outstanding at September 30, 2000 is
8.2%.
During May 1998, U.S. Realty issued $450 million (aggregate principal amount
at maturity) of Convertible Notes which are convertible at the option of the
holder at any time prior to maturity at a conversion rate equal to 26.39095
shares of U.S. Realty, per $1,000 aggregate principal amount at maturity of the
Convertible Notes or an aggregate of 11,875,927 shares upon conversion.
Interest is payable semi-annually at the rate of 2.0% per annum on May 22 and
November 22 of each year. Effective March 1, 2000, the interest rate payable on
the Convertible Notes was increased to 2.25% per annum. The 2.25% per annum
interest rate was in effect until May 14, 2000, and as of the close of business
on May 14, 2000, the interest rate on the Convertible Notes was reduced to 2.0%
per annum. The Convertible Notes were sold at a discount to their principal
amount at maturity and additional interest accretes at an annual rate of 6.75%
less the 2.0% payment, compounded semi-annually, to par by May 22, 2003. The
Convertible Notes may be redeemed, in whole or in part, at the option of U.S.
Realty on or after May 23, 2001 at their accreted value, together with accrued
and unpaid interest. Upon a change in control of U.S. Realty, each holder of
Convertible Notes shall have the right, at the holder's option, to require U.S.
Realty to repurchase such holder's Convertible Notes, in whole or in part, at a
purchase price equal to their accreted value, together with accrued and unpaid
interest through the repurchase date.
If the transaction agreement to combine Security Capital and U.S. Realty is
approved, then on the closing date U.S. Realty will deposit with the indenture
trustee for the Convertible Notes an amount which will provide for the
redemption of the Convertible Notes, at their then accreted value, on the later
of May 23, 2001 or the 30th day after the closing of the transaction and for
payment of all accrued and unpaid interest through the date of redemption.
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<PAGE>
On March 29, 2000, U.S. Realty announced the completion of its second $100
million share repurchase program. U.S. Realty also announced that its board of
directors authorized an increase in U.S. Realty's share repurchase program by
$50 million to $250 million. As of September 30, 2000, U.S. Realty had
repurchased 11,677,914 shares at an aggregate cost of $212.3 million,
representing approximately 13.5% of U.S. Realty's shares outstanding at the
commencement of the initial program. This share repurchase program has been
funded with proceeds received from the sale of the public other investment
positions' portfolio, the sale of the common stock and debentures of Security
Capital and the distribution of net proceeds received by City Center Retail
from the sale of 23 properties. During the nine months ended September 30,
2000, the sale of these investments realized net proceeds of $213.6 million. As
of September 30, 2000 the share repurchase program has been suspended pending
the closing of the transaction agreement to combine U.S. Realty with Security
Capital.
CAPITAL DEPLOYMENT ACTIVITIES
During the nine months ended September 30, 2000, U.S. Realty deployed an
additional $68.8 million in strategic investment positions (including an
advance to CWS Communities of $12.0 million and $36.5 million in advances to
Urban Growth Property), received a distribution of net proceeds from City
Center Retail, in relation to the sale of 23 properties, of $112.0 million and
received net proceeds of $102.2 million from disposal of other investment
positions. As of September 30, 2000, U.S. Realty had outstanding contractual
obligations of $31.6 million to CWS Communities.
U.S. Realty's existing and committed fundings at cost as of September 30,
2000 were as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL COST AMOUNT TO
AMOUNT (AMOUNT BE
COMMITTED FUNDED)(1) FUNDED(1)
---------- ---------- ---------
(IN THOUSANDS $)
<S> <C> <C> <C>
CarrAmerica (NYSE: CRE)......................... $ 699,905 $ 699,905 $ --
City Center Retail (Private).................... 175,722 175,722 --
CWS Communities (Private)....................... 300,330 268,739 31,591
Regency (NYSE: REG)............................. 759,807 759,807 --
Storage USA (NYSE: SUS)......................... 394,362 394,362 --
Urban Growth Property (Private)................. 188,582 188,582 --
Private investment positions.................... 40,544 40,544 --
---------- ---------- -------
Total......................................... $2,559,252 $2,527,661 $31,591
========== ========== =======
</TABLE>
--------
(1) Included in Total Amount Committed.
If the transaction agreement to combine Security Capital and U.S. Realty is
approved, then on the closing date the funding obligation to CWS Communities
will be assumed by Security Capital.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
the course of its operations, U.S. Realty is exposed to interest rate risk,
equity price risk and, to a limited extent, currency exchange risk, all as
described below. While U.S. Realty is not precluded from doing so, U.S. Realty
has not had any involvement with derivative financial instruments. To the
extent U.S. Realty chooses to do so in the future, U.S. Realty would use
derivative financial instruments to hedge specific risks or exposures and not
for speculative or trading purposes.
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<PAGE>
The following discussion only addresses the market risk U.S. Realty faces.
However, U.S. Realty is dependent on the cash flow created by the dividends and
distributions paid by its strategic investment and other investment positions.
Each of these entities is subject to its own specific market risks that could
impact its ability to pay dividends or distributions to us. As a result, U.S.
Realty could indirectly be impacted by the market risk facing the strategic
investment and other investment positions in the future.
SENSITIVITY ANALYSIS
Interest Rate Risk
U.S. Realty is exposed to interest rate changes primarily as a result of
unsecured credit facilities used to finance its investment activity and
maintain financial liquidity. U.S. Realty's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall borrowing costs. To achieve its objectives, U.S.
Realty borrows primarily at variable rates. In future transactions, U.S. Realty
may utilize derivative financial instruments as hedges in anticipation of debt
transactions to manage well-defined interest rate risk or to minimize exposure
to variable rate debt.
During 1999, U.S. Realty had weighted average outstanding borrowings of
$297.9 million at an average interest rate of 6.60% on the Lines of Credit. If
interest rates had been 10% higher on average during 1999, interest expense on
the Lines of Credit, would have increased $2.0 million to $22.0 million which
would have resulted in a reduction in its Net Operating Income in its
Consolidated Statement of Operations for the year ended December 31, 1999 and
in its Net Cash Provided by Operating Activities in its Consolidated Statement
of Cash Flows for the year ended December 31, 1999 by an equivalent amount of
$2.0 million. If interest rates had been 10% lower on average during 1999,
interest expense on U.S. Realty's line of credit, and its predecessor line of
credit, would have decreased $2.0 million to $16.4 million which would have
resulted in an increase in our Net Operating Income in our Consolidated
Statement of Operations for the year ended December 31, 1999 and in U.S.
Realty's Net Cash Provided by Operating Activities in its Consolidated
Statement of Cash Flows for the year ended December 31, 1999 by an equivalent
amount of $2.0 million. The amounts discussed above apply for each 10% change
in the interest rate. There would have been no effect on the fair value of U.S.
Realty's line of credit in its Consolidated Statement of Net Assets. Because at
any point in time, U.S. Realty has a number of short-term borrowings
outstanding under its line of credit with differing interest rates and
maturities, U.S. Realty has chosen a 10% change in the average interest rate
for all borrowings during 1999 discussed as the best method to convey its
exposure for an entire year to interest rate changes. All borrowings under the
new SC-Holdings line at December 31, 1999 have been repriced in 2000 and bear
interest based on the LIBOR rate at the time of the borrowing. The preceding
information is of limited predictive value. As a result, U.S. Realty's ultimate
realized gain or loss with respect to interest rate fluctuations will depend on
the exposures that arise during a future period, hedging strategies at the
time, and prevailing interest rates.
Equity Price Risk
U.S. Realty is exposed to equity price changes primarily as a result of its
strategic investment positions for non-trading purposes and other investment
positions for intermediate term trading purposes. U.S. Realty accounts for its
investments at fair value in accordance with the United States specialized
industry accounting rules prescribed by the American Institute of Certified
Public Accountants Audit and Accounting Guide for Investment Companies.
A change in the equity price, determined by market quotations for public
company investments and other appropriate indicators of fair market value for
private company investments, of any of the investments in the asset category
above will impact U.S. Realty's Consolidated Statement of Net Assets by an
equivalent amount as well as its Consolidated Statement of Operations and the
Consolidated Statement of Cash Flows by the amounts of the change plus its
increasing or decreasing effect on the operating advisor fees. At December 31,
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<PAGE>
1999, the fair market value of U.S. Realty's strategic investment positions was
$2.4 billion. A hypothetical 10% reduction in equity prices would amount to a
reduction in the recorded fair value of these investments as of December 31,
1999 of $237.5 million and would result in a reduction in the amount of U.S.
Realty's (Decrease) Increase in Net Assets Resulting from Operations in its
Consolidated Statement of Operations for the year ended December 31, 1999 of
$234.5 million. Furthermore, it would also result in a reduction by the
equivalent amount of $234.5 million in U.S. Realty's Net Cash Provided by
Operating Activities in its Consolidated Statement of Cash Flows for the year
ended December 31, 1999. The $234.5 million amount results from the reduction
in the fair market value of the assets, $237.5 million, partially offset by the
reduction in operating advisor fees payable by U.S. Realty as a result of
owning a lower value of assets on December 31, 1999, $3.0 million. A
hypothetical 10% increase in equity prices would amount to an increase in the
recorded fair value of these investments as of December 31, 1999 of $237.5
million and would result in an increase in the amount of U.S. Realty's
(Decrease) Increase in Net Assets Resulting From Operations in its Consolidated
Statement of Operations for the year ended December 31, 1999 of $234.5 million.
Furthermore, it would also result in an increase by the equivalent amount of
$234.5 million in U.S. Realty's Net Cash Provided by Operating Activities in
its Consolidated Statement of Cash Flows for the year ended December 31, 1999.
The $234.5 million amount results from the increase in the fair market value of
the assets, $237.5 million, partially offset by the increase in operating
advisor fees payable by us as a result of owning a higher value of assets on
December 31, 1999, $3.0 million. Because U.S. Realty's strategic investments
are already recorded at their fair market value on December 31, 1999, U.S.
Realty has chosen a 10% average change in the equity prices on that reporting
date as the best method to convey the exposure of its strategic investments to
equity price changes.
At December 31, 1999, the fair market value of U.S. Realty's other
investment positions was $137.8 million. A hypothetical 10% reduction in equity
prices would amount to a reduction in the recorded value of these investments
as of December 31, 1999 of $13.8 million and would result in a reduction in the
amount of U.S. Realty's (Decrease) Increase in Net Assets Resulting from
Operations in its Consolidated Statement of Operations of for the year ended
December 31, 1999 of $13.6 million. Furthermore, U.S. Realty would also result
in a reduction by the equivalent amount of $13.6 million in its Net Cash
Provided by Operating Activities in its Consolidated Statement of Cash Flows
for the year ended December 31, 1999. The $13.6 million amount results from the
reduction in the fair market value of the assets, $13.8 million, partially
offset by the reduction in operating advisor fees payable by U.S. Realty as a
result of owning a lower value of assets on December 31, 1999, $0.2 million. A
hypothetical 10% increase in equity prices would amount to an increase in the
recorded fair value of these investments as of December 31, 1999 of $13.8
million and would result in an increase in the amount of U.S. Realty's
(Decrease) Increase in Net Assets Resulting From Operations in its Consolidated
Statement of Operations for the year ended December 31, 1999 of $13.6 million.
Furthermore, it would also result in an increase by the equivalent amount of
$13.6 million in U.S. Realty's Net Cash Provided by Operating Activities in its
Consolidated Statement of Cash Flows for the year ended December 31, 1999. The
$13.6 million amount results from the increase in the fair market value of the
assets, $13.8 million, partially offset by the increase in operating advisor
fees payable by U.S. Realty as a result of owning a higher value of assets on
December 31, 1999, $0.2 million. Because U.S. Realty's other investments are
already recorded at their fair market value on December 31, 1999, U.S. Realty
has chosen a 10% average change in the equity prices on that reporting date as
the best method to convey the exposure of its other investments to equity price
changes.
The amounts discussed above apply for each 10% change in equity prices. The
preceding information is of limited predictive value. As a result, the impact
on U.S. Realty of equity price changes is dependent upon equity prices of its
investments and upon our quoted equity price in effect during future periods.
Currency Exchange Risk
U.S. Realty is exposed to currency exchange changes primarily as a result of
certain administrative expenses and tax liabilities payable in its country of
organization, Luxembourg, since its functional currency is the U.S. dollar. To
date, the amount of administrative expenses and taxes paid in Luxembourg have
not been
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<PAGE>
material and, as a result, U.S. Realty has not taken steps to minimize its
exposure to currency exchange fluctuations. In the future, U.S. Realty's
ultimate realized gain or loss resulting from currency exchange fluctuations
will depend on the change in currency exchange rates between the U.S. Dollar
and the Luxembourg Franc that arise.
AGREEMENTS WITH STRATEGIC INVESTEE COMPANIES
CARRAMERICA
As long as U.S. Realty owns at least 25%, by value, of CarrAmerica's
outstanding shares of common stock on a fully diluted basis as a "25% Owner",
U.S. Realty has the following rights: the right to nominate for election by
shareholders that number of directors to CarrAmerica's board of directors that
corresponds to U.S. Realty's percentage ownership of the outstanding shares of
common stock, but in no case more than 40% of the directors; the participation
right to purchase or subscribe for up to 30%, or up to 35% if necessary for
U.S. Realty to maintain at least 25% ownership on a fully diluted basis, of the
total of any additional shares of capital stock issued or sold by CarrAmerica
or its major subsidiaries, at the same price and on the same terms as other
purchasers or subscribers; and consultation rights, among other things, for any
acquisition or disposition of assets having a value in excess of $25 million,
any financing in excess of $25 million, any operating budgets, any new material
agreements or arrangements with executive officers or any issuance of equity.
U.S. Realty has committed, subject to certain limitations and exceptions,
that while it is a 25% Owner, it will not invest in other companies in a
similar industry to CarrAmerica or in the types of properties owned by
CarrAmerica.
U.S. Realty is subject to a standstill agreement which prohibits it from,
among other things, acquiring under most circumstances more than 45% of
CarrAmerica's outstanding shares of common stock, or more than 40% on a fully
diluted basis, soliciting business combination transactions with respect to
CarrAmerica, selling, pledging or disposing of shares of common stock in
CarrAmerica except in accordance with certain specified limitations, soliciting
proxies for an election contest, calling a special meeting of shareholders or
making shareholder proposals, acting in concert with third parties to acquire
over 5% of any class of voting capital stock of CarrAmerica, making certain
transfers of its shares of SC-Holdings, or seeking representation on
CarrAmerica's board of directors or a change in the size or composition of
CarrAmerica's board of directors other than with respect to its nomination
rights discussed above. In July 2000, the parties amended the agreement to
permit U.S. Realty to own in excess of the 45% limit as a result of share
repurchases by CarrAmerica, to provide that U.S. Realty will vote any such
CarrAmerica shares that U.S. Realty beneficially owns in excess of the 45%
limit either in accordance with the recommendation of the board of directors of
CarrAmerica or in the same proportion as other stockholders of CarrAmerica, and
to provide, at the request of CarrAmerica, for the exchange under certain
circumstances of shares owned by U.S. Realty in excess of the 45% limit for
non-voting convertible common shares or fully participating common-equivalent
non-redeemable preferred shares of Carr America. The standstill originally was
to expire in April 2001, but has been extended until 2003, and will be
automatically extended for one-year periods unless U.S. Realty elects to
terminate the standstill, but the standstill terminates earlier if, among other
things,
(1) any person other than U.S. Realty acquires 15% or more of the
outstanding shares of common stock of CarrAmerica on a fully diluted basis
or obtains the right to elect a number of directors equal to or greater
than the number of directors to which U.S. Realty is entitled,
(2) CarrAmerica's board of directors authorizes (with U.S. Realty's
nominees abstaining or voting against) the solicitation of proposals for
certain business combinations, or CarrAmerica receives a written
submission, not rejected by its board, proposing any such transaction, or
CarrAmerica's board of directors removes any anti-takeover provisions in
connection with any transaction,
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(3) certain events of default occur under debt arrangements of
CarrAmerica or its subsidiaries, or
(4) CarrAmerica violates certain operating and financial covenants
relating to indebtedness limitations, retention of third-party property
managers, investment in non-office properties, termination of REIT status,
and limitations on issuance of preferred stock and units of Carr Realty,
L.P.
CarrAmerica's charter generally prohibits any one shareholder or group of
affiliated shareholders from holding more than 5% of CarrAmerica's outstanding
shares of common stock and/or more than 5% of any class or series of
CarrAmerica's preferred stock. However, U.S. Realty is generally permitted by
the charter to acquire up to 45% of the outstanding shares of common stock
and/or up to 45% of any class or series of preferred stock.
CarrAmerica's organizational documents contain provisions generally
preventing foreign investors, other than U.S. Realty and its affiliates, from
acquiring additional shares of CarrAmerica's capital stock if, as a result of
such acquisition, foreign investors, including U.S. Realty, would hold,
directly or indirectly, 50% or more of the fair market value of such capital
stock, for these purposes, we are assumed to own 45% of such capital stock.
Because U.S. Realty owned 42.8% of CarrAmerica's outstanding common stock as
of December 31, 1999, these provisions would effectively limit significant
further investment in CarrAmerica by non-U.S. investors.
STORAGE USA
As long as U.S. Realty owns 20% or more of Storage USA's outstanding shares
of common stock as a "20% Owner", U.S. Realty has the following rights: the
right to nominate for election to Storage USA's board of directors such number
of directors as corresponds to its percentage ownership of the outstanding
shares of common stock, provided that Storage USA's charter requires that a
majority of the directors on its board be independent; and consultation rights
for, among other things, any acquisition of assets having a value in excess of
$25 million, any disposition of assets having a value in excess of $25
million, any business combination proposal, any financing in excess of $150
million, any operating budget, any material change in executive management,
any new material agreement or arrangement with executive officers or any
issuance of equity in excess of $150 million. As long as U.S. Realty owns 15%
or more of Storage USA's outstanding shares of common stock, U.S. Realty is
entitled, subject to certain exceptions, to a participation right to purchase
or subscribe for up to that number of additional shares of capital stock sold
or issued by Storage USA or its major subsidiaries which corresponds to U.S.
Realty's percentage ownership of the outstanding shares of common stock in
Storage USA prior to such sale or issue, up to a maximum of 35% of such
securities so issued or sold, at the same price and on the same terms as the
other purchasers or subscribers.
U.S. Realty has committed, subject to certain limitations and exceptions,
that while it is a 20% Owner, it will not invest in other companies in a
similar industry to Storage USA.
U.S. Realty is subject to a standstill agreement which prohibits it from,
among other things, acquiring more than 42.5% of Storage USA's outstanding
shares of common stock, soliciting business combination transactions with
respect to Storage USA, pledging or disposing of stock in Storage USA except
in limited circumstances, soliciting proxies for an election contest, or
calling a special meeting of shareholders or making shareholder proposals,
acting in concert with third parties to acquire over 5% of any class of voting
capital stock of Storage USA, making certain transfers of its shares of SC-
Holdings, or seeking representation on Storage USA's board of directors other
than with respect to its nomination rights summarized above. The standstill
originally was to expire in 2003 but has been extended until December 5, 2004,
and will be automatically extended for one-year periods unless U.S. Realty
elects to terminate the standstill, but the standstill terminates earlier if,
among other things,
(1) any person other than U.S. Realty acquires more than 9.8% of the
outstanding shares of common stock of Storage USA on a fully diluted basis
or obtains the right to elect a number of directors equal to or greater
than the number of directors to which U.S. Realty is entitled,
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(2) Storage USA's board authorizes the solicitation of proposals for
certain business combination transactions, or Storage USA receives a
written submission, not rejected by the board, proposing any such
transaction, or Storage USA's board removes certain anti-takeover
provisions in connection with any such transaction,
(3) certain events of default occur under debt arrangements of Storage
USA or its subsidiaries, or
(4) Storage USA violates certain operating and financial covenants
relating to indebtedness limitations, termination of REIT status,
restrictions on securities investments, assets held other than directly by
Storage USA, loans to subsidiaries, assets under third-party management,
investments in properties unrelated to self-storage facilities, and
limitations on ownership of partnership interests.
Storage USA's charter generally prohibits any one shareholder from holding
more than 9.8% of its outstanding shares of common stock. However, U.S. Realty
is generally permitted to acquire up to 42.5% of the outstanding shares of
common stock.
Storage USA's organizational documents contain provisions generally
preventing foreign investors, other than U.S. Realty and its affiliates, from
acquiring additional shares of Storage USA's capital stock if, as a result of
such acquisition, foreign investors, including U.S. Realty, would hold,
directly or indirectly, 50% or more of the fair value of such capital stock.
REGENCY
As long as U.S. Realty owns 20% or more of Regency's outstanding shares of
common stock as a "20% Regency Owner", U.S. Realty has the following
rights: the right to nominate for election to Regency's board of directors that
number of directors which is the greater of three directors, and that number of
directors as corresponds to U.S. Realty's percentage ownership of the common
stock then outstanding, but in no case more than 49% of the directors; and
consultation rights for any acquisitions of assets with a value in excess of
$10 million, any dispositions of assets with a value in excess of $20 million,
any financing in excess of $20 million, any operating budgets, any material
change in executive management, any new material agreements or arrangements
with executive officers or any issuances of equity.
As long as U.S. Realty owns 15% or more of Regency's outstanding shares of
common stock as a "15% Owner", it is entitled, subject to certain exceptions,
to a participation right to purchase or subscribe for up to that number of
additional shares of capital stock sold or issued by Regency or its
subsidiaries which corresponds to U.S. Realty's percentage ownership of shares
of capital stock in Regency prior to such sale or issuance up to a maximum of
49% of such securities so issued or sold, at the same price and on the same
terms as other purchasers or subscribers.
U.S. Realty is subject to a standstill agreement which prohibits it from,
among other things, acquiring more than 60% of Regency's outstanding shares of
common stock on a fully diluted basis, soliciting business combination
transactions with respect to Regency, pledging or disposing of shares in
Regency except in limited circumstances, soliciting proxies for an election
contest, calling a special meeting of shareholders or making shareholder
proposals, acting in concert with third parties to acquire over 5% of any class
of voting capital stock of Regency, making certain transfers of shares of SC-
Holdings, or seeking representation on Regency's board of directors or a change
in the size or composition of Regency's board of directors other than with
respect to our nomination rights discussed above. The standstill originally was
to expire in July 2001 but has been extended until 2003 and will be
automatically extended for one-year periods unless U.S. Realty elects to
terminate the standstill, but the standstill terminates earlier if, among other
things:
(1) any person other than U.S. Realty acquires more than 9.8% of the
outstanding shares of common stock of Regency on a fully diluted basis or
obtains the right to elect a number of directors equal to or greater than
the number of directors to which U.S. Realty is entitled,
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(2) Regency's board authorizes the solicitation of proposals for certain
business combinations, or Regency receives a written submission, not
rejected by the board, proposing any such transaction, or Regency's board
removes any anti-takeover provisions in connection with any such
transaction,
(3) certain events of default occur under debt arrangements of Regency
or its subsidiaries, or
(4) Regency violates certain operating and financial covenants relating
to indebtedness limitations, termination of REIT status, restrictions on
securities investments, assets held other than directly by Regency, loans
to subsidiaries, assets under third-party management, investment in
properties unrelated to shopping centers, and limitations on ownership of
partnership interests.
U.S. Realty has committed, subject to certain limitations and exceptions,
while it is a 20% Regency Owner, not to invest in other companies in a similar
industry to Regency, or in the types of properties owned by Regency within a
certain geographic region.
Regency's charter generally prohibits any one shareholder from holding more
than 7% of its outstanding shares of common stock. Regency's charter permits
U.S. Realty to acquire up to:
(1) 60% of the outstanding shares of Regency common stock on a fully
diluted basis so long as U.S. Realty owns 45% or more of the outstanding
shares of Regency common stock on a fully diluted basis, and
(2) 49% of the outstanding shares of Regency common stock on a fully
diluted basis at any time after U.S. Realty owns less than 45% of the
outstanding shares of Regency common stock on a fully diluted basis for a
continuous period of 180 days.
U.S. Realty has agreed with Regency that with regard to certain amendments
of Regency's charter or bylaws and with regard to certain extraordinary
transactions which require the affirmative vote of a majority of shareholders,
U.S. Realty will vote its shares in excess of 49% of the outstanding shares of
Regency common stock entitled to vote on the proposal in one of the two
following manners, at U.S. Realty's option:
(1) in accordance with the recommendation of the Regency board of
directors, or
(2) proportionately in accordance with the votes of the other holders of
Regency common stock.
With regard to certain extraordinary transactions submitted to a vote of
shareholders which requires the affirmative vote of the holders of two-thirds
of the shares of Regency's common stock, U.S. Realty will vote its shares of
Regency common stock in excess of 32% of the outstanding shares of Regency
common stock entitled to vote on the proposal in one of the two following
manners, at U.S. Realty's option:
(1) in accordance with the recommendation of the Regency board of
directors, or
(2) proportionately in accordance with the votes of the other holders of
Regency common stock.
Regency's organizational documents contain provisions generally preventing
foreign investors, other than U.S. Realty and its affiliates, from acquiring
additional shares of Regency's capital stock if, as a result of such
acquisition, foreign investors, including U.S. Realty, would hold directly or
indirectly 50% or more of the fair market value of such capital stock, or if,
as a result of such acquisition, foreign investors, not including U.S. Realty,
would hold, directly or indirectly, 5% or more of the fair market value of such
capital stock. Since U.S. Realty owned 60.2% of Regency's shares of common
stock on a fully funded and fully diluted basis as of December 31, 1999, these
provisions would effectively limit further investment in Regency by non-U.S.
investors.
Security Capital will succeed to the rights and obligations of U.S. Realty
under each of these agreements. As part of the negotiations with these
investees, the termination dates of the standstill agreement were extended
until 2003, and, in the case of Storage USA, until 2004. In addition, certain
restrictions on each investee's businesses were eliminated.
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These agreements limit the ability of U.S. Realty, and will limit the
ability of Security Capital, to engage in various transactions affecting these
investees without the consent of the investees, such as certain distributions
of the investees' securities or a sale of the investees' shares to a single
purchaser which results in any shareholder exceeding the ownership limits.
CERTAIN LEGAL INFORMATION
U.S. Realty is a public limited company qualifying as a societe
d'investissement a capital fixe organized under Luxembourg law as a closed
ended investment fund governed by Part II of the Luxembourg law of March 30,
1988 on undertakings for collective investment. U.S. Realty is in addition
subject to provisions of the Luxembourg Company Act (law of July 10, 1915 on
commercial companies as amended). U.S. Realty was established on July 7, 1995.
Its Articles of Incorporation were published in the Luxembourg official gazette
Memorial on August 26, 1995. The articles of incorporation were amended for the
last time on June 30, 1999 and the amendments were published in the Memorial on
October 9, 1999. The main object of U.S. Realty as stated in article 4 of the
articles of incorporation is to invest in real estate directly or through one
or several subsidiaries or through direct or indirect shareholding in, and
convertible and other debt of, real estate companies with the purpose of
spreading investment risk and affording its shareholders the results of the
management of its assets. U.S. Realty is registered with the Register of
Commerce and Companies in Luxembourg under number B-51.654 and has its
registered office at 25b, boulevard Royal, Luxembourg L-2449.
NO DISSENTERS' RIGHTS OF APPRAISAL
SECURITY CAPITAL
Holders of Security Capital securities are not entitled under the Maryland
General Corporation Law to appraisal rights in connection with the proposal to
issue shares of Security Capital Class B common stock in connection with the
transaction.
U.S. REALTY
Under Luxembourg company law, there is no established mechanism by which
holders of U.S. Realty shares could seek any appraisal or similar determination
of the fair value of their shares by a court in connection with the transaction
or the liquidation.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying pro forma condensed consolidated financial statements for
Security Capital reflect the acquisition of the assets and the assumption of
(or provision of the necessary funds to satisfy) the liabilities of U.S. Realty
in exchange for shares of Security Capital Class B common stock (and cash, to
be used for the limited cash substitution described below). Shareholders of
U.S. Realty (except those shareholders who vote against the transaction and
choose cash), will receive 1.15 shares of Security Capital Class B common stock
for each U.S. Realty share. If the transaction is completed, U.S. Realty
shareholders who vote against the transaction will have the option of receiving
their consideration in cash. Security Capital has agreed to make up to $200
million of cash available for such shareholders.
Security Capital has arranged a new loan facility to finance most of the
cash payments and the refinancing of U.S. Realty's debt (with the balance, if
any, coming from a recent sale of securities in a strategic investee and line
of credit borrowings). Under the terms of this facility, Security Capital can
borrow up to $530 million.
The pro forma condensed consolidated financial statements assume that
approximately 40.5 million shares of Security Capital Class B common stock and
$200 million of cash are issued to U.S. Realty, and distributed to U.S. Realty
shareholders, other than Security Capital, in the transaction.
The accompanying pro forma condensed consolidated financial statements have
been prepared based on historical financial statements filed of U.S. Realty,
which are included in this joint proxy statement/prospectus, and of Security
Capital, which are incorporated by reference. The unaudited pro forma condensed
consolidated financial statements for Security Capital have been prepared as if
the transaction with U.S. Realty had been completed on January 1, 1999 for
statement of operations purposes and on September 30, 2000 for balance sheet
purposes. The acquisition will be accounted for using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16.
The pro forma adjustments were prepared based upon currently available
information. The assumptions underlying the calculation of the pro forma
adjustments are considered appropriate under the circumstances. The unaudited
pro forma condensed consolidated financial statements should be read in
conjunction with Security Capital's Consolidated Financial Statements and the
notes thereto for the year ended December 31, 1999 along with Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
are included in Security Capital's Annual Report on Form 10-K for the Year
Ended December 31, 1999, and Security Capital's Unaudited Consolidated
Financial Statements and the notes thereto for the nine months ended September
30, 2000 along with Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are included in Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2000, which
are incorporated herein by reference. They should also be read in conjunction
with U.S. Realty's financial statements for the year ended December 31, 1999
along with Management's Discussion and Analysis of Financial Condition and
Results of Operations, and U.S. Realty's unaudited financial statements and
notes thereto for the nine months ended September 30, 2000, along with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included in this joint proxy statement/prospectus. The
most significant change on a pro forma basis is that historical cost accounting
will apply to the combined company, whereas fair value accounting applied to
U.S. Realty. Specifically, changes in unrealized appreciation of assets were
reflected in U.S. Realty earnings, but are not reflected in pro forma earnings
for the combined company. Also, U.S. Realty reflected asset values in its
balance sheet based on public market prices or other valuation techniques,
whereas assets will be reflected at cost for the combined company. These
changes mean that fluctuations in the trading price of the shares of investees
will not affect the combined company's financial statements as they affect U.S.
Realty's financial statements.
The pro forma condensed consolidated financial statements have been provided
for information purposes only in response to requirements of the U.S.
Securities and Exchange Commission and they do not purport to represent what
Security Capital's financial position or results of operations would actually
have been if the transaction had occurred at such dates or to project Security
Capital's financial position or results of operations for any future date or
period.
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SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA TRANSACTION ADJUSTMENTS
----------------------------------------------------------
SECURITY
CAPITAL U.S. REALTY PURCHASE PRICE SECURITY CONSOLIDATION/
ASSETS HISTORICAL HISTORICAL ADJUSTMENT (A) CAPITAL ELIMINATION(I) PRO FORMA
------ ---------- ----------- -------------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments, at equity:
Archstone Communities
Trust................. $ 549,546 $ -- $ -- $ -- $ -- $ 549,546
ProLogis Trust......... 560,698 -- -- -- -- 560,698
Security Capital
European Realty....... 377,529 -- -- -- -- 377,529
Security Capital
Preferred Growth
Incorporated.......... 90,662 -- -- -- -- 90,662
U.S. Realty............ 871,982 -- -- (871,982)(f) -- --
SC-US Real Estate
Shares................ 14,351 -- -- -- -- 14,351
CarrAmerica Realty
Corporation........... -- 865,253 (141,882)(b) -- -- 723,371
City Center Retail
Trust................. -- 175,722 (28,814)(b) -- (146,908) --
CWS Communities
Trust................. -- 268,739 (44,067)(b) -- (224,672) --
Regency Realty
Corporation........... -- 786,142 (128,910)(b) -- (657,232) --
Storage USA, Inc....... -- 358,852 (58,844)(b) -- -- 300,008
Urban Growth Property
Trust................. -- 225,082 (36,908)(b) -- (188,174) --
Real estate, less
accumulated
depreciation........... 987,198 3,776,579 4,763,777
Investments in publicly
traded real estate
securities, at market
value.................. 10,148 -- 10,148
Cash and cash
equivalents............ 48,058 344 54,213 102,615
Other assets............ 127,380 59,056 (4,171)(c) 108,147 290,412
---------- ---------- --------- ----------- ---------- ----------
Total assets......... $3,637,552 $2,739,190 $(443,596) $ (871,982) $2,721,953 $7,783,117
========== ========== ========= =========== ========== ==========
Lines of credit......... $70,500 $ 56,000 -- $ 89,424 (g) $ 389,300 $ 605,224
Transaction loan........ -- -- -- 530,000 (g) -- 530,000
Mortgage notes payable.. 26,115 -- -- -- 758,412 784,527
Long-term debt.......... 699,658 -- -- -- 520,063 1,219,721
Convertible debentures.. 230,742 399,424 -- (399,424)(e) -- 230,742
Capital lease
obligations............ 138,012 -- -- -- -- 138,012
Accounts payable and
accrued expenses....... 159,729 10,037 -- -- 80,118 249,884
Deferred tax liability.. 32,194 29,444 (55,558)(d) -- -- 6,080
---------- ---------- --------- ----------- ---------- ---------- ---
Total liabilities.... 1,356,950 494,905 (55,558) 220,000 (h) 1,747,893 3,764,190
Minority interests...... 62 -- -- -- 974,060 974,122
Shareholders' equity:
Class A common
shares................ 11 -- -- -- -- 11
Class B common
shares................ 535 -- -- 405 (h) -- 940
Series B preferred
shares................ 257,642 -- -- -- -- 257,642
Additional paid-in
capital............... 2,213,546 -- -- 763,860 (h) -- 2,977,406
Accumulated other
comprehensive
income................ (50,091) -- -- -- -- (50,091)
Accumulated deficit.... (141,103) -- -- -- -- (141,103)
U.S. Realty's equity... -- 2,244,285 (388,038)(f) (1,856,247)(h) -- --
---------- ---------- --------- ----------- ---------- ----------
Total shareholders'
equity................. 2,280,540 2,244,285 (388,038) (1,091,982) -- 3,044,805
---------- ---------- --------- ----------- ---------- ----------
Total liabilities and
shareholders' equity... $3,637,552 $2,739,190 $(443,596) $ (871,982) $2,721,953 $7,783,117
========== ========== ========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
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SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
SEPTEMBER 30, 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(a) Represents adjustments to record U.S. Realty's historical assets and
liabilities at their respective purchase values based on the purchase
method of accounting. The assumed purchase price was computed as follows:
<TABLE>
<S> <C>
Issuance of Security Capital Class B common stock (1)....... $ 764,265
Cash payments to U.S. Realty dissenting shareholders (2).... 200,000
Cash payment to U.S. Realty for redemption of the
convertible debentures..................................... 399,424
Assumption of U.S. Realty's liabilities at estimated fair
value...................................................... 66,037
Costs incurred by Security Capital (3)...................... 20,000
----------
Assumed purchase price...................................... $1,449,726
==========
</TABLE>
--------
(1) Represents the value of 40,545 shares of Security Capital Class B
common stock that will be exchanged for the assumed 35,256 outstanding
shares of U.S. Realty representing the U.S. Realty shares not owned by
Security Capital and its subsidiaries and by shareholders who vote
against the transaction and choose cash (based on the exchange ratio
of 1.15 shares of Security Capital Class B common stock to one U.S.
Realty share). The value of the Class B common stock is based on the
closing price of the Security Capital Class B common stock for the
three business days before and after the transaction was announced on
September 26, 2000 ($18.85 per share). The assumed outstanding shares
of U.S. Realty are calculated as follows:
<TABLE>
<S> <C>
U.S. Realty shares outstanding as of September 30, 2000......... 74,884
Less U.S. Realty shares owned by Security Capital............... (30,402)
Less U.S. Realty shares assumed to be purchased for cash........ (9,226)
-------
Assumed outstanding shares of U.S. Realty....................... 35,256
=======
</TABLE>
(2) Represents the cash payment to cash-electing U.S. Realty shareholders
of $21.68 per share based upon the value of Security Capital Class B
common stock issued.
(3) Represents costs to be incurred by Security Capital and U.S. Realty in
connection with the transaction ($19,500 of investment banking and
professional fees and $500 for other costs including printing,
regulatory filings and transfer costs).
(b) Represents the reduction in basis of U.S. Realty's noncurrent assets in
accordance with the purchase method of accounting based on the assumed
purchase price (see note (a)). Prior to its acquisition by Security
Capital, U.S. Realty reported its assets using the fair value method of
accounting. Therefore, the information reflected in the U.S. Realty
historical column represents the values determined by U.S. Realty under
fair value accounting consistent with its past practice. Because the
acquisition by Security Capital is at a price that is less than such value
of the assets, there is approximately $439,425 of negative goodwill, which
must be allocated to the long-lived assets acquired.
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SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET--(CONTINUED)
SEPTEMBER 30, 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A summary of the recorded values of U.S. Realty's assets, the calculation of
negative goodwill and the calculation of the adjustment for the reduction in
basis of U.S. Realty's noncurrent assets are as follows:
<TABLE>
<S> <C>
Recorded value of investments in operating companies.......... $2,679,790
Book value of U.S. Realty's other assets...................... 59,400
Adjustment to recorded value of other assets and liabilities
(see notes (c) and (d))...................................... 21,943
----------
2,761,133
Less purchase price (see note (a))............................ 1,449,726
Less existing Security Capital investment in U.S. Realty...... 871,982
----------
Negative goodwill............................................. $ 439,425
==========
</TABLE>
In accordance with generally accepted accounting principles, the negative
goodwill is applied pro-rata to U.S. Realty's long-lived assets, which are
its investments in operating companies.
(c) Elimination of U.S. Realty's deferred financing costs related to the debt
that will be repaid in connection with the transaction.
(d) As a result of the transaction, a capital loss carryforward of $74,613 and
a net deferred tax asset of $61,102 are created. The capital loss
carryforward can be utilized and is recorded as a reduction to the
historical deferred tax liability. Because the realizability of the net
deferred tax asset of $61,102 is uncertain, a valuation allowance has been
established in accordance with Statement of Financial Accounting Standards
No. 109, fully offsetting this asset. In the third quarter of 2000, U.S.
Realty recorded deferred taxes on the unrealized gain on its investment in
Regency Realty Corporation under the U.S. Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"). This deferred tax is eliminated as
Security Capital is not subject to FIRPTA.
(e) Security Capital will pay approximately $399,424 to redeem U.S. Realty's
convertible debentures.
(f) Adjustment of U.S. Realty's shareholders' equity based on the assumed fair
value of the shares to be received from Security Capital as calculated
below:
<TABLE>
<S> <C>
40,545 shares of Security Capital Class B common stock at
$18.85 per share (the assumed per share value of the Class B
common stock to be issued to U.S. Realty holders on a 1.15
to one basis as described in note (a))...................... $ 764,265
Existing Security Capital investment in U.S. Realty.......... 871,982
Cash paid to U.S. Realty cash-electing shareholders.......... 200,000
Transaction costs incurred by Security Capital............... 20,000
U.S. Realty's shareholders' equity as of September 30, 2000.. (2,244,285)
-----------
Total adjustment........................................... $ (388,038)
===========
(g) The components of the acquisition to be financed are:
U.S. Realty convertible debentures........................... $ 399,424
Cash paid to U.S. Realty cash-electing shareholders plus
transaction costs........................................... 220,000
-----------
Total financed............................................. 619,424
Less transaction loan financing.............................. (530,000)
-----------
Net increase in lines of credit outstanding................ $ 89,424
===========
</TABLE>
110
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET--(CONTINUED)
SEPTEMBER 30, 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(h) Represents (i) the 1.15 to one exchange of 35,256 shares of U.S. Realty
shares for 40,545 shares of Security Capital Class B common stock; (ii)
the par value of shares issued at $0.01 par value ($405) which results in
$763,860 of additional paid-in capital; (iii) the assumed payment of $200
million to U.S. Realty's non-consenting shareholders; and (iv) the
elimination of the remainder of U.S. Realty's shareholders' equity.
(i) Subsequent to the acquisition, Security Capital intends to continue
operating former U.S. Realty's assets as part of a real estate operating
company. As a result, Security Capital will not use fair value accounting
as U.S. Realty did, but rather will continue to use historical cost
accounting for those assets. In addition, the former investments in real
estate companies of U.S. Realty will now be consolidated (where Security
Capital will own greater than 50% of an entity) or reported utilizing the
equity method of accounting where Security Capital does not have control,
yet owns greater than 20%. Thus, purchase accounting adjustments are
required for U.S. Realty's consolidated subsidiaries (City Center Retail
Trust, CWS Communities Trust, Regency Realty Corporation and Urban Growth
Property Trust, collectively the "consolidated entities"). Since the value
of the consolidated entities' assets exceeds Security Capital's new basis
in them, negative goodwill is created which is then allocated to the
consolidated entities' long-lived assets, namely their real estate.
111
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SECURITY U.S. PRO FORMA
CAPITAL REALTY TRANSACTION CONSOLIDATION/
HISTORICAL HISTORICAL ADJUSTMENTS (J) ELIMINATION (U) PRO FORMA
---------- ---------- --------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Income:
Equity in earnings
(loss) of:
Archstone Communities
Trust................. $ 71,361 $ -- $ -- $ -- $ 71,361
ProLogis Trust......... 34,539 -- -- -- 34,539
Security Capital
European Realty....... 1,968 -- -- -- 1,968
Security Capital
Preferred Growth
Incorporated.......... 18,861 -- -- -- 18,861
U.S. Realty............ 153,066 -- (153,066)(k) -- --
SC-US Real Estate
Shares................ 6,077 -- -- -- 6,077
CarrAmerica Realty
Corporation........... -- 39,687 18,107 (l) -- 57,794
City Center Retail
Trust................. -- -- (14,232)(l) 14,232 --
CWS Communities Trust.. -- 10,934 (5,233)(l) (5,701) --
Regency Realty
Corporation........... -- 49,353 (12,582)(l) (36,771) --
Storage USA, Inc....... -- 24,355 (4,678)(l) -- 19,677
Urban Growth Property
Trust................. -- -- 6,927 (l) (6,927) --
Withholding tax........ -- (18,595) 18,595 (m) -- --
Realized capital gains
(losses).............. 125,685 (83,436) 83,059 (n) -- 125,308
Change in unrealized
gain (loss)........... (165) 433,589 (433,589)(o) -- (165)
Financial Services
Division revenues..... 64,638 -- (24,745)(p) -- 39,893
Other income........... 4,235 5,148 (745)(s) 21,416 30,054
Property revenue....... 204,303 -- -- 325,759 530,062
-------- -------- --------- -------- --------
Total income.......... 684,568 461,035 (522,182) 312,008 935,429
-------- -------- --------- -------- --------
Expenses:
Financial Services
Division expenses..... 51,574 -- -- -- 51,574
Operating advisor
fees.................. -- 23,415 (23,415)(p) -- --
General, administrative
and other expenses.... 32,730 2,386 (1,330)(q) 22,868 56,654
Depreciation and
amortization.......... 34,358 -- (1,926)(r) 59,545 91,977
Interest expense....... 88,462 28,299 6,394 (s) 74,370 197,525
Property expenses...... 86,688 -- -- 77,803 164,491
Homestead special
charge................ (1,519) -- -- -- (1,519)
Provision for loss on
real estate........... 71,000 -- -- 6,909 77,909
Losses from disposition
of real estate........ -- -- -- 16,384 16,384
-------- -------- --------- -------- --------
Total expenses........ 363,293 54,100 (20,277) 257,879 654,995
-------- -------- --------- -------- --------
Earnings from operations
before minority
interest and income
taxes.................. 321,275 406,935 (501,905) 54,129 280,434
Minority interests'
share in net
earnings.............. (2,153) -- -- (52,031) (54,184)
Income taxes........... (94,865) (29,444) 62,683 (t) -- (61,626)
-------- -------- --------- -------- --------
Earnings from
operations............. 224,257 377,491 (439,222) 2,098 164,624
Preferred share
dividends............. (13,526) -- -- (2,098) (15,624)
-------- -------- --------- -------- --------
Net earnings from
operations attributable
to common shares....... $210,731 $377,491 $(439,222) $ -- $149,000
======== ======== ========= ======== ========
Weighted average common
shares outstanding:
Basic.................. 108,625 40,545 149,170
======== ========= ========
Diluted................ 120,738 40,545 161,283
======== ========= ========
Per share net earnings
from operations
attributable to common
shares:
Basic.................. $ 1.93 $ 1.00
======== ========
Diluted................ $ 1.81 $ 0.97
======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited
pro forma condensed consolidated financial statements.
112
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SECURITY U.S. PRO FORMA
CAPITAL REALTY TRANSACTION CONSOLIDATION/ PRO
HISTORICAL HISTORICAL ADJUSTMENTS (J) ELIMINATION (U) FORMA
---------- ---------- --------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Income:
Equity in earnings
(loss) of:
Archstone Communities
Trust................. $ 79,700 $ -- $ -- $ -- $ 79,700
ProLogis Trust......... 41,072 -- -- -- 41,072
Security Capital
European Realty....... (2,669) -- -- -- (2,669)
Security Capital
Preferred Growth
Incorporated.......... 2,888 -- -- -- 2,888
U.S. Realty............ (46,798) -- 46,798 (k) -- --
SC-US Real Estate
Shares................ 11,247 -- -- -- 11,247
CarrAmerica Realty
Corporation........... -- 52,916 2,490 (l) -- 55,406
City Center Retail
Trust................. -- 6,990 643 (l) (7,633) --
CWS Communities Trust.. -- 9,057 (2,560)(l) (6,497) --
Regency Realty
Corporation........... -- 57,852 (7,287)(l) (50,565) --
Storage USA, Inc....... -- 31,532 (5,082)(l) -- 26,450
Urban Growth Property
Trust................. -- 10,160 1,274 (l) (11,434) --
Public other investment
positions............. -- 8,925 -- -- 8,925
Withholding tax........ -- (24,152) 24,152 (m) -- --
Realized capital gains
(losses).............. 1,389 (65,587) -- (n) -- (64,198)
Change in unrealized
gain (loss)........... (1,114) (152,693) 152,693 (o) -- (1,114)
Financial Services
Division revenues..... 88,045 -- (34,331)(p) -- 53,714
Other income........... 9,455 7,763 (3,575)(s) 23,630 37,273
Property revenue....... 226,730 -- -- 394,501 621,231
--------- --------- -------- -------- --------
Total income.......... 409,945 (57,237) 175,215 342,002 869,925
--------- --------- -------- -------- --------
Expenses:
Financial Services
Division expenses..... 87,026 -- -- -- 87,026
Operating advisor
fees.................. -- 32,506 (32,506)(p) -- --
General, administrative
and other expenses.... 56,349 3,572 (1,825)(q) 39,265 97,361
Depreciation and
amortization.......... 44,915 -- (2,569)(r) 68,957 111,303
Interest expense....... 133,454 49,418 4,095 (s) 71,274 258,241
Property expenses...... 101,795 -- -- 102,946 204,741
Homestead special
charge................ 65,296 -- -- -- 65,296
Loss on sale of
Strategic Hotel....... 55,245 -- -- -- 55,245
--------- --------- -------- -------- --------
Total expenses........ 544,080 85,496 (32,805) 282,442 879,213
--------- --------- -------- -------- --------
Loss from operations
before minority
interest and
income taxes........... (134,135) (142,733) 208,020 59,560 (9,288)
Minority interests'
share in net loss..... 20,429 -- -- (57,316) (36,887)
Income taxes........... 14,849 (4,555) (22,850)(t) -- (12,556)
--------- --------- -------- -------- --------
Loss from operations.... (98,857) (147,288) 185,170 2,244 (58,731)
Preferred share
dividends.............. (18,035) -- -- (2,244) (20,279)
--------- --------- -------- -------- --------
Net loss from operations
attributable to common
shares................. $(116,892) $(147,288) $185,170 $ -- $(79,010)
========= ========= ======== ======== ========
Weighted average common
shares outstanding:
Basic.................. 119,255 40,545 159,800
========= ======== ========
Diluted................ 119,255 40,545 159,800
========= ======== ========
Per share net loss from
operations attributable
to common shares:
Basic.................. $ (0.98) $ (0.49)
========= ========
Diluted................ $ (0.98) $ (0.49)
========= ========
</TABLE>
The accompanying notes are an integral part of the unaudited
pro forma condensed consolidated financial statements.
113
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(j) The relative impact of transaction-related increases in pro forma earnings
from operations reflected in the accompanying pro forma condensed
consolidated statements of operations should not be extrapolated to future
periods.
(k) Elimination of Security Capital's equity in earnings of U.S. Realty.
(l) As a result of the transaction, Security Capital will account for its
investments in former investees of U.S. Realty under the historical cost
method which would require equity or consolidation depending on Security
Capital's ownership percentage. As a result, it is necessary to replace
the dividend revenue recorded by U.S. Realty with equity in earnings of
each investee:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------------------
EQUITY
DIVIDENDS IN PRO FORMA
RECEIVED EARNINGS ADJUSTMENT
--------- -------- ----------
<S> <C> <C> <C>
CarrAmerica Realty Corporation............. $ 39,687 $ 57,794 $ 18,107
City Center Retail Trust................... -- (14,232) (14,232)
CWS Communities Trust...................... 10,934 5,701 (5,233)
Regency Realty Corporation................. 49,353 36,771 (12,582)
Storage USA, Inc........................... 24,355 19,677 (4,678)
Urban Growth Property Trust................ -- 6,927 6,927
-------- -------- --------
$124,329 $112,638 $(11,691)
======== ======== ========
<CAPTION>
FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1999
------------------------------
EQUITY
DIVIDENDS IN PRO FORMA
RECEIVED EARNINGS ADJUSTMENT
--------- -------- ----------
<S> <C> <C> <C>
CarrAmerica Realty Corporation............. $ 52,916 $ 55,406 $ 2,490
City Center Retail Trust................... 6,990 7,633 643
CWS Communities Trust...................... 9,057 6,497 (2,560)
Regency Realty Corporation................. 57,852 50,565 (7,287)
Storage USA, Inc........................... 31,532 26,450 (5,082)
Urban Growth Property Trust................ 10,160 11,434 1,274
-------- -------- --------
$168,507 $157,985 $(10,522)
======== ======== ========
</TABLE>
(m) Elimination of U.S. Realty's withholding and other taxes since dividends
would be received directly by Security Capital and not be subject to
withholding tax.
(n) For the nine months ended September 30, 2000, U.S. Realty recognized
realized losses on the sale of its investment in Security Capital's debt
and equity securities ($68,857) and a write-down of its investment in City
Center Retail Trust because of losses on sales of properties in that
entity. On a pro forma basis, the realized portion of the Security Capital
loss is offset by a change in unrealized gains/losses below and the loss
on City Center Retail Trust is recognized in equity in its earnings.
(o) As a result of Security Capital using the historical cost method of
accounting for its investees, U.S. Realty's change in unrealized
gain/losses in fair value will be eliminated. In addition, U.S. Realty
held debt and equity securities of Security Capital which were recorded at
market value. The change in unrealized gains/losses of these securities
will also be eliminated.
(p) Elimination of Security Capital management fee for advising U.S. Realty.
114
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(q) While Security Capital expects that additional general and administrative
cost savings could result from the transaction, such savings could not be
factually supported and quantified within the U.S. Securities and Exchange
Commission regulations governing the preparation of the pro forma
financial statements. Consequently, no adjustment has been made to the pro
forma financial statements.
(r) Represents the net decrease in depreciation of real estate as a result of
the reduction in basis to record the excess of historical value over
purchase price (see note (b)).
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
SEPTEMBER DECEMBER 31,
30, 2000 1999
------------ ------------
<S> <C> <C>
Reduction in real estate basis.................. $(130,461) $(130,461)
Less amount of reduction allocated to:
Developments in progress...................... 30,389 30,389
Land held for development..................... 161 161
Land portion of operating facilities.......... 22,855 22,855
--------- ---------
Depreciable portion of the reduction in basis... (77,056) (77,056)
Estimated annual reduction in depreciation
expense based on assumed weighted average life
of 30 years.................................... (2,569) (2,569)
Portion of year effective....................... 0.75 1.00
--------- ---------
Estimated reduction in depreciation for the
period.......................................... $ (1,926) $ (2,569)
========= =========
</TABLE>
(s) The increase in interest expense results from the following:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED
SEPTEMBER DECEMBER 31,
30, 2000 1999
------------ ------------
<S> <C> <C>
Elimination of U.S. Realty's interest expense... $(28,299) $(49,418)
Increase related to borrowing on credit
facilities to fund the cash payment to
dissenters, transaction-related costs
identified in notes (a) and (g) and repayment
of U.S. Realty's convertible debentures and
line of credit (1)............................. 35,438 57,088
Elimination of interest paid to U.S. Realty on
its holdings of Security Capital's convertible
debentures..................................... (745) (3,575)
-------- --------
Net increase in interest expense................ $ 6,394 $ 4,095
======== ========
</TABLE>
--------
(1) Computed using Security Capital's actual weighted average interest
rate of 7.56% for the nine months ended September 30, 2000 and 6.43%
for the year ended December 31, 1999.
(t) Additional income taxes on U.S. Realty's taxable earnings at the statutory
tax rate of 35% and the elimination of deferred taxes recorded by U.S.
Realty (see note (d)).
(u) Represents the consolidation of entities that will be majority owned by
Security Capital. Included in the consolidation is the elimination of
financial services revenues charged to these companies. These amounts
totaled $1,330 and $1,825 for the nine month period ending September 30,
2000 and the year ended December 31, 1999, respectively.
(v) The above pro forma financial information assumes that $200 million is
paid to non-consenting U.S. Realty shareholders. For every reduction of
$50 million in payments, earnings from operations will increase by $0.01
per share on an annual basis.
115
<PAGE>
CERTAIN TAX BASIS INFORMATION OF SECURITY CAPITAL
In the transaction, Security Capital will, for U.S. tax purposes, take a tax
basis in SC-Holdings that is equal to the entire purchase price paid to U.S.
Realty for the equity interests in SC-Holdings. SC-Holdings and its wholly
owned Luxembourg subsidiaries will retain their current adjusted tax basis in
their strategic investments immediately following the transaction. Security
Capital intends to operate in a manner that preserves the existing adjusted tax
basis in the strategic investments. Current aggregate adjusted tax basis in the
shares of the three largest strategic investments held by SC-Holdings and its
wholly owned subsidiaries is approximately as follows:
<TABLE>
<CAPTION>
AGGREGATE
ADJUSTED TAX BASIS
STRATEGIC INVESTMENT (IN $000'S)
-------------------- ------------------
<S> <C>
CarrAmerica......................... $690,782
Storage USA......................... $385,373
Regency............................. $729,705
</TABLE>
116
<PAGE>
OWNERSHIP OF U.S. REALTY SHARES
The following table sets forth the beneficial ownership of U.S. Realty
shares as of December 8, 2000 by (a) each person that beneficially owns more
than 5% of the U.S. Realty shares outstanding (based on publicly available
information, other than with respect to Security Capital), (b) each current
director of U.S. Realty and (c) all directors and executive officers as a
group. Share option equivalents granted to Messrs. Coenen, Kremer, Light, Mauck
and Moes are not reflected in the table below.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------------
AMOUNT AND NATURE PERCENT OF CLASS
OF BENEFICIAL OWNERSHIP BENEFICIALLY OWNED
----------------------- ------------------
<S> <C> <C>
5% SHAREHOLDERS
Security Capital Group
Incorporated (1)............. 30,401,683 40.6
DIRECTORS
Erich Coenen.................. -0- *
Claude Kremer................. -0- *
Jay O. Light.................. 9,500 *
James Mauck................... 8,500 *
Constance B. Moore............ -0- *
Francois Moes................. -0- *
William D. Sanders............ 9,500 *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP
(11 PERSONS)................... 27,505 *
</TABLE>
--------
* Less than 1%.
(1) Includes 30,386,683 shares owned by Security Capital Realty Shares Limited
and 15,000 shares owned by Security Capital U.S. Realty Management Holdings
S.A., subsidiaries of Security Capital.
117
<PAGE>
DESCRIPTION OF SECURITY CAPITAL STOCK
GENERAL
The following description of Security Capital's stock is qualified by the
full text of Security Capital's Charter, Articles Supplementary and Bylaws,
attached as exhibits to Security Capital's Annual Report on Form 10-K for the
year ended December 31, 1999, and incorporated in this document by reference.
See "Where You Can Find More Information." Capitalized terms used in the
summary below without definition have the meanings given to them in those
documents.
AUTHORIZED CAPITAL STOCK
As of November 30, 2000, Security Capital's authorized stock consisted of
15,543,012 shares of Class A Common Stock, par value $0.01 per share;
234,133,373 shares of Class B Common Stock, par value $0.01 per share; 257,642
shares of Series B Cumulative Convertible Redeemable Voting Preferred Stock,
par value $0.01 per share; and 65,973 shares of Series A Junior Participating
Preferred Stock, par value $.01 per share.
SECURITY CAPITAL CLASS A COMMON STOCK
Holders of Security Capital Class A common stock are entitled to one vote
for each share on all matters upon which shareholders are entitled to vote.
Holders of Class A common stock vote on all matters submitted to a vote of
shareholders as a single class with the holders of Class B common stock. Each
share of Class A common stock may at any time, at the option of the holder of
record, be converted into fifty (50) fully paid and nonassessable shares of
Class B common stock. Holders of Class A common stock are entitled to such
dividends or other distributions (including liquidating distributions) per
share, whether in cash or in kind, in stock (including a stock split) or by any
other means, when and as may be authorized by the board of directors of
Security Capital, but a holder of Class A common stock's rights to dividends
and rights upon liquidation are junior to the rights of holders of any
preferred shares.
SECURITY CAPITAL CLASS B COMMON STOCK
Holders of Security Capital Class B common stock are entitled to one two-
hundredth ( 1/200th) of a vote for each share of Class B common stock on all
matters upon which shareholders are entitled to vote. Holders of Class B common
stock vote on all matters submitted to a vote of shareholders as a single class
with the holders of Class A common stock. Holders of Class B common stock do
not have any conversion, redemption or preemptive rights. The holders of Class
B common stock are entitled to dividends or other distributions (including
liquidating distributions) per share, whether in cash, in kind, in stock
(including a stock split), or by any other means, equal to one-fiftieth (
1/50th) of the amount per share authorized by the Security Capital board for
each share of Class A common stock. At such time as there are no shares of
Class A common stock outstanding, holders of Class B common stock would be
entitled to such dividends and distributions as may be authorized by the
Security Capital board. The rights of a holder of Class B common stock to
dividends and rights upon liquidation are junior to the rights of holders of
any preferred shares.
SECURITY CAPITAL SERIES B CUMULATIVE CONVERTIBLE REDEEMABLE VOTING PREFERRED
STOCK ("SERIES B PREFERRED STOCK")
Voting. So long as any shares of Series B preferred stock are outstanding,
in addition to any other vote or consent of shareholders required by law or by
Security Capital's charter, the affirmative vote or consent of at least a
majority of the votes entitled to be cast by the holders of Series B preferred
stock at the time outstanding would be necessary for effecting or validating:
. Any amendment, alteration or repeal of any of the provisions of the
Articles Supplementary providing for the Series B preferred stock, that
adversely affects the powers, rights or preferences of the holders of
Series B preferred stock; provided, however, that the amendment of the
provisions of the Security
118
<PAGE>
Capital charter so as to authorize or create or to increase the
authorized amount of stock of any class ranking below or on a parity
with, Series B preferred stock, is not deemed to adversely affect the
powers, rights or preferences of the holders of Series B preferred
stock; or
. the authorization, reclassification, or creation of, or the increase in
the authorized amount of, any stock of any class or any security
convertible into stock of any class ranking prior to the Series B
preferred stock in the distribution of assets on any liquidation,
dissolution, or winding up of Security Capital or in the payment of
dividends.
For purposes of this independent vote, each share of Series B preferred
stock is entitled to vote as a separate class with one vote per share of
Series B preferred stock, except when any other series of preferred stock
might be entitled to vote together with Series B preferred stock as a single
class on any matter. In that case, the Series B preferred stock and such other
series are entitled to one vote per $1,000 of stated liquidation preference.
The Security Capital charter further provides that this vote may be avoided
if, at or prior to the time when such amendment, alteration or repeal is to
take effect, or when the issuance of any such security is to be made,
provision is made for the redemption of all shares of Series B preferred stock
at the time outstanding and Security Capital deposits an amount of cash
necessary to make this redemption with a bank or trust company located in the
continental United States that has capital and surplus of at least $50 million
in trust for the pro rata benefit of the holders of the shares called for
redemption.
Holders of Series B preferred stock are entitled to vote as one voting
group with holders of Class A common stock and holders of Class B common stock
on the following matters:
. Any amendment, alteration or repeal of any of the provisions of Security
Capital's charter unless Security Capital exercises the redemption
mechanism described above; or
. A consolidation with or merger of Security Capital into another entity,
or a consolidation with or merger of another entity into Security
Capital, or a sale or transfer of all or substantially all of Security
Capital's assets, or the liquidation or dissolution of Security Capital.
When voting on such matters, the holder of each share of Series B preferred
stock is entitled to a number of votes equal to the number of shares of Class
B common stock into which such share of Series B preferred stock could be
converted on the record date for determining the shareholders entitled to
vote, rounded to the nearest one-tenth ( 1/10th) of a vote.
In all other instances where matters are submitted to a vote of the
shareholders, holders of Series B preferred stock are entitled to vote as a
single class with holders of Class A common stock and holders of Class B
common stock. In these instances, the holder of each share of Series B
preferred stock would be entitled to a number of votes equal to one-half of
the number of shares of Class B common stock into which such share of Series B
preferred stock could be converted on the record date for determining those
shareholders entitled to vote, rounded to the nearest one-tenth ( 1/10th) of a
vote.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of Security Capital, whether voluntary or involuntary, but not in
the context of a merger or in the context of a sale of business or property or
share exchange, before any payment or distribution of the assets of Security
Capital can be made to or set apart for the holders of junior stock (such as
Class A common stock and Class B common stock), the holders of Series B
preferred stock would be entitled to receive $1,000 per share of Series B
preferred stock plus an amount equal to all dividends (whether or not earned
or declared) accrued and unpaid thereon to the date of final distribution to
such holders. After this payment, the holders of Series B preferred stock
would not be entitled to any further payment based on this Series B preferred
stock. If, upon any liquidation, dissolution or winding up of Security
Capital, the assets of Security Capital distributable among the holders of
Series B preferred stock were insufficient to pay in full the liquidation
preference and the liquidating payments on any
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class or series of stock ranking on a parity with the Series B preferred stock,
then these assets would be distributed among the holders of Series B preferred
stock and any such class or series of stock ranking on a parity with the Series
B preferred stock ratably in accordance with the amount of their respective
liquidation preferences.
Conversion. Holders of shares of Series B preferred stock have the right
subject to compliance with the provisions of the Security Capital charter, at
any time to convert those shares into the number of fully paid and non-
assessable shares of Class B common stock obtained by dividing the aggregate
liquidation preference of such shares by a specified conversion price that may
be adjusted from time to time. The current conversion price is $39.00.
Dividends. The holders of Series B preferred stock are entitled to receive,
when, as and if declared by the Security Capital board of directors, cumulative
preferential dividends payable in cash in an amount per share equal to 7.00% of
the liquidation preference per annum (equivalent to $70 per share). Such
dividends accrue and are fully cumulative from the date of issuance. So long as
any shares of Series B preferred stock are outstanding, no dividends (other
than dividends or distributions paid solely in shares of, or options, warrants
or rights to subscribe for or purchase shares of fully junior stock) can be
paid or set apart for payment upon any junior stock, nor can any junior stock
be redeemed, purchased or otherwise acquired (except in limited situations)
unless (i) the full cumulative dividends on all outstanding shares of Series B
preferred stock and any parity stock of Security Capital were declared and paid
or declared and set apart for payment for all past dividend periods with
respect to the Series B preferred stock and all past dividend periods with
respect to such parity stock and (ii) sufficient funds were declared and paid
or declared and set apart for the payment of the dividends for the current
dividend period with respect to the Series B preferred stock and the current
dividend period with respect to such Parity Stock.
Redemption. Security Capital may redeem, in whole or in part, Series B
preferred stock after the fifth anniversary of its date of issuance (May 11,
2003). On and after this date, Security Capital may redeem the Series B
preferred stock by (a) paying a redemption price of $1,000 per share of Series
B preferred stock, payable in cash, plus all accrued and unpaid dividends,
without interest, or (b) issuing and delivering to each holder of Series B
preferred stock to be redeemed the number of fully paid and non-assessable
shares of Class B common stock obtained by dividing the aggregate liquidation
preference (excluding any accrued and unpaid dividends which must be paid in
cash) by the current conversion price. Security Capital may effect a redemption
using Class B common stock only if the Class B common stock is trading higher
than the current conversion price for 20 or more trading days within a period
of 30 consecutive trading days.
PREFERRED SHARE PURCHASE RIGHTS AND SERIES A JUNIOR PARTICIPATING PREFERRED
STOCK
On April 21, 1997, the board of directors of Security Capital declared a
dividend of one preferred share purchase right for each share of Class A common
stock and each share of Class B common stock outstanding at the close of
business on April 21, 1997. The holders of any additional shares of Class A
common stock and Class B common stock issued after April 21, 1997 and before
the redemption or expiration of the purchase rights will also be entitled to
one purchase right for each such additional share of Class A common stock and
Class B common stock issued. Each preferred share purchase right entitles the
registered holder, under certain circumstances, to purchase from Security
Capital, in the event the underlying share is a Class A common share, one one-
hundredth (1/100th) of a share of Series A Junior Participating Preferred Stock
(a "participating preferred share") of Security Capital at a purchase price of
$6,000 per one one-hundredth (1/100th) of a participating preferred share (the
"Purchase Price"), subject to adjustment. In the event the underlying share is
a Class B common share, the preferred share purchase right entitles the
registered holder under certain circumstances to purchase from Security Capital
one five-thousandth (1/5000th) of a participating preferred share of Security
Capital at a purchase price of $120 per one five-thousandth (1/5000th) of a
participating preferred share. The description and terms of the preferred share
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").
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The preferred share 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 U.S. Realty 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"), (2) 15 business days (or such later date as may be
determined by action of the board of directors 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 or (3) 10 business days (or
such later date as may be determined by action of the board of directors prior
to such time as any person or group of affiliated persons becomes an acquiring
person) following the filing by any person or group of persons of, or the first
public announcement of the intention of any person or group of persons to file,
any application or other document with any federal or state regulatory
authority seeking approval of or otherwise indicating an intention to enter
into, any transaction or series of transactions 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
other than a transaction in which newly issued Class A common stock or Class B
common stock, as the case may be, are issued directly by Security Capital to
such person or group of persons. Until the rights distribution date (or earlier
redemption or expiration of the preferred share purchase rights), new
certificates issued after April 21, 1997 upon transfer or new issuance of
Security Capital Class A common stock or Class B common stock will contain a
notation incorporating the Rights Agreement by reference. Notwithstanding the
foregoing, if the board of directors 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 shares of Security Capital Class A or Class B common stock
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 preferred share purchase rights will expire on April 21, 2007, unless
this final expiration date is extended or unless the preferred share 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 preferred share
purchase rights are subject to adjustment under certain circumstances from time
to time to prevent dilution. With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price.
Participating preferred shares purchasable upon exercise of the purchase
rights will not be redeemable. Each participating preferred share will be
entitled to a minimum preferential quarterly distribution payment of $1 per
share but will be entitled to an aggregate distribution of 100 times the
distribution declared per share of Security Capital Class A common stock, or if
no Security Capital Class A common stock is outstanding, two times the
distribution declared per share of Security Capital Class B common stock. Each
participating preferred share will have 100 votes, voting together with the
common stock. 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 share of Security Capital Class A common stock, or if no
Security Capital Class A common stock is outstanding, two times the payment
made per share of Security Capital Class B common stock. In the event of any
merger, consolidation or other transaction in which Security Capital Class A
common stock or Security Capital Class B common stock is exchanged, each
participating preferred share will be entitled to receive 100 times the amount
received per share of Security Capital Class A common stock or, if no Security
Capital Class A common stock is outstanding, two times the amount received per
share of Security Capital Class B common stock, as the case may be. In the
event of issuance of participating preferred shares upon exercise of the
preferred share purchase rights, in order to facilitate trading, a depositary
receipt may be issued for each one one-hundredth (1/100th) or one five-
thousandth (1/5000th) of a participating preferred share. The preferred share
purchase rights will be protected by customary antidilution provisions.
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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 preferred share purchase right, other than preferred share purchase rights
beneficially owned by the acquiring person (which will become void), will
thereafter have the right to receive upon exercise a number of shares of
Security Capital Class A common stock or Security Capital Class B common stock,
as the case may be, having a market value (determined in accordance with the
Rights Agreement) of twice the exercise price. In lieu of the issuance of
shares of Security Capital Class A common stock or Security Capital Class B
common stock, as the case may be, upon exercise of preferred share purchase
rights, under certain circumstances the board of directors may, and under
additional circumstances is required to, take such action as may be necessary
to cause Security Capital to issue or pay upon the exercise of preferred share
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 Security Capital Class A common stock or
Security Capital Class B common stock, 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 or 50% or more of its consolidated assets or earning power are
sold, proper provision will be made so that each holder of a preferred share
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
Security Capital Class A common stock or Security Capital Class B common stock,
the board of directors may exchange the preferred share purchase rights (other
than preferred share purchase rights owned by that person or group which will
have become void), in whole or in part, at an exchange ratio of one share of
Security Capital Class A common stock or Security Capital Class B common stock,
as the case may be (or one one-hundredth (1/100th) or one five-thousandth
(1/5000th) of a participating preferred share as the case may be), per
preferred share purchase right (subject to adjustment).
At any time prior to the time a person or group of persons becomes an
acquiring person, the board of directors may redeem the preferred share
purchase rights in whole, but not in part, at a price of $.01 per preferred
share purchase right (the "redemption price") payable in cash, common stock or
any other form of consideration deemed appropriate by the board of directors.
The redemption of the preferred share purchase rights may be made effective at
such time, on such basis and with such conditions as the board of directors in
its sole discretion may establish. Immediately upon the effectiveness of any
redemption of the preferred share purchase rights, the right to exercise the
preferred share purchase rights will terminate and the only right of the
holders of preferred share purchase rights will be to receive the redemption
price.
The terms of the preferred share purchase rights may be amended by the board
of directors without the consent of the holders of the preferred share 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 preferred share purchase
rights and in no event shall any such amendment change the 20% threshold at
which a person acquiring beneficial ownership of Security Capital Class A
common stock or Security Capital Class B common stock becomes an acquiring
person.
The purchase rights have, and are intended to have, certain anti-takeover
effects. The preferred share purchase rights will cause substantial dilution to
a person or group that attempts to acquire Security Capital on terms not
approved by its board of directors, except pursuant to an offer conditioned on
a substantial number of preferred share purchase rights being acquired. The
preferred share purchase rights should not interfere with any merger or other
business combination approved by the board of directors since the preferred
share 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. To the extent any potential acquirors are deterred by the
purchase rights, the purchase rights could delay or prevent a change in control
or other transaction that might involve a premium price or otherwise be in the
best interests of the shareholders of Security Capital and may have the effect
of preserving incumbent management in office.
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COMPARISON OF RIGHTS OF SHAREHOLDERS
GENERAL
After the proposed transaction, shareholders of U.S. Realty, unless they
vote "against" the transaction and make a valid cash election, will become
holders of Security Capital Class B common stock. Their rights will then be
governed by the Security Capital charter, the Security Capital bylaws, and the
Maryland General Corporation Law. Presently, U.S. Realty shareholders' rights
are governed by the U.S. Realty articles of incorporation and the Luxembourg
company law and the Luxembourg law on undertakings for collective investment.
The following is a summary comparison of the material differences between
the rights of holders of Security Capital Class B common stock and holders of
U.S. Realty shares. The following summary is not a complete discussion of all
the differences between the rights of the holders of Security Capital Class B
common shareholders and U.S. Realty shareholders. The summary is qualified in
its entirety by reference to the Maryland General Corporation Law, Luxembourg
company law and the charter and bylaws of Security Capital and articles of
incorporation of U.S. Realty. For information about how to get those documents,
see "Where You Can Find More Information."
BOARD OF DIRECTORS
The Security Capital charter provides that Security Capital's board of
directors is divided into three classes with each class elected at every third
annual meeting of shareholders and serving a three-year term. The U.S. Realty
articles of incorporation do not similarly divide the U.S. Realty board of
directors into classes. U.S. Realty shareholders, rather, elect directors for
one-year terms at an annual general meeting of shareholders. A majority of U.S.
Realty's directors must be residents of Europe. There are no similar
requirements with respect to Security Capital.
NUMBER OF DIRECTORS
Security Capital's bylaws provide that the number of directors shall not be
less than the minimum number required by the Maryland General Corporation Law
(currently one), nor more than fifteen. The Security Capital board of directors
currently consists of 10 directors. The number of directors is determined by
majority vote of the entire board.
U.S. Realty's articles of incorporation provide that the number of directors
shall not be less than three. The U.S. Realty board of directors currently
consists of seven directors. The number of directors is determined by a
majority vote of shareholders present or represented at a general meeting.
REMOVAL OF DIRECTORS
Maryland law provides that, unless the charter provides otherwise (which
Security Capital's charter does not), the stockholders of a Maryland
corporation may remove any director (other than a director who is a member of a
classified board), with or without cause, and may remove a director who is a
member of a classified board only with cause, in each case by the affirmative
vote of a majority of the votes entitled to be cast for the election of
directors. Since Security Capital's board is classified, directors of Security
Capital may only be removed with cause.
The U.S. Realty articles of incorporation provide that a director may be
removed with or without cause or be replaced at any time by a resolution passed
by a majority of the votes of the shares present or represented at a general
meeting.
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VACANCIES
The Security Capital bylaws provide that a vacancy on the board of directors
for any cause other than an increase in the number of directors will be filled
by vote of the majority of the remaining directors, even if such majority may
be less than a quorum. Any vacancy in the number of directors created by an
increase in the number of directors may be filled by a majority vote of the
entire board of directors. Any individual so elected as director shall hold
office until the next annual meeting of shareholders and until his or her
successor is elected and qualifies.
The U.S. Realty articles of incorporation provide that a vacancy on the
board of directors may be filled by a majority vote of at least two remaining
directors, who are required under Luxembourg law to have been appointed at a
general meeting of shareholders. The articles further provide that the
shareholders make a final decision regarding this temporary nomination at their
next general meeting.
STANDARD OF CONDUCT FOR DIRECTORS
Maryland law requires a director of a Maryland corporation to perform his
duties as a director in good faith, in a manner he reasonably believes to be in
the best interests of the corporation and with the care that an ordinarily
prudent person in a like position would use under similar circumstances. An act
of a director of a corporation is presumed to satisfy these standards. A
director is not required to accept, recommend or respond on behalf of the
corporation to any proposal by a potential acquiror. An act of a director
relating to an acquisition or potential acquisition of control of a corporation
may not be subject to a higher duty or greater scrutiny than is applied to any
other act of a director.
Luxembourg law requires a director of a Luxembourg corporation to perform
his duties as a director in good faith and with the care that an ordinarily
prudent person ("bon pere de famille") would use. The law does not set specific
performance standards a director must comply with as to specific transactions,
such as major acquisitions or disposals.
POWER TO ISSUE ADDITIONAL STOCK
Maryland law authorizes a Maryland corporation to issue from time to time
stock of any class authorized by its charter and securities convertible into
stock of any class authorized by its charter. Security Capital's charter
permits its board of directors to authorize the issuance from time to time of
shares of its stock of any class, whether now or hereafter authorized, or
securities convertible into or exchangeable for shares of its stock of any
class, whether now or hereafter authorized, for such consideration as the board
of directors may deem advisable, subject to such limitations as may be set
forth in the Maryland General Corporation Law or Security Capital's bylaws.
According to Luxembourg law, the general meeting of shareholders may decide
to issue additional shares or securities convertible into shares. The general
meeting of shareholders may also authorize the board of directors to issue new
shares or securities convertible into shares, within the limits of "authorized
capital." Such authorization may not be granted for more than five years, but
may be renewed by the general meeting. According to the U.S. Realty articles of
incorporation, the board of directors is authorized to issue additional shares
up to the total authorized capital, within the period expiring on June 30,
2004.
DIVIDENDS AND DISTRIBUTIONS
Maryland law permits a corporation to pay dividends and make other
distributions, after authorization by the board of directors, unless, after
giving effect to the distribution, (a) the corporation would not be able to pay
its debts as they become due in the usual course of business or (b) the
corporation's total assets would be less than the sum of its total liabilities
plus, unless the charter provides otherwise (which the Security Capital charter
does), the amount that would be needed upon dissolution to satisfy the
preferential rights of those stockholders whose preferential rights upon
dissolution are superior to those receiving the distribution.
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According to Luxembourg law and the U.S. Realty articles of incorporation,
dividends and other distributions of the net profits may be declared by the
general meeting of shareholders. The board of directors may also, under certain
conditions, declare interim dividends. For the purpose of determining the net
profits available for dividends and distributions, realized and/or unrealized
capital losses are not set off against the capital gains of the company, unless
the general meeting of shareholders decides otherwise. No distribution may have
as an effect that the total assets of U.S. Realty would be less than one-and-a-
half times U.S. Realty's liabilities to creditors as set out in the annual
accounts.
SHAREHOLDER RIGHTS PLAN
Security Capital has adopted a preferred share purchase rights plan,
described under "Description of Security Capital Stock--Preferred Share
Purchase Rights and Series A Junior Participating Preferred Stock." U.S. Realty
does not have a similar rights plan.
SPECIAL MEETINGS
The Security Capital bylaws provide that the Chairman of the board of
directors (or Co-Chairman if any), the Vice Chairman, if any, the President,
the Chief Executive Officer or board of directors may call special meetings of
the shareholders. The Secretary of Security Capital is required to call a
special meeting upon the written request of shareholders entitled to cast not
less than a majority of all of the votes entitled to be cast at such meeting.
Such request must state the purpose of the meeting and the matters proposed to
be acted on at the meeting. The requesting shareholders are responsible for the
reasonable cost of providing notice of the meeting to other shareholders.
The U.S. Realty articles of incorporation provide that the board of
directors may call meetings, other than the annual general meeting, pursuant to
a notice setting forth the agenda sent at least eight days prior to the meeting
to each registered shareholder. Special meetings may also be called upon
written demand of the shareholders representing at least 20% of the outstanding
shares.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
According to Security Capital's bylaws, for nominations and other business
to be properly brought before an annual or special meeting by a shareholder,
the shareholder must give timely notice in writing to the Secretary of Security
Capital. To be timely, a shareholder's notice must be delivered to the
Secretary at the principal executive offices of Security Capital:
. In the case of an annual meeting, not less than 75 days nor more than
100 days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 30 days or delayed by more than
60 days from such anniversary date, notice by the shareholder must be
delivered not earlier than the 100th day prior to such annual meeting
and not later than the close of business on the later of the 75th day
prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made.
. Additionally, in the event that the number of directors to be elected to
the board of directors is increased and there is no public announcement
naming all of the nominees for director or specifying the size of the
increased board of directors made by Security Capital at least 75 days
prior to the first anniversary of the preceding year's annual meeting, a
shareholder's notice is timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to
the Secretary not later than the close of business on the 10th day
following the day on which such public announcement is first made by
Security Capital.
. In the case of a special meeting, not earlier than the 100th day prior
to such special meeting and not later than the close of business on the
later of the 75th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date
of the special meeting and of the nominees proposed by the board of
directors to be elected at such meeting.
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Luxembourg law and U.S. Realty's articles of incorporation are silent on the
issue of advance notice for shareholder proposals and nominations.
INSPECTION RIGHTS OF STOCKHOLDERS
Under Maryland law, persons who together have been stockholders of record of
at least five percent of the outstanding stock of any class of a Maryland
corporation for at least six months may inspect and copy the corporation's
books of account and stock ledger, request a written statement of the
corporation's affairs and, if the corporation does not maintain the original or
a duplicate stock ledger at its principal office, request a list of the
corporation's stockholders. In addition, any stockholder of a Maryland
corporation may (a) inspect and copy the bylaws, minutes of the proceedings of
stockholders and annual statements of affairs and (b) request the corporation
to provide a sworn statement showing all stock, as well as other securities,
issued and all consideration received by the corporation for such issuance,
during the preceding 12 months.
Under Luxembourg law, any U.S. Realty shareholder may inspect, at the
registered office of the company, the register of registered shares which
contains the precise designation of each registered shareholder and the number
of shares or fractional shares held by him, the payments made on the shares and
the transfers, with their dates, or conversions into bearer shares, if any. Any
U.S. Realty shareholder may also obtain the annual and six-month financial
statements, free of charge. The same can inspect, 15 days before the annual
general meeting, at the registered office of the company, the list of company
securities included in the portfolio of U.S. Realty.
AMENDMENTS TO CHARTER DOCUMENTS
Security Capital's charter permits amendments to the charter by a majority
vote of all shareholders entitled to vote on the matter. Security Capital's
charter also reserves Security Capital's right, as authorized by law, to make
any amendment to its charter, including any amendment altering the contract
rights, as expressly set forth in the charter, of any outstanding shares of
stock. Section 2-105 of the Maryland General Corporation Law permits a
corporation's charter to provide, and Security Capital's charter provides, that
the board of directors may 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 stock.
U.S. Realty cannot amend its articles of incorporation unless at least half
of the voting shares are present or represented at the meeting, and unless two-
thirds of such quorum approve the amendment. If a quorum is not present at a
meeting, the meeting may be adjourned. When an adjourned meeting is resumed,
there is no required quorum for the meeting.
AMENDMENTS TO BYLAWS
Under Maryland law, the power to amend the bylaws may be left with the
stockholders, vested exclusively in the directors or shared by both groups.
With the exception of certain bylaw provisions affecting the Security Capital
Class A common stock, Security Capital's bylaws provide that the board of
directors of Security Capital has the power to alter, amend or repeal the
bylaws or adopt new bylaws, but the stockholders are not divested of the same
power.
U.S. Realty does not have bylaws.
MERGERS, ACQUISITIONS AND OTHER TRANSACTIONS
Section 3-105 of the Maryland General Corporation Law describes the
procedures by which Security Capital may engage in mergers, acquisitions, and
other significant corporate transactions. This Section provides that
consolidations, mergers, share exchanges and transfers of assets (with certain
exceptions) are to be
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approved in the following manner. First, the board of directors must adopt a
resolution which declares that the proposed transaction is advisable on
substantially the terms set forth or referred to in the resolution. Second, the
board of directors must submit the proposed transaction to the shareholders for
consideration at an annual or a special meeting of the shareholders. Third, the
board must give notice to the shareholders which states that a purpose of the
meeting will be to act on the proposed consolidation, merger, share exchange,
or transfer of assets. Finally, Section 3-105 provides that the proposed
transaction must be approved by the affirmative vote of two thirds of all the
votes entitled to be cast on the matter. However, as authorized by Maryland
law, the Security Capital charter expressly provides that, notwithstanding any
provision of law requiring approval by a greater number of votes in order to
take a certain action, such action will be effective and valid if taken or
approved by the affirmative vote of holders of shares entitled to cast a
majority of all votes entitled to be cast on the matter.
U.S. Realty's articles of incorporation are silent on the question of the
procedure to follow for approval of mergers, acquisitions, and other
significant corporate transactions. The Luxembourg Company law prescribes the
procedure to be followed for approval of mergers and divisions of companies of
the same form of that of U.S. Realty. The Luxembourg company law is silent as
to the procedure to be followed for approval of acquisitions or other
significant corporate transactions (other than mergers and divisions).
EXTRAORDINARY TRANSACTIONS WITH INTERESTED SHAREHOLDERS
Security Capital
Security Capital is subject to Maryland statutes that may delay or prevent
unsolicited third party takeover attempts.
Moratorium Provision. Under Maryland law, "business combinations" between a
Maryland corporation and an interested shareholder or an affiliate of an
interested shareholder are prohibited for five years after the most recent date
on which the interested shareholder becomes an interested shareholder. These
business combinations include a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities. An interested shareholder is defined as:
. any person who beneficially owns ten percent or more of the voting power
of the corporation's shares after the date on which the corporation had
100 or more beneficial owners of its stock; or
. an affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question and after the date on
which the corporation had 100 or more beneficial owners of its stock,
was the beneficial owner of ten percent or more of the voting power of
the then outstanding voting stock of the corporation.
A person is not an interested shareholder under the statute if the board of
directors approved in advance the transaction by which he otherwise would have
become an interested shareholder.
After the five-year prohibition, any business combination between the
Maryland corporation and an interested shareholder generally must be
recommended by the board of directors of the corporation and approved by the
affirmative vote of at least:
. eighty percent of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation; and
. two-thirds of the votes entitled to be cast by holders of voting stock
of the corporation other than shares held by the interested shareholder
with whom or with whose affiliate the business combination is to be
effected or held by an affiliate or associate of the interested
shareholder.
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These super-majority vote requirements do not apply if the corporation's
common shareholders receive a minimum price, as defined under Maryland law, for
their shares in the form of cash or other consideration in the same form as
previously paid by the interested shareholder for its shares.
The statute permits various exemptions from its provisions, including
business combinations that are exempted by the board of directors prior to the
time that the interested shareholder becomes an interested shareholder. Any
business combination involving Security Capital and U.S. Realty and their
respective affiliates is exempt from the statute. Consequently, the five-year
prohibition and the super-majority vote requirements will not apply to such
business combinations.
U.S. Realty
U.S. Realty's articles require the independent directors to approve any
transaction between U.S. Realty and Security Capital or its affiliates.
Luxembourg law applicable to U.S. Realty provides that a director who has an
interest opposite to that of U.S. Realty in a transaction considered by the
board of directors for approval must inform the board of the interest and
reference thereto must be made in the minutes of the relevant board meeting.
The director is not permitted to participate in the discussion and in the vote
relating to such transaction. Report of such opposite interest must be made to
the first general meeting convened following the relevant board of directors
meeting. However, it is not the case that the independent director approval
provisions of U.S. Realty's articles are strictly required by these statutory
rules, nor that any U.S. Realty director with an affiliation with Security
Capital would be automatically considered to have an interest opposite to that
of U.S. Realty in any transaction involving U.S. Realty and Security Capital.
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, by officers or by
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-
tenth or more but less than one-third, (ii) one-third or more but less than a
majority, or (iii) a majority or more 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 of directors of the corporation 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.
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The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The bylaws of Security Capital contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
Security Capital's shares of stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
Luxembourg law does not regulate transactions that might be considered
"control share acquisitions" in Maryland. The articles of incorporation of U.S.
Realty confer upon the directors the power to establish regulation of "control
share acquisitions," for the purpose, among others, of protecting the
corporation and/or its shareholders from becoming subject to the tax or
regulatory rules of a given jurisdiction by reason of a certain percentage of
shareholders being nationals or residents or having other specific links with
that given jurisdiction.
LIABILITY EXCULPATION AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Liability Exculpation. Security Capital's charter provides that, to the
maximum extent permitted by Maryland law, no director or officer of Security
Capital will be liable to the corporation or its shareholders for money
damages. Section 5-418 of the Maryland Courts and Judicial Proceedings Article
provides that a corporation may include a provision expanding or limiting the
liability of its directors or officers to the corporation or its shareholders,
with two exceptions. The first exception is that a corporation may not limit
the liability of a director or officer for actual receipt of "an improper
benefit or profit in money, property, or services." The second exception is
that a corporation may not limit the liability of a director or officer for
"active and deliberate dishonesty" established by a final judgment as material
to the cause of action.
Luxembourg law and the U.S. Realty articles of incorporation are silent on
the issue of limiting director or officer liability for money damages to the
corporation or its shareholders.
Indemnification of Directors. Security Capital's charter and bylaws provide,
to the maximum extent permitted by Maryland law, for indemnification and
reimbursement of expenses in advance of final disposition of a legal proceeding
for (a) any individual who is a present or former director or officer of
Security Capital and who is made a party to the proceeding by reason of his or
her service in that capacity or (b) any individual who, while a director of
Security Capital and at the request of Security Capital, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or trustee of such
entity and who is made a party to the proceeding by reason of his or her
service in that capacity. Section 2-418 of the Maryland General Corporation Law
permits a corporation to indemnify any director or officer made a party to any
proceeding by reason of service in that capacity unless it is established that:
. The act or omission of the director was material to the matter giving
rise to the proceeding, and was committed in bad faith or was the result
of active and deliberate dishonesty; or
. The director or officer actually received an improper personal benefit
in money, property, or services; or
. In the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
Furthermore, Section 2-418(b)(2)(ii) prohibits a corporation from
indemnifying a director or officer who is "adjudged to be liable to the
corporation" in a suit by or in the right of the corporation or, with certain
exceptions, a director or officer who brings a proceeding against the
corporation. However, a court may order indemnification in such a case if it
determines that the director or officer is fairly and reasonably entitled to
indemnification, although such indemnification is limited to expenses.
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<PAGE>
The U.S. Realty articles of incorporation provide that U.S. Realty will
indemnify "any director or officer, and his heirs, executors and
administrators, against expenses reasonably incurred by him in connection with
any action, suit or proceeding to which he may be made a party by reason of his
being or having been a director or officer of U.S. Realty or, at its request,
of any other company of which U.S. Realty is a shareholder or a creditor and
from which he is not entitled to be indemnified." The U.S. Realty articles of
incorporation place limitations on indemnification, however. An officer or
director will not be indemnified by U.S. Realty if he or she is finally
adjudged to be liable for gross negligence or misconduct. In the event of
settlement, U.S. Realty will provide indemnification only for such matters
covered by the settlement as to which it has been advised by counsel that the
person to be indemnified did not commit such a breach of duty. The articles of
incorporation further provide that U.S. Realty will advance litigation expenses
to a director or officer if U.S. Realty's counsel determines that
indemnification is likely and if the director or officer agrees to repay any
advance if he is determined not to be entitled to indemnification.
Indemnification for Violations of the Securities Laws. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers or persons controlling Security Capital or
U.S. Realty pursuant to the foregoing provisions, the companies have been
informed that in the opinion of the U.S. Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
STOCK OWNERSHIP LIMITATIONS
The Security Capital charter limits direct or indirect ownership of its
common stock by any single shareholder to 9.8% (the "Ownership Limit"), in
number of shares or value, of the outstanding common stock, with certain
limited exceptions. The Security Capital charter exempts U.S. Realty and
certain other persons from the Ownership Limit. The Security Capital charter
also prohibits any transfer that, if effective, would result in Security
Capital being "closely held" within the meaning of Section 865(h) of the
Internal Revenue Code of 1986, as amended. Any transfer that would result in
any person or entity owning shares in excess of the Ownership Limit is void
with respect to those shares above the Ownership Limit, and the intended
transferee acquires no rights in such shares. If a shareholder acquires
Security Capital shares in violation of these ownership limitations, Security
Capital will exchange the shares in excess of the Ownership Limit for "Excess
Shares"; the actual shares are held for the shareholder in trust until he or
she no longer owns a total number of shares (including the Excess Shares) in
excess of the ownership limitation.
The U.S. Realty articles of incorporation limits direct or indirect
ownership of its common and preferred shares to 9.5% of the (i) value of (a)
the company's outstanding common and preferred shares or, (b) if common or
preferred stock are issued in more than one class, the outstanding common and
preferred shares any class, or (ii) voting power of all common and preferred
shares entitled to vote (the "U.S. Realty Ownership Limit"). The U.S. Realty
articles of incorporation exempt Security Capital and, under certain
circumstances, its affiliates from the U.S. Realty Ownership Limit. Any
transfer that would result in any person or entity beneficially owning more
than U.S. Realty Ownership Limit is unenforceable as to those shares that
result in such excess. U.S. Realty also has several restrictions based on
compliance with the tax laws of several foreign countries. U.S. Realty also has
an "Excess Share" provision similar to that of Security Capital.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE SECURITY
CAPITAL CHARTER AND BYLAWS
The business combination provisions and the control share acquisition
provisions of the Maryland General Corporation Law, the provisions of the
Security Capital charter on classification of the board of directors and
removal of directors and the advance notice provisions of the Security Capital
bylaws could defer, delay or prevent a transaction or a change in control of
Security Capital that might involve a premium price for holders of Security
Capital common stock or otherwise be in their best interest. Security Capital's
bylaws currently contain an exemption from the control share acquisition
provisions of the Maryland General Corporation Law, but that exemption may be
amended or repealed.
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STOCK EXCHANGE LISTING AND DELISTING
Listing of Shares Issued in the Transaction. It is a condition to the
transaction that the shares of Security Capital Class B common stock to be
issued in the transaction be approved for listing on the New York Stock
Exchange, subject only to official notice of issuance.
Euronext Amsterdam Stock Exchange Delisting. If the transaction is
completed, public trading of the U.S. Realty shares will cease and the shares
will be delisted from Euronext Amsterdam.
NYSE Delisting. If the transaction is completed, the U.S. Realty shares
underlying the ADS's will be cancelled, public trading of the ADS's will cease,
and the ADS's will be delisted from the New York Stock Exchange.
Luxembourg Stock Exchange Delisting. If the transaction is completed,
application will be made to delist all U.S. Realty shares from the Luxembourg
Stock Exchange.
EXPERTS
The consolidated financial statements and related schedules of Security
Capital and ProLogis Trust incorporated herein by reference, as included in
Security Capital's annual report on Form 10-K, have been audited by Arthur
Andersen LLP, independent accountants, as indicated in their reports with
respect thereto, and are incorporated herein in reliance upon the authority of
such firm as experts in giving such reports.
The financial statements and schedule of Archstone Communities Trust as of
December 31, 1999 and 1998, and for each of the years in the three-year period
ended December 31, 1999, as included in Security Capital's annual report on
Form 10-K, have been incorporated by reference herein and in the registration
statement in reliance upon the reports of KPMG LLP, independent certified
public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of Frigoscandia Holding AB and
subsidiaries as of December 31, 1999, and for the year then ended, have been
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of CS Integrated LLC and subsidiaries
as of December 31, 1999 and 1998, and for the years then ended have been
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of Security Capital U.S. Realty as of
December 31, 1999 and 1998 and for the years then ended included in this joint
proxy statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers S.a.r.l., independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The audited financial statements of Security Capital (EU) Management
Holdings S.A. incorporated in this joint proxy statement/prospectus by
reference to the Annual Report on Form 10-K of Security Capital Group
Incorporated for the year ended December 31, 1999, have been so incorporated in
reliance on the report of PricewaterhouseCoopers S.a.r.l., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of City Center Retail Trust as of
December 31, 1999 and 1998 and for the years then ended included in this joint
proxy statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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The consolidated financial statements of CWS Communities Trust as of
December 31, 1999 and 1998 and for the years then ended included in this
registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Urban Growth Property Trust as of
December 31, 1999 and 1998 and for the years then ended included in this joint
proxy statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements and schedule of CarrAmerica Realty
Corporation and subsidiaries as of December 31, 1999 and 1998, and for each of
the years in the three-year period ended December 31, 1999, have been
incorporated by reference herein and in the registration statement in reliance
upon the reports of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements and schedule of Regency Realty
Corporation and subsidiaries as of December 31, 1999 and 1998, and for each of
the years in the three-year period ended December 31, 1999, have been
incorporated by reference herein and in the registration statement in reliance
upon the reports of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements incorporated in this joint proxy
statement/prospectus by reference to the Annual Report on Form 10-K of Storage
USA, Inc. for the year ended December 31, 1999, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of Security Capital Class B common stock to be
issued in connection with the transaction will be passed upon by Jeffrey A.
Klopf, Esq., Senior Vice President and Secretary of Security Capital. Mr. Klopf
beneficially owns 812 shares of Security Capital Class A common stock and
32,649 shares of Security Capital Class B common stock, and is a participant in
Security Capital's long-term incentive plans and various other employee benefit
plans offered to employees of Security Capital.
SUBMISSION OF SHAREHOLDER PROPOSALS
SECURITY CAPITAL
As described in Security Capital's proxy statement relating to its 2000
annual meeting of shareholders, any proposals that shareholders of Security
Capital wish to be considered for inclusion in the proxy statement for the 2001
annual meeting of shareholders must be received by Security Capital at its
principal executive offices not later than December 11, 2000. Any shareholder
proposals included in Security Capital's proxy solicitation materials for its
2001 annual meeting or otherwise to be considered at the meeting must comply
with the requirements of the proxy rules adopted under the Securities Exchange
Act. In addition, Security Capital shareholders may present proposals which are
proper subjects for consideration at an annual meeting, including nominees for
election to the board of directors, even if the proposal is not submitted by
the deadline for inclusion in the proxy statement. To do so, the shareholder
must comply with the procedures specified by Security Capital's bylaws, a copy
of which will be furnished to any shareholder without charge. Security
Capital's bylaws require that all shareholders who intend to make proposals at
an annual shareholders' meeting submit their proposals to the Secretary of
Security Capital during the period 75 to 100 days before the anniversary date
of the previous year's annual meeting. To be eligible for consideration at the
2001 annual
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meeting, proposals which have not been submitted by the deadline for inclusion
in the proxy statement must be received by the Secretary of Security Capital
between February 14, 2001 and March 11, 2001.
U.S. REALTY
In the event the transaction is not consummated and a 2001 annual meeting is
held, any proposals of shareholders intended to be included in the proxy
statement for the 2001 annual meeting must be received by the Vice President of
U.S. Realty at its principal executive offices no later than February 28, 2001.
WHERE YOU CAN FIND MORE INFORMATION
Security Capital and U.S. Realty are subject to the informational
requirements of the Securities Exchange Act and file periodic reports, proxy
solicitation materials and other information with the SEC in accordance with
that Act. This joint proxy statement/prospectus incorporates important
financial information about our companies from these materials that we file
with the SEC, but have not included in or delivered with this document. You can
inspect and copy these reports, proxy solicitation materials and other
information at the public reference facilities maintained by the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. You may read and copy this information at prescribed rates at the
following locations of the SEC:
Public Reference Room
450 Fifth Street, N.W., Room 1024
Washington, D.C. 20549
The SEC also maintains a World Wide Web site on the internet that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. Reports, proxy and
information statements and other information regarding U.S. Realty and Security
Capital may be found on the SEC's website, at the following address:
http://www.sec.gov. You can also inspect reports, proxy solicitation materials
and other information about each of us at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
In addition, Security Capital has filed with the SEC a registration
statement on Form S-4 under the Securities Act that registers the distribution
to U.S. Realty shareholders other than Security Capital of shares of Security
Capital Class B common stock in connection with the transaction. The S-4
registration statement, including the attached exhibits and schedules, contains
additional relevant information about Security Capital and U.S. Realty. This
joint proxy statement/prospectus does not contain all the information set forth
in the registration statement, certain portions of which we have omitted in
accordance with the rules and regulations of the SEC. You can obtain that
additional information from the SEC's principal office in Washington, D.C., or
their website as set forth above.
This joint proxy statement/prospectus incorporates by reference the
documents listed below that Security Capital has previously filed with the SEC.
They contain important information about the company and its financial
condition.
<TABLE>
<S> <C>
SECURITY CAPITAL SEC FILINGS (FILE NO. 1-13355) DESCRIPTION OR PERIOD/FILING DATE
Annual Report on Form 10-K Year ended December 31, 1999
Quarterly Reports on Form 10-Q Quarters ended March 31, 2000,
June 30, 2000 and September 30, 2000
Current Reports on Form 8-K Filed March 28, 2000, July 24, 2000 and
September 26, 2000
Description of capital stock contained in Filed September 11, 1997
Registration Statement on Form 8-A
</TABLE>
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In accordance with changes in U.S. securities regulation, U.S. Realty has
not been a foreign private issuer since September 30, 2000.
We incorporate by reference additional documents that either company may
file with the SEC between the date of this document and the date of the
Security Capital special meeting and the U.S. Realty extraordinary meeting.
These documents include periodic reports, including Annual Reports on Form 10-
K, Quarterly Reports on Form 10-Q and proxy statements.
You can obtain any of the documents incorporated by reference in this
document through Security Capital or U.S. Realty, as the case may be, or from
the SEC through its website at the address provided above. You can obtain the
documents incorporated by reference from the companies without charge,
excluding any exhibits to those documents unless we have specifically
incorporated the exhibit into this document. You can obtain documents
incorporated by reference in this document by requesting them in writing or by
telephone from the appropriate company at the following addresses:
<TABLE>
<S> <C>
SECURITY CAPITAL U.S. REALTY
Security Capital Group Incorporated Security Capital U.S. Realty
125 Lincoln Avenue, Suite 300 25b, boulevard Royal
Santa Fe, New Mexico 87501 L-2449 Luxembourg
Attention: Jeffrey A. Klopf, Secretary Attention: Laura L. Hamilton, Vice President
Telephone: (505) 982-9292 Telephone: (+352) 46 37 56 2008
</TABLE>
If you would like to request documents, please do so from Security Capital
by January 5, 2001 and from U.S. Realty by January 8, 2001 to receive them
before the applicable shareholder meeting. If you request any incorporated
documents from us, we will mail them to you by first class mail, or another
equally prompt means, within one business day after we receive your request.
We also hereby incorporate by reference into this joint proxy
statement/prospectus the following financial statements of U.S. Realty's
publicly-held strategic investees:
<TABLE>
<CAPTION>
CARRAMERICA REALTY CORPORATION (FILE NO. DESCRIPTION
1-11706)
<S> <C>
Consolidated balance sheets, statements Pages 4 through 12 of Quarterly
of operations, statements of cash flows Report on
and accompanying notes (unaudited) Form 10-Q for the Quarter Ended
September 30, 2000
Consolidated balance sheets, statements Pages F-1 through F-25 of Annual
of operations, statements of Report on Form 10-K for the Year
stockholders' equity, statements of cash Ended December 31, 1999
flows, accompanying notes and
independent auditor's report
REGENCY REALTY CORPORATION (FILE NO. 1-
12298)
Consolidated balance sheets, statements Quarterly Report on Form 10-Q for
of operations, statements of the Quarter Ended September 30, 2000
stockholders' equity, statements of cash
flows and accompanying notes (unaudited)
Consolidated balance sheets, statements Pages F-2 through F-22 of Annual
of operations, statements of Report on Form 10-K for the Year
stockholders' equity, statements of cash Ended December 31, 1999
flows, accompanying notes and
independent auditor's report
STORAGE USA, INC. (FILE NO. 1-12910)
Consolidated statements of operations, Pages 2 through 12 of Quarterly
balance sheets, statements of cash flows Report on
and accompanying notes (unaudited) Form 10-Q for the Quarter Ended
September 30, 2000
</TABLE>
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<TABLE>
<S> <C>
Consolidated balance sheets, statements Pages 25 through 39 of Annual Report
of operations, statements of cash flows, to Shareholders included in Exhibit
statements of shareholders' equity, 13 to Annual Report on Form 10-K for
accompanying notes and report of the Year Ended December 31, 1999
independent accountants
</TABLE>
This joint statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this joint
proxy statement/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 joint proxy statement/prospectus nor any distribution of
securities pursuant to this joint proxy statement/prospectus shall, under any
circumstances, create any implication that there has been no change in the
information set forth or incorporated into this joint proxy
statement/prospectus by reference or in our affairs since the date of this
joint proxy statement/prospectus.
You should rely only on the information contained or incorporated by
reference in this joint proxy statement/prospectus to vote on the transaction.
We have not authorized anyone to provide you with information that is different
from what is contained in this joint proxy statement/prospectus. This joint
proxy statement/prospectus is dated December 8, 2000. You should not assume
that the information contained in this joint proxy statement/prospectus is
accurate as of any date other than such date, and neither the mailing of the
joint proxy statement/prospectus to shareholders nor the issuance of shares of
Security Capital Class B common stock in connection with the transaction or
distribution thereof to U.S. Realty shareholders shall create any implication
to the contrary.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. REALTY
Condensed Consolidated Statements of Net Assets at 30 September 2000
(unaudited) and 31 December 1999........................................ F-2
Condensed Consolidated Statements of Operations (unaudited) for the three
and nine-month periods ended 30 September 2000 and 1999................. F-3
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine-
month periods ended 30 September 2000 and 1999.......................... F-4
Condensed Consolidated Statements of Changes in Net Assets for the nine-
month period ended 30 September 2000 (unaudited) and the year ended 31
December 1999........................................................... F-5
Consolidated Statements of Changes in Shares Outstanding for the nine-
month period ended 30 September 2000 (unaudited) and the year ended 31
December 1999........................................................... F-5
Consolidated Financial Highlights for the nine-month period ended 30
September 2000 (unaudited) and the year ended 31 December 1999.......... F-5
Consolidated Schedules of Strategic Investment Positions at 30 September
2000 (unaudited) and 31 December 1999................................... F-6
Consolidated Schedules of Other Investment Positions at 30 September 2000
(unaudited) and 31 December 1999........................................ F-7
Notes to Condensed Consolidated Financial Statements (unaudited)......... F-8
Auditor's Report......................................................... F-16
Consolidated Statements of Net Assets at 31 December 1999 and 1998....... F-17
Consolidated Statements of Operations for the years ended 31 December
1999, 1998 and 1997..................................................... F-18
Consolidated Statements of Cash Flows for the years ended 31 December
1999, 1998 and 1997..................................................... F-19
Consolidated Statements of Changes in Net Assets for the years ended 31
December 1999, 1998 and 1997............................................ F-20
Consolidated Financial Highlights for the years ended 31 December 1999,
1998 and 1997........................................................... F-21
Consolidated Schedules of Strategic Investment Positions at 31 December
1999 and 1998........................................................... F-22
Consolidated Schedules of Other Investment Positions at 31 December 1999
and 1998................................................................ F-23
Notes to the Consolidated Financial Statements........................... F-24
CITY CENTER RETAIL TRUST
Report of Independent Accountants........................................ F-33
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-34
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998........................................................... F-35
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999 and 1998.............................................. F-36
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998........................................................... F-37
Notes to the Financial Statements for the years ended December 31, 1999
and 1998................................................................ F-38
CWS COMMUNITIES TRUST
Report of Independent Accountants........................................ F-48
Consolidated Balance Sheets at December 31, 1999 and 1998................ F-49
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998........................................................... F-50
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999
and 1998................................................................ F-51
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998........................................................... F-52
Notes to Consolidated Financial Statements............................... F-53
URBAN GROWTH PROPERTY TRUST
Report of Independent Accountants........................................ F-67
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-68
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998........................................................... F-69
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999 and 1998.............................................. F-70
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998........................................................... F-71
Notes to Consolidated Financial Statements............................... F-72
</TABLE>
F-1
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF NET ASSETS
AT 30 SEPTEMBER 2000 AND 31 DECEMBER 1999
(IN THOUSANDS U.S. $, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
2000 1999
---------- ----------
UNAUDITED AUDITED
<S> <C> <C>
ASSETS
Strategic investment positions at value:
CarrAmerica (Cost $699,905; $699,905, respectively)...... $ 865,253 $ 604,247
City Center Retail (Cost $175,722; $304,132,
respectively)........................................... 175,722 304,132
CWS Communities (Cost $268,739; $236,488, respectively).. 268,739 236,488
Regency (Cost $759,807; $759,807, respectively).......... 786,142 685,465
Storage USA (Cost $394,362; $394,362, respectively)...... 358,852 355,911
Urban Growth Property (Cost $225,082; $188,582,
respectively)........................................... 225,082 188,582
Other investment positions at value:
Security Capital Group Incorporated (Cost $0; $165,000,
respectively)........................................... -- 95,780
Private investment positions (Cost $39,602; $42,019,
respectively)........................................... 39,347 42,019
---------- ----------
Total investments.......................................... $2,719,137 $2,512,624
Cash and cash equivalents.................................. 344 2,732
Accounts receivable and other.............................. 19,709 15,530
---------- ----------
TOTAL ASSETS........................................... $2,739,190 $2,530,886
========== ==========
LIABILITIES
Accounts payable and accrued expenses...................... $ 7,594 $ 6,033
Taxes payable other than income taxes...................... 2,443 4,818
Deferred income tax........................................ 29,444 --
Line of credit............................................. 56,000 239,000
Convertible notes.......................................... 399,424 386,157
---------- ----------
TOTAL LIABILITIES...................................... 494,905 $ 636,008
---------- ----------
TOTAL NET ASSETS (SHAREHOLDERS' EQUITY)................ $2,244,285 $1,894,878
========== ==========
Authorised 250,000,000 shares of $4.00 par value,
86,561,872 shares issued and 74,883,958 outstanding at 30
September 2000 and 86,561,872 issued and 76,700,437
outstanding at 31 December 1999........................... $ 346,247 $ 346,247
Share premium account...................................... 1,536,855 1,564,939
---------- ----------
PAID-IN CAPITAL............................................ $1,883,102 $1,911,186
Legal reserve.............................................. $ 30,375 $ 30,375
Reserve for own shares..................................... 212,304 184,219
Undistributed net operating income......................... 275,926 219,144
Accumulated net realised (loss)/gain....................... (71,592) 11,844
Unrealised appreciation/(depreciation) on strategic
investment and other investment positions, net of deferred
tax expense of $29,444 in 2000............................ 126,474 (277,671)
Acquisition of own shares.................................. (212,304) (184,219)
---------- ----------
SHAREHOLDERS' EQUITY....................................... $2,244,285 $1,894,878
========== ==========
Net Asset Value per share.................................. $ 29.97 $ 24.70
========== ==========
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
F-2
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS U.S. $)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
30 SEPTEMBER 30 SEPTEMBER
------------------- -------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
INCOME
Gross dividends from strategic
investment positions:
CarrAmerica....................... $ 13,229 $ 13,229 $ 39,687 $ 39,687
City Center Retail................ -- -- -- --
CWS Communities................... 3,801 2,431 10,934 5,579
Regency........................... 16,451 15,766 49,353 42,086
Storage USA....................... 8,119 7,883 24,355 23,649
Urban Growth Property............. -- 7,049 -- 7,262
-------- --------- -------- ---------
41,600 46,358 124,329 118,263
Gross dividends from other
investment positions............... -- 1,865 -- 8,176
-------- --------- -------- ---------
41,600 48,223 124,329 126,439
Interest income from Security
Capital debentures................. -- 894 745 2,681
Interest and other income........... 1,851 1,593 4,403 3,160
-------- --------- -------- ---------
TOTAL GROSS INCOME.............. 43,451 50,710 129,477 132,280
Withholding tax on dividends
received......................... (6,240) (7,233) (18,595) (16,503)
-------- --------- -------- ---------
TOTAL INCOME.................... $ 37,211 $ 43,477 $110,882 $ 115,777
======== ========= ======== =========
EXPENSES
Operating advisor fees.............. 8,309 8,283 23,415 24,996
Custodian fees...................... 125 125 458 361
Directors fees...................... 44 32 179 92
Professional expenses............... 691 104 1,355 731
Administrative expenses............. 571 322 918 1,026
Amortisation of convertible notes
deferred costs..................... 394 403 1,183 1,192
Taxes other than income taxes....... (2,425) 1,033 (524) 3,122
Line of credit arrangement and
commitment fees.................... 152 59 881 154
Interest on line of credit.......... 863 5,916 6,026 14,555
Interest on convertible notes....... 6,917 6,763 20,209 20,380
-------- --------- -------- ---------
TOTAL EXPENSES.................. 15,641 23,040 54,100 66,609
-------- --------- -------- ---------
NET OPERATING INCOME................ $ 21,570 $ 20,437 $ 56,782 $ 49,168
NET REALISED AND UNREALISED
GAIN/(LOSS) ON STRATEGIC INVESTMENT
AND OTHER INVESTMENT POSITIONS:
Net realised (loss)/gain on
strategic investment and other
investment positions............... (377) (199) (83,436) 1,420
Net increase/(decrease) in
appreciation on strategic
investment and other investment
positions.......................... 90,830 (190,228) 433,589 (163,265)
-------- --------- -------- ---------
NET GAIN/(LOSS) ON STRATEGIC
INVESTMENT AND OTHER INVESTMENT
POSITIONS.......................... 90,453 (190,427) 350,153 (161,845)
-------- --------- -------- ---------
Increase/(Decrease) In Net Assets
Resulting from Operations, before
tax................................ 112,023 (169,990) 406,935 (112,677)
Deferred income tax expense......... 29,444 -- 29,444 --
-------- --------- -------- ---------
INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.......... $ 82,579 $(169,990) $377,491 $(112,677)
======== ========= ======== =========
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
F-3
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2000 AND 1999
(IN THOUSANDS U.S. $)
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Increase in net assets resulting from operations........ $377,491 $(112,677)
Adjustments to reconcile increase in net assets
resulting from operations to net cash provided by
operating activities:
Movement in realised loss/(gain)...................... 83,436 (1,420)
Movement in unrealised gain (increase)/decrease....... (433,589) 163,265
Movement in accretion on convertible notes............ 13,268 12,149
Movement in convertible notes deferred costs.......... 1,183 1,192
Changes in operating assets and liabilities:
Accounts receivable and other....................... (5,362) 4,539
Accounts payable and accrued expenses............... 1,237 1,319
Operating advisor fees payable...................... 323 (5,919)
Taxes payable other than income taxes............... (2,375) 2,364
Deferred income taxes............................... 29,444 --
-------- ---------
Net cash provided by operating activities......... 65,056 64,812
-------- ---------
INVESTING ACTIVITIES:
Return of capital--distribution from City Center
Retail................................................. 111,989 --
Proceeds from sale of investment in Security Capital.... 96,889 --
Proceeds from sale of other investment positions........ 5,312 135,384
Fundings in strategic investment positions:
CarrAmerica........................................... -- (54)
City Center Retail.................................... -- (78)
CWS Communities....................................... (20,250) (82,926)
Advance--CWS Communities.............................. (12,000) --
Regency............................................... -- (21)
Storage USA........................................... -- (90)
Urban Growth Property................................. -- (7,500)
Advances--Urban Growth Property....................... (36,500) --
Fundings in other investment positions.................. (1,800) (23,770)
-------- ---------
Net cash provided by investing activities......... 143,640 20,945
-------- ---------
FINANCING ACTIVITIES:
Acquisition of own shares............................... (28,084) (162,357)
Net (repayments)/drawdowns from line of credit.......... (183,000) 75,000
-------- ---------
Net cash (used) in financing activities........... (211,084) (87,357)
-------- ---------
Net decrease in cash and cash equivalents................. (2,388) (1,600)
Cash and cash equivalents, beginning of the period........ 2,732 2,994
-------- ---------
Cash and cash equivalents, end of the period.............. $ 344 $ 1,394
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Tax paid................................................ $ 1,850 $ 619
======== =========
Interest paid on borrowings............................. $ 12,028 $ 14,264
======== =========
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
F-4
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS U.S. $)
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED 31 DECEMBER
30 SEPTEMBER 2000 1999
----------------- -----------
UNAUDITED AUDITED
<S> <C> <C>
OPERATIONS:
Net operating income............................. $ 56,782 $ 70,992
Net realised (loss) on strategic investment and
other investment positions...................... (83,436) (65,587)
Increase/(decrease) in appreciation on strategic
investment and other investment positions....... 433,589 (152,693)
Deferred income tax expense...................... (29,444) --
---------- ----------
Increase/(decrease) in net assets resulting from
operations...................................... $ 377,491 $ (147,288)
CAPITAL TRANSACTIONS:
(Decrease) in share premium account.............. $ (28,084) $ (184,219)
Increase in reserve for own shares............... 28,084 184,219
Acquisition of own shares during the
period/year..................................... (28,084) (184,219)
---------- ----------
(Decrease) in net assets resulting from capital
transactions.................................... $ (28,084) $ (184,219)
NET ASSETS:
Increase/(decrease) in net assets during the
period.......................................... 349,407 $ (331,507)
Net assets at the beginning of the period........ 1,894,878 2,226,385
---------- ----------
Net assets at the end of the period/year
(includes undistributed net operating income of
$275,926 for 2000 and $219,144 for 1999)........ $2,244,285 $1,894,878
========== ==========
CONSOLIDATED STATEMENTS OF CHANGES IN SHARES OUTSTANDING
<CAPTION>
NUMBER OF SHARES
-----------------------------
NINE MONTHS ENDED YEAR ENDED
30 SEPTEMBER 31 DECEMBER
2000 1999
----------------- -----------
UNAUDITED AUDITED
<S> <C> <C>
At the beginning of the period/year.............. 76,700,437 86,561,872
Acquisition of own shares during the
period/year..................................... (1,816,479) (9,861,435)
---------- ----------
At the end of the period/year.................... 74,883,958 76,700,437
========== ==========
CONSOLIDATED FINANCIAL HIGHLIGHTS
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
30 SEPTEMBER 31 DECEMBER
2000 1999
----------------- -----------
UNAUDITED AUDITED
<S> <C> <C>
PER-SHARE DATA:
Net asset value at the beginning of the
period/year................................... $ 24.70 $ 25.72
Net operating income........................... 0.75 0.86
Net change in movement in unrealised
appreciation and realised gain on strategic
investment and other investment positions in
the period, net of deferred tax expense in
2000.......................................... 4.26 (2.65)
Acquisition of own shares during the
period/year................................... 0.26 0.77
---------- ----------
Net Asset Value per share at the end of the
period/year..................................... $ 29.97 $ 24.70
========== ==========
</TABLE>
The accompanying notes form an integral part of these condensed financial
statements.
F-5
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF STRATEGIC INVESTMENT POSITIONS
AT 30 SEPTEMBER 2000
(IN THOUSANDS U.S. $, EXCEPT SHARES HELD AND %)
UNAUDITED
<TABLE>
<CAPTION>
NUMBER OF
STRATEGIC INVESTMENT SECURITY SHARES PERCENTAGE
POSITIONS TYPE HELD COST VALUE OF TOTAL ASSETS
-------------------- ------------ ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
CarrAmerica............. Common Stock 28,603,417 $ 699,905 $ 865,253 31.6%
City Center Retail...... Common Stock 30,390,000 175,722 175,722 6.4%
CWS Communities (1)..... Common Stock 25,640,866 268,739 268,739 9.8%
Regency................. Common Stock 34,273,236 759,807 786,142 28.7%
Storage USA............. Common Stock 11,765,654 394,362 358,852 13.1%
Urban Growth Property
(2).................... Common Stock 18,824,100 225,082 225,082 8.2%
---------- ---------- ----
Total investment in
strategic positions.. $2,523,617 $2,679,790 97.8%
========== ========== ====
--------
(1) In addition to the shares held with a cost and fair value of $256.7
million, there is an advance of $12.0 million to CWS Communities included
in these amounts.
(2) In addition to the shares held with a cost and fair value of $188.6
million, there are advances of $36.5 million to Urban Growth Property
included in these amounts.
AT 31 DECEMBER 1999
(IN THOUSANDS U.S. $, EXCEPT SHARES HELD AND %)
AUDITED
<CAPTION>
NUMBER OF
STRATEGIC INVESTMENT SECURITY SHARES PERCENTAGE
POSITIONS TYPE HELD COST VALUE OF TOTAL ASSETS
-------------------- ------------ ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
CarrAmerica............. Common Stock 28,603,417 $ 699,905 $ 604,247 23.9%
City Center Retail...... Common Stock 30,390,000 304,132 304,132 12.0%
CWS Communities......... Common Stock 23,615,858 236,488 236,488 9.3%
Regency................. Common Stock 34,273,236 759,807 685,465 27.1%
Storage USA............. Common Stock 11,765,654 394,362 355,911 14.1%
Urban Growth Property... Common Stock 18,824,100 188,582 188,582 7.4%
---------- ---------- ----
Total investment in
strategic positions.. $2,583,276 $2,374,825 93.8%
========== ========== ====
</TABLE>
The accompanying notes form an integral part of the condensed financial
statements.
F-6
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF OTHER INVESTMENT POSITIONS
AT 30 SEPTEMBER 2000
(IN THOUSANDS U.S. $, EXCEPT %)
UNAUDITED
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
OTHER INVESTMENT POSITIONS COST VALUE ASSETS
-------------------------- -------- -------- ----------
<S> <C> <C> <C>
Companies in which SC-U.S. Realty owns a 5% or
greater interest................................ $ 39,273 $ 39,018 1.4%
Companies in which SC-U.S. Realty owns less than
5% interest..................................... 329 329 0.1%
-------- -------- ---
Total investment in other investment
positions..................................... $ 39,602 $ 39,347 1.5%
======== ======== ===
AT 31 DECEMBER 1999
(IN THOUSANDS U.S. $, EXCEPT %)
AUDITED
<CAPTION>
PERCENTAGE
OF TOTAL
OTHER INVESTMENT POSITIONS COST VALUE ASSETS
-------------------------- -------- -------- ----------
<S> <C> <C> <C>
Companies in which SC-U.S. Realty owns a 5% or
greater interest................................ $ 39,215 $ 39,215 1.6%
Companies in which SC-U.S. Realty owns less than
5% interest..................................... 2,804 2,804 0.1%
-------- -------- ---
Total investment in private investment
positions....................................... $ 42,019 $ 42,019 1.7%
Investment in Security Capital Group
Incorporated.................................... 165,000 95,780 3.8%
-------- -------- ---
Total investment in other investment
positions..................................... $207,019 $137,799 5.5%
======== ======== ===
</TABLE>
The accompanying notes form an integral part of the condensed financial
statements.
F-7
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
30 SEPTEMBER 2000
(UNAUDITED)
NOTE 1--GENERAL
Organization and Transaction Agreement
Security Capital U.S. Realty (the "Company") is a research-driven real
estate company focused on taking significant strategic investment positions
(with board representation, consultation and other rights) in value-added real
estate operating companies based in the United States. The Company's primary
capital deployment objective is to take a proactive ownership role in
businesses that it believes can potentially generate above-average rates of
return. The Company is organised in Luxembourg as a Societe d'Investissement a
Capital Fixe (a company with a fixed capital).
The Company owns its assets through its direct and indirect wholly-owned
subsidiaries, including Security Capital Holdings S.A. (such subsidiaries
collectively referred to herein as "HOLDINGS").
The Company is 40.6% owned by Security Capital Group Incorporated ("Security
Capital"). On 26 September 2000, the Company and Security Capital entered into
an agreement to combine the Company and Security Capital. Under the terms of
the transaction agreement shareholders of the Company will receive either (i)
1.15 shares of Security Capital Class B common stock for each outstanding share
of the Company or (ii) if they vote against the transaction and validly elect
to receive cash, they will receive an amount of cash in U.S. dollars equal to
1.15 multiplied by the average of the daily high and low per share sales prices
of the Security Capital Class B common stock on the New York Stock Exchange
during the fifteen trading days ending on the sixth trading day before the
extraordinary meeting of the shareholders to vote on the transaction. Security
Capital will acquire the assets of the Company, consisting primarily of the
shares in Security Capital Holdings S.A., and assume or provide the necessary
funds to satisfy the liabilities of the Company. If shareholders who vote
against the transaction validly elect to receive cash payments in an amount
exceeding $200 million in the aggregate, Security Capital will have the right
to terminate the transaction agreement.
Consummation of the transaction is dependent on, among other things, (i)
approval of the transaction agreement, which includes a plan of liquidation of
the Company, by a vote of two-thirds of the shares in attendance, by proxy or
otherwise, at an extraordinary meeting of shareholders of the Company assuming
at least a majority of outstanding shares are in attendance or represented and
(ii) approval by a majority vote of Security Capital shareholders at a special
meeting of stockholders of Security Capital of the issuance of Security Capital
Class B common stock necessary to effect the transaction.
Principles of Financial Presentation
The financial statements of the Company as of 30 September 2000 and for the
three- and nine-month periods ended 30 September 2000 and 1999 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. While management of the Company believes that the
disclosures presented are adequate, these interim financial statements should
be read in conjunction with the financial statements and notes included in the
Company's 1999 Annual Report on Form 20-F.
All accounts of HOLDINGS have been consolidated with the Company and all
significant intercompany transactions have been eliminated upon consolidation.
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 the Company's financial
F-8
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30 SEPTEMBER 2000
(UNAUDITED)
statements for the interim periods presented. The results of operations for the
three- and nine-month periods ended 30 September 2000 and 1999 are not
necessarily indicative of the results to be expected for the entire year.
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States. The preparation
of financial statements in conformity with GAAP 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.
The Company accounts for its investments at fair value in accordance with
the U.S. specialised industry accounting rules prescribed by the American
Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide
for Investment Companies (the "Guide"). Under fair value accounting, unrealised
gains or losses are determined by comparing the fair value of the securities
held to the cost of such securities. Unrealised gains or losses relating to
changes in fair value of the Company'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 the Company's operating methods and
plans, certain of the Company's investment gains in majority-owned U.S. real
estate companies may be subject to income taxes.
As of 30 September 2000 and 31 December 1999, 25.9% and 30.5%, respectively,
of the Company's investments were in private or untraded securities valued at
their fair value as determined by the Board of Directors, using the methodology
described more fully in the notes to the consolidated financial statements in
the Company's 1999 Annual Report on Form 20-F. This value may differ from the
value that would have been used had a trading market for these securities
existed. The valuation of assets assumes that any assets disposed of would be
sold in an orderly process; any forced sale of assets under short-term
pressures, which is not foreseen, could adversely affect realisable values.
New Accounting Rules
During June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the Company
effective 1 January 2001. Management intends to adopt the statement as required
in fiscal 2000. Although the Company has not historically used such
instruments, it is not precluded from doing so. Management believes that the
impact of such adoption will not be material to the financial statements.
NOTE 2--INVESTMENTS
The Company aims to have over 95% of its assets deployed in strategic
investment positions and less than 5% invested in other investment positions.
A. Strategic Investment Positions
Strategic investment positions represent significant (minimum of 25% of each
issuer's fully diluted common stock outstanding) equity ownership positions in
public companies or in private companies. With private companies which the
Company sponsors, it expects to own substantially more than 50% of the voting
F-9
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30 SEPTEMBER 2000
(UNAUDITED)
shares. The Company will be the largest shareholder of its strategic investees,
have representation on their boards of directors, and will influence their
operations and strategies through ongoing consultation and research. Strategic
investees are characterised by the perceived potential for a superior market
niche and the ultimate potential for market preeminence with a focused strategy
and product.
B. Other Investment Positions
Historically, other investment positions primarily consisted of ownership
positions of less than 10% of the fully diluted stock in entities taxed as real
estate investment trusts ("REITs") under the U.S. Internal Revenue Code of 1986
and other U.S. real estate companies. The investments took the form of either
direct investments in, or public market purchases of, shares of companies that
the Company believed possessed the requisite fundamentals to generate strong
cash flow growth and/or value appreciation. During the first quarter 2000, the
Company completed the sale of its public other investment positions' portfolio.
At 30 September 2000, the Company has invested $39.6 million primarily in two
private investment positions, both of which are U.S. real estate operating
companies.
As of 31 December 1999, the Company had deployed a total of $165.0 million
in securities of Security Capital, which in turn owned approximately 39.6% of
the Company as of 31 December 1999. This amount was made up of investments in
Security Capital common stock and convertible subordinated debentures. On
22 February 2000, the Company sold all the common stock of Security Capital,
receiving net proceeds of $57.0 million, and on 14 March 2000 the Company sold
all the debentures of Security Capital, receiving net proceeds of $39.9
million.
NOTE 3--LINE OF CREDIT
HOLDINGS has a $350 million unsecured line of credit which is guaranteed by
the Company (the "Line"). The earliest date on which the Line will expire is 1
December 2001, but HOLDINGS has the right on 1 December 2000 to convert the
then outstanding borrowings into a three-year term loan with quarterly
amortisation payments to be made over the three-year period, which would
effectively extend the final loan payment to 1 December 2003. Borrowings under
the Line (and the three-year term loan, if applicable) bear interest at (a) the
sum of (x) the greater of the federal funds rate plus 0.5% per annum or the
United States prime rate and (y) a margin of 0% to 0.85% per annum (based on
the Company's current senior unsecured long-term debt rating) or (b) at
HOLDINGS's option, LIBOR plus a margin of 1.00% to 1.85% per annum (also based
on the Company's current senior unsecured long-term debt). Additionally, there
is a commitment fee of 0.15% to 0.20% per annum (based on the amount of the
line which remains undrawn). All borrowings under the Line are subject to
covenants that the Company must maintain at all times, including: (i) unsecured
liabilities may not exceed 40% of the market value of a borrowing base of owned
securities, (ii) shareholders' equity must exceed the sum of $1.5 billion and
75% of the net proceeds of sales of equity securities after 30 December 1999,
(iii) a ratio of total liabilities to net worth of not more than 1:1, (iv) a
fixed-charge coverage ratio of not less than 1.5:1, (v) an interest-coverage
ratio of not less than 2:1 and (vi) secured debt may not exceed 10% of
consolidated market net worth. As of 30 September 2000, the Company was in
compliance with these covenants.
Average daily borrowings under the Line were $105.0 million for the nine-
month period ended 30 September 2000. Average daily borrowings under a previous
line of credit were $295.0 million for the nine-month period ended 30 September
1999. The weighted average interest rates for these same periods were 7.7% per
annum and 6.5% per annum, respectively. The weighted average stated rate of
interest on borrowings outstanding at 30 September 2000 is 8.2%.
F-10
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30 SEPTEMBER 2000
(UNAUDITED)
NOTE 4--CONVERTIBLE NOTES
Proceeds from the Company's 2% Senior Unsecured Convertible Notes
("Convertible Notes") at issuance, and carrying amount as of the balance sheet
dates, are as follows:
<TABLE>
<CAPTION>
AT 30 SEPTEMBER AT 31 DECEMBER
2000 1999
--------------- --------------
(IN THOUSANDS U.S. $)
<S> <C> <C>
Convertible Notes proceeds................ $ 360,554 $360,554
Accumulated accretion on Convertible
Notes.................................... 38,870 25,603
--------- --------
$ 399,424 $386,157
========= ========
</TABLE>
During May 1998, the Company issued $450 million (aggregate principal amount
at maturity) of Convertible Notes which are convertible at the option of the
holder at any time prior to maturity at a conversion rate equal to 26.39095
shares of the Company per $1,000 aggregate principal amount at maturity of the
Convertible Notes or an aggregate of 11,875,927 shares upon conversion.
Interest is payable semi-annually at the rate of 2.0% per annum on 22 May and
22 November of each year. Effective 1 March 2000, the interest rate payable on
the Convertible Notes was increased to 2.25% per annum. The 2.25% per annum
interest rate was in effect until 14 May 2000, and as of the close of business
on 14 May 2000, the interest rate on the Convertible Notes was reduced to 2.0%
per annum. The Convertible Notes were sold at a discount to their principal
amount at maturity and additional interest accretes at an annual rate of 6.75%
less the 2.0% payment, compounded semi-annually, to par by 22 May 2003. The
Convertible Notes may be redeemed, in whole or in part, at the option of the
Company on or after 23 May 2001 at their accreted value, together with accrued
and unpaid interest. Upon a change in control of the Company, each holder of
Convertible Notes shall have the right, at the holder's option, to require the
Company to repurchase such holder's Convertible Notes, in whole or in part, at
a purchase price equal to their accreted value, together with accrued and
unpaid interest through the repurchase date.
If the transaction agreement to combine Security Capital and the Company, as
described in Note 1, is approved, then on the closing date the Company will
deposit with the indenture trustee for the Convertible Notes an amount which
will provide for the redemption of the Convertible Notes, at their then
accreted value, on the later of 23 May 2001 or the 30th day after the closing
of the transaction and for payment of all accrued and unpaid interest through
the date of redemption.
Conversion of the Convertible Notes would be anti-dilutive for the three-
and nine-month periods ended 30 September 2000 and 1999.
NOTE 5--ADVISORY AGREEMENT
The Company has an advisory agreement with Security Capital U.S. Realty
Management Holdings S.A. (the "Operating Advisor"), a wholly owned subsidiary
of Security Capital. This agreement requires the Operating Advisor to provide
the Company with advice with respect to strategy, investments, financing and
certain other administrative matters. The agreement automatically renews for
successive two-year periods unless either party gives notice it will not renew.
The Operating Advisor subcontracts for certain services through affiliates
based in London, United Kingdom and Chicago, Illinois, United States. The
Operating Advisor is entitled to an advisory fee, payable monthly in arrears,
at an annual rate of 1.25% of the average monthly value of invested assets
(excluding investments in Security Capital securities and investments of short-
term cash and cash equivalents). The Company pays its own third-party operating
and administrative expenses
F-11
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30 SEPTEMBER 2000
(UNAUDITED)
and transaction costs, although the Operating Advisor's fee is reduced to the
extent that third-party operating and administrative expenses (but not
transaction costs) exceed 0.25% per annum of the average monthly value of
invested assets (excluding investments in Security Capital securities and
investments of short-term cash and cash equivalents). Such third party
operating and administrative costs as a ratio of the average monthly value of
assets were 0.06% and 0.01% for the nine months ended 30 September 2000 and
1999, respectively.
The Company pays fees to (i) Banque Internationale a Luxembourg as
Administrative Agent, Corporate Agent and Paying Agent, (ii) First European
Transfer Agent S.A. as Registrar and Transfer Agent, and (iii) Security Capital
European Services S.A. as Domiciliary Agent and Service Agent, in accordance
with usual practice in Luxembourg. Such fees are payable quarterly and are
based on the Company's gross assets.
NOTE 6--TAXATION
Security Capital U.S. Realty, as separate from HOLDINGS, is not liable for
any Luxembourg tax on income. Security Capital U.S. Realty is liable in
Luxembourg for a capital tax of 0.06% per annum of its net asset value. Cash
dividends and interest received by Security Capital U.S. Realty or HOLDINGS on
their investments may be subject to non-recoverable withholding or other taxes
in the countries of origin. U.S. withholding tax rates of 15% were generally in
effect for dividends received for all periods presented.
Under the current United States-Luxembourg tax treaty, the Company believes
that HOLDINGS qualifies for a 15% rate of withholding tax on dividends of
operating income from the REIT investments currently held by HOLDINGS and from
its future REIT investments (if any). The Company also believes that HOLDINGS
will qualify for a 15% rate of withholding tax under the proposed United
States-Luxembourg tax treaty ratified by the United States on most, if not all,
of the REIT investments currently held by HOLDINGS and from future REIT
investments (if any). The Company's beliefs are based on the advice of tax
counsel and the manner in which management intends to operate the Company.
There can be no assurance that these favourable rates will be achieved as to
all such investments. These benefits are also dependent on HOLDINGS meeting the
"limitations on benefits" test under Article 24 of the proposed new treaty. The
tests prescribed by Article 24, particularly in terms of stock ownership
requirements, base erosion and publicly traded criteria, are inherently factual
in nature. Such tests will only need to be applied to HOLDINGS at a future, and
presently indeterminate, point in time and will be dependent on the particular
facts at such time. However, management will use its best efforts to ensure
that HOLDINGS meets the conditions for claiming the reduced treaty withholding
tax rate at the relevant times and the Company currently believes that such
conditions will be met.
Under the U.S. Foreign Investment in Real Property Tax Act of 1980
("FIRPTA") the gain on disposition of a majority-owned U.S. real property
interest by the Company would be subject to U.S. income tax. Accordingly a
deferred tax expense and deferred tax liability has been provided on the
unrealised gain on the Company's investment in Regency as of 30 September 2000.
HOLDINGS, an ordinary corporate taxpayer under Luxembourg law, owns all of
the consolidated group's interests in REITs and other U.S. real estate
companies. Corporations which are resident Luxembourg taxpayers are taxed on
their worldwide net income, determined on the basis of gross income less costs
incurred. Certain items of income and capital gains are excluded from the
calculation of income received for tax purposes, including income and capital
gains from certain investments which meet certain holding period (generally one
calendar year) and size requirements. HOLDINGS operates so as to have the
highest possible percentage of its investments qualify for the exclusion.
Interest accrued on advances from the Company to HOLDINGS is deducted in
determining HOLDINGS's taxable income.
F-12
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30 SEPTEMBER 2000
(UNAUDITED)
Income paid from HOLDINGS to the Company is subject to various levels of
tax, including withholding taxes. Gross cash (but not accrued) interest
payments from HOLDINGS to the Company are subject to withholding tax at a rate
of 3.75%. No dividends were paid to the Company during the reporting periods.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
30 SEPTEMBER
-------------------------
(IN THOUSANDS U.S. $)
2000 1999
------------ ------------
<S> <C> <C>
Gross cash interest payments................... $ 24,985 $ 24,217
============ ============
Capital tax.................................... $ 942 $ 919
Withholding tax................................ (1,466) 2,203
------------ ------------
$ (524) $ 3,122
============ ============
</TABLE>
NOTE 7--DIRECTORS' SHARE OPTION EQUIVALENTS
Each of the Company's independent directors has received share option
equivalents ("SOE") of 25,000 shares of the Company at exercise prices ranging
from $12.30 to $28.88 per share. All grants of SOEs were for services rendered
by the Board of Directors subsequent to their grant. SOEs do not represent a
right to purchase shares from the Company, but a right to receive a restricted
cash payment equal to the excess, if any, of the closing stock price of 25,000
shares on the day of exercise over the exercise price, which was the closing
stock price on the date of grant. Such payments must be applied to the purchase
of shares or American Depositary Shares in the open market at the closing stock
price on the date of exercise. Directors were granted a vested right to
exercise one half of their SOEs immediately, and rights to the balance vest on
the fourth anniversary of their issuance. The right to exercise all SOEs
expires five years from the date of grant. The transaction agreement described
in Note 1, if approved, provides for immediate vesting of all the Company's
outstanding SOEs.
The Company accrues an expense and a liability over the vesting period. This
accrual is adjusted for changes in the Company's closing stock price at each
balance sheet date with the resultant change representing a charge/(reduction)
to administrative expenses for the period in the consolidated statement of
operations. The charges/(reduction) were $290,250 and $(235,000) for the nine
months ended 30 September 2000 and 1999, respectively. At 30 September 2000,
there were 150,000 SOEs granted at a weighted average exercise price of $18.11,
of which 100,000 were vested at a weighted average exercise price of $16.80.
NOTE 8--COMMITMENTS
The Company's existing and committed fundings at cost as of 30 September
2000 were as follows:
<TABLE>
<CAPTION>
TOTAL AMOUNT TOTAL COST AMOUNT TO
COMMITTED (AMOUNT FUNDED) BE FUNDED
------------ --------------- ---------
(IN THOUSANDS U.S. $)
<S> <C> <C> <C>
CarrAmerica (NYSE: CRE).............. $ 699,905 $ 699,905 $ --
City Center Retail (Private)......... 175,722 175,722 --
CWS Communities (Private)............ 300,330 268,739 31,591
Regency (NYSE: REG).................. 759,807 759,807 --
Storage USA (NYSE: SUS).............. 394,362 394,362 --
Urban Growth Property (Private)...... 188,582 188,582 --
Private investment positions......... 40,544 40,544 --
---------- ---------- -------
Total.............................. $2,559,252 $2,527,661 $31,591
========== ========== =======
</TABLE>
F-13
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30 SEPTEMBER 2000
(UNAUDITED)
Capital deployed to additional strategic investment positions, as well as
further funding to existing strategic investees, will generally be initially
funded with borrowings under the new HOLDINGS Line. These borrowings are
expected to be reduced by internally generated free cash flow. If the
transaction agreement to combine Security Capital and the Company, as described
in Note 1, is approved, then on the closing date the funding obligation to CWS
Communities will be assumed by Security Capital.
NOTE 9--LEGAL RESERVE
According to Luxembourg law, an annual transfer of 5% of the net profit to a
legal reserve is required until this reserve equals 10% of the value of the
issued Share capital. No transfer will be made in 2000 as a result of the
decrease in net assets resulting from operations for the year ended 31 December
1999.
NOTE 10--SHARE REPURCHASE PROGRAMME
On 29 March 2000, the Company announced the completion of its second $100
million share repurchase programme. The Company also announced that its Board
of Directors authorised an increase in the Company's share repurchase programme
by $50 million to $250 million. As of 30 September 2000, the Company had
repurchased 11,677,914 shares at an aggregate cost of $212.3 million,
representing approximately 13.5% of the Company's shares outstanding at the
commencement of the initial programme. As of 30 September 2000 the share
purchase programme has been suspended pending the closing of the transaction
agreement to combine the Company and Security Capital. The net asset value per
share as of 30 September 2000 has been calculated on 74,883,958 shares
outstanding.
F-14
<PAGE>
SECURITY CAPITAL U.S. REALTY
AUDITOR'S REPORT
To the Board of Directors and 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, and the consolidated schedules
of investments and the notes to the consolidated financial statements of
Security Capital U.S. Realty (the "Company") as of 31 December 1999 and 1998
and for each of the three years ended 31 December 1999, 1998 and 1997. 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 audits.
We conducted our audits in accordance with International Standards on
Auditing and United States 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, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the attached consolidated financial statements audited by us
present fairly, in all material respects, the financial position of the Company
and its subsidiaries at 31 December 1999 and 1998, and the results of their
operations and their cash flows and their financial highlights for each of the
three years ended 31 December 1999, 1998 and 1997 in conformity with Luxembourg
legal and regulatory requirements and in conformity with accounting principles
generally accepted in the United States.
PricewaterhouseCoopers S.a.r.l. Luxembourg, 25 February 2000
F-15
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF NET ASSETS
(IN THOUSANDS $, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT 31 DECEMBER
----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Strategic investment positions at value:
CarrAmerica (Cost $699,905 and $699,851,
respectively)....................................... $ 604,247 $ 686,482
City Center Retail (Cost $304,132 and $304,035,
respectively)....................................... 304,132 304,035
CWS Communities (Cost $236,488 and $153,563,
respectively)....................................... 236,488 153,563
Regency (Cost $759,807 and $759,788,
respectively)(Note 3A).............................. 685,465 762,580
Storage USA (Cost $394,362 and $394,272,
respectively)....................................... 355,911 380,178
Urban Growth Property (Cost $188,582 and $181,082,
respectively)....................................... 188,582 181,082
Other investment positions at value:
Security Capital Group Incorporated (Cost $165,000
and $165,000, respectively)......................... 95,780 116,245
Private investment positions (Cost $42,019 and
$15,275, respectively).............................. 42,019 15,275
Public special opportunity positions (Cost $0 and
$298,756, respectively)............................. -- 247,205
---------- ----------
Total investments...................................... $2,512,624 $2,846,645
Cash and cash equivalents.............................. 2,732 2,994
Accounts receivable and other (Note 4)................. 15,530 23,989
---------- ----------
TOTAL ASSETS........................................... $2,530,886 $2,873,628
---------- ----------
LIABILITIES
Accounts payable and accrued expenses (Note 5)......... $ 6,033 $ 13,497
Taxes payable (Note 9)................................. 4,818 1,306
Line of credit (Note 6)................................ 239,000 262,500
Convertible notes (Note 7)............................. 386,157 369,940
---------- ----------
TOTAL LIABILITIES...................................... $ 636,008 $ 647,243
---------- ----------
TOTAL NET ASSETS (SHAREHOLDERS' EQUITY)................ $1,894,878 $2,226,385
========== ==========
SHARES
Authorized 250,000,000 shares of $4.00 par value,
86,561,872 shares issued and 76,700,437 shares
outstanding at 31 December 1999 and 86,561,872
shares issued and outstanding at 31 December 1998
(Note 13)........................................... $ 346,247 $ 346,247
Share premium account (Note 14)........................ 1,564,939 1,749,158
---------- ----------
PAID-IN CAPITAL........................................ $1,911,186 $2,095,405
Legal Reserve (Note 12)................................ $ 30,375 $ 30,375
Reserve for own shares (Note 14)....................... 184,219 --
Undistributed net operating income..................... 219,144 148,152
Accumulated net realised gain.......................... 11,844 77,431
Unrealised depreciation on strategic investment and
other investment positions............................ (277,671) (124,978)
Acquisition of own shares (Note 14).................... (184,219) --
---------- ----------
TOTAL NET ASSETS....................................... $1,894,878 $2,226,385
========== ==========
Net Asset Value per share (Note 14).................... $ 24.70 $ 25.72
</TABLE>
The accompanying notes form an integral part of the financial statements.
F-16
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS $, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED 31
DECEMBER
------------------------------
1999 1998 1997
--------- --------- --------
REVENUES
Gross dividends from strategic
investment positions:
CarrAmerica...................... $ 52,916 $ 51,999 $ 41,412
City Center Retail............... 6,990 -- --
CWS Communities.................. 9,057 4,783 --
Regency (Note 3A)................ 57,852 56,422 33,017
Storage USA...................... 31,532 29,934 24,497
Urban Growth Property............ 10,160 4,338 --
--------- --------- --------
$168,507 $ 147,476 $ 98,926
Gross dividends from public special
opportunity positions............. 8,925 20,908 17,594
--------- --------- --------
$177,432 $ 168,384 $116,520
Interest income from affiliate..... 3,575 3,575 2,896
Interest income from non-affiliate
and other income.................. 4,188 1,132 805
--------- --------- --------
TOTAL GROSS REVENUES............... $ 185,195 $ 173,091 $120,221
Withholding tax on dividends
received.......................... (24,152) (16,266) (17,304)
--------- --------- --------
TOTAL REVENUES..................... $ 161,043 $ 156,825 $102,917
========= ========= ========
EXPENSES
Operating advisor fees............. $ 32,544 $ 35,220 $ 24,632
Custodian fees..................... 475 459 470
Directors fees..................... 155 103 85
Professional expenses.............. 1,500 1,843 810
Administrative expenses............ 1,404 2,057 1,159
Amortisation of convertible notes
deferred costs.................... 1,573 959 --
Taxes.............................. 4,555 2,429 1,857
Line of credit arrangement and
commitment fees................... 1,177 2,561 2,259
Interest on line of credit......... 20,045 18,434 11,336
Interest on convertible notes...... 26,623 14,861 --
--------- --------- --------
TOTAL EXPENSES..................... $ 90,051 $ 78,926 $ 42,608
--------- --------- --------
NET OPERATING INCOME............... $ 70,992 $ 77,899 $ 60,309
NET REALISED AND UNREALISED
(LOSS)/GAIN ON STRATEGIC
INVESTMENT AND OTHER INVESTMENT
POSITIONS
Net realised (loss)/gain on public
special opportunity positions..... $ (65,587) $ 32,878 $ 41,073
Net (decrease)/increase in
appreciation on strategic
investment and other investment
positions......................... (152,693) (642,372) 264,974
--------- --------- --------
NET (LOSS)/GAIN ON STRATEGIC
INVESTMENT AND OTHER INVESTMENT
POSITIONS......................... $(218,280) $(609,494) $306,047
--------- --------- --------
(DECREASE)/INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS......... $(147,288) $(531,595) $366,356
========= ========= ========
The accompanying notes form an integral part of the financial statements.
F-17
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS $, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 DECEMBER
---------------------------------
1999 1998 1997
--------- --------- -----------
<S> <C> <C> <C>
Operating Activities:
(Decrease)/Increase in net assets resulting
from operations........................... $(147,288) $(531,595) $ 366,356
Adjustments to reconcile
(decrease)/increase in net assets
resulting from operations to net cash
provided by operating activities:
Movement in unrealised gain............... 152,693 642,372 (264,974)
Movement in accretion on convertible
notes.................................... 16,217 9,387 --
Movement in convertible notes deferred
costs.................................... 1,573 959 --
Changes in operating assets and
liabilities:
Accounts receivable and other............ 6,886 (10,266) 1,498
Interest receivable from affiliate....... -- -- 366
Accounts payable and accrued expenses.... (1,233) (256) 2,488
Operating advisor fees payable........... (6,230) 1,371 4,629
Taxes payable............................ 3,512 286 625
--------- --------- -----------
Net cash provided by operating
activities............................. $ 26,130 $ 112,258 $ 110,988
--------- --------- -----------
Investing Activities:
Fundings in strategic investment positions:
CarrAmerica............................... $ (54) $ (63,464) $ (207,971)
City Center Retail........................ (97) (220,370) (83,665)
CWS Communities........................... (82,925) (60,963) (92,600)
Regency(Note 3A).......................... (19) (10,634) (471,741)
Storage USA............................... (90) (45,828) (76,561)
Urban Growth Property..................... (7,500) (163,379) (17,703)
Fundings in Security Capital Group......... -- -- (142,500)
Fundings in other investment positions,
net....................................... 272,012 (31,323) (104,700)
--------- --------- -----------
Net cash provided/(used) in investing
activities............................. $ 181,327 $(595,961) $(1,197,441)
--------- --------- -----------
Financing Activities:
Net proceeds from share offerings.......... $ -- $ -- $ 1,072,966
Net proceeds from convertible notes
offering.................................. -- 352,667 --
Offering expenses charged against the share
premium account........................... -- (440) --
Acquisition of own shares.................. (184,219) -- --
Net (repayments)/drawdowns from line of
credit.................................... (23,500) 132,500 (39,500)
--------- --------- -----------
Net cash (used)/provided by financing
activities............................. $(207,719) $ 484,727 $ 1,033,466
--------- --------- -----------
Net (decrease)/increase in cash and cash
equivalents................................ $ (262) $ 1,024 $ (52,987)
Cash and cash equivalents, beginning of the
year....................................... 2,994 1,970 54,957
--------- --------- -----------
Cash and cash equivalents, end of the year.. $ 2,732 $ 2,994 $ 1,970
========= ========= ===========
Supplemental disclosure of cash flow
information:
Tax paid.................................... $ 1,043 $ 2,141 $ 1,232
========= ========= ===========
Interest paid on borrowings................ $ 30,012 $ 22,987 $ 11,929
========= ========= ===========
</TABLE>
The accompanying notes form an integral part of these financial statements.
F-18
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS $)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 DECEMBER
----------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS $, EXCEPT PER
SHARE AMOUNT)
<S> <C> <C> <C>
OPERATIONS:
Net operating income........................ $ 70,992 $ 77,899 $ 60,309
Net realised (loss)/gain on public special
opportunity positions...................... (65,587) 32,878 41,073
(Decrease)/Increase in appreciation on
strategic investment and other investment
positions.................................. (152,693) (642,372) 264,974
---------- ---------- ----------
(Decrease)/Increase in net assets resulting
from operations............................ $ (147,288) $ (531,595) $ 366,356
CAPITAL TRANSACTIONS:
Net proceeds from offerings................. -- $ -- $1,072,965
(Decrease)/Increase in share premium
account.................................... (184,219) (440) --
Increase in reserve for own shares.......... 184,219 -- --
Acquisition of own shares during the year... (184,219) -- --
---------- ---------- ----------
(Decrease)/Increase in net assets resulting
from capital transactions.................. $ (184,219) $ (440) $1,072,965
NET ASSETS:
(Decrease)/Increase in net assets during the
year....................................... $ (331,507) $ (532,035) $1,439,321
Net assets at the beginning of the year..... 2,226,385 2,758,420 1,319,099
---------- ---------- ----------
Net assets at the end of the year (includes
undistributed net operating income of
$219,144, $148,152 and $73,324 for the
years ended 31 December 1999, 1998 and
1997, respectively)........................ $1,894,878 $2,226,385 $2,758,420
========== ========== ==========
Per Share Data:
Net Asset Value............................. $24.70 $25.72 $31.87
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHARES OUTSTANDING (1)
<TABLE>
<CAPTION>
NUMBER OF SHARES
FOR THE YEARS ENDED 31 DECEMBER
---------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
At the beginning of the year................. 86,561,872 86,561,872 48,246,355
Issued during the year....................... -- -- 38,315,517
Acquisition of own shares during the year.... (9,861,435) -- --
---------- ---------- ----------
At the end of the year....................... 76,700,437 86,561,872 86,561,872
========== ========== ==========
</TABLE>
--------
(1) Share amounts have been restated to reflect the reverse stock split which
took effect 18 June 1999. See Note 13.
The accompanying notes form an integral part of the financial statements.
F-19
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED FINANCIAL HIGHLIGHTS (1)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 DECEMBER
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Per share data:
Net asset value at the beginning of the
year...................................... $ 25.72 $ 31.87 $ 27.34
Net operating income....................... 0.86 0.90 0.92
Net change in movement in unrealised
appreciation and
realised gain on strategic investment and
other
investment positions in the year.......... (2.65) (7.05) 4.64
Shares issued during the year.............. -- -- (1.03)
Acquisition of own shares during the year.. 0.77 -- --
---------- ---------- ----------
Net asset value per share at the end of the
year...................................... $ 24.70 $ 25.72 $ 31.87
========== ========== ==========
</TABLE>
--------
(1) Per share amounts have been restated to reflect the reverse stock split
which took effect 18 June 1999. See Note 13.
The accompanying notes form an integral part of the financial statements.
F-20
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF STRATEGIC INVESTMENT POSITIONS
AT 31 DECEMBER 1999
(IN THOUSANDS $, EXCEPT SHARES HELD AND PERCENTAGES)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
STRATEGIC INVESTMENT SECURITY SHARES OF TOTAL
POSITIONS TYPE HELD COST VALUE ASSETS
-------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CarrAmerica............. Common Stock 28,603,417 $ 699,905 $ 604,247 23.9%
City Center Retail...... Common Stock 30,390,000 304,132 304,132 12.0%
CWS Communities......... Common Stock 23,615,858 236,488 236,488 9.3%
Regency (Note 3A)....... Common Stock 34,273,236 759,807 685,465 27.1%
Storage USA............. Common Stock 11,765,654 394,362 355,911 14.1%
Urban Growth Property... Common Stock 18,824,100 188,582 188,582 7.4%
---------- ---------- ----
Total investment in
strategic investment
positions.............. $2,583,276 $2,374,825 93.8%
========== ========== ====
</TABLE>
AT 31 DECEMBER 1998
(IN THOUSANDS $, EXCEPT SHARES HELD AND PERCENTAGES)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
STRATEGIC INVESTMENT SECURITY SHARES OF TOTAL
POSITIONS TYPE HELD COST VALUE ASSETS
-------------------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CarrAmerica............. Common Stock 28,603,417 $ 699,851 $ 686,482 23.9%
City Center Retail...... Common Stock 30,390,000 304,035 304,035 10.6%
CWS Communities......... Common Stock 15,323,358 153,563 153,563 5.3%
Regency (Note 3A)....... Common Stock 34,273,236 759,788 762,580 26.6%
Storage USA............. Common Stock 11,765,654 394,272 380,178 13.2%
Urban Growth Property... Common Stock 18,074,100 181,082 181,082 6.3%
---------- ---------- ----
Total investment in
strategic investment
positions.............. $2,492,591 $2,467,920 85.9%
========== ========== ====
</TABLE>
The accompanying notes are part of the financial statements.
F-21
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF OTHER INVESTMENT POSITIONS
AT 31 DECEMBER 1999
(IN THOUSANDS $, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
PERCENTAGE OF
COST VALUE TOTAL ASSETS
-------- -------- -------------
<S> <C> <C> <C>
PROPERTY TYPE
Private investment positions
Companies in which SC-U.S. Realty owns a 5%
or greater interest:
Other...................................... $ 39,215 $ 39,215 1.6%
Companies in which SC-U.S. Realty owns less
than a 5% interest:
Other...................................... 2,804 2,804 0.1%
-------- -------- ---
Total investment in private investment
positions..................................... $ 42,019 $ 42,019 1.7%
Investment in Security Capital Group
Incorporated.................................. 165,000 95,780 3.8%
-------- -------- ---
Total investment in other investment
positions..................................... $207,019 $137,799 5.5%
======== ======== ===
</TABLE>
AT 31 DECEMBER 1998
(IN THOUSANDS $, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
PERCENTAGE OF
COST VALUE TOTAL ASSETS
-------- -------- -------------
<S> <C> <C> <C>
PROPERTY TYPE
Private investment positions
Companies in which SC-U.S. Realty owns a 5%
of greater interest:
Other...................................... $ 14,446 $ 14,446 0.5%
Companies in which SC-U.S. Realty owns less
than 5% interest:
Other:..................................... 829 829 0.1%
-------- -------- ----
Total investment in private investment
positions..................................... $ 15,275 $ 15,275 0.6%
Public special opportunity positions
Companies in which SC-U.S. Realty owns a 5%
or greater interest:
Retail..................................... $ 35,493 $ 37,646 1.3%
Companies in which SC-U.S. Realty owns less
than a 5% interest:
Office/Industrial.......................... 107,905 97,658 3.4%
Hotel...................................... 79,600 41,356 1.4%
Multifamily................................ 29,044 28,727 1.0%
Storage.................................... 10,227 11,350 0.4%
Diversified................................ 13,683 11,004 0.4%
Retail..................................... 8,406 6,949 0.2%
Other...................................... 14,398 12,515 0.4%
-------- -------- ----
Total investment in public special opportunity
positions..................................... $298,756 $247,205 8.5%
Investment in Security Capital Group
Incorporated.................................. 165,000 116,245 4.0%
-------- -------- ----
Total investment in other investment
positions..................................... $479,031 $378,725 13.1%
======== ======== ====
</TABLE>
The accompanying notes are part of the financial statements.
F-22
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANISATION
Security Capital U.S. Realty (the "Company" or "we") (NYSE: RTY, Amsterdam
Stock Exchange ISIN Code: LU0060100673, Bloomberg Symbol: SCUS NA, Reuters
Symbol: CAPAu.AS) was incorporated on 7 July 1995 and is a research-driven real
estate management company focused on taking significant strategic investment
positions (with board representation, consultation and other rights) in value-
added real estate operating companies based in the United States. Our primary
capital deployment objective is to take a proactive ownership role in
businesses that it believes can potentially generate above-average rates of
return. We are organised in Luxembourg as a Societe d'Investissement a Capital
Fixe (a company with a fixed capital). On 24 June 1999 our ADRs began trading
on the NYSE under the ticker symbol "RTY".
We own our assets through direct and indirect wholly owned subsidiaries,
including Security Capital Holdings S.A. (such subsidiaries collectively
referred to herein as "Holdings"). All accounts of Holdings have been
consolidated with SC-U.S. Realty and all significant intercompany transactions
have been eliminated upon consolidation. References to SC-U.S. Realty are to
the consolidated entity consisting of Security Capital U.S. Realty and
Holdings, unless noted otherwise.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States and with
Luxembourg regulatory requirements. The preparation of financial statements in
accordance with GAAP requires our management to make estimates of certain
reported amounts in the financial statements. Actual results may differ from
those estimates.
A. Fair Value Basis of Presentation
We account for our investments at fair value in accordance with the U.S.
specialised industry accounting rules prescribed by the American Institute of
Certified Public Accountants (AICPA) Audit and Accounting Guide for Investment
Companies (the "Guide"). Thus, our investments in publicly traded companies are
valued at market determined by using closing market prices on the NYSE or other
recognised stock exchanges when appropriate as of the balance sheet date,
subject to an appropriate adjustment for transfer restrictions, if any. For
privately held investments in which we have an ownership interest, we will,
whenever the Board of Directors believes significant developments have occurred
affecting the value of an investment and on at least an annual basis, utilise
valuation evidence and methodologies appropriate to the nature of the
investment to derive fair value. These will include external valuations, cash
flow valuation techniques and valuation information derived through placements
of private companies' securities as well as review by management for other
specific indicators of changes in value relating to property performance and/or
significant changes in local or general market conditions. The Board of
Directors, in its discretion, may permit some other method of valuation to be
used, if it determines that such valuation better reflects the fair value of
any of our assets.
Under fair value accounting, unrealised gains or losses are determined by
comparing the fair value of the securities held to the cost of such securities.
Unrealised gains or losses relating to changes in fair value of our 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 our
operating methods and plans, our investment gains generally are not subject to
income taxes.
As of 31 December 1999 and 1998, 30.5% and 22.8%, respectively, of our
investments were in private or untraded securities valued at their fair value
as determined by the Board of Directors, using the methodology described above.
This value may differ from the value that would have been used had a trading
market for these securities existed. The valuation of assets assumes that any
assets disposed of would be sold in an orderly
F-23
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
process; any forced sale of assets under short-term pressures, which is not
foreseen, could adversely affect realisable values.
B. Accounting for Investments and Income
All purchases and sales of publicly traded securities are recorded as of the
trade date (i.e., the date that our broker actually executes an order to buy or
sell). All purchases and sales of privately held securities are recorded as of
the date the actual purchase or sale is made. Dividend income is recorded on
the ex-dividend date for each dividend declared by an issuer. Dividends
received are presented on a gross basis. Holdings may be entitled to refunds on
a portion of the withholding tax because the withholding tax is not levied on
the portion of dividends which is a return of capital. Interest income is
recorded on the accrual basis. Interest received is stated net of withholding
taxes. Realised gains and losses on sales of shares are determined on the
average cost method.
C. Cash and Cash Equivalents
We consider all cash on hand, demand deposits with financial institutions
and short-term, highly liquid investments with original maturities of three
months or less to be cash equivalents.
D. Deferred Financing Costs/Discounts
Underwriting fees relating to the issuance of the $450 million aggregate
principal amount at maturity of our 2% Senior Unsecured Convertible Notes due
2003 (the "Convertible Notes") are capitalised and amortised over the term of
the obligation. Discounts on the Convertible Notes are accreted as a component
of interest expense using the effective interest method over the term of the
obligation.
E. New Accounting Pronouncements
During June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities".
This statement provides new accounting and reporting standards for the use of
derivative instruments. Adoption of this statement is required by the Company
effective 1 January 2000. Management intends to adopt the statement as required
in fiscal 2001. Although the Company has not historically used such
instruments, it is not precluded from doing so. Management believes that the
impact of such adoption will not be material to the financial statements.
F. Reclassification
Certain 1997 numbers have been reclassified to conform to the 1999
presentation.
NOTE 3--INVESTMENTS
We aim to have over 95% of our assets deployed in strategic investment
positions and less than 5% invested in other investment positions.
A. Strategic Investment Positions
Strategic investment positions represent significant (minimum of 25% of each
issuer's fully diluted common stock outstanding) equity ownership positions in
public companies or in private companies. With private companies which we
sponsor, it expects to own substantially more than 50% of the voting shares. We
will be the largest shareholder of its strategic investees, have representation
on their boards of directors, and
F-24
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
influence their operations and strategies through ongoing consultation and
research. Strategic investees are characterised by the perceived potential for
a superior market niche and the ultimate potential for market preeminence with
a focused strategy and product.
The merger of Pacific Retail and Regency occurred on 28 February 1999.
Shareholders of Pacific Retail received 0.48 shares of Regency common stock for
each common share of Pacific Retail they owned. For the years ended 31 December
1999, 1998 and 1997, the financial information for Pacific Retail has been
reflected in the financial information of Regency.
B. Other Investment Positions
Other investment positions primarily consist of ownership positions of less
than 10% of the fully diluted stock in entities taxed as real estate investment
trusts under the U.S. Internal Revenue Code of 1986, as amended ("REITs") and
other U.S. real estate companies. The investments have and will take the form
of either direct investments in, or public market purchases of, shares of
companies that we believe possess the requisite fundamentals to generate strong
cash flow growth and/or value appreciation. In exceptional circumstances, and
to a very limited extent, we have made investments in companies which are not
publicly traded. Typically such an investment has been in a company which does
not at the time of investment fulfill the criteria for a strategic investment
position.
As of 31 December 1999 and 1998, we had deployed a total of $165 million in
securities of Security Capital Group. This amount is made up of an investment
of $110 million (representing 52,430.9 shares of Class A common stock and $55
million aggregate principal amount of 6.5% convertible subordinated debentures
due 2016) and an additional $55 million (representing 1,964,286 shares of Class
B common stock) invested during Security Capital Group's initial public
offering in September 1997. On 13 January 2000, the Board of Directors
determined that the securities of Security Capital Group should be sold. On 22
February 2000, SC-U.S. Realty sold all the common stock of Security Capital
Group, receiving net proceeds of $57.0 million and on 14 March 2000, SC-U.S.
Realty sold all the debentures of Security Capital Group, receiving net
proceeds of $39.9 million. As of 31 December 1999, the company carried its
entire investment in Security Capital Group securities at $95.8 million,
reflecting fair market value on that date.
NOTE 4--ACCOUNTS RECEIVABLE AND OTHER
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------
1999 1998
------- -------
(IN THOUSANDS $)
<S> <C> <C>
Dividends................................................. $ 6,701 $ 8,162
Receivable from brokers on investments sold............... -- 8,219
Deferred issue costs on Convertible Notes (1)............. 5,354 6,927
Interest.................................................. 3,473 580
Refund of withholding tax................................. -- 97
Other..................................................... 2 4
------- -------
$15,530 $23,989
======= =======
</TABLE>
--------
(1) Represents the underwriting fees of $7.9 million relating to the issuance
of Convertible Notes (see Note 7). The fees have been deferred and will be
fully amortised over a period of five years starting from the date of
issue on 22 May 1998.
F-25
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
AT DECEMBER 31
--------------
1999 1998
------ -------
(IN THOUSANDS $)
<S> <C> <C>
Operating advisor fees..................................... $2,384 $ 8,614
Interest payable on line of credit......................... 1,108 762
Interest payable on Convertible Notes...................... 1,068 975
Custodian fees............................................. 70 110
Acquisition of own shares.................................. 239 --
Other...................................................... 1,164 3,036
------ -------
$6,033 $13,497
====== =======
</TABLE>
NOTE 6--LINE OF CREDIT
On 30 December 1999, the $400 million unsecured line of credit of the
Company, which was guaranteed by HOLDINGS (the "Company Line"), was replaced by
the $350 million unsecured line of credit of HOLDINGS, which is guaranteed by
the Company (the "new HOLDINGS Line") (both lines referred to herein as the
"Lines of Credit").
In an effort to secure investment-grade ratings, on 8 December 1998, SC-U.S.
Realty converted its $700 million secured line of credit of HOLDINGS (the "old
HOLDINGS Line"), into the Company Line from Commerzbank Aktiengesellschaft and
a consortium of European and international banks, of which $262.5 million was
drawn and outstanding as of 31 December 1998. SC-U.S. Realty received
investment-grade ratings from each of Moody's Investor Service (Baa3), Standard
& Poor's Rating Services (BBB-) and Duff & Phelps Credit Rating Co. (BBB-). On
30 December 1999 the new HOLDINGS Line was extended for an additional year and
reduced to $350 million.
The earliest date on which the new HOLDINGS Line will expire is 1 December
2001, but SC-U.S. Realty has the right on 1 December 2000 to convert the then
outstanding borrowings into a three-year term loan with quarterly amortisation
payments to be made over the four-year period, which would effectively extend
the final loan payment to 1 December 2003. Borrowings under the new HOLDINGS
Line (and the three-year term loan, if applicable) bear interest at (a) the sum
of (x) the greater of the federal funds rate plus 0.5% per annum or the United
States prime rate and (y) a margin of 0% to 0.85% per annum (based on SC-U.S.
Realty's current senior unsecured long-term debt rating) or (b) at SC-U.S.
Realty's option, LIBOR plus a margin of 1.00% to 1.85% per annum (also based on
SC-U.S. Realty's current senior unsecured long-term debt). Additionally, there
is a commitment fee of 0.15% to 0.20% per annum (based on the amount of the
line which remains undrawn). All borrowings under the new HOLDINGS Line are
subject to covenants that SC-U.S. Realty must maintain at all times, including:
(i) unsecured liabilities may not exceed 40% of the market value of a borrowing
base of owned securities, (ii) shareholders' equity must exceed the sum of $1.5
billion and 75% of the net proceeds of sales of equity securities thereafter,
(iii) a ratio of total liabilities to net worth of not more than 1:1, (iv) a
fixed-charge coverage ratio of not less than 1.5:1, (v) an interest-coverage
ratio of not less than 2:1 and (vi) secured debt may not exceed 10% of
consolidated market net worth. As of 31 December 1999, SC-U.S. Realty was in
compliance with these covenants.
Our total indebtedness under the new Holdings line as of 31 December 1999
was $239.0 million and under the Company line as of 31 December 1998 was $262.5
million.
Average daily borrowings under the new Holdings line were $297.9 million for
the year ended 31 December 1999. Average daily borrowings under the Company
line and the old Holdings line were
F-26
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$274.4 million for the year ended 31 December 1998. The weighted average
interest rates for these same periods were 6.60% and 6.67%, respectively.
NOTE 7--CONVERTIBLE NOTES
<TABLE>
<CAPTION>
AT
31 DECEMBER 1999
----------------
(IN THOUSANDS $)
<S> <C>
Convertible Notes proceeds.............................. $360,554
Accumulated accretion on Convertible Notes.............. 25,603
--------
$386,157
========
</TABLE>
We completed a convertible debt offering in May 1998. A holder may convert
the Convertible Notes at any time prior to maturity at a conversion rate equal
to 26.39095 Shares (giving effect to the reverse stock split) per $1,000
aggregate principal amount at maturity of the Convertible Notes. Interest is
payable semi-annually at the rate of 2% per annum on 22 May and 22 November of
each year commencing on 22 November 1998. Effective 1 January 1999, the
interest rate payable on the Convertible Notes was increased to 2.5% per annum.
The 2.5% interest rate was in effect until SC-U.S. Realty listed certain equity
securities on the NYSE and registered the Convertible Notes and related equity
securities for resale. SC-U.S. Realty completed these steps on 30 July 1999 and
as of 1 August 1999, the interest rate on the Convertible Notes was reduced to
2.0% per annum. The Convertible Notes were sold at a discount to their
principal amount at maturity and additional interest will accrete at a rate of
4.75%, compounded semi-annually, to par by 22 May 2003. We may redeem the
Convertible Notes, in whole or in part, on or after 23 May 2001 at the accreted
value, together with accreted and unpaid interest. Upon a change in control of
SC-U.S. Realty, each holder of Convertible Notes may require the Company to
repurchase such holder's Convertible Notes, in whole or in part, at a purchase
price equal to the accreted value, together with accrued and unpaid interest
through the repurchase date.
Conversion of the Convertible Notes would be anti-dilutive for the year
ended 31 December 1999.
NOTE 8--ADVISORY AGREEMENT
We have an advisory agreement with Security Capital U.S. Realty Management
S.A. (the "Operating Advisor"), a wholly owned subsidiary of Security Capital
Group. This agreement requires the Operating Advisor to provide us with advice
with respect to strategy, investments, financing and certain other
administrative matters affecting us. The Operating Advisor has agreed to
identify tangible capital deployment opportunities in U.S. real estate
companies and evaluate such companies' competitive positions, management
expertise, strategic direction, financial strength and prospects for long-term
sustainable per share cash flow growth. The Operating Advisor also advises us
on obtaining board and committee representation and management rights from
strategic investees. The agreement automatically renews for successive two-year
periods unless either party gives notice it will not renew. The Operating
Advisor subcontracts for certain services through affiliates based in London,
United Kingdom and Chicago, Illinois, United States. The Operating Advisor is
entitled to an advisory fee, payable monthly in arrears, at an annual rate of
1.25% of the average monthly value of invested assets (excluding investments in
Security Capital Group securities and investments of short-term cash and cash
equivalents). We pay our own third party operating and administrative expenses
and transaction costs, although the Operating Advisor's fee will be reduced to
the extent that third party operating and administrative expenses (but not
transaction costs) exceed 0.25% per annum of average monthly value of invested
assets (excluding investments in Security Capital Group securities and
investments
F-27
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of short-term cash and cash equivalents). Such third party operating and
administrative costs as a ratio of average monthly value of assets were 0.08%,
0.09% and 0.13% for the years ended 31 December 1999, 1998 and 1997,
respectively.
We pay fees to (i) Banque Internationale a Luxembourg as Administrative
Agent, Corporate Agent and Paying Agent, (ii) First European Transfer Agent
S.A. as Registrar and Transfer Agent, and (iii) Security Capital European
Services S.A. as Domiciliary Agent and Service Agent, in accordance with usual
practice in Luxembourg. Such fees are payable quarterly and are based on our
gross assets.
NOTE 9--TAXATION
SC-U.S. Realty as separate from Holdings, is not liable for any Luxembourg
tax on income. We are liable in Luxembourg for a capital tax of 0.06% per annum
of its net asset value. Cash dividends and interest received by SC-U.S. Realty
or Holdings on their investments may be subject to non-recoverable withholding
or other taxes in the countries of origin. U.S. withholding tax rates of 15%
were generally in effect for dividends received for all periods presented.
Under the current United States-Luxembourg tax treaty, we believe that
Holdings qualifies for a 15% rate of withholding tax on dividends of operating
income from the REIT investments currently held by Holdings and from its future
REIT investments (if any). We also believe that Holdings will qualify for a 15%
rate of withholding tax under the proposed United States-Luxembourg tax treaty
recently ratified by the United States on most, if not all, of the REIT
investments currently held by Holdings and from future REIT investments (if
any). Our beliefs are based on the advice of tax counsel and on the manner in
which management intends to operate our subsidiaries. There can be no assurance
that these favourable rates will be achieved as to all such investments. These
benefits are also dependent on Holdings meeting the "limitations on benefits"
test under Article 24 of the proposed new treaty. The tests prescribed by
Article 24, particularly in terms of stock ownership requirements, base erosion
and publicly traded criteria are inherently factual in nature. Such tests will
only need to be applied to Holdings (or other subsidiaries of Holdings or our
subsidiaries) at a future, and presently indeterminate, point in time and will
be dependent on the particular facts at such time. However, management intends
to use its best efforts to ensure that Holdings meets the conditions for
claiming the reduced treaty withholding tax rate at the relevant times and the
Company currently believes that such conditions will be met.
Holdings, an ordinary corporate taxpayer under Luxembourg law, owns all of
the consolidated group's interests in REITs and other U.S. real estate
companies. Corporations which are resident Luxembourg taxpayers are taxed on
their worldwide net income, determined on the basis of gross income less costs
incurred. Certain items of income and capital gains are excluded from the
calculation of income received for tax purposes, including income and capital
gains from certain investments which meet certain holding period (generally one
calendar year) and size requirements. Holdings operates so as to have the
highest possible percentage of its investments qualify for the exclusion.
Interest accrued on advances from us to Holdings is deducted in determining
Holdings' taxable income.
Income paid from Holdings to us is subject to various levels of tax,
including withholding taxes. Gross cash (but not accrued) interest payments
from Holdings to us are subject to withholding tax at a rate of 3.75%. No
dividends were paid to us during the reporting periods.
F-28
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
31 DECEMBER
-----------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS $)
<S> <C> <C> <C>
Gross cash interest payments...................... $89,783 $25,262 $15,264
======= ======= =======
Capital tax....................................... $ 1,188 $ 1,481 $ 1,285
Withholding tax................................... 3,367 947 572
------- ------- -------
$ 4,555 $ 2,428 $ 1,857
======= ======= =======
</TABLE>
NOTE 10--DIRECTORS' SHARE OPTION EQUIVALENTS
Each of our independent directors has received share option equivalents
("SOE") of 25,000 Shares at strike prices ranging from $17.20 to $28.88 per
Share. All grants of SOEs were for services rendered by the Board of Directors
subsequent to their grant. A SOE granted prior to 30 June 1998 does not
represent a right to purchase Shares from us, but a right to receive a
restricted cash payment equal to the excess, if any, of the net asset value of
25,000 Shares on the day of exercise over the strike price, which was the net
asset value on the date of grant. Such payments must be applied to the purchase
of Shares to be issued at net asset value on the date of exercise. SOEs granted
after 30 June 1998 do not represent a right to purchase Shares from us, but a
right to receive a restricted cash payment equal to the excess, if any, of the
closing stock price of 25,000 Shares on the day of exercise over the strike
price, which was the closing stock price on the date of grant. Such payments
must be applied to the purchase of Shares to be issued at the closing stock
price on the date of exercise. Directors were granted a vested right to
exercise one-half of their SOEs immediately, and rights to the balance vest on
the fourth anniversary of their issuance. The right to exercise all SOEs
expires five years from the date of grant.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED 31 DECEMBER
-------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SOEs outstanding at
beginning of year...... 150,000 $20.94 125,000 $22.54 100,000 $20.96
SOEs issued............. 25,000 19.60 50,000 17.20 25,000 28.88
SOEs forfeited.......... (12,500) 20.00 (12,500) 21.90 -- --
SOEs exercised.......... (12,500) 20.00 (12,500) 21.90 -- --
-------- ------ -------- ------ -------- ------
SOEs outstanding at end
of year................ 150,000 $20.87 150,000 $20.94 125,000 $22.54
======== ====== ======== ====== ======== ======
SOEs currently
exercisable............ 75,000 $20.87 75,000 $20.94 62,500 $22.54
======== ====== ======== ====== ======== ======
</TABLE>
No SOEs have expired during the years represented above, except for an SOE
in respect of 12,500 Shares granted to a director in October 1998 upon his
retirement. The retiring director exercised the remaining part of such SOE in
respect of 12,500 Shares in September 1999. We accrue a liability for the 50%
of the SOEs granted which vest immediately and the remaining 50% ratably over
the four year vesting period. This accrual is adjusted for changes in our net
asset value or closing stock price, as the case may be, at each balance sheet
date with the resultant change representing a charge to administrative expenses
for the period in the consolidated statement of operations. The charges were
$(256,000), $561,000 and $526,500 for the years ended 31 December 1999, 1998
and 1997, respectively.
F-29
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--COMMITMENTS
Our existing and committed fundings at cost as of 31 December 1999 were as
follows:
<TABLE>
<CAPTION>
TOTAL TOTAL COST AMOUNT
AMOUNT (AMOUNT TO BE
COMMITTED FUNDED)(1) FUNDED (1)
---------- ---------- ----------
(IN THOUSANDS $)
<S> <C> <C> <C>
CarrAmerica (NYSE:CRE).................... $ 699,905 $ 699,905 $ --
City Center Retail (Private).............. 350,232 304,132 46,100(2)
CWS Communities (Private)................. 300,329 236,488 63,841(2)
Regency (NYSE:REG) (3).................... 759,807 759,807 --
Storage USA (NYSE:SUS).................... 394,362 394,362 --
Urban Growth Property (Private)........... 188,582 188,582 --
Security Capital Group (NYSE:SCZ)......... 165,000 165,000 --
Other private investments................. 42,019 42,019 --
---------- ---------- --------
Total................................... $2,900,236 $2,790,295 $109,941
========== ========== ========
</TABLE>
--------
(1) Included in Total Amount Committed.
(2) Represents a contractual obligation.
(3) On 28 February 1999 Regency merged with Pacific Retail. See Note 3A to the
Consolidated Financial Statements for more information.
Our existing and committed fundings at cost as of 31 December 1998 were as
follows:
<TABLE>
<CAPTION>
AMOUNT
TOTAL TOTAL COST TO BE
AMOUNT (AMOUNT FUNDED
COMMITTED FUNDED)(1) (1)
---------- ---------- --------
(IN THOUSANDS $)
<S> <C> <C> <C>
CarrAmerica (NYSE:CRE)..................... $ 699,851 $ 699,851 $ --
City Center Retail (Private)............... 350,135 304,035 46,100(2)
CWS Communities (Private).................. 300,329 153,563 146,766
Regency (NYSE:REG) (3)..................... 759,788 759,788 --
Storage USA (NYSE:SUS)..................... 394,272 394,272 --
Urban Growth Property (Private)............ 181,082 181,082 --
Security Capital Group (NYSE:SCZ).......... 165,000 165,000 --
Other private investments.................. 15,275 15,275 --
Public special opportunity positions....... 298,756 298,756 --
---------- ---------- --------
Total.................................... $3,164,488 $2,971,622 $192,866
========== ========== ========
</TABLE>
--------
(1) Included in Total Amount Committed.
(2) Represents a contractual obligation.
(3) On 28 February 1999 Regency merged with Pacific Retail. See Note 3A to the
Consolidated Financial Statements.
F-30
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Our existing and committed fundings at cost as of 31 December 1997 were as
follows:
<TABLE>
<CAPTION>
TOTAL TOTAL COST AMOUNT
AMOUNT (AMOUNT TO BE
COMMITTED FUNDED)(1) FUNDED (1)
---------- ---------- ----------
(IN THOUSANDS $)
<S> <C> <C> <C>
CarrAmerica (NYSE:CRE)................... $ 636,387 $ 636,387 $ --
City Center Retail (Private)............. 151,865 83,665 68,200(2)
CWS Communities (Private)................ 300,954 92,600 208,354(2)
Regency (NYSE:REG) (3)................... 749,154 749,154 --
Storage USA (NYSE:SUS)................... 348,444 348,444 --
Urban Growth Property (Private).......... 150,837 17,703 133,134(2)
Security Capital Group (NYSE:SCZ)........ 165,000 165,000 --
Other private investments................ 7,856 7,856 --
Public special opportunity positions..... 274,852 274,852 --
---------- ---------- --------
Total.................................. $2,785,349 $2,375,661 $409,688
========== ========== ========
</TABLE>
--------
(1) Included in Total Amount Committed.
(2) Represents a contractual obligation.
(3) On 28 February 1999 Regency merged with Pacific Retail. See Note 3A to the
Consolidated Financial Statements.
Capital deployed to additional strategic investment positions, as well as
further funding to existing strategic investees, will generally be initially
funded with borrowings under the new HOLDINGS Line. These borrowings are
expected to be reduced by internally generated free cash flow and the proceeds
of future issuances of debt or equity securities.
NOTE 12--LEGAL RESERVE
According to Luxembourg law, an annual transfer of 5% of the net profit to a
legal reserve is required until this reserve equals 10% of the value of the
issued Share capital. No transfer will be made in 2000 as a result of the
decrease in net assets resulting from operations for the year ended 31 December
1999.
NOTE 13--REVERSE STOCK SPLIT
On 17 May 1999, our shareholders approved a one-for-two reverse stock split.
The effective date of the reverse stock split was 18 Jun 1999, when every two
shares of SC-U.S. Realty were automatically converted into one share. The
shares issued and outstanding as of 31 December 1998 have been restated from
173,123,743 shares to reflect the reverse stock split.
NOTE 14--SHARE REPURCHASE PROGRAMME
On 5 May 1999, we announced that our Board of Directors had authorised a
share repurchase programme of up to $100 million of the Company's shares and on
29 June 1999 the Company announced that its Board of Directors authorised an
increase in the Company's share repurchase programme to $200 million. In
reviewing the Company's capital allocation strategy, management and the Board
of Directors concluded that the complete disconnect between the Company's
current public market valuation and the underlying value of the company has
created an excellent investment opportunity in comparison to current investment
alternatives in the marketplace. As of 31 December 1999, SC-U.S. Realty had
repurchased 9,861,435 shares for an aggregate cost of $184.2 million,
representing approximately 11.4% of the Company's shares outstanding. The Net
Asset Value per share as of 31 December 1999 has been calculated on 76,700,437
shares.
F-31
<PAGE>
CITY CENTER RETAIL TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of City Center Retail Trust
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of City
Center Retail Trust and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 27, 2000
F-32
<PAGE>
CITY CENTER RETAIL TRUST
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Real estate assets:
Real estate held for sale....................... $ 8,455,035 $ --
Investment in real estate....................... 427,184,974 354,949,989
Less accumulated depreciation................... (11,697,722) (3,886,302)
------------ ------------
423,942,287 351,063,687
Cash and cash equivalents......................... 243,122 1,633,958
Accounts receivable (net of allowance for doubtful
accounts of $357,094 and $290,471 in 1999 and
1998, respectively).............................. 3,963,130 3,559,397
Earnest money deposits and pursuit costs.......... -- 749,116
Other assets (net of accumulated amortization of
$198,542 and $183,516 in 1999 and 1998,
respectively).................................... 2,795,704 1,757,195
Property, furniture and equipment (net of
accumulated depreciation of $179,219 and $112,724
in 1999 and 1998, respectively).................. 337,089 576,172
Loan costs (net of accumulated amortization of
$1,282,419 and $99,772 in 1999 and 1998,
respectively).................................... 1,425,471 1,228,052
Trademark (net of accumulated amortization of
$472,223 and $136,847 in 1999 and 1998,
respectively).................................... 4,527,776 4,863,153
------------ ------------
Total assets.................................. $437,234,579 $365,430,730
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable................................ $ 3,837,683 $ 4,276,756
Accrued expenses and other liabilities.......... 5,765,348 3,423,384
Accrued development costs....................... 14,259,126 6,429,106
Accrued real estate taxes....................... 4,031,917 3,670,562
Deferred revenue................................ 550,739 467,895
Debt............................................ 102,251,733 41,079,704
------------ ------------
Total liabilities............................. 130,696,546 59,347,407
Commitments and contingencies..................... -- --
Shareholders' equity:
Common shares ($.01 par value per share;
150,000,000 shares authorized, 30,429,600
shares issued, 30,410,300 shares outstanding as
of December 31, 1999 and 30,429,600 shares
outstanding as of December 31, 1998)........... 304,296 304,296
Common stock in treasury, at cost............... (193,000) --
Additional paid-in capital...................... 296,997,473 303,991,704
Retained earnings............................... 9,429,264 1,787,323
------------ ------------
Total shareholders' equity.................... 306,538,033 306,083,323
------------ ------------
Total liabilities and shareholders' equity.... $437,234,579 $365,430,730
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
CITY CENTER RETAIL TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Base rent........................................... $31,235,544 $15,799,434
Percentage rent..................................... 2,573,794 1,906,004
Recoveries.......................................... 8,846,752 4,471,599
Other income........................................ 238,808 163,007
----------- -----------
42,894,898 22,340,044
----------- -----------
Expenses:
Rental expenses..................................... 9,937,752 6,560,729
Real estate taxes................................... 6,192,712 3,570,467
General and administrative.......................... 9,949,748 5,807,723
Depreciation and amortization....................... 8,561,988 3,912,495
----------- -----------
34,642,200 19,851,414
----------- -----------
Income from operations................................ 8,252,698 2,488,630
Interest incurred..................................... 610,757 58,645
----------- -----------
Net income............................................ $ 7,641,941 $ 2,429,985
=========== ===========
Net income per common share outstanding, basic and
diluted.............................................. $ 0.25 $ 0.12
=========== ===========
Weighted average common shares outstanding............ 30,418,958 19,652,719
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
CITY CENTER RETAIL TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
RETAINED
COMMON COMMON EARNINGS/ TOTAL
SHARES SHARES ADDITIONAL TREASURY SUBSCRIPTIONS (ACCUMULATED SHAREHOLDER'S
OUTSTANDING (PAR VALUE) PAID-IN-CAPITAL STOCK RECEIVABLE DEFICIT) EQUITY
----------- ----------- --------------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998................... 8,330,200 $ 83,302 $ 83,218,698 $ -- $(2,000) $ (642,662) $ 82,657,338
Issuance of shares..... 22,099,600 220,996 220,775,004 -- -- -- 220,996,000
Cancellation of
subscribed stock...... (200) (2) (1,998) -- 2,000 -- --
Net income............. -- -- -- -- -- 2,429,985 2,429,985
---------- -------- ------------ --------- ------- ---------- ------------
Balance at December 31,
1998................... 30,429,600 304,296 303,991,704 -- -- 1,787,323 306,083,323
Acquisition of treasury
shares................. (19,300) -- -- (193,000) -- -- (193,000)
Dividends paid.......... -- -- (6,994,231) -- -- -- (6,994,231)
Net income.............. -- -- -- -- -- 7,641,941 7,641,941
---------- -------- ------------ --------- ------- ---------- ------------
Balance at December 31,
1999................... 30,410,300 $304,296 $296,997,473 $(193,000) $ -- $9,429,264 $306,538,033
========== ======== ============ ========= ======= ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
CITY CENTER RETAIL TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 7,641,941 $ 2,429,985
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 10,684,988 4,174,442
Bad debts....................................... 136,173 --
Changes in assets and liabilities:
Accounts receivable........................... (931,356) (3,124,600)
Allowance for doubtful accounts............... 391,450 124,217
Property, furniture and equipment............. 161,797 (342,208)
Other assets.................................. (1,225,593) (1,600,759)
Accounts payable.............................. (439,073) 1,447,377
Accrued expenses and other liabilities........ 2,424,807 4,373,514
Accrued real estate taxes..................... 361,355 1,376,714
------------ -------------
Net cash provided by operating activities... 19,206,489 8,858,682
------------ -------------
Cash flows from investing activities:
Acquisitions and development of real estate..... (73,010,821) (235,603,508)
Net earnest money deposits and pursuit costs.... 749,116 (224,973)
Acquisition of trademark........................ -- (5,000,000)
------------ -------------
Net cash used in investing activities....... (72,261,705) (240,828,481)
------------ -------------
Cash flows from financing activities:
Common stock issued............................. -- 220,996,000
Proceeds from line of credit.................... 66,794,314 20,000,000
Repayment of line of credit..................... (23,000,000) --
Proceeds from mortgage debt..................... 22,000,000 --
Repayment of mortgage debt...................... (5,562,637) (6,951,122)
Payment of loan costs........................... (1,380,066) (1,327,824)
Treasury stock.................................. (193,000) --
Dividends paid.................................. (6,994,231) --
------------ -------------
Net cash provided by financing activities... 51,664,380 232,717,054
------------ -------------
Net change in cash and cash equivalents..... (1,390,836) 747,255
Cash and cash equivalents at beginning of period.. 1,633,958 886,703
------------ -------------
Cash and cash equivalents at end of period........ $ 243,122 $ 1,633,958
============ =============
Supplemental schedule of non-cash investing and
financing activities:
Assumption of existing long-term debt in
conjunction with real estate acquired.......... $ -- $ 28,030,826
============ =============
Real estate development costs included in accounts
payable.......................................... $ 14,259,126 $ 6,429,106
============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest including
capitalized.................................... $ 4,271,794 $ 407,680
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
City Center Retail Trust (the "Company") is a privately held company
incorporated in the State of Maryland on September 27, 1996. The Company
acquires, develops, redevelops and operates urban retail properties on
a national basis. At both December 31, 1999 and 1998, 99% of the Company's
shares of common stock outstanding was owned by Security Capital Holdings, S.A.
("Holdings"), a wholly-owned subsidiary of Security Capital U.S. Realty
("USRealty"). The Company qualifies as a real estate investment trust for
Federal income tax purposes.
The Company owns a controlling general partnership interest in City Center
Retail Trust/McCaffery Developments, L.P. (the "MD Partnership"), which owns
Mazza Gallerie (Washington, DC) and Friendship Heights Center (Washington, DC).
The MD Partnership also owns a 100% interest in City Center Retail
Trust/McCaffery Developments, L.L.C., which owns The Streets of Woodfield
(Chicago, IL) and two properties held for future development. During 1999, the
limited partner in the MD Partnership redeemed their interest in the MD
Partnership for $5.5 million, which was accrued by the Company at December 31,
1999 and settled in January 2000.
The Company also owns 100% interests in 100 Grant Avenue Venture, L.P., and
CCRT West Palm, Inc., each of which owns a single property. The aforementioned
entities are collectively referred to as the "Affiliates." All other properties
are held directly by the Company.
Basis of Presentation
The accompanying financial statements of the Company have been prepared on a
consolidated basis which include the accounts of the Company and its
Affiliates. All significant intercompany balances and transactions have been
eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amount of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Any instruments which have an original maturity of ninety days or less when
purchased are considered cash equivalents. Cash and cash equivalents consist of
cash in bank accounts and funds invested in money market funds.
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts.
F-37
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
. The amounts reported in the consolidated balance sheet for cash and cash
equivalents, trade receivables, and long-term debt approximate fair
value.
. The fair value of the Company's long term debt has been estimated based
on the current rates available to the Company for debt of the same
remaining maturities. The Company considers their carrying value to be a
reasonable estimation of their fair value.
Real Estate and Depreciation
Land, buildings and improvements are recorded at cost. Major additions and
improvements to rental property are capitalized as buildings and improvements,
while maintenance and repairs which do not improve or extend the useful lives
of the respective assets are reflected in operating and maintenance expenses.
Real estate investments include the capitalization of certain costs directly
related to the pursuit, due diligence, acquisition and development of real
estate properties, including construction period interest and real estate
taxes. Pursuant to EITF 97-11, "Accounting for Internal Costs Relating to Real
Estate Property Acquisitions," the capitalization of certain internal
acquisition costs was discontinued in March 1998.
Depreciation is computed using the straight-line method over estimated useful
lives up to forty years for buildings and improvements, twelve years for
personal property, and five to twelve years for furniture and equipment.
Depreciation of development/redevelopment properties commences upon the
completion and placing in service of the property or major building phases.
Depreciation for tenant improvements is computed over individual lease terms on
a straight-line basis.
Depreciation for redevelopments having significant operations is computed only
on those portions of the building which are in service and not undergoing
redevelopment. For redevelopments having only incidental operations, no
depreciation expense is recognized and any incidental net operating income is
capitalized as a credit to construction in progress.
The Company has established standards to review its long-lived assets for
potential impairment. Based on such a review as of December 31, 1999, the
carrying values of long-lived assets are expected to be recoverable from their
future cash flows, and in accordance with SFAS 121, no impairment should be
recognized.
Interest costs associated with the development of projects are capitalized to
qualifying real estate investments as incurred, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 34.
Trademark, Loan Costs and Other Assets
Trademark represents the value of the trade name relating to the Company's
Cocowalk property (South Florida), recorded at its acquisition cost, which was
negotiated with the seller, and is being amortized over its estimated useful
life of fifteen years on a straight line basis.
Loan costs primarily include costs associated with the closing of the Company's
line of credit and construction loan facilities, which are amortized over the
term of the loan. Other assets include lease commissions associated with
operating properties which are amortized over individual lease terms on a
straight line basis.
F-38
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Rental Revenues
The Company leases retail space to tenants under lease agreements having
varying terms. Leases are accounted for as operating leases, with minimum rent
recognized on a straight-line basis over the term of the lease, regardless of
when payments are due. Many of the lease agreements contain provisions which
provide for additional rents based on tenants' sales revenue ("percentage
rents") and for reimbursement of the tenants' share of real estate taxes and
certain common area maintenance costs and operating expenses ("tenant
recoveries"). Percentage rents are recognized on an accrual basis as tenants'
reported sales exceed the sales levels specified in the lease agreements.
Tenant recoveries are recognized in the period in which the related expenses
are incurred. The Company reserves an allowance for bad debts for tenants
having accounts receivable greater than 90 days past due.
Federal Income Taxes
The Company elected as of January 1, 1997, to be treated as a Real Estate
Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended.
As a REIT, the Company is entitled to a tax deduction for the amount of
dividends paid to its shareholders. Accordingly, the distributed net income of
the Company is subject to taxation at the shareholder level only, provided the
Company distributes at least 95% of its taxable income and meets certain other
REIT qualification requirements. The Company met such requirements in 1999 and
1998.
Per Share Data
Under SFAS No. 128 "Earnings Per Share," options should be reflected in diluted
earnings per share by application of the treasury stock method only if the
options will have a dilutive effect on earnings per share. Since the estimated
fair value of the common stock during the period presented does not exceed the
exercise price of the options granted, the options do not have a dilutive
effect on earnings per share and therefore basic and diluted earnings per share
are the same.
Per share data is computed based upon the weighted average number of common
shares outstanding during the period.
2. REAL ESTATE ASSETS
During 1999, the Company and its Affiliates acquired one operating property at
an aggregate cost of $4,750,000, and entered into a ground lease for land used
for the development of one property. In addition, costs of $65,363,673 were
incurred for development/redevelopment projects in process. Real estate assets
include approximately $315,408 of acquisition and development overhead costs
capitalized during 1998. There were no such costs capitalized during 1999.
Included in the real estate asset balance are two properties classified as held
for sale which consist of a building located in Chicago, IL with a carrying
value of $6.6 million and a leasehold interest in land located in Houston, TX
with a carrying value of $1.8 million. During 1999, the building in Chicago, IL
had net operating income of $104,000; the land in Houston, TX is non-operating.
Both properties were sold in January 2000. See Subsequent Events footnote for
additional disclosure.
Construction period interest costs of $5,181,150 and $963,491 relating to
development/redevelopment projects were capitalized in 1999 and 1998,
respectively.
F-39
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Real estate assets are comprised of urban retail centers, construction in
progress and land planned for retail center development in the following
markets:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL COST BY
MARKET
-----------------
TOTAL COSTS TOTAL COSTS
12/31/99 12/31/98 12/31/99 12/31/98
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Chicago, IL Area.................... $129,031,602 $ 89,135,308 29.6% 25.1%
South Florida....................... 78,899,313 75,033,549 18.1% 21.1%
Washington, DC...................... 101,564,678 73,423,109 23.3% 20.7%
Portland, OR........................ 33,910,858 33,137,709 7.8% 9.3%
San Francisco, CA................... 36,429,512 31,445,028 8.4% 8.9%
Philadelphia, PA.................... 27,736,818 26,569,421 6.4% 7.5%
Los Angeles/San Diego, CA........... 26,265,139 26,205,865 6.0% 7.4%
Houston, TX......................... 1,802,089 -- 0.4% --%
------------ ------------ ------ ------
Total............................. $435,640,009 $354,949,989 100.0% 100.0%
============ ============ ====== ======
</TABLE>
The following summarizes real estate assets as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Properties classified as held for sale........... $ 8,455,035 $ --
Operating properties:
Land........................................... 91,987,595 89,471,908
Buildings and improvements..................... 232,931,448 191,825,741
Personal property.............................. 30,704,104 28,072,322
------------ ------------
Total........................................ 364,078,182 309,369,971
Properties under development/redevelopment:
Construction in progress........................ 70,518,114 44,693,555
Land held for future development................. 1,043,713 886,463
------------ ------------
Total real estate assets..................... 435,640,009 354,949,989
Less accumulated depreciation.................... (11,697,722) (3,886,302)
------------ ------------
Net real estate assets....................... $423,942,287 $351,063,687
============ ============
</TABLE>
The Company's operating properties are leased to tenants under operating leases
with expiration dates extending to the year 2019. Future minimum rent under
non-cancellable operating leases, excluding tenant reimbursements of operating
expenses and excluding additional percentage rents, as of December 31, 1999 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------------
<S> <C>
2000............................................................... $ 33,113,820
2001............................................................... 32,094,078
2002............................................................... 30,158,938
2003............................................................... 27,337,048
2004............................................................... 26,871,477
Thereafter......................................................... 190,828,877
------------
Total............................................................ $340,404,238
============
</TABLE>
F-40
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company recognizes base rents on a straight line basis over the term of all
tenant leases. As a result, revenues of $1,219,358 and $628,227 were recognized
in 1999 and 1998, respectively, relating to the excess of straight line rents
over scheduled rental payments pursuant to the leases.
At December 31, 1999, the operating properties were approximately 96% leased
and properties under development/redevelopment were approximately 89% leased.
There were no tenants who individually represented 10% more of the Company's
combined minimum rent. The operating properties' tenant base includes primarily
national and regional retailers; consequently, the credit risk is concentrated
in the retail industry.
3. PROPERTY, FURNITURE AND EQUIPMENT
The following summarizes property, furniture and equipment as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Leasehold improvements............................... $ 25,084 $ 140,836
Furniture............................................ 250,922 281,858
Equipment............................................ 240,302 266,202
--------- ---------
Total property, furniture and equipment............ 516,308 688,896
Less accumulated depreciation........................ (179,219) (112,724)
--------- ---------
Net property, furniture and equipment.............. $ 337,089 $ 576,172
========= =========
</TABLE>
4. OPERATING LEASES
The Company leases office space under operating leases which expire through the
year 2003. Future minimum lease payments required under operating leases as of
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- --------
<S> <C>
2000.............................................................. $142,658
2001.............................................................. 94,784
2002.............................................................. 98,497
2003.............................................................. 75,764
2004.............................................................. --
Thereafter........................................................ --
--------
Total........................................................... $411,703
========
</TABLE>
Rental Expense for operating leases amounted to $255,790 and $266,666 in 1999
and 1998, respectively.
5. DEBT
The Company had the following debt obligations as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Line of credit debt.............................. $ 56,400,000 $20,000,000
Construction loan facility....................... 7,394,314 --
Deferred purchase payments....................... 9,906,977 13,966,625
Mortgage debt.................................... 28,550,442 7,113,079
------------ -----------
Total debt..................................... $102,251,733 $41,079,704
============ ===========
</TABLE>
F-41
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Under the terms of the purchase agreement, deferred purchase price payments of
$5 million and $10 million were due on August 13, 1999 and February 13, 2000,
respectively. A $5 million payment was made on August 13, 1999. The reported
liability for these deferred payments has been discounted based on a 7.5%
interest rate, with interest expense recognized to the extent of the amortized
discount. This obligation is secured by a $10 million letter of credit in favor
of the seller.
Mortgage debt as of December 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
LOAN INTEREST
LENDER COLLATERAL BALANCE RATE MATURITY
------ ---------- ------------ -------- --------
<S> <C> <C> <C> <C>
American Fidelity 8625 Germantown Ave.
Assurance Co............ (Philadelphia, PA) $ 2,467,502 8.375 7/1/04
American Fidelity 8400 Germantown Ave.
Assurance Co............ (Philadelphia, PA) 2,697,759 8.500 2/1/09
AMRESCO.................. 222 Clematis
(West Palm Beach, FL) 1,604,077 9.500 2/11/22
Northwestern Mutual...... 645 N Michigan Ave.
(Chicago, IL) 21,781,104 7.000 4/01/06
------------
$ 28,550,442
============
</TABLE>
The above mortgages are non-recourse to the Company and are subject to yield
maintenance penalties if prepaid. The Northwestern Mutual mortgage was entered
into by the Company during March 1999. Principal and interest are paid monthly
and are due in amounts ranging from $14,420 to $155,491.
Principal amounts due for deferred purchase payments and mortgage debt
mature as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- -----------
<S> <C>
2000.......................................................... $10,640,456
2001.......................................................... 789,975
2002.......................................................... 853,718
2003.......................................................... 922,661
2004.......................................................... 2,442,227
Subsequent.................................................... 22,808,382
-----------
Total....................................................... $38,457,419
===========
</TABLE>
The Company entered into a $100 million revolving line of credit facility
agreement with a bank group led by Wells Fargo Bank in November 1998. As of
December 31, 1999, the line of credit balance was $56,400,000 and was
collateralized by mortgages on twelve of the Company's operating properties.
Borrowings on the line of credit bear interest at rates ranging from
LIBOR+1.30% to LIBOR+1.55%, depending upon the Company's overall leverage. The
interest rate as of December 31, 1999 was LIBOR+1.30%, or approximately 7.8%.
In addition, unused commitment fees ranging from 0.125% to 0.25% are assessed
on undrawn portions of the loan commitment. The maturity date on the revolving
line of credit is November 11, 2000. Under the terms of the credit agreement,
the Company is subject to financial covenants which limit the Company's overall
leverage level to below 50%, limit the Company's development project
commitments to available financing commitments, and require minimum interest
coverage and debt service coverage ratios of 2.00 and 1.75, respectively.
F-42
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company entered into a construction loan facility with Bank of Montreal in
June 1999. The loan is recourse to the Company and is collateralized by a
mortgage on Mazza Gallerie property (Washington, DC). As of December 31, 1999,
there was an outstanding balance of $7,394,314 out of a total of $25 million of
loan availability under the facility. Borrowings under the facility bear
interest at a rate of LIBOR+2.00%. The maturity date on the facility is
December 31, 2000.
6. LETTERS OF CREDIT
The Company entered into a $15 million letter of credit agreement with a
national bank in August 1998 to collateralize the Company's $15 million
deferred purchase price obligation to the seller of the Cocowalk property. The
letter of credit carries an average annual fee of 1.11%. The letter of credit
is collateralized by an assignment of the proceeds of a $15 million unfunded
investor agreement with Holdings. The letter of credit balance was reduced to
$10 million following the $5 million deferred purchase price payment on August
13, 1999.
7. SHAREHOLDERS' EQUITY
Offerings
There were no common stock issuances during 1999. The Company issued 22,060,000
shares of common stock to Holdings during 1998. Proceeds from the issuances
totaling $220,600,000 in 1998, were used to acquire real estate and fund
development activities of the Company.
In January 1998, the Company completed a private offering of 39,400 common
shares at $10 per share resulting in a total equity investment of $394,000.
Funding and issuance of shares occurred in January 1998. The private offering
was made primarily to comply with regulatory guidelines associated with the
Company's REIT status.
Distributions
Distributions of $0.23 per share of common stock and $0 per share of common
stock were made during 1999 and 1998, respectively.
Treasury Stock
In 1999, the Company repurchased 19,300 shares of common stock for $193,000
from former employees.
Investor Agreement
The Company, Holdings and USRealty have entered into various investor
agreements whereby the Company agreed to sell and Holdings agreed to purchase
an aggregate maximum of $350 million of the Company's common shares at a price
of $10 per share. As of December 31, 1999, Holdings had funded $304 million of
the commitment.
8. SHARE OPTION PLAN
The Board of Trustees and shareholders adopted the City Center Retail Trust
Share Option Plan (the "Plan") effective as of December 15, 1997. The purpose
of the Plan is to enable officers and key employees of the
F-43
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Company to participate in the Company's future and to enable the Company to
attract and retain these persons by offering them proprietary interests in the
Company. The Plan is administered by the Company's compensation committee and
authorizes the issuance of up to 5,000,000 shares of common stock pursuant to
the grant or exercise of stock options.
Options granted in 1999 vest at the rate of 25% per year beginning on the first
anniversary of the grant date. Options granted in 1998 vest at the rate of 25%
per year beginning on the second anniversary of the grant date. Options will
expire after ten years from the grant date.
Option activity for the two years ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year: 1,625,000 $10.00 1,115,156 $10.76
Granted.............................. 5,000 10.00 785,000 10.00
Exercised............................ -- -- -- --
Canceled............................. (17,500) 10.00 (275,156) 13.08
--------- ---------
Outstanding at end of year............. 1,612,500 $10.00 1,625,000 $10.00
========= =========
Exercisable at end of year............. 385,625 --
========= =========
Available for future grant at year
end................................... 3,370,000 3,375,000
========= =========
Weighted average per share fair value
of options granted
during year........................... $ 1.58 $ 0.86
Weighted average remaining contractual
life.................................. 7.87 8.88
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Risk free interest rate.............................. 5.93% 4.75%
Dividend yield....................................... 3.00% 3.00%
Expected lives....................................... 6.25 years 6.75 years
Expected volatility.................................. 0.00% 0.00%
</TABLE>
F-44
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company has applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan; accordingly, no compensation costs
have been recognized. Had compensation costs for the Company's Plan been
determined based on the fair value at the grant date for the options granted in
1999 and 1998 in accordance with the method required by Statement of Financial
Accounting Standards No. 123, the Company's net income per share would have
been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Net income (loss):
As reported.................................. $7,641,941 $2,429,985
Pro forma.................................... 7,418,873 2,292,127
Per share net income attributable to common and
common equivalent shares
As reported, basis and diluted .............. $ 0.25 $ .12
Pro forma, basic and diluted................. 0.24 .12
</TABLE>
9. RELATED PARTY TRANSACTIONS
Administrative Services Agreement
The Company and Security Capital Group, Inc. ("SCGroup"), an affiliate of the
Company's primary shareholder, entered into an Administrative Services
Agreement (the "ASA"), pursuant to which SCGroup provides certain
administrative services to the Company. These services include insurance
administration, cash management, human resources, management information
systems, tax administration, shareholder communications and investor relations.
Services provided under the ASA are required to be performed in a commercially
reasonable manner and on terms no less favorable than those available from
unaffiliated third parties. Total charges for 1999 and 1998 were $520,108 and
$549,000, respectively. In addition to services described above, during 1998,
the ASA provided for accounts payable and general accounting services. The
agreement expired on December 31, 1999 and was renewed for a one-year term
subject to termination provisions.
In conjunction with the ASA, through June 1999, the SCGroup also processed and
paid certain travel and administrative expenses on behalf of the Company, and
was subsequently reimbursed by the Company. As of December 31, 1999 and 1998,
the Company owed SCGroup approximately $0 and $242,000, respectively, in
reimbursements relating to this arrangement, which is included in accounts
payable in the accompanying balance sheet.
Other Agreements with Affiliates
Pursuant to the partnership agreement and the development/leasing agreements
with the limited partner of the MD Partnership or its affiliate, the Company
paid various fees in connection with acquisition, development, leasing, and
consulting services provided by the limited partner or its affiliate which
totaled $2,421,151 and $3,410,179 in 1999 and 1998, respectively.
F-45
<PAGE>
CITY CENTER RETAIL TRUST
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
10. COMMITMENTS AND CONTINGENCIES
Contingent Obligations
During November, 1999, the Company entered into severance agreements with all
of its employees which provide for the payments of specified amounts upon the
earliest of: 1) the Company's sale of substantially all of its assets, 2) the
involuntary termination of employees, other than for cause, or 3) June 30,
2000. The estimated severance cost of $3,411,057 has been accrued and is
included in 1999 general and administrative expense. As of December 31, 1999,
no employees had been terminated and no severance costs had been paid.
Litigation and Environmental Contingencies
The Company is a defendant in a complaint brought by a development agent
relating to a dispute over the agent's profit participation fee. In the opinion
of management, amounts accrued for this matter are adequate and it is unlikely
that any additional cost would have a material adverse effect on the Company's
financial condition or results of operations.
The Company, like other commercial real estate owners, is subject to various
claims, lawsuits, environmental laws and regulations related to the ownership,
operation, development and acquisition of real estate properties. The Company
is not aware of any matters or environmental condition existing at any of its
properties which is likely to have a materially adverse effect on the Company's
financial condition or results of operations.
11. SUBSEQUENT EVENTS
On January 5, 2000, the Company sold its leasehold interest in land located in
Houston, TX, for approximately $3.8 million. On January 7, 2000, the Company
sold Chicago/Wabash (Chicago, IL) property to the limited partner of the MD
Partnership for approximately $6.8 million, in conjunction with the Company's
redemption of the limited partner's interest in the MD Partnership for $5.5
million. A $2.1 million gain on the sale of the Houston and the Chicago/Wabash
properties was recognized in 2000. Both the Houston and Chicago/Wabash
properties are classified as properties held for sale as of December 31, 1999.
12. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S
REPORT
On March 10, 2000, the Company entered into a definitive agreement to sell 18
properties for $182.8 million, with a closing expected by March 31, 2000. An
estimated $16.6 million loss on this sale will be recognized in 2000.
F-46
<PAGE>
CWS COMMUNITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
CWS Communities Trust:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of CWS
Communities Trust and its subsidiaries at December 31, 1999 and 1998 and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 26, 2000, except for Note 15, as to which the date is February 2, 2000.
F-47
<PAGE>
CWS COMMUNITIES TRUST
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Real estate investments............................ $355,604,641 $216,150,135
Other real estate assets........................... 1,642,642 1,060,260
Less: accumulated depreciation..................... (14,227,270) (7,112,891)
------------ ------------
343,020,013 210,097,504
Cash and cash equivalents.......................... 2,143,031 2,997,701
Accounts and other receivables..................... 1,027,398 352,723
Mortgages receivable............................... 3,237,580 3,217,750
Due from affiliates................................ 4,628,662 2,278,422
Escrow deposits.................................... 1,756,315 3,254,326
Investment in CWS Management Services
Incorporated...................................... 2,176,959 2,135,682
Goodwill, net...................................... 2,506,728 1,235,453
Deferred acquisition costs......................... 2,221,410 2,120,712
Other assets, net.................................. 2,195,676 350,640
------------ ------------
Total assets................................... $364,913,772 $228,040,913
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving credit facility........................ $ 30,929,173 $ --
Mortgages payable................................ 47,675,510 29,473,846
Accounts payable and accrued expenses............ 3,849,462 2,943,204
Distributions payable............................ 4,545,328 --
Accrued real estate taxes........................ 398,178 212,528
Resident security deposits....................... 1,033,892 674,702
Prepaid rent..................................... 126,559 54,469
------------ ------------
Total liabilities.............................. 88,558,102 33,358,749
------------ ------------
Commitments and contingencies...................... -- --
Redeemable common shares........................... 13,914,212 6,512,468
Minority interest.................................. 49,698,928 37,987,941
Receivables from minority unitholders.............. (14,187,068) --
Shareholders' equity:
Shares of beneficial interest, $0.01 par value;
250,000,000 shares authorized
Series A common shares (23,833,078 and
15,493,078 issued and outstanding at December
31, 1999 and 1998, respectively)............... 236,728 153,328
Series B convertible common shares (1,383,314
issued and outstanding)........................ -- --
Additional paid-in capital....................... 236,491,100 153,174,500
Distributions in excess of net earnings.......... (9,798,230) (3,146,073)
------------ ------------
226,929,598 150,181,755
------------ ------------
Total liabilities and shareholders' equity..... $364,913,772 $228,040,913
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-48
<PAGE>
CWS COMMUNITIES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Income:
Net rental income................................. $36,980,207 $19,987,784
Management fees................................... 358,597 579,449
Other income...................................... 946,776 298,421
----------- -----------
38,285,580 20,865,654
----------- -----------
Operating expenses:
Operating and maintenance......................... 10,325,145 5,156,804
Depreciation and amortization..................... 7,360,241 6,899,340
General and administrative........................ 4,856,428 3,734,008
Real estate taxes and insurance................... 2,803,034 1,416,932
----------- -----------
25,344,848 17,207,084
----------- -----------
Interest expense (income):
Interest expense, net............................. 4,219,315 1,143,422
Interest income................................... (926,243) (335,835)
----------- -----------
3,293,072 807,587
----------- -----------
Earnings before minority interest and equity in CWS
Management Services Incorporated................... 9,647,660 2,850,983
Equity in CWS Management Services Incorporated...... (1,712,189) (1,015,714)
Minority interest................................... (1,379,799) (280,339)
----------- -----------
Net income.......................................... $ 6,555,672 $ 1,554,930
=========== ===========
Weighted average common shares outstanding (basic).. 21,637,649 13,395,341
=========== ===========
Weighted average common shares outstanding
(diluted).......................................... 21,672,841 16,332,115
=========== ===========
Basic earnings per share............................ $ .30 $ .12
=========== ===========
Diluted earnings per share.......................... $ .30 $ .11
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-49
<PAGE>
CWS COMMUNITIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST
(250,000,000 SHARES
AUTHORIZED)
--------------------
SERIES B
SERIES A CONVERTIBLE ADDITIONAL (DISTRIBUTIONS
COMMON COMMON PAID-IN IN EXCESS OF
SHARES SHARES CAPITAL NET EARNINGS)
-------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Balances at December 31,
1997........................ $ 91,620 $ -- $ 91,528,057 $ 223,264
Issuance of shares......... 61,708 61,646,443
Shareholder distributions.. (4,924,267)
Net income................. 1,554,930
-------- ----- ------------ ------------
Balances at December 31,
1998........................ 153,328 -- 153,174,500 (3,146,073)
-------- ----- ------------ ------------
Issuance of shares......... 83,400 -- 83,316,600
Shareholder distributions.. (13,207,829)
Net income................. 6,555,672
-------- ----- ------------ ------------
Balances at December 31,
1999........................ $236,728 $ -- $236,491,100 $ (9,798,230)
======== ===== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-50
<PAGE>
CWS COMMUNITIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income....................................... $ 6,555,672 $ 1,554,930
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization.................... 7,360,241 6,899,340
Amortization of debt issuance costs.............. 106,535 --
Minority interest................................ 1,379,799 280,339
Loss from investment in CWS Management Services
Incorporated.................................... 1,712,189 1,015,714
Changes in operating assets and liabilities:
Accounts and other receivables................. (674,675) (291,280)
Due from affiliates............................ (2,072,911) (1,229,976)
Other assets................................... (1,177,811) (259,698)
Accounts payable and accrued expenses.......... 906,258 2,611,968
Accrued real estate taxes...................... 185,650 212,528
Resident security deposits..................... 359,190 672,789
Prepaid rent................................... 72,090 38,986
------------ ------------
Net cash provided by operating activities.... 14,712,227 11,505,640
------------ ------------
Investing activities:
Construction of and acquisition of real estate
investments..................................... (79,941,681) (71,783,594)
Mortgage receivable originations................. (19,830) (3,217,750)
Due from affiliates.............................. (277,329) (1,048,446)
Costs incurred to obtain and develop real
estate.......................................... (100,698) (2,120,712)
Escrow deposits.................................. 1,498,011 (3,254,326)
Other real estate assets......................... (582,382) (617,716)
------------ ------------
Net cash used in investing activities........ (79,423,909) (82,042,544)
------------ ------------
Financing activities:
Debt issuance costs.............................. (802,600) (18,739)
Proceeds from revolving credit facility.......... 30,929,173 --
Proceeds from issuance of mortgages payable...... -- 17,247,242
Principal payments on mortgages payable.......... (23,556,758) --
Distributions payable to shareholders............ 4,545,328 --
Distributions to shareholders and limited
partners........................................ (16,471,063) (6,146,002)
Proceeds from the sale of shares................. 83,400,000 61,708,151
Receivables from minority unitholders............ (14,187,068) --
------------ ------------
Net cash provided by financing activities.... 63,857,012 72,790,652
------------ ------------
Net change in cash and cash equivalents............ (854,670) 2,253,748
Cash and cash equivalents at beginning of the
year.............................................. 2,997,701 743,953
------------ ------------
Cash and cash equivalents at end of the year....... $ 2,143,031 $ 2,997,701
============ ============
Interest paid...................................... $ 4,176,338 $ 1,064,819
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-51
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and formation
CWS Communities Trust (the "Company") was formed under the laws of the state
of Maryland on November 26, 1997, to be a self-administered and self-managed
real estate investment trust ("REIT"). The Company acquired a sole general
partnership interest in CWS Communities LP (the "Operating Partnership") and at
December 31, 1999 owns 82.7% of the general partnership interests in the
Operating Partnership. The Company has been formed for the purpose of
acquiring, developing, managing and owning manufactured housing communities. At
December 31, 1999, 94.2% of the Company's outstanding shares of beneficial
interest are constructively owned by Security Capital Holdings S.A.
("HOLDINGS"), a wholly-owned subsidiary of Security Capital U.S. Realty
("USREALTY").
Principles of consolidation
The consolidated financial statements include the accounts of CWS
Communities Trust, its 82.7% ownership in CWS Communities LP, its wholly-owned
subsidiary, CWS Kennesaw LLC, which was formed on July 20, 1998 for the purpose
of managing, operating and leasing the community commonly known as Woodlands of
Kennesaw, and CWS Greenbriar LLC, wholly-owned by the Company and CWS
Greenbriar, LP (1% owned by CWS Greenbriar LLC, and 99% owned by the Operating
Partnership), formed December 17, 1999 for Greenbriar Colony Community. The
Operating Partnership also owns a 94.7% non-voting economic interest in CWS
Management Services Incorporated ("the Manager") which was formed on March 6,
1998. The Operating Partnership's ownership in the Manager will increase to 95%
over the period from March 6, 1998 through March 31, 2000, as goodwill
contributed to the Manager is earned (See Note 9--Merger and contribution
agreement/goodwill). The Manager conducts the Company's third-party management
and home brokerage operations and, due to the non-voting nature of the
Operating Partnership's ownership interest in the Manager, is accounted for
using the equity method of accounting.
Revenue recognition
Revenues from rent as well as operating cost recoveries from residents,
including trash pickup, cable television, ad valorem taxes, sewer and R/V
storage, are recognized in the period when the revenues or recoveries are
earned. The Operating Partnership leases its homesites under operating leases
with initial terms typically of one year. A majority of the Operating
Partnership's leases range from periods of one month to one year; however,
leases can extend for periods up to five years.
Real estate investments and related depreciation
Costs related directly to the development and improvement of real estate are
capitalized; ordinary repairs and maintenance are expensed as incurred.
Depreciation is computed on a straight-line basis over the expected economic
useful lives, which are principally 10 to 30 years for buildings and
improvements and 5 to 7 years for other real estate assets which are comprised
principally of furniture and fixtures.
The Company periodically reviews the carrying value of each property to
determine if circumstances exist indicating that the carrying amount of long-
lived assets, on an individual community basis has been impaired, or that
depreciation periods should be modified. If facts or circumstances support the
possibility of impairment, the Company will prepare a projection of the
undiscounted future cash flows without interest charges, of the specific
property, and determine if the property's carrying amount is recoverable based
on the undiscounted future cash flows. If an impairment is indicated, an
adjustment will be made to the carrying amount based on the difference between
the sum of the expected future discounted net cash flows and the carrying
amount of the
F-52
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
asset. Impairment losses are recognized in operating income as they are
determined. As of December 31, 1999, no impairment losses have been incurred.
Capitalized interest
The Company capitalizes interest as part of the cost of real estate projects
during construction periods. During the year ended December 31, 1999 and 1998,
$175,631 and $44,877 of interest was capitalized, respectively.
Cash and cash equivalents
Cash and cash equivalents include all cash and investments with original
maturities of three months or less.
Escrow deposits
Escrow deposits consist of funds on deposit with sellers for the potential
purchase of real estate investments.
Deferred acquisition costs
Deferred acquisition costs includes deferred costs associated with the
acquisition and development of manufactured home communities. Upon acquisition
of a particular community, costs relating to such community are capitalized as
part of real estate investments. If a particular community is not acquired,
such costs are expensed in the period in which the acquisition was terminated.
Income taxes
The Company elected real estate investment trust ("REIT") status under the
Internal Revenue Code of 1986, as amended. REITs are not required to pay
federal income taxes if minimum distribution, income, asset and shareholder
tests are met and, accordingly, no provision has been made for federal income
taxes in the accompanying consolidated financial statements. The Manager is
taxed as a separate entity.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from income reported for financial reporting
purposes primarily due to the differences between book and tax depreciation.
Redeemable common shares
Redeemable common shares includes certain Class A common shares and all of
the Class B convertible common shares (see Note 9--Shareholders Agreement).
Minority interest
Minority interest represents limited partners' proportionate share of the
equity in the Operating Partnership, of which the Company has a majority
ownership interest and the accounts of which are consolidated into the Company.
Income is allocated to minority interest based on the weighted average
percentage ownership held by the limited partners during the year.
F-53
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of estimates
The Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities, and related revenues and expenses, to prepare these financial
statements in accordance with generally accepted accounting principles. Actual
results could differ from those estimates.
Fair value of financial instruments
The Company has estimated the fair value of its financial instruments at
December 31, 1999 and 1998 as required by Statement of Financial Accounting
Standards No. 107. The Company reports the carrying amount of cash and cash
equivalents and mortgage receivables at cost which approximates fair value due
to the short maturity of these instruments. The carrying amount of the
Company's borrowings approximates fair value due to the Company's ability to
obtain such borrowings at comparable interest rates.
Reclassifications
Certain reclassifications have been made to the prior year balances to
conform with the current year presentation. These reclassifications had no
effect on net income or shareholders' equity as previously reported.
2. REAL ESTATE INVESTMENTS
As of December 31, 1999 and 1998, the Company owned thirty-seven and twenty-
three operating communities, respectively, located in eight states throughout
the country. The following table reflects property ownership by state and the
percentage of revenue by state for the largest states:
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF TOTAL
PROPERTIES REVENUES
------------ ----------
STATE 1999 1998 1999 1998
----- ----- ----- ---- ----
<S> <C> <C> <C> <C>
Florida............................................ 15 5 37.9% 34.9%
Texas.............................................. 10 7 22.7 16.7
Georgia............................................ 5 5 12.6 12.7
California......................................... 3 -- 11.1 --
Other.............................................. 4 6 15.7 35.7
----- ----- ---- ----
37 23 100 100
----- ----- ---- ----
</TABLE>
Real estate investments at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------- ----------------------------
NUMBER OF NUMBER OF
HOMESITES HOMESITES
INVESTMENT (UNAUDITED)(1) INVESTMENT (UNAUDITED)(1)
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Operating communities... $349,243,533 14,097 $212,736,872 8,051
Communities under
construction........... 2,020,202 311 1,468,763 410
Land held for
development............ 4,340,906 583 1,944,500 277
Other real estate
assets................. 1,642,642 -- 1,060,260 --
------------ ------ ------------ -----
Total real estate
investments.......... 357,247,283 14,991 217,210,395 8,738
Less accumulated
depreciation......... (14,227,270) (7,112,891)
------------ ------------
Net real estate
investments........ $343,020,013 $210,097,504
============ ============
</TABLE>
--------
(1) Homesite information is based upon management's estimates and has not been
audited by the Company's independent accountants.
F-54
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation expense of real estate investments for the years ended December
31, 1999 and 1998 was $7,114,379 and $6,697,875. Effective January 1, 1999, the
Company changed its estimated useful lives from 20 to 30 years for buildings
and improvements. In the opinion of management, 30 years more appropriately
reflects anticipated useful lives of such assets. The effect of this change on
net income for the year ended December 31, 1999 was to increase net income by
approximately $3.3 million and $.15 per share.
3. MORTGAGES RECEIVABLE
On April 17, 1998, the Company loaned Creekside Mobile Community Investors
funds for the payment of a mortgage loan associated with a community (one of
the unacquired CWS "25," see Note 9--Merger and contribution
agreement/goodwill). In addition, various individual manufactured home
mortgages were acquired by the Company upon the acquisitions of Green River and
Los Ranchos, manufactured home communities, on November 13, 1998 and May 21,
1999, respectively. The Creekside, Green River and Los Ranchos mortgages
receivable are collateralized by the community and homes, respectively, from
which they were originated.
The following table summarizes mortgages receivable as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
# OF INTEREST BALANCE AT BALANCE AT
MAKER MORTGAGES RATE MATURITY DATE PAYMENTS 12/31/99 12/31/98
----- --------- -------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Creekside Mobile 1 Libor + 2% March 31, 2000 Interest monthly $2,891,350 $2,891,350
Community Investors principal at
maturity
Various 23 (1999) Principal and 346,230 326,400
21 (1998) interest
monthly
---------- ----------
$3,237,580 $3,217,750
========== ==========
</TABLE>
Scheduled repayments of mortgages receivable at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000............................................................. $2,910,873
2001............................................................. 21,407
2002............................................................. 20,994
2003............................................................. 21,670
2004............................................................. 22,976
Thereafter....................................................... 239,660
----------
$3,237,580
==========
</TABLE>
4. INVESTMENT IN CWS MANAGEMENT SERVICES INCORPORATED
The Operating Partnership accounts for its 94.7% investment in the Manager
using the equity method of accounting due to the non-voting nature of the
Operating Partnership's ownership interest. As stated in the Articles of
Incorporation of the Manager, the non-voting shares held by the Operating
Partnership are entitled to 95% of the income and loss from the Manager.
F-55
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is summarized financial information of the Manager as of and
for the years then ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
BALANCE SHEET
Inventory in manufactured homes.................... $ 2,511,961 $ 1,876,576
Goodwill, net...................................... 3,859,607 2,462,865
Total assets....................................... 7,297,787 5,097,505
Due to affiliates.................................. 4,639,675 2,125,313
Total equity....................................... 2,308,386 2,357,224
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INCOME STATEMENT
Home sales......................................... $ 3,072,350 $ 3,519,133
Gross profit....................................... 934,609 504,313
Management fees, related party..................... 324,499 248,731
Total operating costs.............................. 2,836,624 1,557,508
Net loss........................................... (1,802,304) (1,069,173)
</TABLE>
5. REVOLVING CREDIT FACILITY
The Operating Partnership entered into a $50 million revolving line of
credit with Bank of America, N.A. as agent for a syndicate of lenders, on
September 15, 1999. The credit facility is collateralized by certain
communities. The agreement is effective through September 15, 2001, with an
option to renew for one-year extensions with the approval of Bank of America
and participating lenders. Borrowings bear interest at the LIBOR or Base Rate
plus the applicable margins (which range from 1.5% to 1.75%) depending on the
Operating Partnership's previous quarter-end debt ratio. The Company is charged
a fee of .20% or .25% per annum depending on the average unfunded line of
credit balance and the aforementioned debt ratio.
The line of credit contains various financial and other covenants applicable
to the Company and Operating Partnership, including a liabilities to total
asset ratio, a tangible net worth ratio, an interest expense and fixed coverage
ratio, and liquidity ratio. As of December 31, 1999 there was $30.9 million
outstanding under this line of credit and the Company and Operating Partnership
were in compliance with all covenants.
6. MORTGAGES PAYABLE
Mortgages payable are subject to certain financial debt covenants including,
but not limited to, maintaining a Tangible Net Worth (defined as total
shareholder's equity less intangible assets) minimum value; a ratio of total
assets to total liabilities; and a ratio of earnings before interest, taxes,
depreciation, and amortization (EBITDA) to interest expense. Additionally, the
mortgages are collateralized by the communities to which they relate.
F-56
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Mortgages payable consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PRINCIPAL BALANCE AT
-----------------------
MATURITY INTEREST
COMMUNITY LOCATION DATE RATE 12/31/1999 12/31/1998
--------- ---------- ---------- ----------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Tierra West............. New Mexico 03/30/2000 Libor + 1.5% or $1,000,000 $ 1,000,000
Prime Rate(3)(4)
Arlington Lakeside...... Texas 09/15/1999 Libor + 1.5% or -- 3,224,464
Prime Rate(3)(4)
Northwood............... Texas 09/15/1999 Libor + 1.5% or -- 4,991,250
Prime Rate(3)(4)
Stone Mountain.......... Georgia 09/15/1999 Libor + 1.5% or -- 4,257,884
Prime Rate(3)(4)
Grand Place............. Texas 09/15/1999 Libor + 1.5% or -- 3,791,840
Prime Rate(3)(4)
Green River............. California 10/15/2004 7.99% 7,802,600 8,038,808
Woodlands of Kennesaw... Georgia 06/01/2001 9.47% 4,116,056 4,169,600
Parkwood Communities.... Florida 08/15/2003 Libor + 1.25% or 2,329,848 --
7.5%
whichever is greater(5)
Parkwood Communities.... Florida 12/12/2002 Libor + 1.25% or 1,433,696 --
7.5%
whichever is greater(5)
Parkwood Communities.... Florida 05/01/2006 8.50% 955,302 --
Lakeside Terrace........ Florida 10/01/2001 7.75% 3,059,170 --
Los Ranchos............. California 11/01/2003 8.50% 2,148,459 --
Crystal Lake............ Florida 01/14/2000 8.00%(6) 147,871 --
Crystal Lake............ Florida 01/14/2000 8.00%(6) 403,155 --
Crystal Lake............ Florida 01/14/2000 8.00%(6) 107,033 --
Kings Manor............. Florida 01/14/2000 8.00%(6) 194,937 --
Palm Valley............. Florida 01/14/2000 8.00%(6) 1,230,432 --
Shadow Hills............ Florida 01/14/2000 8.00%(6) 416,675 --
Sunset Palms............ Florida 01/14/2000 8.00%(6) 730,595 --
University Village...... Florida 01/14/2000 8.00%(6) 1,830,794 --
Palm Valley............. Florida 10/31/2000 7.97% 10,000,000 --
Sunset Palms............ Florida 09/30/2001 8.27% 6,768,887 --
Beacon Hill Colony...... Florida 09/30/2004 7.25% 3,000,000 --
---------- ---------- ----------------------- ----------- -----------
$47,675,510 $29,473,846
=========== ===========
</TABLE>
--------
(1) Payments are interest only payable monthly with the full principal balance
due at maturity.
(2) Payments are interest and principal payable monthly.
(3) Rate at December 31, 1998 was 6.53% (Libor + 1.5%). The weighted average
interest rate of these combined loans for the year ended December 1998 was
7.14%.
(4) Rate at December 31, 1999 was 7.66% (60 day Libor + 1.5%). The weighted
average interest rate of these combined loans for the year ended December
31, 1999 was 6.77%.
(5) Rate at December 31, 1999 was 7.71% (30 day Libor + 1.25%). The weighted
average interest rate of these combined loans for the year ended December
31, 1999 was 7.65%.
F-57
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) Amounts were repaid on January 14, 2000.
Scheduled principal payments on the mortgages payable at December 31, 1999
are as follows:
<TABLE>
<S> <C>
2000.......................................................... $17,253,565
2001.......................................................... 14,808,540
2002.......................................................... 2,491,708
2003.......................................................... 5,067,442
2004.......................................................... 7,295,362
Thereafter.................................................... 758,893
-----------
$47,675,510
===========
</TABLE>
7. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), which establishes standards for computing and presenting earnings
per share (EPS). Basic EPS excludes the effect of potentially dilutive
securities while diluted EPS reflects the potential dilution that would occur
if dilutive securities or other contracts to issue common shares were
exercised, converted into, or resulted in the issuance of common shares that
then shared in the earnings of the Company. The following table provides a
reconciliation from basic earnings per share to diluted earnings per share for
the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------- ----------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- ---------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income............. $6,555,672 21,637,649 $0.30 $1,554,930 13,395,341 $0.12
----- -----
EFFECT OF DILUTIVE
SECURITIES
Minority interest...... -- -- 280,339 2,936,774
Effect of stock
options............... -- 35,192 -- --
---------- ---------- ---------- ----------
DILUTED EPS
Income available to
common shares and
assumed conversions... $6,555,672 21,672,841 $0.30 $1,835,269 16,332,115 $0.11
========== ========== ===== ========== ========== =====
</TABLE>
Options to purchase 427,621 and 767,522 common shares at prices of $10.50
and $10, respectively, per share were outstanding during 1999 and 1998,
respectively, but were not included in the computation of diluted EPS because
the options' exercise price was greater than or equal to the estimated fair
market value of the common shares. The options expire 10 years from the date of
grant, or upon termination of employment or death. In addition to the above,
minority interest shares totaling 4,549,711 on a weighted average basis, were
not included in the 1999 calculation because the effect of their inclusion is
anti dilutive.
8. SHAREHOLDERS' EQUITY
The Company's capital structure consists of Class A common shares of
beneficial interest ("Class A shares") and Class B convertible common shares of
beneficial interest ("Class B shares"). The outstanding Class A shares do not
have redemption or conversion rights or the benefit of any sinking fund. In the
event of liquidation, dissolution or winding up of the Company, the holders of
Class A shares are entitled to receive ratably, the assets remaining after
satisfaction of all liabilities and payment of preferences and accrued
F-58
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
dividends, if any, on the Company's shares ranking senior to the Class A
shares. The rights of holders of Class A shares are subordinate to the rights
and preferences established by the Company's board of trustees for any
preferred shares, which may subsequently be issued.
The Class B shares shall be entitled to participate with each Class A share
in an amount equal to the product of (a) the participation to which the holder
of one Class A common share is entitled, multiplied by (b) the applicable
Subscription Factor (See Note 9--Merger and contribution agreement/goodwill) as
of the date of the determination of the shareholders entitled to such
participation right. Class B shares are convertible at any time prior to the
Automatic Conversion Date (See Note 9--Merger and contribution
agreement/goodwill) to Class A shares using the product of one Class A share
multiplied by the applicable Subscription Factor.
The Company's board of trustees is authorized to issue from the authorized
but unissued shares of the Company, 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 such series.
Between December 5, 1997 and December 31, 1999, the Company closed on a
series of private offerings to HOLDINGS which resulted in the issuance of
23,615,858 Class A shares of beneficial interest at $10 per share for a total
amount of $236,158,578.
The Company's Declaration of Trust seeks to preserve its REIT status by
restricting any shareholder from owning more than 9.8% of the Company's shares
of beneficial interest, other than HOLDINGS, Byron L. Williams ("Williams"), or
Steven J. Sherwood ("Sherwood").
9. OPERATING AGREEMENTS
In conjunction with the formation of the Company and related entities, the
Company entered into a series of agreements which established the initial
capitalization of the Company, established terms of various aspects of the
operations of the Company and consummated agreements with certain shareholders.
The nature and the terms of these agreements and the impact on these
consolidated financial statements are discussed below.
Investor agreement
On December 1, 1997, HOLDINGS, USREALTY and the Company entered into an
investor agreement whereby HOLDINGS agreed to purchase up to 30 million shares
at $10 per share. As of December 31, 1999, HOLDINGS has completed the purchase
of 23,615,858 shares. As long as HOLDINGS owns at least 10% or more of the
shares outstanding, it will have certain rights regarding appointment of
trustees to the board of trustees and a non-voting consultant to the investment
committee of the Company's board of trustees. As long as HOLDINGS and its
affiliates own at least 20% of the shares outstanding, USREALTY will have
certain rights regarding approval of budgets, operating plans, property
acquisitions or sales, changes in executive officers and sales of shares.
Merger and contribution agreement/goodwill
On March 6, 1998, USREALTY, HOLDINGS, Clayton, Williams and Sherwood, Inc.
("CWS"), the Company, the Operating Partnership, CWS Communities Incorporated,
the Manager, Castlewood Brokerage Joint Venture ("CBJV"), Sherwood and Williams
entered into a contribution agreement, as discussed below, whereas the parties
agreed, subject to certain terms and conditions, the following: (a) the merger
as discussed
F-59
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
below, between CWS and CWS Communities Incorporated (a qualified REIT
subsidiary wholly-owned by the Company used to facilitate the merger); (b) the
contribution by Williams and CBJV of various contract rights to the Operating
Partnership in exchange for units of the Operating Partnership; (c) the
contribution of the right to purchase 25 CWS communities (CWS "25"), owned in
part by the parties mentioned above, to the Operating Partnership for units of
limited partnership interests in the Operating Partnership and other
consideration; and, (d) the advance by USREALTY to HOLDINGS of all necessary
funds for HOLDINGS to acquire shares of beneficial interest of the Company in
exchange for cash to be used in the purchase of the CWS "25" pursuant to the
investor agreement.
The following summarizes the shares, units and assets exchanged as a result
of the Merger and contribution agreement under the purchase method of
accounting assuming all of the CWS "25" are ultimately acquired by the Company:
<TABLE>
<S> <C>
Value of Class A shares and B shares of the Company exchanged
for CWS in merger............................................ $ 15,436,077
Value of Class A and B units of the Operating Partnership
exchanged for certain contract rights held by Williams and
CBJV......................................................... 6,194,410
------------
Total consideration........................................... 21,630,487
Less: Assets contributed by CWS............................... (328,155)
------------
Excess consideration.......................................... 21,302,332
Less:
Consideration recognized on the acquisition of 21 of the CWS
"25" as of December 31, 1999................................. (19,162,517)
------------
Excess consideration to be recognized upon acquisition of the
remaining CWS "25"........................................... $ 2,139,815
============
</TABLE>
As a result of the above, in connection with the purchase of twelve and nine
communities, respectively, from the CWS "25" during 1999 and 1998 the Company
has recorded the following amounts:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Property purchase options............................ $ 7,165,412 $4,752,766
Goodwill allocated to the Operating Partnership...... 1,488,291 1,325,706
Goodwill allocated to the Manager.................... 1,753,466 2,676,876
----------- ----------
Consideration recognized in 1999 and 1998............ $10,407,169 $8,755,348
=========== ==========
</TABLE>
At December 31, 1999, of the consideration exchanged, $1,941,462 is
represented by Class A shares or units. The remaining goodwill and allocated
excess consideration for property purchase options is represented by Class B
units or shares valued at $17,221,055. The remaining unearned value of the
Class B units and shares are recognized as the remaining CWS "25" communities
are acquired ending on the automatic conversion date, which was extended from
December 31, 1999 to March 31, 2000. At such time, the Class B shares/units
will be converted to the number of Class A shares/units which equals the
product of (a) one Class A share and (b) the applicable subscription factor
(calculated as the ratio of qualifying properties and substitute properties
purchased to the total initial value of the initial CWS "25" communities) as of
the automatic conversion date.
Excess consideration paid for the option to purchase the CWS "25"
communities is capitalized to the individual properties upon closing based on
the fair value of the property acquired in relation to the total estimated fair
value of the CWS "25" communities.
Goodwill is amortized utilizing the straight-line method over a period of
ten years beginning March 6, 1998. For the years ended December 31, 1999 and
1998, the Company had recognized $217,022 and $90,247, respectively, in
amortization related to the goodwill.
F-60
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additionally, the Company has agreed to pay brokerage commissions in the
amount of 3% of the purchase price of the CWS "25" to affiliates as each
community is acquired. In connection with this obligation, the Company has
issued 640,013 Class B units of the Operating Partnership to the affiliates. As
the communities are purchased, the value of the units is capitalized to the
individual community purchased. As of December 31, 1999 and 1998, approximately
$5,696,000 and $2,300,000 has been capitalized to the individual communities,
respectively.
Shareholders' agreement
On March 6, 1998, USREALTY, HOLDINGS, Sherwood, Steven Sherwood Trust,
Zachary Sherwood S Trust, Williams, The BBC-Williams Family Living Trust and
the Company (collectively referred to as the "Shareholders") entered into a
Shareholders' Agreement. Among other provisions of the agreement, the agreement
nominated Sherwood and Williams as trustees of the Company until such time as
certain events occur.
Redeemable common shares
In addition, the Shareholders agreed to a put option allowing certain
shareholders to cause the Company to purchase their Class A and B shares,
subject to certain provisions, at a purchase price of $10 per share/unit. As
the exercise of the put option is beyond the control of the Company, such stock
is reflected as redeemable common shares and is not considered equity of the
Company. At December 31, 1999 and 1998, redeemable common shares include
160,295 Class A shares and 1,383,314 Class B shares of the Company.
Corporate services agreement
The Corporate Services Agreement was entered into by and among MHC Trading
LLC, a Delaware limited liability company and related party ("MHC"), the
Operating Partnership and the Manager, whereby, certain officers and employees
of the Operating Partnership and the Manager would continue to perform
management services for third party communities and the CWS 25 communities
previously managed by MHC through March 31, 2000, provided that the services
will end upon the (a) acquisition of the CWS community by the Operating
Partnership, or (b) the assignment of the property management contract for any
third-party properties to the Manager. In exchange for the services provided,
MHC pays a management fee to the Operating Partnership and the Manager. For the
years ended December 31, 1999 and 1998, the Operating Partnership and the
Manager earned $358,597 and $579,449 and $324,499 and $248,731, respectively,
in fees related to this agreement. In addition, MHC reimburses the Operating
Partnership for a portion of the payroll expense related to these officers and
employees. For the years ended December 31, 1999 and 1998, the Operating
Partnership received $61,109 and $104,607, respectively, in payroll
reimbursements.
Consulting agreement with Williams
The Operating Partnership entered into a contract with Williams to employ
his services in relation to the acquisition of portfolios of existing
manufactured home communities consisting of at least 3 communities with an
aggregate value of not less than $25,000,000 over a period of 48 months which
began March 6, 1998. During this period, Williams will be paid a commission of
1.5% (payable in units of the Operating Partnership) of the adjusted sales
price of each portfolio of communities identified by Williams and subsequently
acquired by the Operating Partnership. Upon request, Williams can defer receipt
of up to $3.5 million of the above commissions. The Operating Partnership will
also reimburse Williams for travel expenses and other out-of-pocket costs or
expenses incurred by Williams related to performance under this agreement,
subject to a pre-approved budget. Additionally, the Operating Partnership has
agreed to furnish Williams an office for a six-year period commencing March 6,
1998 or until he ceases to be a trustee of the Company. As of December 31,
1999, no commissions have been paid or are due.
F-61
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Development opportunity agreement with Sherwood
On March 6, 1998, the Operating Partnership entered into a development
opportunity agreement with Sherwood regarding four previously identified
manufactured home communities. The Operating Partnership has the right to
develop, own and operate any of the four communities. Sherwood will be paid a
cash fee if the acquired community's operating results meet certain pre-
established thresholds. In addition, Sherwood is entitled to receive the
difference between the agreed upon value of the community and the actual price
paid to acquire three of the communities. One community was acquired in 1998 by
the Operating Partnership.
Employment agreement with Sherwood
The Company and Sherwood entered into a three-year Employment Agreement
commencing March 6, 1998. This agreement provides for (a) an annual target
bonus; (b) a long-term regular bonus payable to Sherwood on the third
anniversary of the agreement if he is employed by the Company; and, (c) a long-
term performance bonus, if he is employed by the Company on the third
anniversary. The long-term performance bonus will be based upon the total
annual return of the shares of USREALTY from March 6, 1998 through March 6,
2001.
Both Sherwood and Williams have executed noncompete agreements regarding
participation in the manufactured housing business for the period ending one
year after termination of employment for Sherwood and one year after
termination of Williams' engagement in portfolio acquisition for the Operating
Partnership.
10. SUPPLEMENTAL CASH FLOW INFORMATION
The following tables summarize noncash investing and financing transactions
of the Company for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES:
REAL ESTATE ASSETS ACQUIRED.................... $ 59,512,825 $ 50,937,682
Minority interest partnership units issued..... (13,594,422) (35,330,839)
Notes payable assumed.......................... (41,758,422) (12,226,604)
Shares issued.................................. (4,159,981) (3,380,239)
------------ ------------
$ -- $ --
============ ============
INVESTMENT IN CWS MANAGEMENT SERVICES
INCORPORATED ACQUIRED......................... $ 1,753,466 $ 3,151,396
Shares issued or earned........................ (1,753,466) (2,430,137)
Minority interest partnership units issued..... -- (335,875)
Assets contributed............................. -- (385,384)
------------ ------------
$ -- $ --
============ ============
GOODWILL ACQUIRED.............................. $ 1,488,291 $ 1,325,706
Shares issued or earned........................ (1,488,291) (702,096)
Minority interest partnership units issued..... -- (623,610)
------------ ------------
$ -- $ --
============ ============
</TABLE>
F-62
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTIES
Administrative services agreement
The Company outsources certain services to Security Capital Group, Inc., a
related party to HOLDINGS and USREALTY under an administrative services
agreement. Services outsourced during 1999 and 1998 included general ledger
accounting, registrar and transfer agent, stock option administration and
reporting, cash management, corporate tax administration, accounts payable,
human resources, legal, MIS, payroll, property tax administration, and risk
management. During the years ended December 31, 1999 and 1998, the Operating
Partnership incurred $506,406 and $468,495, respectively, and the Manager
incurred $99,705 and $33,537, respectively, of fees related to these services.
Due from affiliates includes the following as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Flooring receivable, Manager......................... $1,325,775 $1,048,446
Operations funding, Manager.......................... 3,313,900 829,371
Liabilities paid on behalf of Manager................ -- 247,494
Other................................................ (11,013) 153,111
---------- ----------
Due from affiliates................................ $4,628,662 $2,278,422
========== ==========
</TABLE>
Flooring receivable, Manager
On March 6, 1998, the Operating Partnership entered into an agreement with
the Manager, whereby, the Operating Partnership agreed to fund the purchase of
manufactured houses by the Manager. The Manager may borrow up to 85% of the
purchase price of home inventory under a collateralized promissory note. The
maximum unpaid principal balance shall not exceed $5 million with a maturity
date of March 6, 2008. Interest accrues on the outstanding balance at 8.5%
annually. The agreement calls for principal and accrued interest to be due upon
the closing of each home sale. The Company earned approximately $93,485 and
$71,828, respectively of interest income during 1999 and 1998 related to this
agreement.
Operations funding, Manager
During 1999 and 1998, the Operating Partnership funded the cash flow needs
of the Manager. The Operating Partnership will continue funding the Manager's
operating deficits until such time as operating cash flows from the Manager
become positive. On March 6, 1998, the Operating Partnership paid several
liabilities on behalf of the Manager associated with the portion of CWS that
was contributed to the Manager subsequent to the merger with CWS (Note 9--
Merger and contribution agreement/goodwill). Amounts outstanding are not
collateralized and are noninterest-bearing.
12. INCENTIVE STOCK PROGRAM
On June 5, 1998, the board of trustees adopted the CWS Communities Trust
1998 Long-Term Incentive Plan ("the Plan") which authorized the issuance of
four million common shares and units in the form of incentive stock options,
non-qualified stock options and restricted stock. The options granted during
the years ended December 31, 1999 and 1998, vest over periods ranging from
three to five years. In the event of termination of the participant or the plan
following a change in control of the REIT (greater than 50% change in
ownership), options or awards which have not otherwise expired shall become
immediately exercisable and any other awards shall become fully vested. The
exercise price is equal to, or greater than, the estimated fair
F-63
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
market value of the stock at the date of the grant. Options expire at the
earlier of ten years from the date of grant or upon termination of employment
or death.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plan. No compensation has been recognized for the Plan as
the Company has issued the options at an exercise price, which represents the
fair market value at the date of grant. Had compensation cost for the option
issuances been determined based on the fair market value at the grant date,
consistent with the method provided by Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), the Company's pro forma net earnings for the
years ended December 31, 1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C> <C>
Net income attributable to common
shares................................. As reported $6,555,672 $1,554,930
Pro forma $6,528,113 $1,554,619
Basic earnings per share................ As reported $ .30 $ .12
Pro forma $ .30 $ .12
Diluted earnings per share.............. As reported $ .30 $ .11
Pro forma $ .30 $ .11
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. The Company anticipates making awards in the
future under its stock-based compensation plans.
The following table summarizes activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
AVERAGE SHARES OF
EXERCISE UNDERLYING
PRICE OPTIONS
-------- ----------
<S> <C> <C>
Outstanding at December 31, 1997....................... $ -- --
Granted.............................................. 10.00 773,022
Exercised............................................ -- --
Cancelled............................................ 10.00 (5,500)
------ ---------
Outstanding at December 31, 1998....................... $10.00 767,522
====== =========
Options exercisable at December 31, 1998............... $10.00 --
====== =========
Weighted average fair value of options granted during
1998.................................................. $ .007
======
Outstanding at December 31, 1998....................... $10.00 767,522
Granted.............................................. 10.50 427,621
Exercised............................................ -- --
Cancelled............................................ 10.00 (28,500)
------ ---------
Outstanding at December 31, 1999....................... $10.18 1,166,643
====== =========
Options exercisable at December 31, 1999............... $10.00 117,525
====== =========
Weighted average fair value of options granted during
1999.................................................. $ .22
======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the "Black Scholes Model". The Company has assumed the following in estimating
the fair value of the options: expected lives of 6.25 to 6.75 years, dividend
yield of 6 to 6.1%, expected volatility of 2% and risk-free interest rates
ranging from 4.51% to 6.58%.
F-64
<PAGE>
CWS COMMUNITIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about options outstanding under
the plan at December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$10.00 739,022 8.78 $10.00 117,525 $10.00
$10.50 427,621 9.92 $10.50 -- $ --
</TABLE>
13. 401(K) SAVINGS PLAN
Effective January 1, 1998, the Company adopted a 401(k) Savings Plan (the
"Savings Plan") for its employees. Under the Savings Plan, employees, age 21
and older, are eligible to participate after they have completed sixty days of
service for full-time employees and 1,000 hours of service for part-time
employees. Wages eligible for contribution to the Savings Plan include bonuses,
overtime pay and commissions. The Company matches 50% of employee
contributions, with a maximum match of 3% of the employees pay. Total matching
contributions paid by the Operating Partnership for the years ended December
31, 1999 and 1998 were $101,973 and $41,150, respectively. Participants are
immediately vested in their pretax and after-tax contributions, matching
contributions vest at a rate of 20% per year subsequent to completion of one
full year of service.
14. COMMITMENTS AND CONTINGENCIES
The Company is subject to environmental regulations related to the
ownership, operation, development and acquisition of real estate properties. As
part of the Company's due diligence procedures, the Company obtains or conducts
Phase I environmental assessments on each property prior to acquisition. The
Company is not aware of any environmental condition on any of its properties
which is likely to have a material adverse effect on the Company's financial
condition or results of operations.
As part of the March 6, 1998 contribution agreement, the Company ("Lender")
committed to advance Sherwood and Williams (the "Borrowers") funds up to a
maximum of the lesser of (a) 100% of the initial fair market value of the
collateral securing the loan, or (b) the amount requested by the Borrowers in
writing. The collateral for the loans will be the total units held by the
Borrowers. The loan agreements provide for principal payment of the loans
through the use of the collateral or cash. Interest on the loans will accrue at
an annual rate of 6%, increasing by one-quarter of one percent on each
anniversary date of the loan agreement up to a maximum of 8.25%.
As of December 31, 1999, $14 million has been provided to the Borrowers. In
connection with these agreements, the Company earned $288,329 interest income
in 1999.
The Company, Operating Partnership and Manager are parties to various claims
and routine litigation arising from the ordinary course of business; however,
they do not believe that the results of any such claims and litigation,
individually, or in aggregate, will have a material adverse effect on its
business, financial position, or results of its operations.
15. SUBSEQUENT EVENTS
On January 14, 2000, the Operating Partnership paid off $5.1 million in
mortgages payable. Also, on January 14, 2000, the Operating Partnership
acquired 80 acres in Denver, Colorado for the development of Prairie Greens.
This development community is projected to consist of 392 homesites at a total
expected investment of $14.1 million. On February 2, 2000, the Operating
Partnership acquired Greenbriar Colony, an operating community in Bath,
Pennsylvania with 319 homesites and a total expected investment $12.4 million.
F-65
<PAGE>
URBAN GROWTH PROPERTY TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Urban Growth Property Trust
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of Urban
Growth Property Trust and its subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 27, 2000
F-66
<PAGE>
URBAN GROWTH PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Real estate........................................ $272,729,552 $244,989,676
Less accumulated depreciation.................... (6,319,183) (2,369,090)
------------ ------------
266,410,369 242,620,586
Cash and cash equivalents.......................... 42,846,851 3,186,270
Restricted cash.................................... 4,941,453 1,421,019
Earnest money deposits and pursuit costs........... 559,446 577,928
Accounts receivable................................ 4,449,934 1,377,786
Due from affiliate................................. 1,494,408 395,314
Loan costs (net of accumulated amortization of
$107,367 and $41,514 in 1999 and 1998,
respectively)..................................... 1,549,493 191,600
Other assets (net of accumulated amortization of
$500,152 and $463,227 in 1999 and 1998,
respectively)..................................... 2,124,316 2,209,207
------------ ------------
Total assets................................... $324,376,270 $251,979,710
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable................................. $ 518,365 $ 144,739
Accrued expenses and other liabilities........... 2,030,280 1,802,753
Real estate taxes payable........................ 4,998,225 4,547,814
Long-term debt................................... 118,668,551 56,403,693
------------ ------------
Total liabilities.............................. 126,215,421 62,898,999
Minority interest.................................. 5,478,135 5,439,644
Commitments and contingencies...................... -- --
Shareholders' equity:
Common shares ($.01 par value per share;
150,000,000 shares authorized, 19,061,250 and
18,311,250 shares issued and outstanding as of
December 31, 1999 and 1998, respectively)....... 190,613 183,113
Additional paid-in capital....................... 190,421,888 182,929,388
Subscriptions receivable......................... -- (1,000)
Retained earnings................................ 2,070,213 529,566
------------ ------------
Total shareholders' equity..................... 192,682,714 183,641,067
------------ ------------
Total liabilities and shareholders' equity..... $324,376,270 $251,979,710
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
URBAN GROWTH PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Base rental income.................................. $27,608,627 $14,610,753
Percentage rent..................................... 4,964,345 2,787,796
Gain on sale of real estate......................... 215,886 --
Interest and other income........................... 1,082,328 484,109
----------- -----------
Total income...................................... 33,871,186 17,882,658
----------- -----------
Expenses:
General and administrative.......................... 3,510,120 2,769,401
Real estate taxes................................... 6,228,093 3,280,074
Interest expense.................................... 6,377,096 3,560,557
Depreciation and amortization....................... 4,423,171 2,308,966
Other expense....................................... 1,184,944 430,596
----------- -----------
Total expenses.................................... 21,723,424 12,349,594
----------- -----------
Net income before minority interest................... 12,147,762 5,533,064
Minority interest..................................... 567,112 438,741
----------- -----------
Net income............................................ $11,580,650 $ 5,094,323
=========== ===========
Net income per common share outstanding, basic and
diluted.............................................. $ 0.62 $ 0.52
=========== ===========
Weighted average common shares outstanding............ 18,632,209 9,802,349
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
URBAN GROWTH PROPERTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED TOTAL
SHARES COMMON PAID-IN- SUBSCRIPTIONS EARNINGS SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL RECEIVABLE (DEFICIT) EQUITY
----------- -------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998.... 1,724,300 $ 17,243 $ 17,225,757 $(2,000) $ (441,333) $ 16,799,667
Sale of common shares....... 16,587,050 165,871 165,704,630 -- -- 165,870,501
Cancellation of 100 shares
of subscribed stock........ (100) (1) (999) 1,000 -- --
Net income.................. -- -- -- -- 5,094,323 5,094,323
Common share distributions.. -- -- -- -- (4,123,424) (4,123,424)
---------- -------- ------------ ------- ------------ ------------
Balance at December 31, 1998.. 18,311,250 $183,113 $182,929,388 $(1,000) $ 529,566 $183,641,067
Sale of common shares....... 750,000 7,500 7,492,500 -- -- 7,500,000
Subscription received....... -- -- -- 1,000 -- 1,000
Net income.................. -- -- -- -- 11,580,650 11,580,650
Common share distributions.. -- -- -- -- (10,040,003) (10,040,003)
---------- -------- ------------ ------- ------------ ------------
Balance at December 31, 1999.. 19,061,250 $190,613 $190,421,888 $ -- $ 2,070,213 $192,682,714
========== ======== ============ ======= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
URBAN GROWTH PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 11,580,650 $ 5,094,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 4,423,171 2,308,966
Amortization of discount........................ 131,555 72,033
Gain on sale of real estate..................... (215,886) --
Minority interest............................... 567,112 438,741
Changes in assets and liabilities:
Restricted cash............................... (3,520,434) (775,704)
Accounts receivable........................... (4,166,206) (1,369,933)
Accounts receivable from a related party...... (5,036) (251,762)
Other assets.................................. (162,286) (2,208,256)
Accounts, payable, accrued expenses and other
liabilities.................................. 295,989 1,534,278
Real estate taxes payable..................... 450,411 3,989,053
------------ -------------
Net cash provided by in operating
activities................................. 9,379,040 8,831,739
------------ -------------
Cash flows from investing activities:
Real estate investments....................... (27,278,121) (175,838,929)
Proceeds from dispositions.................... 6,576,631 --
Construction costs............................ (308,045) (1,637,563)
Loan costs.................................... (1,423,746) --
Earnest money deposits, pursuit costs and
other assets................................. (49,287) 114,681
------------ -------------
Net cash used in investing activities....... (22,482,568) (177,361,811)
------------ -------------
Cash flows from financing activities:
Common stock issued............................. 7,500,000 165,870,501
Subscription received........................... 1,000 --
Common share distributions...................... (10,040,003) (4,123,424)
Proceeds from mortgage loan payable............. 64,000,000 --
Principal payments on mortgage loans payable.... (6,711,105) (436,659)
Payments to purchase capital lease purchase
option......................................... (784,760) --
Principal payments on obligation under capital
lease.......................................... (370,832) (19,542)
Distributions to minority interest.............. (830,191) (796,558)
------------ -------------
Net cash provided by financing activities..... 52,764,109 160,494,318
------------ -------------
Net change in cash and cash equivalents..... 39,660,581 (8,035,754)
Cash and cash equivalents at beginning of
period.......................................... 3,186,270 11,222,024
------------ -------------
Cash and cash equivalents at end of period....... $ 42,846,851 $ 3,186,270
============ =============
Supplemental schedule of non-cash investing and
financing activities:
Assumption of existing notes payable in
conjunction with real estate acquired.......... $ 6,000,000 $ 39,310,191
Fully depreciated assets written off............ 104,013 --
Minority interest contributed................... 301,570 437,543
Supplemental cash flow information:
Interest paid including capitalized............. $ 6,981,492 $ 3,279,296
Capitalized interest............................ 298,977 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Urban Growth Property Trust (the "Company"), is a privately held company
incorporated in the State of Maryland on September 27, 1996. At December 31,
1999 and 1998, 98.8% and 98.7%, respectively, of the Company's shares of common
stock outstanding were owned by Security Capital Holdings, S.A. ("Holdings"), a
wholly-owned subsidiary of Security Capital U.S. Realty ("USRealty"). The
Company qualifies as a real estate investment trust for Federal income tax
purposes.
The Company owns a 100% interest (partially direct and partially indirect) in
Urban Growth Property Limited Partnership ("UGPLP"), which was created in July
1998 to acquire, develop and own parking garages. The Company contributed cash
and all of its real estate in consideration for substantially all of the
partnership units of UGPLP upon formation. As of December 31, 1999, the
Company's portfolio consisted of 26 operating properties with a combined number
of parking stalls in excess of 17,000 in twelve target markets in the United
States. The Company also owns three development properties that will have an
additional 3,100 parking stalls.
The Company owns 50% interests in two limited liability companies and an 81.3%
interest in a general partnership, each of which owns a parking garage in the
downtown Chicago area. These interests are owned by the Company through its
ownership of UGPLP.
The Company also owns an undivided 78% interest in a downtown Chicago parking
facility. The remaining 22% is owned by certain shareholders of a related third
party operator of certain of its garage facilities, InterParking Incorporated
("IPI"). The Company accounts for its ownership by recording its share of the
parking facility's assets, liabilities, income and expense in the accompanying
financial statements.
Basis of Presentation
The accompanying financial statements of the Company have been prepared on a
consolidated basis which includes the accounts of the Company, its affiliated
limited liability companies, and its majority-owned partnership. All
significant intercompany balances have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's 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.
Cash and Cash Equivalents
Any instruments which have an original maturity of ninety days or less when
purchased are considered cash equivalents. Cash and cash equivalents consist of
cash in bank accounts and funds invested in money market funds.
Restricted Cash
Restricted cash represents escrow and reserve funds for real estate taxes and
capital improvements established pursuant to the mortgage financing agreements.
F-71
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
Reclassifications
Certain items presented in the financial statements for prior periods have been
reclassified to conform with current classifications.
Fair Value of Financial Instruments
The fair value of the Company's long-term debt has been estimated based on the
current rates available to the Company for debt of the same remaining
maturities. The Company considers their carrying value to be a reasonable
estimation of their fair value.
Real Estate and Depreciation
Real estate is carried at cost. During 1998, the Company acquired controlling
interests in certain affiliated companies. The excess of amounts paid over the
historical cost of the affiliated companies' assets was allocated to the
underlying real estate properties. Costs directly related to the acquisition,
renovation, or development of real estate are capitalized. Real estate also
includes capitalized interest of $298,977 in 1999 and none in 1998 in
accordance with the capitalized interest policy described below.
Depreciation is computed using the straight-line method over estimated useful
lives up to forty years for buildings and improvements, and five to seven years
for furniture and equipment.
The Company has established standards to review its long-lived assets for
potential impairment. Based on such a review as of December 31, 1999, there are
no impairments to the carrying values of long-lived assets that would have a
material impact on the Company's financial statements.
Capitalized Interest
The Company capitalizes interest costs incurred during the construction period
of qualifying projects.
Loan Costs and Other Assets
Loan costs primarily include costs associated with the $64,000,000 loan payable
and are amortized on a straight-line basis over the terms of the respective
loan agreements.
Other assets consist primarily of costs amounting to $1,567,674, in 1999 and
$1,608,750 in 1998 associated with a prepaid ground lease incurred in
connection with the acquisition of a parking facility in Hartford, Connecticut,
in 1998. Prepaid ground lease costs are being amortized on a straight-line
basis over the life of the lease (40 years). Other assets also consist of
leasing commissions and computer equipment which are amortized on a straight-
line basis over the term of the respective lease agreements and over five
years, respectively. Organizational costs of $112,204 which were included in
the 1998 balance were expensed in 1999 with the adoption of SOP 98-5 Reporting
on The Costs of Start-Up Activities which requires such costs to be expensed.
Rental Income
The Company leases parking space under agreements with varying terms. Certain
parking garages owned by the Company are leased to a related third party
operator, InterParking Incorporated ("IPI") under agreements that provide for
minimum base and additional rents based on a percentage of the operator's
gross revenues. Additionally, certain retail space attached to the primary
parking facilities is leased under arrangements which call for additional rent
based upon tenants' sales volume. All leases are accounted for as operating
leases with minimum rent recognized on a straight-line basis over the term of
the lease regardless of when payments are due. Additional rents are reflected
on the accrual basis. Rents recognized on a straight-line basis amounted to
$1,453,882 and $1,115,985 in 1999 and 1998, respectively.
F-72
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
Federal Income Taxes
The Company has elected as of January 1, 1997, to be treated as a qualified
Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986,
as amended. As a REIT, the Company is entitled to a tax deduction for the
amount of dividends paid its shareholders, thereby effectively subjecting the
distributed net income of the Company to taxation at the shareholder level
only, provided it distributes at least 95% of its taxable income and meets
certain other REIT qualification requirements.
Employee Stock Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). As allowed by SFAS 123, the Company continues to
apply the accounting provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and reports pro forma
fair value effects required by SFAS 123. In accordance with APB 25, total
compensation cost is measured by the difference between the market price of
stock at the date of grant or award and the price, if any, to be paid by an
employee and is recognized as an expense over the period the employee performs
related services.
Restricted Stock Awards
At the end of 1998, the Company awarded 50,000 restricted stock units to an
officer. The compensation expense is recognized over the period the employee
performs related services. Expenses recorded in 1999 and 1998 amounted to
$122,520 and $0, respectively.
Per Share Data
Under SFAS No. 128, "Earnings Per Share", options should be reflected in
diluted earnings per share by application of the treasury stock method only if
the options will have a dilutive effect on earnings per share. Since the
estimated fair value of the common stock during the period presented does not
exceed the exercise price of the options granted, the options do not have a
dilutive effect on earnings per share and therefore basic and diluted earnings
per share are the same.
Per share data is computed based upon the weighted average number of common
shares outstanding during the period.
F-73
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
2. REAL ESTATE INVESTMENTS
The Company acquired interests in seven properties in 1999 with an aggregate
purchase cost of $28,584,103. Real estate investments are comprised of income
producing parking garages, retail and office space and construction in progress
in the following markets:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL COST
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Atlanta, Georgia............................... 2.2% 1.4%
Baltimore, Maryland............................ 5.1% 4.7%
Boston, Massachusetts.......................... 5.5% 6.0%
Chicago, Illinois.............................. 48.2% 51.7%
Hartford, Connecticut.......................... 4.4% 4.8%
Los Angeles, California........................ 1.5% --
Philadelphia, Pennsylvania..................... 16.8% 17.0%
Pittsburgh, Pennsylvania....................... 2.0% 2.2%
Providence, Rhode Island....................... 2.5% --
Raleigh-Durham, North Carolina................. 2.4% 1.8%
San Diego, California.......................... 1.2% 1.3%
San Francisco, California...................... 8.2% 9.1%
------------ ------------
100% 100%
============ ============
The following summarizes real estate investments as of December 31:
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land........................................... $122,211,092 $107,189,358
Buildings and improvements..................... 139,143,005 137,050,128
Construction in progress....................... 11,375,455 750,190
------------ ------------
Total real estate............................ 272,729,552 244,989,676
Less accumulated depreciation.................. (6,319,183) (2,369,090)
------------ ------------
Net real estate.............................. $266,410,369 $242,620,586
============ ============
</TABLE>
F-74
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
The Company's operating leases have expiration dates extending to the year
2097. Future minimum rent receivable under noncancelable operating leases,
excluding tenant reimbursements of operating expenses and excluding additional
contingent rentals based on tenants' sales volume as of December 31, 1999, are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------------
<S> <C>
2000......................................................... $ 14,907,929
2001......................................................... 10,666,235
2002......................................................... 10,158,031
2003......................................................... 9,059,555
2004......................................................... 7,623,842
Thereafter................................................... 170,407,337
------------
Total...................................................... $222,822,929
============
</TABLE>
3. CAPITAL LEASE OBLIGATION
The Company acquired the leasehold interest on an off-airport parking facility
serving Raleigh-Durham International Airport in Raleigh-Durham, North Carolina.
The lease contained a bargain purchase option allowing the Company to purchase
the land for $1,119,750 in May 2003, the end of the lease. Accordingly, the
Company has accounted for this leasehold interest as a capital lease in
accordance with Statement of Financial Accounting Standards No. 13, "Accounting
for Leases". During October, 1999 the Company terminated the lease and
purchased the land for $1,500,939.
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
Mortgage loans payable collateralized by real estate
are as follows:
<S> <C> <C>
1999 1998
----------- -----------
8.29% mortgage loan payable to an insurance company
in the original principal amount of $9,000,000.
Principal and interest are paid monthly in the amount
of $71,201 through November 15, 2001 and $76,912
beginning December 15, 2001 through maturity on
November 15, 2006.................................... $ 8,620,968 $ 8,754,608
9.0% mortgage loan payable to a national bank in the
amount of $8,600,000. Interest on the outstanding
balance was due monthly in arrears through completion
of construction at which time principal and interest
payments became payable monthly in the amount of
$72,171 based on a 25-year amortization schedule. The
remaining principal and interest is due at maturity
on March 14, 2007.................................... 8,432,477 8,537,785
8.774% commercial mortgage loan payable to a credit
company in the original principal amount of
$7,500,000. Principal and interest are payable
monthly in the amount of $61,783 based on a 30-year
amortization schedule. The remaining principal and
interest is due at maturity on February 1, 2007...... 7,232,625 7,334,872
9.375% mortgage note payable to a national bank in
the original principal amount of $32,000,000.
Principal and interest payments of $237,933 are due
monthly based on a 30-year amortization schedule. The
remaining principal and interest is due at maturity
on August 31, 2006................................... 28,810,740 29,035,830
</TABLE>
F-75
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
Other long-term debt obligations are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Obligation under capital lease due in monthly
installments of $8,200 through May 31, 2003. The
present value of the future minimum lease
payments of $390,374 has been discounted
utilizing the Company's incremental borrowing
rate of 8%. See Capital Lease Obligation
footnote for additional disclosure.............. $ -- $ 1,155,592
Non-interest bearing note payable to a seller in
the principal amount of $2,000,000 which is
collateralized by land located in Philadelphia,
PA. The note is due November 27, 2001 (42 months
after the acquisition date) and has been
discounted utilizing an 8% imputed interest
rate. The original discount on the note amounts
to $487,027, of which $131,555 and $72,033 were
amortized in 1999 and 1998, respectively........ 1,716,561 1,585,006
8% loan payable to an insurance company issued
September, 1999, in the original principal
amount of $64,000,000. Principal and interest
are paid monthly in the amount of $445,308. The
note matures on October 1, 2006 and is
collateralized by 13 parking facilities. 63,855,180 --
------------- ------------
Total long-term debt............................ $118,668,551 $56,403,693
============= ============
</TABLE>
The notes are subject to prepayment penalties generally equal to one percent of
the remaining principal amounts of the notes multiplied by the percent of the
remaining months to maturity.
Principal maturities on the long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------------
<S> <C>
2000........................................................ $ 1,207,018
2001........................................................ 3,318,177
2002........................................................ 1,496,478
2003........................................................ 1,624,696
2004........................................................ 1,761,907
Thereafter 109,543,714
------------
Total principal due......................................... 118,951,990
Less: unamortized discount.................................. (283,439)
------------
Total carrying value...................................... $118,668,551
============
</TABLE>
As part of their borrowing arrangements, the Company is expected to maintain
escrow balances for the payment of real estate taxes on the mortgaged
properties and specified capital improvement escrows. Escrow balances recorded
as restricted cash were $4,941,453 and $1,421,019 at December 31, 1999 and
1998, respectively.
4. MINORITY INTEREST
In June 1997, the Company acquired (and subsequently contributed to UGPLP) a
50% membership interest in LWP Associates L.L.C. ("LWP") for approximately $2.8
million in cash. LWP owns a parking facility with
F-76
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
approximately 900 stalls and 9,000 square feet of rental space located in
Chicago, Illinois. The property is subject to a mortgage loan in the amount of
$8,620,968 at December 31, 1999 and $8,754,608 at December 31, 1998.
In August 1997, the Company acquired (and subsequently contributed to UGPLP) a
50% membership interest in VW Investors, L.L.C. ("VWI") for approximately $3.7
million in cash. At the date of acquisition, VWI owned property in Chicago,
Illinois upon which an eleven story parking facility containing approximately
800 parking stalls was being constructed. The property is subject to a mortgage
loan in the amount of $8,432,477 at December 31, 1999 and $8,537,785 at
December 31, 1998.
On July 2, 1998, UGPLP acquired an 81.3% controlling interest in the Urban
Growth Wabash Randolph Partnership ("UGWRP"), which owns a 1,100 stall self-
parking facility located in downtown Chicago, Illinois. The property also
includes approximately 50,000 square feet of office and retail space and is
subject to a mortgage loan in the amount of $28,810,740 at December 31, 1999
and $29,035,830 as of December 31, 1998.
The following is an analysis of minority interest:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Beginning balance................................. $5,439,644 $5,359,918
Minority ownership interest contributions......... 301,570 437,543
Distributions to minority interest holders........ (830,191) (796,558)
Minority interests in net earnings of investees... 567,112 438,741
---------- ----------
$5,478,135 $5,439,644
========== ==========
</TABLE>
5. SHAREHOLDERS' EQUITY
Offerings
During 1999 and 1998, the Company offered shares of its common stock to its
principal shareholder, Holdings, in a series of private transactions. The
proceeds of the offerings were used to acquire properties and interests in
affiliated companies and as working capital for operations.
Common Share Distributions
During 1998, the Board of Trustees approved dividend distributions of $0.25 and
$0.01 per share of common stock to shareholders of record on December 20, 1998
and December 28, 1998, respectively. All dividends were paid as of December 31,
1998.
During 1999, the Board of Trustees approved dividend distributions of $0.11,
$0.13, $0.05, $0.10, and $0.15 per share of common stock to shareholders of
record on March 31, 1999, June 30, 1999, July 27, 1999, September 30, 1999, and
December 24, 1999, respectively. All dividends were paid as of December 31,
1999.
For Federal Income taxes, the entire dividend distribution is estimated to be
taxable as ordinary income.
6. SHARE OPTION PLAN
The Board of Trustees and shareholders adopted the Employee Share Option Plan
(the "Option Plan") effective as of February 12, 1998. The purpose of the
Option Plan is to enable officers and key employees of the Company to
participate in the Company's future and to enable the Company to attract and
retain these persons
F-77
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
by offering them proprietary interests in the Company. The Option Plan is
administered by the Company's Board of Trustees and authorizes the issuance of
up to 5,000,000 shares of common stock pursuant to the grant or exercise of
stock options.
Options vest at the rate of 25% per year beginning on the first or second
anniversary of the grant date. Options will expire after ten years from the
grant date. All options were issued at an exercise price of $10 per share.
Option activity for the years ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 510,500 $10.00 -- --
Granted............................. -- -- 510,500 $10.00
Exercised........................... -- -- -- --
Cancelled........................... (55,000) $10.00 -- --
========== ====== ========== ======
Outstanding at end of year............ 455,500 $10.00 510,500 $10.00
========== ====== ========== ======
Exercisable at end of year............ 67,500 --
========== ==========
Available for future grant at year
end.................................. 4,544,500 4,489,500
========== ==========
Weighted average per share fair value
of options granted
during year.......................... -- $ 0.45
Weighted average remaining contractual
life................................. 8.68 years 9.66 years
</TABLE>
The fair value of each option grant was estimated on the date of the grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998
---- ----------
<S> <C> <C>
Risk free interest rate.................................... -- 4.75%
Dividend yield............................................. -- 6.00%
Expected lives............................................. -- 6.75 years
Expected volatility........................................ -- 10.00%
</TABLE>
F-78
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
The Company has applied APB No. 25 and related interpretations in accounting
for its Plan. Accordingly, no compensation costs have been recognized. Had
compensation costs for the Company's Plan been determined based on the fair
value at the grant date for the options granted in 1998 in accordance with the
method required by SFAS No. 123, the Company's net income per share would have
been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Net income
As reported.................................. $11,580,650 $5,094,323
Pro forma.................................... $11,535,404 $5,078,787
Per share net income attributable to common and
common equivalent shares
As reported, basic and diluted............... $ 0.62 $ 0.52
Pro forma, basic and diluted................. $ 0.62 $ 0.52
</TABLE>
7. RELATED PARTY TRANSACTIONS
Management Agreements
LWP is provided management services for the retail space located in its garage
facility by IPI. Management fees for such services are charged to LWP at five
percent (5%) of the gross retail revenue.
Additionally, the Company has executed parking facility lease agreements with
IPI that generally provide for the Company to receive a fixed base rent plus a
percentage of the gross receipts of the facility equal to between 60 and 80
percent. The Company's lease agreements with IPI represent approximately 76% of
its rental income in 1999 and 55% in 1998, of which $400,350 and $395,314 was
receivable at December 31, 1999 and 1998, respectively.
Promissory Notes
There were promissory notes due from IPI at December 31, 1999 totaling
$1,094,058. The notes have interest rates ranging from 8.77% to 9.63% and
maturities ranging from on demand to August 2002. One of the notes is
collateralized by shuttle buses.
Administrative Services Agreement
The Company and SC Group Incorporated ("SC Group"), an affiliate of the
Company's primary shareholder, entered into an Administrative Services
Agreement (the "ASA"), pursuant to which SC Group has agreed to provide the
Company with administrative services. These services include but are not
limited to insurance administration, accounts payable, general accounting,
internal audit, cash management, human resources, management information
systems, tax and legal administration, research, shareholder communications and
investor relations. The provision of services under the ASA are required to be
commercially reasonable and on terms not less favorable than those which could
be obtained from unaffiliated third parties. Total charges for 1999 and 1998
were $338,173 and $472,510, respectively. The initial term of the agreement
expired on December 31, 1998, whereupon the Company and SCGroup executed a new
ASA in January 1999. The 1999 ASA has an initial term expiring on December 31,
1999 and successive one-year renewal periods, unless otherwise terminated. The
Company owes SCGroup for services rendered under the ASA, $35,831 and $79,767
at December 31, 1999 and 1998, respectively.
F-79
<PAGE>
URBAN GROWTH PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
Office Space
The Company utilized certain office space under lease to Security Capital Group
Incorporated ("SCG"), the parent company of SCGroup, until June 1999, when the
Company moved into its own offices. SCG did not charge the Company for rent.
8. COMMITMENTS AND CONTINGENCIES
The Company, like others in the commercial real estate industry, is subject to
numerous environmental laws and regulations related to the ownership,
operation, development and acquisition of real estate properties. As part of
due diligence procedures, the Company has obtained or conducted Phase I
environmental assessments on each property prior to acquisition. The Company is
not aware of any environmental condition on any of its properties which is
likely to have a materially adverse effect on the Company's financial condition
or results of operations.
F-80
<PAGE>
APPENDIX A
TRANSACTION AGREEMENT
by and among
SECURITY CAPITAL GROUP INCORPORATED
SC REALTY INCORPORATED
and
SECURITY CAPITAL U.S. REALTY
dated as of September 26, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I Certain Definitions................................... A-2
ARTICLE II Purchase and Sale of Stock; Liquidation............... A-7
Section 2.1. Purchase and Sale of Holdings Shares.................. A-7
Section 2.2. Liquidation of USRealty............................... A-8
Section 2.3. Time and Place of Closings............................ A-8
ARTICLE III Representations and Warranties of USRealty............ A-8
Section 3.1. Incorporation; Authorization; etc..................... A-8
Section 3.2. Capitalization; Structure............................. A-9
Section 3.3. Financial Statements.................................. A-10
Section 3.4. Properties; Leases.................................... A-11
Section 3.5. Absence of Certain Changes............................ A-11
Section 3.6. Litigation; Orders.................................... A-11
Section 3.7. Licenses, Approvals, Other Authorizations, Consents,
Reports, etc.......................................... A-12
Section 3.8. Compliance with Laws.................................. A-12
Section 3.9. Insurance............................................. A-12
Section 3.10. Material Contracts.................................... A-12
Section 3.11. Brokers, Finders, etc................................. A-12
Section 3.12. No Undisclosed Liabilities............................ A-12
Section 3.13. Joint Proxy Statement/Prospectus; Form S-4............ A-13
Section 3.14. Required Vote......................................... A-13
Section 3.15. Opinion of USRealty Financial Advisor................. A-13
Section 3.16. Board Approval........................................ A-13
Section 3.17. No Dissenters' Rights................................. A-13
Section 3.18. Exemption From Takeover Laws.......................... A-14
ARTICLE IV Representations and Warranties of SCGI and Purchaser.. A-14
Section 4.1. Incorporation; Authorization; etc..................... A-14
Section 4.2. Capitalization........................................ A-15
Section 4.3. Reports and Financial Statements...................... A-16
Section 4.4. Properties; Leases.................................... A-16
Section 4.5. Absence of Certain Changes............................ A-16
Section 4.6. Litigation; Orders.................................... A-16
Section 4.7. Licenses, Approvals, Other Authorizations, Consents,
Reports, etc.......................................... A-17
Section 4.8. Compliance with Laws.................................. A-17
Section 4.9. Insurance............................................. A-17
Section 4.10. Material Contracts.................................... A-17
Section 4.11. Brokers, Finders, etc................................. A-17
Section 4.12. No Undisclosed Liabilities............................ A-17
Section 4.13. Joint Proxy Statement/Prospectus; Form S-4............ A-17
Section 4.14. Required Vote......................................... A-18
Section 4.15. Environmental Matters................................. A-18
Section 4.16. Taxes................................................. A-19
Section 4.17. Employee Benefits..................................... A-19
Section 4.18. Board Approval........................................ A-19
Section 4.19. Opinion of SCGI Financial Advisor..................... A-19
Section 4.20. Exemption From Takeover Laws.......................... A-20
Section 4.21. Required Financing.................................... A-20
Section 4.22. No Knowledge of Breaches.............................. A-20
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE V Covenants of SCGI, Purchaser and USRealty............. A-20
Section 5.1. Investigation of Business; Access to Properties and
Records............................................... A-20
Section 5.2. Efforts; Obtaining Consents........................... A-20
Section 5.3. Further Assurances.................................... A-21
Section 5.4. Conduct of Business by USRealty....................... A-21
Section 5.5. Conduct of Business by SCGI........................... A-23
Section 5.6. Preservation of Business.............................. A-23
Section 5.7. Non-Solicitation...................................... A-23
Section 5.8. Financial Statements.................................. A-23
Section 5.9. Satisfaction and Discharge of USRealty Notes.......... A-24
Section 5.10. Joint Proxy Statement/Prospectus; Form S-4............ A-24
Section 5.11. Stockholders Meetings................................. A-25
Section 5.12. NYSE Listing.......................................... A-26
Section 5.13. Public Announcements.................................. A-26
Section 5.14. Takeover Laws......................................... A-26
Section 5.15. Certain Actions....................................... A-26
Section 5.16. Share Option Equivalents.............................. A-27
Section 5.17. Litigation............................................ A-27
Section 5.18. Notification of Certain Matters....................... A-27
Section 5.19. Indemnification....................................... A-27
Section 5.20. Certain Agreement Relating to USRealty Investees...... A-28
ARTICLE VI Conditions Precedent.................................. A-28
Section 6.1. Conditions to Each Party's Obligations................ A-28
Section 6.2. Additional Conditions to Obligations of SCGI and
Purchaser............................................. A-29
Section 6.3. Additional Conditions to Obligations of USRealty...... A-29
ARTICLE VII Termination of Agreement.............................. A-30
Section 7.1. Termination........................................... A-30
Section 7.2. Procedure and Effect of Termination................... A-30
ARTICLE VIII Miscellaneous......................................... A-31
Section 8.1. Non-Survival of Representations, Warranties and
Agreements............................................ A-31
Section 8.2. Counterparts.......................................... A-31
Section 8.3. Governing Law......................................... A-31
Section 8.4. Jurisdiction; Waiver of Trial by Jury................. A-31
Section 8.5. Entire Agreement...................................... A-31
Section 8.6. Expenses.............................................. A-31
Section 8.7. Notices............................................... A-31
Section 8.8. Successors and Assigns................................ A-32
Section 8.9. Headings; Definitions................................. A-32
Section 8.10. Amendments and Waivers................................ A-33
Section 8.11. Severability.......................................... A-33
Section 8.12. Interpretation; Absence of Presumption................ A-33
</TABLE>
Exhibit A Plan of Liquidation
Exhibit B Form of Agreement with Trustee
Exhibit C Securities for Satisfaction and Discharge
A-ii
<PAGE>
TRANSACTION AGREEMENT
THIS TRANSACTION AGREEMENT (the "Agreement"), dated as of September 26,
2000, is by and among Security Capital Group Incorporated, a Maryland
corporation ("SCGI"), SC Realty Incorporated, a Nevada corporation and an
indirect wholly owned subsidiary of SCGI ("Purchaser"), and Security Capital
U.S. Realty, incorporated in the Grand Duchy of Luxembourg as a Societe
d'Investissement a Capital Fixe ("USRealty").
WHEREAS, the Board of Directors of USRealty (the "USRealty Board") has
appointed a special committee (the "Special Committee"), and the Special
Committee has received the written opinion of the USRealty Financial Advisor
(as defined below) to the effect that, based on, and subject to, the various
assumptions and qualifications set forth in such opinion, as of the date of
such opinion, the consideration to be received by holders of USRealty Shares
(other than SCGI and its affiliates) pursuant to this Agreement and the Plan of
Liquidation is fair to such holders from a financial point of view;
WHEREAS, the Special Committee has determined that this Agreement, the
Equity Purchase, the Plan of Liquidation and the other transactions
contemplated hereby are fair to, advisable and in the best interests of
USRealty and its stockholders, and has approved, and has voted to recommend to
the USRealty Board that the USRealty Board approve, this Agreement, the Equity
Purchase, the Plan of Liquidation and the other transactions contemplated
hereby;
WHEREAS, the USRealty Board (including a majority of the independent
directors as required by the Articles of Incorporation of USRealty) has
determined that this Agreement, the Equity Purchase, the Plan of Liquidation
and the other transactions contemplated hereby are fair to, advisable and in
the best interests of USRealty and its stockholders and has voted to approve
this Agreement and determined to recommend acceptance and approval by
USRealty's stockholders of this Agreement, the Equity Purchase, the Plan of
Liquidation and the other transactions contemplated hereby;
WHEREAS, the Boards of Directors of SCGI and Purchaser have each determined
that this Agreement, the Equity Purchase, and the SCGI Share Issuance (as
defined below) and the other transactions contemplated hereby are fair to,
advisable and in the best interests of SCGI and Purchaser and their respective
stockholders and have voted to approve this Agreement, and the Board of
Directors of SCGI has determined to recommend that SCGI's stockholders approve
of the SCGI Share Issuance;
WHEREAS, USRealty owns all of the outstanding equity interests of Security
Capital Holdings S.A., a Luxembourg corporation ("Holdings"), except for one
share which is owned by the Operating Advisor (as defined below);
WHEREAS, as the first step in the transactions contemplated hereby, SCGI
desires Purchaser to, and Purchaser desires to, purchase from USRealty, and
USRealty desires to sell to Purchaser, all of the issued and outstanding shares
of common stock and other equity interests of Holdings owned by USRealty and
certain other assets in exchange for shares of Class B Common Stock, par value
US$.01 per share, of SCGI ("SCGI Class B Common Shares") and cash sufficient to
satisfy and discharge USRealty's outstanding 2% Senior Unsecured Convertible
Notes Due 2003 (the "USRealty Notes") and to pay the Shares Cash Amount (as
defined below), all upon the terms and subject to the conditions set forth
herein (the "Equity Purchase"); and
WHEREAS, as the second step in the transactions contemplated hereby,
USRealty will, pursuant to the terms of the Plan of Liquidation set forth as
Exhibit A, make a liquidating distribution to its stockholders in the form of
the SCGI Class B Common Shares received by USRealty pursuant to the Equity
Purchase, or in the form of cash (to the extent of distributions in respect of
Cash USRealty Shares (as defined below)).
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto agree as follows:
A-1
<PAGE>
ARTICLE I
Certain Definitions
As used in this Agreement the following terms shall have the following
respective meanings:
"Action" shall mean any complaint, claim, prosecution, indictment, action,
suit, arbitration, investigation, inquiry or proceeding by or before any
Governmental Authority.
"Advance Agreement" shall mean the Amended and Restated Advance Agreement,
dated as of December 8, 1998, as amended, by and between USRealty and Holdings.
"Advance Agreement Interests" shall have the meaning set forth in Section
2.1(a).
"Advisory Agreement" shall mean the Advisory Agreement, dated July 1, 1997,
between USRealty, Holdings and the Operating Advisor.
"Affiliate" shall mean any Person that directly, or indirectly through one
or more intermediaries, controls or is controlled by or is under common control
with the party specified.
"Agreement" shall have the meaning set forth in the preamble hereof.
"Carr Letter Agreement" shall mean the Letter Agreement, dated July 28,
2000, among CarrAmerica Realty Corporation, Carr Realty, L.P., USRealty and
Holdings.
"Cash USRealty Shares" shall have the meaning set forth in Section
5.11(b)(ii).
"Charter Amendment" shall have the meaning set forth in Section 4.18.
"Closing Date" shall have the meaning set forth in Section 2.3.
"Code" shall mean the U.S. Internal Revenue Code of 1986, as amended, and
any successor thereto.
"CSSF" shall mean the Luxembourg Commission de Surveillance du Secteurr
Financier.
"Drop Dead Date" shall mean March 31, 2001 (such date being the date of
expiration of the funding commitment contained in the commitment letter set
forth in Section 6.2(b) of the SCGI Disclosure Schedule); provided that the
Drop Dead shall be automatically extended from time to time in the event such
funding commitment is extended beyond March 31, 2001, in which case "Drop Dead
Date" shall mean the date to which such funding commitment is so extended; and
provided, further that the Drop Dead Date shall similarly be extended from time
to time if the funding commitment referred to in the preceding proviso is not
extended past March 31, 2001, so long as SCGI from time to time has obtained a
commitment or commitments for replacement funding in amounts sufficient to pay
the Purchase Price Cash Amount, in which case the "Drop Dead Date" shall mean
the date of expiration of such replacement commitment or commitments; and
provided, further, that under no circumstances shall the Drop Dead Date be
extended beyond June 30, 2001 without the prior written consent of USRealty.
"Encumbrance" shall mean any mortgage, pledge, lien, easement, restrictive
covenant, right of way, lease, purchase agreement, option, security interest or
other encumbrance and agreement.
"Environmental Laws" shall have the meaning set forth in Section 4.15.
"Environmental Liabilities" shall have the meaning set forth in Section
4.15.
A-2
<PAGE>
"Equity Purchase" shall have the meaning set forth in the recitals hereof.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall have the meaning set forth in Section 4.17(c).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Ratio" shall have the meaning set forth in Section 2.1(e).
"Expenses" shall have the meaning set forth in Section 7.2(b).
"Fair Market Value" shall have the meaning set forth in Section 2.1(e).
"Form S-4" shall have the meaning set forth in Section 5.10.
"GAAP" shall mean United States generally accepted accounting principles.
"Governmental Authority" shall have the meaning set forth in Section 3.1(d).
"Hazardous Substance" shall have the meaning set forth in Section 4.15.
"Holdings" shall have the meaning set forth in the recitals hereof.
"Holdings Advance Agreement" shall mean the Advance Agreement, dated as of
December 30, 1998 among Holdings, Alston Holdings SARL (f/k/a Security Capital
Holdings Investment I SARL), Barcelona Holdings SARL (f/k/a/ Security Capital
Holdings Investment II SARL), Coventry Holdings SARL (f/k/a Security Capital
Holdings Investment III SARL), Dublin Holdings SARL (f/k/a Security Capital
Holdings Investment IV SARL), Edinburgh Holdings SARL (f/k/a Security Capital
Holdings Investment V SARL), Frankfurt Holdings SARL (f/k/a Security Capital
Holdings Investment VI SARL), Geneva Holdings SARL (f/k/a Security Capital
Holdings Investment VII SARL), Helsinki Holdings SARL (f/k/a Security Capital
Holdings Investment VIII SARL), Istanbul Holdings SARL (f/k/a Security Capital
Holdings Investment IX SARL), Johnstone Holdings SARL (f/k/a Security Capital
Holdings Investment X SARL), Kirkwall Holdings SARL (f/k/a Security Capital
Holdings Investment XI SARL), Lisbon Holdings SARL (f/k/a Security Capital
Holdings Investment XII SARL), Madrid Holdings SARL (f/k/a Security Capital
Holdings Investment XIII SARL), Arden Square Holdings SARL (f/k/a Security
Capital Shopping Center I SARL), Blossom Valley Holdings SARL (f/k/a Security
Capital Shopping Center II SARL), Cooper Street Plaza Holdings SARL (f/k/a
Security Capital Shopping Center III SARL), Dallas Holdings SARL (f/k/a
Security Capital Shopping Center IV SARL), El Camino Holdings SARL (f/k/a
Security Capital Shopping Center V SARL), Friars Mission Holdings SARL (f/k/a
Security Capital Shopping Center VI SARL), Security Capital Office Portfolio
SARL, Security Capital Storage Portfolio SARL, Sheffield Holdings SARL (f/k/a
Security Capital Holdings Investment XIV SARL), and Redondo Village Holdings
SARL (f/k/a Security Capital Shopping Center VII SARL).
"Holdings Balance Sheet" shall have the meaning set forth in Section 3.3.
"Holdings Financial Statements" shall have the meaning set forth in Section
3.3.
"Holdings Material Adverse Effect" shall mean any change or development in,
or effect on, the business or businesses of Holdings and the Holdings
Subsidiaries that is, or would reasonably be expected to be, materially adverse
to the business, assets, financial condition or results of operations of
Holdings and the Holdings Subsidiaries, taken as a whole, other than any
adverse change or development to the extent attributable to the announcement or
pendency of the Equity Purchase or the Plan of Liquidation.
A-3
<PAGE>
"Holdings Shares" shall mean the shares of Common Stock, par value US$10.00
per share, of Holdings.
"Holdings Subsidiaries" shall mean all of the subsidiaries of Holdings,
more than 90% of the voting power of whose outstanding voting securities or
equity interests are directly or indirectly owned by Holdings other than the
Private Investees.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Joint Proxy Statement/Prospectus" shall have the meaning set forth in
Section 5.10.
"knowledge" of any Person that is not an individual shall mean the
knowledge of those individuals who are senior vice presidents, managing
directors or directors of such Person, and in the case of SCGI shall also
include such officers and directors of the Operating Advisor and Jeffrey A.
Cozad.
"Licenses" shall have the meaning set forth in Section 3.7(a).
"Liquidation Closing" shall mean the consummation of the transactions
contemplated by Section 2.2.
"Liquidator" shall mean Security Capital U.S. Realty Management Holdings
S.A. or such Affiliate of SCGI as may be designated by SCGI, and as may be
permitted to serve in such capacity in accordance with applicable Luxembourg
law and the applicable regulations of the CSSF.
"Notes Indenture" shall mean the Indenture, dated as of May 22, 1998,
between USRealty, as Issuer, and State Street Bank and Trust Company, as
Trustee, as amended by the First Supplemental Indenture thereto, dated as of
May 22, 1998.
"Notes Payoff Amount" shall have the meaning set forth in Section 5.9.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Operating Advisor" shall mean Security Capital U.S. Realty Management
Holdings S.A., a wholly owned subsidiary of SCGI.
"Participating USRealty Shares" shall mean all of the outstanding USRealty
Shares other than the Cash USRealty Shares.
"Per Share Cash Amount" shall have the meaning set forth in Section 2.1(e).
"Permitted Exceptions" shall mean (a) mechanics', materialmen's, carriers',
workmen's, warehousemen's, repairmen's, landlords' or similar liens imposed by
law arising and incurred in the ordinary course of business and securing
obligations that are not delinquent, (b) liens for taxes and other
governmental charges, assessments or fees which (i) are not yet due and
payable or which may be paid without penalty or (ii) are being contested in
good faith through appropriate procedures and in respect of which adequate
reserves have been created or (c) Encumbrances which individually or in the
aggregate do not detract in any material respect from the value of any of the
property or assets subject thereto or interfere with the present use thereof.
"Person" shall mean any individual, firm, corporation, partnership or other
entity (including Governmental Authorities), and shall include any successor
(by merger or otherwise) of such entity.
"Plan of Liquidation" shall mean the plan of liquidation of USRealty
attached as Exhibit A.
"Private Investees" shall mean City Center Retail Trust, a Maryland real
estate investment trust, CWS Communities Trust, a Maryland real estate
investment trust, and Urban Growth Property Trust, a Maryland real estate
investment trust.
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"Purchase and Sale Closing" shall mean the consummation of the transactions
contemplated by Section 2.1.
"Purchase Price Cash Amount" shall have the meaning set forth in Section
2.1(e).
"Purchase Price Shares" shall have the meaning set forth in Section 2.1(e).
"Purchaser" shall have the meaning set forth in the preamble hereof.
"Redemption Amount" shall have the meaning set forth in Section 5.9.
"Redemption Date" shall have the meaning set forth in Section 5.9.
"Required SCGI Vote" shall have the meaning set forth in Section 4.14.
"Required USRealty Vote" shall have the meaning set forth in Section 3.14.
"Rights Agreement" shall mean the Rights Agreement, dated as of April 21,
1997, between SCGI and The First National Bank of Boston, as Rights Agent.
"RSUs" shall mean restricted stock units.
"Satisfaction and Discharge" shall have the meaning set forth in Section
5.9.
"SCGI" shall have the meaning set forth in the preamble hereof.
"SCGI Balance Sheet" shall mean the consolidated balance sheet of SCGI and
its subsidiaries as of December 31, 1999 and the notes thereto contained in
the SEC Reports.
"SCGI Class A Common Shares" shall mean the shares of Class A Common Stock,
par value US$.01 per share, of SCGI.
"SCGI Class B Common Shares" shall have the meaning set forth in the
recitals hereof.
"SCGI Disclosure Schedule" shall have the meaning set forth in the
introductory paragraph of Article IV.
"SCGI Employee Benefit Plan" shall mean any employee benefit plan, program,
policy, practices, or other arrangement providing benefits to any current or
former employee, officer or director of SCGI or any of its subsidiaries or any
beneficiary or dependent thereof that is sponsored or maintained by SCGI or
any of its subsidiaries or to which SCGI or any of its subsidiaries
contributes or is obligated to contribute, whether or not written, including
any employee welfare benefit plan within the meaning of Section 3(1) of ERISA,
any employee pension benefit plan within the meaning of Section 3(2) of ERISA
(whether or not such plan is subject to ERISA) and any bonus, incentive,
deferred compensation, vacation, stock purchase, stock option, severance,
employment, change of control or fringe benefit plan, program or agreement.
"SCGI Financial Advisor" shall mean Goldman, Sachs & Co.
"SCGI Incentive Plans" shall mean the 1995 Option Plan, the 1998 Long Term
Incentive Plan, the Security Capital Realty Investors Incorporated Option
Plans A and B, the Security Capital Group Incorporated 1991 and 1992 Option
Plans A and B and the 1991 and 1992 Option Plans B and the Security Capital
Group Incorporated Outside Directors Plan.
"SCGI Material Adverse Effect" shall mean any change or development in, or
effect on, the business or businesses of SCGI and its subsidiaries that is, or
would reasonably be expected to be, materially adverse to the business,
assets, financial condition or results of operations of SCGI and its
subsidiaries, taken as a whole.
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"SCGI SEC Reports" shall have the meaning set forth in Section 4.3.
"SCGI Series B Preferred Shares" shall mean the shares of Series B
Cumulative Convertible Redeemable Voting Preferred Stock, par value US$.01 per
share, of SCGI.
"SCGI Share Issuance" shall have the meaning set forth in Section 4.1(b).
"SCGI Shares" shall mean the SCGI Class A Common Shares and the SCGI Class
B Common Shares.
"SCGI Stockholders Approval" shall mean the approval by SCGI's stockholders
of the SCGI Share Issuance by the Required SCGI Vote.
"SCGI Stockholders Meeting" shall have the meaning set forth in Section
5.11(a).
"SCGI Voting Shares" shall mean the SCGI Series A Common Shares, the SCGI
Series B Common Shares and the SCGI Series B Preferred Shares.
"SEC" shall mean the United States Securities and Exchange Commission or
any successor thereto.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Share Option Equivalent Grants" shall mean the rights of certain directors
of USRealty pursuant to those certain Share Option Equivalent Grant letter
agreements entered into between such directors and USRealty, which are listed
on Section 5.16 of the USRealty Disclosure Schedule.
"Shares Cash Amount" shall have the meaning set forth in Section 2.1(e).
"Special Committee" shall have the meaning set forth in the recitals
hereof.
"subsidiary" of any entity means any entity more than 50% of the voting
power of whose outstanding voting securities or equity interests are directly
or indirectly owned by such other entity.
"Takeover Laws" shall have the meaning set forth in Section 5.14.
"Taxes" shall have the meaning set forth in Section 4.16.
"Tax Returns" shall have the meaning set forth in Section 4.16.
"Title IV Plans" shall have the meaning set forth in Section 4.17(c).
"Trustee" shall mean the trustee under the Notes Indenture.
"USRealty" shall have the meaning set forth in the preamble hereof.
"USRealty Board" shall have the meaning set forth in the recitals hereof.
"USRealty Disclosure Schedule" shall have the meaning set forth in the
introductory paragraph of Article III.
"USRealty Financial Advisor" shall mean Merrill Lynch & Co. Incorporated.
"USRealty Notes" shall have the meaning set forth in the preamble hereof.
"USRealty Other Assets" shall have the meaning set forth in Section 3.3(c).
"USRealty Reports" shall have the meaning set forth in Section 3.3(b).
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"USRealty Shares" shall mean the shares of Common Stock, par value US$4.00
per share, of USRealty.
"USRealty Stockholders Approval" shall mean the approval by the
stockholders of USRealty of this Agreement and the Plan of Liquidation by the
Required USRealty Vote.
"USRealty Stockholders Meeting" shall have the meaning set forth in Section
5.11(b).
ARTICLE II
Purchase and Sale of Equity; Liquidation
Section 2.1. Purchase and Sale of Holdings Shares. (a) On the basis of the
representations, warranties, covenants and agreements and subject to the
satisfaction or waiver (to the extent permitted) of the conditions set forth
in Article VI, at the Purchase and Sale Closing USRealty will sell and SCGI
will cause Purchaser to, and Purchaser will, purchase (x) all of the Holdings
Shares owned by USRealty and (y) all of USRealty's right, title and interest
in amounts then owing and accrued under the Advance Agreement (the "Advance
Agreement Interests"), which together constitute, and will constitute as of
the Purchase and Sale Closing, all of the issued and outstanding shares of
capital stock or other equity interests of Holdings and debt and other
interests in Holdings owned by USRealty, and (z) any cash on hand.
(b) In payment for such Holdings Shares, Advance Agreement Interests and
cash on hand, and subject to the satisfaction or waiver (to the extent
permitted) of the applicable conditions set forth herein, (1) SCGI will issue
and deliver to an account specified by Purchaser and Purchaser will cause to
be delivered to USRealty certificates representing the Purchase Price Shares,
(2) SCGI will cause Purchaser to, and Purchaser will, pay to USRealty the
Purchase Price Cash Amount, by wire transfer in immediately available funds to
the account or accounts specified by USRealty, and (3) Purchaser and USRealty
will deliver to each other executed counterparts to appropriate instruments
effecting the transfer, sale and conveyance to Purchaser of the Advance
Agreement Interests (to the extent not theretofore capitalized pursuant to
Section 5.15(a)) and, in accordance with Section 5.15(c), USRealty will
deliver to Purchaser an appropriate instrument effecting the transfer to
Holdings, and assumption by Holdings, of any assets and liabilities
transferred to or assumed by Holdings pursuant to Section 5.15(c).
Certificates for the Purchase Price Shares shall be in book entry form and
registered in the name of USRealty.
(c) Immediately following the delivery by Purchaser of the Purchase Price
Cash Amount and the Purchase Price Shares to USRealty pursuant to Section
2.1(b), USRealty shall effect the Satisfaction and Discharge of the USRealty
Notes.
(d) Immediately following the Satisfaction and Discharge, USRealty shall
deliver to Purchaser certificates for all of the Holdings Shares owned by
USRealty, properly signed, in form suitable for the transfer of such Holdings
Shares to Purchaser.
(e) For purposes hereof: the term "Purchase Price Shares" shall mean a
number of SCGI Class B Common Shares equal to the product of (i) 1.15 (the
"Exchange Ratio") and (ii) the Participating USRealty Shares; the term "Fair
Market Value" shall mean the average of the high and low per share sales
prices of the SCGI Class B Common Shares during the regular trading sessions
on the New York Stock Exchange for each of the 15 full trading days
immediately preceding (but not including) the date that is five trading days
prior to the date of the USRealty Stockholders Meeting; the term "Per Share
Cash Amount" shall mean an amount equal to the Fair Market Value multiplied by
the Exchange Ratio; and the term "Purchase Price Cash Amount" shall mean an
amount in cash equal to the sum of (i) the Notes Payoff Amount plus (ii) the
product of (x) the number of Cash USRealty Shares and (y) the Per Share Cash
Amount (such product, being equal to the fair market value of the additional
SCGI Class B Common Shares that would otherwise have been received by USRealty
had there been no Cash USRealty Shares, the "Shares Cash Amount"). SCGI and
USRealty shall make prompt public announcement of the dollar amount of Fair
Market Value and the Per Share Cash Amount
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following their determination, by press release and by publishing such
information in newspapers of general circulation in Luxembourg, Amsterdam and
New York.
(f) Effective as of the time of the Purchase and Sale Closing, the Advisory
Agreement will be terminated and of no further force or effect.
Section 2.2. Liquidation of USRealty. As promptly as practicable following
completion of the transactions contemplated by Section 2.1, USRealty shall
enter into voluntary liquidation and the Liquidator shall distribute the
Purchase Price Shares and the Shares Cash Amount to the stockholders of
USRealty pursuant to the terms of the Plan of Liquidation. SCGI and Purchaser
will, through USRealty's transfer agent, or such other bank trust company
designated by the Liquidator and reasonably satisfactory to USRealty, cooperate
with the Liquidator to expedite the issuance or recordation of certificates or
other evidence of ownership of the Purchase Price Shares in the names or for
the accounts of the USRealty stockholders entitled to receive such Purchase
Price Shares. From and after the Purchase and Sale Closing, SCGI shall make
available such funds as may be necessary to defray the reasonable costs and
expenses of the liquidation of USRealty pursuant to the Plan of Liquidation,
and which are not otherwise available to USRealty or the Liquidator.
Section 2.3. Time and Place of Closings. Subject to satisfaction or waiver
of the conditions to the Purchase and Sale Closing and the Liquidation Closing
set forth herein, the Purchase and Sale Closing and the Liquidation Closing
shall take place at the offices of counsel to USRealty in Luxembourg,
Luxembourg, as promptly as practicable after satisfaction or waiver, if
permissible, of the conditions set forth in Article VI or at such other time
and date as SCGI and USRealty may agree (the "Closing Date").
ARTICLE III
Representations and Warranties of USRealty
Except as set forth in the USRealty Disclosure Schedule delivered by
USRealty to SCGI prior to the execution hereof (the "USRealty Disclosure
Schedule") (each Section of which qualifies the correspondingly numbered
representation and warranty or covenant), USRealty hereby represents and
warrants to SCGI and Purchaser as follows:
Section 3.1. Incorporation; Authorization; etc. (a) Each of Holdings and the
Holdings Subsidiaries has been duly organized and is validly existing under the
laws of the jurisdiction of its incorporation. Each of Holdings and the
Holdings Subsidiaries has full corporate power and authority to own its
properties and assets and to conduct its business as it is now being conducted
and is duly qualified to transact business in each jurisdiction in which the
nature of property owned or leased by it or the conduct of its business
requires it to be so qualified, except where the failure to be so qualified or
to have such power or authority would not have a Holdings Material Adverse
Effect. Each jurisdiction in which Holdings or any of the Holdings Subsidiaries
is qualified to do business is set forth in Section 3.1(a) of the USRealty
Disclosure Schedule.
(b) USRealty has been duly organized and is validly existing under the laws
of Luxembourg.
(c) USRealty has full corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by USRealty, the performance by USRealty of its obligations hereunder and the
consummation by USRealty of the transactions contemplated hereby have been duly
and validly authorized by the USRealty Board and, except for obtaining the
USRealty Stockholders Approval, no other corporate proceeding or action on the
part of USRealty, the USRealty Board or the stockholders of USRealty is
necessary therefor.
(d) The execution, delivery and performance of this Agreement by USRealty
will not (i) violate or conflict with any provision of the respective articles
of incorporation of USRealty or Holdings, (ii) except as set forth in
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Section 3.1(d) of the USRealty Disclosure Schedule, conflict with, violate or
constitute a default under any provision of, or be an event that is (or with
the giving of notice or passage of time or both will result in) a violation of
or default under, or result in the acceleration of or entitle any party to
accelerate (whether after the giving of notice or lapse of time or both) any
obligation or right under, or result in the imposition of any lien upon or the
creation of a security interest in any of the Holdings Shares or any of the
assets or properties of Holdings or any of the Holdings Subsidiaries pursuant
to, or require a consent or create a penalty or increase Holdings' or any
Holdings Subsidiary's payment or performance obligations under, any mortgage,
lien, lease, instrument, order, arbitration award, judgment or decree, or any
contract, agreement, license or permit, to which USRealty, Holdings or any
Holdings Subsidiary is a party or by which any of them or any of their property
is bound, other than as would not, individually or in the aggregate, have a
Holdings Material Adverse Effect or materially delay the consummation of the
Equity Purchase and the transactions contemplated by the Plan of Liquidation or
(iii) assuming that all consents, approvals, authorizations and other actions
described in Section 3.7(b) have been obtained and all filings and obligations
set forth in Section 3.7(b) have been made, violate or conflict with, or result
in the imposition of any lien (other than liens arising from any actions taken
or arrangements made by SCGI or any of its subsidiaries) upon any of the
Holdings Shares, or any of the assets or properties of Holdings or any Holdings
Subsidiary pursuant to, any provision of law, regulation, rule, writ,
injunction, decree, statute, order, judgment or ruling of any federal, state,
local, foreign, supernational or supranational court or tribunal (including any
court or tribunal dealing with labor matters), governmental, regulatory or
administrative agency, department, bureau, authority or commission or arbitral
panel ("Governmental Authority") or any other restriction of any kind or
character to which USRealty, Holdings or any Holdings Subsidiary is or may be
subject or by which any of them or any of their property is or may be bound,
other than violations, conflicts, liens and restrictions that would not,
individually or in the aggregate, have a Holdings Material Adverse Effect or
materially delay the consummation of the Equity Purchase and the transactions
contemplated by the Plan of Liquidation. This Agreement has been duly executed
and delivered by USRealty, and, assuming the due execution hereof by SCGI and
Purchaser, this Agreement constitutes the legal, valid and binding obligation
of USRealty enforceable against USRealty in accordance with its terms, except
as may be limited or otherwise affected by Luxembourg laws relating to the
collective procedures of undertaking of collective investment.
(e) Upon consummation of the Equity Purchase at the Purchase and Sale
Closing, as contemplated by this Agreement, USRealty will deliver to SCGI good
and valid title to all of the outstanding Holdings Shares that it owns, free
and clear of any liens, claims, charges, security interests, options or other
legal or equitable encumbrances or other rights of third parties (except those
imposed by any action taken or arrangement made by SCGI or any of its
subsidiaries).
(f) USRealty has made available to SCGI complete and correct copies of the
articles of incorporation (or similar instruments), as amended to date, of
USRealty, Holdings and each of the Holdings Subsidiaries, and has made
available to SCGI the corporate minute books containing the records of meetings
of the stockholders and boards of directors, the stock certificate books and
the stock record books of Holdings and the Holdings Subsidiaries. The stock
record books of Holdings and the Holdings Subsidiaries which USRealty has made
available to SCGI are complete and correct in all material respects and
accurately reflect the ownership of all of the outstanding shares of Holdings'
and the Holdings Subsidiaries' respective capital stock and all other
securities issued by any of Holdings or the Holdings Subsidiaries. Neither
Holdings nor any of the Holdings Subsidiaries is in default under or in
violation of any provision of its articles of incorporation (or similar
instruments).
(g) The sale of the Holdings Shares pursuant hereto and the liquidation of
USRealty pursuant to the Plan of Liquidation will not give rise to any material
Tax for or to USRealty or Holdings in Luxembourg or any of its political
subdivisions, other than Taxes, if any, arising from the transactions
contemplated by Section 5.15.
Section 3.2. Capitalization; Structure (a) As of June 30, 2000, the
authorized capital stock of USRealty consisted of 250,000,000 USRealty Shares,
of which (i) 74,877,121 USRealty Shares were issued and outstanding, (ii)
11,684,751 USRealty Shares were owned by USRealty, and (iii) 11,875,298
USRealty
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Shares are reserved or available for issuance upon the conversion of the
USRealty Notes. Since June 30, 2000, no shares of capital stock of USRealty or
options or warrants or other rights to acquire capital stock from USRealty have
been issued or reserved for issuance except upon any conversion of the USRealty
Notes in accordance with the terms thereof. All of the outstanding shares of
capital stock of USRealty are validly issued, fully paid and nonassessable.
Except for the USRealty Notes, there are no securities, options, warrants,
calls, rights, commitments, agreements, arrangements or undertakings of any
kind to which USRealty, Holdings or any Holdings Subsidiary is a party or by
which any of them is bound obligating USRealty, Holdings or any Holdings
Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock or other voting securities of USRealty or
obligating USRealty, Holdings or any Holdings Subsidiary to issue, grant,
extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking, and there are no outstanding
obligations of USRealty, Holdings or any Holdings Subsidiary to repurchase,
redeem or otherwise acquire any shares of capital stock of USRealty. No bonds,
debentures, notes or other indebtedness of USRealty having the right to vote on
any matters on which stockholders may vote are issued or outstanding.
(b) The authorized capital stock of Holdings consists of 800,000,000
Holdings Shares, of which 4,300 shares are issued and outstanding. All of the
outstanding shares of capital stock of Holdings are validly issued, fully paid
and nonassessable and are owned beneficially and of record by USRealty, except
for one share which is owed by the Operating Advisor. All of the outstanding
shares of capital stock or other equity interests of the Holdings Subsidiaries,
and, to the knowledge of USRealty, all of the shares of capital stock of the
Private Investees directly or indirectly owned by Holdings, all as listed in
Section 3.2(b) of the USRealty Disclosure Schedule, are validly issued, fully
paid and nonassessable. The outstanding shares of capital stock or other equity
interests of the Holdings Subsidiaries and the Private Investees are owned by
Holdings, in the amounts set forth in Section 3.2(b) of the USRealty Disclosure
Schedule. Neither the Holdings Shares nor the shares of outstanding common
stock or other equity interests of any Holdings Subsidiary, or, to the
knowledge of USRealty, any Private Investee, have been issued in violation of,
or are subject to, any preemptive rights. The shares of capital stock or other
equity interests of the Holdings Subsidiaries and the Private Investees (to the
extent such shares or interests are owned by Holdings) and the Holdings Shares
are owned in each case free and clear of any liens, claims, charges, security
interests, options or other legal or equitable encumbrances or restrictions.
Other than pursuant to the Advance Agreement and the Holdings Advance
Agreement, there are no securities, options, warrants, calls, rights,
commitments, agreements, arrangements or undertakings of any kind to which
USRealty, Holdings or any Holdings Subsidiary is a party or by which any of
them is bound obligating USRealty, Holdings or any Holdings Subsidiary to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other voting securities of Holdings or any Holdings
Subsidiary or obligating USRealty, Holdings or any Holdings Subsidiary to
issue, grant, extend or enter into any such security, option, warrant, call,
right, commitment, agreement, arrangement or undertaking, and there are no
outstanding obligations of USRealty, Holdings or any Holdings Subsidiary to
repurchase, redeem or otherwise acquire any shares of capital stock of Holdings
or any Holdings Subsidiary.
(c) Neither Holdings nor any Holdings Subsidiary directly or indirectly owns
or has the right to acquire any capital stock of or other equity interests,
investment, partnership, joint venture or similar interest in any corporation,
partnership or other entity or other Person except for the ownership of the
outstanding shares or other equity interests of the Holdings Subsidiaries as
set forth in Section 3.2(b) of the USRealty Disclosure Schedule or as set forth
in Section 3.2(c) of the USRealty Disclosure Schedule.
Section 3.3. Financial Statement. (a) USRealty has previously furnished to
SCGI true and complete copies of (i) the financial statements of Holdings and
each of its subsidiaries, including statements of net assets as of December 31,
1999 and 1998, statements of operations and consolidated statements of cash
flows for the fiscal years ended December 31, 1999, 1998 and 1997 (such
financial statements being audited and accompanied by the unqualified opinions
of PricewaterhouseCoopers (Luxembourg) S.a.r.l.), as applicable, and (ii)
unaudited financial statements for Holdings and its subsidiaries as of and for
the six-month period ended June 30, 2000 (collectively, the "Holdings Financial
Statements"). The audited balance sheet as of
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December 31, 1999 is referred to in this Agreement as the "Holdings Balance
Sheet". The Holdings Financial Statements (including, in each case, any notes
thereto) present fairly in all material respects the financial position and
results of operations and cash flows of Holdings and each of its subsidiaries
for the respective periods or as of the respective dates set forth therein, in
each case in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as otherwise indicated therein and except, in the case
of the unaudited Holdings Financial Statements, for changes resulting from
normal and recurring year-end adjustments). The Holdings Financial Statements
have been prepared from and in accordance with the books and records of
Holdings and its subsidiaries.
(b) USRealty has filed all required registration statements, prospectuses,
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC and the CSSF since January 1, 1999 (collectively, including
all exhibits thereto, the "USRealty Reports"). As of their respective dates,
none of the USRealty Reports (and, if amended or superseded by a filing prior
to the date hereof or the Closing Date, then on the date of such filing),
contained, and none of the USRealty Reports filed subsequent to the date hereof
will contain, any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Each of the financial statements (including the related notes)
included in the USRealty Reports presents fairly, in all material respects, the
consolidated financial position and consolidated results of operations and cash
flows of USRealty and its subsidiaries as of the respective dates or for the
respective periods set forth therein, all in conformity with GAAP consistently
applied during the periods involved except as otherwise noted therein, and
subject, in the case of the unaudited interim financial statements, to normal
and recurring year-end adjustments. All of such USRealty Reports, as of their
respective dates (and as of the date of any amendment to the respective
USRealty Report), complied as to form in all material respects with the
applicable requirements of the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder and the applicable rules and
regulations of the CSSF, respectively.
(c) USRealty has no assets or property other than the Holdings Shares, and
other than as set forth in Section 3.3(c) of the USRealty Disclosure Schedule
(the assets and property set forth in such Section 3.3(c) of the USRealty
Disclosure Schedule, the "USRealty Other Assets").
Section 3.4. Properties; Leases. Except for Permitted Exceptions, at the
Purchase and Sale Closing, Holdings or a Holdings Subsidiary will have good
and, with respect to real property, marketable title to, or valid leasehold
interests in, as the case may be, and hold free and clear of all Encumbrances,
all of the material properties reflected in the Holdings Balance Sheet or
acquired in the ordinary course of business since the date of the Holdings
Balance Sheet other than properties sold in the ordinary course of business
consistent with past practice. USRealty has delivered to SCGI or otherwise made
available, correct and complete copies of all material leases relating to real
property to which Holdings or any of the Holdings Subsidiaries is a party, all
of which are identified in Section 3.4 of the USRealty Disclosure Schedule.
There are no pending or, to USRealty's knowledge, threatened condemnation
proceedings relating to any of such material real property.
Section 3.5. Absence of Certain Changes. Except as contemplated by this
Agreement, since December 31, 1999, there has been no (a) Holdings Material
Adverse Effect or (b) action taken by Holdings or any Holdings Subsidiary
which, if taken from the date hereof through the Purchase and Sale Closing,
would violate Section 5.4(b) through (k).
Section 3.6. Litigation; Orders. Except as set forth in the USRealty Reports
filed prior to the date hereof, or as set forth in Section 3.6 of the USRealty
Disclosure Schedule, there are no Actions pending or, to the knowledge of
USRealty, threatened or claims asserted against Holdings or any Holdings
Subsidiary that would, individually or in the aggregate, have a Holdings
Material Adverse Effect. There are no judgments or outstanding orders,
injunctions, decrees, stipulations, settlement agreements, citations,
investigations, fines or awards against or binding upon Holdings or any
Holdings Subsidiary or any of their respective properties or businesses that
would, individually or in the aggregate, have a Holdings Material Adverse
Effect.
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Section 3.7. Licenses, Approvals, Other Authorizations, Consents, Reports,
etc. (a) Holdings and the Holdings Subsidiaries possess or have been granted
all registrations, filings, applications, certifications, notices, consents,
licenses, permits, approvals, certificates, franchises, orders, qualifications,
authorizations and waivers ("Licenses") of any Governmental Authority necessary
to conduct their businesses in the manner in which they are presently being
conducted, except where the failure to possess or be granted such Licenses
would not, individually or in the aggregate, have a Holdings Material Adverse
Effect.
(b) Except (i) as set forth in Section 3.7(b) of the USRealty Disclosure
Schedule, (ii) the applicable notification requirements of the HSR Act and the
approval of the CSSF, (iii) required filings under the Exchange Act, (iv) any
required filings and notices to the NYSE or the Amsterdam Stock Exchange, and
(v) those the failure to make, file, give or obtain which would not,
individually or in the aggregate, have a Holdings Material Adverse Effect or
prevent the consummation of the Equity Purchase and the other transactions
contemplated hereby, there are no Licenses required to be made, filed, given or
obtained by USRealty, Holdings or any of the Holdings Subsidiaries with, to or
from any Governmental Authority in connection with the consummation of the
Equity Purchase and the other transactions contemplated under this Agreement.
Section 3.8. Compliance with Laws. To the knowledge of USRealty, the conduct
of the businesses of Holdings and the Holdings Subsidiaries is in and has been
in compliance in all material respects with all material statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees applicable
thereto. None of USRealty, Holdings or the Holdings Subsidiaries has received
written notice of any alleged violation of any statute, law, regulation,
ordinance, rule, judgment, order or decree from any Governmental Authority
applicable to Holdings or any of the Holdings Subsidiaries or to their
properties which has not been satisfactorily addressed and which give rise to
material fines or other civil penalties or to any criminal liabilities.
Section 3.9. Insurance. Each of Holdings and the Holdings Subsidiaries is
covered by valid and currently effective insurance policies issued in its favor
that are customary in scope and amount of coverage for companies of similar
size and financial condition in the industry and locale in which it operates.
Except as would not, individually or in the aggregate, have a Holdings Material
Adverse Effect, all such policies are in full force and effect, all premiums
due thereon have been paid and Holdings and the Holdings Subsidiaries have
complied with the provisions of such policies.
Section 3.10. Material Contracts. Section 3.10 of the USRealty Disclosure
Schedule sets forth, as of the date hereof, (i) each contract, agreement,
arrangement or understanding to which Holdings or any Holdings Subsidiary is a
party or by which any of them or any of their properties or assets is bound and
which, if Holdings were subject to the periodic reporting requirements under
the Exchange Act, would constitute a "material contract" (as such term is
defined in Item 601(b)(10) of Regulation S-K under the Exchange Act) which is
not filed as an exhibit to the USRealty Reports filed prior to the date hereof
or (ii) any non-competition agreement or any other agreement or arrangement
that materially limits or otherwise materially restricts Holdings or any
Holdings Subsidiary or any successor thereto or acquiror thereof from engaging
or competing in any material line of business or in any geographic area.
Section 3.11. Brokers, Finders, etc. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any
broker's or finder's fee or any other similar commission or fee in connection
with any of the transactions contemplated by this Agreement, based upon
arrangements made by or on behalf of USRealty or any of its subsidiaries,
except the USRealty Financial Advisor, whose fees and expenses will be paid by
USRealty in accordance with USRealty's agreement with such firm, a copy of
which has been provided to SCGI.
Section 3.12. No Undisclosed Liabilities. Except as and to the extent
disclosed in the USRealty Reports and the Holdings Financial Statements,
respectively, since December 31, 1999, neither USRealty nor Holdings and the
Holdings Subsidiaries, respectively, have incurred any liabilities that are of
a nature that would be required to be disclosed on a balance sheet of,
respectively, USRealty or Holdings and the Holdings
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Subsidiaries or the footnotes thereto prepared in conformity with GAAP, other
than (i) liabilities incurred in the ordinary course of business or (ii)
liabilities that would not, individually or in the aggregate, have a Holdings
Material Adverse Effect.
Section 3.13. Joint Proxy Statement/Prospectus; Form S-4. (a) None of the
information supplied or to be supplied by USRealty for inclusion or
incorporation by reference in (A) the Form S-4 will, at the time the Form S-4
becomes effective under the Securities Act or at the time of any post-effective
amendment thereto, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (B) the Joint Proxy Statement/Prospectus
will, on the date it is first mailed to USRealty stockholders or SCGI
stockholders or at the time of the USRealty Stockholders Meeting or the SCGI
Stockholders Meeting, 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. The Joint Proxy Statement/Prospectus will comply as
to form in all material respects with the requirements of the Exchange Act and
the rules and regulations of the SEC thereunder and with all applicable
Luxembourg regulations and requirements.
(b) Notwithstanding the foregoing provisions of this Section 3.13, no
representation or warranty is made by USRealty with respect to statements made
or incorporated by reference in the Form S-4 or Joint Proxy
Statement/Prospectus based on information supplied by SCGI or Purchaser for
inclusion or incorporation by reference therein.
Section 3.14. Required Vote. The affirmative vote of the holders of at least
66 2/3% of the USRealty Shares present or represented at a meeting at which at
least a majority of the outstanding USRealty Shares are present or represented
is the only vote of the holders of any class of capital stock of USRealty
necessary to approve this Agreement and the dissolution and liquidation of
USRealty in accordance with the Plan of Liquidation (the "Required USRealty
Vote").
Section 3.15. Opinion of USRealty Financial Advisor. USRealty has received
the opinion of the USRealty Financial Advisor, dated the date hereof, to the
effect that, based on, and subject to, the various assumptions and
qualifications set forth in such opinion, as of such date, the consideration to
be received by the USRealty stockholders (other than SCGI and its affiliates)
pursuant to the transactions contemplated hereby are fair to such stockholders
from a financial point of view, a copy of which opinion has been made available
to SCGI.
Section 3.16. Board Approval. The Special Committee by resolutions duly
adopted by unanimous vote at a meeting duly called and held and not
subsequently rescinded or modified in any way, has duly (a) determined that
this Agreement is fair to and in the best interests of USRealty and its
stockholders other than SCGI and its affiliates, (b) approved this Agreement,
the Equity Purchase and the Plan of Liquidation, and (c) recommended that the
full USRealty Board approve this Agreement, the Equity Purchase and the Plan of
Liquidation. The USRealty Board, based upon the unanimous recommendation of the
Special Committee, by resolutions duly adopted by unanimous vote at a meeting
duly called and held and not subsequently rescinded or modified in any way, has
duly (i) determined that this Agreement is fair to and in the best interests of
USRealty and its stockholders other than SCGI and its affiliates, (ii) approved
this Agreement, the Equity Purchase and the Plan of Liquidation, (iii)
determined to recommend that the stockholders of USRealty approve this
Agreement and the Plan of Liquidation, and (iv) directed that this Agreement
and the Plan of Liquidation be submitted for consideration by USRealty's
stockholders at the USRealty Stockholders Meeting. To the knowledge of
USRealty, no foreign, state or local takeover statute is applicable to the
Equity Purchase or the other transactions contemplated by this Agreement.
Section 3.17. No Dissenters' Rights. The transactions contemplated by this
Agreement will not give rise to any right on the part of the stockholders of
USRealty to obtain in respect of their USRealty Shares any
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amount determined by any Governmental Authority under any law or regulation of
any Governmental Authority applicable to USRealty.
Section 3.18. Exemption From Takeover Laws. The transactions contemplated
hereby are not subject to the requirements of any "moratorium", "control
share", "fair price" or other anti-takeover laws and regulations (collectively,
"Takeover Laws") of the Grand Duchy of Luxembourg.
ARTICLE IV
Representations and Warranties of SCGI and Purchaser
Except as set forth in the SCGI Disclosure Schedule delivered by SCGI to
USRealty prior to the execution hereof (the "SCGI Disclosure Schedule") (each
Section of which qualifies the correspondingly numbered representation and
warranty or covenant) SCGI and Purchaser, jointly and severally, hereby
represent and warrant to USRealty as follows:
Section 4.1. Incorporation; Authorization; etc. (a) Each of SCGI, Purchaser
and SCGI's subsidiaries has been duly organized, is validly existing and in
good standing under the laws of the jurisdiction of its incorporation. Each of
SCGI, Purchaser and SCGI's subsidiaries has full corporate power and authority
to own its properties and assets and to conduct its business as it is now being
conducted and is in good standing and is duly qualified to transact business in
each jurisdiction in which the nature of property owned or leased by it or the
conduct of its business requires it to be so qualified, except where the
failure to be in good standing or so qualified would not, individually or in
the aggregate, have an SCGI Material Adverse Effect.
(b) Each of SCGI and Purchaser has full corporate power and authority to
execute and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by SCGI and Purchaser, the performance by SCGI and Purchaser of
their obligations hereunder and the consummation by SCGI and Purchaser of the
transactions contemplated hereby have been duly and validly authorized by the
respective Boards of Directors of SCGI and Purchaser and, except for (i)
obtaining the Required SCGI Vote for the issuance of the Purchase Price Shares
pursuant hereto (the "SCGI Share Issuance") and (ii) the filing of articles
supplementary with the Maryland State Department of Assessments and Taxation in
connection with the Charter Amendment, no other corporate proceeding or action
on the part of SCGI or Purchaser or their respective Boards of Directors and
stockholders are necessary therefor.
(c) The execution, delivery and performance of this Agreement by SCGI and
Purchaser will not (i) (assuming the Charter Amendment has become effective),
violate or conflict with any provision of the respective charters (or similar
organizational documents) of SCGI, Purchaser and SCGI's subsidiaries, (ii)
except as set forth in Section 4.1(c) of the SCGI Disclosure Schedule, conflict
with, violate or constitute a default under any provision of, or be an event
that is (or with the giving of notice or passage of time or both will result
in) a violation of or default under, or result in the acceleration of or
entitle any party to accelerate (whether after the giving of notice or lapse of
time or both) any obligation or right under, or result in the imposition of any
lien upon or the creation of a security interest in any of the Purchase Price
Shares or any of the assets or properties of SCGI or any of its subsidiaries
pursuant to, or require a consent or create a penalty or increase SCGI's or any
such subsidiary's payment or performance obligations under, any material
mortgage, lien, lease, instrument, order, arbitration award, judgment or
decree, or any material contract, agreement, license or permit, to which SCGI
or any of its subsidiaries is a party or by which any of them or any of their
property is bound, or (iii) assuming that all consents, approvals,
authorizations and other actions described in Section 4.7 have been obtained
and all filings and obligations set forth in Section 4.7 have been made,
violate or conflict with in any material respect, or result in the imposition
of any material lien upon any of the Purchase Price Shares or any of the assets
or properties of SCGI and its subsidiaries pursuant to, any provision of law,
regulation, rule, writ, injunction, decree, statute, order, judgment or ruling
of any Governmental Authority or any other material restriction of any kind or
character to which SCGI or any of its subsidiaries is or may be
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subject or by which any of them or any of their property is or may be bound.
This Agreement has been duly executed and delivered by SCGI and Purchaser, and,
assuming the due execution hereof by USRealty, this Agreement constitutes the
legal, valid and binding obligation of SCGI and Purchaser, enforceable against
SCGI and Purchaser in accordance with its terms, except as may be limited or
otherwise affected by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other laws affecting the rights of creditors generally
and principles of equity, whether considered at law or in equity, including
concepts of materiality, reasonableness, public policy and unconscionability.
(d) Upon consummation of the Equity Purchase at the Purchase and Sale
Closing, as contemplated by this Agreement, Purchaser will deliver to USRealty
good and valid title to the Purchase Price Shares, free and clear of any liens,
claims, charges, security interests, options or other legal or equitable
encumbrances or other rights of third parties (except those imposed by any
action taken or arrangement made by USRealty or any of its subsidiaries).
(e) SCGI has made available to USRealty complete and correct copies of the
charters (or similar instruments), as amended to date, of SCGI and each of its
subsidiaries, and has made available to USRealty the corporate minute books
containing the records of meetings of the stockholders and boards of directors
of SCGI and each of its subsidiaries. None of SCGI, Purchaser or SCGI's
subsidiaries is in default under or in violation of any provision of its
charter (or similar instruments).
Section 4.2. Capitalization. (a) As of August 31, 2000, the authorized
capital stock of SCGI consisted of (i) 20,000,000 SCGI Class A Common Shares,
of which 1,094,121 shares were issued and outstanding and no shares were held
in the treasury of SCGI, 204,484 shares were reserved for issuance upon
conversion of SCGI's 6.50% Convertible Subordinated Debentures Due March 29,
2016, 153,135 shares were reserved for issuance upon the exercise of stock
options outstanding under the SCGI Incentive Plans and 2,994 shares were
reserved for issuance under the 6.5% Debenture Interest Reinvestment Plan, (ii)
229,537,385 SCGI Class B Common Shares, of which 53,157,330 shares were
outstanding, no shares were held in the treasury of SCGI, 15,238,483 shares
were reserved for issuance upon the exercise of stock options and vesting of
RSUs outstanding under the SCGI Incentive Plans or conversion of Class A Common
Shares issuable upon their exercise or vesting, 54,706,050 shares were reserved
for issuance upon conversion of outstanding Class A Common Shares, 6,606,205
shares were reserved for issuance upon conversion of Series B Preferred Shares,
10,224,189 shares were reserved for issuance upon conversion of Class A Common
Shares reserved for issuance upon conversion of SCGI's 6.5% Convertible
Subordinated Debentures and 149,700 shares were reserved for issuance upon
conversion of Class A Common Shares reserved for issuance under the 6.5%
Debenture Reinvestment Plan (iii) 65,973 shares of Series A Junior
Participating Preferred Stock, US$.01 par value per share, of which no shares
were outstanding and all of which shares were reserved for issuance upon
exercise of the Rights issued pursuant to the Rights Agreement, (iv) 139,000
shares of Series A Cumulative Convertible Redeemable Voting Preferred Stock,
US$.01 par value per share, of which no shares were issued and outstanding, and
(v) 257,642 SCGI Series B Preferred Shares, of which 257,642 shares were issued
and outstanding. Since August 31, 2000, no shares of capital stock of SCGI or
options or warrants or other rights to acquire capital stock from SCGI have
been issued or reserved for issuance except (x) in respect of the securities
described in the foregoing sentence and (y) in respect of the grant or exercise
of stock options or RSUs as permitted by Section 5.5. All issued and
outstanding shares of capital stock of SCGI are validly issued, fully paid and
nonassessable. As a result of the Charter Amendment, the number of authorized
Class A Common Shares will be changed to 15,543,012 Class A Common Shares, the
number of Class B Common Shares will be changed to 234,133,373 Class B. Common
Shares and the Series A Cumulative Convertible Redeemable Voting Preferred
Stock will be eliminated.
(b) Except (i) as set forth in Section 4.2(b) of the SCGI Disclosure
Schedule or in the SCGI SEC Reports, (ii) as contemplated by this Agreement,
(iii) as set forth in Section 4.2(a), and (iv) the Rights issued pursuant to
the Rights Agreement, (x) there are no securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which SCGI or any of its subsidiaries is a party or by which any of them is
bound obligating SCGI or any of its subsidiaries to issue, deliver or sell, or
cause to be issued,
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delivered or sold, additional shares of capital stock or other voting
securities of SCGI or obligating SCGI or any of its subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking, (y) there are no outstanding
obligations of SCGI or any of its subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of SCGI, and (z) no bonds,
debentures, notes or other indebtedness of SCGI having the right to vote on any
matters on which stockholders may vote are issued or outstanding. The Purchase
Price Shares, when issued as contemplated herein, will be duly authorized,
validly issued, fully paid and nonassessable, and will not have been issued in
violation of, or be subject to, any preemptive rights.
(c) All the outstanding shares of capital stock of, or other equity
interests in, each SCGI subsidiary have been validly issued and are fully paid
and nonassessable and are owned to the extent set forth in Section 4.2(c) of
the SCGI Disclosure Schedule directly or indirectly by SCGI, free and clear of
any liens, claims, charges, security interests, options or other legal or
equitable encumbrances or restrictions. Except as set forth in the SCGI SEC
Reports, neither SCGI nor any of its subsidiaries directly or indirectly owns
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for, any corporation, partnership, joint venture or
other business association or entity (other than SCGI's subsidiaries), that is
or would reasonably be expected to be material to SCGI and its subsidiaries
taken as a whole.
Section 4.3. Reports and Financial Statements. SCGI has filed all required
registration statements, prospectuses, reports, schedules, forms, statements
and other documents required to be filed by it with the SEC since January 1,
1999 (collectively, including all exhibits thereto, the "SCGI SEC Reports"). As
of their respective dates, none of the SCGI SEC Reports (and, if amended or
superseded by a filing prior to the date hereof or the Closing Date, then on
the date of such filing), contained, and none of the SCGI SEC Reports filed
subsequent to the date hereof will contain, any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Each of the financial statements
(including the related notes) included in the SCGI SEC Reports presents fairly,
in all material respects, the consolidated financial position and consolidated
results of operations and cash flows of SCGI and its subsidiaries as of the
respective dates or for the respective periods set forth therein, all in
conformity with GAAP consistently applied during the periods involved except as
otherwise noted therein, and subject, in the case of the unaudited interim
financial statements, to normal and recurring year-end adjustments. All of such
SCGI SEC Reports, as of their respective dates (and as of the date of any
amendment to the respective SCGI SEC Report), complied as to form in all
material respects with the applicable requirements of the Securities Act and
the Exchange Act and the rules and regulations promulgated thereunder.
Section 4.4. Properties; Leases. Except for Permitted Exceptions or as set
forth in Section 4.4 of the SCGI Disclosure Schedule, at the Purchase and Sale
Closing SCGI or a subsidiary of SCGI will have good and marketable title to, or
valid leasehold interests in, as the case may be, and hold free and clear of
all Encumbrances, all of the material properties reflected in the SCGI Balance
Sheet or acquired in the ordinary course of business since the date of the SCGI
Balance Sheet other than properties sold in the ordinary course of business
consistent with past practice. SCGI has delivered to USRealty or otherwise made
available, correct and complete copies of all material leases relating to real
property to which SCGI or any of its subsidiaries is a party. There are no
pending or, to SCGI's knowledge, threatened condemnation proceedings relating
to any of such material real property.
Section 4.5. Absence of Certain Changes. Except as contemplated by this
Agreement, since December 31, 1999, there has been no (a) SCGI Material Adverse
Effect or (b) action taken by SCGI which, if taken from the date hereof through
the Closing Date, would violate Section 5.5.
Section 4.6. Litigation; Orders. Except as set forth in the SCGI SEC
Reports, there are no Actions pending or, to the knowledge of SCGI, threatened
or claims asserted against SCGI or any of its subsidiaries that would have an
SCGI Material Adverse Effect. There are no material judgments or material
outstanding orders, injunctions, decrees, stipulations, settlement agreements,
citations, investigations, fines or awards against or binding upon SCGI and its
subsidiaries or any of their respective properties or businesses.
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Section 4.7. Licenses, Approvals, Other Authorizations, Consents, Reports,
etc. (a) SCGI and its subsidiaries possess or have been granted all material
Licenses of any Governmental Authority necessary to conduct their businesses in
the manner in which they are presently being conducted.
(b) Except (i) as set forth in Section 4.7(b) of the SCGI Disclosure
Schedule, (ii) for the applicable notification requirements of the HSR Act,
(iii) required filings under the Exchange Act and the Securities Act, (iv) the
filing of articles supplementary with the Maryland State Department of
Assessments and Taxation in connection with the Charter Amendment, (v) any
required filings and notices to the NYSE or the Amsterdam Stock Exchange, and
(vi) those the failure to make, file, give or obtain which would not,
individually or in the aggregate, have an SCGI Material Adverse Effect or
prevent the consummation of the Equity Purchase and the other transactions
contemplated hereby, there are no Licenses required to be made, filed, given or
obtained by SCGI or any of its subsidiaries with, to or from any Governmental
Authority in connection with the consummation of the Equity Purchase and the
other transactions contemplated by this Agreement.
Section 4.8. Compliance with Laws. To the knowledge of SCGI and Purchaser,
the conduct of the businesses of SCGI and its subsidiaries is in and has been
in compliance in all material respects with all material statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees applicable
thereto. Neither SCGI nor any of its subsidiaries has received written notice
of any alleged violation of any statute, law, regulation, ordinance, rule,
judgment, order or decree from any Governmental Authority applicable to SCGI or
any of its subsidiaries or to their properties which has not been
satisfactorily addressed and which give rise to material fines or other civil
penalties or to any criminal liabilities.
Section 4.9. Insurance. Each of SCGI and its subsidiaries is covered by
valid and currently effective insurance policies issued in its favor that are
customary in scope and amount of coverage for companies of similar size and
financial condition in the industry and locale in which it operates. All such
policies are in full force and effect, all premiums due thereon have been paid
and SCGI and its subsidiaries have complied with the provisions of such
policies in all material respects.
Section 4.10. Material Contracts. As of the date hereof, except as set forth
in the SCGI SEC Reports filed prior to the date hereof, neither SCGI nor any of
its subsidiaries is a party to or bound by (i) any "material contract" (as such
term is defined in Item 601(b)(10) of Regulation S-K under the Exchange Act),
or (ii) any non-competition agreement or any other agreement or arrangement
that limits or otherwise restricts SCGI or any of its subsidiaries or any
successor thereto from engaging or competing in any line of business or in any
geographic area, which agreement or arrangement would reasonably be expected to
have an SCGI Material Adverse Effect, giving effect to the Equity Purchase.
Section 4.11. Brokers, Finders, etc. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any
broker's or finder's fee or any other similar commission or fee in connection
with any of the transactions contemplated by this Agreement, based upon
arrangements made by or on behalf of SCGI or any of its subsidiaries except the
SCGI Financial Advisor, whose fees and expenses will be paid by SCGI in
accordance with SCGI's agreement with such firm.
Section 4.12. No Undisclosed Liabilities. Except as disclosed in the SCGI
SEC Reports filed prior to the date hereof, since December 31, 1999, SCGI and
its subsidiaries have not incurred any liabilities that are of a nature that
would be required to be disclosed on a balance sheet of SCGI and its
subsidiaries or the footnotes thereto prepared in conformity with GAAP, other
than (i) liabilities incurred in the ordinary course of business, (ii)
liabilities that would not have an SCGI Material Adverse Effect, and (iii)
liabilities incurred in connection with the financing for the Equity Purchase,
as described in the commitment letter set forth in Section 6.2(b) of the SCGI
Disclosure Schedule, and fees and expenses (including fees and expenses of
legal counsel and accountants) relating to such financing.
Section 4.13. Joint Proxy Statement/Prospectus; Form S-4. (a) None of the
information supplied or to be supplied by SCGI for inclusion or incorporation
by reference in (i) the Form S-4 will, at the time the Form
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S-4 becomes effective under the Securities Act or at the time of any post-
effective amendment thereto, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the Joint Proxy
Statement/Prospectus will, on the date it is first mailed to USRealty
stockholders or SCGI stockholders or at the time of the USRealty Stockholders
Meeting or the SCGI Stockholders Meeting, 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. The Form S-4 and the
Joint Proxy Statement/Prospectus will comply as to form in all material
respects with the requirements of the Exchange Act and the Securities Act, as
applicable, and the rules and regulations of the SEC thereunder.
(b) Notwithstanding the foregoing provisions of this Section 4.13, no
representation or warranty is made by SCGI with respect to statements made or
incorporated by reference in the Form S-4 or Joint Proxy Statement/Prospectus
based on information supplied in writing by USRealty for inclusion or
incorporation by reference therein.
Section 4.14. Required Vote. The affirmative vote of the holders of at least
a majority of the votes cast by the holders of the SCGI Voting Shares voting as
a single class, provided that the total vote cast represents over 50% in
interest of all SCGI Voting Shares entitled to vote, is the only vote of the
holders of any class of capital stock of SCGI necessary to approve the SCGI
Share Issuance (the "Required SCGI Vote").
Section 4.15. Environmental Matters. Except as would not have an SCGI
Material Adverse Effect and except as disclosed in the SCGI SEC Reports filed
prior to the date hereof, (a) the operations of SCGI and its subsidiaries have
been and are in compliance with all Environmental Laws and with all licenses
required by Environmental Laws, (b) there are no pending or, to the knowledge
of SCGI, threatened, Actions under or pursuant to Environmental Laws against
SCGI or any of its subsidiaries or involving any real property currently or, to
the knowledge of SCGI, formerly owned, operated or leased by SCGI or any of its
subsidiaries, and (c) SCGI and its subsidiaries are not subject to any
Environmental Liabilities and, to the knowledge of SCGI, no facts,
circumstances or conditions relating to, arising from, associated with or
attributable to any real property currently or, to the knowledge of SCGI,
formerly owned, operated or leased by SCGI or any of its subsidiaries or
operations thereon would reasonably be expected to result in Environmental
Liabilities.
As used in this Agreement, "Environmental Laws" means any and all foreign,
federal, state, local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, decisions, injunctions, orders, decrees, requirements of any
Governmental Authority, any and all common law requirements, rules and bases of
liability regulating, relating to or imposing liability or standards of conduct
concerning pollution, Hazardous Materials or protection of human health, safety
or the environment, as in effect on or prior to the Closing Date and includes
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section 9601 et seq., the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801 et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 et seq., the Clean Water Act, 33 U.S.C. Section 1251 et
seq., the Clean Air Act, 33 U.S.C. Section 2601 et seq., the Toxic Substances
Control Act, 15 U.S.C. Section 2601 et seq., the Federal Insecticide, Fungicide
and Rodenticide Act, 7 U.S.C., Section 136 et seq., Occupational Safety and
Health Act 29 U.S.C. Section 651 et seq. and the Oil Pollution Act of 1990, 33
U.S.C. Section 2701 et seq., as such laws have been amended or supplemented,
and the regulations promulgated pursuant thereto, and all analogous state or
local statutes. As used in this Agreement, "Environmental Liabilities" with
respect to any Person means any and all liabilities of or relating to such
Person or any of its subsidiaries (including any entity which is, in whole or
in part, a predecessor of such Person or any of such subsidiaries), whether
vested or unvested, contingent or fixed, actual or potential, known or unknown,
which (i) arise under or relate to matters covered by Environmental Laws, and
(ii) relate to actions occurring or conditions existing on or prior to the
Closing Date. As used in this Agreement, "Hazardous Materials" means any
hazardous or toxic substances, materials or wastes, defined, listed, classified
or regulated as such in or under any Environmental Laws and which includes
petroleum, petroleum products, friable asbestos, urea formaldehyde and
polychlorinated biphenyls.
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Section 4.16. Taxes. Each of SCGI and its subsidiaries has filed all Tax
Returns required to have been filed (or extensions have been duly obtained) and
has paid all Taxes required to have been paid by it, except where failure to
file such Tax Returns or pay such Taxes would not have an SCGI Material Adverse
Effect.
For purposes hereof: (i) "Tax" (and, with correlative meaning, "Taxes")
means any federal, state, local or foreign income, gross receipts, property,
sales, use, license, excise, franchise, employment, payroll, withholding,
alternative or add on minimum, ad valorem, transfer or excise tax, or any other
tax, custom, duty, governmental fee or other like assessment or charge of any
kind whatsoever, together with any interest or penalty, imposed by any
governmental authority, and (ii) "Tax Return" means any return, report or
similar statement required to be filed with respect to any Tax (including any
attached schedules), including any information return, claim for refund,
amended return or declaration of estimated Tax.
Section 4.17. Employee Benefits. (a) With respect to each SCGI Employee
Benefit Plan, except for SCGI Employee Benefit Plans the liabilities under
which are reflected in the financial statements included in the SCGI SEC
Reports or which would not have an SCGI Material Adverse Effect, SCGI has made
available to USRealty a true, correct and complete copy of: (i) all plan
documents, trust agreements, and insurance contracts and other funding
vehicles; (ii) the most recent Annual Report (Form 5500 Series) and
accompanying schedule, if any; (iii) the current summary plan description and
any material modifications thereto, if any (in each case, whether or not
required to be furnished under ERISA); (iv) the most recent annual financial
report, if any; (v) the most recent actuarial report, if any; and (vi) the most
recent determination letter from the IRS, if any.
(b) With respect to each SCGI Employee Benefit Plan, SCGI and its
subsidiaries have complied, and are now in compliance, with all provisions of
ERISA, the Code and all other laws and regulations applicable to such SCGI
Employee Benefit Plans and each SCGI Employee Benefit Plan has been
administered in accordance with its terms, in each case except as would not
have an SCGI Material Adverse Effect. Each SCGI Employee Benefit Plan that is
required by ERISA to be funded is fully funded in accordance with reasonable
actuarial assumptions, except as would not have an SCGI Material Adverse
Effect.
(c) To the extent that any entity which, together with SCGI, would be
treated as a single employer within the meaning of Code Section 414(b), (c),
(m) or (o) (an "ERISA Affiliate") has or at any time has had an obligation to
contribute to a plan subject to Title IV of ERISA, including a multi-employer
plan within the meaning of ERISA Section 4001(a)(3) (collectively, the "Title
IV Plans"), except in each case as would not individually or in the aggregate
have an SCGI Material Adverse Effect or as otherwise disclosed or reflected in
the SCGI SEC Reports, there is no liability under Title IV of ERISA that has
occurred or is likely to occur in respect of such Title IV Plan.
Section 4.18. Board Approval. The Board of Directors of SCGI, by resolutions
duly adopted by unanimous vote at a meeting duly called and held and not
subsequently rescinded or modified in any way, has duly (a) determined that
this Agreement is fair to and in the best interests of SCGI and its
stockholders, (b) approved this Agreement, the Equity Purchase, and the SCGI
Share Issuance, (c) determined to recommend that the stockholders of SCGI
approve the SCGI Share Issuance and directed that the SCGI Share Issuance be
submitted for consideration by SCGI's stockholders at the SCGI Stockholders
Meeting, and (d) approved an amendment to the Charter of SCGI reclassifying
4,456,988 authorized but unissued Class A Common Shares and 139,000 authorized
but unissued shares of Series A Preferred Stock into a total of 4,595,988 Class
B Common Shares (the "Charter Amendment").
Section 4.19. Opinion of SCGI Financial Advisor. SCGI has received the
opinion of the SCGI Financial Advisor, as of the date hereof, to the effect
that, as of such date, and based upon and subject to the assumptions and
matters set forth therein, the consideration (consisting of the Purchase Price
Shares and the Purchase Price Cash Amount) to be paid by SCGI pursuant to this
Agreement is fair from a financial point of view to SCGI.
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Section 4.20. Exemption From Takeover Laws. SCGI and Purchaser have taken
all action required to be taken by it in order to exempt this Agreement and the
transactions contemplated hereby from, and this Agreement and the transactions
contemplated hereby are exempt from, the requirements of any Takeover Laws (a)
of the State of Maryland, in the case of SCGI and (b) of the State of Nevada,
in the case of Purchaser.
Section 4.21. Required Financing. SCGI and/or Purchaser have received the
commitment letter set forth on Section 6.2(b) of the SCGI Disclosure Schedule,
and the funds proposed to be made available thereunder, upon receipt thereof,
will be sufficient to consummate the Equity Purchase, including funds
sufficient to pay the Purchase Price Cash Amount.
Section 4.22. No Knowledge of Breaches. As of the date of this Agreement,
neither SCGI nor the Operating Advisor has any knowledge of any breach by
USRealty of USRealty's representations and warranties hereunder.
ARTICLE V
Covenants of SCGI, Purchaser and USRealty
Section 5.1. Investigation of Business; Access to Properties and
Records. (a) Prior to the Closing Date, USRealty shall and shall cause Holdings
and the Holdings Subsidiaries to, and SCGI shall and shall cause its
subsidiaries to, afford to representatives of the other party full access to
their respective personnel, offices, plants, properties, books and records
during normal business hours, in order that USRealty and SCGI may have full
opportunity to make such investigations as such party desires of the affairs
and assets of SCGI, on the one hand, or Holdings and the Holdings Subsidiaries
on the other hand; provided, however, that such investigation by USRealty and
SCGI shall not unreasonably disrupt the personnel and operations of SCGI and
its subsidiaries, on the one hand, or Holdings and the Holdings Subsidiaries,
on the other hand.
(b) On the Closing Date or as soon thereafter as practicable, USRealty will
deliver or cause to be delivered to SCGI all corporate records of Holdings and
the Holdings Subsidiaries, and all other original (or copies thereof, if
originals are not immediately available) agreements, documents, books and
records relating to the businesses of Holdings and the Holdings Subsidiaries.
(c) Except as required by law or a regulatory body or court having
jurisdiction over USRealty and except to the extent such information becomes
publicly available other than as a result of any action taken by USRealty, from
and after the Closing Date, USRealty shall maintain the confidentiality of non-
public information with respect to Holdings and the Holdings Subsidiaries. In
the event that USRealty after the Closing Date is requested, or becomes
required by law or a regulatory body or court having jurisdiction over
USRealty, to disclose any confidential information relating to Holdings and the
Holdings Subsidiaries, USRealty will provide SCGI with prompt notice thereof
(before such information is disclosed if practicable) so that SCGI may at its
expense seek a protective order or other appropriate remedy and/or waive
compliance with the terms of this Section 5.1(c).
Section 5.2. Efforts; Obtaining Consents. (a) Subject to the terms and
conditions herein provided, each of USRealty, SCGI and Purchaser agrees to use
all reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective as promptly as practicable the transactions contemplated by this
Agreement and to cooperate with the other in connection with the foregoing,
including using its reasonable efforts (i) to obtain all waivers, consents and
approvals from other parties to loan agreements, leases, mortgages and other
contracts necessary for the consummation of the transactions contemplated
hereby, (ii) to make all required filings and registrations with, and
submissions of information requested by, and to obtain all consents, approvals
and authorizations that are required to be obtained from, Governmental
Authorities, (iii) to lift or rescind any injunction, restraining order, decree
or other order adversely affecting the ability of the parties hereto to
consummate the transactions contemplated hereby, and (iv) to fulfill all
conditions to this Agreement. Each of USRealty, SCGI and
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Purchaser shall use all reasonable efforts to prevent the entry, enactment or
promulgation of any threatened or pending preliminary or permanent injunction
or other order, decree or ruling or statute, rule, regulation or executive
order that would adversely affect the ability of the parties hereto to
consummate the transactions contemplated hereby.
(b) SCGI and USRealty shall promptly file or cause to be filed with the
Antitrust Division of the United States Department of Justice and the United
States Federal Trade Commission pursuant to the HSR Act all requisite documents
and notifications in connection with the transactions contemplated by this
Agreement. SCGI shall pay the filing fee incurred in connection with such
filings under the HSR Act. Each party hereto shall promptly inform the other of
any material communication from the Federal Trade Commission, the Department of
Justice or any other Governmental Authority regarding any of the transactions
contemplated hereby. If either SCGI or USRealty or any Affiliate thereof
receives a request for additional information or documentary material from any
such government or Governmental Authority with respect to the transactions
contemplated hereby, then such party shall endeavor in good faith to make, or
cause to be made, as soon as reasonably practicable and after consultation with
the other party, an appropriate response in compliance with such request. Each
of the parties hereto will advise the other promptly in respect of any
understandings, undertakings or agreements (oral or written) which it proposes
to make or enter into with the Federal Trade Commission, the Department of
Justice or any other Governmental Authority in connection with the transactions
contemplated hereby.
(c) SCGI shall use all reasonable efforts to cause the financing necessary
for the satisfaction of the condition in Section 6.2(b) to be obtained on the
terms set forth in the commitment letter attached to Schedule 6.2(b) of the
SCGI Disclosure Schedule or on such other terms as may be commercially
available at the time of funding.
(d) SCGI shall file articles supplementary with the Maryland State
Department of Assessments and Taxation in connection with the Charter
Amendment.
Section 5.3. Further Assurances. SCGI, Purchaser and USRealty agree that,
from time to time, whether before, at or after the Closing Date, each of them
will take such other action (including using its reasonable best efforts to
cause its subsidiaries to take such action) as may be reasonably necessary to
carry out the purposes and intents of this Agreement.
Section 5.4. Conduct of Business by USRealty. From the date hereof through
the Closing Date, except as disclosed in Section 5.4 of the USRealty Disclosure
Schedule or otherwise provided for in this Agreement (including pursuant to the
Plan of Liquidation or Section 5.14), and, except as advised, recommended or
agreed to by the Operating Advisor, or as consented to or approved by SCGI in
writing, USRealty covenants and agrees that:
(a) each of Holdings and the Holdings Subsidiaries shall operate its
business in the ordinary and usual course in accordance with past
practices;
(b) none of USRealty, Holdings or the Holdings Subsidiaries shall issue,
sell or agree to issue or sell (i) any shares of its capital stock, or (ii)
any securities convertible into, or options with respect to, or warrants to
purchase or rights to subscribe for, any shares of its capital stock or
make any change in its issued and outstanding capital stock or redeem,
purchase or otherwise acquire any of its capital stock, other than as
required pursuant to obligations set forth in Section 5.4 of the USRealty
Disclosure Schedule;
(c) neither Holdings nor any Holdings Subsidiary shall (i) increase in
any manner the compensation of, or enter into any new bonus or incentive
agreement or arrangement with, any of its directors, officers or other
employees other than increases in compensation in the ordinary course of
business and consistent with past practice and which are not material in
the aggregate; (ii) pay or agree to pay any pension, retirement allowance
or other employee benefit to any director, officer or employee, whether
past or
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present, other than as required by applicable law, contracts or plan
documents in effect on the date hereof; (iii) enter into any new
employment, severance, consulting, or other compensation agreement with any
director, officer or employee or other person other than in connection with
any new hires or promotions in the ordinary course and consistent with past
practice; or (iv) commit itself to any additional pension, profit-sharing,
deferred compensation, group insurance, severance pay, retirement or other
employee benefit plan, fund or similar arrangement or adopt or amend or
commit itself to adopt or amend any of such plans, funds or similar
arrangements in existence on the date hereof;
(d) none of USRealty, Holdings nor any of the Holdings Subsidiaries
shall (i) amend its articles of incorporation (or similar instruments),
(ii) declare any dividend or make any distribution with respect to its
capital stock (other than any dividend or distribution by Holdings to
USRealty as may be necessary to allow USRealty to defray the reasonable
costs and expenses of the liquidation of USRealty pursuant to the Plan of
Liquidation, and which cannot be satisfied out of the USRealty Other
Assets), (iii) assume, incur or guarantee any obligation for borrowed money
other than trade payables in the ordinary course of business consistent
with past practice, (iv) cancel or compromise, except for compromises of
current or former short-term trade receivables or other current assets in
the ordinary course of business consistent with past practice, any debts
owed to it, or (v) waive or release any rights of material value;
(e) none of USRealty, Holdings nor any of the Holdings Subsidiaries
shall (i) sell, transfer, lease or otherwise dispose of any of its assets
other than inventory, accounts receivable or fixtures in the ordinary
course of business consistent with past practice, (ii) create or permit to
exist any new security interest, lien or encumbrance on any of its
properties or assets, other than Permitted Exceptions, (iii) enter into any
joint venture, partnership or other similar arrangement, (iv) make any
investment in or purchase any securities of any Person other than in
connection with the cash management activities of USRealty, Holdings and
the Holdings Subsidiaries in the ordinary course of business consistent
with past practice, other than as required pursuant to obligations set
forth in Section 5.4 of the USRealty Disclosure Schedule, (v) purchase any
assets of any Person other than in the ordinary course of business
consistent with past practice or (vi) incur any liabilities which are, in
the aggregate, in excess of liabilities that can be funded with internally
generated cash flows, other than liabilities incurred to fund binding
commitments in effect as of the date hereof or liabilities the incurrence
of which is necessary to fund the ordinary course business activities of
such entities consistent with past practice;
(f) neither Holdings nor any Holdings Subsidiary shall permit a change
in its methods of maintaining its books, accounts or business records or,
except as required by GAAP or applicable Luxembourg accounting principles
(in which event prior notice shall be given to SCGI), change any of its
accounting principles or the methods by which such principles are applied
for tax or financial reporting purposes;
(g) the Holdings Subsidiaries together shall incur capital expenditures
only in the ordinary course of business consistent with prior practice and
not in excess of the capital budget provided to SCGI prior to the date
hereof;
(h) none of USRealty, Holdings nor any of the Holdings Subsidiaries
shall (i) enter into or terminate any material lease, contract or
agreement, or make any change in any of their material leases, contracts
and agreements, (ii) reclassify any assets or liabilities, or (iii) do any
other act that (A) would cause any representation or warranty of USRealty
in this Agreement to be or become untrue in any material respect or
(B) would reasonably be expected to have a Holdings Material Adverse
Effect;
(i) USRealty, Holdings and the Holdings Subsidiaries will comply in all
material respects with all material laws and regulations applicable to
them;
(j) neither Holdings nor any of the Holdings Subsidiaries shall make any
election with respect to Taxes, consent to any waiver or extension of time
to assess or collect any Taxes or file any Tax Return other than a Tax
Return filed in the ordinary course of business and prepared in a manner
consistent with past practice;
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(k) none of USRealty, Holdings nor any of the Holdings Subsidiaries
shall agree to take any action prohibited by this Section 5.4;
(l) None of USRealty, Holdings or any of the Holdings Subsidiaries shall
propose, initiate or approve any action to be taken by a Private Investee,
if such action if taken by a Holdings Subsidiary would be prohibited by
this Section 5.4 or Section 5.7.
Section 5.5. Conduct of Business by SCGI. From the date hereof through the
Closing Date, except as otherwise contemplated in this Agreement or set forth
in Section 5.5 of the SCGI Disclosure Schedule, and except as consented to or
approved by USRealty in writing, SCGI covenants and agrees that (a) except for
(i) issuances of SCGI Shares (including the related Rights) upon exercise of
outstanding stock options or vesting of outstanding RSUs or upon the exercise,
conversion or redemption pursuant to their terms of securities outstanding on
the date hereof and under the 6.5% Debenture Interest Reinvestment Plan and
(ii) new grants of stock options (and issuances of SCGI Shares and the related
Rights upon exercise thereof), SCGI Shares and RSUs in each case pursuant to
the terms of the SCGI Incentive Plans, it shall not issue, sell or agree to
issue or sell (x) any shares of its capital stock or (y) any securities
convertible into, or options with respect to, or warrants to purchase or rights
to subscribe for, any shares of its capital stock or make any change in its
issued and outstanding capital stock; (b) except for the filing of articles
supplementary with the Maryland State Department of Assessments and Taxation in
connection with the Charter Amendment, it shall not amend its charter; (c) it
shall not declare any dividend or make any distribution with respect to its
capital stock, other than pursuant to the terms of SCGI capital stock
outstanding as of the date hereof; (d) it shall not redeem, purchase or
otherwise acquire any SCGI Shares other than in open market transactions or in
negotiated transactions with third parties or in connection with cashless
exercises; and (e) it shall not agree to take any action prohibited by this
Section 5.5.
Section 5.6. Preservation of Business. From the date hereof through the
Closing Date, subject to the terms and conditions of this Agreement, USRealty
shall, and shall cause Holdings and the Holdings Subsidiaries to, use all
reasonable efforts to preserve the business of Holdings and the Holdings
Subsidiaries intact, to preserve the good will of customers, suppliers,
employees and others having significant business relations with Holdings and
the Holdings Subsidiaries, to retain their key employees, and to maintain
insurance in full force and effect.
Section 5.7. Non-Solicitation. Except as otherwise contemplated in this
Agreement or in Section 5.4 of the USRealty Disclosure Schedule, USRealty shall
not, and shall not permit Holdings or the Holdings Subsidiaries to, directly or
indirectly, (a) solicit any inquiries or proposals for, or enter into or
continue or resume any discussions with respect to or enter into any
negotiations or agreements relating to the sale or exchange of any Holdings
Shares, any shares of capital stock of U.S. Realty, any Holdings Subsidiary or
any Private Investee or all, or a substantial part, of the assets of U.S.
Realty, Holdings, any Holdings Subsidy or any Private Investee or (b) furnish
or cause to be furnished any non-public information concerning the business and
operations of any of them to any Person (other than to or at the request of
SCGI and its representatives) other than in the ordinary course of business
consistent with past practice or as required by applicable law (including
applicable laws relating to the duties of the USRealty Board).
Section 5.8. Financial Statements. Prior to and through the Closing Date,
USRealty shall deliver to SCGI promptly after they are prepared such monthly or
other financial statements or financial reports of USRealty, Holdings and the
Holdings Subsidiaries as are prepared by or relating to USRealty, Holdings and
the Holdings Subsidiaries in the ordinary course of business and such other
financial information as SCGI may reasonably request, promptly after such
request. USRealty shall use its reasonable efforts to have
PricewaterhouseCoopers (Luxembourg) S.a.r.l. consent to SCGI's use of and
reliance on the Holdings Financial Statements and such other financial
statements of USRealty and its subsidiaries and/or Holdings and the Holdings
Subsidiaries as may be required in connection with filings under the U.S.
federal securities laws.
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Section 5.9. Satisfaction and Discharge of USRealty Notes. Section 401 of
the Notes Indenture provides for the satisfaction and discharge of the Notes
Indenture with respect to the USRealty Notes under certain circumstances
specified in such Section 401 of the Notes Indenture, including among other
things, the deposit by USRealty with the Trustee of funds for the purpose and
in an amount sufficient to pay and discharge the entire indebtedness on the
USRealty Notes at a specified redemption date and the entering into of
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name and at the expense of USRealty. Prior to the date
hereof, Purchaser, USRealty and the Trustee have arranged (and USRealty and
SCGI do hereby agree), for purposes of effecting, at the Purchase and Sale
Closing as contemplated by Section 2.1, the satisfaction and discharge of the
Notes Indenture with respect to the USRealty Notes pursuant to Section 401 of
the Notes Indenture (the "Satisfaction and Discharge"), that, at the Purchase
and Sale Closing: (a) Purchaser and USRealty shall enter into an agreement with
the Trustee in the form attached as Exhibit B, (b) USRealty shall deliver in
trust to the Trustee an amount of cash (the "Notes Payoff Amount") equal to, at
SCGI's election, either (i) the Accreted Value (as defined in the Notes
Indenture) on the later of May 23, 2001 or such date as is 30 days following
the Closing Date (the "Redemption Date" at all USRealty Notes outstanding on
the Closing Date plus any interest payments required to be made on such
USRealty Notes following the Closing Date through and including the Redemption
Date, the "Redemption Amount") or (ii) an amount sufficient to purchase on the
Closing Date securities set forth on Exhibit C with face amounts and maturity
dates to provide for funds in such trust, on the Redemption Date, equal to the
Redemption Amount, provided that in the case of this clause (ii), SCGI shall
provide to USRealty for delivery to the Trustee a verified accountant's report
thereon, and (c) USRealty shall deliver to the Trustee the Company Order
contemplated by Section 401 of the Notes Indenture (which shall specify that
the USRealty Notes shall be redeemed on the Redemption Date) and such other
documents as may be required by the Notes Indenture, the Trust Indenture Act or
the agreement with the Trustee referred to in clause (a) above.
Section 5.10. Joint Proxy Statement/Prospectus; Form S-4. As promptly as
practicable after the execution hereof, SCGI and USRealty shall prepare and
file with the SEC proxy materials which shall constitute the Joint Proxy
Statement/Prospectus relating to (i) the SCGI Stockholders Meeting and the vote
of the stockholders of SCGI with respect to the SCGI Share Issuance pursuant
hereto, and (ii) the USRealty Stockholders Meeting and the vote of USRealty
Stockholders with respect to this Agreement and the Plan of Liquidation (such
proxy materials, together with any amendments thereof or supplements thereto,
in the form delivered to the stockholders of USRealty and SCGI, the "Joint
Proxy Statement/Prospectus") and SCGI shall prepare and file a registration
statement on Form S-4 with respect to the issuance and distribution of the
Purchase Price Shares pursuant hereto and the Plan of Liquidation (the "Form S-
4"). The Joint Proxy Statement/Prospectus will be included in and will
constitute a part of the Form S-4 as SCGI's prospectus. Each of SCGI and
USRealty shall use reasonable best efforts (i) to have the Form S-4 declared
effective by the SEC as promptly as practicable after filing with the SEC and
to keep the Form S-4 effective as long as it is necessary to consummate the
transactions contemplated by this Agreement (including the Plan of
Liquidation), and (ii) to have the Joint Proxy Statement/Prospectus cleared by
the CSSF. SCGI and USRealty shall, as promptly as practicable after receipt
thereof, provide the other party copies of any written comments and advise the
other party of any oral comments, with respect to the Joint Proxy
Statement/Prospectus or the Form S-4 received from the SEC or the CSSF and
shall notify the other of any request by the SEC for amendments or supplements
to the Form S-4 or the Joint Proxy Statement/Prospectus. SCGI and USRealty
shall respond promptly to any comments made by the SEC, the CSSF or any other
governmental official with respect to the Joint Proxy Statement/Prospectus or
the Form S-4. SCGI and USRealty shall each supply the other with copies of all
correspondence between such party or any of its representatives and the SEC,
the CSSF or any other Governmental Authority with respect to the Form S-4, the
Joint Proxy Statement/Prospectus and the transactions contemplated hereby. SCGI
shall provide USRealty with a reasonable opportunity to review and comment on
any amendment or supplement to the Form S-4 prior to filing such with the SEC,
and with a copy of all such filings made with the SEC or the CSSF. SCGI and
USRealty shall, to the extent reasonably practicable, each have the opportunity
to participate in all communications with the SEC and its staff and the CSSF,
including meetings and telephone conferences regarding the Form S-4 and the
Joint Proxy Statement/Prospectus and the transactions contemplated therein.
Notwithstanding any other provision herein to
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the contrary, no amendment or supplement (including by incorporation by
reference) to the Joint Proxy Statement/Prospectus or the Form S-4 shall be
made without the approval of both parties, which approval shall not be
unreasonably withheld or delayed; provided, that with respect to documents
filed by a party which are incorporated by reference in the Form S-4 or Joint
Proxy Statement/Prospectus, this right of approval shall apply only with
respect to information relating to the other party or its business, financial
condition or results of operations. USRealty will use reasonable best efforts
to cause the Joint Proxy Statement/Prospectus to be mailed to USRealty
stockholders of record as of the record date for the USRealty Stockholders
Meeting (by registered mail, if an available method), and SCGI will use
reasonable best efforts to cause the Joint Proxy Statement/Prospectus to be
mailed to SCGI's stockholders of record as of the record date for the SCGI
Stockholders Meeting, in each case as promptly as practicable after the Form S-
4 is declared effective under the Securities Act, and sufficiently in advance
of the USRealty Stockholders Meeting and SCGI Stockholders Meeting so as to
allow USRealty's and SCGI's record stockholders reasonably sufficient time to
distribute the Joint Proxy Statement/Prospectus to the beneficial holders of
the USRealty and SCGI securities entitled to vote at the USRealty Stockholders
Meeting and the SCGI Stockholders Meeting, respectively. Each party will advise
the other party, promptly after it receives notice thereof, of the time when
the Form S-4 has become effective, the issuance of any stop order, the
suspension of the qualification of the Purchase Price Shares issuable in
connection with the Equity Purchase and the Plan of Liquidation for offering or
sale in any jurisdiction, or any request by the SEC or the CSSF for amendment
of the Joint Proxy Statement/Prospectus or the Form S-4. If at any time prior
to the Closing Date any information should be discovered by USRealty or SCGI
which should be set forth in an amendment or supplement to any of the Form S-4
or the Joint Proxy Statement/Prospectus so that any of such documents would not
include any misstatement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, the party which discovers such
information shall promptly notify the other party hereto and, to the extent
required by law, rules or regulations, an appropriate amendment or supplement
describing such information shall be promptly filed with the SEC and the CSSF
and disseminated to the stockholders of SCGI and USRealty. SCGI will also take
such actions (other than qualifying to do business in any jurisdiction in which
it is not now so qualified) as may be required to be taken under the applicable
"blue sky" laws in connection with the issuance and distribution of the
Purchase Price Shares pursuant hereto and to the Plan of Liquidation. SCGI and
USRealty shall share equally all fees and expenses, other than attorneys' and
accounting fees and expenses, incurred in relation to the preparation, printing
and mailing of the Form S-4 and the Joint Proxy Statement/Prospectus.
Section 5.11. Stockholders Meetings. (a) SCGI shall, as promptly as
reasonably practicable following the execution hereof, duly take all lawful
action to call, give notice of, convene and hold a meeting of its stockholders
(the "SCGI Stockholders Meeting") for the purpose of obtaining the SCGI
Stockholders Approval with respect to the SCGI Share Issuance, and shall take
all lawful action to solicit the approval of the SCGI Share Issuance; and the
Board of Directors of SCGI shall, subject to its legal and regulatory duties
under applicable law, recommend approval of the SCGI Share Issuance by the
stockholders of SCGI, and shall not, subject to its legal and regulatory duties
under applicable law, withdraw, modify or materially qualify in any manner
adverse to USRealty such recommendation or take any action or make any
statement in connection with the SCGI Stockholders Meeting materially
inconsistent with such recommendation.
(b) (i) USRealty shall, as promptly as reasonably practicable following the
execution hereof, duly take all lawful action to call, give notice of, convene
and hold a meeting of its stockholders (the "USRealty Stockholders Meeting")
for the purpose of obtaining the USRealty Stockholders Approval with respect to
this Agreement and the dissolution and liquidation of USRealty pursuant to the
Plan of Liquidation, and shall take all lawful action to solicit the approval
of this Agreement and the Plan of Liquidation. The USRealty Board shall
recommend approval of this Agreement by the stockholders of USRealty, and shall
not withdraw, modify or materially qualify in any manner adverse to SCGI such
recommendation or take any action or make any statement in connection with the
USRealty Stockholders Meeting materially inconsistent with such recommendation;
provided that the USRealty Board shall have no obligation to take any such
action or fail to take any such action if taking or failing to take, as the
case may be, such action would be inconsistent with its
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legal and regulatory duties (including its duty to act in the best interests of
the USRealty stockholders) under applicable law.
(ii) The Joint Proxy Statement/Prospectus and the proxy card sent to the
stockholders of USRealty in connection with the USRealty Stockholders Meeting
shall specify that any USRealty Share the holder of which does not wish to
consent to receive SCGI Class B Common Shares upon consummation of the
transactions contemplated by the Plan of Liquidation, but instead wishes to
receive cash upon consummation of the transactions contemplated by the Plan of
Liquidation, and votes against approval of this Agreement and the Plan of
Liquidation and who so indicates such wish to receive cash upon consummation of
the transactions contemplated by the Plan of Liquidation on a proxy card
properly completed and returned in accordance with the instructions and rules
relating thereto (each such USRealty Share, a "Cash USRealty Share"), shall not
receive SCGI Class B Common Shares upon consummation of the transactions
contemplated by the Plan of Liquidation, but instead shall receive the Per
Share Cash Amount for each USRealty Share held by such holder. USRealty
stockholders who do not so properly indicate their desire to receive cash
instead of SCGI Class B Common Shares upon consummation of the liquidation and
distribution to stockholders contemplated by the Plan of Liquidation, shall be
for all purposes considered to have elected to receive SCGI Class B Common
Shares upon consummation of the liquidation and distribution to stockholders
contemplated by the Plan of Liquidation. USRealty stockholders who vote in
favor of approval of this Agreement and the Plan of Liquidation or abstain from
voting, and USRealty stockholders who do not return the proxy card in
connection with the USRealty Stockholders Meeting, will be deemed to have
consented to receive SCGI Class B Common Shares upon consummation of the
liquidation and distribution to stockholders contemplated by the Plan of
Liquidation, and prominent disclosure of these matters shall be included the
Joint Proxy Statement/Prospectus and the proxy card sent to the stockholders of
USRealty in connection with the USRealty Stockholders Meeting.
(c) SCGI shall vote, or shall cause to be voted, all of the USRealty Shares
beneficially owned by it in favor of the approval of this Agreement and the
Plan of Liquidation.
Section 5.12. NYSE Listing. SCGI shall promptly prepare and submit to the
NYSE a supplemental listing application covering the Purchase Price Shares, and
shall use all reasonable efforts to cause such shares to be approved for
listing on the NYSE, subject only to official notice of issuance, prior to the
consummation of the Equity Purchase.
Section 5.13. Public Announcements. Each of the parties hereto agrees,
unless otherwise required by applicable law or by obligations pursuant to any
listing agreement with or rules of any securities exchange (in which case such
party shall use its reasonable efforts to provide the other party the
opportunity to review and comment), to consult with each other, and provide
each other the opportunity to review and comment, before issuing any press
release or, to the extent practical, otherwise making any public statement with
respect to this Agreement or the transactions contemplated hereby. The parties
agree that the initial joint press release to be issued with respect to the
transactions contemplated hereby will be in the form agreed to by the parties
hereto prior to the execution of this Agreement.
Section 5.14. Takeover Laws. Each of the parties hereto shall take all
reasonable steps within its control to exempt (or ensure the continued
exemption of) the transactions contemplated by this Agreement from, or if
necessary challenge the validity or applicability of, any applicable Takeover
Law, as now or hereafter in effect, that purports to apply to this Agreement or
the transactions contemplated hereby.
Section 5.15. Certain Actions. (a) At the request of Purchaser and subject
to the satisfaction of the applicable conditions set forth in Article VI, prior
to the delivery by Purchaser of the Purchase Price Cash Amount and the Purchase
Price Shares pursuant to Section 2.1 at the Purchase and Sale Closing, (i)
Holdings shall declare and pay a dividend in the amount of, or repay to
USRealty, in cash, a portion specified by Purchaser (but in no event more than
US$200 million in aggregate of dividends and repayments) of the total amount
then owing to USRealty under the Advance Agreement and/or (ii) USRealty shall
contribute to
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Holdings, by way of a capital contribution in a manner to be determined by
Purchaser, all or a portion of the total amount then owing to USRealty under
the Advance Agreement.
(b) At the request of Purchaser, and subject to the satisfaction of the
applicable conditions set forth in Article VI, prior to delivery by Purchaser
of the Purchase Price Cash Amount and Purchase Price Shares pursuant to Section
2.1 at the Purchase and Sale Closing, (i) Holdings shall cause its wholly owned
subsidiaries to declare and pay dividends in the amount of, or repay to
Holdings, in cash, a portion specified by Purchaser (but in no event a total of
more than US$50 million in aggregate of dividends and repayments) of the total
amount owed to Holdings by such wholly owned subsidiaries under the Holdings
Advance Agreement and/or (ii) Holdings shall contribute to its wholly owned
subsidiaries, by way of a capital contribution in a manner to be determined by
Purchaser, all or a portion of the total amount then owing by such subsidiaries
to Holdings under the Holdings Advance Agreement and/or (iii) Holdings shall
cause certain asset transfers as between it and its wholly owned subsidiaries.
(c) Immediately prior to the delivery by Purchaser of the Purchase Price
Cash Amount and the Purchase Price Shares pursuant to Section 2.1, USRealty
shall transfer, convey and otherwise assign to Holdings all of USRealty's
assets, if any, other than the Holdings Shares, the Advance Agreement Interests
and any cash on hand, and all of USRealty's liabilities, if any, other than
with respect to the USRealty Notes or pursuant to the Advance Agreement, and
shall cause Holdings to accept such transfer, conveyance and assignment.
(d) SCGI shall indemnify and hold USRealty harmless from, and shall pay when
due, any Taxes for or to USRealty arising from the transactions contemplated by
this Section 5.15.
Section 5.16. Share Option Equivalents. Effective as of the time of the
Purchase and Sale Closing, and notwithstanding anything to the contrary in the
Share Option Equivalent Grants, and whether or not then vested, the restricted
cash payment specified in paragraph 2 of each of the Share Option Equivalent
Grants shall be vested, deemed to be exercised as of the last full trading day
prior to such time, be due and payable, and shall be paid, but the recipients
of such payments shall, notwithstanding the terms of the Share Option
Equivalent Grants, have no obligation to apply any such restricted cash payment
to any particular purpose.
Section 5.17. Litigation. SCGI shall have the right to conduct and control,
through counsel of its own choosing, in consultation and cooperation with
USRealty and the Special Committee and their respective counsel, the defense or
settlement of any action or claim brought by any stockholder or purported
stockholder of USRealty before any domestic or foreign court of competent
jurisdiction which challenges the acquisition in whole or in part the Equity
Purchase or the entering into of this Agreement, seeks to restrain or prohibit
the consummation of the transactions contemplated hereby or seeks to obtain
material damages, and USRealty shall not, and shall cause its subsidiaries and
affiliates not to, pay or settle any such claim or action to which it is a
party without the prior written consent of SCGI; provided, that the Special
Committee shall be permitted to fully participate in such defense or settlement
through counsel chosen by it; and provided further, that SCGI shall not, and
shall cause its subsidiaries and affiliates not to, settle any such action or
claim naming as parties any of the members of the USRealty Board without the
consent of such members of the USRealty Board, which consent shall not be
unreasonably withheld.
Section 5.18. Notification of Certain Matters. Each of USRealty, SCGI and
Purchaser shall give prompt notice to the other parties hereof of any notice or
other communication from any third party alleging that the consent of such
third party is or may be required in connection with the transactions
contemplated by this Agreement.
Section 5.19. Indemnification. (a) SCGI agrees that all rights to
indemnification or exculpation now existing in favor of the directors and
officers of USRealty, Holdings and the Holdings Subsidiaries as provided in
their respective articles, certificates, charter or bylaws or otherwise in
effect as of the date hereof with respect to matters occurring prior to the
consummation of the last to occur of any of the transactions contemplated
hereby shall survive such consummation and shall continue in full force and
effect, and no action
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shall be taken by SCGI during the six year period beginning on the last to
occur of any of the transactions contemplated hereby if such action could
reasonably be expected to materially reduce any such rights to indemnification
or exculpation. To the maximum extent permitted by law, such indemnification
shall be mandatory rather than permissive, and SCGI shall advance expenses in
connection with such indemnification.
(b) SCGI shall maintain in effect for not less than six (6) years from the
consummation of the last to occur of any of the transactions contemplated
hereby, the policies of the directors' and officers' liability and fiduciary
insurance most recently maintained by USRealty (provided that SCGI may
substitute therefor policies of at least the same coverage containing terms and
conditions which are no less advantageous to the beneficiaries thereof so long
as such substitution does not result in gaps or lapses in coverage) with
respect to matters occurring prior to the consummation of the last to occur of
any of the transactions contemplated hereby to the extent available; provided
that in no event shall SCGI be required to expend more than an amount per year
equal to 150% of the current annual premiums paid by USRealty (the "Premium
Amount") to maintain or procure insurance coverage pursuant hereto, and
provided, further, that, if SCGI is unable to obtain the insurance called for
by this Section 5.20(b), SCGI will obtain as much comparable insurance as is
available for the Premium Amount per year.
Section 5.20. Certain Agreement Relating to USRealty Investees. USRealty
hereby agrees on its own behalf and on behalf of Holdings, effective as of the
Purchase and Sale Closing, to the matters set forth in paragraph 1(iv) of the
Carr Letter Agreement. USRealty shall, and shall cause Holdings to, prior to
the Purchase and Sale Closing, cooperate with SCGI and take all such actions as
SCGI may reasonably request in order to afford SCGI from and after the Purchase
and Sale Closing the rights and benefits of USRealty and/or Holdings under the
agreements, arrangements and understandings with the Persons in which Holdings
holds investments.
ARTICLE VI
Conditions Precedent
Section 6.1. Conditions to Each Party's Obligations. The respective
obligations of SCGI, Purchaser and USRealty to effect the Equity Purchase and
the SCGI Share Issuance are subject to the satisfaction or waiver prior to the
Closing Date of the following conditions:
(a) Stockholder Approval. (i) SCGI shall have obtained the Required SCGI
Vote in connection with the approval of the SCGI Share Issuance by the
stockholders of SCGI, and (ii) USRealty shall have obtained the Required
USRealty Vote in connection with the approval of this Agreement and the
Plan of Liquidation.
(b) No Injunction or Restraints; Illegality. No laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other Governmental
Authority of competent jurisdiction shall be in effect, (i) having the
effect of making the transactions contemplated hereby or by the Plan of
Liquidation illegal or otherwise prohibiting consummation of the
transactions contemplated hereby; provided, however, that the provisions of
this Section 6.1(b) shall not be available to any party whose failure to
fulfill its obligations pursuant to Section 5.2 shall have been the cause
of, or shall have resulted in, such order or injunction.
(c) Required Regulatory Filings. The waiting period (and any extension
thereof) applicable to the Equity Purchase under the HSR Act shall have
been terminated or shall have expired.
(d) Other Governmental and Regulatory Approvals. Other than with respect
to the matters addressed in Section 6.1(c), all consents, approvals and
actions of, filings with and notices to any Governmental Authority required
of SCGI, USRealty or any of their subsidiaries to consummate the Equity
Purchase, the SCGI Share Issuance and the other transactions contemplated
hereby, the failure of which to be obtained or taken would reasonably be
expected to have a Holdings Material Adverse Effect
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or an SCGI Material Adverse Effect shall have been obtained; provided,
however, that the provisions of this Section 6.1(d) shall not be available
to any party whose failure to fulfill its obligations pursuant to Section
5.2 shall have been the cause of, or shall have resulted in, the failure to
obtain such consent or approval.
(e) NYSE Listing. The Purchase Price Shares shall have been approved for
listing on the NYSE, subject only to official notice of issuance.
(f) Effectiveness of the Form S-4. The Form S-4 shall have been declared
effective by the SEC under the Securities Act. No stop order suspending the
effectiveness of the Form S-4 shall have been issued by the SEC and no
proceedings for that purpose shall be pending before or threatened by the
SEC.
Section 6.2. Additional Conditions to Obligations of SCGI and Purchaser. The
obligation of SCGI and Purchaser to effect the Equity Purchase and the SCGI
Share Issuance are subject to the satisfaction of, or waiver by SCGI and
Purchaser, on or prior to the Closing Date of the following additional
conditions:
(a) Representations, Warranties and Covenants of USRealty. The
representations and warranties of USRealty contained in this Agreement
shall be true and correct when made and, except for representations and
warranties that speak as of a specific date or time (which need only be
true and correct as of such date or time), on and as of the Closing Date
with the same effect as though such representations and warranties had been
made on and as of such date, except for such inaccuracies or breaches as
would not, individually or in the aggregate, have a Holdings Material
Adverse Effect, and also except for such inaccuracies or breaches as have
arisen on the advice, recommendation or approval of the Operating Advisor,
and the covenants and agreements of USRealty contained in this Agreement to
be performed on or before the Closing Date in accordance with this
Agreement shall have been duly performed in all material respects, and SCGI
shall have received at the Purchase and Sale Closing a certificate to the
effect of the foregoing dated the Closing Date and validly executed by an
executive officer of USRealty.
(b) Financing. SCGI and/or its subsidiaries shall have received the
proceeds of financing pursuant to the commitment letter set forth on and
attached to Section 6.2(b) of the SCGI Disclosure Schedule on terms and
conditions set forth therein (or (as modified in accordance with Section
5.2(c)) on such other terms and conditions, or involving such other
financing sources, as SCGI shall determine in its discretion) in amounts
sufficient to pay the Purchase Price Cash Amount.
(c) Shares Cash Amount. The Shares Cash Amount shall not exceed
US$200,000,000.
Section 6.3. Additional Conditions to Obligations of USRealty. The
obligation of USRealty to effect the Equity Purchase is subject to the
satisfaction of, or waiver by USRealty, on or prior to the Closing Date of the
following additional conditions:
(a) Representations, Warranties and Covenants of SCGI and Purchaser. The
representations and warranties of SCGI and Purchaser contained in this
Agreement shall be true and correct when made and, except for
representations and warranties that speak as of a specific date or time
(which need only be true and correct as of such date or time), on and as of
the Closing Date with the same effect as though such representations and
warranties had been made on and as of such date, except for such
inaccuracies or breaches as would not, individually or in the aggregate,
have an SCGI Material Adverse Effect, and the covenants and agreements of
SCGI contained in this Agreement to be performed on or before the Closing
Date in accordance with this Agreement shall have been duly performed in
all material respects, and USRealty shall have received at the Purchase and
Sale Closing a certificate to the effect of the foregoing dated the Closing
Date and validly executed by an executive officer of SCGI and an executive
officer of Purchaser.
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ARTICLE VII
Termination of Agreement
Section 7.1. Termination. This Agreement may be terminated at any time prior
to the Purchase and Sale Closing:
(a) by mutual written consent of Purchaser and USRealty;
(b) by either Purchaser or USRealty, if any Governmental Authority of
competent jurisdiction shall have issued an injunction, restraining order
or decree that restrains or prohibits the consummation of the Equity
Purchase or the transactions contemplated by the Plan of Liquidation, and
such injunction, restraining order or decree shall have become final and
nonappealable;
(c) by either Purchaser or USRealty, if the Purchase and Sale Closing
has not occurred by the close of business on the Drop Dead Date, unless the
failure of the Purchase and Sale Closing to occur by such date shall be due
to the failure of the party seeking to terminate this Agreement to perform
or observe in all material respects the covenants and agreements of such
party set forth herein;
(d) by either Purchaser or USRealty, if the SCGI Stockholders Approval
shall not have been obtained at the SCGI Stockholders Meeting or the
USRealty Stockholders Approval shall not have been obtained at the USRealty
Stockholders Meeting; or
(e) by Purchaser, if (i) the USRealty Stockholder Approval shall have
been obtained at the USRealty Stockholders Meeting and (ii) the Shares Cash
Amount exceeds US$200,000,000.
Section 7.2. Procedure and Effect of Termination. (a) In the event of
termination of this Agreement by either or both of Purchaser or USRealty
pursuant to Section 7.1, written notice thereof shall forthwith be given by the
terminating party or parties to the other party or parties hereto, and this
Agreement shall thereupon terminate and become void and have no effect, and the
transactions contemplated hereby shall be abandoned without further action by
the parties hereto, except that the provisions of Section 7.2(b) and Section
8.6 shall survive the termination of this Agreement; provided, however, that
such termination shall not relieve any party hereto of any liability for any
willful breach of this Agreement (other than a breach of a representation, as
to which no party shall be liable hereunder).
(b) In the event that this Agreement is terminated pursuant to Section
7.1(c): (i) by Purchaser, if the failure of the Purchase and Sale Closing to
occur by the Drop Dead Date shall be due to the failure of USRealty to perform
or observe in all material respects its covenants and agreements set forth
herein or (ii) by USRealty, if the failure of the Purchase and Sale Closing to
occur by the Drop Dead Date shall be due to the failure of SCGI or Purchaser to
perform or observe in all material respects their covenants and agreements set
forth herein, the non-terminating party shall pay or cause to be paid to the
terminating party, in same day funds, such terminating party's Expenses, upon
demand. If this Agreement is terminated by any party on or after the Drop Dead
Date and as of such date all conditions to the parties' obligations set forth
in Article VI, other than (A) the condition set forth in Section 6.2(b), (B)
the delivery at the Purchase and Sale Closing of the certificates referenced in
Section 6.2(a) and 6.3(a), and (C) any condition which has not been or cannot
be satisfied as a result of the failure of SCGI or Purchaser to perform or
observe in all material respects their covenants and agreements set forth
herein, shall have been satisfied or waived, SCGI shall pay or cause to be paid
to USRealty, in same day funds, USRealty's Expenses upon demand. For purposes
of this Section 7.2(b), "Expenses" of a party means the documented out-of-
pocket fees and expenses incurred or paid by or on behalf of USRealty or
Holdings, in the case of Expenses of USRealty, or Purchaser or SCGI, in the
case of Expenses of Purchaser, in connection with the Equity Purchase or the
other transactions contemplated by this Agreement (including fees and expenses
of counsel, commercial banks, investment banking firms and accountants), but in
any event not to exceed US$2,100,000.
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ARTICLE VIII
Miscellaneous
Section 8.1. Non-Survival of Representations, Warranties and
Agreements. None of the representations, warranties, covenants and other
agreements herein or in any instrument delivered pursuant hereto, including any
rights arising out of any breach of such representations, warranties, covenants
and other agreements, shall survive the Purchase and Sale Closing and the
Liquidation Closing, and thereafter there shall be no liability on the part of
any of the parties or any of their respective officers, directors or
stockholders in respect thereof, except for (a) the covenants of USRealty
contained in Sections 2.1 and 2.2 (to the extent not performed at the Purchase
and Sale Closing or the Liquidation Closing), (b) those covenants and
agreements contained herein and therein that by their terms apply or are to be
performed in whole or in part after the Purchase and Sale Closing or the
Liquidation Closing, which shall survive the Purchase and Sale Closing and the
Liquidation Closing until fully satisfied, and (c) the provisions of this
Article VIII.
Section 8.2. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party.
Section 8.3. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland without regard
to principles of conflict of laws; provided, however, that the parties agree
that all questions of Luxembourg corporate or securities law and the
interpretation thereof (including questions relating to the legal and
regulatory duties of the directors of USRealty) shall be governed by the laws
of the Grand Duchy of Luxembourg.
Section 8.4. Jurisdiction; Waiver of Trial by Jury. The parties hereby
consent to the exclusive jurisdiction of the United States District Court for
the Southern District of New York and any of the courts of the state of New
York in any dispute arising under this Agreement and agree further that service
of process or notice in any such action, suit or proceeding shall be effective
if in writing and delivered in person or sent as provided in Section 8.7. ANY
RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS
AGREEMENT OR IN CONNECTION HEREWITH IS HEREBY WAIVED.
Section 8.5. Entire Agreement. This Agreement and the Schedules and Exhibits
hereto contain the entire agreement between the parties with respect to the
subject matter hereof and there are no agreements, understandings,
representations or warranties between the parties other than those set forth or
referred to herein. This Agreement is not intended to confer and shall not
confer upon any Person not a party hereto any rights or remedies hereunder.
Section 8.6. Expenses. Except as otherwise set forth in this Agreement, all
legal and other costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs and expenses.
Section 8.7. Notices. All notices hereunder shall be sufficiently given for
all purposes hereunder if in writing and delivered personally, sent by
documented overnight delivery service or, to the extent receipt is confirmed,
telecopy, telefax or other electronic transmission service to the appropriate
address or number as set forth below. Notices to USRealty shall be addressed
to:
Security Capital U.S. Realty
25b, boulevard Royal
L-2449 Luxembourg
Attention: Managing Director
Facsimile Number: 011-352-46-37-56-5555
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with a copy to:
King & Spalding
1100 Louisiana
Houston, Texas 77002-3200
Attention: Randolph C. Coley, Esq.
Facsimile Number: (713) 751-3280
and
Arendt & Medernach
8-10 Rue Mathias Hardt
Boite Postale 39
Luxembourg L-2010
Luxembourg
Attention: Claude Niedner, Esq.
Facsimile Number: 011-352-40-78-04
and
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Edward J. Schneidman, Esq.
Facsimile Number: (312) 701-7711
or at such other address and to the attention of such other person as USRealty
may designate by written notice to SCGI. Notices to SCGI or Purchaser shall be
addressed to:
Security Capital Group Incorporated
125 Lincoln Avenue
Santa Fe, New Mexico 87501
Attention: Jeffrey A. Klopf, Esq.
Facsimile Number: (505) 988-8920
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Adam O. Emmerich, Esq.
Facsimile Number: (212) 403-2000
or at such other address and to the attention of such other person as SCGI may
designate by written notice to USRealty.
Section 8.8. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that no party hereto will assign its rights or
delegate its obligations under this Agreement without the express prior written
consent of each other party hereto.
Section 8.9. Headings; Definitions. The Section and Article headings
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean Sections or Articles of this
Agreement unless otherwise stated. All capitalized terms defined herein are
equally applicable to both the singular and plural forms of such terms.
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Section 8.10. Amendments and Waivers. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing waive compliance by the
other party hereto with any term or provision of this Agreement on the part of
such other party hereto to be performed or complied with. The waiver by any
party hereto of a breach of any term or provision of this Agreement shall not
be construed as a waiver of any subsequent breach.
Section 8.11. Severability. In the event that this Agreement, or any of its
provisions, or the performance of any provision, is found to be illegal or
unenforceable under applicable law now or hereafter in effect, the parties
shall be excused from performance of such portions of this Agreement as shall
be found to be illegal or unenforceable under the applicable laws or
regulations without affecting the validity of the remaining provisions of the
Agreement; provided that (i) the remaining provisions of the Agreement shall in
their totality constitute a commercially reasonable agreement, and (ii) should
any method of termination of this Agreement or a portion thereof be found to be
illegal or unenforceable, such method shall be reformed to comply with the
requirements of applicable law so as, to the greatest extent possible, to allow
termination by that method. Nothing herein shall be construed as a waiver of
any party's right to challenge the validity of such law.
Section 8.12. Interpretation; Absence of Presumption. (a) For the purposes
hereof, (1) words in the singular shall be held to include the plural and vice
versa and words of one gender shall be held to include the other gender as the
context requires, (2) the terms "hereof", "herein", and "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole (including all of the Exhibits hereto) and not to any
particular provision of this Agreement, and Article, Section, paragraph and
Exhibit references are to the Articles, Sections, paragraphs and Exhibits to
this Agreement unless otherwise specified, (3) references to the "transactions
contemplated hereby" or "transactions contemplated by this Agreement" shall
include the transactions contemplated by the Equity Purchase and Plan of
Liquidation, (4) the word "including" and words of similar import when used in
this Agreement shall mean "including without limitation" unless the context
otherwise requires or unless otherwise specified, (5) the word "or" shall not
be exclusive, (6) provisions shall apply, when appropriate, to successive
events and transactions, (7) all references to any period of days shall be
deemed to be to the relevant number of calendar days unless otherwise specified
and (8) references to a "business day" shall be deemed to be references to any
day that is not a Saturday, Sunday or other day on which the commercial banks
in New York City are authorized or required by law to remain closed.
(b) This Agreement shall be construed without regard to any presumption or
rule requiring construction or interpretation against the party drafting or
causing any instrument to be drafted.
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IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each
of the parties as of the day first above written.
SECURITY CAPITAL GROUP INCORPORATED
/s/ C. Ronald Blankenship
By: _________________________________
Name: C. Ronald Blankenship
Title:Vice Chairman and Chief
Operating Officer
SC REALTY INCORPORATED
/s/ Jeffrey A. Klopf
By: _________________________________
Name: Jeffrey A. Klopf
Title:Secretary
SECURITY CAPITAL U.S. REALTY
/s/ C. Kremer
By: _________________________________
Name: C. Kremer
Title:Director
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EXHIBIT A TO
TRANSACTION AGREEMENT
PLAN OF LIQUIDATION
Capitalized terms used and not defined herein have the meanings ascribed to
such terms in the Transaction Agreement, dated as of September 26, 2000, by and
among Security Capital Group Incorporated, SC Realty Incorporated and Security
Capital U.S. Realty (the "Agreement").
LIQUIDATING DISTRIBUTION TO USREALTY STOCKHOLDERS.
1. In the liquidation, each holder of USRealty Shares will receive (a) in
respect of such holder's Cash USRealty Shares, an amount in cash equal to the
number of Cash USRealty Shares held by such holder multiplied by the Per Share
Cash Amount and (b) in respect of such holder's Participating USRealty Shares
(x) a number of full SCGI Shares equal to the product of the number of
Participating USRealty Shares held by such holder multiplied by the Exchange
Ratio, rounded down to the next whole number, and (y) cash in lieu of any
fractional share in an amount as set forth in Paragraph (2) below.
2. No fractional SCGI Shares and no certificates or scrip therefor, or other
evidence of ownership thereof, will be distributed in the liquidation. In lieu
of any such fractional share, each holder of Participating USRealty Shares who
would otherwise have been entitled to a fraction of an SCGI Share will receive
in the liquidation cash in an amount equal to such holder's proportionate
interest in the net proceeds from the sale or sales in the open market by the
Liquidator, on behalf of all such holders, of the aggregate fractional SCGI
Shares that would otherwise have been distributed pursuant to clause (a) of
Paragraph 1 above, but for the rounding down to a whole number of SCGI Shares.
Promptly following the Liquidation Closing, the Liquidator shall determine the
excess of (a) the number of Purchase Price Shares over (b) the total number of
full SCGI Shares to be distributed by the Liquidator to holders of
Participating USRealty Shares (such excess being herein called the "Excess
Shares"), and the Liquidator shall sell the Excess Shares at the prevailing
prices on the NYSE. Such sale of Excess Shares by the Liquidator shall be
executed on the NYSE through one or more member firms of the NYSE and shall be
executed in round lots to the extent practicable. SCGI shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs incurred
in connection with such sale of Excess Shares. As soon as practicable after the
determination of the amount of cash to be paid to holders of Participating
USRealty Shares in lieu of any fractional share interests, the Liquidator shall
distribute in accordance with this Plan of Liquidation such amounts to such
holders of Participating USRealty Shares. For purposes of determining the
number of full SCGI Shares to be distributed to any holder of Participating
USRealty Shares and the fractional share, if any, in lieu of which such holder
shall receive cash, all Participating USRealty Shares held by such holder shall
be aggregated, and in no event shall any such holder receive an amount of cash
in respect of more than one SCGI Share.
3. The Liquidator shall be entitled to deduct and withhold from the cash
otherwise distributed pursuant to this Plan of Liquidation to any holder of
USRealty Shares such amounts as the Liquidator is required to deduct and
withhold with respect to the making of such distribution under the Code or
under any provision of state, local or foreign tax law. To the extent that
amounts are so withheld by the Liquidator, such withheld amounts shall be
treated for all purposes as having been distributed to the holder of the
USRealty Shares in respect of which such deduction and withholding was made by
the Liquidator.
4. The Liquidator and/or USRealty may engage and authorize USRealty's
transfer agent, or such other bank trust company designated by the Liquidator
and reasonably satisfactory to USRealty (the "Distribution Agent"), to assist
in the distribution of the SCGI Shares and cash to holders of USRealty Shares
in accordance with the Agreement and this Plan of Liquidation. Following the
Purchase and Sale Closing, USRealty shall, promptly upon receipt of
instructions from the Liquidator, deposit such SCGI Shares and cash with the
Distribution Agent.
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APPENDIX B
Investment Banking
Corporate and
Institutional
Client Group
World Financial Center
North Tower
New York, New York
10281-1330
212 449 1000 Main
September 26, 2000
Special Committee of the Board of Directors
Security Capital U.S. Realty
25b boulevard Royal
L-2449 Luxembourg
Members of the Special Committee of the Board of Directors:
Security Capital U.S. Realty (the "Company"), Security Capital Group
Incorporated (the "Acquiror") and SC Realty Incorporated, a wholly owned
subsidiary of the Acquiror (the "Acquisition Sub"), propose to enter into a
Transaction Agreement (the "Agreement") pursuant to which the Acquisition Sub
will purchase assets from the Company (the "Purchase") and the Company will be
liquidated (the "Liquidation" and, together with the Purchase, the
"Transactions"). Pursuant to the Transactions, each outstanding share of the
Company's common stock, par value $4 per share (the "Company Shares"), other
than shares held by the Acquiror and its affiliates, will be entitled to
receive 1.15 shares of the Class B common stock of the Acquiror, par value
$.01 per share (the "Acquiror Shares"), or an amount of cash equal to the
market value of 1.15 Acquiror Shares, determined as specified in the Agreement.
You have asked us whether, in our opinion, the consideration to be received
by stockholders of the Company, other than the Acquiror and its affiliates,
pursuant to the Transactions is fair from a financial point of view to the
holders of the Company Shares, other than the Acquiror and its affiliates.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Acquiror that we deemed to be
relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and the Acquiror expected to result from the
Transactions furnished to us by the Company and the Acquiror;
(3) Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning the matters
described in clauses 1 and 2 above, as well as their respective businesses
and prospects before and after giving effect to the Transactions;
(4) Reviewed the market prices and valuation multiples for the Company
Shares and the Acquiror Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and the Acquiror
and compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Transactions with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) Participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their financial and
legal advisors;
(8) Reviewed the potential pro forma impact of the Transactions;
(9) Reviewed the Agreement; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, real estate, market and monetary conditions.
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[LOGO] Merrill Lynch
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Acquiror or any direct or indirect subsidiary
of the Company or the Acquiror or been furnished with any such evaluation or
appraisal. In addition, we have not assumed any obligation to conduct any
physical inspection of the properties or facilities of the Company or the
Acquiror. With respect to the financial forecast information furnished to or
discussed with us by the Company or the Acquiror, we have assumed that they
have been reasonably prepared and reflect the best currently available
estimates and judgment of the Company's or the Acquiror's management as to the
expected future financial performance of the Company or the Acquiror, as the
case may be.
Our opinion is necessarily based upon market, real estate, economic and
other conditions as they exist and can be evaluated on, and on the information
made available to us as of, the date hereof. We have assumed that in the course
of obtaining the necessary regulatory or other consents or approvals
(contractual or otherwise) for the Transactions, no restrictions, including any
divestiture requirements or amendments or modifications, will be imposed that
will have a material adverse effect on the contemplated benefits of the
Transactions.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Special Committee of the Board of Directors to
solicit, nor have we solicited, third-party indications of interest for the
acquisition of all or any part of the Company. In addition, although we have
considered the possible liquidation of the Company, the Acquiror is in a
position to block such liquidation and we have been advised and have assumed
that the Acquiror would not permit the liquidation of all or any portion of the
Company nor would it consider any transaction other than the Transactions.
We are acting as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the Transactions and will receive a
fee from the Company for our services, a significant portion of which is
contingent upon the consummation of the Transactions. In addition, the Company
has agreed to indemnify us for certain liabilities arising out of our
engagement. We have, in the past, provided financial advisory and financing
services to the Company and the Acquiror and/or its affiliates and may continue
to do so and have received, and may receive, fees for the rendering of such
services. In addition, in the ordinary course of our business, we may actively
trade the Company Shares and other securities of the Company, as well as the
Acquiror Shares and other securities of the Acquiror, for our own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
This opinion is solely for the use and benefit of the Board of Directors of
the Company. Our opinion does not address the merits of the underlying decision
by the Company to engage in the Transactions and does not constitute a
recommendation to any shareholder as to how such shareholder should vote on the
proposed Transactions or any matter related thereto. We are not expressing any
opinion herein as to the prices at which the Company Shares or the Acquiror
Shares will trade following the announcement or consummation of the
Transactions.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the consideration to be received by stockholders of the
Company, other than the Acquiror and its affiliates, pursuant to the
Transactions is fair from a financial point of view to the holders of the
Company Shares, other than the Acquiror and its affiliates.
Very truly yours,
/s/ Tjarda Clagett
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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APPENDIX C
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Goldman, Sachs & Co.| 85 Broad Street | New York, New York 10004
Tel:212-902-1000
Goldman
Sachs
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September 26, 2000
Board of Directors
Security Capital Group Incorporated
125 Lincoln Avenue
Santa Fe, NM 87501
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Security Capital Group Incorporated (the "Company") of the
consideration, consisting of the Purchase Price Shares and the Purchase Price
Cash Amount (each as defined below), to be paid by the Company pursuant to the
Transaction Agreement, dated as of September 26, 2000, by and among the
Company, SC Realty Incorporated, an indirect wholly owned subsidiary of the
Company, and Security Capital U.S. Realty ("US Realty") (the "Transaction
Agreement"). Capitalized terms not defined herein shall have the meanings
ascribed to such terms in the Transaction Agreement.
Pursuant to the terms of the Transaction Agreement, in exchange for (i) all
of the outstanding equity interests of Security Capital Holdings S.A.
("Holdings"), except one share of common stock which is indirectly wholly owned
by the Company, and (ii) all of the Advance Agreement Interests and any cash on
hand at US Realty, the Company is to deliver to US Realty (1) a number of
shares (the "Purchase Price Shares") of Class B Common Stock, par value $.0l
per share (the "Company Common Stock"), of the Company equal to the product of
(x) 1.15 multiplied by (y)(A) the number of shares of common stock, par value
$4.00 per share (the "US Realty Common Stock"), of US Realty then outstanding
less (B) the number of shares of US Realty Common Stock in respect of which the
holders thereof duly request to receive the Per Share Cash Amount (as defined
below) (each such share, a "Cash US Realty Share") and (2) an amount of cash
(the "Purchase Price Cash Amount") equal to (x) the Notes Payoff Amount plus
(y) the product of (A) the Per Share Cash Amount multiplied by (B) the number
of Cash US Realty Shares (this product, the "Shares Cash Amount"). The "Per
Share Cash Amount" will equal the product of (x) 1.15 multiplied by (y) the
average of the high and low sales prices of the Company Common Stock during the
regular trading sessions on the New York Stock Exchange for each of the 15 full
trading days immediately preceding (but not including) the date that is five
business days prior to the date of the US Realty Stockholders Meeting.
Following this exchange, US Realty is to distribute the Notes Payoff Amount,
the Purchase Price Shares and the Shares Cash Amount in accordance with the
Transaction Agreement and the Plan of Liquidation. We understand that it is a
condition to the Company's obligation to consummate the transactions
contemplated by the Transaction Agreement that the Shares Cash Amount not
exceed $200 million. We also understand that the Company holds approximately
40.6% of the outstanding shares of US Realty Common Stock and, pursuant to an
advisory agreement, a wholly owned subsidiary of the Company manages US Realty.
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Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having provided certain investment banking services
to the Company from time to time, including having acted as (i) co-manager for
the Company's initial public offering of 22,569,710 shares of Company Common
Stock in September 1997, (ii) co-manager of the Company's offering in June 1998
of 6.95% Notes due 2005 in the aggregate principal amount of $200 million,
7.15% Notes due 2007 in the aggregate principal amount of $100 million and
6.70% Notes due 2028 in the aggregate principal amount of $200 million, (iii) a
named dealer with respect to the Company's medium term note program in the
aggregate principal amount of $200 million and (iv) financial advisor to the
Company in connection with its merger with an affiliate in August 1994; and
having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to, the Transaction
Agreement. We also have provided certain investment banking services to US
Realty from time to time, including having acted as (i) lead manager of US
Realty's initial public offering of 22,244,420 shares of US Realty Common Stock
in June 1996, (ii) lead manager of US Realty's offering of 16,233,800 shares of
US Realty Common Stock in November 1996, (iii) joint lead manager of US
Realty's offering of 11,808,367 shares of US Realty Common Stock in December
1997 and (iv) lead manager of US Realty's offering of 2.0% Notes due May 2003
in the aggregate face amount of $450 million in May 1998. In addition, the
Company and an affiliate of Goldman, Sachs & Co. invested in a joint venture
entity formed for the purposes of acquiring and owning hotel properties. The
Company sold its investment back to that entity in June 1999. Goldman, Sachs
& Co. provides a full range of financial advisory and securities services and,
in the course of its normal trading activities, may from time to time effect
transactions and hold positions in securities, including derivative securities,
of the Company or US Realty for its own account and for the accounts of
customers.
In connection with this opinion, we have reviewed, among other things, the
Transaction Agreement; Annual Reports to Stockholders and Annual Reports on
Form 10-K of the Company for the three years ended December 31, 1999; Annual
Reports to Shareholders of US Realty for the three years ended December 31,
1999 and the Annual Report on Form 20-F of US Realty for the year ended
December 31, 1999; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of the Company; certain interim reports to shareholders
and Reports on Form 6-K of US Realty; certain other communications from the
Company and US Realty to their stockholders and shareholders, respectively; and
certain internal financial analyses and forecasts for the Company and US Realty
prepared by the Company's management, including certain forecasts prepared by
the Company's management on a pro forma basis that reflect certain cost
savings, operating synergies and other transaction-related adjustments
projected by the management of the Company to result from the transactions
contemplated by the Transaction Agreement (the "Pro Forma Forecasts"). We also
have held discussions with members of the senior management of the Company
regarding their assessment of the strategic rationale for, and the potential
benefits of, the transactions contemplated by the Transaction Agreement and the
past and current business operations, financial condition and future prospects
of the Company and US Realty. In addition, we have reviewed the reported price
and trading activity for the Company's equity securities, the US Realty Common
Stock and the US Realty American Depositary Shares, compared certain financial
and stock market information for the Company and US Realty with similar
information for certain other companies the securities of which are publicly
traded, reviewed the financial terms of certain recent business combinations in
the real estate industry specifically and in other industries generally and
performed such other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information discussed with or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. In that
regard, we have assumed with your consent that the financial forecasts prepared
by management of the Company have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the Company,
and that the Pro Forma Forecasts will be realized in the amounts and time
periods contemplated thereby. In addition, we have not made an independent
evaluation or appraisal of the assets and liabilities of the Company or US
Realty or any of their respective subsidiaries and we have not been
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furnished with any such evaluation or appraisal. We also have assumed that all
material governmental, regulatory or other consents and approvals necessary for
the consummation of the transactions contemplated by the Transaction Agreement
will be obtained without any adverse effect on the Company or US Realty or on
the contemplated benefits of the transactions contemplated by the Transaction
Agreement. With your consent, we have relied upon the advice the Company has
received from its legal counsel and tax advisors as to all legal and tax
matters in connection with the transactions contemplated by the Transaction
Agreement. Our advisory services and the opinion expressed herein are provided
for the information and assistance of the Board of Directors of the Company in
connection with its consideration of the transactions contemplated by the
Transaction Agreement and our opinion does not constitute a recommendation as
to how any holder of voting stock of the Company should vote with respect to
such transactions.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the
consideration (consisting of the Purchase Price Shares and Purchase Price Cash
Amount) to be paid by the Company pursuant to the Transaction Agreement is fair
from a financial point of view to the Company.
Very truly yours,
<TABLE>
<S> <C> <C> <C>
/s/ Goldman, Sachs & Co.
_________________________
GOLDMAN, SACHS & CO.
</TABLE>
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