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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number 1-13355
SECURITY CAPITAL GROUP INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Maryland 36-3692698
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
125 Lincoln Avenue
Santa Fe, New Mexico 87501
(Address of Principal Executive Offices and Zip Code)
(505) 982-9292
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
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<S> <C>
Class A Common Stock, par value $.01 per share New York Stock Exchange
Class B Common Stock, par value $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing price of the registrant's Class A and Class B Common
Stock on March 17, 2000, the aggregate market value of the voting common
equity held by non-affiliates of the registrant was $1,209,797,547.
At March 17, 2000, there were 1,189,864 shares of the registrant's Class A
Common Stock outstanding and 50,612,427 shares of the registrant's Class B
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2000 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
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TABLE OF CONTENTS
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<CAPTION>
Item Description Page
---- ----------- ----
PART I
<C> <S> <C>
1. Business........................................................... 1
2. Properties......................................................... 12
3. Legal Proceedings.................................................. 14
4. Submission of Matters to a Vote of Security Holders................ 14
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 14
6. Selected Financial Data............................................ 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 16
7A. Quantitative and Qualitative Disclosure About Market Risk.......... 28
8. Financial Statements and Supplementary Data........................ 28
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 29
PART III
10. Directors and Executive Officers of the Registrant................. 29
11. Executive Compensation............................................. 29
12. Security Ownership of Certain Beneficial Owners and Management..... 29
13. Certain Relationships and Related Transactions..................... 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 29
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Item 1. Business
Overview
Security Capital Group Incorporated 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.
Operating Structure
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<C> <S>
. Archstone Communities Trust Capital Markets Group
. BelmontCorp Global Capital Management Group
. Homestead Village Incorporated Mutual Funds/Separate Accounts
. ProLogis Trust Managed Entities
s Access Self-Storage S.A. Shared Services
s Akeler S.A. Corporate Services Group
s Bernheim-Comofi S.A. Real Estate Research Group
s Interparking S.A.
s City & West End Properties S.A
s London and Henley S.A.
. CarrAmerica Realty Corporation
. City Center Retail Trust
. CWS Communities Trust
. Regency Realty Corporation
. Storage USA, Inc.
. Urban Growth Property Trust
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. Directly owned by Security Capital
s Indirectly owned through Security Capital European Realty
. Indirectly owned through Security Capital U.S. Realty
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The Capital Division
The Capital Division allocates capital to real estate operating companies
that are positioned to generate internal earnings growth through superior
operations as well as property development and significant customer-service
income. Its strategy is to focus on high-performance companies that can create
brand value and ultimately achieve one of the top two market positions 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
December 31, 1999, 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 $23.8 billion as of December 31, 1999.
Capital Division strategic investments include the following:
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<CAPTION>
Direct/Indirect Direct/Indirect Equity Market Total Market
Common Share Full Capitalization(2) Capitalization(2)
Investees Ownership Ownership(1) (in millions) (in millions)
--------- --------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Archstone Communities
Trust.................. 39.2 % 36.6 % $3,175 $5,640
BelmontCorp............. 100.0 % 100.0 % 78 94
Homestead Village
Incorporated(3)........ 87.0 % 74.0 % 255 743
ProLogis Trust.......... 30.8 % 27.8 % 3,825 6,380
Security Capital
European Realty(4)..... 34.6 % 34.6 % 1,500 1,519
Access Self-Storage
S.A.(5)(6)........... 97.4 % 98.1 % 204 283
Akeler S.A./Bernheim-
Comofi S.A.(5)....... (7) (7) 509 918
Interparking S.A.(5).. 73.6 % 73.6 % (8) (8)
City & West End
Properties S.A.(5)... 99.3 % 99.4 % 242 412
London and Henley
S.A.(5).............. 95.6 % 97.2 % 164 284
Security Capital U.S.
Realty(4).............. 39.6 % 34.3 % 1,089 1,714
CarrAmerica Realty
Corporation(5)....... 42.8 % 38.4 % 1,981 3,584
City Center Retail
Trust(5)............. 99.9 % 99.9 % 304 406
CWS Communities
Trust(5)............. 94.2 % 77.9 % 311 389
Regency Realty
Corporation(5)....... 60.2 % 55.0 % 1,500 2,512
Storage USA, Inc.(5).. 41.8 % 37.0 % 1,019 1,837
Urban Growth Property
Trust(5)............. 98.8 % 98.8 % 191 309
</TABLE>
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(1) Full ownership assumes contractual equity commitments by investors have
been funded, convertible instruments have been converted into common
shares, and options and warrants for common shares have been exercised.
(2) Equity market capitalization assumes full ownership excluding conversions
or exercises with a strike price more than the December 31, 1999 market
value. The resulting number of common shares is multiplied by the closing
price of the common shares on such date for those companies listed on an
exchange or, in the case of private entities, the last private equity
offering price. Total market capitalization is equity market
capitalization and debt that has not been converted.
(3) Ownership of Homestead does not include any indirect ownership Security
Capital may obtain in Homestead upon conversion of the convertible
mortgage notes held by Archstone. On March 23, 2000, Security Capital
announced a proposal to acquire all of the outstanding shares of common
stock it does not already own. See "Funding Commitments and Liquidity".
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(4) The European management and Boards of Directors of SC-European Realty and
SC-U.S. Realty receive operating and investment advice from the Global
Capital Management Group of the Financial Services Division.
(5) This company is an investee of SC-European Realty or SC-U.S. Realty
through a subsidiary and is not directly owned by Security Capital. The
ownership percentage reflected is that of SC-European Realty or SC-U.S.
Realty.
(6) SC-European Realty's storage interests are operated under two groups,
Access Self-Storage in Europe and Millers Storage in Australia.
(7) SC-European Realty's common share ownership of Akeler is 97.0% and its
full ownership is 97.7%. Common share and full ownership of Bernheim-
Comofi is 100%.
(8) Interparking S.A. is owned 73.6% by Bernheim-Comofi, which in turn is
owned 100% by SC-European Realty. Interparking S.A.'s equity and total
market capitalization is included in the market capitalization of
Bernheim-Comofi.
. Archstone Communities Trust (NYSE: ASN). Archstone focuses on the
development, acquisition, redevelopment, operation and long-term ownership
of apartment communities in growth markets with high barriers to entry
across the United States. As of December 31, 1999, Archstone had 267
apartment communities representing 80,556 units, including 7,830 units under
construction and an estimated 4,471 units in planning, owned or under
control. During 1999, Archstone disposed of $589 million in non-core assets,
using the proceeds to expand its presence into key Northeast and Midwest
markets, as well as to buy back $121.6 million of its shares under a $150
million share repurchase program.
. BelmontCorp. Belmont is a private company that seeks to become a preeminent
developer, owner and operator of moderately priced senior assisted living
facilities in the United States. Belmont differentiates itself from
competitors through its purpose-built facility design, moderate-price
positioning and proprietary operating system. Belmont is creating its
communities in infill locations in prime suburban areas of large
metropolitan markets that have excellent senior demographics and high
barriers to entry. As of March 2000, Belmont had four properties in
operation, four properties under development and seven properties in
planning.
. Homestead Village Incorporated (NYSE: HSD). Homestead operates moderately
priced, extended-stay lodging hotels, providing a quality lodging experience
for the growing ranks of business travelers staying four nights or more.
Homestead targets corporate customers with multi-location extended stay
needs. Homestead's facilities generally are adjacent to major business
centers and close to retail areas for guest convenience. As of December 31,
1999, Homestead had 136 Homestead Village properties with 18,176 rooms in
key business destinations across the United States.
. ProLogis Trust (NYSE: PLD). ProLogis is a leading U.S.-based global provider
of distribution services and facilities. ProLogis' major activities include
the acquisition, development, marketing, leasing, operation and long-term
management of distribution, light manufacturing and temperature-controlled
facilities, located primarily in full-service, master-planned business
parks. As of December 31, 1999, ProLogis, including its unconsolidated
subsidiaries, had 1,575 distribution facilities owned and operating
throughout North America and Europe totaling 166.8 million square feet. In
1999, ProLogis gained leading positions in the largest U.S. logistics
markets through its merger with Meridian Industrial Trust and expanded its
corporate distribution facilities services business with additional lease
agreements both in the U.S. and in Europe. ProLogis also formed a $1.3
billion European Properties Fund to access third-party equity capital for
expansion in Europe.
Security Capital European Realty (SC-European Realty). SC-European Realty is a
research driven real estate company that owns and provides direction for
investments in start-up or existing real estate operating companies. Each
strategic investment of SC-European Realty has an objective to become a leader
in its respective product niche. As of December 31, 1999, SC-European Realty
had strategic investments within five lines of business: self-storage, pan-
European office, London West End office, parking and rental residential. SC-
European Realty's investment focus is predominantly in Europe.
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SC-European Realty's Strategic Ownership Positions:
. Access Self-Storage S.A. Access is a leading private operator and
developer of self-storage facilities located in the U.K., France, and
Germany, markets where self-storage is a new and growing business. In
addition, SC-European Realty also owns Millers Storage S.A., the leading
self-storage company in Australia.
. Akeler S.A./Bernheim-Comofi S.A. SC-European Realty's suburban office
interests are undertaken through two private companies, Akeler and
Bernheim-Comofi. Both Akeler and Bernheim-Comofi use customer-driven
development strategies. Akeler owns, operates and develops suburban
office buildings and office parks primarily in the U.K., while Bernheim-
Comofi owns, operates and develops suburban office and office parks
primarily in Brussels. Together they are the foundation of a pan-European
office presence. At December 31, 1999, the two companies had a total of
16 operating properties with approximately 750,000 square feet of space
and another 15 office properties under development.
. City & West End Properties S.A. City & West End is a private owner,
operator and redeveloper of office space in the West End of London, where
demand for space continues to grow while development restrictions limit
new supply. At December 31, 1999, City & West End owned eight operating
properties with approximately 636,400 square feet of space, and had
another three office properties with approximately 142,000 square feet
under development.
. Interparking S.A. Interparking S.A. is a leading private owner/operator
of off-street public parking facilities in continental Europe. As of
December 31, 1999, Interparking S.A. operated 242 facilities with 115,442
parking spaces in 70 cities across six countries.
. London and Henley S.A. London and Henley is a leading private U.K.
apartment owner, operator and developer. As of December 31, 1999, London
and Henley's portfolio of apartment properties included 94 operating
properties and 10 properties under development.
Security Capital U.S. Realty (SC-U.S. Realty) (NYSE: RTY). SC-U.S. Realty is a
European-based real estate company that holds, through a wholly owned
subsidiary, significant strategic positions in leading real estate operating
companies based in the United States. Through its ownership role, board
representation and ongoing consultation, SC-U.S. Realty seeks to influence the
business strategies and operations of the companies in which it invests. SC-
U.S. Realty's strategic ownership positions as of December 31, 1999, include
ownership positions in six public and private U.S. real estate operating
companies.
SC-U.S. Realty's Strategic Ownership Positions:
. CarrAmerica Realty Corporation (NYSE: CRE). CarrAmerica is a national
company that owns, develops and operates office properties in key growth
markets throughout the United States. CarrAmerica offers corporate
customers exceptional customer service on a national basis. At December
31, 1999, CarrAmerica owned 271 properties (approximately 22.6 million
square feet of space) with another 22 office properties under
construction.
. City Center Retail Trust. City Center Retail is a private company
established to provide quality customer service and premier urban-infill
locations to top U.S. and international retailers. City Center Retail
acquires, develops and owns retail properties in city centers across the
United States.
. CWS Communities Trust. CWS Communities is one of the leading private
owners, operators and developers of manufactured home communities in
North America with properties in both the United States and Canada. At
December 31, 1999, CWS Communities owned and operated or managed, or had
under contract to acquire or develop, a total of 40 communities in eight
states and Canada with a total of 14,887 homesites.
. Regency Realty Corporation (NYSE: REG). Regency is a leading national
owner and operator of grocery-anchored, neighborhood infill shopping
centers in selected growth markets throughout the United States. In
February 1999, Regency completed its merger with Pacific Retail Trust, a
Dallas-based private real estate investment trust 73.4% owned by SC-U.S.
Realty that had been focused on similar properties in the western United
States.
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. Storage USA, Inc. (NYSE: SUS). Storage USA is a national company that
acquires, develops, constructs, franchises, owns and operates self-
storage facilities in the United States. Storage USA's strategy is to
maximize rents, occupancy and profitability at each of its facilities
while increasing its market share in the highly fragmented self-storage
business. In 1999, Storage USA formed $400 million in joint ventures with
GE Capital Corporation to acquire and develop self-storage facilities to
continue to expand its national presence and capitalize on growth
opportunities in the self-storage industry.
. Urban Growth Property Trust. Urban Growth Property is a private company
focused on acquiring, developing and owning strategically located income-
producing parking assets and land (initially used for parking or car
parks) in key urban infill locations in selected target markets
throughout the United States. At December 31, 1999, Urban Growth Property
owned 29 properties with a total of 20,303 parking spaces representing a
total expected investment of $278 million.
The Financial Services Division
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.
In addition, Security Capital also provides certain 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.
Security Capital Global Capital Management Group
The Global Capital Management Group manages or advises capital invested in
publicly traded and private real estate companies and securities for
investment companies, institutional separate accounts and other Security
Capital affiliates. The Global Capital Management Group invests in securities
that it believes should outperform the market due to factors such as an
emerging new strategy or opportunity, imminent changes in supply and demand
that would affect asset performance, market inefficiencies that result in
mispriced securities, or consolidation opportunities. The Global Capital
Management Group, through its clients, will also commit capital to private
start-up companies that have significant prospects for sustained growth, that
can utilize both strategic and operating consultation and capital, and that
have the prospect of becoming public companies. At December 31, 1999, the
Global Capital Management Group had total assets under management of $5.1
billion.
Subsidiaries of the Global Capital Management Group provide investment
research and advice to SC-U.S. Realty and SC-European Realty. The Global
Capital Management Group also manages Security Capital Preferred Growth
Incorporated, a private real estate company investing in the convertible
securities of real estate companies on an intermediate-term basis. It also
advises third party separate accounts and Security Capital Real Estate Mutual
Funds Incorporated, an open-end investment management company with two mutual
funds, Security Capital European Real Estate Shares (NASDAQ: SEUIX) and
Security Capital U.S. Real Estate Shares (NASDAQ: SUSIX). The Global Capital
Management Group's clients will generally take ownership positions not
exceeding 4.99% of the equity securities of its investees, except with respect
to SC-European Realty, Security Capital Preferred Growth Incorporated and SC-
U.S. Realty, in which they typically take larger ownership positions.
Security Capital Markets Group Incorporated
The Capital Markets Group is a registered broker-dealer that provides
investment banking and brokerage services to private and public companies
within the Security Capital organization and to institutional clients.
Services provided include acting as placement agent for private and public
offerings of equity securities of such
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affiliates, providing financial advisory services and arranging block trades
of publicly traded securities. In providing these services, the Capital
Markets Group maintains strong relationships with institutional investors that
have invested in Security Capital and its public and private affiliates.
In 1998, Security Capital Markets Group Limited, which operates from
London, was formed to provide similar services to Security Capital affiliates
in the U.K. and Europe.
Corporate Services Group
The Corporate Services Group provides information systems and related
processing, administrative and accounting services to affiliates for
negotiated fees under administrative services agreements. As a result,
Security Capital and its operating affiliates realize the benefits of
economies of scale by consolidating several high-volume processing activities
in a centralized operations center. In addition, operating affiliates in a
start-up mode have access to proven and efficient critical services.
Real Estate Research Group
The Real Estate Research Group provides the Global Capital Management
Group, the Capital Division and affiliates with proprietary economic and real
estate research that assists them in their capital deployment decisions.
Economic and demographic analyses are made and translated into an overall
evaluation of the demand prospects for various property types in each market.
This research provides a point-of-view on both short and long-term supply and
demand fundamentals.
Strategy
Security Capital plans to focus its investments only in companies that
produce internal earnings growth through property development activities and
the generation of substantial third-party service income. These companies must
also be able to create measurable brand value and ultimately achieve one of
the top two market positions in their respective niches.
To achieve these objectives, Security Capital plans to work with the
management teams of its affiliates that do not meet these criteria to
reposition the company and carefully maximize value for shareholders. The
objective of these efforts is to evolve to a simplified structure and
eliminate the gap between the public market price of Security Capital's stock
and private market valuation of Security Capital's underlying assets.
Significant Developments During 1999
In 1999, management outlined a revised investment and operating strategy to
unlock shareholder value. Progress was made on key initiatives of that
strategy:
Portfolio Optimization: Sale of Strategic Hotel Capital Incorporated
In September 1999, Security Capital completed the sale of its entire
ownership position back to Strategic Hotel, realizing net proceeds of $329
million. A loss on the sale of Strategic Hotel of $55.2 million was recorded
as of June 28, 1999. Security Capital used approximately $259 million of the
$329 million proceeds from the sale of Strategic Hotel to pay down its line of
credit to zero. The remaining proceeds were used to repurchase shares through
its share repurchase program.
Share Repurchase Program
On August 12, 1999, Security Capital announced an initial $100 million
share repurchase program. This program was completed in December 1999, and an
additional $100 million program was announced on December 8, 1999. Under the
share repurchase programs, as of March 1, 2000, Security Capital repurchased
12,603,997 Class B common stock equivalents or approximately 10.3% of shares
outstanding on August 12, 1999 (comprised of 86,113 Class A Shares and
8,298,347 Class B Shares). In addition, as of March 1, 2000, Security
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Capital repurchased $37.8 million principal amount of 6.5% Convertible
Subordinated Debentures due 2016, which were convertible into 1,635,757 Class
B Shares, at a gain of $10.9 million.
Operating Expense Reduction, Maintenance of Strong Balance Sheet
Through the implementation of new technology and a disciplined focus on
margin improvements, Security Capital reduced operating expenses significantly
during 1999. Excluding severance and other one-time charges, annualized
operating expenses decreased to $84.7 million at the end of 1999, a reduction
of $32 million from levels anticipated in 1998 for 1999.
Operating Profitability: Restructuring of Homestead
A restructuring program of Homestead, including changes in management, was
initiated in May and resulted in substantial improvements in operating
performance and financial strength. Three primary objectives were established:
reduction of debt (through land sales), reduction in operating costs and
improving property level operating margins. Consistent with these objectives,
Homestead curtailed the development activity that was in planning stages at
the time of its change in management. As of December 31, 1999, Homestead had
sold $72.6 million of the original $95.5 million of land which was to be
developed. Total debt was decreased from $700.4 million at year-end 1998 to
$487.6 million at year-end 1999, and annualized overhead costs were decreased
from $48.6 million in the first quarter of 1999 to $25.0 million in the first
quarter of 2000. Weekly revenue per available room increased 15.6% to $245 in
1999, compared to $212 in 1998.
SC-U.S. Realty's Sale of SOI Portfolio, Share Repurchase Program
In May, SC-U.S. Realty's Board approved a $100 million share repurchase
program, which was subsequently expanded to $200 million. In December, SC-U.S.
Realty completed the sale of its special opportunity investment (SOI)
portfolio, allocating proceeds from the sale for additional share repurchases
under the existing program, as well as to reduce the balance outstanding on
its line of credit. As of December 31, 1999, SC-U.S. Realty had repurchased
9,861,435 shares for an aggregate cost of $184.2 million, representing
approximately 11.4% of SC-U.S. Realty's shares outstanding when the program
was initiated. The share repurchases have increased Security Capital's
ownership in SC-U.S. Realty to 39.6% at December 31, 1999, from 35.0% a year
earlier.
As of December 31, 1999, SC-U.S. Realty owned 52,431 Class A Shares of
Security Capital's common stock, 1,964,286 Class B Shares of Security Capital,
and $55 million of Security Capital's 6.5% Convertible Subordinated Debentures
due 2016. On February 2, 2000, SC-U.S. Realty announced the decision of its
Board of Directors to sell its holdings in Security Capital. As of March 14,
2000, SC-U.S. Realty had sold all its holdings in Security Capital.
Agreements with Operating Companies
Security Capital had the following agreements with its affiliates.
Investor Agreements
Security Capital has entered into investor agreements with several of its
direct investees, including Archstone, Belmont, Homestead and ProLogis. The
investor agreements provide Security Capital with rights regarding board
representation and major transactions. The scope of Security Capital's rights
depends on its percentage ownership of the common stock of the investee.
Generally, if Security Capital owns at least 10% of the outstanding common
stock of the investee, Security Capital has the right to approve any increase
in the size of the board of directors or trustees and to nominate a
proportionate number of directors or trustees of the investee. However, with
investees with publicly traded securities, the number of trustees or directors
Security Capital may nominate is limited to less than a majority of the board.
The investor agreements also provide Security Capital with the right of prior
approval or consultation on major matters and actions, including the issuance
of securities and the incurrence of indebtedness, and provide Security Capital
with registration rights
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regarding the common stock of such investee held by Security Capital. The
investor agreements do not limit Security Capital's ownership in the investee
other than in Archstone, in which Security Capital is limited to no more than
49% ownership.
Administrative Services Agreements
SCGroup Incorporated, a wholly owned subsidiary of Security Capital,
provides a variety of administrative services, including cash management,
human resource, information systems, payroll, accounts payable processing,
risk management and tax administration to subsidiaries and other affiliates of
Security Capital under administrative services agreements. In 1999, SCGroup
received $17.7 million in fees for such services. The administrative services
agreements generally have effective terms of one year. No assurances can be
given that all or any of these administrative services agreements will
continue to be renewed. There is a trend to return certain administrative
activities to customers as new technological infrastructure is completed.
Advisory Agreements
The Global Capital Management Group provides SC-U.S. Realty with advice
with respect to strategy, investments, financing, administrative and other
operating matters. Fees for such advice are based upon the value of SC-U.S.
Realty's investments. During 1999, such fees totaled $32.5 million. The
advisory agreement has a two-year term ending June 2001, which renews
automatically for an additional two year term unless the agreement is
terminated by SC-U.S. Realty.
The Global Capital Management Group also provides SC-European Realty with
advice with respect to strategy, investments, financing, administrative and
other matters. Fees for such services are based upon the value of SC-European
Realty's investments. During 1999, such fees totaled $14.6 million. The
advisory agreement has a five-year term ending November 2002, which renews
automatically for an additional two year term unless the agreement is
terminated by SC-European Realty.
Employees
As of December 31, 1999, Security Capital employed 392 persons at the
corporate level, and its affiliated operating companies employed 17,089
persons. None of Security Capital's employees are covered by collective
bargaining agreements. Security Capital believes its relations with its
employees are good.
Competition
There are numerous developers, operators, real estate companies and other
owners of real estate that compete with Security Capital's operating
affiliates in seeking land for development to operate their respective
businesses. Security Capital's operating companies compete on a global,
regional and national basis with no individual market material to Security
Capital as a whole. All of the properties of Security Capital's operating
companies are located in developed areas that include various competitors. The
number of competitive properties in a particular market could have a material
adverse effect on Security Capital's operating companies and on the rents or
guest rates charged by them. Security Capital's operating companies may be
competing with others that have greater resources and whose officers,
directors and trustees have more experience than the officers, directors and
trustees of Security Capital's operating companies.
The global real estate securities management business of Security Capital
competes for capital and investment opportunities with a large number of
investment management firms as well as certain insurance companies, commercial
banks and other financial institutions, some of which may have greater access
to capital and other resources and which may offer a wider range of services
than Security Capital. Real estate securities investment management firms can
be formed with relatively small amounts of capital and depend most
significantly on the continued involvement of their professional staff.
Security Capital believes that competition among real estate securities
investment management firms is affected principally by investment performance,
development and implementation of investment strategies, information
technologies and databases and client service performance.
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The mutual fund industry is highly competitive. SC-European Real Estate
Shares and SC-US Real Estate Shares are in direct competition with other real
estate mutual funds sold directly by investment management firms, broker-
dealers, as well as other investment alternatives offered by banks and other
financial institutions. There are over 60 mutual funds which focus on publicly
traded real estate company securities. Many of these mutual funds have longer
histories and may have greater access to capital through more established
distribution channels. Competition in the sale of mutual funds is affected by
a number of factors including industry/sector returns, performance,
advertising and sales promotion efforts, the level of fees and distribution
channels available.
The Capital Markets Group competes with other investment banking firms for
private placement and financial advisory services to be provided to affiliates
of Security Capital. Competition in the investment banking area is affected by
a number of factors, including the level of fees, services provided and
placement capabilities.
Trademarks and Service Marks
Security Capital uses a number of trademarks, including "Security Capital"
and variants thereof. All trademarks, service marks and copyright
registrations associated with the business of Security Capital are registered
in the name of Security Capital and, if not maintained, expire over various
periods of time beginning in 2005. Security Capital intends to defend
vigorously against infringement of its trademarks, service marks and
copyrights.
Government Regulation
The real estate operating companies in which Security Capital has an
investment are subject to governmental regulations. Government authorities at
the federal, state and local levels are actively involved in the issuance and
enforcement of regulations relating to land use and zoning restrictions.
Regulations may be issued which could have the effect of restricting or
curtailing certain uses of existing structures or requiring that the
structures be renovated or altered in some fashion. The issuance of any such
regulations could have the effect of increasing the expenses and lowering the
profitability of any of the properties affected. Security Capital does not
believe that any of these regulations will have a material impact on it or the
operating companies in which it has an investment.
A number of states regulate the licensing of hotels by requiring
registration, disclosure statements and compliance with specific standards of
conduct. Homestead believes that each of its properties has the necessary
permits and approvals to operate its respective business, and Homestead
intends to continue to obtain such permits and approvals for its new
properties.
Under the Americans with Disabilities Act (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Although Security Capital's operating
companies have attempted to satisfy ADA requirements in the designs for their
properties to the extent ADA is applicable to their property type, no
assurance can be given that a material ADA claim will not be asserted against
any of Security Capital's operating companies, which could result in a
judicial order requiring compliance and the expenditure of substantial sums to
achieve compliance, an imposition of fines or an award of damages to private
litigants.
Most states require a license to operate an assisted living community.
Regulations vary across state lines and affect the physical and operating
characteristics of a community. Life safety is of primary concern to
regulators, given the age and frailty of the senior assisted living
population. Belmont believes that its communities meet the standards set by
regulators in each of the markets it has entered. Certain states require that
an assisted living provider obtain a Certificate of Need prior to applying for
a building permit or operating license. While Belmont to date has been
successful with this requirement in all the states where it has sought to do
business, the process is arduous and may impede entry into some markets in the
future.
The Capital Markets Group is registered as a broker-dealer with the
Securities and Exchange Commission ("SEC"), all states, the District of
Columbia, and is a member of the National Association of Securities Dealers,
9
<PAGE>
Inc. ("NASD"). All of its activities as a broker-dealer are subject to
extensive federal, state and NASD regulation and oversight. Capital Markets
Limited is a broker-dealer member firm of the Securities and Futures Authority
in the U.K.
The Global Capital Management Group is registered as an investment adviser
with the SEC and its advisory activities are subject to extensive federal
regulation.
Environmental Matters
The operating companies in which Security Capital has an investment are
subject to environmental and health and safety laws and regulations related to
the ownership, operation, development and acquisition of real estate. Under
those laws and regulations, the operating companies may be liable for, among
other things, the costs of removal or remediation of certain hazardous
substances, including asbestos-related liability. Those laws and regulations
often impose liability without regard to fault.
As part of their due diligence procedures, the operating companies in which
Security Capital has an investment have conducted Phase I environmental
assessments on each of their properties prior to their acquisition; however,
no assurance can be given that those assessments have revealed all potential
environmental liabilities. Security Capital is not aware of any environmental
condition on any of the properties of the companies in which it has an
investment which is likely to have a material adverse effect on its
consolidated financial position or results of operations; however, no
assurance can be given that any such condition does not exist or may not arise
in the future.
Senior Executive Officers of Security Capital
The following are senior executive officers of Security Capital:
Thomas B. Allin--50--Managing Director of the Capital Division since
December 1998, where he provides operating oversight for companies in which
Security Capital has direct or indirect ownership positions. Mr. Allin
currently has operating responsibility for SC-European Realty. From April 1998
to December 1998, Mr. Allin was President and Chief Operating Officer of
Strategic Hotel. From April 1996 to December 1997, Mr. Allin was President and
Chief Executive Officer of Gordon Biersch, a beer brewery and restaurant
business. From 1973 to April 1996, Mr. Allin was with McDonald's Corp., most
recently as Senior Vice President and Zone Manager from February 1993 to April
1996. Mr. Allin is a Director of Access, Interparking S.A., Regency and SC-
European Realty and is a Trustee of Urban Growth Property.
C. Ronald Blankenship--50--Director, Vice Chairman and Chief Operating
Officer since May 1998. Previously, Mr. Blankenship was Managing Director of
Security Capital since 1991. Prior to June 1997 he was the Chairman of
Archstone. Mr. Blankenship is a Trustee of Archstone and City Center Retail,
and a Director of Belmont, Storage USA and CarrAmerica, and Interim Chairman,
Chief Executive Officer and a Director of Homestead since May 1999.
Jeffrey A. Cozad--35--Managing Director and a Director of SC-U.S. Realty
since June 1996, where he is responsible for financial and legal operations,
capital markets and investor relations. Previously, he was a Senior Vice
President of the Capital Markets Group in its New York office, where he was
head of capital markets activities and where he provided capital markets
services for affiliates of Security Capital from 1991 to 1996. Mr. Cozad has
been a Director of Regency since February 1999.
C. Robert Heaton--54--Managing Director since December 1997, where he
oversees human capital for Security Capital and companies in which Security
Capital has direct and indirect ownership positions. From March 1996 to
December 1997, Mr. Heaton was Senior Vice President of Human Capital for
Security Capital. From March 1994 to February 1996, Mr. Heaton was Senior Vice
President with Right Management Consultants, Inc., a worldwide career
management and human resources consulting firm.
Thomas N. Kendall--44--Managing Director of SCGroup since December 1999,
where he is responsible for Shared Services operations. Mr. Kendall was Senior
Vice President and Chief Information Officer for
10
<PAGE>
SCGroup from March 1998 to December 1999. Prior thereto, from May 1994 to
March 1998, Mr. Kendall was with Andersen Consulting, where he was Senior
Manager from April 1995 to March 1998.
Jeffrey A. Klopf--51--Senior Vice President and Secretary of Security
Capital since January 1996; from January 1988 to December 1995, a partner with
Mayer, Brown & Platt, where he practiced corporate and securities law. Mr.
Klopf provides legal services to Security Capital and its directly-owned
operating companies.
Anthony R. Manno, Jr--48--Managing Director of the Global Capital
Management Group since January 1995, where he is responsible for investment
strategy and execution. Mr. Manno was a member of Security Capital's
Investment Committee from March 1994 to June 1996. Prior thereto, Mr. Manno
was a Managing Director of LaSalle Partners Limited from March 1980 to March
1994.
Caroline S. McBride--46--Managing Director of the Capital Division since
March 1997, where she provides operating oversight for companies in which
Security Capital has direct or indirect ownership positions. From June 1996 to
July 1997, Mrs. McBride was Managing Director of the Global Capital Management
Group. Prior thereto, Mrs. McBride was with IBM from July 1978 to May 1996.
Mrs. McBride is a Director of the Real Estate Research Institute, CarrAmerica,
Storage USA, Belmont and a Trustee of CWS Communities.
A. Richard Moore--54--Managing Director of the Capital Division since May
1998, where he provides operating oversight for companies in which Security
Capital has direct or indirect ownership positions. Mr. Moore has been Interim
Chief Financial Officer for Homestead since May 1999. From March 1990 to May
1998, Mr. Moore was a Vice President with Goldman, Sachs & Co., where his most
recent position was in the Equity Research Department. Mr. Moore is also a
Managing Director of SC-European Realty Management Ltd. and SC (UK) Management
Ltd.
Constance B. Moore--44--Managing Director of the Capital Division since
January 1999, where she provides operating oversight for companies in which
Security Capital has direct or indirect ownership positions. From July 1998 to
December 1998, Ms. Moore was Co-Chairman, Chief Operating Officer and Trustee
of Archstone. From January 1996 to July 1998, Ms. Moore was Co-Chairman, Chief
Operating Officer and Director of Security Capital Atlantic Incorporated
(which merged into Archstone), and from May 1994 to December 1995, she was
Managing Director of Archstone. From March 1993 to April 1994, Ms. Moore was
Senior Vice President of Security Capital. Ms. Moore is a Trustee of
Archstone, City Center Retail and CWS Communities, and a Director of Belmont.
Jeremy J. Plummer--40--Managing Director of SC-European Realty since
October 1997, where he is responsible for strategic investments in real estate
companies in Europe. Prior thereto, from October 1993 to October 1997, he was
Head of International Real Estate for SPP Investment Management; from 1992 to
October 1993, Mr. Plummer was Chief Executive Officer of London & Edinburgh
Trust Ventures.
William D. Sanders--58--Founder, Chairman and Chief Executive Officer of
Security Capital. Mr. Sanders currently serves as a Director of CarrAmerica,
SC-U.S. Realty, SC-European Realty, Storage USA, and an Advisory Director of
Regency. He is a member of the Board of Governors of the National Association
of Real Estate Investment Trusts ("NAREIT").
Kenneth D. Statz--41--Managing Director of the Global Capital Management
Group since December 1997, where he is responsible for the development and
implementation of portfolio investment strategy. From July 1996 to December
1997, Mr. Statz was Senior Vice President of the Global Capital Management
Group; from May 1995 to June 1996, Vice President of the Global Capital
Management Group. Prior thereto, Mr. Statz was a Vice President in the
investment research department of Goldman, Sachs & Co. from February 1993 to
January 1995, concentrating on research and underwriting for the REIT
industry.
Donald E. Suter--43--Managing Director of Capital Markets Group since July
1997, where he provides capital markets services for affiliates of Security
Capital. From May 1996 to June 1997, Mr. Suter was Senior Vice President of
Capital Markets Group. From October 1995 to April 1996, Mr. Suter was
President and Chief Operating Officer for Cullinan Properties Limited in
Peoria, Illinois. From July 1984 to October 1995, Mr. Suter was with LaSalle
Partners Limited in Chicago, Illinois, where his last position held was Senior
Vice President, Corporate Finance Group. Mr. Suter is a general securities
principal registered with the NASD.
11
<PAGE>
James C. Swaim--47--Senior Vice President of Security Capital since
December 1998 and Vice President of Security Capital from December 1997 to
December 1998. Mr. Swaim is the principal accounting officer for Security
Capital. From July 1996 to December 1997, he was a private business and
financial consultant. From December 1984 to March 1996, Mr. Swaim was employed
by Farah Incorporated, where his most recent position was Executive Vice
President and Chief Financial Officer, and where he was a member of the Board
of Directors.
Paul E. Szurek--39--Managing Director of SCGroup and Chief Financial
Officer of Security Capital since July 1997. From January 1996 through June
1997, Mr. Szurek was Managing Director of SC-U.S. Realty and EU Management,
where he was responsible for operations, corporate finance and mergers and
acquisitions. Mr. Szurek was Senior Vice President of Security Capital from
June 1993 to January 1996, and was Vice President of Security Capital from
April 1991 to June 1993.
Robert S. Underhill--44--Managing Director of the Capital Division since
August 1997, where he provides operating oversight for companies in which
Security Capital has direct or indirect ownership positions. Mr. Underhill was
Senior Vice President of Security Capital from February 1995 to August 1997
and Senior Vice President of the Global Capital Management Group. Mr.
Underhill was a consultant for affiliates of Security Capital from November
1994 to February 1995. Mr. Underhill is a Trustee of Urban Growth Property and
Managing Director of City Center Retail.
Thomas G. Wattles--48--Managing Director of Security Capital since 1991 and
a Trustee of ProLogis since 1993. He was a Director of ProLogis' predecessor
since its formation in 1991, and was Non-Executive Chairman of ProLogis from
March 1997 to May 1998. Mr. Wattles was Co-Chairman and Chief Investment
Officer of ProLogis and its former REIT Manager from November 1993 to March
1997, and Director of the former REIT Manager from June 1991 to March 1997.
Mr. Wattles is a Trustee of CWS Communities, City Center Retail and Urban
Growth Property.
Item 2. Properties
Security Capital's principal offices are in Santa Fe, New Mexico, and the
Company and its affiliates also have domestic offices in Atlanta, Chicago,
Denver, El Paso, New York, Santa Fe and international offices in Brussels,
London and Luxembourg. The companies in which Security Capital has investments
have offices throughout the United States and in Europe. In addition, while
Security Capital itself does not own investment real estate, the companies in
which Security Capital has investments own an extensive number of properties.
These properties are summarized below as of December 31, 1999.
<TABLE>
<CAPTION>
Approximate Square Footage or
Company Location Type Number of Units
------- -------- ---- -----------------------------
<S> <C> <C> <C> <C> <C>
Archstone Throughout USA Multifamily Operating 227 properties
communities 68,255 units
Development 23 properties
7,830 units
In planning and 17 properties
under control 4,471 units
Belmont South, Mid-west Senior assisted living Operating 3 properties
and West USA communities 433 units
Development 2 properties
278 units
In planning 9 properties
Homestead Throughout USA Extended stay Operating 136 properties
lodging 18,176 units
ProLogis Throughout North Distribution facilities Operating 1,575 properties
America and 166.8 million sq. ft.
Europe Development 83 properties
17.9 million sq. ft.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Approximate Square Footage or
Company Location Type Number of Units
------- -------- ---- -----------------------------
<S> <C> <C> <C> <C> <C>
Access Self-
Storage Europe Self-storage facilities Operating 42 properties
1.9 million sq. ft.
Development 15 properties
788,000 sq. ft.
In planning 8 properties
472,000 sq. ft.
Akeler/Bernheim-
Comofi Europe Offices Operating 16 properties
750,000 sq. ft.
Development 15 properties
4.1 million sq. ft.
City & West End London Offices Operating 8 properties
636,000 sq. ft.
Development 3 properties
142,000 sq. ft.
Interparking
S.A. Europe Parking facilities Operating 242 properties
115,442 spaces
London and Hen-
ley London Apartments Operating 94 properties
732 units
Development 10 properties
224 units
Planning 1 property
77 units
CarrAmerica Throughout USA Offices Operating 271 properties
22.6 million sq. ft.
Development 22 properties
1.5 million sq. ft.
City Center Re-
tail Throughout USA Retail facilities Operating 21 properties
1.1 million sq. ft.
Development 5 properties
987,000 sq. ft.
In planning 2 properties
46,000 sq. ft.
CWS Communities South and West Manufactured home Operating 37 properties
USA communities 14,097 units
Development 1 property
311 units
In planning 2 properties
479 units
Regency South and West Grocery store Operating 190 properties
USA anchored shopping 22.1 million sq. ft.
centers Development 26 properties
2.7 million sq. ft.
Storage USA Throughout USA Self-storage facilities Operating 405 properties
27.3 million sq. ft.
Development 4 properties
273,000 sq. ft.
In planning 3 properties
269,000 sq. ft.
Urban Growth
Property East and Midwest Parking facilities and Operating 26 properties
USA urban lots 17,203 spaces
Development 1 property
1,100 spaces
In planning 2 properties
2,000 spaces
</TABLE>
13
<PAGE>
In addition to the above properties owned by Security Capital's investees,
Security Capital and its 100% owned subsidiaries lease properties in Chicago,
El Paso, Houston, London, Luxembourg, New York and Santa Fe. Security Capital
leases its El Paso property from ProLogis under a lease which expires July 31,
2005, and has annual lease payments of approximately $633,000.
Item 3. Legal Proceedings
Security Capital and its subsidiaries are parties to certain legal
proceedings arising in the ordinary course of their business, none of which
are expected to have a material adverse impact on Security Capital.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Class A Shares are listed on the NYSE under the symbol "SCZ.A" and the
Class B Shares are listed on the NYSE under the symbol "SCZ". The table below
indicates the range of the high and low sales prices of the Class A Shares and
the Class B Shares for the periods listed.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
CLASS A SHARES:
1998:
First Quarter........................................ $ 1,600 $ 1,472
Second Quarter....................................... $ 1,570 $ 1,300
Third Quarter........................................ $ 1,375 $ 885
Fourth Quarter....................................... $ 810 $ 600
1999:
First Quarter........................................ $ 733 $ 594
Second Quarter....................................... $ 760 $ 619
Third Quarter........................................ $ 765 $ 690
Fourth Quarter....................................... $ 740 $ 600
2000:
First Quarter (through March 17)..................... $ 675 $ 600
CLASS B SHARES:
1998:
First Quarter........................................ $32.500 $29.500
Second Quarter....................................... $31.625 $25.875
Third Quarter........................................ $27.250 $17.125
Fourth Quarter....................................... $18.000 $11.875
1999:
First Quarter........................................ $14.938 $11.625
Second Quarter....................................... $16.031 $12.063
Third Quarter........................................ $15.375 $13.875
Fourth Quarter....................................... $14.688 $11.875
2000:
First Quarter (through March 17)..................... $13.750 $12.000
</TABLE>
At March 17, 2000, there were approximately 675 holders of record of the
Class A Shares and 121 holders of record of the Class B Shares.
14
<PAGE>
Holders of Class A Shares are entitled to receive ratably such dividends as
may be authorized by the Board of Directors of Security Capital (the "Board")
out of funds legally available therefor. Holders of Class B Shares are
entitled to dividends equal to one-fiftieth ( 1/50th) of the amount per share
declared by the Board for each Class A Share. Class B Share dividends will be
paid in the same form and at the same time as Class A Share dividends, except
that, in the event of a stock split or stock dividend, holders of Class A
Shares will receive Class A Shares and holders of Class B Shares will receive
Class B Shares, unless otherwise specifically designated by resolution of the
Board.
Security Capital has not paid any dividends on its Class A Shares (since
1994) or Class B Shares. Any payment of dividends will depend upon the results
of operations, capital requirements and financial condition of Security
Capital and such other factors as the Board deems relevant. The Board intends
to follow a policy of retaining earnings to finance Security Capital's growth
and for general corporate purposes and, therefore, Security Capital has no
present intention to pay any dividends or make any distributions on Class A
Shares or Class B Shares in the future.
Security Capital's line of credit covenants restrict dividends, such that
during a non-monetary default, no payment, other than dividends paid on
Security Capital's Series B Preferred Shares, are permitted. Distributions and
dividends paid, other than those on Security Capital's Series B Preferred
Shares, cannot exceed 50% of the cash flow available for distributions,
provided no event of default has occurred and is continuing. In the event of a
monetary default, all distributions are prohibited.
Security Capital's 6.50% Convertible Subordinated Debentures due 2016
provide that no dividends shall be permitted if a default exists, if
immediately before and immediately after giving effect to a dividend payment,
Security Capital's consolidated equity, determined in accordance with
generally accepted accounting principles ("GAAP"), does not exceed $300
million or if the ratio of indebtedness, as defined, to consolidated
shareholders' equity is not less than the ratio of 5 to 1.
Item 6. Selected Financial Data
The following table sets forth selected financial information of Security
Capital for 1999, 1998, 1997, 1996 and 1995 (dollars in thousands, except per
share data). The Company's consolidated financial information included below
has been derived from the Company's consolidated financial statements. Arthur
Andersen LLP's report on the consolidated financial statements for the years
ended December 31, 1999 and 1998 is included in this report on page 39. The
following selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and with the consolidated financial statements and notes thereto
included in this report.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1999 1998(1) 1997(2) 1996 1995
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Operating Data:
Equity in earnings (loss) of
investees.................. $ 78,899 $ (71,950) $170,576 $168,473 $ 45,685
Property revenues........... 226,730 144,374 58,397 145,907 103,634
Financial Services Division
revenues................... 88,045 93,850 105,941 77,512 49,404
Total revenues.............. 409,945 165,477 367,704 398,122 200,534
Property expenses........... 101,795 63,339 25,089 58,259 40,534
Financial Services Division
expenses................... 87,026 76,093 87,190 79,296 56,317
General, administrative and
other expenses............. 56,349 62,774 54,940 32,617 20,197
Costs incurred in acquiring
Financial Services
Division................... -- -- -- -- 158,444
Gain on sale of management
companies.................. -- -- 93,395 -- --
Interest expense:
Security Capital:
Convertible
debentures/notes(3)..... 20,535 21,016 94,749 93,912 78,785
Long-term debt........... 52,979 19,844 -- -- --
Line of credit........... 8,817 18,360 7,631 6,256 5,977
Majority-owned
subsidiaries:(4).......... 51,123 22,983 2,054 17,056 19,042
--------- --------- -------- -------- ---------
Total interest expense. 133,454 82,203 104,434 117,224 103,804
--------- --------- -------- -------- ---------
Net earnings (loss)
attributable to Class B
Shares..................... $(116,996) $(157,104) $106,154 $ 32,067 $(201,634)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1999 1998(1) 1997(2) 1996 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Per Share Data:
Series A Preferred Share
cash dividends(5)...... $ -- $ 27.50 $ 75.00 $ 56.25 --
Series B Preferred Share
cash dividends(5)...... $ 70.00 $ 44.33 -- -- --
Net earnings (loss) per
Class B Share:
Basic.................. $ (0.98) $ (1.29) $ 1.39 $ 0.61 $ (4.50)
Diluted................ $ (0.98) $ (1.29) $ 1.28 $ 0.57 $ (4.50)
Weighted average Class B
Shares outstanding:
Basic.................. 119,255 121,325 76,577 52,950 44,834
Diluted................ 119,255 121,325 93,054 56,686 44,834
<CAPTION>
As of December 31,
-------------------------------------------------------
1999 1998(1) 1997(2) 1996 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments, at equity.. $2,659,398 $3,071,772 $2,658,748 $1,438,937 $ 930,043
Real estate, net of
accumulated
depreciation........... 1,073,474 1,164,869 716,882 1,365,373 865,367
Total assets............ 3,957,151 4,510,357 3,614,239 2,929,284 1,855,056
Long-term debt:
Security Capital(3).... 978,557 937,010 323,024 940,197 718,611
Majority-owned
subsidiaries(4)....... 378,210 343,362 301,606 257,099 118,524
Minority interests...... 94,723 132,718 107,135 394,537 159,339
Total shareholders'
equity................. $2,180,787 $2,422,979 $2,548,873 $ 918,702 $ 528,539
</TABLE>
- --------
(1) In the fourth quarter of 1999, changed business activities required SC-
European Realty to change its basis of accounting from fair value
accounting to historical cost accounting. The 1998 financial statements
have been restated as if this change had been made retroactive to SC-
European Realty's inception in 1998 (see note 1 to the consolidated
financial statements).
(2) Prior to 1997, Security Capital consolidated the accounts of Security
Capital Atlantic Incorporated ("Atlantic"). During 1997, Security
Capital's ownership of Atlantic decreased to less than 50%. Accordingly,
Atlantic was not consolidated effective January 1, 1997.
(3) On September 29, 1997 Security Capital called for redemption its
convertible debentures due 2014. Substantially all the holders of these
debentures elected to convert their debentures into Class A Shares.
(4) Security Capital does not guarantee the debt of any of its consolidated or
unconsolidated operating companies.
(5) 257,642 Series B Preferred Shares were issued on May 12, 1998, in exchange
for the 139,000 Series A Preferred Shares and 3,293,288 Class B Shares.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
The statements contained in this report that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements are based on current expectations, management's
beliefs, and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance. Actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. Security Capital
undertakes no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise.
The important factors that could cause Security Capital's actual results to
differ materially from those expressed in the forward-looking statements
include, among others,
. changes in general economic conditions,
. changes in capital availability and interest rates,
16
<PAGE>
. increased or unexpected competition,
. changes in capital markets generally or the market for real estate
securities, and
. changes in tax laws.
For more detail, see "Risk Factors" at the end of Item 7.
Overview
The results of operations for each of Security Capital's reportable
segments, the Capital Division and the Financial Services Division, are
discussed below. These two sections are followed by a discussion of Security
Capital's Liquidity and Capital Resources. All three of these sections should
be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
Results of Operations
Capital Division
Earnings from the Capital Division are generated by its strategic
investments. The majority of these investments are not consolidated and the
Capital Division reports its share of their respective earnings. The
consolidated investments include Homestead (which is the largest consolidated
investment), Belmont, SC-European Real Estate Shares, and SC-U.S. Real Estate
Shares. Cash flow for the Capital Division is generated through receipt of
dividends and interest payments. (See note 2 to the consolidated financial
statements for detail of dividends received.)
Results for 1999 were significantly impacted by changes in the equity in
earnings from strategic investees, the sale of Security Capital's position in
Strategic Hotel and an additional investment in Homestead.
Equity in Earnings of Unconsolidated Investees
The equity in earnings of the Capital Division's unconsolidated investees
includes changes in unrealized gains or losses for SC-U.S. Realty and SC-
Preferred Growth. These changes are generated as a result of fluctuating
market prices for the shares in their underlying investments and are reflected
in earnings due to SC-U.S. Realty's and SC-Preferred Growth's use of fair
value accounting. Fluctuations in market prices do not have an impact on cash
flow, but the general decline in real estate equity security prices in 1999
and 1998 had a materially adverse impact on Security Capital's equity in
earnings of SC-U.S. Realty.
Presented below is Security Capital's equity in earnings (loss) for the
years ended December 31, 1999, 1998, and 1997 (dollar amounts in millions) and
Security Capital's common share ownership interest in unconsolidated
affiliates as of December 31, 1999, 1998 and 1997. Explanations of earnings
changes at the investee level, which materially impacted Security Capital's
equity in earnings, follow the table.
<TABLE>
<CAPTION>
Equity in Earnings % Ownership as
(Loss) Year Ended of December
December 31, 31,
----------------------- ----------------
1999 1998 1997 1999 1998 1997
------ ------- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Archstone......................... $ 79.7 $ 75.1 $ 45.6 39.2% 38.1% 33.1%
ProLogis.......................... 41.1 25.5 2.1 30.8% 40.4% 42.5%
SC-European Realty................ (2.7) (3.5) -- 34.6% 34.6% --
SC-Preferred Growth............... 2.9 (3.8) 6.2 9.3% 9.8% 12.9%
SC-U.S. Realty.................... (46.8) (163.8) 120.1 39.6% 35.0% 32.9%
Strategic Hotel:
Earnings........................ 4.7 (1.5) (3.4) -- 30.4% 39.5%
Interest income................. 6.5 11.1 1.3
------ ------- ------
$ 85.4 $ (60.9) $171.9
====== ======= ======
</TABLE>
17
<PAGE>
Archstone
Atlantic was merged into Archstone in July 1998. For purposes of this
table, the results of Archstone and Atlantic are combined for the years ended
December 31, 1998 and 1997. Archstone's increase in earnings for 1999 compared
to 1998 was due primarily to an increase in rental rates and improvement in
operating margins. The earnings increase in 1998 compared to 1997 was
primarily due to a one time, non-cash expense of $71.7 million in 1997 related
to Archstone's acquisition of its REIT and property management companies from
Security Capital. An increase in gains on dispositions of real estate, and
increases in properties owned and average rents also contributed to the
overall earnings increase in 1998.
ProLogis
In March 1999, ProLogis merged with Meridian Industrial Trust. The shares
issued by ProLogis to complete the merger reduced Security Capital's ownership
position from 40.4% at year-end 1998 to 30.8% at year-end 1999. Security
Capital continues to be ProLogis' largest shareholder.
ProLogis' increase in earnings for 1999 over 1998 was primarily due to an
increase in income generated by ProLogis' unconsolidated subsidiaries (which
provide temperature-controlled storage and build-to-suit services) and a 27.9%
increase in the square footage of distribution facilities owned. The increase
in earnings for 1998 compared to 1997 was due primarily to a one-time non-cash
expense of $75.4 million related to ProLogis' acquisition of its REIT and
property management companies from Security Capital. Properties owned and
average rents also increased from 1997 to 1998.
SC-European Realty
SC-European Realty commenced operations in April 1998. Therefore, the
primary reason for its improved results in 1999 compared to 1998 was a full
year of operations in 1999. Security Capital's weighted average investment
increased to $392.5 million in 1999 from $156.3 million in 1998. SC-European
Realty's current investments are primarily in operating and development
companies with significant pre-stabilized assets. It is expected that earnings
for SC-European Realty will increase as additional properties reach
stabilization. However, there is no assurance that this will occur and failure
to do so would impair the ability of SC-European Realty to grow both its
portfolio and its earnings.
SC-Preferred Growth
SC-Preferred Growth's change in earnings for the years ended 1999, 1998 and
1997 was due primarily to changes in unrealized gains or losses on investments
and increases in SC-Preferred Growth's weighted average net assets at fair
value. SC-Preferred Growth's weighted average net assets at fair value were
$822.7 million in 1999, $633.3 million in 1998 and $81.5 million in 1997. The
market value of SC-Preferred Growth's investments declined by $7.1 million in
1999 compared to a $66.6 million decline in value for 1998 and a $49.9 million
increase in 1997. The overall improvement for 1999 was partially offset by a
realized loss of $16.3 million on the disposition of an investment.
SC-U.S. Realty
SC-U.S. Realty experienced losses for the years ended 1999 and 1998
compared to earnings for 1997. The 1999 and 1998 losses resulted primarily
from the overall decrease in market prices for the shares in its underlying
investments. The portfolio of strategic long-term investments experienced a
$183.8 million market value decline in 1999, a $472.8 million market value
decline in 1998 and a $241.4 million market value increase in 1997. SC-U.S.
Realty realized a $65.6 million loss on the sale of its special opportunity
investment portfolio in 1999 (see Part I "Business--Significant Developments
During 1999", for further details) and experienced a $169.6 million market
value decline in 1998 and a $23.6 million market value increase in 1997. Net
investment income (defined as dividends and other investment income net of
administrative expenses, advisor fees, taxes and interest) was
18
<PAGE>
$71.0 million, $77.9 million and $60.3 million for the years ended 1999, 1998,
and 1997 respectively. The decline in net investment income during 1999
compared to 1998 is primarily related to decreased dividend income from the
special opportunity investment portfolio due to the sale of this portfolio
throughout 1999.
During 1999, Security Capital's ownership position in SC-U.S. Realty
increased from 35.0% to 39.6% as SC-U.S. Realty repurchased approximately
11.4% of its outstanding shares. Security Capital made an additional
investment in SC-U.S. Realty of $1.7 million in 1999.
Strategic Hotel
In September 1999, Security Capital sold its entire ownership in Strategic
Hotel for net proceeds of approximately $329 million. This sale generated a
loss of $55.2 million and a capital loss tax benefit of $19.3 million, of
which $8.0 million was used in 1999 (see income tax discussion). The sale
proceeds were used to reduce Security Capital's line of credit balance and to
fund share and debenture repurchases. As a result of the sale, equity in
earnings from Strategic Hotel were not recorded after the second quarter of
1999.
Consolidated Investments
Homestead
Early in 1999, Homestead's management determined that financing for
previously planned development activity was not available. Furthermore,
initial 1999 operating results were below management's expectations due to
lower-than-forecasted occupancy levels. Security Capital's Vice-Chairman, C.
Ronald Blankenship, became interim Chairman and Chief Executive Officer of
Homestead, and James C. Potts was elevated to Chief Operating Officer.
Together, they established three primary objectives: reduction of debt
(through land sales), reduction in operating costs, and improved property
level operating margins.
A special charge of $65.3 million was recorded in the second quarter of
1999 for write-downs of land held for sale, write-offs of costs of pursuing
other land parcels and the costs of severance of personnel. (See note 13 to
the consolidated financial statements for details of the special charge.)
Additionally, Homestead completed a rights offering of common shares (for net
proceeds of $221.7 million) of which Security Capital acquired 95%.
Consistent with the three primary objectives, Homestead made a decision to
curtail the development activity that was in planning stages at the time of
its change in management. As of December 31, 1999, Homestead had sold $72.6
million of the original $95.5 million of land held for sale. Total debt
decreased from $700.4 million at December 31, 1998 to $487.6 million at
December 31, 1999, and annualized overhead costs decreased from $48.6 million
at the end of the first quarter of 1999 to $25.0 million in the first quarter
of 2000.
The following table sets forth the results of Homestead's operations by
quarter in 1999 and in total for 1997 and 1998. It should be noted that
Homestead's business is seasonal and lower occupancy and revenues for the
fourth quarter are typical.
<TABLE>
<CAPTION>
Homestead Total Portfolio
-------------------------------------------
1Q99 2Q99 3Q99 4Q99 1999* 1998* 1997*
---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Properties............... 125 129 136 136 136 120 71
Average Occupancy.................. 62.8% 70.9% 75.2% 71.4% 70.2% 70.4% 74.7%
Average Weekly Rate................ $352 $352 $347 $345 $349 $301 $253
Weekly RevPAR...................... $221 $250 $261 $246 $245 $212 $189
Property Operating Margin**........ 54.2% 54.1% 60.1% 56.3% 56.3% 59.2% 59.2%
</TABLE>
- --------
*All amounts are annual averages except "Operating Properties," which are as
of year-end.
**Management targets an operating margin of 55% to 57%, but there are no
assurances that such margins will be achieved.
19
<PAGE>
Overall property level results for Homestead are summarized below for the
years ended 1999, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Total Room Revenue.................................... $223.5 $144.4 $58.4
Total Room Expense.................................... $ 98.0 $ 63.3 $25.1
------ ------ -----
Net operating income.................................. $125.5 $ 81.1 $33.3
====== ====== =====
</TABLE>
The increase in net operating income from 1998 to 1999 was due to an
increase in the number of operating facilities as well as the restructuring of
operations discussed above. The increase in net operating income from 1997 to
1998 was due primarily to an increase in the number of operating facilities.
The annual increase in properties from 1997 to 1998, and again from 1998 to
1999, was the primary reason for Security Capital's consolidated increase in
depreciation from $15.3 million in 1997 to $37.4 million in 1998 and $44.9
million in 1999.
Belmont
The first Belmont community in Houston opened in 1998. Subsequent openings
included Nashville and Louisville in 1999 and Memphis in January 2000.
Construction is underway on four additional sites. All of Belmont's activities
currently involve developmental activities and ownership of properties that
are pre-stabilized.
Realized and Unrealized Gains and Losses
Realized capital gains increased by $14.0 million from 1998 to 1999. This
increase was due primarily to a gain on the sale of securities held by SC-US
Real Estate Shares. These sales also contributed to $57.9 million in lower
investments in publicly traded securities held as of December 31, 1999,
compared to December 31, 1998.
The change in unrealized gains or losses is a direct result of changing
real estate security prices. Such change was a decrease of $1.1 million in
1999, a decrease of $13.8 million in 1998 and an increase of $12.4 million in
1997.
Interest Expense
Consolidated interest expense was $133.5 million in 1999, $82.2 million in
1998 and $104.4 million in 1997. The increase from 1998 to 1999 was due to an
increase in average long-term debt outstanding from $273.4 million in 1998 to
$696.5 million in 1999 and higher interest expense at Homestead as no interest
was capitalized after the curtailment of development activity during the
second quarter of 1999. The decrease in 1998 from 1997 was due primarily to
the conversion of $715.8 million principal amount of 12% convertible
subordinated debentures due 2014 to Class A Shares during the fourth quarter
of 1997.
Preferred Share Dividends
Preferred share dividends for 1999, 1998, and 1997 were $18.0 million,
$35.1 million and $10.4 million, respectively. The decrease in 1999 and
increase in 1998 was due to a $19.8 million non-cash dividend incurred in 1998
in conjunction with the exchange of Series A Preferred Shares and certain
Class B Shares for Series B Preferred Shares. See note 6 to the consolidated
financial statements for further discussion.
EBDADT
Earnings before depreciation, amortization and deferred taxes, or "EBDADT,"
is considered by management 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
20
<PAGE>
of real estate depreciation. The value of the 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 (as described in note 4 to the
consolidated financial statements), the most material being the omission of
changes in unrealized gains and losses on real estate securities due to
fluctuations in market prices. EBDADT should not be considered 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.
Capital Division EBDADT reflects equity in EBDADT before extraordinary
items from investees, less allocated general and administrative expenses,
interest expense, taxes and depreciation.
EBDADT results before special items for the Capital Division are presented
in the following chart:
CAPITAL DIVISION EBDADT (in millions)
[LINE CHART]
1999 1998 1997
- ----------------------------
$222.7 $194.7 $145.0
Favorable EBDADT performance (before special items) of the Capital Division
for 1999 compared to 1998 (before special items) is primarily attributed to
improved operating performance by substantially all investees as described
above. SC-U.S. Realty's equity in EBDADT increased by 23.8% in 1999 primarily
due to increased operating performance of its investees and increased by 53.2%
in 1998 primarily due to additional capital deployed by SC-U.S. Realty into
its investees, as well as improved operating performance of its investees.
Equity in EBDADT for SC-U.S. Realty differs from GAAP equity in earnings
because GAAP equity in earnings reflects changes in fair value of investments,
whereas EBDADT does not (SC-U.S. Realty's EBDADT instead reflects the EBDADT
performance of its investees). Increases in EBDADT were partially offset by
severance and other costs that will result in future savings and an increase
in interest expense.
Annualized overhead for the Capital Division decreased from $36.4 million
at year-end 1998 to $17.0 million at year-end 1999.
Due to changes in strategic focus (see Part 1, "Business") and related re-
allocations of capital, the Capital Division also incurred the following
special items for the years ended 1999, 1998 and 1997. Management does not
believe these items relate to continuing operating performance (amounts in
millions):
<TABLE>
<CAPTION>
1999 1998 1997
------- ----- -----
<S> <C> <C> <C>
. Homestead's special charges related to land write-
downs, employee severance and other expenses related
to curtailing its development program............... $ (45.6) $(4.7) $ --
. Security Capital's special charge related to
overhead reductions -- (3.7) --
. Loss on sale of Strategic Hotel..................... (55.3) -- --
. Realized gains (losses) on intermediate--term
investments......................................... (25.8) (0.4) 21.7
. Extraordinary gain on retirement of debt............ 10.9 -- --
------- ----- -----
$(115.8) $(8.8) $21.7
======= ===== =====
</TABLE>
Capital Division EBDADT for 1999, 1998 and 1997, inclusive of the special
items, was $106.9 million, $185.9 million and $166.7 million, respectively.
21
<PAGE>
Improvements in EBDADT from 1997 to 1998 were due primarily to increased
equity in EBDADT resulting from increased investments by the Capital Division
and improved operating performance by investees. See note 4 to the
consolidated financial statements for further discussion of EBDADT.
Financial Services Division
The primary components of the Financial Services Division are the Capital
Markets Group and the Global Capital Management Group. These two groups are
the Financial Services Division's primary earnings generators. In addition,
the Corporate Services Group and the Real Estate Research Group enable
Security Capital and its affiliates to consolidate certain activities for
economies of scale. All fees paid by affiliates to the Financial Services
Division are included for EBDADT purposes. Revenues for the Financial Services
Division are presented in the following table for the years ended December 31,
1999, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
Revenues
---------------------
1999 1998 1997
------ ----- ------
<S> <C> <C> <C>
Capital Markets Group.............................. $ 23.1 $31.1 $ 13.4
Global Capital Management Group.................... 57.3 49.2 26.2
Corporate Services Group........................... 17.7 17.6 5.3
Real Estate Research Group......................... 1.1 1.5 0.8
REIT and property management fees.................. -- -- 63.2
------ ----- ------
Sub-total........................................ 99.2 99.4 108.9
Less amounts eliminated in consolidation........... (11.2) (5.5) (3.0)
------ ----- ------
Total.............................................. $ 88.0 $93.9 $105.9
====== ===== ======
</TABLE>
The decline in real estate security prices in 1998 and 1999 has made it
more difficult to attract assets to Security Capital's mutual funds and
investees, and to execute capital markets transactions, which has, in turn,
impacted revenues for the Global Capital Management Group and the Capital
Markets Group. Additionally, the decline in real estate securities prices in
1998 and 1999 reduced the value of assets under management in some of Security
Capital's managed entities, thereby decreasing fee income to the Global
Capital Management Group for managing such entities. Any reduced growth could
be partially offset, over the long-term, by increases in other Financial
Services Division revenues as Security Capital continues to expand in this
area, although no assurance of this growth can be given.
In spite of these negative market conditions and a general decline in real
estate security prices, the Global Capital Management Group experienced an
overall increase in assets under management from 1998 to 1999 due to an
increase in third-party assets to be managed, thereby leading to an increase
in fee revenue. Assets under management for the Global Capital Management
Group as of December 31, 1999, 1998 and 1997, are presented in the following
table (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
SC-European Realty................................... $1,203 $1,156 $ --
SC-Preferred Growth.................................. 861 800 461
SC-U.S. Realty....................................... 2,513 2,847 2,930
Mutual Funds......................................... 61 111 133
Other................................................ 413 79 --
------ ------ ------
$5,051 $4,993 $3,524
====== ====== ======
</TABLE>
Costs relating to personnel and overhead reductions also affected the 1999
operating results of the Financial Services Division. Annualized overhead for
the Financial Services Division was reduced from $77.2 million at year-end
1998 to $67.7 million at year-end 1999. Security Capital expects overhead to
be significantly lower in 2000 than in 1999.
22
<PAGE>
Revenues and expenses for the Financial Services Division for 1998 compared
to 1997 decreased primarily as a result of Archstone and ProLogis becoming
internally managed by acquiring the Financial Services Division subsidiaries
of Security Capital which had previously managed these companies. The impact
on revenues of this sale was partially offset by a growth in assets under
management, an increase in capital markets fees, and increased revenue for
corporate and real estate research services. In 1998, the Financial Services
Division incurred a $3.7 million fourth quarter special charge for overhead
and other cost reductions due to a change in strategy related to the retail
distribution of real estate mutual funds and a reduction of personnel and
associated costs.
EBDADT
Financial Services Division EBDADT reflects allocations of Security
Capital's G&A, taxes and depreciation. EBDADT results for the years ended
December 31, 1999, 1998, and 1997 were as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Capital Markets Group............................... $ 10.1 $23.5 $ 9.9
Global Capital Management Group..................... 21.7 16.5 15.7
Corporate Services Group............................ (11.3) (7.0) (6.6)
Real Estate Research Group.......................... (3.7) (3.7) (1.1)
Income tax expense.................................. (1.3) (1.7) (0.6)
------ ----- -----
EBDADT before special items....................... $ 15.5 $27.6 $17.3
====== ===== =====
</TABLE>
The 1997 EBDADT information reflects pro forma data, assuming the September
9, 1997, exchange of Security Capital's REIT management and property
management companies for common shares of ProLogis and Archstone occurred as
of the beginning of 1997 and excluding interest expense on the 12% convertible
subordinated debentures due 2014, as they were converted to Class A Shares
prior to December 31, 1997.
EBDADT results for all years can be attributed to the same factors that
impacted Financial Services Division revenues and expenses, as discussed
above.
Other Items
The following items are not specific to either the Capital Division or
Financial Services Division, but had an impact on operations as a whole.
General, administrative and other expenses
General, administrative and other expenses for 1999, 1998 and 1997 were
$56.3 million, $62.8 million and $54.9 million, respectively. The decrease
from 1998 to 1999 resulted primarily from personnel reductions and other cost
controls by Security Capital and Homestead. The increase from 1997 to 1998 was
from additional personnel and related costs and Homestead's special charge
related to a reduction in development activity. Security Capital's share of
Homestead's fourth quarter special charge for 1998 was $4.7 million, which is
reflected in Capital Division EBDADT above.
Provision for Income Taxes
The effective income tax benefit was 13% of loss from operations for 1999,
which is less than the U.S. statutory tax rate of 35%. The tax benefit was
lower than the statutory rate because 1999 losses at consolidated subsidiaries
(which were not consolidated for tax purposes) can only be recognized when the
subsidiary is sold or through taxable income generated by the subsidiary and
capital losses generated from the 1999 sale of Strategic Hotel can only be
used to offset future capital gains. In addition, income from foreign
subsidiaries is taxed at a rate lower than the U.S. statutory tax rate. The
effective tax rate in 1998 was 32% of the operating loss, which approximates
the statutory tax rate. While the 1997 effective tax rate approximates the
statutory rate, the provision was increased due to the non-deductibility of
certain warrant issuances offset by the utilization of prior years' net
operating losses.
23
<PAGE>
Security Capital's tax basis in its strategic investees at December 31,
1999, was as follows (in thousands):
<TABLE>
<S> <C>
Archstone........................................................ $750,764
ProLogis......................................................... 638,982
SC-European Realty............................................... 440,537
SC-U.S. Realty................................................... 733,645
</TABLE>
Gain on Sale of REIT and Property Managers
Prior to September 1997, Security Capital managed the operations and
provided property management services to various REITs (Archstone, Atlantic
and ProLogis) in which Security Capital was a significant owner. Effective
September 9, 1997, Security Capital exchanged the subsidiaries that provided
the management services for additional common shares of Archstone (3,295,533
shares), Atlantic (2,306,591 shares) and ProLogis (3,692,024 shares) and
recorded a gain of $93.4 million.
Extraordinary items
In 1999 there were extraordinary gains on early extinguishments of debt,
net of minority interest, totaling $16.0 million. The first, amounting to
$10.9 million, related to the repurchase of $37.8 million principal amount of
6.5% Convertible Subordinated Debentures due 2016 by Security Capital. The
second, amounting to $5.8 million, related to full settlement of a finders'
fee liability by Homestead. The $17.7 million extraordinary loss in 1998 on
the early extinguishment of debt, net of minority interest, relates to a
mortgage loan purchase agreement entered into by Homestead with Atlantic and
Merrill Lynch Mortgage Capital Inc. See note 5 to the consolidated financial
statements for further discussion of these items.
Liquidity and Capital Resources
Investment Activity
Security Capital's investment activity primarily consists of allocation
(redemptions) of its capital to its various affiliates. The following table
summarizes Security Capital's capital allocations to and redemptions of its
primary investments for the years ended December 31, 1999, 1998 and 1997 (in
millions):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
ProLogis......................................... $ -- $ -- $ 75.0
SC-European Realty............................... 64.8 375.3 --
SC-Preferred Growth.............................. -- 25.0 54.9
SC-U.S. Realty................................... 1.7 45.7 273.0
Strategic Hotel.................................. (329.5) 175.0 200.0
Publicly traded real estate securities........... (55.9) (0.2) 106.2
Homestead warrants............................... -- -- 26.7
Real estate investments:
Homestead...................................... 93.7 461.8 395.9
Belmont........................................ 43.4 25.6 --
Homestead proceeds from sale of land............. (73.0) -- --
</TABLE>
In 1999, Security Capital also invested $213.8 million in Homestead Village
common stock, which is not reflected in the financial statements due to its
elimination in consolidation. Real estate investments reflect development
activity at Homestead and Belmont.
24
<PAGE>
Financing Activity
Security Capital reduced its total debt from $1.8 billion at year-end 1998
to $1.6 billion at year-end 1999. This decrease was primarily the result of a
reduction in line of credit balances by $304.1 million. In addition, the
following financing transactions occurred in 1999:
Security Capital:
. Issuance of $85.3 million of senior unsecured notes
. Repurchase of $37.8 million principal amount of 6.5% Convertible
Subordinated Debentures due 2016 for $27.4 million
. Repurchase of $119.8 million of Security Capital common stock discussed
below
Homestead:
. Sale and lease-back of properties which generated $127.4 million of
proceeds
. Repayment of $122 million of mortgage notes
At year-end 1999, Homestead had an outstanding balance of $125.4 million on
its lines of credit compared to $357.1 million at year-end 1998. Homestead's
lines of credit reductions were primarily accomplished with $73.0 million in
proceeds from land sales and $221.7 million in proceeds from a rights offering
of common stock.
Subsequent to year end 1999 Homestead has made payments totaling $31.5
million on the bank line of credit reducing its line of credit debt to $93.9
million. On February 29, 2000, Homestead entered into an amended and restated
bank credit facility which allows for $110 million of total borrowings of
which $35 million is available on a revolving basis. The amended and restated
line matures February 28, 2003, bears interest at LIBOR plus 2.5%, is secured
by 64 operating properties, permits payment of dividends based upon a
definition of free cash flow, and requires maintenance of financial ratio and
coverage covenants.
Total debt at year-end 1998 was $1.8 billion compared to $797.4 million at
year-end 1997. This net increase was primarily a result of the following
financing transactions:
. Increases in borrowings under the lines of credit of $347.7 million
. The issuance of $614.2 million of senior unsecured notes; and
. Proceeds from the sale of common stock by Homestead to minority interest
holders of $30.9 million, offset by Homestead's payment to extinguish
debt of $25.3 million.
Excluding Homestead and Belmont, Security Capital's 1999 year-end debt-to-
total-capitalization ratio was 49%. The average maturity of Security Capital's
$1 billion of fixed rate indebtedness (excluding Homestead and Belmont) is
13.2 years, at an average fixed rate of 7.2%. The maximum maturity in any year
is $285 million in 2005.
Cash from Operations
Due to higher average debt outstanding and higher average interest rates,
consolidated interest expense increased from $82.2 million in 1998 to $133.5
million in 1999 as discussed previously. This increase in interest expense was
partially offset by an increase in dividends received from Archstone and
ProLogis from 1998 to 1999. The net increase, along with reduced capital
markets fees, was the primary cause for the decrease in consolidated cash from
operations from $140.7 million in 1998 to $103.1 million in 1999. The debt
reductions and overhead reductions described above are expected to result in
higher cash from operations in 2000.
Cash provided by operating activities increased by $113.5 million in 1998
compared to 1997. This increase is primarily due to a $34.7 million increase
in distributions from unconsolidated investees and a $78.8 million increase in
net non-cash items. The non-cash items are related to the equity in earnings
of unconsolidated
25
<PAGE>
investees, provision for deferred taxes, the change in unrealized gain or loss
on investments, depreciation and amortization and the gain on sale of
management companies in the third quarter of 1997.
Stock and Debenture Repurchase Programs
In 1999, Security Capital used a portion of the proceeds from the sale of
Strategic Hotel and internal cash flow to repurchase its common stock. As of
March 1, 2000, Security Capital had repurchased 12,603,997 shares of Class B
common stock equivalents for a purchase price of $163.7 million (comprised of
86,113 Class A Shares and 8,298,347 Class B Shares). As of March 1, 2000,
Security Capital also repurchased $37.8 million principal amount of 6.5%
Convertible Subordinated Debentures due 2016 in 1999 for $27.4 million.
Security Capital's board has authorized a total amount of $200 million for the
common share repurchase program and $60 million for the debenture repurchase
program.
Derivative Financial Instruments
As of year-end 1999 and 1998, Security Capital had no derivative financial
instruments.
Future Capital Commitments and Liquidity
Security Capital and its subsidiaries have a remaining funding commitment
of $77.7 million to SC-European Realty, as of December 31, 1999. In addition,
as of December 31, 1999, Security Capital has committed to invest an
additional $31.9 million in Belmont.
On March 23, 2000, Security Capital announced a proposal to acquire all of
the outstanding shares of Homestead common stock it does not already own for
$3.40 per share in cash. The aggregate value of the transaction would be
approximately $53.0 million, funds would be provided under Security Capital's
revolving line of credit. The Homestead Board is expected to form a special
committee consisting of independent members of the Homestead Board to consider
Security Capital's proposal. Security Capital may amend or withdraw the
proposal at any time in its sole discretion and, therefore, there are no
assurances that the transaction will be consummated.
Security Capital expects that cash flows from operations and funds
currently available under its revolving line of credit will be sufficient to
enable Security Capital to satisfy its anticipated cash requirements for
operations and currently committed investments. In the longer term, Security
Capital intends to finance its business activities through the selective sale
of assets, internally generated cash flow, its line of credit, and future
issuance of equity and debt securities. The business activities to be financed
may include investments in new business initiatives, additional investments in
certain existing affiliates and additional potential repurchases of Security
Capital securities.
Homestead believes it will have adequate cash resources from cash on hand
and cash flow from operations to fund its future business needs. However, due
to the risks of operation of lodging properties, including competitive
pressures, rates, occupancies, and costs of operation, there can be no
assurance of adequate future cash flow generation. In addition, Homestead may
generate cash flow from the sale of its remaining land sites, but no assurance
can be given that such sales will occur or provide significant net proceeds.
Year 2000 Information Technology Issues
The Year 2000 issue arose as many existing computer programs and chip-based
embedded technology systems use only the last two digits to refer to a year,
and therefore, did not properly recognize a year that began with "20" instead
of the familiar "19". Security Capital adopted a Year 2000 compliance program
to minimize or prevent the number and seriousness of any disruptions that
could have occurred as a result of the Year 2000 issue.
26
<PAGE>
Third party costs to address the Year 2000 issue were less than $100,000
and internal costs incurred for Year 2000 compliance issues were also less
than $100,000. Security Capital does not anticipate any additional costs
related to Year 2000.
No significant Year 2000 related problems or failures were experienced by
Security Capital prior to or after January 1, 2000 and no significant Year
2000 problems or failures are anticipated.
Risk Factors
The following matters may affect Security Capital's future financial
performance.
Reliance on Dividends and Earnings of Investees
Most of Security Capital's cash flow and earnings comes from real estate
operating companies in which it owns shares. Security Capital is 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 has influence over these real estate operating companies because of
its significant ownership interest and contractual rights, it has a non-
majority ownership interest and fewer than a majority of the board seats in
most of these companies and does not have unilateral control. Security Capital
could be adversely affected by decisions or actions of investee management.
Conflicts of Interest
Transactions with 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 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 contain any restrictions on interested party
transactions.
Real Estate Risks
Risks which are unique to the real estate business, which could materially
impact Security Capital, are:
. 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.
. 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).
Charges Resulting from Changes in Business Strategy or Restructuring
During 1999, Security Capital incurred two significant charges to earnings
from the sale of its interest in Strategic Hotel and a termination of
Homestead's development program. Any changes in strategy or market conditions
that lead to similar actions in the future could result in similar charges.
27
<PAGE>
Investment Company Act Risk
Security Capital is not registered as an investment company under the
Investment Company Act of 1940, in reliance on an exemption provided by Rule
3a-1 issued under the Investment Company Act. Security Capital is not required
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 do not elect to
participate in future equity offerings by its 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 as an investment company
under the Investment Company Act. Security Capital would suffer additional
regulatory costs and expenses, and might be required to discontinue certain
operations or investments, if it were required to register as an investment
company under the Investment Company Act.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Security Capital's exposure to market risks consists of interest rate risk
related to its own borrowings (and those of its consolidated investments) and
equity price risk related to its investments in marketable equity securities
and its investment in SC-U.S. Realty, which uses fair value accounting, and
SC-Preferred Growth.
Security Capital'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 mitigate interest rate risk, Security Capital
borrows on a long-term basis, primarily at fixed rates and staggered
maturities; therefore, Security Capital's primary interest rate risk is
related to its variable rate line of credit ("LOC"). Security Capital
occasionally utilizes derivative financial instruments as hedges in
anticipation of future long-term debt transactions to manage well-defined
interest rate risk exposure. Security Capital had no outstanding interest rate
hedges as of December 31, 1999 or 1998.
Security Capital manages its equity price risks by limiting the percentage
of its assets invested in marketable equity securities for trading purposes.
As of December 31, 1999 and 1998, less than 2% and less than 3%, respectively,
of total assets were invested in marketable equity securities that were
available for sale.
Sensitivity Analysis
The table below represents the impact of hypothetical changes in interest
rates on Security Capital and its consolidated affiliates (in millions):
<TABLE>
<CAPTION>
Variable Average Hypothetical
Interest Rate 1999 Interest Rate Impact on
Exposure Balance Change Earnings
-------------- ------- ------------- ----------
<S> <C> <C> <C> <C>
Security Capital.......... LOC $125.7 (+/-)1% $ (+/-)1.3
Homestead................. LOC $264.6 (+/-)1% $ (+/-)2.6
Belmont................... Mortgage Notes $ 3.4 (+/-)1% $ --
</TABLE>
As of December 31, 1999, Security Capital held $60.0 million of publicly
traded real estate securities at market value through its consolidated mutual
funds, SC-US Real Estate Shares and SC-European Real Estate Shares. These
securities have exposure to price risk. A hypothetical 10% change in quoted
market prices would amount to a change of approximately $6.0 million in the
recorded value of investments.
Security Capital's 1999 combined equity in loss for SC-U.S. Realty and SC-
Preferred Growth was $43.9 million. A hypothetical 10% change in the market
value of SC-U.S. Realty's publicly traded investments and SC-Preferred
Growth's investments would amount to a $68.9 million change in Security
Capital's equity in earnings.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
Security Capital's Consolidated Balance Sheets as of December 31, 1999 and
1998, and its Consolidated Statements of Operations and Comprehensive Income,
Shareholders' Equity and Cash Flows for each of the years in the three-year
period ended December 31, 1999, together with the report of Arthur Andersen
LLP, independent public accountants, are included under Item 14 of this report
and are incorporated herein by reference. Selected quarterly financial data is
presented in Note 11 of the Notes to the Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information regarding the executive officers of Security Capital, see
"Item 1. Business--Senior Executive Officers of Security Capital." The
information regarding the directors of Security Capital is incorporated herein
by reference to the description under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in Security
Capital's definitive proxy statement for its 2000 annual meeting of
shareholders (the "2000 Proxy Statement").
Item 11. Executive Compensation
Incorporated herein by reference to the description under the captions
"Election of Directors" and "Executive Compensation" in the 2000 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the description under the caption
"Principal Shareholders" in the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the description under the caption
"Certain Relationships and Transactions" in the 2000 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to Financial Statements below, which is incorporated
herein by reference.
2. Financial Statement Schedules:
Schedule I.
All other schedules have been omitted since the required information
is presented in the financial statements and the related notes or is
not applicable.
29
<PAGE>
3. Exhibits:
See Index to Exhibits, which is incorporated herein by reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the last quarter of the period covered by this report:
<TABLE>
<CAPTION>
Item Financial
Date Reported Statements
---- -------- ----------
<S> <C> <C>
December 9, 1999...................................... 5 No
</TABLE>
(c) Exhibits: The Exhibits required by Item 601 of Regulation S-K are
listed in the Index to Exhibits, which is incorporated herein by reference.
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Security Capital Group Incorporated
Report of Independent Public Accountants................................ 32
Consolidated Balance Sheets as of December 31, 1999 and December 31,
1998................................................................... 33
Consolidated Statements of Operations and Comprehensive Income for the
years ended
December 31, 1999, 1998 and 1997....................................... 34
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997....................................... 36
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... 37
Notes to Consolidated Financial Statements.............................. 39
Schedule I--Condensed Financial Information of Registrant............... 63
Archstone Communities Trust
Independent Auditors' Report............................................ 68
Balance Sheets as of December 31, 1999 and December 31, 1998............ 69
Statements of Earnings for the years ended December 31, 1999, 1998 and
1997................................................................... 70
Statements of Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997.................................................... 71
Statements of Cash Flows for the years ended December 31, 1999, 1998 and
1997................................................................... 72
Notes to Financial Statements........................................... 73
Independent Auditors' Report............................................ 94
Schedule III--Real Estate and Accumulated Depreciation as of December
31, 1999............................................................... 95
ProLogis Trust
Report of Independent Public Accountants................................ 103
Consolidated Balance Sheets as of December 31, 1999 and December 31,
1998................................................................... 104
Consolidated Statements of Earnings for the years ended December 31,
1999, 1998 and 1997.................................................... 105
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997....................................... 106
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... 108
Notes to Consolidated Financial Statements.............................. 109
Report of Independent Public Accountants................................ 145
Schedule III--Real Estate and Accumulated Depreciation as of December
31, 1999............................................................... 146
Security Capital U.S. Realty
Auditors' Report........................................................ 162
Consolidated Statements of Net Assets at December 31, 1999 and December
31, 1998............................................................... 163
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997.................................................... 164
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................... 165
Consolidated Statements of Changes in Net Assets for the years ended
December 31, 1999, 1998 and 1997....................................... 166
Consolidated Statements of Changes in Shares Outstanding for the years
ended December 31, 1999, 1998 and 1997................................. 166
Consolidated Financial Highlights for the years ended December 31, 1999,
1998 and 1997.......................................................... 167
Consolidated Schedules of Strategic Investment Positions at December 31,
1999 and 1998.......................................................... 167
Consolidated Schedules of Other Investment Positions at December 31,
1999 and 1998.......................................................... 168
Notes to the Consolidated Financial Statements.......................... 169
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Security Capital Group Incorporated:
We have audited the accompanying consolidated balance sheets of Security
Capital Group Incorporated (a Maryland Corporation) and subsidiaries as of
December 31, 1999 and 1998 and the related consolidated statements of
operations and comprehensive income, shareholders' equity, and cash flows for
each of the three years ended December 31, 1999. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule referred to below based on our audits. We did not
audit the financial statements of Archstone Communities Trust, Security
Capital EU Management Holdings and Security Capital U.S. Realty (prior to
January 1, 1999), for which the accompanying statements reflect 21.3% and
35.9% of the total consolidated assets of Security Capital Group Incorporated
and subsidiaries as of December 31, 1999 and 1998, respectively, and 26.7%,
42.6% and 44.6% of the total consolidated income in the consolidated
statements of operations of Security Capital Group Incorporated and
subsidiaries for each of the three years ended December 31, 1999,
respectively. Those statements were audited by other auditors whose reports
have been furnished to us and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the reports of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Security Capital Group Incorporated and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years ended December 31,
1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The attached Schedule I is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
based on our audits and the reports of other auditors, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
March 23, 2000
32
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1999 1998
------ ---------- ----------
<S> <C> <C>
Investments, at equity:
Archstone Communities Trust.......................... $ 826,957 $ 827,977
ProLogis Trust....................................... 591,449 623,715
Security Capital European Realty..................... 419,039 380,539
Security Capital Preferred Growth Incorporated....... 75,504 77,782
Security Capital U.S. Realty......................... 746,449 791,562
Strategic Hotel Capital Incorporated................. -- 370,197
---------- ----------
2,659,398 3,071,772
---------- ----------
Real estate, less accumulated depreciation............. 1,073,474 1,164,869
Investments in publicly traded real estate securities,
at market value....................................... 59,971 117,878
---------- ----------
Total real estate investments...................... 3,792,843 4,354,519
Cash and cash equivalents.............................. 30,567 13,209
Other assets........................................... 133,741 142,629
---------- ----------
Total assets....................................... $3,957,151 $4,510,357
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Lines of credit...................................... $ 216,349 $ 520,480
Mortgage and construction notes payable.............. 237,356 343,362
Long-term debt....................................... 699,606 614,236
Convertible debentures............................... 278,951 322,774
Capital lease obligation............................. 140,854 --
Accounts payable and accrued expenses................ 96,300 118,152
Deferred income taxes................................ 12,225 35,656
---------- ----------
Total liabilities.................................. 1,681,641 1,954,660
Minority interests..................................... 94,723 132,718
Shareholders' Equity:
Class A Common Shares, $.01 par value; 20,000,000
shares authorized; 1,218,411 and 1,487,109 shares
issued and outstanding in 1999 and 1998,
respectively........................................ 12 15
Class B Common Shares, $.01 par value; 229,537,385
shares authorized; 52,695,620 and 47,628,481 shares
issued and outstanding in 1999 and 1998,
respectively........................................ 527 476
Series B Preferred Shares, $.01 par value; 257,642
shares issued and outstanding in 1999 and 1998;
stated liquidation preference of $1,000 per share... 257,642 257,642
Additional paid-in capital........................... 2,308,274 2,416,123
Accumulated other comprehensive income (loss)........ (12,020) 5,375
Accumulated deficit.................................. (373,648) (256,652)
---------- ----------
Total shareholders' equity......................... 2,180,787 2,422,979
---------- ----------
Total liabilities and shareholders' equity......... $3,957,151 $4,510,357
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
INCOME:
Equity in earnings (loss) of:
Archstone Communities Trust................ $ 79,700 $ 75,076 $ 45,587
ProLogis Trust............................. 41,072 25,514 2,101
Security Capital European Realty........... (2,669) (3,467) --
Security Capital Preferred Growth
Incorporated.............................. 2,888 (3,831) 6,175
Security Capital U.S. Realty............... (46,798) (163,745) 120,113
Strategic Hotel Capital Incorporated....... 11,247 9,593 (2,103)
Realized capital gains (losses).............. 1,389 (12,582) 8,024
Change in unrealized gain or loss on
investments................................. (1,114) (13,785) 12,375
Financial Services Division revenues from
related parties............................. 88,045 93,850 105,941
Other income, net............................ 9,455 14,480 11,094
Property revenue............................. 226,730 144,374 58,397
--------- --------- --------
409,945 165,477 367,704
--------- --------- --------
EXPENSES:
Financial Services Division expenses......... 87,026 76,093 87,190
General, administrative and other expenses... 56,349 62,774 54,940
Depreciation and amortization................ 44,915 37,419 15,319
Interest expense............................. 133,454 82,203 104,434
Property expenses............................ 101,795 63,339 25,089
Homestead special charge..................... 65,296 -- --
Loss on sale of Strategic Hotel.............. 55,245 -- --
--------- --------- --------
544,080 321,828 286,972
--------- --------- --------
Earnings (loss) from operations................ (134,135) (156,351) 80,732
Gain on sale of management companies......... -- -- 93,395
--------- --------- --------
Earnings (loss) before income taxes, minority
interest, extraordinary items and change in
accounting principle.......................... (134,135) (156,351) 174,127
--------- --------- --------
Provision for income tax benefit (expense):
Current...................................... 785 (4,698) --
Deferred..................................... 14,064 54,488 (56,378)
--------- --------- --------
Total income tax benefit (expense)............. 14,849 49,790 (56,378)
Minority interests in net (earnings) loss of
subsidiaries................................ 20,429 2,202 (1,170)
--------- --------- --------
Earnings (loss) before extraordinary items and
change in accounting principle................ (98,857) (104,359) 116,579
Extraordinary items--gain (loss) on early
extinguishments of debt, net of minority
interests of $5,849 in 1999 and $7,687 in
1998........................................ 16,032 (17,657) --
Change in accounting principle--cumulative
effect on prior years of expensing costs of
start-up activities, net of minority
interest of $4,297.......................... (16,136) -- --
--------- --------- --------
Net earnings (loss)............................ (98,961) (122,016) 116,579
Less Preferred Share dividends............... (18,035) (35,088) (10,425)
--------- --------- --------
Net earnings (loss) attributable to common
shares........................................ $(116,996) $(157,104) $106,154
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME--(Continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net earnings (loss) attributable to common
shares......................................... $(116,996) $(157,104) $106,154
Other comprehensive income (loss):
Foreign currency translation adjustments,
common net................................... (17,395) 5,375 --
--------- --------- --------
Comprehensive income (loss)..................... $(134,391) $(151,729) $106,154
========= ========= ========
Weighted-average Class B common shares
outstanding:
Basic......................................... 119,255 121,325 76,577
========= ========= ========
Diluted....................................... 119,255 121,325 93,054
========= ========= ========
Earnings (loss) per share:
Basic earnings (loss) before extraordinary
items and change in accounting principle..... $ (0.98) $ (1.15) $ 1.39
Extraordinary items--gain (loss) on early
extinguishments of debt...................... 0.13 (0.14) --
Change in accounting principle--cumulative
effect of expensing costs of start-up
activities................................... (0.13) -- --
--------- --------- --------
Basic net earnings (loss) attributable to
common shares................................ $ (0.98) $ (1.29) $ 1.39
========= ========= ========
Diluted earnings (loss) before extraordinary
items and change in accounting principle..... $ (0.98) $ (1.15) $ 1.28
Extraordinary items--gain (loss) on early
extinguishments of debt...................... 0.13 (0.14) --
Change in accounting principle--cumulative
effect of expensing cost of start-up
activities................................... (0.13) -- --
--------- --------- --------
Diluted net earnings (loss) attributable to
common shares................................ $ (0.98) $ (1.29) $ 1.28
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1998 and 1999
(In thousands, except shares)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------------------ at Liquidation
Class A Class B Value Accumulated
----------------- ------------------ ------------------ Additional Other Total
Shares Par Shares Par Paid-in Comprehensive Accumulated Shareholders'
Outstanding Value Outstanding Value Series A Series B Capital Income Deficit Equity
----------- ----- ----------- ----- -------- -------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1996............. 1,209,009 $12 -- $-- $139,000 $ -- $ 985,392 $ -- $(205,702) $ 918,702
Issuance of
Class A Shares,
net............. 110,544 1 -- -- -- -- 101,435 -- -- 101,436
Issuance of
Class B Shares,
initial public
offering........ -- -- 22,569,710 226 -- -- 591,440 -- -- 591,666
Conversion of
12% convertible
debentures to
Class A Shares.. 684,349 7 -- -- -- -- 757,747 -- -- 757,754
Issuance of
warrants........ -- -- -- -- -- -- 61,428 -- -- 61,428
Interest
reinvestment
plans........... 5,222 -- -- -- -- -- 6,964 -- -- 6,964
Exercise of
stock options
and warrants.... 36,477 -- 57,831 -- -- -- 4,543 -- -- 4,543
Income tax
benefit from
stock options
exercised....... -- -- -- -- -- -- 226 -- -- 226
Net earnings.... -- -- -- -- -- -- -- -- 116,579 116,579
Series A
Preferred Share
dividends....... -- -- -- -- -- -- -- -- (10,425) (10,425)
--------- --- ---------- ---- -------- -------- ---------- -------- --------- ----------
Balances at
December 31,
1997............. 2,045,601 $20 22,627,541 $226 $139,000 $ -- $2,509,175 $ -- $ (99,548) $2,548,873
Conversion of
Class A Shares
to Class B
Shares.......... (565,040) (5) 28,251,899 283 -- -- (278) -- -- --
Exercise of
stock options
and warrants.... 1,488 -- 34,849 -- -- -- 1,918 -- -- 1,918
Issuance of
Series B
Preferred
Shares.......... -- -- (3,296,640) (33) (139,000) 257,642 (98,766) -- (19,843) --
Conversion of
2016 Convertible
Debentures to
Class B Shares.. -- -- 10,832 -- -- -- 250 -- -- 250
Issuance of
Class A Shares,
net............. 5,060 -- -- -- -- -- 4,318 -- -- 4,318
Cost of raising
capital......... -- -- -- -- -- -- (494) -- -- (494)
Net loss........ -- -- -- -- -- -- -- -- (122,016) (122,016)
Series B
Preferred Share
dividends....... -- -- -- -- -- -- -- -- (15,245) (15,245)
Foreign currency
translation
adjustments,
common net...... -- -- -- -- -- -- -- 5,375 -- 5,375
--------- --- ---------- ---- -------- -------- ---------- -------- --------- ----------
Balances at
December 31,
1998............. 1,487,109 $15 47,628,481 $476 $ -- $257,642 $2,416,123 $ 5,375 $(256,652) $2,422,979
Conversion of
Class A Shares
to
Class B Shares.. (207,867) (2) 10,393,335 104 -- -- (102) -- -- --
Conversion of
2016 Convertible
Debentures...... 43 -- 260,953 3 -- -- 6,070 -- -- 6,073
Share repurchase
program......... (69,705) (1) (5,601,547) (56) -- -- (119,205) -- -- (119,262)
Issuance of
Shares, net..... 8,831 -- 14,398 -- -- -- 5,388 -- -- 5,388
Net loss........ -- -- -- -- -- -- -- -- (98,961) (98,961)
Series B
Preferred Share
dividends....... -- -- -- -- -- -- -- -- (18,035) (18,035)
Foreign currency
translation
adjustments,
common net...... -- -- -- -- -- -- -- (17,395) -- (17,395)
--------- --- ---------- ---- -------- -------- ---------- -------- --------- ----------
Balances at
December 31,
1999............. 1,218,411 $12 52,695,620 $527 $ -- $257,642 $2,308,274 $(12,020) $(373,648) $2,180,787
========= === ========== ==== ======== ======== ========== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss)....................... $ (98,961) $ (122,016) $ 116,579
Adjustments to reconcile net earnings
(loss) to cash flows provided by
operating activities:
Loss on sale of Strategic Hotel......... 55,245 -- --
Homestead special charge................ 51,587 -- --
Deferred income tax expense (benefit)... (14,064) (54,488) 56,378
Minority interests...................... (20,429) (2,202) 1,170
Extraordinary items--(gain) loss on
early extinguishments of debt, net of
minority interests..................... (16,032) 17,657 --
Cumulative effect on prior years of
expensing costs of start-up activities,
net of minority interests.............. 16,136 -- --
Equity in (earnings) loss of
unconsolidated investees............... (78,899) 71,950 (170,576)
Distributions from unconsolidated
investees.............................. 150,756 144,757 110,082
Change in unrealized gain or loss on
investments............................ 1,114 13,785 (12,375)
Depreciation and amortization........... 44,915 37,419 15,319
Gain on sale of management companies.... -- -- (93,395)
Other................................... 9,953 5,946 18,353
Increase in other assets.................. (153) (24,215) (13,886)
Increase (decrease) in accounts payable
and accrued expenses..................... 6,649 52,135 (383)
--------- ----------- -----------
Net cash flows provided by operating
activities........................... 107,817 140,728 27,266
--------- ----------- -----------
Investing Activities:
Real estate investments................... (137,111) (487,447) (395,896)
Proceeds from sale of land................ 72,995 -- --
Redemptions from (investments in):
ProLogis Trust.......................... -- -- (75,002)
Security Capital U.S. Realty............ (1,686) (45,726) (273,042)
Security Capital European Realty........ (64,805) (375,265) --
Strategic Hotel Capital Incorporated.... 329,451 (175,000) (200,000)
Security Capital Preferred Growth
Incorporated........................... -- (25,000) (54,850)
Publicly traded real estate securities,
net.................................... 55,945 228 (106,163)
Homestead Village Incorporated warrants. -- (26,682)
Other..................................... 608 (8,727) (29,490)
--------- ----------- -----------
Net cash flows provided by (used in)
investing activities................. 255,397 (1,116,937) (1,161,125)
--------- ----------- -----------
Financing Activities:
Proceeds from lines of credit............. 478,830 1,359,878 532,308
Payments on lines of credit............... (782,961) (1,012,206) (393,500)
Proceeds from long-term debt offerings.... 85,317 614,236 --
Proceeds from unsecured note and mortgage
notes payable............................ 16,022 163,041 191,750
Payments on mortgage notes and capital
leases................................... (126,174) (122,028) --
Proceeds from issuance of convertible
debt..................................... -- -- 98,729
Extinguishments of debt................... (27,428) (25,344) (72)
Proceeds from issuance of common shares,
net...................................... 5,880 5,656 691,043
Repurchase of common shares............... (119,754) -- --
Proceeds from issuance of common shares
to minority interest holders............. 25,296 30,911 18,346
Sale of real estate, net.................. 127,360 -- --
Preferred dividends paid.................. (18,035) (15,245) (10,425)
Debt issuance costs....................... (7,278) (20,543) (2,409)
Other..................................... (2,931) (392) 220
--------- ----------- -----------
Net cash flows provided by (used in)
financing activities................. (345,856) 977,964 1,125,990
--------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................... 17,358 1,755 (7,869)
Cash and cash equivalents, beginning of
year...................................... 13,209 11,454 19,323
--------- ----------- -----------
Cash and cash equivalents, end of year..... $ 30,567 $ 13,209 $ 11,454
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Non-Cash Investing and Financing Activities:
Receipt of Security Capital European Realty
shares in satisfaction of indebtedness.......... $ -- $ 70,772 $ --
======== ======== ========
Issuance of Series B Preferred Shares:
Series B Preferred Shares issued............... $ -- $257,642 $ --
Series A Preferred Shares retired.............. -- (139,000) --
Fair value of Class B Shares retired........... -- (98,799) --
Series A Preferred dividend recorded........... -- (19,843) --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
Shares issued to acquire SCGPB Incorporated...... $ -- $ -- $ (6,600)
======== ======== ========
Shares received from Archstone in exchange for
management companies............................ $ -- $ -- $ 75,838
======== ======== ========
Shares received from ProLogis in exchange for
management companies............................ $ -- $ -- $ 81,871
======== ======== ========
Issuance of warrants to Atlantic shareholders.... $ -- $ -- $ 11,530
======== ======== ========
Issuance of common stock under debenture
interest reinvestment plans..................... $ -- $ -- $ 6,964
======== ======== ========
Conversion of 2014 and 2016 Convertible
Debentures...................................... $ 6,073 $ 250 $757,754
======== ======== ========
Increase in property and equipment and
development cost payable........................ $ -- $ 12,250 $ 22,752
======== ======== ========
Increase in property and equipment and lease
obligation from capital lease................... $145,000 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
Business:
Security Capital Group Incorporated ("Security Capital") is a global real
estate research, investment and operating management company. Its strategy is
to create the optimal organization to hold significant ownership positions in
real estate operating companies that generate substantial internal growth and
third-party service income and are able to become market leaders by creating
brand value. Security Capital operates its business through two divisions. The
Capital Division provides operational and capital deployment oversight to
direct and indirect investments in real estate investment trusts ("REITs") and
real estate operating companies. The Capital Division generates earnings
principally from its ownership of these affiliates (see note 2). The Financial
Services Division generates fees principally from capital management and
capital markets activities. In addition, corporate services and research
services are provided which enable Security Capital and its affiliates to
consolidate certain activities for economies of scale. Security Capital is a
Maryland corporation.
Restatement of prior period results:
In the fourth quarter of 1999, the Board of Directors of Security Capital
European Realty ("SC-European Realty") approved a change in operating strategy
by determining to retain, in general, at least an 80% interest in its
investees and by becoming more active in the day to day operations of its
investees.
As a result of this change in strategy, SC-European Realty has changed its
basis of accounting from fair value accounting to historical cost accounting.
Fair value accounting requires that investments be marked to their fair value
and unrealized gains and losses be recognized as a component of net income.
Historical cost accounting requires that the operations of investments that
are owned greater than 50% be consolidated on the historical cost basis and
operations of investments that are owned between 20% and 50% be reported using
the equity method of accounting based on the historical cost basis financial
statements of the investee. Under generally accepted accounting principles
("GAAP"), such a change in accounting requires a restatement of all prior
periods so that the results of those periods are reported as if this change
had been made retroactive to the entity's inception. SC-European Realty was
established in 1998; therefore, Security Capital has restated its 1998
consolidated financial statements and the first three quarters of its 1999
consolidated financial statements.
Security Capital accounts for its investment in SC-European Realty by the
equity method. The impact of this restatement on Security Capital's financial
statements for the year ended and as of December 31, 1998, is as follows:
<TABLE>
<CAPTION>
As Previously
Reported Restated
------------- ---------
<S> <C> <C>
Consolidated Balance Sheet:
Investment in SC-European Realty, at equity.... $ 379,971 $ 380,539
Consolidated Statement of Operations and
Comprehensive Income:
Equity in earnings of SC-European Realty....... $ 4,234 $ (3,467)
Deferred income tax benefit.................... 51,793 54,488
Net loss attributable to common shares......... (152,098) (157,104)
Comprehensive loss............................. (152,098) (151,729)
Basic and diluted loss per share:
Loss before extraordinary items................ $ (1.10) $ (1.15)
Loss attributable to common shares............. $ (1.25) $ (1.29)
</TABLE>
See note 11 for the impact on the selected quarterly financial data.
39
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principles of Financial Presentation:
The accompanying consolidated financial statements include the results of
Security Capital, its wholly owned Financial Services Division subsidiaries
and its majority-owned Capital Division investees, which include BelmontCorp
("Belmont"), Homestead Village Incorporated ("Homestead"), Security Capital
European Real Estate Shares ("SC-European Real Estate Shares") and Security
Capital U.S. Real Estate Shares ("SC-US Real Estate Shares"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
At December 31, 1999, minority interest relates mainly to Homestead and SC-US
Real Estate Shares.
Security Capital accounts for its 20% or greater (but not more than 50%)
owned investees, and those over which it has substantial influence as the
manager or advisor, by the equity method. For an investee accounted for under
the equity method, Security Capital's share of net earnings or losses of the
investee is reflected in income as earned and dividends reduce the investment
as received.
Two of Security Capital's equity method investees, Security Capital
Preferred Growth Incorporated ("SC-Preferred Growth") and Security Capital
U.S. Realty ("SC-U.S. Realty") and two of Security Capital's majority-owned
investees, SC-European Real Estate Shares and SC-US Real Estate Shares,
account for their investments at fair value in accordance with the specialized
industry accounting rules prescribed by the American Institute of Certified
Public Accountants Audit and Accounting Guide for Investment Companies. Under
fair value accounting, unrealized gains or losses are determined by comparing
the fair value of the securities held to the cost of such securities.
Unrealized gains or losses relating to changes in the fair values of SC-
Preferred Growth's and SC-U.S. Realty's investments are reported as a
component of their net earnings.
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, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses recognized during the reporting period. Actual results could
differ from those estimates.
Certain amounts in the 1998 and 1997 consolidated financial statements and
notes to consolidated financial statements have been reclassified to conform
to the 1999 presentation.
Cash and Cash Equivalents:
Security Capital considers all cash on hand, demand deposits with financial
institutions, and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Real Estate and Depreciation:
Real estate, which is comprised of real estate assets owned by Homestead
and Belmont, is carried at cost, which is not in excess of net realizable
value. Costs directly related to land acquisition, and development or
renovation of real estate are capitalized. Costs incurred in connection with
the pursuit of unsuccessful acquisitions or developments are expensed at the
time the pursuit is abandoned.
Repairs and maintenance are expensed as incurred. Renovations and
improvements are capitalized and depreciated over their estimated useful
lives.
Depreciation is computed over the expected useful lives of depreciable
property on a straight-line basis. Properties are depreciated principally over
the useful lives of 20 to 40 years for buildings and improvements and 2 to 10
years for furnishings and other equipment.
40
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalized Interest:
Security Capital capitalizes interest as part of the cost of real estate
projects under development by its consolidated subsidiaries.
Deferred Loan Fees:
Costs incurred in connection with the issuance or renewal of debt are
capitalized, included with other assets and amortized over the term of the
related loan (issuance costs) or twelve months (renewal costs).
Revenue Recognition:
Rental, fee and interest income are recorded on the accrual method of
accounting. A provision for possible loss is made when collection of
receivables is considered doubtful.
Comprehensive Income:
Security Capital has adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", which establishes standards for the
reporting and display of comprehensive income and its components.
Comprehensive income is the total of net earnings attributable to common
shares and other comprehensive income. Other comprehensive income for Security
Capital and its equity method investees consists of foreign currency
translation adjustments, which have been recorded as a component of equity
pursuant to Statement of Financial Accounting Standards No. 52.
Security Capital's consolidated subsidiaries and Security Capital's share
of ProLogis Trust ("ProLogis") and SC-European Realty operations whose
functional currency is not the U.S. dollar, translate their financial
statements into U.S. dollars. Assets and liabilities are translated at the
exchange rate in effect as of the financial statement date. Income statement
accounts are translated using the average exchange rate for the period. Gains
and losses resulting from the translation are included in accumulated other
comprehensive income as a separate component of shareholders' equity.
Recent Accounting Pronouncements:
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued
which established standards for the accounting and reporting of derivative
instruments. Management is still evaluating the effects this standard will
have on Security Capital's consolidated financial position, results of
operation or financial statement disclosures.
Interest Rate Contracts:
In 1998, Security Capital utilized various interest rate contracts to hedge
interest rate risk on anticipated debt offerings. These anticipatory hedges
were designated, and effective, as hedges of identified debt issuances which
had a high probability of occurring. Gains and losses resulting from changes
in the market value of these contracts were deferred and amortized into
interest expense over the life of the related debt issuance.
Employee Stock Based Compensation:
Security Capital has adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and continues
to apply the accounting provisions of ABP Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") as allowed under SFAS 123, making the
proforma
41
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fair value disclosures required by SFAS 123. In accordance with APB 25, total
proforma compensation cost is measured by the difference between the quoted
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 expense over the period the
employee performs the related services.
(2) Real Estate Investments
Security Capital holds the following investments at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Security Capital's Net
Investments
% Ownership (Redemptions) for the
as of Year Ended
December 31, December 31,
------------- ---------------------------
Investment Type of Entity 1999 1998 1999 1998
---------- -------------- ------ ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
EQUITY-METHOD INVESTEES:
Archstone Communities Apartment REIT 39.2% 38.1% $ -- $ --
Trust (publicly traded)
("Archstone") (a)
ProLogis Trust (b) Industrial REIT 30.8% 40.4% -- --
(publicly traded)
SC--European Realty (c) Global real estate investments 34.6% 34.6% 64,805,000 375,737,000
(private entity)
SC--Preferred Growth Convertible security investments in real 9.3% 9.8% -- 25,000,000
estate companies (private REIT)
SC-U.S. Realty U.S. real estate investments 39.6% 35.0% 1,686,000 45,726,000
(publicly traded)
Strategic Hotel Capital Luxury and upscale hotels -- 30.4% (329,451,000) 175,000,000
Incorporated (d) (private entity)
("Strategic Hotel")
CONSOLIDATED INVESTEES:
Belmont (e) Senior assisted living 100% 100% 37,802,000 30,487,000
(private entity)
Homestead (f) Extended-stay lodging 87.0% 69.8% 213,810,000 129,108,000
(publicly traded)
SC-European Real Estate European real estate securities fund 99.4% 99.9% (6,500,000) 1,000,000
Shares (mutual fund)
SC--U.S. Real Estate U.S. real estate securities fund 51.6% 89.9% (58,500,000) (9,500,000)
Shares (mutual fund)
</TABLE>
- --------
(a) In July 1998 Security Capital Pacific Trust and Security Capital Atlantic
Incorporated ("Atlantic") merged to form Archstone Communities Trust.
Security Capital continues to be Archstone's largest shareholder.
(b) On March 30, 1999, ProLogis merged with Meridian Industrial Trust, Inc.
Security Capital continues to be ProLogis' largest shareholder.
(c) SC-European Realty was formed in 1998. In April 1998, SC-European Realty
completed a $1,500,000,000 equity subscription offering, of which Security
Capital and its subsidiaries subscribed for $518,258,000 of common shares.
(d) On September 10, 1999, Security Capital sold its entire ownership position
in Strategic Hotel for proceeds of approximately $329,000,000. See note 14
for further discussion.
42
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) As of December 31, 1999, $76,097,000 had been funded by Security Capital
to Belmont and an additional $31,903,000 of unfunded commitments remained.
(f) In May 1999, Security Capital invested $213,810,000 in Homestead through
participation in a common stock rights offering.
Security Capital received dividends and interest (Strategic Hotel only)
from its investees for the years ended December 31, 1999, 1998 and 1997, as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Dividends Received
---------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Dividends:
Archstone/Atlantic (a)..................... $ 80,720 $ 78,674 $ 71,191
ProLogis................................... 64,870 61,876 47,090
SC-European Real Estate Shares............. 463 26 --
SC-Preferred Growth........................ 5,166 4,207 204
SC-US Real Estate Shares................... 2,149 7,098 9,600
--------- -------- --------
153,368 151,881 128,085
--------- -------- --------
Interest:
Strategic Hotel (b)........................ 6,541 11,090 1,297
--------- -------- --------
$ 159,909 $162,971 $129,382
========= ======== ========
<CAPTION>
Dividend Amount Per
Investee Share
---------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Archstone.................................... $ 1.4800 $ 1.3900 $ 1.3000
Atlantic (a)................................. -- 0.8000 1.5600
ProLogis..................................... 1.3000 1.2399 1.0628
SC-European Real Estate Shares............... 0.4463 0.0440 --
SC-Preferred Growth.......................... 1.3125 1.1000 0.2000
SC-US Real Estate Shares..................... 0.5129 0.7521 0.9955
</TABLE>
- --------
(a) Atlantic merged into Archstone in July 1998.
(b) Includes deferred interest income from Strategic Hotel of $3,041 and
$5,469 for the years ended December 31, 1999 and 1998, respectively. See
note 14 for discussion of the sale of Strategic Hotel.
43
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes real estate investments of Security Capital's
consolidated investees as of December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Extended-stay lodging properties (Homestead):
Operating properties............................. $ 901,558 $ 939,107
Properties under capital lease................... 145,000 --
Developments under construction.................. -- 110,891
Developments in planning......................... -- 126,054
Land held for sale............................... 22,960 4,332
---------- ----------
Total real estate, at cost..................... 1,069,518 1,180,384
Less accumulated depreciation.................. 72,008 48,783
---------- ----------
Subtotal..................................... 997,510 1,131,601
---------- ----------
Senior assisted living properties (Belmont):
Operating properties............................. 40,814 15,054
Developments under construction.................. 20,144 13,565
Developments in planning......................... 14,467 2,712
Land held for future development................. 1,265 1,320
Land held for sale............................... -- 650
---------- ----------
Total real estate, at cost..................... 76,690 33,301
Less accumulated depreciation.................. 726 33
---------- ----------
Subtotal..................................... 75,964 33,268
---------- ----------
Total real estate.................................. $1,073,474 $1,164,869
========== ==========
</TABLE>
Presented below is summarized financial information for Security Capital's
equity-method investees as of December 31, 1999 and 1998 and for the years
ending December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Archstone Atlantic(a)
-------------------------------- -------------------
1999 1998 1997 1998 1997
---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Total assets.............. $5,302,437 $5,059,898 $2,805,686 $ -- $1,441,411
Total liabilities......... 2,679,628 2,410,114 1,265,250 -- 550,430
Minority interest......... 55,303 21,459 -- -- --
Shareholders' equity...... 2,567,506 2,628,325 1,540,436 -- 890,981
Revenues.................. 666,872 513,645 355,662 101,532 175,157
Net earnings before
extraordinary items and
change in accounting
principles............... 229,372 199,457 72,918 26,175 52,723
Net earnings attributable
to common shares......... 204,528 177,022 53,534 24,019 51,154
Security Capital share of
net earnings............. 79,700 63,078 18,849 11,998 26,738
</TABLE>
<TABLE>
<CAPTION>
ProLogis Strategic Hotel(b)
-------------------------------- -------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total assets............ $5,848,040 $4,330,729 $3,033,953 $ -- $2,135,294 $1,018,292
Total liabilities....... 2,832,232 2,023,066 1,003,912 -- 1,206,855 638,013
Minority interest....... 62,072 51,295 53,304 -- 267,198 108,030
Shareholders' equity.... 2,953,736 2,256,368 1,976,737 -- 661,241 272,249
Revenues................ 567,171 372,795 296,118 350,133 547,388 72,000
Net earnings (loss)
before extraordinary
items and change in
accounting principles.. 182,274 111,329 39,749 15,462 (4,586) (12,576)
Net earnings (loss)
attributable to common
shares................. 123,999 62,231 4,431 15,462 (4,586) (12,576)
Security Capital share
of net earnings (loss). 41,072 25,514 2,101 4,706 (1,497) (3,400)
Security Capital
interest income from
affiliate.............. -- -- -- 6,541 11,090 1,297
</TABLE>
44
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
SC-European Realty(c) SC-Preferred Growth SC-U.S. Realty
---------------------- ---------------------------- ----------------------------------
1999 1998 1999 1998 1997 1999 1998 1997
---------- ---------- -------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets............ $1,904,712 $1,650,897 $881,391 $840,243 $597,747 $2,530,886 $2,873,627 $2,901,821
Total liabilities....... 673,593 542,681 68,461 18,114 52,836 636,008 647,243 143,400
Minority interest....... 34,527 22,843 -- -- -- -- -- --
Shareholders' equity.... 1,196,592 1,085,373 812,930 822,129 544,911 1,894,878 2,226,384 2,758,421
Revenues................ 120,393 56,953 -- -- -- -- -- --
Net loss before change
in accounting princi-
ple.................... (7,737) (10,046) -- -- -- -- -- --
Net investment income
(loss)................. -- -- 53,767 35,238 1,482 70,992 77,899 60,308
Realized gains (losses)
on investments......... -- -- (16,337) -- -- (65,587) 32,878 41,073
Increase (decrease) in
market value of
investments............ -- -- (7,103) (66,618) 49,866 (152,693) (642,372) 264,974
Adjusted net earnings
(loss)(d).............. (8,655) (10,046) 30,327 (31,380) 51,348 (126,823) (482,840) 366,355
Security Capital share
of adjusted net earn-
ings (loss)............ (2,669) (3,467) 2,888 (3,831) 6,175 (46,798) (163,745) 120,113
</TABLE>
- --------
(a) Atlantic merged into Archstone in July 1998.
(b) Subsequent to the second quarter of 1999, Security Capital no longer
recorded equity in earnings from Strategic Hotel as a result of the write-
down in carrying value to net sales value as of June 28, 1999. Therefore,
the 1999 summarized earnings results only include Strategic Hotel through
June 28, 1999.
(c) SC-European Realty was formed in 1998. 1998 amounts have been restated as
discussed in note 1.
(d) SC-U.S. Realty's earnings are adjusted to exclude their unrealized gains
and losses in Security Capital securities.
(3) Financial Services Division
Security Capital's Financial Services Division earns fee income from
providing the services described below. Such services are furnished primarily
to affiliates.
Capital Management Services
The Global Capital Management Group provides oversight, guidance and/or
management to various entities which own real estate securities on strategic,
intermediate-term or short-term bases. Customers include managed entities such
as SC-U.S. Realty, SC-European Realty and SC-Preferred Growth, and open-end
entities, including the company's various mutual funds as well as third-party
accounts.
Operating Advisors
Financial Services Division subsidiaries domiciled in Luxembourg advise on
all investment and operational activities of SC-U.S. Realty and SC-European
Realty. The advisors are paid an operating advisor fee of 1.25% of average
monthly investments at fair value (other than liquid short-term investments
and investments in Security Capital).
Management Company
A U.S. subsidiary manages SC-Preferred Growth (a REIT), SC-US Real Estate
Shares and SC-European Real Estate Shares, which are open-end mutual funds, as
well as separate accounts. The management fees earned by this subsidiary range
from 0.45% (plus performance incentives) to 1.12% of the fair value of the
average assets under management.
45
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capital Markets Services
The Capital Markets Group provides capital markets services, mainly through
private placement offerings, for affiliated companies.
Corporate Services
The Corporate Services Group provides information systems and related
processing, administrative and accounting services to affiliates for
negotiated fees under administrative services agreements. As a result,
Security Capital and certain of its operating affiliates realize the benefits
of economies of scale by consolidating several high-volume processing
activities in a centralized operations center. In addition, operating
affiliates in a start-up mode have access to proven and efficient critical
services.
Real Estate Research Services
The Real Estate Research Group conducts proprietary real estate research
and provides analysis of long-term market conditions and short-term trends to
Security Capital's affiliates.
Formerly Owned REIT Managers and Property Managers
Prior to September 1997, certain Security Capital Financial Services
Division subsidiaries managed the operations ("REIT Managers") and provided
property management services ("Property Managers") to various REITs
(Archstone, Atlantic and ProLogis) in which Security Capital was a significant
owner. Each REIT Manager was paid a REIT management fee based on 16% of cash
flow, as defined, of the REIT. Property management fees were at market rates
and were paid separately to Security Capital's property management
subsidiaries. Effective September 9, 1997, Security Capital exchanged the REIT
Managers and Property Managers for additional common shares of Archstone
(3,295,533 shares), Atlantic (2,306,591 shares) and ProLogis (3,692,024
shares) and recorded a gain of $93,395,000.
Financial Services Division revenues for the years ended December 31, 1999,
1998 and 1997, were earned from the following sources (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Capital Markets Group...................... $ 23,163 $ 31,091 $ 13,397
Corporate Services Group................... 17,697 17,644 5,334
Global Capital Management Group............ 57,264 49,199 26,210
Real Estate Research Group................. 1,134 1,461 840
Property management........................ -- -- 23,785
REIT management............................ -- -- 39,379
-------- -------- --------
Total Financial Services Division
revenues.............................. 99,258 99,395 108,945
Less amounts eliminated in consolidation... (11,213) (5,545) (3,004)
-------- -------- --------
Consolidated Financial Services Division
revenue from related parties.............. $ 88,045 $ 93,850 $105,941
======== ======== ========
</TABLE>
(4) Segment Reporting
Earnings before depreciation, amortization and deferred taxes, or "EBDADT,"
is considered by management to be an additional measure of operating
performance for Security Capital and its affiliates, supplementing net
earnings as measured by GAAP. For EBDADT purposes, all investees (including
consolidated
46
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
investees) are accounted for on the equity method. In general, EBDADT is
defined for Security Capital and its consolidated and equity-method investees
as follows:
Net earnings before affiliate extraordinary items plus or minus:
<TABLE>
<C> <S>
Plus Real estate depreciation (depreciation will not be added back
for non-real estate assets whose value is declining over time)
Plus Amortization of real estate related non-cash items
Plus EBDADT, net of dividends received, of SC-U.S. Realty from its
strategic investees
Plus Other non-cash, non-recurring expenses
Plus/Minus Deferred tax expense (benefit)
Plus/Minus Losses (gains) on the disposition of depreciated real estate
Plus/Minus Unrealized losses (gains) on non-strategic investments
</TABLE>
With respect to Security Capital investees in which Security Capital has
less than a 20% interest, and does not have the ability to significantly
influence management, Security Capital includes only dividends or interest
received in its EBDADT. SC-U.S. Realty and SC-European Realty use the same
approach for investees in which they own less than 20%.
The EBDADT measure presented by Security Capital will not be comparable
with other entities that do not compute EBDADT in a manner consistent with
Security Capital.
Security Capital operates its business based on two reportable segments.
These segments are managed separately due to the nature of their operations.
The first segment, the Capital Division, records revenues by reporting its
pro-rata share of its investees' EBDADT and the second segment, the Financial
Services Division, records revenues based on the services provided to its
customers and includes all revenues received from affiliates. These segments
are described in notes 2 and 3 above.
47
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Presented below is a Statement of EBDADT by reportable segment for the
years ended December 31, 1999, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
1999 1998 1997(2)
-------- -------- --------
<S> <C> <C> <C>
Capital Division:
Equity in Investees' EBDADT............... $346,959 $306,273 $205,982
Interest and other income................. 3,596 2,238 4,085
-------- -------- --------
350,555 308,511 210,067
-------- -------- --------
Operating expenses(1)..................... 29,538 36,347 27,375
Interest expense(2)....................... 82,303 59,220 27,248
Current income tax (benefit) expense...... (2,063) 2,997 --
Convertible preferred share dividends..... 18,035 15,245 10,425
-------- -------- --------
Capital Division EBDADT(3).............. 222,742 194,702 145,019
-------- -------- --------
Financial Services Division:
Revenues.................................. 99,258 99,395 53,411
Operating expenses(1)..................... 82,476 70,111 35,512
Current income tax expense................ 1,278 1,701 575
-------- -------- --------
Financial Services Division EBDADT...... 15,504 27,583 17,324
-------- -------- --------
EBDADT before special items................. 238,246 222,285 162,343
Realized gains (losses)(4)................ (25,826) (409) 21,724
Special charges(5)........................ (45,581) (8,449) --
Loss on sale of Strategic Hotel........... (55,288) -- --
Gain on retirement of debentures, net of
tax...................................... 10,942 -- --
-------- -------- --------
EBDADT...................................... $122,493 $213,427 $184,067
======== ======== ========
</TABLE>
- --------
(1) Included in operating expenses are allocations of general and
administrative expenses to each division based on revenues. Prior to such
allocation, Capital Division expenses were $8,965 in 1999, $7,029 in 1998
and $3,174 in 1997, Financial Services Division expenses were $75,754 in
1999, $74,416 in 1998 and $43,974 in 1997 and general and administrative
expenses were $27,295 in 1999, $25,013 in 1998 and $15,739 in 1997.
(2) The 1997 EBDADT information reflects pro forma data assuming the September
9, 1997, exchange of Security Capital's REIT management and property
management companies for common shares of ProLogis and Archstone occurred
as of the beginning of 1997 and excluding interest expense on the 12%
convertible subordinated debentures due 2014, as they were converted to
common stock prior to December 31, 1997.
(3) For purposes of calculating Capital Division EBDADT, Security Capital
applies all interest expense, preferred share dividends and similar
charges for invested capital to the Capital Division. Capital Division
operating expenses include the direct costs of personnel assigned to the
Capital Division plus a proportionate share of general and administrative
costs based on revenues.
(4) Includes $24,201 for the year ended December 31, 1999, of realized losses
related to intermediate-term investments of SC-U.S. Realty.
(5) The special charges relate to land write-downs and personnel and overhead
reductions.
48
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Presented below is a reconciliation of net earnings (loss) to EBDADT for
the years ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net earnings (loss) attributable to
common shares.......................... $(116,996) $(157,104) $ 106,154
Investee reconciling items:
Real estate depreciation.............. 187,796 162,476 76,307
Gain on sale of undepreciated real
estate............................... (36,971) (25,503) (20,912)
Unrealized (gains) losses............. 59,564 220,612 (104,730)
Loss on sale of management companies.. -- -- 62,042
EBDADT, net of dividends from Strate-
gic Investees of SC-U.S. Realty...... 28,906 18,694 9,015
Interest rate hedge expense........... 309 13,642 --
Loss on extinguishment of debt........ 434 17,657 --
Other................................. 1,373 (2,199) 6,430
--------- --------- ---------
241,411 405,379 28,152
========= ========= =========
Security Capital reconciling items:
Deferred tax (benefit) expense........ (14,064) (54,488) 56,378
Change in accounting principle........ 16,136 -- --
Extraordinary gain on extinguishment
of debt.............................. (5,090) -- --
Convertible debenture interest
expense.............................. -- -- 74,965
Non-cash preferred share dividends.... -- 19,843 --
Gain on sale of management companies.. -- -- (93,395)
Pro forma effect of the sale of the
REIT and property management compa-
nies................................. -- -- 11,813
Other................................. 1,096 (203) --
--------- --------- ---------
(1,922) (34,848) 49,761
--------- --------- ---------
Total EBDADT........................ $ 122,493 $ 213,427 $ 184,067
========= ========= =========
</TABLE>
Presented below is a reconciliation of assets at fair value to assets
presented in accordance with GAAP as of December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Capital Division Assets at fair value (1)........ $3,481,013 $3,973,091
Excess of assets at fair value over
unconsolidated GAAP assets.................... (94,400) (300,139)
Consolidation of Homestead, Belmont and mutual
funds......................................... 590,581 847,584
Proceeds from assumed exercise of options and
warrants (2).................................. (20,043) (10,179)
---------- ----------
GAAP Assets.................................. $3,957,151 $4,510,357
========== ==========
</TABLE>
- --------
(1) For internal management purposes, Security Capital values its Capital
Division assets at fair value and does not allocate a value to the
Financial Services Division.
(2) Includes only those options and warrants whose exercise price is equal to
or less than market value as of these dates.
49
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Indebtedness
Lines of Credit:
A summary of the lines of credit borrowings as of and for the years ended
December 31, 1999 and 1998, is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------- -------------------------------
Security Security
Capital Homestead Combined Capital Homestead Combined
-------- --------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total lines of credit... $470,000 $170,000 $640,000 $650,000 $400,000 $1,050,000
Borrowings outstanding
at December 31......... 90,900 125,449 216,349 163,400 357,080 520,480
Weighted average daily
borrowings............. 125,677 264,639 390,316 247,283 179,958 427,241
Weighted average daily
interest rate.......... 6.43% 7.73% 7.31% 7.13% 7.51% 7.29%
Interest rate as of
December 31............ 7.57% 9.48% 8.68% 6.35% 7.30% 7.00%
</TABLE>
At December 31, 1999, Security Capital had a $470,000,000 unsecured
revolving line of credit with Wells Fargo Bank, National Association (Wells
Fargo), as agent for a group of lenders. Borrowings accrued interest at LIBOR
plus a margin (1.30% as of December 31, 1999), based upon Security Capital's
credit rating, or a Base Rate (defined as the higher of Wells Fargo prime rate
or the Federal Funds rate plus .50%). The agreement is effective through April
6, 2002, with an option to renew for successive one-year periods with the
approval of lenders. Commitment fees on the line range from 0.125% to 0.20%
per annum based on the average unfunded line of credit balance. The line is
guaranteed by SC Realty Incorporated ("SC Realty") and SC Realty Shares
Limited, each of which is a wholly owned subsidiary of Security Capital.
During a non-monetary default, no payments other than dividends paid on
Security Capital's Series B Preferred Shares are permitted. Distributions and
dividends paid, other than those on Security Capital's Series B Preferred
Shares, cannot exceed 50% of the cash flow available for distributions,
provided no event of default has occurred and is continuing. In the event of a
monetary default, all distributions are prohibited.
At December 31, 1999, Homestead had a $170,000,000 line of credit maturing
December 31, 2000. The line as amended March 18, 1999, bears interest at a
margin of 2.0% to 3.0% over LIBOR, or alternatively 1.0% to 2.0% over prime or
1.5% to 2.5% over the federal funds rate, with the margin dependent on the
percentage of borrowings outstanding versus qualifying collateral. The line
currently prohibits distributions or dividends on equity. Total cost, as
defined, of projects in development cannot exceed 25% of gross asset value, as
defined, in 1999 or 15% in 2000; and Homestead's business activities will be
limited to development, ownership and operation of extended stay hotels.
Subsequent to year end 1999 Homestead has made payments totaling
$31,500,000 on the bank line of credit reducing its line of credit debt to
$93,900,000. On February 29, 2000, Homestead entered into an amended and
restated bank credit facility which allows for $110,000,000 of total
borrowings of which $35,000,000 is available on a revolving basis. The amended
and restated line matures February 28, 2003, bears interest at LIBOR plus
2.5%, is secured by 64 operating properties, permits payment of dividends
based upon a definition of free cash flow, and requires maintenance of
financial ratio and coverage covenants.
Each line of credit requires maintenance of certain financial covenants.
Security Capital, SC Realty, SC Realty Shares Limited and Homestead were in
compliance with all such covenants at December 31, 1999.
Homestead Convertible Mortgage Notes Payable:
At December 31, 1999, Homestead had outstanding convertible mortgage notes
in the principal amount of $221,334,000, all of which were payable to
Archstone. The notes are collateralized by 54 Homestead properties
50
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with a cost of $359,300,000. The notes accrue interest at 9.0% on the
principal amount and require interest only payments every six months on May 28
and November 28 of each year. The notes are due October 31, 2006, and are
callable on or after May 28, 2001. The notes are convertible, at the option of
Archstone, into 21,191,262 shares of Homestead common stock (a conversion
ratio equal to one share of common stock for every approximate $10.44 of
principal amount outstanding). If these notes were converted Security
Capital's ownership in Homestead would be reduced from 87.0% to 74.0%.
In the third quarter of 1998, Homestead entered into an agreement whereby,
through a series of transactions, Homestead extinguished $98,000,000 of 9.0%
convertible mortgage notes due to Atlantic with the proceeds of the
$122,000,000 first mortgage note (see note 8). The transaction resulted in a
$25,344,000 loss on early extinguishment of debt measured as the difference
between the $98,000,000 carrying amount of the 9.0% convertible mortgage notes
and the amount paid to extinguish the debt, including transaction costs. The
loss on extinguishment was recorded as an extraordinary item in the third
quarter of 1998.
The $122,000,000 first mortgage note was secured by 26 Homestead properties
which had formerly secured the convertible mortgage notes to Atlantic. The
$122,000,000 mortgage bore interest at LIBOR plus 1.70% through September 30,
1998, LIBOR plus 2% through November 30, 1998, and LIBOR plus 2.25% thereafter
through February 23, 1999, when the note was paid in full with the proceeds of
a sale and leaseback of 18 of the 26 collateral properties (see Capital Lease
Obligation in note 8).
Belmont Construction Notes Payable:
Belmont obtained a $22,865,000 commitment for construction loans from a
bank during the third and fourth quarters of 1999 on three communities under
construction. The loans bear interest at rates of 30-day LIBOR plus 2.5%
during the construction period and 30-day LIBOR plus 2.35% after issuance of
certificates of occupancy and operating licenses. The outstanding balance and
weighted average interest rate as of December 31, 1999, was $16,022,000 and
8.38%, respectively. The loans have a maturity date of September 2001 and are
secured by a deed of trust on land, building, furniture and fixtures and an
assignment of rents and leases.
The terms of the construction loans require Belmont to maintain certain
financial ratios. Belmont was in compliance with all such requirements as of
December 31, 1999. In January 2000, Belmont obtained a $14,775,000 commitment
for a fourth community under construction, bringing Belmont's total commitment
to $37,640,000.
Senior Unsecured Notes:
During 1998 and 1999 Security Capital issued the following unsecured long-
term debt (in thousands):
<TABLE>
<CAPTION>
Principal Maturity Semi-annual interest Balance at
Amount Interest rate Date Payment Dates December 31, 1999
--------- ------------- -------- ---------------------- -----------------
<S> <C> <C> <C> <C>
$100,000 7.75% 11/15/03 May and November 15 $ 99,927
14,700 7.66% 12/21/04 March and September 15 14,702
5,000 7.75% 01/11/05 March and September 15 5,000
54,550 7.80% 01/12/05 March and September 15 54,550
25,750 7.80% 01/19/05 March and September 15 25,750
200,000 6.95% 06/15/05 June and December 15 199,832
100,000 7.15% 06/15/07 June and December 15 99,845
200,000 7.70% 06/15/28 June and December 15 200,000
-------- --------
$700,000 $699,606
======== ========
</TABLE>
51
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All of the Notes are redeemable at any time at the option of Security
Capital, in whole or in part, at a redemption price equal to the sum of the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date plus an adjustment, if any, based on the yield to maturity
relative to treasury security market yields available at redemption.
Under the terms of the indentures, Security Capital may incur additional
debt only if, after giving effect to the debt being incurred, (i) the ratio of
debt to adjusted total assets, as defined in the indentures, does not exceed
50%, and (ii) the fixed charge coverage ratio, as defined in the indentures,
for the four preceding fiscal quarters is not less than 1.5 to 1.0. In
addition, Security Capital may not at any time permit its consolidated
tangible net worth, as defined in the indentures, to be less than
$1,500,000,000. At December 31, 1999, Security Capital was in compliance with
all debt covenants contained in the indentures.
Convertible Debentures:
As of December 31, 1999 and 1998, Security Capital had $278,951,000 and
$322,774,000, respectively, of 6.50% convertible subordinated debentures due
2016 outstanding. The convertible debentures accrue interest at 6.5% per annum
and pay interest semi-annually in June and December. The convertible
debentures are convertible into Class A Shares at $1,153.90 per share, at the
option of the holder. Security Capital can redeem the convertible debentures
at par plus accrued interest at any time, upon not less than 60 days nor more
than 90 days prior written notice to the holders.
In November 1999, Security Capital's Board of Directors authorized the
repurchase of up to $60,000,000 of the convertible debentures. As of December
31, 1999, Security Capital repurchased $37,750,000 principal amount of the
convertible debentures, resulting in an extraordinary gain of $10,942,000.
Other Long-Term Liabilities:
Homestead had a series of agreements with an unaffiliated person ("Finder")
who developed the Homestead Village concept and performed certain services.
The agreements extended through February 5, 2043, and provided for quarterly
payments to Finder for assistance in the site location, development and
initial operations of the first 39 Homestead Village properties. On October
25, 1999, Homestead paid the Finder $2,300,000 in full settlement of all
amounts due under the agreements, including amounts owed for the third quarter
of 1999, and the agreements and Homestead's obligation to pay any future
amounts to Finder were terminated. The difference between the $7,900,000
carrying amount of the long-term liability at the time of repayment and the
amount paid to terminate the agreements resulted in a gain of $5,800,000 which
was recorded as an extraordinary item in the fourth quarter of 1999.
Interest:
Presented below are the interest costs incurred by Security Capital and its
consolidated subsidiaries for the years ended December 31, 1999, 1998 and 1997
(in thousands).
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total interest incurred....................... $141,663 $108,906 $174,317
======== ======== ========
Homestead and Belmont capitalized interest
included in total interest incurred.......... $ 8,209 $ 26,703 $ 69,883
======== ======== ========
Interest paid in cash......................... $133,643 $ 92,963 $111,445
======== ======== ========
Amortization of deferred financing costs
included in interest expense................. $ 6,155 $ 6,360 $ 5,031
======== ======== ========
</TABLE>
52
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Shareholders' Equity
Share Repurchase Program:
In August 1999, Security Capital's Board of Directors authorized the
repurchase of up to $100,000,000 of Class A Shares and Class B Shares of
Security Capital. An additional $100,000,000 repurchase program for Class A
Shares and Class B Shares was announced on December 8, 1999. As of December
31, 1999, under the share repurchase program, Security Capital had repurchased
69,705 Class A Shares and 5,601,547 Class B Shares for a combined purchase
price of $119,126,000. Through March 1, 2000, under the share repurchase
program, Security Capital had repurchased 86,113 Class A Shares and 8,298,347
Class B Shares for a combined purchase price of $163,698,000.
Shelf Registration:
In September 1998, Security Capital filed a $1,000,000,000 shelf
registration statement with the Securities and Exchange Commission ("SEC").
These securities can be issued in the form of Class A Shares, Class B Shares,
unsecured debt securities, preferred shares or warrants to purchase any of the
above securities. They will be issued on an as-needed basis, subject to
Security Capital's ability to complete offerings on satisfactory terms. As of
December 31, 1999, Security Capital had $800,000,000 in shelf registered
securities available for issuance.
Series B Preferred Shares:
On May 12, 1998, Security Capital issued 257,642 shares of Series B
Preferred Shares, par value $.01 per share, to Commerzbank Aktiengesellshaft
("Commerzbank"), in exchange for 139,000 Series A Preferred Shares and
3,293,288 Class B Shares held by Commerzbank. Security Capital also paid a
cash dividend to Commerzbank on the Series A Preferred Shares for the period
from April 1, 1998, to May 12, 1998, of $1,216,250.
The Series B Preferred Shares have a liquidation preference of $1,000 per
share for an aggregate preference of $257,642,000 plus any accrued and unpaid
dividends. Subject to certain adjustments, each Series B Preferred Share is
convertible, at the option of the holder at any time, into 25.641026 Class B
Shares (a conversion price of $39.00 per share). The Series B Preferred Shares
are initially convertible into a total of 6,606,205 Class B Shares and are
entitled to receive cumulative preferential cash distributions at the rate of
7.0% of the liquidation preference per annum. The Series B Preferred Shares
are redeemable, at the option of Security Capital, after May 12, 2003, at a
redemption price equal to $1,000 per share plus any accrued and unpaid
dividends.
The exchange of the Series B Preferred Shares for the Series A Preferred
Shares and 3,293,288 Class B Shares was based on the fair value of those
securities at the date of the Exchange Agreement. For financial accounting
purposes, the fair value of the Series B Preferred Shares issued
($257,642,000) less the sum of (a) the carrying value of the Series A
Preferred Shares ($139,000,000) and (b) the fair value of the Class B Shares
($98,799,000) was recorded as a dividend ($19,843,000).
Series A Preferred Shares:
The 139,000 Series A Preferred Shares, which were exchanged for Series B
Preferred Shares as described above, were issued on April 1, 1996. The Series
A Preferred Shares had a liquidation preference of $1,000 per share for an
aggregate preference of $139,000,000 plus any accrued but unpaid dividends.
Holders of the Series A Preferred Shares received cash distributions at the
rate of 7.5% of the liquidation preference per annum (equivalent to $75.00 per
share).
53
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debenture Interest Reinvestment Plan:
Participants in Security Capital's Debenture Interest Reinvestment Plan may
reinvest the cash portion of their interest payments applicable to Security
Capital's convertible debentures in Class A Shares at the fair value per share
determined as of the prior quarter end date.
Acquisition of SCGPB Incorporated:
Included in general, administrative and other expenses in 1997 is a
$6,600,000 charge associated with an exchange of Class A Shares for shares of
a corporate entity (SCGPB Incorporated) owned by Security Capital's chairman,
whose sole assets were warrants and options to purchase Class A Shares. The
above-described charge represents the value applicable to the holder's ability
to defer exercising the warrants and options until 2002 in accordance with
their terms.
Per Share Data:
The following is a reconciliation of the numerators and denominators used
to calculate basic and diluted earnings per Class B Share under SFAS 128 for
the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net income (loss) before extraordinary
items and change in accounting
principle............................... $ (98,857) $(104,359) $116,579
Preferred Share dividends................ (18,035) (35,088) (10,425)
--------- --------- --------
Net income (loss) attributable to common
shares before extraordinary items and
change in accounting principle.......... (116,892) (139,447) 106,154
Debenture interest expense, net of tax... -- -- 12,860
--------- --------- --------
Net income (loss) before extraordinary
items and change in accounting principle
attributable to common shares and
assumed conversions..................... $(116,892) $(139,447) $119,014
========= ========= ========
Basic weighted-average Class B Shares
outstanding............................. 119,255 121,325 76,577
Increase in shares which would result
from:
Exercise of options.................... -- -- 1,302
Exercise of warrants................... -- -- 2,605
Conversion of debentures............... -- -- 12,570
--------- --------- --------
Diluted weighted-average Class B Shares
outstanding............................. 119,255 121,325 93,054
========= ========= ========
Per share net earnings (loss)
attributable to Class B Shares before
extraordinary item and change in
accounting principle:
Basic.................................. $ (0.98) $ (1.15) $ 1.39
========= ========= ========
Diluted................................ $ (0.98) $ (1.15) $ 1.28
========= ========= ========
</TABLE>
54
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For loss periods (1999 and 1998), the Convertible Debentures and the
Convertible Preferred Shares are not assumed converted and the conversion of
options and warrants are not assumed exercised for the purpose of calculating
diluted earnings per Class B Share as the effects are anti-dilutive.
(7) Stock Based Compensation
Security Capital has stock option plans for directors, officers and key
employees which provide for grants of non-qualified stock options and
incentive options. Under all option plans, the option exercise price equals
the fair value of the stock as of the date of grant. Vesting of the options
commences no more than three years from grant date and options are fully
vested no more than six years from grant date. Options expire ten years from
date of grant. As of December 31, 1999, options to purchase 40,432 Class A
Shares and 5,251,327 Class B Shares are available for issue.
Security Capital has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the option plans. As
permitted by SFAS 123, Security Capital has applied its provisions to options
granted subsequent to December 31, 1994. Since the SFAS 123 method of
accounting has not been applied to options granted prior to 1995, the
resulting pro forma compensation cost may not be representative of such costs
to be expected in future years. The pro forma effect of SFAS 123 is summarized
as follows (in thousands, except share data):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net earnings (loss)--as reported.......... $(116,996) $(157,104) $106,154
Net earnings (loss)--pro forma for SFAS
123...................................... $(126,116) $(165,770) $102,435
Basic earnings (loss) per share--as
reported................................. $ (0.98) $ (1.29) $ 1.39
Basic earnings (loss) per share--pro
forma.................................... $ (1.06) $ (1.37) $ 1.34
Diluted earnings (loss) per share--as
reported................................. $ (0.98) $ (1.29) $ 1.28
Diluted earnings (loss) per share--pro
forma.................................... $ (1.06) $ (1.37) $ 1.21
</TABLE>
Pro forma net earnings for 1999, 1998 and 1997 include a deferred tax
benefit of $4,911,000, $4,666,000 and $4,630,000, respectively, related to the
additional compensation expense.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Risk-free interest rates:
Class A Shares...................................... 6.28% 4.74% 5.87%
Class B Shares...................................... 6.58% 4.72% --
Expected lives (in years):
Class A Shares...................................... 2.97 6.70 7.00
Class B Shares...................................... 6.25 6.25 --
Expected dividends None None None
Expected volatility:
Class A Shares...................................... 32% 43% 22%
Class B Shares...................................... 30% 30% --
Weighted average fair value per share granted:
Class A Shares...................................... $ 197 $ 744 $567
Class B Shares...................................... $6.01 $6.39 $--
</TABLE>
55
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of Security Capital's stock option plans at
December 31, 1999, 1998 and 1997, and changes during the years then ended is
presented in the following table:
<TABLE>
<CAPTION>
Common Stock
---------------------------------------
Class A Wtd. Avg. Class B Wtd. Avg.
Shares Ex. Price Shares Ex. Price
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996. 140,314 $ 639 -- $ --
Converted from 12% debentures
to common stock options(1).... 54,144 1,055 -- --
Granted........................ 53,035 1,476 -- --
Acquisition of SCGPB
Incorporated (see note 6)..... (23,836) 475 -- --
Exercised...................... (7,472) 684 -- --
Forfeited...................... (8,228) 944 -- --
------- ---------
Outstanding at December 31, 1997. 207,957 966 -- --
------- ---------
Granted........................ 8,666 1,446 3,901,841 15.99
Exercised...................... (1,488) 647 -- --
Forfeited...................... (10,208) 1,090 (4,068) 18.44
------- ---------
Outstanding at December 31, 1998. 204,927 983 3,897,773 15.98
------- ---------
Granted........................ 235 692 2,612,800 13.73
Exercised...................... (1,766) 212 -- --
Forfeited...................... (24,895) 1,264 (922,803) 15.81
------- ---------
Outstanding at December 31, 1999. 178,501 $ 951 5,587,770 $14.96
======= =========
</TABLE>
- --------
(1) $56,739,674 of 12% convertible subordinated debentures were converted to
Class A Shares during 1997 at a conversion price of $1,048.
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------
Wtd. Avg.
Range of Exercise Remaining Wtd. Avg. Wtd. Avg.
Prices for Class A and Number Contractual Exercise Number Exercise
B Shares Outstanding Life Price Exercisable Price
---------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Class A Shares:
$62-1,043............. 72,011 3.58 years $ 497 50,469 $ 353
$1,046-1,139.......... 61,702 5.30 years $1,095 42,607 $1,082
$1,154-1,600.......... 44,788 7.86 years $1,481 12,531 $1,472
--------- -------
178,501 105,607
========= =======
Class B Shares:
$12-24................ 5,587,770 9.21 years $14.96 835,250 $15.87
</TABLE>
Restricted Stock Awards
In December 1999 and 1998, Security Capital awarded 560,386 and 1,268,000
restricted Class B Share units, respectively, to certain officers. Each
restricted Class B Share unit provides the holder with an award of one Class B
Share, subject to either a four year, five year or performance-related vesting
schedule. The related compensation expense is being recognized over the
vesting periods. Compensation expense recognized was $3,576,000 and $715,000
for the years ended 1999 and 1998, respectively.
56
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
401(k) Plan and Nonqualified Savings Plan
Security Capital has a 401(k) plan and a nonqualified savings plan. The
plans work together to provide for matching employer contributions of 50 cents
for every dollar contributed by an employee, up to 6% of the employees' annual
compensation. The matching employer contributions are made in Class B Shares,
which vest based on years of service at a rate of 20% per year.
(8) Leases
On February 23, 1999, Homestead completed a sale and leaseback of 18 of the
26 Homestead properties collaterizing a $122,000,000 mortgage note, which was
due June 1999. Hospitality Properties Trust purchased the properties for
$145,000,000. Homestead will continue to operate the properties under a long-
term lease through December 2015 and pay a minimum rent of approximately
$16,000,000 per year and a minimum payment of $1,500,000 per year to a
furniture, fixtures and equipment reserve. Homestead posted a security deposit
equal to one year's rent. The majority of the proceeds from the sale were used
to repay the $122,000,000 mortgage note and to post the approximate
$16,000,000 security deposit.
The lease is considered a capital lease for financial reporting purposes
and thus the present value of the minimum lease payments, discounted at
approximately 9.8%, was recorded as an asset of $145,000,000 to be amortized
over the lease term, and an obligation, which will be reduced over the term of
the lease by allocating rent payments between interest expense and reduction
of the lease obligation. The balance of the lease obligation at December 31,
1999, was $140,854,000.
The lease also provides for two extension periods of 15 years each at the
option of Homestead, requires payment of percentage rents beginning July 2000
based on increases in revenues over a base period, and requires a percentage
of revenues be paid to a furniture, fixtures and equipment reserve to be used
for capital expenditures.
Minimum future rental payments due under capital leases and non-cancelable
operating leases (principally for office space and equipment) having remaining
terms in excess of one year as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
Year Ended December 31, -------- ---------
<S> <C> <C>
2000................................................... $ 17,460 $ 5,997
2001................................................... 17,460 5,786
2002................................................... 17,460 4,822
2003................................................... 17,460 3,643
2004................................................... 17,460 2,808
Thereafter............................................. 192,060 6,142
-------- -------
Total minimum payments............................. 279,360 $29,198
=======
Less amount representing interest.................... 138,506
--------
Present value of net minimum lease payments............ $140,854
========
</TABLE>
Lease expense for the years ended December 31, 1999, 1998 and 1997, was
$6,016,000, $5,445,000 and $4,008,000, respectively, including $695,000,
$676,000 and $1,445,000 in 1999, 1998 and 1997, respectively, paid to
ProLogis. Included above are lease agreements with ProLogis with total
remaining obligations of $3,900,000.
57
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Income Taxes
Security Capital accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting For Income Taxes" ("SFAS 109").
Security Capital files a consolidated Federal income tax return. On May 28,
1999, Security Capital increased its ownership in Homestead from 69.8% to 87%.
So long as Security Capital owns more than 80% of Homestead, Security Capital
will consolidate Homestead's taxable results in Security Capital's federal
income tax return. Prior to May 28, 1999, Homestead filed a separate federal
income tax return. SC-US Real Estate Shares and SC-European Real Estate Shares
have complied with the provisions of the Internal Revenue Code available to
regulated investment companies and intend to distribute investment company net
taxable income and net capital gains to shareholders. Therefore, no provision
for federal income taxes has been made in Security Capital's consolidated
financial statements for SC-US Real Estate Shares or SC-European Real Estate
Shares.
A reconciliation of income tax expense computed at the U.S. federal
statutory tax rate of 35% in 1999, 1998 and 1997 to the amount recorded in the
consolidated financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Computed U.S. Federal expected provision
(benefit)................................. $(39,834) $(53,952) $ 60,534
Increases (decreases) resulting from:
Change in valuation allowance(1)......... 11,295 -- (21,375)
Non-taxable foreign income, net.......... (8,500) (3,874) (3,955)
State and foreign taxes.................. (86) 1,337 --
Issuance of shares to SCGPB Incorporated. -- -- 2,310
Non-deductible warrant issuance.......... -- -- 17,464
Unrecognized tax benefits in consolidated
subsidiaries............................ 21,818 3,053 (814)
Other.................................... 458 3,646 2,214
-------- -------- --------
Actual U.S. Federal provision (benefit).... $(14,849) $(49,790) $ 56,378
======== ======== ========
</TABLE>
- --------
(1) As of December 31, 1999, represents the valuation allowance provided
against the capital loss tax benefit of $19,336,000 on the provision for
loss on the sale of Strategic Hotel (see note 14).
Security Capital has net operating loss carryforwards ("NOL's") of
approximately $8,747,000 as of December 31, 1999. Security Capital had NOL's
of approximately $57,300,000 at December 31, 1997. The 1997 NOL's were used
entirely during 1998.
58
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1999 and 1998, are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Security Capital's NOL's.......................... $ 3,061 $ --
Homestead's NOL's................................. 30,657 29,144
Deferred financing costs.......................... 15,580 17,322
Lease obligation, mortgages and other liabilities. 54,650 6,274
Capitalized assets................................ 2,071 --
-------- --------
Gross deferred tax assets......................... 106,019 52,740
Valuation allowance............................... (39,455) (29,662)
Other............................................. 6,528 700
-------- --------
Deferred tax assets, net of valuation allowances.. 73,092 23,778
-------- --------
Deferred tax liabilities:
Investments in equity method operating companies.. (5,899) (36,356)
Depreciable assets................................ (79,418) (23,078)
-------- --------
Net deferred tax liability........................ $(12,225) $(35,656)
======== ========
</TABLE>
(10) Derivative Financial Instruments
Security Capital uses derivatives to manage well-defined risks associated
with interest rate fluctuations on anticipated transactions. In May 1998, in
anticipation of the June 1998 debt offering (see note 5), Security Capital
entered into a notional amount of $375,000,000 of forward treasury lock
transactions. These contracts were terminated in June 1998, resulting in
deferred losses totaling $9,500,000. These losses are being amortized into
interest expense over the life of the related Senior Unsecured Notes which
have a weighted average maturity of 16.6 years. As of December 31, 1999 and
1998, Security Capital had no interest rate hedge contracts outstanding.
59
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data (in thousands except per share amounts)
for 1999 and 1998 is summarized below. As discussed in note 1, because of a
change in SC-European Realty's operating strategy, Security Capital was
required to restate the last three quarters of 1998 and the first three
quarters of 1999 to reflect this change. Therefore, presented below are both
the restated and the previously reported amounts.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------- Year Ended
March 31, June 30, September 30, December 31, December 31,
--------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Restated 1999:
Revenues, including
equity in earnings
(loss)............... $ 6,180 $225,130 $ 76,474 $102,161 $ 409,945
Loss from operations.. (95,542) (7,366) (30,666) (561) (134,135)
Net earnings (loss)... (83,701) (22,700) (20,447) 9,852 (116,996)
Basic earnings (loss)
per Class B Share.... (0.69) (0.19) (0.17) 0.09 (0.98)
Diluted earnings
(loss) per Class B
Share................ (0.69) (0.19) (0.17) 0.08 (0.98)
Restated 1998:
Revenues, including
equity in earnings
(loss)............... $ 66,431 $ 49,026 $ (58,416) $108,436 $ 165,477
Earnings (loss) from
operations........... 10,625 (24,714) (141,796) (466) (156,351)
Net earnings (loss)... 4,027 (42,440) (116,510) (2,181) (157,104)
Basic earnings (loss)
per Class B Share.... 0.03 (0.35) (0.97) (0.02) (1.29)
Diluted earnings
(loss) per Class B
Share................ 0.03 (0.35) (0.97) (0.02) (1.29)
Previously Reported
1999:
Revenues, including
equity in earnings
(loss)............... $ (10,072) $215,969 $ 90,222 N/A N/A
Loss from operations.. (111,794) (16,527) (16,918) N/A N/A
Net loss.............. (94,131) (28,654) (11,511) N/A N/A
Basic loss per Class B
Share................ (0.78) (0.24) (0.10) N/A N/A
Diluted loss per Class
B Share.............. (0.78) (0.24) (0.10) N/A N/A
Previously Reported
1998:
Revenues, including
equity in earnings
(loss)............... $ 66,431 $ 49,596 $ (56,198) $113,349 $ 173,178
Earnings (loss) from
operations........... 10,625 (24,144) (139,578) 4,447 (148,650)
Net earnings (loss)... 4,027 (42,070) (115,067) 1,012 (152,098)
Basic earnings (loss)
per Class B Share.... 0.03 (0.35) (0.96) 0.01 (1.25)
Diluted earnings
(loss) per Class B
Share................ 0.03 (0.35) (0.96) 0.01 (1.25)
</TABLE>
(12) Fair Values of Financial Instruments
The following disclosures of the estimated fair value of financial
instruments were determined by Security Capital based on quoted market prices
for the same or similar issues or by discounting the future cash flows using
rates currently available for debt with similar terms and maturities.
Considerable judgement and a high
60
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
degree of subjectivity are involved in developing these estimates and,
accordingly, they are not necessarily indicative of amounts that Security
Capital could realize upon disposition.
The carrying amount of cash and cash equivalents, other assets, accounts
payable and accrued expenses approximate fair value as of December 31, 1999
and 1998, because of the short maturity of these instruments. Similarly, the
carrying value of lines of credit borrowings and the carrying value of the
Belmont construction notes payable approximates fair value at the balance
sheet dates since the interest rates fluctuate based on published market
rates.
The following table reflects the carrying amount and estimated fair value
of Security Capital's long-term debt at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term debt....................... $699,606 $645,159 $614,236 $575,514
Convertible debentures............... $278,951 $227,261 $322,774 $261,253
Homestead convertible mortgage notes
payable............................. $221,334 $218,000 $221,334 $218,363
</TABLE>
(13) Homestead Special Charge
In the second quarter of 1999, Homestead determined, based on its inability
to obtain financing for development of sites beyond those already in
construction, to further curtail its development program. As of the beginning
of the second quarter, Homestead had substantial investments in ownership of
land for development and in costs of pursuit of additional development sites.
All land previously held for development is now held for sale, all pursuits
for acquisition of additional sites for development were abandoned, and
Homestead reduced overhead costs and personnel to reflect a company with
stabilized operations of 136 properties. Homestead recorded a special charge
of $65,296,000 in May 1999 consisting of approximately $43,500,000 for write-
downs of the carrying cost of land held for sale to its estimated fair value
less estimated costs to dispose, approximately $7,100,000 for write-offs of
costs of pursuits and loss of non-refundable earnest money deposits,
approximately $5,500,000 for closing of administrative offices and
discontinued new initiatives, and approximately $9,200,000 for the costs of
severance of personnel. Revisions to these estimates may be required based
upon the ultimate sale of the properties.
Carrying costs on the land sites, such as interest and property taxes, have
been expensed since April 1999, and will continue until the sites are disposed
of and will adversely affect earnings until disposal. Of the 24 land sites
originally held for sale as of May 1999, one was sold in third quarter 1999
and ten were sold in the fourth quarter 1999. Sales of these parcels generated
$72,600,000 in net proceeds. Six of the remaining 13 land sites are subject to
the security interests of the lenders under the Homestead line of credit and
any sale of the encumbered sites requires the consent of the lenders. Proceeds
from the sale of encumbered sites will be used to repay the Homestead line of
credit.
(14) Strategic Hotel
On June 28, 1999, Security Capital's board of directors approved the sale
of its entire ownership position to Strategic Hotel. The sale closed on
September 10, 1999, for net proceeds of approximately $329,000,000. A
provision for loss on the sale of Strategic Hotel of $55,245,000 was recorded
as of June 28, 1999. In conjunction with the provision, a capital loss tax
benefit of $19,336,000 was recorded. However, a valuation allowance of
61
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$11,295,000 was provided against the tax benefit (see note 9) because Security
Capital currently has no definitive plans to sell any assets which would
generate sufficient taxable capital gains to offset this capital loss.
As a result of the write-down in carrying value of Strategic Hotel to its
net sales value, equity in earnings from Strategic Hotel were not recorded
after the second quarter of 1999.
(15) Change in Accounting Principle
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), establishing accounting standards requiring the expensing of
organizational, pre-opening and start-up costs. Security Capital adopted SOP
98-5 effective January 1, 1999. Upon adoption, any material unamortized
organizational, pre-opening and start-up costs were written off as a
cumulative effect of adoption of an accounting standard. The cumulative impact
of the adoption of SOP 98-5 on Security Capital's results of operation and
financial position was $16,136,000 in the first quarter of 1999, primarily
related to Homestead and Belmont.
(16) Commitments and Contingencies
Security Capital and its investees are parties to various claims and
routine litigation arising in the ordinary course of business. Based on advice
of legal counsel, Security Capital does not believe that the results of all
claims and litigation, individually or in the aggregate, will have a material
adverse effect on its business, financial position or results of operations.
Security Capital's investees are subject to environmental and health and
safety laws and regulations related to the ownership, operation, development
and acquisition of real estate. Under such laws and regulations, Security
Capital's investees may be liable for, among other things, the costs of
removal or remediation of certain hazardous substances, including asbestos-
related liability. Such laws and regulations often impose liability without
regard to fault.
As part of their due diligence procedures, Security Capital's investees
conduct Phase I environmental assessments on each property prior to
acquisition. The cost of complying with environmental regulations was not
material to Security Capital's results of operations. Security Capital and its
investees are not aware of any environmental condition on any of their
properties which is likely to have a material adverse effect on Security
Capital's financial condition or results of operations.
Security Capital and its affiliates have committed to invest up to
$518,258,000 in equity securities of SC-European Realty (see note 2). As of
December 31, 1999, $440,542,000 had been funded by Security Capital and its
affiliates. As of December 31, 1999, $76,097,000 had been funded by Security
Capital to Belmont and an additional $31,903,000 of unfunded commitments
remained. At December 31, 1999, Belmont had approximately $14,100,000 of
unfunded commitments for developments under construction.
(17) Subsequent Event
On March 23, 2000, Security Capital announced a proposal to acquire all of
the outstanding shares of Homestead common stock it does not already own for
$3.40 per share in cash. The aggregate value of the transaction would be
approximately $53.0 million. The Homestead Board is expected to form a special
committee consisting of independent members of the Homestead Board to consider
Security Capital's proposal. Security Capital may amend or withdraw the
proposal at any time in its sole discretion and, therefore, there are no
assurances that the transaction will be consummated.
62
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (Unconsolidated)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1999 1998
------ ---------- ----------
<S> <C> <C>
Investments in and advances to subsidiaries............ $3,222,644 $3,505,486
Cash and cash equivalents.............................. 74 85
Other assets........................................... 36,226 35,538
---------- ----------
Total assets....................................... $3,258,944 $3,541,109
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Long-term debt....................................... $ 699,606 $ 614,236
Convertible debt..................................... 278,951 322,774
Line of Credit....................................... 90,900 163,400
Accounts payable and accrued expenses................ 8,964 17,982
---------- ----------
Total liabilities.................................. 1,078,421 1,118,392
---------- ----------
Shareholders' Equity:
Class A Shares, $.01 par value; 20,000,000 shares
authorized, 1,218,411 and 1,487,109 shares issued
and outstanding in 1999 and 1998, respectively...... 12 15
Class B Shares, $.01 par value; 229,537,385 shares
authorized; 52,695,620 and 47,628,481 shares issued
and outstanding in 1999 and 1998, respectively...... 527 476
Series B Preferred Shares, $.01 par value; 257,642
shares issued and outstanding in 1999 and 1998;
stated liquidation preference of $1,000 per share... 257,642 257,642
Additional paid-in capital........................... 2,308,010 2,415,861
Accumulated other comprehensive income (loss)........ (12,020) 5,375
Accumulated deficit.................................. (373,648) (256,652)
---------- ----------
Total shareholders' equity......................... 2,180,523 2,422,717
---------- ----------
Total liabilities and shareholders' equity......... $3,258,944 $3,541,109
========== ==========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
63
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unconsolidated)
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
INCOME:
Equity in earnings (loss) of subsidiaries.... $ (10,519) $ (23,386) $172,145
Interest and other income.................... 8,432 6,450 6,905
--------- --------- --------
(2,087) (16,936) 179,050
--------- --------- --------
EXPENSES:
General, administrative and other expenses... 18,587 21,750 33,830
Interest expense............................. 83,745 49,519 94,749
--------- --------- --------
102,332 71,269 128,579
--------- --------- --------
Earnings (loss) from operations................ (104,419) (88,205) 50,471
Gain on sale of management companies......... -- -- 93,395
--------- --------- --------
Earnings (loss) before income taxes............ (104,419) (88,205) 143,866
--------- --------- --------
Provision for income benefit (expense):
Current...................................... 5,702 4,636 --
Deferred..................................... (140) (20,790) (27,287)
--------- --------- --------
Total income tax benefit (expense)............. 5,562 (16,154) (27,287)
--------- --------- --------
Net earnings (loss) before extraordinary items
and change in accounting principle............ (98,857) (104,359) 116,579
Extraordinary items--gain (loss) on early
extinguishments of debt..................... 16,032 (17,657) --
Change in accounting principle--cumulative
effect on prior years of expensing costs of
start-up activities......................... (16,136) -- --
--------- --------- --------
Net earnings (loss)............................ (98,961) (122,016) 116,579
Less Series A Preferred Share dividends...... (18,035) (35,088) (10,425)
--------- --------- --------
Net earnings (loss) attributable to common
shares........................................ (116,996) (157,104) 106,154
Other comprehensive income (loss):
Foreign currency translation adjustments,
common net.................................. (17,395) 5,375 --
--------- --------- --------
Comprehensive income (loss).................... $(134,391) $(151,729) $106,154
========= ========= ========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
64
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (Unconsolidated)
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net earnings (loss).......................... $ (98,961) $(122,016) $ 116,579
Adjustments to reconcile net earnings (loss)
to cash flows provided by operating
activities:
Equity in (earnings) loss of subsidiaries.. 10,519 41,043 (172,145)
Distributions from subsidiaries............ 550,061 191,296 65,739
Provision (benefit) for deferred income
taxes..................................... 140 20,790 27,287
Extraordinary items--(gain) loss on early
extinguishments of debt................... (16,032) 17,657 --
Cumulative effect on prior years of
expensing costs of start up activities.... 16,136 -- --
Gain on sale of management companies....... -- -- (93,395)
Decrease (increase) in other assets.......... (2,557) 5,317 2,575
Increase (decrease) in accounts payable and
accrued expenses............................ (8,458) (13,407) 2,353
--------- --------- ---------
Net cash provided by (used in) operating
activities.............................. 450,848 140,680 (51,007)
--------- --------- ---------
Investing Activities:
Investment in and advances to subsidiaries... (305,560) (379,154) (733,486)
Other........................................ 1,169 (375) (2,309)
--------- --------- ---------
Net cash flows used in investing
activities.............................. (304,391) (379,529) (735,795)
--------- --------- ---------
Financing Activities:
Proceeds from issuance of convertible debt... -- -- 98,729
Extinguishment of debt....................... (27,428) -- --
Proceeds from sale of common shares, net of
expense..................................... 5,880 6,382 692,877
Proceeds from line of credit................. 436,910 354,800 --
Payments on line of credit................... (509,410) (721,400) --
Proceeds from long-term debt offerings....... 85,317 614,236 --
Repurchase of common shares.................. (119,754) (641) (1,834)
Preferred dividends paid..................... (18,035) (15,245) (10,425)
Other........................................ 52 -- 381
--------- --------- ---------
Net cash flows provided by (used in)
financing activities.................... (146,468) 238,132 779,728
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. (11) (717) (7,074)
Cash and cash equivalents, beginning of year.. 85 802 7,876
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 74 $ 85 $ 802
========= ========= =========
Non-Cash Investing and Financing Activities:
Issuance of Series B Preferred Shares:
Series B Preferred Shares issued........... $ -- $ 257,642 $ --
Series A Preferred Shares retired.......... -- (139,000) --
Fair value of Class B Shares retired....... -- (98,799) --
Series A Preferred dividend recorded....... -- (19,843) --
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
Transfer of line of credit from SC Realty..... $ -- $ 530,000 $ --
========= ========= =========
Shares issued to acquire SCGPB Incorporated... $ -- $ -- $ 6,600
========= ========= =========
Shares received from Archstone in exchange for
management companies......................... $ -- $ -- $ 75,838
========= ========= =========
Shares received from ProLogis in exchange for
management companies......................... $ -- $ -- $ 81,871
========= ========= =========
Issuance of Warrants to Atlantic shareholders. $ -- $ -- $ 11,530
========= ========= =========
Conversion of 2014 and 2016 Debentures........ $ 6,073 $ 250 $ 757,754
========= ========= =========
Contribution of shares to SC Realty:
ProLogis Trust............................... $ -- $ -- $ 81,871
Archstone Communities Trust.................. -- -- 75,838
Security Capital Atlantic Incorporated....... -- -- 13,655
--------- --------- ---------
-- -- 171,364
Less deferred income taxes................... -- -- (48,777)
--------- --------- ---------
$ -- $ -- $ 122,587
========= ========= =========
Security Capital U.S. Real Estate Shares..... $ -- $ -- $ 9,927
========= ========= =========
Homestead Village Incorporated............... $ -- $ -- $ 748
========= ========= =========
Contribution of Belmont note receivable to SC
Realty....................................... $ -- $ -- $ 9,453
========= ========= =========
</TABLE>
See notes to consolidated financial statements and accompanying notes.
65
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unconsolidated)
1. Investments in Subsidiaries
Security Capital has investments in SC Realty Incorporated ("SC Realty")
and a Financial Services Division. SC Realty and the entities that comprise
the Financial Services Division are wholly owned subsidiaries of Security
Capital.
At December 31, 1999, SC Realty holds interests in the following companies:
Archstone Communities Trust, BelmontCorp, Homestead Village Incorporated,
ProLogis Trust, Security Capital European Realty, Security Capital European
Real Estate Shares, Security Capital Preferred Growth, Security Capital U.S.
Real Estate Shares and Security Capital U.S. Realty. The Financial Services
Division provides operational and capital deployment oversight, capital
management, capital markets, corporate services and research services for the
companies in which SC Realty has directly and indirectly invested.
Restatement of prior period results:
In the fourth quarter of 1999, the Board of Directors of Security Capital
European Realty ("SC-European Realty") approved a change in operating strategy
by determining to retain, in general, at least an 80% interest in its
investees and by becoming more active in the day to day operations of its
investees.
As a result of this change in strategy, SC-European Realty has changed its
basis of accounting from fair value accounting to historical cost accounting.
Fair value accounting requires that investments be marked to their fair value
and unrealized gains and losses be recognized as a component of net income.
Historical cost accounting requires that the operations of investments that
are owned greater than 50% be consolidated on the historical cost basis and
operations of investments that are owned between 20% and 50% be reported using
the equity method of accounting based on the historical cost basis financial
statements of the investee. Under generally accepted accounting principles,
such a change in accounting requires a restatement of all prior periods so
that the results of those periods are reported as if this change had been made
retroactive to the entity's inception. SC-European Realty was established in
1998; therefore, Security Capital has restated its 1998 consolidated financial
statements and the first three quarters of its 1999 consolidated financial
statements.
The impact of this restatement on Security Capital's financial statements
for the year ended and as of December 31, 1998, is as follows:
<TABLE>
<CAPTION>
As Previously
Reported Restated
------------- ----------
<S> <C> <C>
Balance Sheet:
Investments in and advances to subsidiaries........ $3,505,117 $3,505,486
Statement of Operations:
Equity in loss of subsidiaries..................... $ (36,037) $ (23,386)
Net loss attributable to common shares............. (152,098) (157,104)
Comprehensive loss................................. (152,098) (151,729)
</TABLE>
Dividends from consolidated subsidiaries amounted to $550,061,000,
$191,296,000, and $65,739,000 during 1999, 1998 and 1997, respectively.
2. Indebtedness
See discussion on Security Capital's line of credit, Senior Unsecured Notes
and Convertible Debt in note 5 to the consolidated financial statements.
66
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unconsolidated)--(Continued)
3. Income Taxes
Security Capital files a consolidated Federal income tax return which
includes SC Realty and the Financial Services Division companies. Security
Capital has net operating loss carryforwards ("NOL's") of approximately
$8,747,000 as of December 31, 1999. At December 31, 1997, Security Capital had
NOL's amounting to approximately $57,300,000, all of which were used during
1998. The income tax benefit ($5,562,000) in 1999 is comprised of $5,702,000
of current income tax benefit offset by a deferred tax expense of $140,000.
The income tax expense ($16,154,000) in 1998 is comprised of $4,636,000 of
current income tax benefit partially offset by the deferred tax expense of
$20,790,000 related to use of the NOL's. The income tax expense ($27,287,000)
in 1997 is comprised of $48,777,000 of deferred tax expense applicable to the
gain on sale of the management companies offset by the effect of the deferred
tax asset ($21,490,000) applicable to Security Capital's NOL's. A deferred tax
asset in 1998 and liability in 1997 was recorded by SC Realty applicable to
its equity method investments.
4. Reclassifications
Certain amounts in 1997 and 1998 have been reclassified to conform to the
1999 presentation.
67
<PAGE>
Independent Auditors' Report
The Board of Trustees and Shareholders
Archstone Communities Trust:
We have audited the accompanying balance sheets of Archstone Communities
Trust as of December 31, 1999 and 1998, and the related statements of
earnings, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Archstone Communities
Trust as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
January 27, 2000, except as to Note 16,
which is as of February 4, 2000
68
<PAGE>
ARCHSTONE COMMUNITIES TRUST
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1999 1998
------ ---------- ----------
<S> <C> <C>
Real estate............................................ $5,217,331 $4,869,801
Less accumulated depreciation.......................... 300,658 205,795
---------- ----------
4,916,673 4,664,006
Mortgage notes receivable, net......................... 210,357 211,967
---------- ----------
Net investments.................................... 5,127,030 4,875,973
Cash and cash equivalents.............................. 10,072 10,119
Restricted cash in tax-deferred exchange escrow........ 68,729 90,874
Other assets........................................... 96,606 82,932
---------- ----------
Total assets....................................... $5,302,437 $5,059,898
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Unsecured credit facilities.......................... $ 493,536 $ 264,651
Long-Term Unsecured Debt............................. 1,276,572 1,231,167
Mortgages payable.................................... 694,948 676,613
Distributions payable................................ 53,518 53,364
Accounts payable..................................... 26,677 55,649
Accrued expenses..................................... 74,462 83,114
Other liabilities.................................... 59,915 45,556
---------- ----------
Total liabilities.................................. 2,679,628 2,410,114
---------- ----------
Minority interest...................................... 55,303 21,459
---------- ----------
Shareholders' equity:
Series A Convertible Preferred Shares (3,705,390
shares in 1999 and 4,700,615 in 1998; stated
liquidation preference of $25 per share)............ 92,635 117,515
Series B Preferred Shares (4,200,000 shares;
liquidation preference of $25 per share)............ 105,000 105,000
Series C Preferred Shares (2,000,000 shares;
liquidation preference of $25 per share)............ 50,000 50,000
Series D Preferred Shares (2,000,000 shares;
liquidation preference of $25 per share)............ 50,000 --
Common Shares (139,008,353 in 1999 and 143,313,015 in
1998)............................................... 139,008 143,313
Additional paid-in capital........................... 2,271,856 2,350,239
Unrealized holding gain.............................. 394 --
Distributions in excess of net earnings.............. (141,387) (137,742)
---------- ----------
Total shareholders' equity......................... 2,567,506 2,628,325
---------- ----------
Total liabilities and shareholders' equity......... $5,302,437 $5,059,898
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
69
<PAGE>
ARCHSTONE COMMUNITIES TRUST
STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rental revenues..................................... $637,808 $484,539 $335,060
Other income........................................ 29,064 29,106 20,602
-------- -------- --------
666,872 513,645 355,662
-------- -------- --------
Expenses:
Rental expenses..................................... 163,110 130,558 88,023
Rental expenses paid to affiliate................... 1,996 2,521 7,642
Real estate taxes................................... 52,421 40,681 27,386
Depreciation on real estate investments............. 132,437 96,337 52,893
Interest expense.................................... 121,494 83,350 61,153
General and administrative expenses................. 20,521 13,978 4,036
General and administrative expenses paid to
affiliate.......................................... 1,635 2,114 14,314
Nonrecurring expenses:
Branding strategy and Atlantic Merger integration. -- 2,193 --
Costs incurred in acquiring management companies
from an affiliate................................ -- -- 71,707
Provision for possible loss on investments.......... 2,000 4,700 3,000
Other expenses...................................... 3,979 3,287 822
-------- -------- --------
499,593 379,719 330,976
-------- -------- --------
Earnings from operations............................. 167,279 133,926 24,686
Gains on dispositions of depreciated real estate,
net................................................ 62,093 65,531 48,232
-------- -------- --------
Earnings before extraordinary items.................. 229,372 199,457 72,918
Less extraordinary items............................ 1,113 1,497 --
-------- -------- --------
Net earnings......................................... 228,259 197,960 72,918
Less Preferred Share dividends...................... 23,731 20,938 19,384
-------- -------- --------
Net earnings attributable to Common Shares--Basic.... $204,528 $177,022 $ 53,534
======== ======== ========
Weighted average Common Shares outstanding--Basic.... 139,801 118,592 81,870
-------- -------- --------
Weighted average Common Shares outstanding--Diluted.. 139,829 125,825 81,908
-------- -------- --------
Earnings before extraordinary item per Common Share:
Basic............................................... $ 1.47 $ 1.51 $ 0.65
======== ======== ========
Diluted............................................. $ 1.47 $ 1.50 $ 0.65
======== ======== ========
Net earnings per Common Share:
Basic and Diluted................................... $ 1.46 $ 1.49 $ 0.65
======== ======== ========
Distributions paid per Common Share.................. $ 1.48 $ 1.39 $ 1.30
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
70
<PAGE>
ARCHSTONE COMMUNITIES TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Series A
Convertible Series B Series C Series D
Preferred Preferred Preferred Preferred Distribu-
Shares at Shares at Shares at Shares at Common Unrealized tions in
aggregate aggregate aggregate aggregate Shares Additional holding excess
liquidation liquidation liquidation liquidation at par paid-in gain of net
preference preference preference preference value capital (loss) earnings Total
----------- ----------- ----------- ----------- -------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996. $162,374 $105,000 $ -- $ -- $ 75,511 $ 918,434 $ 74,923 $ (68,734) $1,267,508
Comprehensive
income:
Net earnings...... -- -- -- -- -- -- -- 72,918 72,918
Preferred Share
dividends paid... -- -- -- -- -- -- -- (19,384) (19,384)
Other
comprehensive
income........... -- -- -- -- -- -- 8,871 -- 8,871
----------
Comprehensive
income
attributable to
Common Shares.... -- -- -- -- -- -- -- -- 62,405
----------
Common Share
distributions.... -- -- -- -- -- -- -- (112,505) (112,505)
Issuance of shares
to affiliate..... -- -- -- -- 3,296 68,780 -- -- 72,076
Issuance of
shares, net of
expenses......... -- -- -- -- 11,420 236,956 -- -- 248,376
Other, net........ (27,164) -- -- -- 2,407 27,333 -- -- 2,576
-------- -------- ------- ------- -------- ---------- -------- --------- ----------
Balances at
December 31, 1997. 135,210 105,000 -- -- 92,634 1,251,503 83,794 (127,705) 1,540,436
Comprehensive
income:
Net earnings...... -- -- -- -- -- -- -- 197,960 197,960
Preferred Share
dividends paid... -- -- -- -- -- -- -- (20,938) (20,938)
Other
comprehensive
income........... -- -- -- -- -- -- (83,794) -- (83,794)
----------
Comprehensive
income
attributable to
Common Shares.... -- -- -- -- -- -- -- -- 93,228
----------
Common Share
distributions.... -- -- -- -- -- -- -- (187,059) (187,059)
Atlantic Merger... -- -- 50,000 -- 47,752 1,038,390 -- -- 1,136,142
Issuance of
shares, net of
expenses......... -- -- -- -- 2,050 41,959 -- -- 44,009
Other, net........ (17,695) -- -- -- 877 18,387 -- -- 1,569
-------- -------- ------- ------- -------- ---------- -------- --------- ----------
Balances at
December 31, 1998. 117,515 105,000 50,000 -- 143,313 2,350,239 -- (137,742) 2,628,325
Comprehensive
income:
Net earnings...... -- -- -- -- -- -- -- 228,259 228,259
Preferred Share
dividends paid... -- -- -- -- -- -- -- (23,731) (23,731)
Other
comprehensive
income........... -- -- -- -- -- -- 394 -- 394
----------
Comprehensive
income
attributable to
Common Shares.... -- -- -- -- -- -- -- -- 204,922
----------
Common Share
distributions.... -- -- -- -- -- -- -- (208,173) (208,173)
Repurchase of
shares, net of
expenses......... (750) -- -- -- (6,098) (114,733) -- -- (121,581)
Issuance of
shares, net of
expenses......... -- -- -- 50,000 -- (1,740) -- -- 48,260
Other, net........ (24,130) -- -- -- 1,793 38,090 -- -- 15,753
-------- -------- ------- ------- -------- ---------- -------- --------- ----------
Balances at
December 31, 1999. $ 92,635 $105,000 $50,000 $50,000 $139,008 $2,271,856 $ 394 $(141,387) $2,567,506
======== ======== ======= ======= ======== ========== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
71
<PAGE>
ARCHSTONE COMMUNITIES TRUST
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings................................. $ 228,259 $ 197,960 $ 72,918
Adjustments to reconcile net earnings to net
cash flow provided by operating activities:
Depreciation and amortization.............. 133,817 96,908 54,541
Gains on dispositions of depreciated real
estate, net............................... (62,093) (65,531) (48,232)
Provision for possible loss on investments. 2,000 4,700 3,000
Costs incurred in acquiring management
companies from an affiliate............... -- -- 71,707
Extraordinary item......................... 1,113 1,497 --
Change in accounts payable................... (19,119) (9,714) 4,000
Change in accrued expenses and other
liabilities................................. 4,598 16,886 11,034
Change in other assets....................... (6,038) (21,172) (9,244)
--------- --------- ---------
Net cash flow provided by operating
activities................................ 282,537 221,534 159,724
--------- --------- ---------
Investing activities:
Real estate investments...................... (801,805) (688,151) (616,100)
Proceeds from dispositions, net of closing
costs....................................... 572,741 401,031 297,895
Cash acquired in Atlantic Merger............. -- 79,359 --
Change in tax-deferred exchange escrow....... 22,145 (90,874) --
Funding of convertible mortgage notes
receivable.................................. -- (11,895) (85,750)
Other, net................................... (3,522) 1,385 843
--------- --------- ---------
Net cash flow used in investing activities. (210,441) (309,145) (403,112)
--------- --------- ---------
Financing activities:
Proceeds from (payments on) Long-Term
Unsecured Debt.............................. (30,000) 447,200 50,000
Proceeds from Fannie Mae secured debt........ 36,206 268,450 --
Debt issuance costs incurred................. (6,304) (14,281) (1,518)
Principal payments on mortgages payable...... (62,965) (111,325) (53,131)
Proceeds from bond refinancing............... 16,000 -- --
Proceeds from (payments on) unsecured credit
facilities, net............................. 228,885 (356,621) 121,300
Repurchase of Common Shares.................. (121,581) -- --
Proceeds from issuance of Common Shares,
net......................................... -- 44,009 249,199
Proceeds from issuance of Series D Preferred
Shares, net................................. 48,260 -- --
Proceeds from issuance of perpetual
preferred units............................. 41,969 -- --
Cash distributions paid on Common Shares..... (208,018) (165,190) (105,547)
Cash dividends paid on Preferred Shares...... (23,731) (20,938) (19,384)
Other, net................................... 9,136 1,499 1,753
--------- --------- ---------
Net cash flow provided by (used in)
financing activities...................... (72,143) 92,803 242,672
--------- --------- ---------
Net change in cash and cash equivalents....... (47) 5,192 (716)
Cash and cash equivalents at beginning of
year......................................... 10,119 4,927 5,643
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 10,072 $ 10,119 $ 4,927
========= ========= =========
</TABLE>
See Note 15 for supplemental information on non-cash investing and financing
activities.
The accompanying notes are an integral part of the financial statements.
72
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(1) Description of Business and Summary of Significant Accounting Policies
In July 1998, Security Capital Atlantic Incorporated was merged with and
into Security Capital Pacific Trust. This transaction is hereafter referred to
as the "Atlantic Merger". Upon consummation of the Atlantic Merger, the name
of the company was changed to Archstone Communities Trust. Financial
information and references throughout this document are labeled "Archstone"
for both pre- and post- transaction periods. Archstone's financial statements
and related footnotes as of and for the period from the merger date (July
1998) to December 31, 1998 give effect to the Atlantic Merger, which was
accounted for under the purchase method. See Note 8 for a more complete
discussion.
Business
Archstone is an equity real estate investment trust ("REIT") organized in
1963 under the laws of the state of Maryland. Archstone primarily owns,
operates, develops, acquires and redevelops income-producing apartment
communities in our strategic target markets throughout the United States.
Principles of Financial Presentation
The accounts of Archstone and its controlled subsidiaries are consolidated
in the accompanying financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation. We use the
equity method to account for investments when we do not control but have the
ability to exercise significant influence over the operating and financial
policies of the investee. For an investee accounted for under the equity
method, Archstone's share of net earnings or losses of the investee is
reflected in income as earned and dividends are credited against the
investment as received.
The preparation of these financial statements in conformity with generally
accepted accounting principles ("GAAP") requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual amounts realized or paid could differ from those estimates.
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.
Real Estate and Depreciation
Real estate, other than land and properties held for sale, is carried at
depreciated cost. Long-lived assets to be disposed of are reported at the
lower of their carrying amount or fair value less cost to sell. Such assets
are no longer depreciated when designated as held for sale. We periodically
review long-lived assets to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. This review involves comparing an investment's book value
to its estimated future cash flows, on an undiscounted basis.
We capitalize direct and certain related indirect costs associated with the
successful acquisition, development or improvement of real estate. Capitalized
costs associated with unsuccessful acquisition or development pursuits are
expensed at the time the pursuit is abandoned.
73
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Depreciation is computed over the expected useful lives of depreciable
property on a straight-line basis as follows:
<TABLE>
<S> <C>
Buildings and related land improvements....................... 20-40 years
Furniture, fixtures, equipment and other...................... 5-10 years
</TABLE>
Interest
During 1999, 1998 and 1997, the total interest paid in cash on all
outstanding debt, was $148.0 million, $96.4 million, and $73.1 million,
respectively.
We capitalize interest incurred during the construction period as part of
the cost of apartment communities under development. Interest capitalized
during 1999, 1998 and 1997 aggregated $31.9 million, $29.9 million, and $17.6
million, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of equity securities are
deducted from shareholders' equity. Costs incurred in connection with the
issuance or renewal of debt are capitalized as other assets and are amortized
into interest expense over the term of the related loan or the renewal period.
The balance of any unamortized loan costs associated with refinanced debt is
expensed upon replacement with new debt. Amortization of loan costs included
in interest expense for 1999, 1998 and 1997 was $4.8 million, $3.3 million,
and $3.2 million, respectively.
We occasionally utilize derivative financial instruments to lower our
overall borrowing costs. The costs associated with entering into these
agreements, as well as the related gains or losses on such agreements, are
deferred and are amortized into interest expense over the term of the
underlying debt.
Revenue and Gain Recognition
We generally lease our apartment units under operating leases with terms of
one year or less. Rental income is recognized according to the terms of the
underlying leases which approximates the revenue which would be recognized if
spread evenly over the lease term.
Gains on sales of real estate are recorded when the recognition criteria
set forth by GAAP have been met.
Rental Expenses
Rental expenses shown on the accompanying Statements of Earnings include
costs associated with on-site and property management personnel, utilities
(net of utility reimbursements from residents), repairs and maintenance, make-
ready, property insurance, marketing, landscaping, and other on-site and
related administrative costs.
Federal Income Taxes
We have made an election to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended, and believe Archstone qualifies as a REIT.
Accordingly, no provision has been made for federal income taxes in the
accompanying financial statements.
74
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
Comprehensive income, which is defined as all changes in equity during each
period except those resulting from transactions with or distributions to
shareholders, is displayed in the accompanying Statements of Shareholders'
Equity. The amounts reflected as "other comprehensive income" in 1998 and 1997
reflect unrealized holding gains and losses on convertible mortgages notes
receivable (see Note 3).
Per Share Data
Following is a reconciliation of basic earnings per share to diluted
earnings per share for the periods indicated (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
Reconciliation of numerator between basic and diluted net earnings per Common
Share (1):
<S> <C> <C> <C>
Net earnings attributable to Common Shares--Basic.... $204,528 $177,022 $53,534
Dividends on Series A Convertible Preferred Shares. -- 9,332 --
Minority interest.................................. -- 645 --
-------- -------- -------
Net earnings attributable to Common Shares--Diluted.. $204,528 $186,999 $53,534
======== ======== =======
Reconciliation of denominator between basic and diluted net earnings per
Common Share (1):
Weighted average number of Common Shares
outstanding--Basic.................................. 139,801 118,592 81,870
Assumed conversion of Series A Convertible
Preferred Shares into Common Shares............... -- 6,765 --
Minority interest.................................. -- 458 --
Incremental options outstanding.................... 28 10 38
-------- -------- -------
Weighted average number of Common Shares
outstanding--Diluted................................ 139,829 125,825 81,908
======== ======== =======
</TABLE>
- --------
(1) Excludes the impact of potentially dilutive equity securities during the
periods in which they are anti-dilutive.
Expected Impact of New Accounting Rules
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued which
established standards for the accounting and reporting of derivative
instruments. The new rules, which become effective January 1, 2001, are not
expected to have a material impact on Archstone's financial position or
results of operations. See Note 11 for further information on derivative
financial instruments.
Reclassifications
Certain of the 1998 and 1997 amounts have been reclassified to conform to
the 1999 presentation.
75
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Real Estate
Investments in Real Estate
Equity investments in real estate, at cost, were as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998 (1)
----------------- -----------------
Investment Units Investment Units
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Apartment communities:
Operating communities.................... $4,444,289 68,255 $4,027,044 69,341
Communities under construction (2) ...... 563,020 7,830 701,897 12,120
Development communities In Planning (3)
Owned.................................. 45,481 2,096 69,710 3,398
Under Control (4)...................... -- 2,375 -- 3,772
---------- ------ ---------- ------
Total development communities In
Planning............................ 45,481 4,471 69,710 7,170
---------- ------ ---------- ------
Total apartment communities............ 5,052,790 80,556 4,798,651 88,631
---------- ------ ---------- ------
Hotel asset (5)............................ 22,870 22,870
Other real estate assets (6)............... 141,671 48,280
---------- ----------
Total real estate.................... $5,217,331 $4,869,801
========== ==========
</TABLE>
- --------
(1) Includes the real estate assets acquired in the Atlantic Merger (see Note
8).
(2) Unit information is based on management's estimates and has not been
audited or reviewed by Archstone's independent auditors.
(3) "In Planning" is defined as parcels of land owned or under control upon
which construction of apartments is expected to commence within 36 months.
"Under Control" is defined as land parcels which Archstone does not own,
yet has an exclusive right (through contingent contract or letter of
intent) during a contractually agreed upon time period to acquire for the
future development of apartment communities, subject to approval of
contingencies during the due diligence process. There can be no assurance
that any such land will be acquired.
(4) Archstone's investment as of December 31, 1999 and 1998 for developments
Under Control was $5.3 million and $4.8 million, respectively, and is
reflected in the "Other assets" caption of Archstone's Balance Sheets.
(5) Represents Archstone's investment in a five-story Holiday Inn hotel
located in the Fisherman's Wharf area of San Francisco, California.
(6) Includes land that is not In Planning and, in 1999, our investment in an
unconsolidated taxable subsidiary.
Capital Expenditures
In conjunction with the underwriting of each acquisition of an operating
community, we prepare acquisition budgets that encompass the incremental
capital needed to achieve our investment objectives. These expenditures,
combined with the initial purchase price and related closing costs, are
capitalized and classified as "acquisition-related" capital expenditures, as
incurred.
As part of our operating strategy, we periodically evaluate each
community's physical condition relative to established business objectives and
the community's competitive position in its market. In conducting these
evaluations, we consider Archstone's return on investment in relation to its
long-term cost of capital as well as our research and analysis of competitive
market factors. Capital expenditures for operating communities are classified
as either "redevelopment" or "recurring".
76
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The redevelopment category includes: (i) redevelopment initiatives, which
are intended to reposition the community in the marketplace and include items
such as significant upgrades to the interiors, exteriors, landscaping and
amenities; (ii) revenue-enhancing expenditures, which include investments that
are expected to produce incremental community revenues, such as building
garages, carports and storage facilities or gating a community; and (iii)
expense-reducing expenditures, which include items such as water submetering
systems and xeriscaping that reduce future operating costs.
Recurring capital expenditures consist of significant expenditures for
items having a useful life in excess of one year, which are incurred to
maintain a community's long-term physical condition at a level commensurate
with our stringent operating standards. Examples of recurring capital
expenditures include roof replacements, parking lot resurfacing and exterior
painting.
Repairs, maintenance and make-ready expenditures, including the replacement
of carpets and appliances, are expensed as incurred, to the extent they are
not acquisition-related costs identified during our pre-acquisition due
diligence. Make-ready expenditures are costs incurred in preparing a vacant
apartment unit for the next resident.
The change in investments in real estate, at cost, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1.................... $4,869,801 $2,604,919 $2,153,363
---------- ---------- ----------
Apartment communities:
Real estate assets acquired in the
Atlantic Merger...................... -- 1,823,727 --
Acquisition-related expenditures...... 401,392 285,806 391,234
Redevelopment expenditures............ 72,517 57,171 43,187
Recurring capital expenditures........ 13,022 9,464 8,762
Development expenditures, excluding
land acquisitions.................... 334,049 378,161 205,619
Acquisition and improvement of land
for development...................... 43,417 67,248 75,196
Dispositions (1)...................... (542,554) (344,336) (268,210)
Provision for possible loss on
investments.......................... (450) -- (2,800)
---------- ---------- ----------
Net apartment community activity........ 321,393 2,277,241 452,988
---------- ---------- ----------
Other:
Change in other real estate assets.... 32,359 -- --
Dispositions.......................... (4,672) (9,959) (1,232)
Provision for possible loss on
investments.......................... (1,550) (2,400) (200)
---------- ---------- ----------
Net other activity...................... 26,137 (12,359) (1,432)
---------- ---------- ----------
Balance at December 31.................. $5,217,331 $4,869,801 $2,604,919
========== ========== ==========
</TABLE>
- --------
(1) At December 31, 1999, Archstone held a portion of the 1999 disposition
proceeds aggregating $68.7 million in an interest bearing escrow account,
pending the acquisition of other apartment communities to complete tax-
deferred exchanges.
At December 31, 1999, Archstone had unfunded contractual commitments
related to real estate investment activities aggregating approximately $280.7
million.
We were committed to the sale of seven apartment communities and certain
other real estate assets having an aggregate carrying value of $57.5 million
as of December 31, 1999. Each property's carrying value is less than or equal
to its estimated fair market value, net of estimated costs to sell. The
property-level earnings, after
77
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
mortgage interest and depreciation, from communities held for disposition at
December 31, 1999, which are included in Archstone's earnings from operations
for 1999, 1998 and 1997, were $3.8 million, $3.3 million and $2.6 million,
respectively.
(3) Mortgage Notes Receivable
Convertible Mortgage Note Terms
In October 1996, we contributed 54 extended-stay lodging assets to
Homestead Village Incorporated (NYSE:HSD) in exchange for common stock and
convertible mortgage notes. The common stock was distributed to Archstone's
shareholders in November 1996. In total, we received $221.3 million (face
amount) of convertible mortgage notes in exchange for development financing
provided to Homestead from 1996 through 1998, including the notes received in
exchange for the initial contribution of properties.
In May 1999, Homestead consummated a common share rights offering and, in
accordance with the terms of the agreement governing Archstone's convertible
mortgage notes, the conversion ratio of the notes was adjusted. The notes are
convertible into Homestead common stock on the basis of one share of Homestead
common stock for every $10.44 of principal face amount outstanding. Previously
the conversion ratio was $11.50. As a result of this lower conversion ratio,
Archstone has the right to convert the Homestead notes into 1,944,860
additional Homestead common shares, for a total of 21,191,262 Homestead common
shares. The conversion feature had no intrinsic value as of December 31, 1999.
The convertible mortgage notes bear interest at 9.0% of face per annum which
is received in interest-only payments on a semi-annual basis, are callable by
Homestead after October 31, 2001 and mature on October 31, 2006. The extended-
stay lodging assets we contributed serve as collateral securing the
convertible mortgage notes.
<TABLE>
<S> <C>
Face amount of convertible mortgage notes....................... $221,334
Original issue discount......................................... (22,501)
--------
Amount funded................................................... 198,833
Other adjustments (1)........................................... 6,768
--------
Carrying value at December 31, 1999............................. $205,601
========
</TABLE>
- --------
(1) Includes the amortization of the original issue discount and the net
unamortized discount on the conversion feature.
(4) Borrowings
Unsecured Credit Facilities
Upon consummation of the Atlantic Merger in July 1998, we replaced our $350
million unsecured revolving credit facility with a $750 million unsecured
revolving credit facility provided by a group of financial institutions led by
Chase Bank of Texas, National Association. The $750 million unsecured credit
facility matures in July 2001, at which time it may be converted into a two-
year term loan at our option. The unsecured credit facility bears interest at
the greater of prime or the federal funds rate plus 0.50%, or at our option,
the London interbank offered rate ("LIBOR") (6.5% at December 31, 1999 and an
average of 5.3% for the year ended December 31, 1999) plus 0.65%. The spread
over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.25% based upon the
rating of our long-term unsecured senior notes payable and tax-exempt
unsecured bonds ("Long-Term Unsecured Debt"). Under a competitive bid option
contained in the credit agreement, we may be able to borrow up to $375 million
at a lower interest rate spread over LIBOR, depending on market conditions.
Under the agreement, Archstone pays a facility fee, which is equal to 0.15% of
the commitment. Archstone paid commitment fees of $1.1 million, $0.8 million,
and $0.4 million in 1999, 1998 and 1997, respectively.
78
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Upon replacing the $350 million credit facility with the $750 million
credit facility, we expensed the remaining $1.5 million of unamortized loan
costs associated with the $350 million credit facility, which was recorded as
an extraordinary item during 1998.
The following table summarizes our unsecured credit facility borrowings (in
thousands, except for percentages):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Total unsecured credit facility............ $750,000 $750,000 $350,000
Borrowings outstanding at December 31...... $485,000 $234,000 $223,500
Weighted average daily borrowings.......... $387,082 $340,658 $121,038
Maximum borrowings outstanding during the
period.................................... $485,000 $624,000 $251,250
Weighted average daily nominal interest
rate...................................... 6.0% 6.3% 6.7%
Weighted average daily effective interest
rate...................................... 6.4% 6.8% 8.4%
</TABLE>
In September 1996, we entered into a short-term, unsecured borrowing
agreement with Chase Bank of Texas in order to enhance cash management
flexibility. This borrowing agreement was renegotiated by Archstone upon
consummation of the Atlantic Merger under terms similar to the previous
agreement. In October 1998, the maximum borrowing capacity under the agreement
was increased to $100 million. The agreement bears interest at an overnight
rate that ranged from 5.4% to 6.3% during 1999. At December 31, 1999 and 1998,
there were $8.5 million and $30.7 million of borrowings outstanding under this
agreement respectively.
Long-Term Unsecured Debt
A summary of our Long-Term Unsecured Debt outstanding at December 31, 1999
follows (amounts in thousands):
<TABLE>
<CAPTION>
Coupon Effective Balance at Balance at Average
Rate Interest December 31, December 31, Remaining
Type of Debt (1) Rate (2) 1999 1998 Life (years)
------------ ------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Long-term unsecured
senior notes........... 7.3% 7.5% $1,200,857 $1,231,167 7.9
Unsecured tax-exempt
bonds.................. 3.9% 4.3% 75,715 -- 8.4
--- --- ---------- ---------- ---
Total/average......... 7.1% 7.3% $1,276,572 $1,231,167 7.9
=== === ========== ========== ===
</TABLE>
- --------
(1) Represents a fixed rate for the long-term unsecured notes and a variable
rate for the unsecured tax-exempt bonds. See Note 11 for information on
derivative financial instruments.
(2) Represents the effective interest rate, including interest rate hedges,
loan cost amortization and other ongoing fees and expenses, where
applicable.
The $1.2 billion of long-term unsecured senior notes generally have semi-
annual interest payments and either amortizing annual principal payments or
balloon payments due at maturity. (see--Scheduled Debt Maturities). The notes
are redeemable any time at our option, in whole or in part. The redemption
price is equal to the sum of the principal amount of the notes being redeemed
plus accrued interest through the redemption date plus an adjustment, if any,
based on the yield to maturity relating to market yields available at
redemption. The long-term unsecured senior notes are governed by the terms and
provisions of an indenture agreement. The unsecured tax-exempt bonds require
semi-annual interest payments and are due upon maturity in 2008.
79
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mortgages Payable
Archstone's mortgages payable generally feature either monthly interest and
principal payments or monthly interest only payments with balloon payments due
at maturity. A summary of mortgages payable outstanding at December 31, 1999
follows (amounts in thousands):
<TABLE>
<CAPTION>
Principal Balance
Effective at December 31,
Interest -----------------
Type of Mortgage Rate (1) 1999 1998
---------------- --------- -------- --------
<S> <C> <C> <C>
Fannie Mae secured debt (2)........................ 6.5% $304,365 $268,450
Conventional fixed rate............................ 7.9% 110,776 108,588
Tax-exempt fixed rate.............................. 6.3% 56,576 61,604
Tax-exempt floating rate........................... 4.5% 192,847 209,316
Other.............................................. 6.3% 30,384 28,655
---- -------- --------
Total/average mortgage debt...................... 6.1% $694,948 $676,613
==== ======== ========
</TABLE>
- --------
(1) Includes the effect of interest rate hedges, credit enhancement fees,
other bond-related costs and loan cost amortization, where applicable, as
of December 31, 1999. See Note 11 for information on derivative financial
instruments.
(2) Represents a long-term secured debt agreement with the Federal National
Mortgage Association ("Fannie Mae"). The Fannie Mae secured debt matures
January 2006, although Archstone has the option to extend the term of any
portion of the debt for up to an additional 30-year period at any time,
subject to Fannie Mae's approval.
The changes in mortgages payable during the past three years consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balances at January 1...................... $676,613 $265,652 $217,188
Notes assumed in Atlantic Merger......... -- 160,329 --
Notes assumed or originated.............. 141,613 362,158 101,595
Bond refinancing......................... (59,715) -- --
Regularly scheduled principal
amortization............................ (5,391) (4,316) (3,284)
Prepayments, final maturities and other.. (58,172) (107,210) (49,847)
-------- -------- --------
Balances at December 31.................... $694,948 $676,613 $265,652
======== ======== ========
</TABLE>
Scheduled Debt Maturities
Approximate principal payments due during each of the next five calendar
years and thereafter, are as follows (in thousands):
<TABLE>
<CAPTION>
Mortgages Payable
-----------------------
Regularly
Long-Term Scheduled Final
Unsecured Principal Maturities
Debt Amortization and Other Total
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
2000........................ $ 75,310 $ 4,876 $ 2,199 $ 82,385
2001........................ 70,010 5,240 5,201 80,451
2002........................ 97,810 5,596 293 103,699
2003........................ 171,560 5,891 20,590 198,041
2004........................ 51,560 6,135 36,639 94,334
Thereafter.................. 810,322 158,737 443,551 1,412,610
---------- -------- -------- ----------
Total..................... $1,276,572 $186,475 $508,473 $1,971,520
========== ======== ======== ==========
</TABLE>
The average annual principal payments due from 2005 to 2019 are $90.7
million per year.
80
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The $750 million unsecured credit facility matures in July 2001, at which
time it may be converted into a two-year term loan at our option.
Other
Archstone's debt instruments generally contain certain covenants common to
the type of facility or borrowing, including financial covenants establishing
minimum debt service coverage ratios and maximum leverage ratios. We were in
compliance with all financial covenants pertaining to our debt instruments at
December 31, 1999.
See Note 11 for a summary of derivative financial instruments used in
connection with our debt instruments.
(5) Distributions to Shareholders
To maintain Archstone's status as a REIT, we are generally required to
distribute at least 95% of our taxable income. The payment of distributions is
subject to the discretion of Archstone's Board of Trustees ("the Board") and
is dependent upon our strategy, financial condition and operating results. At
its December 1999 Board meeting, the Board announced an anticipated increase
in the annual distribution level from $1.48 to $1.54 per Common Share.
The following table summarizes the cash dividends paid per share on the
common shares of beneficial interest, par value $1.00 per share ("Common
Shares") and Preferred Shares (collectively, the Series A convertible
preferred shares, Series B preferred shares, Series C preferred shares, and
Series D preferred shares) in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Common Shares.......................................... $1.48 $1.39 $1.30
Series A Convertible Preferred Shares.................. $1.99 $1.87 $1.75
Series B Preferred Shares.............................. $2.25 $2.25 $2.25
Series C Preferred Shares (1).......................... $2.16 $1.08 --
Series D Preferred Shares (2).......................... $0.88 -- --
</TABLE>
- --------
(1) In 1998, represents dividends paid subsequent to the Atlantic Merger.
(2) Shares were issued in August 1999. The annualized dividend level is
$2.1875 per share.
(6) Minority Interest
In August 1999, a consolidated subsidiary issued 520,000 Series E perpetual
preferred units ($25 liquidation preference per unit) to a limited partnership
in exchange for $13.0 million. In November 1999, an additional 400,000 units
were issued in exchange for $10.0 million. The units pay cumulative quarterly
distributions of $0.5234 per share ($2.09375 or 8.375% per annum), are
redeemable at our option after August 13, 2004 and are convertible into
Archstone Series E Cumulative Redeemable Perpetual Preferred shares on or
after August 13, 2009.
In September 1999, a consolidated subsidiary issued 800,000 Series F
perpetual preferred units ($25 liquidation preference per unit) to a limited
partnership in exchange for $20.0 million. The units pay cumulative quarterly
distributions of $0.5078 per share ($2.03125 or 8.125% per annum), are
redeemable at our option after September 27, 2004 and are convertible into
Archstone Series F Cumulative Redeemable Perpetual Preferred shares on or
after September 27, 2009.
The total net proceeds of $42.0 million from the issuance of perpetual
preferred units in 1999 were used to repay borrowings under our unsecured
credit facilities.
81
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
During 1998, certain operating communities were acquired by a consolidated
subsidiary of Security Capital Atlantic Incorporated in exchange for cash and
limited partnership units. The Atlantic subsidiary became a subsidiary of
Archstone as a result of the Atlantic Merger. As of December 31, 1999 and 1998
there were approximately 598,000 and 913,000 of these limited partnership
units outstanding, respectively. The units are convertible on a one for one
basis into Common Shares and are generally entitled to distributions in
amounts equal to those distributed on Common Shares.
All of the units are reflected as minority interest in the accompanying
Balance Sheets. Distributions on the units are recorded as minority interest
expense and are reflected as "Other expenses" in Archstone's 1999 and 1998
Statements of Earnings. See Note 16 for information regarding an additional
issuance of perpetual preferred units.
(7) Shareholders' Equity
Shares of Beneficial Interest
Archstone's Declaration of Trust authorizes us to issue up to 250,000,000
Shares of Beneficial Interest, $1.00 par value per share, consisting of Common
Shares, preferred shares and such other shares of beneficial interest as the
Board may create and authorize from time to time. The Board may classify or
reclassify any unissued shares from time to time by setting or changing the
preferences, conversion rights, voting powers, restrictions, limitations as to
distributions, qualifications of terms or conditions of redemption.
Preferred Shares
The Series A Convertible Preferred Shares issued in November 1993 have a
liquidation preference of $25.00 per share for an aggregate liquidation
preference at December 31, 1999 of $92.6 million. Holders of the Series A
Convertible Preferred Shares are entitled only to limited voting rights under
certain conditions. Each Series A Convertible Preferred Share is convertible,
in whole or in part at the option of the holder at anytime, into 1.3469 of
Archstone's Common Shares. During 1999, 1998 and 1997, approximately 965,000,
708,000, and 1,087,000 of Series A Convertible Preferred Shares were
converted, at the option of the holders, into approximately 1,300,000,
953,000, and 1,463,000 Common Shares, respectively. This activity is included
in "Other, net" in the accompanying Statements of Shareholders' Equity.
Distributions on the Series A Convertible Preferred Shares are payable in
an amount per share equal to the greater of $1.75 per annum or the annualized
quarterly distribution rate on the Common Shares into which the Series A
Convertible Preferred Shares are convertible. Based on our anticipated 2000
Common Share dividend level, the dividend on the Series A Convertible
Preferred Shares will be $2.074. The Series A Convertible Preferred Shares are
redeemable at our option after November 30, 2003.
A summary of Archstone's Series B, Series C and Series D Preferred Shares
outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Liquidation Total
Preferred Shares Preference Liquidation Dividend Redeemable on
Shares Outstanding (per share) Preference (per share) or After (1)
--------- ----------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Series B................ 4.2 million $25.00 $105 million $2.2500 May 24, 2000
Series C................ 2.0 million $25.00 $ 50 million $2.1560 August 20, 2002
Series D................ 2.0 million $25.00 $ 50 million $2.1875 August 6, 2004
</TABLE>
- --------
(1) We may redeem the shares for cash, in whole or in part, at a redemption
price of $25.00 per share plus any accrued but unpaid distributions, if
any, to the redemption date. The redemption price (other than the portion
thereof consisting of accrued and unpaid distributions) is payable solely
out of the sale proceeds of other shares of Archstone, which may include
other series of preferred shares.
82
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The holders of the Preferred Shares do not have preemptive rights over the
holders of Common Shares. The Preferred Shares have no stated maturity and are
not subject to any sinking fund or other obligation of Archstone to redeem or
retire the Preferred Shares. Holders of the Preferred Shares are entitled to
receive, when and as declared by the Board, out of funds legally available for
the payment of distributions, cumulative preferential cash distributions. The
Series B, Series C, and Series D Preferred Shares are not convertible into any
other securities of Archstone.
All Preferred Share distributions are cumulative from the date of original
issue and are payable quarterly in arrears on the last day of each March,
June, September and December. All dividends due and payable on Preferred
Shares have been accrued and paid as of the end of each fiscal year. All
series of Preferred Shares rank on a parity as to distributions and
liquidation proceeds.
If six quarterly dividends payable (whether or not consecutive) on any
series or class of preferred shares that are of equal rank with respect to
dividends and any distribution of assets, shall not be paid in full, the
number of independent members of the Board ("Outside Trustees") shall be
increased by two and the holders of all such preferred shares voting as a
class regardless of series or class, shall be entitled to elect the two
additional Outside Trustees. Whenever all arrears in dividends have been paid,
the right to elect the two additional Outside Trustees shall cease and the
terms of such Outside Trustees shall terminate.
Share Repurchase
In February 1999, the Board authorized a $100 million share repurchase
program, which was completed in July 1999. In September 1999, the Board
authorized an additional repurchase of up to $50 million Common Shares.
Through both programs, we have repurchased a total of $121.6 million of Common
Shares (6.1 million shares at an average price of $19.76 per share) as of
December 31, 1999. Proceeds from apartment community dispositions were used to
reduce our unsecured credit facilities, providing the capacity to fund the
share purchases.
Dividend Reinvestment and Share Purchase Plan
We established the Dividend Reinvestment and Share Purchase Plan in
December 1997 in order to increase ownership in the company by private
investors. Under the plan, holders of Common Shares have the ability to
automatically reinvest their cash dividends to purchase additional Common
Shares at a two percent discount from market rates, based on the average of
the high and low sales price of a Common Share on the day of the purchase.
Additionally, existing and prospective investors have the ability to tender
cash payments that will be applied towards the purchase of Common Shares. The
amount purchased by an individual is limited to a maximum of $5,000 per month,
with any investments above the limitation requiring company approval. We did
not grant approval for any purchases above the $5,000 threshold during 1999.
In January 1998, we filed a registration statement with the SEC registering
the offering of 2,000,000 Common Shares, which may be issued pursuant to the
terms of the plan.
Ownership Restrictions and Significant Shareholder
Our governing documents restrict beneficial ownership of our outstanding
shares by a single person, or persons acting as a group, to 9.8% of the Common
Shares and 25% of each series of Preferred Shares. The purpose of these
provisions is to assist in protecting and preserving Archstone's REIT status
and to protect the interests of shareholders in takeover transactions by
preventing the acquisition of a substantial block of shares without first
negotiating with the Board. For Archstone to qualify as a REIT under the
Internal Revenue Code of 1986, as amended, not more than 50% in value of its
outstanding capital shares may be owned by five or fewer individuals at any
time during the last half of Archstone's taxable year. The provision permits
five persons to acquire up to a maximum of 9.8% each of the Common Shares, or
an aggregate of 49% of the outstanding Common Shares.
Common Shares owned by a person or group of persons in excess of the 9.8%
limit are subject to redemption by Archstone. The provision does not apply
where a majority of the Board, in its sole and absolute
83
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
discretion, waives such limit after determining that the eligibility of
Archstone to qualify as a REIT for federal income tax purposes will not be
jeopardized or the disqualification of Archstone as a REIT is advantageous to
shareholders.
The Board has permitted Security Capital Group Incorporated ("Security
Capital") to acquire up to 49% of Archstone's fully converted Common Shares.
Security Capital's ownership of Common Shares is attributed for tax purposes
to its shareholders. Security Capital owned approximately 39% of Archstone's
total outstanding Common Shares at December 31, 1999. Pursuant to an agreement
between Security Capital and Archstone, Security Capital has agreed to acquire
no more than 49% of the fully converted Common Shares, subject to certain
limited exceptions.
Purchase Rights
In 1994, the Board authorized the distribution to shareholders of one
purchase right for each Common Share held. Holders of additional Common Shares
issued after this date and prior to the expiration of the purchase rights in
July 2004 will be entitled to one purchase right for each additional Common
Share.
Each purchase right entitles the holder under certain circumstances to
purchase from Archstone one one-hundredth of a share of a Participating
Preferred Share at a price of $60.00 per one one-hundredth of Participating
Preferred Share, subject to adjustment. Purchase rights are exercisable when a
person or group of persons acquires beneficial ownership of 20% or more of the
fully converted Common Shares (49% in the case of Security Capital and certain
defined affiliates), or takes formal actions, the intent of which would result
in the beneficial ownership by a person of 25% or more of the outstanding
Common Shares (49% in the case of Security Capital and certain defined
affiliates). Under certain circumstances, each purchase right entitles the
holder to purchase, at the purchase right's then current exercise price, a
number of Common Shares having a market value of twice the purchase right's
exercise price. The acquisition of Archstone pursuant to certain transactions
or other business transactions would entitle each holder to purchase, at the
purchase right's then current exercise price, a number of the acquiring
company's common shares having a market value at that time equal to twice the
purchase right's exercise price. The purchase rights will expire in July 2004
and are subject to redemption in whole, but not in part, at a price of $0.01
per purchase right payable in cash, shares of Archstone or any other form of
consideration determined by the Board.
Shelf Registration
In December 1998, we filed a $750 million shelf registration with the SEC
to supplement an existing shelf registration with a balance of $77.2 million.
These securities can be issued in the form of Long-Term Unsecured Debt, Common
Shares or preferred shares on an as-needed basis, subject to our ability to
complete offerings on satisfactory terms. As of December 31, 1999 Archstone
had approximately $777.2 million in shelf-registered securities available for
issuance.
(8) Atlantic Merger
In July 1998, Security Capital Atlantic Incorporated ("Atlantic"), an
affiliated apartment REIT which operated primarily in the southeast and mid-
Atlantic markets of the United States, was merged with and into Security
Capital Pacific Trust ("Pacific"). The combined company continued its
existence under the name Archstone and is traded on the NYSE under the symbol
"ASN". In accordance with the terms of the Atlantic Merger, each outstanding
Atlantic common share was converted into the right to receive one Common Share
and each outstanding Atlantic Series A preferred share was converted into the
right to receive one comparable share of a new class of Series C Preferred
Shares. As a result, 47,752,052 Common Shares and 2,000,000 Series C Preferred
Shares were issued to Atlantic's shareholders in exchange for all of the
outstanding Atlantic common shares and Atlantic Series A preferred shares. In
addition, Archstone assumed Atlantic's debt and other liabilities. The total
purchase price paid for Atlantic aggregated approximately $1.9 billion. The
transaction was structured as a tax-free transaction and was accounted for
under the purchase method. See Note 5 for additional information on
Archstone's dividend and distribution levels, which were adjusted subsequent
to the Atlantic Merger.
84
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarized pro forma unaudited information represents the
combined historical operating results of Pacific and Atlantic with the
appropriate purchase accounting adjustments, assuming the Atlantic Merger had
occurred on January 1, 1997. The pro forma financial information presented is
not necessarily indicative of what Archstone's actual operating results would
have been had the two companies constituted a single entity during such
periods (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Total revenues........................................ $610,866 $550,805
======== ========
Net earnings attributable to Common Shares before
extraordinary items.................................. $201,562 $110,680
======== ========
Net earnings attributable to Common Shares............ $199,842 $110,680
======== ========
Weighted average Common Shares outstanding:
Basic............................................... 141,939 128,575
======== ========
Diluted............................................. 148,714 128,614
======== ========
Earnings attributable to Common Shares before
extraordinary items Per Common Share:
Basic and Diluted................................... $ 1.42 $ 0.86
======== ========
Net earnings attributable to Common Shares per Common
Share:
Basic and Diluted................................... $ 1.41 $ 0.86
======== ========
</TABLE>
(9) Acquisition of REIT Manager and Property Manager
In September 1997, we acquired the operations and businesses of our REIT
manager and property manager from Security Capital in exchange for 3,295,533
Common Shares. As a result of the transaction, we became an internally managed
REIT.
The market value of the 3,295,533 Common Shares issued was approximately
$73.3 million, based on the $22.25 per share closing price of the Common
Shares on such date. Of this amount, approximately $1.6 million was allocated
to the estimated fair value of the tangible net assets acquired. The $71.7
million difference between the market value of the Common Shares and the
estimated fair value of the net tangible assets acquired was recorded as
"Costs incurred in acquiring management companies from an affiliate" (a non-
recurring and non-cash expense) in Archstone's 1997 Statement of Earnings.
Since the management companies did not have significant operations other than
the management of Archstone and its assets, the transaction did not qualify as
the acquisition of a "business" for purposes of applying APB Opinion No. 16,
Business Combinations. Consequently, the market value of the Common Shares
issued in excess of the fair value of the net tangible assets acquired was
recorded as an operating expense rather than capitalized as goodwill.
As a result of this transaction, we no longer pay REIT and property
management fees to Security Capital. The REIT management agreement required us
to pay a fee of approximately 16% of cash flow from operations, whereas the
property management agreement required payment of a fee equal to approximately
3.5-3.75% of revenues, as defined in the respective agreements. None of these
fees were capitalized. In lieu of these fees, we now directly incur the
personnel and other costs related to these functions.
Concurrent with the closing of the transaction, we also entered into an
agreement with Security Capital for the provision of certain administrative
services. Archstone purchases these services in exchange for a fee which,
through December 31, 1998, was equal to Security Capital's direct cost of such
services plus 20%. Effective January 1, 1999, the fee arrangement was revised
to provide for the payment of our specific usage at fixed rates
85
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
per unit for each service provided. The agreement has a one-year term and
expires on December 31, 2000. We may modify or terminate the agreement, in
whole or in part, at any time, subject to certain terms and conditions.
(10) Benefit Plans
In September 1997, our Common Shareholders approved the long-term incentive
plan. To date, there have been three types of awards issued under the plan:
(i) an employee share purchase plan with matching options, (ii) share options
with a dividend equivalent unit ("DEU") feature, and (iii) restricted Common
Share unit awards with a dividend feature. No more than 8,650,000 Common
Shares in the aggregate may be awarded under the plan and no individual may be
awarded more than 500,000 Common Shares in any one-year period. The plan has a
10-year term.
Dividend Equivalent Units
The long-term incentive plan generally provides that participants who are
awarded share options or restricted Common Share units will also be credited
with DEUs with respect to such awards. Options awarded under the employee
share purchase plan are not eligible for DEUs. The DEUs credited to share
options or restricted Common Share units are awarded annually at the end of
each year and vest under the same terms as the underlying share options or
restricted Common Share units.
DEUs credited to share options represent the number of share options held
plus DEUs previously awarded, multiplied by the excess between the average
annual dividend yield on Common Shares and the average dividend yield for the
Standard & Poor's 500 Stock Index. The average annual dividend yield for the
Standard & Poor's 500 Stock Index is not deducted when calculating DEUs
credited to restricted Common Share units. As of December 31, 1999, there were
a total of 151,840 DEUs outstanding, awarded to 172 holders of share options
and restricted Common Share units. These DEUs were valued at $3.1 million on
December 31, 1999 based upon the market price of the Common Shares on that
date. We recognize the value of the DEUs awarded as compensation expense over
the vesting period, net of any previously recorded DEU expense related to
forfeitures.
Employee Share Purchase Plan with Matching Options
As of December 31, 1999, certain officers and other employees had purchased
931,304 Common Shares at prices ranging from $21.19 to $24.31 per Common Share
under the employee share purchase plan. Archstone financed 95% of the total
purchase price through 10-year notes from the participants aggregating $19.2
million at December 31, 1999. The share purchase notes are recorded as a
reduction in shareholders' equity and are included in "Other, net" on the
accompanying Statements of Shareholders' Equity. The notes bear interest at
approximately 6.0% per annum. All dividends on the shares are applied to
interest and principal on the notes, with no cash distributions to employees.
The notes are fully recourse to the participant and are also secured by the
Common Shares purchased. For each Common Share purchased, participants were
granted two options, each to purchase one Common Share at the market price of
the underlying share on the date of grant. The matching share options
gradually vest over a five-year period. The matching share options do not have
a DEU feature. A reconciliation of the notes due from employees during 1999
and 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Beginning balance....................................... $26,275 $17,238
Notes assumed in Atlantic Merger........................ -- 11,338
Notes issued............................................ -- 1,164
Retirements............................................. (6,854) (3,254)
Principal payments received............................. (251) (211)
------- -------
Ending balance...................................... $19,170 $26,275
======= =======
</TABLE>
86
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Of the notes outstanding at December 31, 1999, approximately $16.3 million
were due from officers.
Share Options with DEU's and Trustee Options
We have awarded share options with a DEU feature to certain officers and
other employees. The exercise price of each share option granted is equal to
the Common Share market price on the date of grant (See "Proforma Compensation
Expense" below). The share options awarded generally vest at a rate of 25% per
year.
Additionally, Archstone has authorized 300,000 Common Shares for issuance
to Outside Trustees. The exercise price of Outside Trustee options may not be
less than the fair market value on the date of grant. All the options, except
the 35,000 issued in 1999, have a five-year term and are exercisable in whole
or in part at any time. The options issued in 1999 have a DEU feature, a 10-
year term and vest over a four-year period.
A summary of all share options outstanding at December 31, 1999 follows:
<TABLE>
<CAPTION>
Weighted-
Average
Range of Remaining
Number of Exercise Expiration Contractual
Options Prices (1) Date Life
--------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Matching options under the
employee share purchase plan... 1,862,608 $21.19-$24.31 2007-2008 7.7 years
Share options with DEU's........ 2,260,806 $19.00-$24.31 2007-2009 9.0 years
Outside Trustees................ 73,000 $15.59-$22.59 2000-2009 5.8 years
---------
Total......................... 4,196,414
=========
</TABLE>
- --------
(1) The exercise price was equal to market price on the date of grant. The
weighted average exercise prices for the matching options under the
employee share purchase plan, share options with DEU's and Outside Trustee
options were $22.17, $20.68, and $21.46 per Common Share, respectively, as
of December 31, 1999. The weighted average exercise price for all options
outstanding at December 31, 1999 was $21.36 per Common Share.
A summary of the status of our share option plans as of December 31, 1999,
1998 and 1997, and changes during the years ended on those dates is presented
below.
<TABLE>
<CAPTION>
Weighted
Average Number of
Number of Exercise Options
Options Price Exercisable
--------- -------- -----------
<S> <C> <C> <C>
Balance/Average at December 31, 1996............ 32,000 $16.48 32,000
-------
Granted....................................... 1,857,417 22.06
Exercised..................................... (2,000) 16.34
Forfeited..................................... (2,000) 8.46
--------- ------
Balance/Average at December 31, 1997............ 1,885,417 21.99 38,000
--------- ------ -------
Assumed in the Atlantic Merger................ 1,260,138 22.44
Granted....................................... 1,582,754 20.67
Exercised..................................... (8,000) 16.14
Forfeited..................................... (563,660) 22.30
--------- ------
Balance/Average at December 31, 1998............ 4,156,649 21.62 48,000
--------- ------ -------
Granted....................................... 923,528 20.74
Exercised..................................... (10,000) 18.83
Forfeited..................................... (873,763) 21.87
--------- ------
Balance/Average at December 31, 1999............ 4,196,414 $21.36 873,325
========= ====== =======
</TABLE>
87
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Restricted Common Share Unit Awards
During 1999 and 1998, we awarded 360,594 and 220,572 restricted Common
Share units with a DEU feature to certain employees under the long-term
incentive plan, respectively, of which 22,663 have been forfeited. Each
restricted Common Share unit provides the holder with one Common Share,
subject to certain vesting provisions. The Common Share units and related DEU
feature generally vest at 20% per year, over a five-year period. We recognize
the value of the awards as compensation expense over the vesting period.
Proforma Compensation Expense
We have adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which allows us to continue to account for our various share option plans
using Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related interpretations. Under APB 25, if
the exercise price of the share options equals the market price of the
underlying share on the date of grant, no compensation expense is recognized.
Accordingly, we did not recognize compensation expense related to share
options as the exercise price of all options granted was equal to the market
price on the date of grant. Had compensation cost for these plans been
determined using the option valuation models prescribed by SFAS No. 123, net
earnings attributable to Common Shares and earnings per Common Share for 1999,
1998, and 1997 would change as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net earnings attributable to Common Shares
(in thousands):
As reported................................. $204,528 $177,022 $53,534
-------- -------- -------
Pro forma................................... $203,348 $175,991 $53,318
======== ======== =======
Basic earnings per Common Share:
As reported................................. $ 1.46 $ 1.49 $ 0.65
-------- -------- -------
Pro forma................................... $ 1.45 $ 1.48 $ 0.65
======== ======== =======
Diluted earnings per Common Share:
As reported................................. $ 1.46 $ 1.49 $ 0.65
-------- -------- -------
Pro forma................................... $ 1.45 $ 1.48 $ 0.65
======== ======== =======
</TABLE>
The pro forma amounts above were calculated using the Black-Scholes model,
using the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average risk-free interest
rate.................................. 6.52% 4.74% 6.08%
Weighted average dividend yield........ 6.97% 6.43% 5.60%
Weighted average volatility............ 16.31% 25.44% 18.35%
Weighted average expected option life.. 6.27 years 6.74 years 6.74 years
</TABLE>
The weighted average fair value of all options granted (excluding Trustee
options) was approximately $2.00, $3.00 and $3.00 per option during 1999,
1998, and 1997, respectively.
401(k) Plan and Nonqualified Savings Plan
In December 1997, the Board established a 401(k) plan and a nonqualified
savings plan, which both became effective on January 1, 1998. The plans work
together to provide for matching employer contributions of fifty cents for
every dollar contributed by an employee, up to 6% of the employees' annual
compensation. The matching employer contributions are made in Common Shares,
which vest based on years of service at a rate of 20% per year.
(11) Fair Values of Financial Instruments
The following disclosures of estimated fair value of financial instruments
were determined based on available market information and valuation
methodologies believed to be appropriate for these purposes.
88
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Considerable judgment and a high degree of subjectivity are involved in
developing these estimates and, therefore, are not necessarily indicative of
the actual amounts that Archstone could realize upon disposition.
At December 31, 1999, the carrying amount of cash and cash equivalents,
restricted cash in tax-deferred exchange escrow, and trade receivables and
payables were representative of their fair values because of the short-term
maturity of these instruments. Similarly, the carrying value of the unsecured
credit facilities approximates fair value as of those dates since the interest
rates on these instruments fluctuate based on published market rates. At
December 31, 1999, the estimated fair value of our mortgage notes receivable
approximated their amortized cost. At December 31, 1999, our marketable
securities, which are all classified as "available for sale", had an estimated
fair value and actual carrying value of $7.7 million. At December 31, 1999 our
Long-Term Unsecured Debt had an estimated fair value of approximately $1.2
billion and an actual carrying value of $1.3 billion. The mortgages payable
had an estimated fair value and actual carrying value of approximately $0.7
billion at December 31, 1999.
Derivative Financial Instruments
Our involvement with derivative financial instruments is limited and we do
not use them for trading or other speculative purposes. We occasionally
utilize derivative financial instruments to lower our overall borrowing costs.
On December 22, 1999, we entered into an interest rate swap agreement with
a notional amount of $7.25 million, relating to a tax-exempt bond carrying a
fixed interest rate of 5.25% per annum. The $7.25 million swap effectively
provides for a floating interest rate through the bond mandatory tender date
of December 1, 2006, at which time the agreement terminates. The actual
floating effective interest rate at December 31, 1999 was 4.1% per annum.
On July 28, 1999, we entered into an interest rate swap agreement with a
notional amount of $15.1 million, relating to unsecured tax-exempt bonds
carrying a fixed interest rate of 5.3% per annum. The $15.1 million swap
effectively provides for a floating interest rate through the bond mandatory
tender date of June 1, 2008, at which time the agreement terminates. The
actual floating effective interest rate at December 31, 1999, was 4.1% per
annum.
On June 29, 1999, we entered into an interest rate swap agreement with a
notional amount of $60.6 million, relating to unsecured tax-exempt bonds
carrying a fixed interest rate of 5.3% per annum. The $60.6 million swap
effectively provides for a floating interest rate through the bond mandatory
tender date of June 1, 2008, at which time the agreement terminates. The
actual floating effective interest rate at December 31, 1999, was 4.3% per
annum.
On May 12, 1999, we entered into an interest rate swap agreement with a
notional amount of $36.3 million, relating to secured tax-exempt bonds
carrying a fixed interest rate of 9.0% per annum. The $36.3 million swap
effectively provides for a floating interest rate through the bond maturity
date of May 1, 2004, at which time the agreement terminates. The actual
floating effective interest rate at December 31, 1999, was 4.6% per annum.
On April 13, 1999, we entered into an interest rate swap agreement with a
notional amount of $100 million, relating to a portion of the outstanding
balance on our $750 million unsecured line of credit. The $100 million swap
effectively provides for a fixed interest rate of 5.9% through April 13, 2000,
at which time the agreement terminates. The effective interest rate on
Archstone's unsecured line of credit, including the effect of the hedge, was
6.4% per annum as of December 31, 1999.
On January 21, 1999, we entered into two interest rate swap agreements with
notional amounts aggregating $55.0 million, relating to Long-Term Unsecured
Debt. The $55.0 million of notes, which were originally issued at a floating
weighted average effective interest rate of 7.3%, were effectively converted
to a fixed weighted average interest rate of 7.1% through maturity.
89
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the closing of the $268.5 million of long-term secured
debt agreement in December 1998 with Fannie Mae, we entered into an interest
rate cap agreement on December 30, 1998, with a notional amount aggregating
$118.5 million, which capped this portion of the debt at an effective interest
rate of 6.9% through December 2002. The actual floating effective interest
rate at December 31, 1999, was 6.7% per annum. Additionally in January 1999,
we entered into an interest rate swap on the remaining $150 million, which was
originally issued at a floating weighted average interest rate of 5.9% per
annum. The swap effectively provides for a fixed interest rate of 6.3% until
maturity in 2006.
As of December 31, 1999, marking our various interest rate agreements to
market would result in a net gain of $15.8 million, prior to consideration of
the associated issuance costs, if each had been terminated on such date.
In anticipation of a Long-Term Unsecured Debt offering that closed in March
1998, we entered into four separate interest rate contracts in 1997 with
notional amount aggregating $120 million. Upon completion of the offering, we
terminated the interest rate contracts, realizing a loss of approximately $5.5
million. The resulting loss was deferred and is being amortized into interest
expense over the term of the debt agreement.
(12) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data (in thousands except per share amounts)
for 1999 and 1998 is summarized below. The sum of the quarterly earnings per
Common Share amounts may not equal the annual earnings per Common Share
amounts due primarily to the impact of equity issuances.
<TABLE>
<CAPTION>
Three Months Ended Year Ended
----------------------------------- ----------
3-31 6-30 9-30 12-31 12-31
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
1999:
Total revenues................ $161,387 $163,317 $168,872 $173,296 $666,872
-------- -------- -------- -------- --------
Earnings from operations...... 39,330 42,415 43,361 42,173 167,279
Gains on dispositions of
depreciated real estate, net. 5,319 13,659 27,909 15,206 62,093
Less extraordinary item....... 1,113 -- -- -- 1,113
Less Preferred Share
dividends.................... 5,691 5,617 6,036 6,387 23,731
-------- -------- -------- -------- --------
Net earnings attributable to
Common Shares--Basic......... 37,845 50,457 65,234 50,992 204,528
-------- -------- -------- -------- --------
Net earnings per Common Share:
Basic....................... $ 0.27 $ 0.36 $ 0.47 $ 0.37 $ 1.46
======== ======== ======== ======== ========
Diluted..................... $ 0.27 $ 0.36 $ 0.46 $ 0.37 $ 1.46
======== ======== ======== ======== ========
1998:
Total revenues................ $ 95,611 $ 98,176 $159,045 $160,813 $513,645
-------- -------- -------- -------- --------
Earnings from operations...... 29,299 28,048 37,961 38,618 133,926
Gains on dispositions of
depreciated real estate, net. 15,484 -- 21,204 28,843 65,531
Less extraordinary item....... -- -- 1,497 -- 1,497
Less Preferred Share
dividends.................... 4,712 4,757 5,723 5,746 20,938
-------- -------- -------- -------- --------
Net earnings attributable to
Common Shares--Basic......... $ 40,071 $ 23,291 $ 51,945 $ 61,715 $177,022
======== ======== ======== ======== ========
Net earnings per Common Share:
Basic....................... $ 0.43 $ 0.25 $ 0.36 $ 0.43 $ 1.49
======== ======== ======== ======== ========
Diluted..................... $ 0.42 $ 0.25 $ 0.36 $ 0.43 $ 1.49
======== ======== ======== ======== ========
</TABLE>
90
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(13) Segment Data
We define each of our apartment communities as individual operating
segments. We have determined that all of our apartment communities have
similar economic characteristics and also meet the other criteria which permit
the apartment communities to be aggregated into one reportable segment. We
rely primarily on net operating income for purposes of making decisions about
allocating resources and assessing segment performance.
Following are reconciliations of the reportable segment's: (i) revenues to
consolidated revenues, (ii) net operating income to consolidated earnings from
operations, and (iii) assets to consolidated assets, for the periods indicated
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Reportable segment revenues............... $ 634,028 $478,144 $331,346
Other non-reportable operating segment
income (1)............................... 32,844 35,501 24,316
--------- -------- --------
Total segment and consolidated revenues... $ 666,872 $513,645 $355,662
========= ======== ========
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Reportable segment net operating income
(2)...................................... $ 416,515 $305,309 $208,423
Other non-reportable operating segment net
operating income......................... 3,766 5,470 3,586
--------- -------- --------
Total segment net operating income.... 420,281 310,779 212,009
--------- -------- --------
Reconciling items:
Other income............................ 29,064 29,106 20,602
Depreciation on real estate investments. (132,437) (96,337) (52,893)
Interest expense........................ (121,494) (83,350) (61,153)
General and administrative expenses..... (22,156) (16,092) (18,350)
Provision for possible loss on
investments............................ (2,000) (4,700) (3,000)
Nonrecurring expenses................... -- (2,193) (71,707)
Other expenses.......................... (3,979) (3,287) (822)
--------- -------- --------
Consolidated earnings from operations..... $ 167,279 $133,926 $ 24,686
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Reportable segment assets........................... $4,819,307 $4,536,529
Other non-reportable operating segment assets (3)... 371,727 385,587
---------- ----------
Total segment assets............................ 5,191,034 4,922,116
---------- ----------
Reconciling items:
Cash and cash equivalents......................... 515 5,429
Restricted cash in tax-deferred exchange escrow... 68,729 90,874
Other assets...................................... 42,159 41,479
---------- ----------
Consolidated total assets........................... $5,302,437 $5,059,898
========== ==========
</TABLE>
- --------
(1) Includes $23.6 million, $22.9 million and $16.7 million of interest income
on the convertible mortgage notes receivable in 1999, 1998 and 1997,
respectively (see Note 3). Also includes income from our unconsolidated
taxable subsidiary and interest income on cash equivalents and other notes
receivable.
91
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Net operating income is defined as rental revenues less rental expenses
and real estate taxes.
(3) Includes $205.6 million and $203.0 million of convertible mortgage notes
receivable during 1999 and 1998, respectively, and various other real
estate investments.
We do not derive any of our consolidated revenues from foreign countries
and do not have any major customers that individually account for 10% or more
of our consolidated revenues.
(14) Commitments and Contingencies
Archstone is a party to various claims and routine litigation arising in
the ordinary course of business. We do not believe that the results of any of
such claims and litigation, individually or in the aggregate, will have a
material adverse effect on our business, financial position or results of
operations.
Archstone is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of our due
diligence investigation procedures, we conduct Phase I environmental
assessments on each property prior to acquisition. The cost of complying with
environmental regulations was not material to Archstone's results of
operations for any of the years in the three-year period ended December 31,
1999. We are not aware of any environmental condition on any of our
communities which is likely to have a material effect on Archstone's financial
condition or results of operations.
See Note 2 for apartment construction and redevelopment commitments.
(15) Supplemental Cash Flow Information
Significant non-cash investing and financing activities for the years ended
December 31, 1999, 1998 and 1997 are as follows:
(i) Holders of Series A Convertible Preferred Shares converted $24.1
million, $17.7 million and $27.2 million of their shares into Common
Shares during the years ended December 31, 1999, 1998 and 1997,
respectively.
(ii) In connection with the acquisition of apartment communities, we
assumed mortgage debt of $105.4 million, $93.7 million (excluding
mortgage debt assumed in the Atlantic Merger) and $101.6 million
during the years ended December 31, 1999, 1998 and 1997, respectively.
(iii) We refinanced $59.7 million in bonds during the year ended December
31, 1999.
(iv) We issued 47,752,052 Common Shares valued at approximately $1.1
billion, 2,000,000 Series C Preferred Shares valued at approximately
$50.6 million and assumed debt and other liabilities valued at
approximately $778.9 million in exchange for approximately $1.9
billion of assets in the Atlantic Merger.
(v) We recorded an $83.8 million decrease and an $8.9 million increase in
the unrealized gain on the convertible mortgage notes receivable during
the years ended December 31, 1998 and 1997 respectively, primarily as a
result of changes in the market value of the common stock into which
these securities are convertible.
(vi) We had notes receivable outstanding from employees aggregating $19.2
million, $26.3 million (including $11.3 million assumed in the
Atlantic Merger) and $17.2 million for the purchase of Common Shares
under the Archstone's long-term incentive plan in 1999, 1998 and 1997,
respectively.
(vii) We issued 3,295,533 Common Shares valued at $73.3 million to Security
Capital in exchange for the operations and business of the REIT and
property management companies in September 1997.
92
<PAGE>
ARCHSTONE COMMUNITIES TRUST
NOTES TO FINANCIAL STATEMENTS--(Concluded)
(16) Subsequent Event
In February 2000, a consolidated subsidiary issued 680,000 additional Series
E perpetual preferred units ($25 liquidation preference per unit) to a limited
partnership in exchange for $17.0 million. The units pay cumulative quarterly
dividends of $0.5234 per share ($2.09375 or 8.375% per annum), are redeemable
at our option after August 13, 2004 and are convertible into Archstone Series E
Cumulative Redeemable Perpetual Preferred shares on or after August 13, 2009.
93
<PAGE>
Independent Auditors' Report
The Board of Trustees and Shareholders
Archstone Communities Trust:
Under date of January 27, 2000, except as to Note 16 which is as of
February 4, 2000, we reported on the balance sheets of Archstone Communities
Trust as of December 31, 1999 and 1998, and the related statements of
earnings, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement schedule. This financial statement schedule is the responsibility of
the company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule as listed in the
accompanying index, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Chicago, Illinois
January 27, 2000
94
<PAGE>
SCHEDULE III
ARCHSTONE COMMUNITIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amount at Which Carried
Archstone Costs at December 31, 1999
--------------------- Capitalized -------------------------------
Buildings & Subsequent Buildings & Con-
Encum- Improve- to Improve- Accumulated struction
Units brances Land ments Acquisition Land ments Totals Depreciation Year
------ -------- --------- ----------- ----------- -------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Communities:
Albuquerque, New
Mexico:
Comanche Wells.. 179 $ -- $ 719 $ 4,072 $ 835 $ 719 $ 4,907 $ 5,626 $ 753 1985
La Paloma....... 424 -- 4,135 -- 19,966 4,135 19,966 24,101 3,165 1996
La Ventana...... 232 -- 2,210 -- 13,590 2,210 13,590 15,800 1,673 1996
Pavilions....... 240 -- 2,182 7,624 6,339 2,182 13,963 16,145 3,082 (a)
Telegraph Hill.. 200 -- 1,216 6,889 1,013 1,216 7,902 9,118 701 1986
Vista Del Sol... 168 -- 1,105 4,419 1,238 1,105 5,657 6,762 946 1987
Vistas at Seven
Bar Ranch...... 572 -- 3,541 5,351 20,709 3,541 26,060 29,601 3,451 (b)
Wellington
Place.......... 280 -- 1,881 7,523 1,904 1,881 9,427 11,308 1,446 1981
Atlanta, Georgia:
Archstone Roswell. 664 30,355 6,791 38,484 457 6,791 38,941 45,732 2,806 1988
Archstone Vinings. 200 -- 1,787 10,126 740 1,787 10,866 12,653 658 1978
Azalea Park..... 447 15,033 4,330 24,536 484 4,330 25,020 29,350 1,658 1987
Cameron Ashford. 365 -- 4,245 24,053 251 4,245 24,304 28,549 1,542 1990
Cameron at
Barrett Creek.. 332 -- 1,963 11,126 13,733 1,963 24,859 26,822 400 1999
Cameron Briarcliff. 220 -- 2,515 14,250 238 2,515 14,488 17,003 915 1989
Cameron at
Northpoint..... 264 -- 2,248 12,740 8,073 2,248 20,813 23,061 612 1999
Cameron Bridge.. 224 -- 2,119 12,010 4,948 2,119 16,958 19,077 516 1999
Cameron Brook... 440 18,774 4,050 22,950 306 4,050 23,256 27,306 1,447 1988
Cameron Dunwoody. 238 -- 2,747 15,566 148 2,747 15,714 18,461 999 1989
Cameron Greens.. 304 10,013 2,389 13,537 239 2,389 13,776 16,165 865 1986
Cameron Landing. 368 15,340 3,535 20,030 516 3,535 20,546 24,081 1,359 1998
Cameron Pointe.. 214 12,545 2,725 15,440 462 2,725 15,902 18,627 989 1987
Cameron Station. 348 15,058 2,880 16,321 1,010 2,880 17,331 20,211 1,062 (d)
Cameron Woodlands 644 -- 4,901 27,775 319 4,901 28,094 32,995 1,758 (e)
Lake Ridge
at Dunwoody.... 268 -- 3,126 17,712 179 3,126 17,891 21,017 1,347 1979
Old Salem....... 172 -- 1,490 8,446 521 1,490 8,967 10,457 557 1968
Trolley Square.. 270 -- 2,918 16,534 524 2,918 17,058 19,976 1,082 1989
Winterscreek.... 200 4,834 1,561 8,846 86 1,561 8,932 10,493 570 1984
Austin, Texas:
Archstone Hunters'
Run I & II..... 400 14,820 2,197 -- 17,856 2,197 17,856 20,053 2,428 (f)
Archstone Monterey
Ranch I........ 168 16,861 424 -- 9,204 424 9,204 9,628 164 1999
Archstone Monterey
Ranch II....... 456 -- 1,151 -- 23,686 1,151 23,686 24,837 2,365 1996
Archstone Monterey
Ranch III...... 448 -- 1,131 -- 11,958 1,131 11,958 13,089 (c) (c)
Archstone Northwest
Hills.......... 314 -- 1,311 7,431 3,054 1,311 10,485 11,796 1,588 1979
Ridge, The...... 326 -- 1,669 6,675 3,326 1,669 10,001 11,670 1,672 1978
Shadowood....... 236 -- 1,197 4,787 1,154 1,197 5,941 7,138 954 1985
Birmingham,
Alabama:
Cameron at the
Summit I....... 372 -- 3,458 19,595 414 3,458 20,009 23,467 1,685 1998
Cameron at the
Summit II...... 268 -- 698 3,955 13,387 698 17,342 18,040 101 (c)
Boston,
Massachusetts:
Arboretum, The.. 312 36,346 6,721 38,087 513 6,721 38,600 45,321 926 1989
Archstone
Tewksbury...... 77 3,076 1,189 6,739 190 1,189 6,929 8,118 181 1995
Archstone
Tewksbury II... 168 -- 3,235 660 16,171 3,235 16,831 20,066 50 (c)
<CAPTION>
Year
Acquired
--------
<S> <C>
Apartment Communities:
Albuquerque, New
Mexico:
Comanche Wells.. 1994
La Paloma....... 1993
La Ventana...... 1994
Pavilions....... (a)
Telegraph Hill.. 1996
Vista Del Sol... 1993
Vistas at Seven
Bar Ranch...... (b)
Wellington
Place.......... 1993
Atlanta, Georgia:
Archstone Roswell. 1998
Archstone Vinings. 1998
Azalea Park..... 1998
Cameron Ashford. 1998
Cameron at
Barrett Creek.. 1998
Cameron Briarcliff. 1998
Cameron at
Northpoint..... 1998
Cameron Bridge.. 1998
Cameron Brook... 1998
Cameron Dunwoody. 1998
Cameron Greens.. 1998
Cameron Landing. 1998
Cameron Pointe.. 1998
Cameron Station. 1998
Cameron Woodlands 1998
Lake Ridge
at Dunwoody.... 1998
Old Salem....... 1998
Trolley Square.. 1998
Winterscreek.... 1998
Austin, Texas:
Archstone Hunters'
Run I & II..... (f)
Archstone Monterey
Ranch I........ 1993
Archstone Monterey
Ranch II....... 1993
Archstone Monterey
Ranch III...... 1993
Archstone Northwest
Hills.......... 1993
Ridge, The...... 1993
Shadowood....... 1993
Birmingham,
Alabama:
Cameron at the
Summit I....... 1998
Cameron at the
Summit II...... 1998
Boston,
Massachusetts:
Arboretum, The.. 1999
Archstone
Tewksbury...... 1999
Archstone
Tewksbury II... 1999
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Gross Amount at Which
Initial Cost to Carried at December 31,
Archstone Costs 1999
------------------- Capitalized ---------------------------
Buildings & Subsequent Buildings & Con-
Encum- Improve- to Improve- Accumulated struction Year
Units brances Land ments Acquisition Land ments Totals Depreciation Year Acquired
------ ------- ------- ----------- ----------- ------- ----------- ------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Communities:
Charlotte, North
Carolina:
Archstone Tyvola
Centre......... 404 $ -- $ 3,470 $2,461 $ 1,698 $ 3,470 $ 4,159 $ 7,629 $ (c) (c) 1998
Cameron at
Hickory Grove.. 202 6,063 1,434 8,127 219 1,434 8,346 9,780 522 1988 1998
Cameron
Matthews....... 212 9,035 2,034 11,526 165 2,034 11,691 13,725 748 1998 1998
Archstone
Eastover....... 128 -- 1,431 8,107 705 1,431 8,812 10,243 527 1987 1998
Pinnacle at
North Cross,
The............ 312 -- 3,573 20,264 206 3,573 20,470 24,043 819 1997 1998
Archstone
Reafield....... 324 -- 3,009 17,052 1,012 3,009 18,064 21,073 1,101 1987 1998
Springs at
Steele Creek... 264 -- 2,475 14,028 170 2,475 14,198 16,673 879 1997 1998
Waterford Square
I & II......... 694 -- 6,220 35,243 280 6,220 35,523 41,743 2,416 (g) 1998
Chicago,
Illinois:
Foxfire (k)..... 294 8,119 3,137 17,770 192 3,137 17,962 21,099 171 1988 1999
Garden Glen (k). 460 33,410 6,844 38,722 1,203 6,844 39,925 46,769 374 1987 1999
Prairie Court
(k)............ 125 7,250 2,071 11,708 111 2,071 11,819 13,890 112 1987 1999
Dallas, Texas:
Archstone
Knoxbridge..... 334 15,462 4,668 26,453 697 4,668 27,150 31,818 812 1994 1998
Archstone
Legacy......... 244 -- 1,532 8,683 2,581 1,532 11,264 12,796 1,687 1985 1993
Archstone Spring
Creek.......... 278 -- 1,613 9,140 2,925 1,613 12,065 13,678 1,792 1983 1993
Oaks at Park
Boulevard, The. 216 -- 1,386 5,543 3,050 1,386 8,593 9,979 1,078 1986 1993
Summerstone..... 192 -- 1,028 5,824 2,192 1,028 8,016 9,044 1,164 1983 1993
Timber Ridge I &
II............. 352 -- 1,672 5,671 10,829 1,672 16,500 18,172 1,730 (h) (h)
Denver, Colorado:
Archstone Dakota
Ridge.......... 480 -- 2,108 24 32,494 2,108 32,518 34,626 433 1999 1997
Cambrian, The... 383 -- 2,256 9,026 3,967 2,256 12,993 15,249 1,872 1983 1993
Cedars II, The.. 172 -- 828 529 4,192 828 4,721 5,549 (c) (c) 1999
Cedars, The..... 408 -- 3,128 12,512 5,828 3,128 18,340 21,468 2,849 1984 1993
Fox Creek I..... 175 -- 1,167 4,669 1,612 1,167 6,281 7,448 896 1984 1993
Fox Creek II.... 112 -- -- -- 8,819 -- 8,819 8,819 159 1999 1995
Legacy Heights.. 384 16,417 2,049 4 20,496 2,049 20,500 22,549 1,199 1998 1997
Reflections I &
II............. 416 -- 2,396 6,362 14,550 2,396 20,912 23,308 2,828 (i) (i)
Regency Park.... 204 8,500 2,416 13,674 16 2,416 13,690 16,106 20 1986 1999
Silver Cliff.... 312 -- 2,410 13,656 1,156 2,410 14,812 17,222 2,248 1991 1994
Sunwood......... 156 -- 1,030 4,596 3,013 1,030 7,609 8,639 1,143 1981 1992
Wendemere at the
Ranch.......... 256 -- 2,606 14,769 469 2,606 15,238 17,844 548 1984 1999
El Paso, Texas:
Las Flores...... 468 5,648 625 6,624 1,447 625 8,071 8,696 3,981 (j) (j)
Ft.
Lauderdale/West
Palm Beach:
Archstone at
Woodbine....... 408 -- 3,803 1,832 4,222 3,803 6,054 9,857 (c) (c) 1999
Archstone
Pembrooke
Pines.......... 308 -- 2,675 15,159 1,051 2,675 16,210 18,885 996 1988 1998
Archstone
Waterview...... 192 -- 1,847 10,464 874 1,847 11,338 13,185 705 1988 1998
Cameron at
Meadow Lakes... 189 -- 1,712 9,702 121 1,712 9,823 11,535 620 1983 1998
Cameron at the
Villages....... 384 -- 3,298 18,686 722 3,298 19,408 22,706 1,219 1987 1998
Cameron Cove.... 221 8,173 1,648 9,338 644 1,648 9,982 11,630 617 1986 1998
Cameron Gardens. 300 -- 2,803 15,882 6,017 2,803 21,899 24,702 550 1999 1998
Cameron Hidden
Harbor......... 200 5,233 1,868 10,587 839 1,868 11,426 13,294 704 1986 1998
Cameron Palms... 340 -- 2,252 12,763 13,813 2,252 26,576 28,828 421 1999 1998
Cameron Park I.. 196 -- 2,129 12,063 2,580 2,129 14,643 16,772 562 1999 1998
Cameron View.... 176 -- 1,487 8,425 376 1,487 8,801 10,288 554 1987 1998
Cameron
Waterways...... 300 -- 3,678 20,840 452 3,678 21,292 24,970 1,209 1998 1998
Archstone Island
Reach.......... 280 -- 2,764 15,662 605 2,764 16,267 19,031 387 1990 1999
Park Place at
Turtle Run..... 350 -- 2,598 14,721 128 2,598 14,849 17,447 938 1989 1998
Ft. Myers,
Florida:
Forestwood...... 397 11,058 2,534 14,361 520 2,534 14,881 17,415 933 1986 1998
Houston, Texas:
7100 Almeda..... 348 -- 1,713 9,706 2,484 1,713 12,190 13,903 1,680 1984 1994
Archstone
Braeswood...... 240 -- 1,861 10,548 1,775 1,861 12,323 14,184 1,863 1984 1993
Archstone
Braeswood II... 36 -- 1,125 5 3,050 1,125 3,055 4,180 35 1999 1997
Archstone
Brompton Court. 794 -- 4,058 22,993 8,940 4,058 31,933 35,991 4,628 1972 1994
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
Gross Amount at Which Carried
Initial Cost to Archstone Costs at December 31, 1999
---------------------------Capitalized--------------------------------
Subsequent Buildings & Con-
Encum- Buildings & to Improve- Accumulated struction
Units brances Land Improve-ments Acquisition Land ments Totals Depreciation Year
------ -------- ----------- -------------------------- -------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Communities:
Houston, Texas
(continued):
Archstone
Medical Center
I.............. 360 $ 13,295 $ 4,210 $ -- $ 14,660 $ 4,210 $ 14,660 $ 18,870 $ 1,991 1996
Archstone
Medical Center
II............. 318 -- 3,368 -- 15,908 3,368 15,908 19,276 541 1999
Memorial Heights
I.............. 360 14,801 3,169 -- 16,087 3,169 16,087 19,256 3,226 1996
Memorial Heights
II............. 256 12,174 9,164 -- 7,042 9,164 7,042 16,206 4 1998
Indianapolis,
Indiana:
Arbor Green..... 208 -- 1,597 9,049 446 1,597 9,495 11,092 591 1989
Archstone River
Ridge.......... 202 -- 461 2,612 12,681 461 15,293 15,754 100 (c)
Inland Empire,
California:
Crossing, The... 296 -- 2,227 12,622 2,058 2,227 14,680 16,907 1,453 1989
Miramonte....... 290 -- 2,357 13,364 1,231 2,357 14,595 16,952 1,618 1989
Sierra Hills.... 300 612 2,810 15,921 1,827 2,810 17,748 20,558 1,270 1990
Terracina....... 736 -- 5,780 32,757 3,252 5,780 36,009 41,789 3,504 1988
Westcourt....... 515 -- 1,909 10,817 4,795 1,909 15,612 17,521 1,712 1986
Woodsong........ 262 -- 1,846 10,469 920 1,846 11,389 13,235 1,033 1985
Jacksonville,
Florida:
Cameron Lakes I
& II........... 555 -- 5,268 29,855 355 5,268 30,210 35,478 2,457 (l)
Las Vegas,
Nevada:
Crossings at
Lake Mead, The. 444 -- 2,086 11,867 2,035 2,086 13,902 15,988 1,720 1986
Horizons at
Piccole Ranch.. 408 -- 3,173 18,048 1,307 3,173 19,355 22,528 2,434 1990
La Tierra at the
Lakes.......... 896 -- 5,904 33,561 6,137 5,904 39,698 45,602 5,167 1986
Los Angeles,
California:
Oakridge........ 178 -- 3,212 18,200 1,355 3,212 19,555 22,767 686 1985
Regency Court... 174 -- 1,962 11,118 1,066 1,962 12,184 14,146 341 1988
Minneapolis,
Minnesota:
Eden Commons
(k)............ 196 5,979 1,973 11,181 258 1,973 11,439 13,412 328 1987
Regency Woods
(k)............ 282 -- 3,591 20,368 29 3,591 20,397 23,988 140 1988
Willow Creek
(k)............ 240 -- 1,976 11,192 73 1,976 11,265 13,241 107 1979
Nashville,
Tennessee:
Amberwood at
Bellevue....... 225 5,002 2,235 12,660 966 2,235 13,626 15,861 440 1986
Archstone Briley
Parkway........ 360 -- 2,471 14,003 367 2,471 14,370 16,841 1,057 1986
Cameron
Overlook....... 452 -- 4,031 22,843 186 4,031 23,029 27,060 1,897 1998
Enclave at
Brentwood, The. 380 -- 2,672 15,143 1,197 2,672 16,340 19,012 1,004 1988
Shadowbluff..... 220 5,720 1,422 8,059 145 1,422 8,204 9,626 520 1986
Orange County,
California:
Las Flores...... 504 7,368 8,900 264 41,392 8,900 41,656 50,556 1,297 1999
Newpointe....... 160 -- 1,403 7,981 651 1,403 8,632 10,035 809 1987
Rivermeadows.... 152 -- 2,082 11,797 1,503 2,082 13,300 15,382 992 1986
Sorrento........ 241 4,744 4,872 -- 22,888 4,872 22,888 27,760 800 1998
Villa
Marseilles..... 192 3,630 1,970 11,162 4,850 1,970 16,012 17,982 1,138 1991
Windemere....... 182 -- 2,611 14,815 14 2,611 14,829 17,440 101 1987
Orlando, Florida:
Cameron
Promenade...... 212 -- 2,236 12,671 1,117 2,236 13,788 16,024 670 1999
Cameron Springs. 340 -- 2,893 16,391 378 2,893 16,769 19,662 1,060 1986
Cameron
Wellington I... 192 -- 1,505 8,526 98 1,505 8,624 10,129 548 1988
Cameron
Wellington II.. 120 -- 1,605 9,094 274 1,605 9,368 10,973 422 1999
Kingston
Village........ 120 -- 1,039 5,887 610 1,039 6,497 7,536 397 1982
Phoenix, Arizona:
Bay Club at Mesa
Cove........... 472 -- 2,797 11,188 2,336 2,797 13,524 16,321 2,136 1985
Cochise at
Arrowhead I
(k)............ 272 -- 2,019 -- 16,080 2,019 16,080 18,099 920 1999
Cochise at
Arrowhead II
(k)............ 200 -- 1,601 -- 11,074 1,601 11,074 12,675 180 1999
Foxfire......... 188 -- 1,055 5,976 1,011 1,055 6,987 8,042 1,041 1985
Miralago I...... 496 18,720 2,743 -- 22,519 2,743 22,519 25,262 2,417 1997
Moorings at Mesa
Cove, The...... 406 -- 3,261 13,045 2,136 3,261 15,181 18,442 2,682 1985
Peaks at Papago
Park, The 768 -- 5,131 23,408 10,221 5,131 33,629 38,760 4,975 (m)
<CAPTION>
Year
Acquired
--------
<S> <C>
Apartment Communities:
Houston, Texas
(continued):
Archstone
Medical Center
I.............. 1994
Archstone
Medical Center
II............. 1994
Memorial Heights
I.............. 1996
Memorial Heights
II............. 1996
Indianapolis,
Indiana:
Arbor Green..... 1998
Archstone River
Ridge.......... 1998
Inland Empire,
California:
Crossing, The... 1996
Miramonte....... 1995
Sierra Hills.... 1997
Terracina....... 1996
Westcourt....... 1996
Woodsong........ 1996
Jacksonville,
Florida:
Cameron Lakes I
& II........... 1998
Las Vegas,
Nevada:
Crossings at
Lake Mead, The. 1995
Horizons at
Piccole Ranch.. 1995
La Tierra at the
Lakes.......... 1995
Los Angeles,
California:
Oakridge........ 1998
Regency Court... 1999
Minneapolis,
Minnesota:
Eden Commons
(k)............ 1998
Regency Woods
(k)............ 1999
Willow Creek
(k)............ 1999
Nashville,
Tennessee:
Amberwood at
Bellevue....... 1998
Archstone Briley
Parkway........ 1998
Cameron
Overlook....... 1998
Enclave at
Brentwood, The. 1998
Shadowbluff..... 1998
Orange County,
California:
Las Flores...... 1996
Newpointe....... 1996
Rivermeadows.... 1997
Sorrento........ 1996
Villa
Marseilles..... 1996
Windemere....... 1999
Orlando, Florida:
Cameron
Promenade...... 1998
Cameron Springs. 1998
Cameron
Wellington I... 1998
Cameron
Wellington II.. 1998
Kingston
Village........ 1998
Phoenix, Arizona:
Bay Club at Mesa
Cove........... 1993
Cochise at
Arrowhead I
(k)............ 1995
Cochise at
Arrowhead II
(k)............ 1995
Foxfire......... 1994
Miralago I...... 1995
Moorings at Mesa
Cove, The...... 1992
Peaks at Papago
Park, The (m)
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
Gross Amount at Which Carried
Initial Cost to Archstone Costs at December 31, 1999
---------------------------Capitalized--------------------------------
Subsequent Buildings & Con-
Encum- Buildings & to Improve- Accumulated struction
Units brances Land Improve-ments Acquisition Land ments Totals Depreciation Year
------ -------- ----------- -------------------------- -------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment
Communities:
Phoenix, Arizona
(continued):
Ridge, The...... 380 $ -- $ 1,852 $ 10,492 $ 1,067 $ 1,852 $ 11,559 $ 13,411 $ 1,891 1987
San Marbeya (k). 404 -- 3,675 93 23,369 3,675 23,462 27,137 478 1999
San Marquis
North.......... 208 -- 1,215 -- 9,866 1,215 9,866 11,081 1,429 1994
San Marquis
South.......... 264 -- 2,312 -- 11,568 2,312 11,568 13,880 1,967 1994
San Palmera (k). 412 -- 3,515 -- 23,216 3,515 23,216 26,731 2,282 1997
San Valiente I
(k)............ 376 -- 3,062 -- 19,796 3,062 19,796 22,858 1,988 1997
San Valiente II
(k)............ 228 -- 1,647 -- 12,360 1,647 12,360 14,007 202 1999
Scottsdale
Greens......... 644 23,465 3,489 19,774 8,753 3,489 28,527 32,016 4,553 1980
Portland, Oregon:
Arbor Heights... 348 -- 2,669 -- 20,771 2,669 20,771 23,440 1,669 1998
Brighton........ 233 -- 1,675 9,532 1,743 1,675 11,275 12,950 1,014 1985
Cambridge
Crossing....... 250 -- 2,260 -- 13,411 2,260 13,411 15,671 1,154 1998
Hedges Creek.... 408 -- 3,758 162 23,647 3,758 23,809 27,567 605 1999
Preston's
Crossing....... 228 -- 851 -- 12,280 851 12,280 13,131 1,358 1996
Timberline...... 130 -- 1,058 5,995 643 1,058 6,638 7,696 672 1990
Raleigh, North
Carolina:
52 Magnolia..... 228 11,765 2,732 15,482 283 2,732 15,765 18,497 978 1995
Archstone at
Preston........ 388 -- 882 4,996 21,828 882 26,824 27,706 143 (c)
Cameron at Six
Forks.......... 172 -- 1,417 8,027 225 1,417 8,252 9,669 519 1985
Cameron at
Southpoint..... 288 -- 1,719 9,741 9,397 1,719 19,138 20,857 369 1999
Cameron Brooke.. 228 -- 2,031 11,508 258 2,031 11,766 13,797 925 1997
Cameron Lake I &
II............. 368 -- 3,145 17,820 1,342 3,145 19,162 22,307 1,145 (n)
Cameron Ridge... 228 -- 1,694 9,599 675 1,694 10,274 11,968 615 1985
Cameron Square.. 268 -- 2,575 14,590 190 2,575 14,780 17,355 923 1987
Cameron Woods... 328 -- 2,107 11,940 8,182 2,107 20,122 22,229 512 1999
Conifer Glen.... 186 -- 2,204 12,511 148 2,204 12,659 14,863 508 1997
Cornerstone..... 302 -- 3,748 21,239 334 3,748 21,573 25,321 1,335 1997
Poplar Place.... 230 -- 2,189 12,407 772 2,189 13,179 15,368 816 1987
Waterford Point. 336 14,560 3,136 17,763 -- 3,136 17,763 20,899 1,307 1996
Reno, Nevada:
Enclave, The.... 228 -- 1,947 -- 13,810 1,947 13,810 15,757 723 1998
Enclave II, The. 180 -- 1,538 -- 12,988 1,538 12,988 14,526 89 (c)
Vista Ridge..... 324 -- 2,002 -- 19,416 2,002 19,416 21,418 2,096 1997
Richmond,
Virginia:
Archstone Swift
Creek I........ 288 -- 812 4,604 16,732 812 21,336 22,148 41 (c)
Cameron at
Gayton......... 220 -- 1,905 10,796 168 1,905 10,964 12,869 688 1987
Cameron at
Virginia
Center......... 264 -- 2,907 16,472 1,227 2,907 17,699 20,606 779 1999
Cameron at
Virginia Center
II............. 88 -- 242 1,372 5,367 242 6,739 6,981 60 1999
Cameron at
Wyndham........ 312 -- 3,782 21,433 992 3,782 22,425 26,207 1,161 1999
Cameron Crossing
I & II......... 424 -- 4,968 28,155 1,600 4,968 29,755 34,723 1,799 1998
Salt Lake City,
Utah:
Archstone River
Oaks........... 448 -- 5,400 213 28,822 5,400 29,035 34,435 318 (c)
Brighton Place.. 336 -- 2,091 11,892 4,376 2,091 16,268 18,359 2,074 1979
Carrington
Place.......... 142 3,372 1,072 6,072 724 1,072 6,796 7,868 434 1986
Cloverland...... 186 4,124 1,392 7,886 1,265 1,392 9,151 10,543 576 1985
Crossroads...... 240 4,435 1,521 8,619 2,183 1,521 10,802 12,323 857 1986
Fairstone at
Riverview...... 492 -- 4,636 -- 27,383 4,636 27,383 32,019 2,079 1998
Greenpointe..... 224 -- 923 5,050 3,237 923 8,287 9,210 881 (o)
Mountain Shadow. 262 -- 927 4,730 6,294 927 11,024 11,951 1,063 (p)
Raintree........ 152 -- 948 5,373 905 948 6,278 7,226 337 1984
Remington, The.. 288 10,530 2,324 -- 14,986 2,324 14,986 17,310 1,781 1997
Riverbend....... 200 -- 1,357 7,692 1,140 1,357 8,832 10,189 472 1985
<CAPTION>
Year
Acquired
--------
<S> <C>
Apartment
Communities:
Phoenix, Arizona
(continued):
Ridge, The...... 1993
San Marbeya (k). 1997
San Marquis
North.......... 1993
San Marquis
South.......... 1993
San Palmera (k). 1995
San Valiente I
(k)............ 1995
San Valiente II
(k)............ 1995
Scottsdale
Greens......... 1994
Portland, Oregon:
Arbor Heights... 1996
Brighton........ 1996
Cambridge
Crossing....... 1996
Hedges Creek.... 1997
Preston's
Crossing....... 1995
Timberline...... 1996
Raleigh, North
Carolina:
52 Magnolia..... 1998
Archstone at
Preston........ 1998
Cameron at Six
Forks.......... 1998
Cameron at
Southpoint..... 1998
Cameron Brooke.. 1998
Cameron Lake I &
II............. 1998
Cameron Ridge... 1998
Cameron Square.. 1998
Cameron Woods... 1998
Conifer Glen.... 1998
Cornerstone..... 1998
Poplar Place.... 1998
Waterford Point. 1998
Reno, Nevada:
Enclave, The.... 1996
Enclave II, The. 1996
Vista Ridge..... 1995
Richmond,
Virginia:
Archstone Swift
Creek I........ 1998
Cameron at
Gayton......... 1998
Cameron at
Virginia
Center......... 1998
Cameron at
Virginia Center
II............. 1998
Cameron at
Wyndham........ 1998
Cameron Crossing
I & II......... 1998
Salt Lake City,
Utah:
Archstone River
Oaks........... 1997
Brighton Place.. 1995
Carrington
Place.......... 1997
Cloverland...... 1997
Crossroads...... 1996
Fairstone at
Riverview...... 1996
Greenpointe..... (o)
Mountain Shadow. (p)
Raintree........ 1998
Remington, The.. 1995
Riverbend....... 1998
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
Initial Cost to Gross Amount at Which Carried
Archstone Costs at December 31, 1999
-------------------- Capitalized -------------------------------
Buildings & Subsequent Buildings & Con-
Encum- Improve- to Improve- Accumulated struction Year
Units brances Land ments Acquisition Land ments Totals Depreciation Year Acquired
------ -------- -------- ----------- ----------- -------- ----------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Communities:
San Antonio,
Texas:
Archstone
Huebner Oaks... 344 $ -- $ 1,455 $ 8,248 $ 1,963 $ 1,455 $ 10,211 $ 11,666 $ 1,556 1983 1993
Austin Pointe... 328 -- 1,728 9,725 1,596 1,728 11,321 13,049 1,845 1982 1993
Camino Real..... 176 -- 1,084 4,338 2,577 1,084 6,915 7,999 1,051 1979 1993
Contour Place... 126 -- 456 1,829 632 456 2,461 2,917 694 1984 1992
Crescent, The... 306 -- 1,145 -- 15,290 1,145 15,290 16,435 2,724 1994 1992
Dymaxion........ 190 -- 683 3,740 837 683 4,577 5,260 605 1984 1994
Marbach Park.... 304 -- 1,122 6,361 1,307 1,122 7,668 8,790 1,287 1985 1993
Rancho Mirage... 254 -- 724 2,971 1,909 724 4,880 5,604 788 1974 1993
St. Tropez I.... 273 -- 2,013 8,054 2,749 2,013 10,803 12,816 1,798 1982 1992
Stanford
Heights........ 276 -- 1,631 -- 12,002 1,631 12,002 13,633 1,705 1996 1993
Sterling
Heights........ 224 9,498 1,644 -- 10,818 1,644 10,818 12,462 1,534 1995 1993
Villas of Castle
Hills.......... 163 -- 1,037 4,148 1,147 1,037 5,295 6,332 871 1971 1993
Waters at
Northern Hills,
The............ 305 -- 1,251 7,105 1,932 1,251 9,037 10,288 1,348 1982 1994
San Diego,
California:
Archstone La
Jolla.......... 296 -- 4,741 26,866 1,379 4,741 28,245 32,986 2,317 1991 1996
Archstone
Mission Valley. 736 -- 20,893 656 10,543 20,893 11,199 32,092 (c) (c) 1998
Archstone Torrey
Hills.......... 340 -- 10,400 659 28,745 10,400 29,404 39,804 95 (c) 1997
Archstone
University
Towne Centre... 328 20,846 4,616 26,160 2,095 4,616 28,255 32,871 2,068 1986 1997
Carmel Del Mar.. 232 14,670 3,802 21,546 2,491 3,802 24,037 27,839 1,071 1991 1998
Club Pacifica... 264 -- 2,141 12,132 1,356 2,141 13,488 15,629 1,328 1987 1996
El Dorado Hills. 448 -- 4,418 25,084 3,500 4,418 28,584 33,002 2,583 1983 1996
Ocean Crest..... 450 -- 3,918 22,207 3,265 3,918 25,472 29,390 1,959 (q) (q)
Archstone
Seaport
Village........ 387 -- 5,963 33,789 1,725 5,963 35,514 41,477 999 1992 1999
Seascape........ 208 -- 2,659 15,066 1,675 2,659 16,741 19,400 661 1986 1998
San Francisco
(Bay Area),
California:
Archstone
Emerald Park... 324 -- 8,950 170 36,575 8,950 36,745 45,695 134 (c) 1997
Archstone
Hacienda....... 540 5,002 18,696 668 47,785 18,696 48,453 67,149 96 (c) 1997
Archstone Marina
Bay............ 468 -- 5,952 33,728 1,062 5,952 34,790 40,742 2,652 1991 1997
Archstone
Monterey Grove. 224 -- 4,451 13 22,564 4,451 22,577 27,028 277 (c) 1997
Archstone San
Ramon.......... 496 -- 7,820 44,311 1,924 7,820 46,235 54,055 3,620 1988 1997
Archstone Willow
Glen........... 412 -- 16,140 746 11,681 16,140 12,427 28,567 (c) (c) 1998
Ashton Place.... 948 45,566 9,782 55,429 28,310 9,782 83,739 93,521 6,363 1970 1996
Harborside...... 149 -- 3,213 18,210 481 3,213 18,691 21,904 1,492 1989 1996
Los Padres
Village........ 245 -- 4,579 25,946 1,143 4,579 27,089 31,668 1,916 1988 1997
Redwood Shores.. 304 23,608 5,608 31,778 2,473 5,608 34,251 39,859 2,932 1986 1996
Treat Commons... 510 -- 5,788 32,802 1,458 5,788 34,260 40,048 3,620 1988 1995
Seattle,
Washington:
Archstone
Inglewood Hill. 230 -- 2,463 68 17,931 2,463 17,999 20,462 179 (c) 1997
Archstone
Northcreek..... 524 -- 5,750 261 34,175 5,750 34,436 40,186 446 (c) 1998
Cambrian, The... 422 -- 6,231 35,309 1,854 6,231 37,163 43,394 2,566 1991 1997
Canyon Creek.... 336 17,324 5,250 -- 19,800 5,250 19,800 25,050 1,792 1997 1997
Canyon Creek II. 216 7,865 2,705 15,330 1,973 2,705 17,303 20,008 865 1989 1998
Fairwood
Landing........ 194 -- 1,223 6,928 1,222 1,223 8,150 9,373 650 1982 1996
Forestview...... 192 -- 1,681 -- 13,896 1,681 13,896 15,577 697 1998 1996
Harbour Pointe.. 230 -- 2,027 -- 13,128 2,027 13,128 15,155 953 1997 1996
Redmond Hill
Central........ 258 -- 1,950 11,118 1,687 1,950 12,805 14,755 1,568 1987 1995
Newport
Crossing....... 192 -- 1,694 9,602 781 1,694 10,383 12,077 841 1990 1997
Pebble Cove..... 288 14,261 1,895 -- 15,742 1,895 15,742 17,637 1,542 1996 1995
Redmond Hill
East........... 332 -- 2,795 15,593 3,242 2,795 18,835 21,630 2,204 1990 1995
Redmond Hill
West........... 184 6,251 2,084 11,833 1,567 2,084 13,400 15,484 539 1986 1999
Stonemeadow
Farms.......... 280 -- 4,370 -- 18,134 4,370 18,134 22,504 741 1999 1997
Waterford Place. 360 -- 4,131 23,407 1,383 4,131 24,790 28,921 1,495 1989 1997
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
Initial Cost to Gross Amount at Which Carried
Archstone Costs at December 31, 1999
-------------------- Capitalized -------------------------------
Buildings & Subsequent Buildings & Con-
Encum- Improve- to Improve- Accumulated struction
Units brances Land ments Acquisition Land ments Totals Depreciation Year
------ -------- -------- ----------- ----------- -------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apartment Communities:
Tampa/St.
Petersburg,
Florida:
Archstone Boot
Ranch.......... 250 $ -- $ 2,102 $ 11,910 $ 546 $ 2,102 $ 12,456 $ 14,558 $ 778 1988
Archstone Rocky
Creek.......... 264 -- 511 2,896 15,268 511 18,164 18,675 137 (c)
Cameron
Bayshore....... 328 -- 2,035 11,530 1,025 2,035 12,555 14,590 754 1984
Cameron Lakes... 207 -- 1,570 8,897 530 1,570 9,427 10,997 600 1986
Cameron Palm
Harbor......... 168 5,517 1,293 7,325 436 1,293 7,761 9,054 486 1988
Country Place
Village I...... 88 1,904 777 4,400 422 777 4,822 5,599 289 1982
Country Place
Village II..... 100 -- 805 4,563 362 805 4,925 5,730 301 1983
Tucson, Arizona:
Tierra Antigua.. 147 -- 992 3,967 1,000 992 4,967 5,959 1,156 1979
Villa Caprice... 268 -- 1,279 7,248 1,118 1,279 8,366 9,645 1,316 1972
Ventura County,
California:
Le Club......... 370 -- 4,958 28,097 2,155 4,958 30,252 35,210 2,091 1987
Pelican Point... 400 -- 4,365 24,735 1,947 4,365 26,682 31,047 1,779 1985
Washington, D.C.:
Archstone
Bellemeade
Farms.......... 316 13,122 3,250 18,416 787 3,250 19,203 22,453 688 1988
Archstone Fair
Lakes.......... 282 15,477 3,687 20,893 610 3,687 21,503 25,190 576 1988
Archstone
Governor's
Green.......... 338 -- 1,836 10,402 20,483 1,836 30,885 32,721 151 (c)
Archstone
Milestone II... 132 -- 2,009 435 1,271 2,009 1,706 3,715 (c) (c)
Bristol Gables.. 358 -- 5,429 30,760 33 5,429 30,793 36,222 129 1988
Camden at
Kendall Ridge.. 184 -- 2,089 11,838 157 2,089 11,995 14,084 769 1990
Cameron at
Milestone...... 444 -- 5,633 31,920 311 5,633 32,231 37,864 2,158 1997
Cameron at
Saybrooke...... 252 -- 3,210 18,190 154 3,210 18,344 21,554 1,161 1990
Cameron Woodland
Park........... 392 -- 6,989 494 10,645 6,989 11,139 18,128 (c) (c)
Ellipse at
Government
Center, The.... 404 -- 5,704 38,310 1,061 5,704 39,371 45,075 57 1989
West Springfield
Terrace........ 244 -- 2,918 16,537 268 2,918 16,805 19,723 1,067 1978
------ -------- -------- ---------- ---------- -------- ---------- ---------- --------
Total Apartment
Communities--
Operating and
Under
Construction.... 76,085 $692,630 $732,260 $2,800,434 $1,474,615 $732,260 $4,275,049 $5,007,309 $296,303
====== ======== ======== ========== ========== ======== ========== ========== ========
Other:
Development
Communities in
Planning and
Owned........... 45,481 --
---------- --------
Hotel Asset...... 22,870 4,355
---------- --------
Other Real Estate
Assets (r)...... 141,671 --
---------- --------
Total Real Estate
Assets.......... $5,217,331 $300,658
========== ========
<CAPTION>
Year
Acquired
--------
<S> <C>
Apartment Communities:
Tampa/St.
Petersburg,
Florida:
Archstone Boot
Ranch.......... 1998
Archstone Rocky
Creek.......... 1998
Cameron
Bayshore....... 1998
Cameron Lakes... 1998
Cameron Palm
Harbor......... 1998
Country Place
Village I...... 1998
Country Place
Village II..... 1998
Tucson, Arizona:
Tierra Antigua.. 1992
Villa Caprice... 1993
Ventura County,
California:
Le Club......... 1997
Pelican Point... 1997
Washington, D.C.:
Archstone
Bellemeade
Farms.......... 1998
Archstone Fair
Lakes.......... 1998
Archstone
Governor's
Green.......... 1998
Archstone
Milestone II... 1999
Bristol Gables.. 1999
Camden at
Kendall Ridge.. 1998
Cameron at
Milestone...... 1998
Cameron at
Saybrooke...... 1998
Cameron Woodland
Park........... 1998
Ellipse at
Government
Center, The.... 1999
West Springfield
Terrace........ 1998
Total Apartment
Communities--
Operating and
Under
Construction....
Other:
Development
Communities in
Planning and
Owned...........
Hotel Asset......
Other Real Estate
Assets (r)......
Total Real Estate
Assets..........
</TABLE>
100
<PAGE>
- -------
(a) Phase I (118 units) was acquired in 1991 and Phase II (122 units) was
developed in 1992.
(b) Vistas at Seven Bar Ranch (364 units) was developed in 1996 and Corrales
Pointe (208 units) was acquired in 1993.
(c) As of 12/31/99, community was under construction.
(d) Phase I (108 units) was constructed in 1981 and Phase II (240 units) was
constructed in 1983.
(e) Phase I (332 units) was constructed in 1983 and Phase II (312 units) was
constructed in 1985.
(f) Phase I (240 units) was developed in 1995 and Phase II (160 units) was
developed in 1996.
(g) Phase I (408 units) was developed in 1996 and Phase II (286 units) was
developed in 1998.
(h) Phase I (160 units) was acquired in 1994 and constructed in 1984 and Phase
II (192 units) was acquired in 1996 and developed in 1998.
(i) Phase I (208 units) was acquired in 1993 and Phase II (208 units) was
developed in 1996.
(j) Phase I (120 units) was developed in 1980, Phase II (60 units) was
developed in 1981 and Phase III (288 units) was developed in 1983.
(k) Represents properties owned by third party developers that are subject to
presale agreements to Archstone to acquire such properties. Archstone's
investment as of December 31, 1999 represents development loans made by
Archstone to such developers.
(l) Phase I (302 units) was developed in 1996 and Phase II (253 units) was
developed in 1998.
(m) Phase I and II (624 units) were acquired in 1994 and Phase III (144 units)
was developed in 1996.
(n) Phase I (196 units) was constructed in 1985 and Phase II (172 units) was
constructed in 1982.
(o) Phase I (192 units) was acquired in 1995 and Phase II (32 units) was
developed in 1997.
(p) Phase I (174 units) was acquired in 1995 and constructed in 1985 and Phase
II (88 units) was acquired in 1996 and constructed in 1996.
(q) Camino Pointe and Ocean Crest were combined in 1999. Camino Pointe (150
units) was constructed in 1985 and acquired in 1998 and Ocean Crest (300
units) was constructed in 1993 and acquired in 1996.
(r) Includes land that is not In Planning and our investment in an
unconsolidated taxable subsidiary.
See accompanying independent auditors' report.
101
<PAGE>
The following is a reconciliation of the carrying amount and related
accumulated depreciation of Archstone's investment in real estate, at cost (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
Carrying Amounts 1999 1998 1997
---------------- ---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1....................... $4,869,801 $2,604,919 $2,153,363
---------- ---------- ----------
Apartment communities:
Real estate assets acquired in the
Atlantic Merger......................... -- 1,823,727 --
Acquisition-related expenditures......... 401,392 285,806 391,234
Redevelopment expenditures............... 72,517 57,171 43,187
Recurring capital expenditures........... 13,022 9,464 8,762
Development expenditures, excluding land
acquisitions............................ 334,049 378,161 205,619
Acquisition and improvement of land for
development............................. 43,417 67,248 75,196
Dispositions............................. (542,554) (344,336) (268,210)
Provision for possible loss on
investments............................. (450) -- (2,800)
---------- ---------- ----------
Net apartment community activity........... 321,393 2,277,241 452,988
---------- ---------- ----------
Other:
Change in other real estate assets....... 32,359 -- --
Dispositions............................. (4,672) (9,959) (1,232)
Provision for possible loss on
investments............................. (1,550) (2,400) (200)
---------- ---------- ----------
Net other activity......................... 26,137 (12,359) (1,432)
---------- ---------- ----------
Balance at December 31..................... $5,217,331 $4,869,801 $2,604,919
========== ========== ==========
<CAPTION>
December 31,
----------------------------------
Accumulated Depreciation 1999 1998 1997
------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1....................... $ 205,795 $ 129,718 $ 97,574
Depreciation for the year.................. 132,437 96,337 52,893
Accumulated depreciation on real estate
dispositions.............................. (37,230) (20,260) (20,749)
Other...................................... (344) -- --
---------- ---------- ----------
Balance at December 31..................... $ 300,658 $ 205,795 $ 129,718
========== ========== ==========
</TABLE>
See accompanying independent auditors' report.
102
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
ProLogis Trust
We have audited the accompanying consolidated balance sheets of ProLogis
Trust and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Frigoscandia Holding
AB accounted for under the equity method of accounting, in which the Trust has
investments in and advances to amounting to $196.9 million and $229.9 million
as of December 31, 1999 and 1998, respectively, and losses from unconsolidated
entity of $2.9 million and $7.6 million in 1999, and 1998, respectively. We
did not audit the financial statements of CS Integrated LLC accounted for
under the equity method of accounting, in which the Trust has an investment in
and advances to amounting to $186.9 million as of December 31, 1999 and
earnings from unconsolidated entity of $9.2 million in 1999. These statements
were audited by other auditors whose reports were furnished to us, and our
opinion, insofar as it relates to the amounts included for these entities is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of ProLogis Trust and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
March 21, 2000
103
<PAGE>
PROLOGIS TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1999 1998
------ ---------- ----------
<S> <C> <C>
Real estate............................................ $4,974,951 $3,657,500
Less accumulated depreciation........................ 366,703 254,288
---------- ----------
4,608,248 3,403,212
Investments in and advances to unconsolidated entities. 940,364 733,863
Cash and cash equivalents.............................. 69,338 63,140
Accounts and notes receivable.......................... 46,998 11,648
Other assets........................................... 183,092 118,866
---------- ----------
Total assets....................................... $5,848,040 $4,330,729
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Lines of credit...................................... $ 98,700 $ 344,300
Short-term borrowings................................ -- 150,000
Senior unsecured debt................................ 1,729,630 1,083,641
Other unsecured debt................................. 30,892 --
Mortgage notes....................................... 657,913 184,964
Assessment bonds..................................... 10,721 11,281
Securitized debt..................................... 26,952 31,559
Accounts payable and accrued expenses................ 117,651 116,378
Construction payable................................. 23,064 34,025
Amount due to affiliate.............................. 221 395
Distributions and dividends payable.................. 54,939 39,283
Other liabilities.................................... 81,549 27,240
---------- ----------
Total liabilities.................................. 2,832,232 2,023,066
---------- ----------
Minority interest...................................... 62,072 51,295
Shareholders' equity:
Series A Preferred Shares; $0.01 par value; 5,400,000
shares issued and outstanding at December 31, 1999
and 1998; stated liquidation preference of $25.00
per share........................................... 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par
value; 7,020,703 shares issued and outstanding at
December 31, 1999 and 7,537,600 shares issued and
outstanding at December 31, 1998; stated liquidation
preference of $25.00 per share...................... 175,518 188,440
Series C Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at December 31, 1999
and 1998; stated liquidation preference of $50.00
per share........................................... 100,000 100,000
Series D Preferred Shares; $0.01 par value;
10,000,000 shares issued and outstanding at December
31, 1999 and 1998; stated liquidation preference of
$25.00 per share.................................... 250,000 250,000
Series E Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at December 31, 1999;
stated liquidation preference of $25.00 per share... 50,000 --
Common shares of beneficial interest; $0.01 par
value; 161,825,466 shares issued and outstanding at
December 31, 1999 and 123,415,711 shares issued and
outstanding at December 31, 1998.................... 1,618 1,234
Additional paid-in capital............................. 2,663,350 1,907,232
Employee share purchase notes.......................... (22,906) (25,247)
Accumulated other comprehensive income................. (9,765) 23
Distributions in excess of net earnings................ (389,079) (300,314)
---------- ----------
Total shareholders' equity......................... 2,953,736 2,256,368
---------- ----------
Total liabilities and shareholders' equity......... $5,848,040 $4,330,729
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
104
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income:
Rental income.................................. $491,826 $345,046 $284,533
Other real estate income....................... 46,678 17,554 12,291
Income from unconsolidated entities............ 22,519 2,755 3,278
Interest....................................... 6,369 2,752 2,392
-------- -------- --------
Total income.................................. 567,392 368,107 302,494
-------- -------- --------
Expenses:
Rental expenses, net of recoveries $87,907 in
1999, $57,415 in 1998 and $42,288 in 1997 and
including amounts paid to affiliate of $1,314
in 1999, $984 in 1998 and $280 in 1997........ 33,501 27,120 23,187
Property management fees paid to affiliate, net
of recoveries of $3,870 in 1997............... -- -- 3,821
General and administrative, including amounts
paid to affiliate of $1,582 in 1999, $1,992 in
1998 and $657 in 1997......................... 38,284 22,893 6,770
REIT management fee paid to affiliate.......... -- -- 17,791
Depreciation and amortization.................. 152,447 100,590 76,562
Interest....................................... 170,746 77,650 52,704
Interest rate hedge expense.................... 945 26,050 --
Costs incurred in acquiring management
companies from affiliate...................... -- -- 75,376
Other.......................................... 4,920 6,187 3,891
-------- -------- --------
Total expenses................................ 400,843 260,490 260,102
-------- -------- --------
Earnings from operations......................... 166,549 107,617 42,392
Minority interest share in earnings.............. 4,979 4,681 3,560
-------- -------- --------
Earnings before gain on disposition of real
estate and foreign currency exchange gains
(losses)........................................ 161,570 102,936 38,832
Gain on disposition of real estate............... 38,994 5,565 7,378
Foreign currency hedge income (expense).......... -- 2,054 (6,028)
Foreign currency exchange gains (losses), net.... (16,818) 2,938 (348)
-------- -------- --------
Earnings before income taxes..................... 183,746 113,493 39,834
Income tax expense:
Current........................................ 1,472 368 85
Deferred....................................... -- 1,796 --
-------- -------- --------
Total income taxes............................ 1,472 2,164 85
-------- -------- --------
Earnings before cumulative effect of accounting
change.......................................... 182,274 111,329 39,749
Cumulative effect of accounting change........... 1,440 -- --
-------- -------- --------
Net earnings..................................... 180,834 111,329 39,749
Less preferred share dividends................... 56,835 49,098 35,318
-------- -------- --------
Net earnings attributable to Common Shares....... $123,999 $ 62,231 $ 4,431
======== ======== ========
Weighted average Common Shares outstanding--
Basic........................................... 152,412 121,721 100,729
======== ======== ========
Weighted average Common Shares outstanding--
Diluted......................................... 152,739 122,028 100,869
======== ======== ========
Basic per share net earnings attributable to
Common Shares:
Earnings before cumulative effect of accounting
change........................................ $ 0.82 $ 0.51 $ 0.04
Cumulative effect of accounting change......... (0.01) -- --
-------- -------- --------
Net earnings attributable to Common Shares.... $ 0.81 $ 0.51 $ 0.04
======== ======== ========
Diluted per share net earnings attributable to
Common Shares:
Earnings before cumulative effect of accounting
change........................................ $ 0.82 $ 0.51 $ 0.04
Cumulative effect of accounting change......... (0.01) -- --
-------- -------- --------
Net earnings attributable to Common Shares.... $ 0.81 $ 0.51 $ 0.04
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
105
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E Accumu-
Preferred Preferred Preferred Preferred Preferred lated
Common Shares Shares at Shares at Shares at Shares at Shares at Employee Other
----------------- Aggregate Aggregate Aggregate Aggregate Aggregate Additional Share Compre-
Number Par Liquidation Liquidation Liquidation Liquidation Liquidation Paid-in Purchase hensive
of Shares Value Preference Preference Preference Preference Preference Capital Notes Income
--------- ------- ----------- ----------- ----------- ----------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31,
1996............. 93,677 $ 937.0 $135,000 $201,250 $100,000 $ -- $-- $1,257,347 $ -- $--
Net earnings.... -- -- -- -- -- -- -- -- -- --
Preferred share
dividends....... -- -- -- -- -- -- -- -- -- --
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- -- -- -- -- -- -- -- -- (63)
Comprehensive
income
attributable to
Common Shares... -- -- -- -- -- -- -- -- -- --
Sale of Common
Shares.......... 18,455 184.6 -- -- -- -- -- 405,082 -- --
Common Shares
issued under
employee share
purchase plan... 1,357 13.6 -- -- -- -- -- 28,777 (27,345) --
Common Shares
issued in 1997
Merger, net of
costs........... 3,692 36.9 -- -- -- -- -- 79,102 -- --
Common Shares
issued under
dividend
reinvestment and
share purchase
plans........... 20 0.2 -- -- -- -- -- 429 -- --
Limited
partnership
units converted
to Common
Shares.......... 105 1.0 -- -- -- -- -- 1,587 -- --
Series B
preferred shares
converted to
Common Shares... 63 0.6 -- (1,242) -- -- -- 1,241 -- --
Principal
payments on
employee share
purchase notes.. -- -- -- -- -- -- -- -- 64 --
Retirements of
employee share
purchase notes.. (5) (0.1) -- -- -- -- -- (100) 95 --
Common Share
distributions
paid............ -- -- -- -- -- -- -- -- -- --
Common Share
distributions
accrued......... -- -- -- -- -- -- -- -- -- --
------- ------- -------- -------- -------- ------- ---- ---------- ------- ----
Balances at
December 31,
1997............. 117,364 1,173.8 135,000 200,008 100,000 -- -- 1,773,465 (27,186) (63)
Net earnings.... -- -- -- -- -- -- -- -- -- --
Preferred share
dividends....... -- -- -- -- -- -- -- -- -- --
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- -- -- -- -- -- -- -- -- 86
Comprehensive
income
attributable to
Common Shares... -- -- -- -- -- -- -- -- -- --
Sale of Common
Shares.......... 5,494 54.9 -- -- -- -- -- 130,279 -- --
Sale of
preferred
shares.......... -- -- -- -- -- 250,000 -- (8,469) -- --
Common Shares
issued under
dividend
reinvestment and
share purchase
plans........... 18 0.1 -- -- -- -- -- 403 -- --
<CAPTION>
Distri-
butions
In
Excess Total
of Net Shareholders'
Earnings Equity
--------- -------------
<S> <C> <C>
Balances at
December 31,
1996............. $(95,145) $1,599,389
Net earnings.... 39,749 39,749
Preferred share
dividends....... (35,318) (35,318)
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- (63)
-------------
Comprehensive
income
attributable to
Common Shares... -- 4,368
Sale of Common
Shares.......... -- 405,267
Common Shares
issued under
employee share
purchase plan... -- 1,445
Common Shares
issued in 1997
Merger, net of
costs........... -- 79,139
Common Shares
issued under
dividend
reinvestment and
share purchase
plans........... -- 429
Limited
partnership
units converted
to Common
Shares.......... -- 1,588
Series B
preferred shares
converted to
Common Shares... -- --
Principal
payments on
employee share
purchase notes.. -- 64
Retirements of
employee share
purchase notes.. -- (5)
Common Share
distributions
paid............ (81,498) (81,498)
Common Share
distributions
accrued......... (33,449) (33,449)
--------- -------------
Balances at
December 31,
1997............. (205,661) 1,976,737
Net earnings.... 111,329 111,329
Preferred share
dividends....... (49,098) (49,098)
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- 86
-------------
Comprehensive
income
attributable to
Common Shares... -- 62,317
Sale of Common
Shares.......... -- 130,334
Sale of
preferred
shares.......... -- 241,531
Common Shares
issued under
dividend
reinvestment and
share purchase
plans........... -- 403
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E Accumu-
Preferred Preferred Preferred Preferred Preferred lated
Common Shares Shares at Shares at Shares at Shares at Shares at Employee Other
------------------ Aggregate Aggregate Aggregate Aggregate Aggregate Additional Share Compre-
Number Par Liquidation Liquidation Liquidation Liquidation Liquidation Paid-in Purchase hensive
of Shares Value Preference Preference Preference Preference Preference Capital Notes Income
--------- -------- ----------- ----------- ----------- ----------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Shares
issued upon
exercise of
warrants........ 12 $ 0.1 $ -- $ -- $ -- $ -- $ -- $ 118 $ -- $ --
Limited
partnership
units converted
to Common
Shares.......... 20 0.2 -- -- -- -- -- 302 -- --
Series B
preferred shares
converted to
Common Shares... 593 5.9 -- (11,568) -- -- -- 11,562 -- --
Principal
payments on
employee share
purchase notes.. -- -- -- -- -- -- -- -- 143 --
Retirements of
employee share
purchase notes.. (85) (0.8) -- -- -- -- -- (2,039) 1,796 --
Sale of options
to
unconsolidated
entities........ -- -- -- -- -- -- -- 1,333 -- --
Stock-based
compensation.... -- -- -- -- -- -- -- 278 -- --
Common Share
distributions
paid............ -- -- -- -- -- -- -- -- -- --
Common Share
distributions
accrued......... -- -- -- -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ------- ---------- -------- -------
Balances at
December 31,
1998............. 123,416 1,234.2 135,000 188,440 100,000 250,000 -- 1,907,232 (25,247) 23
Net earnings.... -- -- -- -- -- -- -- -- -- --
Preferred share
dividends....... -- -- -- -- -- -- -- -- -- --
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- -- -- -- -- -- -- -- -- (9,788)
Comprehensive
income
attributable to
Common Shares... -- -- -- -- -- -- -- -- -- --
Preferred and
Common Shares
issued in
Meridian Merger. 37,388 373.9 -- -- -- -- 50,000 733,307 -- --
Common Shares
issued under
dividend
reinvestment and
share purchase
plans........... 344 3.4 -- -- -- -- -- 6,327 -- --
Limited
partnership
units converted
to Common
Shares.......... 14 0.1 -- -- -- -- -- 205 -- --
Series B
preferred shares
converted to
Common Shares... 663 6.6 -- (12,922) -- -- -- 12,916 -- --
Principal
payments on
employee share
purchase notes.. -- -- -- -- -- -- -- -- 2,341 --
Sale of options
to
unconsolidated
entities........ -- -- -- -- -- -- -- 1,226 -- --
Stock-based
compensation.... -- -- -- -- -- -- -- 2,137 -- --
Common Share
distributions
paid............ -- -- -- -- -- -- -- -- -- --
Common Share
distributions
accrued......... -- -- -- -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ------- ---------- -------- -------
Balances at
December 31,
1999............. 161,825 $1,618.2 $135,000 $175,518 $100,000 $250,000 $50,000 $2,663,350 $(22,906) $(9,765)
======= ======== ======== ======== ======== ======== ======= ========== ======== =======
<CAPTION>
Distri-
butions
In Excess Total
of Net Shareholders'
Earnings Equity
---------- -------------
<S> <C> <C>
Common Shares
issued upon
exercise of
warrants........ $ -- $ 118
Limited
partnership
units converted
to Common
Shares.......... -- 302
Series B
preferred shares
converted to
Common Shares... -- --
Principal
payments on
employee share
purchase notes.. -- 143
Retirements of
employee share
purchase notes.. -- (244)
Sale of options
to
unconsolidated
entities........ -- 1,333
Stock-based
compensation.... -- 278
Common Share
distributions
paid............ (117,601) (117,601)
Common Share
distributions
accrued......... (39,283) (39,283)
---------- -------------
Balances at
December 31,
1998............. (300,314) 2,256,368
Net earnings.... 180,834 180,834
Preferred share
dividends....... (56,835) (56,835)
Accumulated
other
comprehensive
income--foreign
currency
translation
adjustments..... -- (9,788)
-------------
Comprehensive
income
attributable to
Common Shares... -- 114,211
Preferred and
Common Shares
issued in
Meridian Merger. -- 783,681
Common Shares
issued under
dividend
reinvestment and
share purchase
plans........... -- 6,331
Limited
partnership
units converted
to Common
Shares.......... -- 205
Series B
preferred shares
converted to
Common Shares... -- --
Principal
payments on
employee share
purchase notes.. -- 2,341
Sale of options
to
unconsolidated
entities........ -- 1,226
Stock-based
compensation.... -- 2,137
Common Share
distributions
paid............ (158,554) (158,554)
Common Share
distributions
accrued......... (54,210) (54,210)
---------- -------------
Balances at
December 31,
1999............. $(389,079) $2,953,736
========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
107
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings............................. $ 180,834 $ 111,329 $ 39,749
Minority interest share in earnings...... 4,979 4,681 3,560
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization.......... 152,447 100,590 76,562
Gain on disposition of real estate..... (38,994) (5,565) (7,378)
Straight-lined rents................... (9,889) (6,756) (5,435)
Amortization of deferred loan costs.... 4,440 2,200 1,977
Stock-based compensation............... 1,657 278 --
(Income) loss from unconsolidated
entities.............................. (20,948) 11,108 (570)
Deferred income taxes.................. -- 1,796 --
Foreign currency exchange (gains)
losses, net............................. 11,344 (3,227) 348
Foreign currency hedge (income) expense.. -- (2,054) 6,028
Interest rate hedge expense.............. 945 26,050 --
Costs incurred in acquiring management
companies from affiliate................ -- -- 75,376
Increase in accounts receivable and
other assets............................ (35,904) (36,824) (24,390)
Increase in accounts payable, accrued
expenses and other liabilities.......... 20,654 35,390 25,508
Increase (decrease) in amount due to
affiliate............................... (174) (743) 1,138
----------- ----------- ---------
Net cash provided by operating
activities.......................... 271,391 238,253 192,473
----------- ----------- ---------
Investing activities:
Real estate investments.................. (452,161) (695,764) (601,577)
Tenant improvements and lease
commissions on previously leased space.. (19,751) (12,757) (15,539)
Recurring capital expenditures........... (28,114) (8,038) (5,523)
Proceeds from dispositions of real
estate.................................. 557,736 109,336 137,147
Investments in and advances to
unconsolidated entities................. (141,037) (657,499) (85,569)
Cash acquired in Meridian Merger......... 48,962 -- --
----------- ----------- ---------
Net cash used in investing
activities.......................... (34,365) (1,264,722) (571,061)
----------- ----------- ---------
Financing activities:
Proceeds from sale of shares, net of
expenses................................ -- 371,865 405,712
Proceeds from exercised warrants,
dividend reinvestment plan and share
purchase plan........................... 6,331 521 429
Repurchase of Common Shares.............. -- (244) (5)
Proceeds from secured financing
transactions............................ 466,075 66,000 --
Proceeds from issuance of senior
unsecured debt.......................... 500,000 374,463 199,772
Debt issuance and other transaction
costs incurred.......................... (58,248) (5,848) (3,171)
Distributions paid on Common Shares
(includes $11,132 paid to Meridian
shareholders)........................... (208,969) (151,050) (106,556)
Distributions paid to minority interest
holders................................. (7,251) (6,409) (5,665)
Preferred shares dividends paid
(includes $729 paid to Meridian
shareholders)........................... (56,835) (49,098) (35,318)
Principal payments on senior unsecured
notes................................... (12,500) (15,000) --
Principal payments received on and
retirements of employee share purchase
notes................................... 2,341 143 64
Payments on derivative financial
instruments............................. (27,715) (3,974) 1,894
Payments to Meridian shareholders........ (67,581) -- --
Proceeds from lines of credit and short-
term borrowings......................... 1,939,845 1,569,225 530,991
Payments on lines of credit and short-
term borrowings......................... (2,335,445) (1,074,925) (569,591)
Payment on line of credit assumed in
Meridian Merger......................... (328,400) -- --
Regularly scheduled principal payments
on mortgage notes....................... (6,560) (5,658) (4,925)
Principal payments on mortgage notes at
maturity and prepayments................ (35,916) (5,411) (14,804)
----------- ----------- ---------
Net cash (used in) provided by
financing activities................ (230,828) 1,064,600 398,827
----------- ----------- ---------
Net increase in cash and cash equivalents. 6,198 38,131 20,239
Cash and cash equivalents, beginning of
year..................................... 63,140 25,009 4,770
----------- ----------- ---------
Cash and cash equivalents, end of year.... $ 69,338 $ 63,140 $ 25,009
=========== =========== =========
</TABLE>
See Note 12 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of these consolidated financial
statements.
108
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Description of Business:
ProLogis Trust ("ProLogis") is a publicly held real estate investment trust
("REIT") that owns and operates a global network of industrial distribution
facilities. The ProLogis Operating System(TM), comprised of the Market
Services Group, the Global Services Group, the Global Development Group and
the Customer Services Group, utilizes ProLogis' international network of
distribution facilities to meet customer expansion and reconfiguration needs
globally. ProLogis believes it has distinguished itself from its competition
by developing an organizational structure and service delivery system built
around its customers. ProLogis has organized its business into three operating
segments: property operations, corporate distribution facilities services
business and temperature-controlled distribution operations. See Note 18.
2. Summary of Significant Accounting Policies:
Principles of Financial Presentation
The accounts of ProLogis, its wholly owned subsidiaries and its majority
owned and controlled partnerships are consolidated in the accompanying
financial statements. All material intercompany transactions have been
eliminated. Certain amounts included in the consolidated financial statements
for prior years have been reclassified to conform to the 1999 financial
statement presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of 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.
On December 29, 1998, ProLogis invested in Garonor Holdings S.A. ("Garonor
Holdings") by acquiring 100% of its preferred stock. Garonor Holdings, a
Luxembourg company, owns Garonor S.A. ("ProLogis Garonor"), an industrial
distribution real estate operating company in France. Security Capital Group
Incorporated ("Security Capital"), ProLogis' largest shareholder, acquired
100% of the common stock of Garonor Holdings. ProLogis accounted for its
investment in Garonor Holdings under the equity method. On June 29, 1999,
ProLogis acquired the common stock of Garonor Holdings from Security Capital,
resulting in ProLogis owning all of the outstanding common and preferred stock
of Garonor Holdings. Accordingly, since June 29, 1999 the accounts of Garonor
Holdings have been consolidated in ProLogis' financial statements along with
ProLogis' other wholly owned subsidiaries and majority owned and controlled
partnerships. The results of operations of Garonor Holdings for the period
from December 29, 1998 through June 29, 1999 are reflected by ProLogis under
the equity method. See Note 5.
REIT Organization Status
In January 1993, ProLogis was formed as a Maryland REIT and has elected to
be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code").
REITs are not generally required to pay federal income taxes if minimum
distribution and income, asset and shareholder tests are met. During 1999,
1998 and 1997, ProLogis was in compliance with the REIT requirements. Thus, no
federal income tax provision has been reflected in the accompanying
consolidated financial statements for ProLogis and its wholly owned
subsidiaries which are qualified REIT subsidiaries. The foreign countries that
ProLogis operates in do not recognize REITs under their respective tax laws.
Accordingly, ProLogis has recognized foreign country income taxes in its
results of operations, as applicable.
109
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Real Estate and Depreciation
Real estate is carried at cost, which is not in excess of estimated fair
market value. Costs directly associated with the successful acquisition,
renovation or development of real estate are capitalized. Direct costs
associated with unsuccessful acquisitions are expensed at the time the pursuit
is abandoned.
Depreciation is computed over the estimated useful lives of depreciable
property on a straight-line basis: 10 years for tenant improvements, 30 years
for acquired buildings and 40 years for buildings developed by ProLogis.
ProLogis' management periodically reviews long-lived assets (primarily real
estate) that it owns and operates for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of", management's review
involves comparing current and future operating performance of the assets, the
most significant of which is undiscounted operating cash flows, to the
carrying value of the assets. Based on this analysis, a provision for possible
loss is recognized if necessary. In management's opinion, long-lived assets,
primarily real estate assets, are not carried at amounts in excess of their
estimated realizable values. Long-lived assets (primarily real estate) to be
disposed of, if any, are reported at the lower of their carrying amount or
fair value less cost to sell.
ProLogis acquired certain real estate through the formation of partnerships
(as discussed in Note 7) wherein ProLogis contributed cash and the limited
partners contributed real estate in exchange for partnership units which are
ultimately exchangeable for ProLogis common shares of beneficial interest,
$0.01 par value ("Common Shares"). In consolidating the partnerships' assets,
real estate cost includes the estimated fair value attributable to the limited
partners' interests as of the acquisition dates.
ProLogis Development Services Incorporated ("ProLogis Development
Services") develops industrial distribution facilities to meet customer
requirements, which are often subsequently sold to customers or third parties.
ProLogis Development Services also contracts on a fee basis to develop
distribution facilities for customers or third parties. ProLogis owns 100% of
the preferred stock of ProLogis Development Services and realizes
substantially all economic benefits of its activities. Because ProLogis
advances mortgage loans to ProLogis Development Services to fund its
acquisition, development and construction activities, ProLogis Development
Services is consolidated with ProLogis. ProLogis Development Services is not a
qualified REIT subsidiary of ProLogis under the Code. Accordingly, provisions
for federal income taxes are recognized, as appropriate.
Capitalization Policy
Renovations and improvements to real estate assets are capitalized and
depreciated over their estimated useful lives. Repairs and maintenance costs
are expensed as incurred to the extent they are not acquisition-related
renovation costs identified during ProLogis' pre-acquisition due diligence.
General and administrative costs incurred for development (including land
acquisitions), renovation and leasing activities that are incremental and
identifiable to a specific activity are capitalized. Prior to April 1, 1998,
ProLogis also capitalized direct and incremental management costs incurred in
connection with the acquisition of existing operating facilities. In
accordance with Emerging Issues Task Force Issue 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisitions", which was
effective on April 1, 1998, such costs are no longer capitalized.
110
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs capitalized to real estate are depreciated over the estimated useful
lives of the real estate. Costs capitalized related to leasing activities are
included with other assets and are amortized over the lease term. ProLogis'
average lease term is between four and five years.
ProLogis capitalizes interest costs incurred during the land development or
construction period of qualifying projects.
Unconsolidated Entities
ProLogis' investments in certain entities are accounted for under the
equity method. Accordingly, these investments are recognized at ProLogis' cost
as adjusted for ProLogis' proportionate share of the earnings or losses of the
companies, distributions received and other basis adjustments, as appropriate.
ProLogis' proportionate share of the earnings or losses of these companies is
recognized in income. See Note 5.
Cash and Cash Equivalents
ProLogis considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Costs of Raising Capital
Costs incurred in connection with the issuance of shares are deducted from
shareholders' equity. Costs incurred in connection with the incurrence or
renewal of debt are capitalized, included with other assets, and amortized
over the term of the related loan or the renewal term.
Minority Interest
Minority interest is carried at cost and represents limited partners'
interests in various real estate partnerships controlled by ProLogis. Certain
minority interests are carried at the pro rata share of the estimated fair
value of the real estate contributed as of the acquisition dates, as adjusted
for subsequent earnings, contributions and distributions. Common Shares issued
upon exchange of limited partnership units are accounted for at the cost of
the minority interest surrendered.
Financial Instruments
In the normal course of business, ProLogis uses certain derivative
financial instruments for the purpose of currency exchange rate and interest
rate risk management. To qualify for hedge accounting, the derivative
instruments used for risk management purposes must effectively reduce the risk
exposure that they are designed to hedge. For instruments associated with the
hedge of anticipated transactions, hedge effectiveness criteria also require
that the occurrence of the underlying transactions be probable. Instruments
meeting these hedging criteria are formally designated as hedges at the
inception of the contract. Those risk management instruments not meeting these
criteria are accounted for at fair value with changes in fair value recognized
immediately in net income. See Note 16.
In assessing the fair value of its financial instruments, both derivative
and non-derivative, ProLogis uses a variety of methods and assumptions that
are based on market conditions and risks existing at each balance sheet date.
Primarily, quoted market prices or quotes from brokers or dealers for the same
or similar instruments are used to value marketable securities, long-term
investments and long-term debt. These values represent a general approximation
of possible value and may never actually be realized.
111
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities" was issued in June 1998. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000 and early adoption is allowed. SFAS No.
133 provides comprehensive guidelines for the recognition and measurement of
derivatives and hedging activities and, specifically, requires all derivatives
to be recorded on the balance sheet at fair value as an asset or liability,
with an offset to accumulated other comprehensive income or income. Management
is still evaluating the effects this standard will have on ProLogis'
consolidated financial position, results of operations or financial statement
disclosures based on the derivative financial instruments currently employed
by ProLogis. See Note 16.
Foreign Currency Exchange Gains or Losses
ProLogis' consolidated subsidiaries whose functional currency is not the
U.S. dollar translate their financial statements into U.S. dollars. Assets and
liabilities are translated at the exchange rate in effect as of the financial
statement date. Income statement accounts are translated using the average
exchange rate for the period. Gains and losses resulting from the translation
are included in accumulated other comprehensive income as a separate component
of shareholders' equity.
Foreign subsidiaries of ProLogis have certain transactions denominated in
currencies other than their functional currency. In these instances,
nonmonetary assets and liabilities are remeasured at the historical exchange
rate, monetary assets and liabilities are remeasured at the exchange rate in
effect at the end of the period, and income statement accounts are remeasured
at the average exchange rate for the period. Remeasurement gains and losses of
such foreign subsidiaries, resulting primarily from the remeasurement of
intercompany loans, are included in ProLogis' results of operations. ProLogis
recognized losses from remeasurement of $11,436,000 and $348,000 for the years
ended December 31, 1999 and 1997, respectively, and a gain from remeasurement
of $3,227,000 for the year ended December 31, 1998.
Transaction gains or losses occur when a transaction, denominated in a
currency other than the functional currency, is settled and the functional
currency cash flows realized are more or less than expected based upon the
exchange rate in effect when the transaction was initiated. Transaction gains
and losses are included in ProLogis' results of operations. ProLogis
recognized net foreign currency exchange transaction losses of $5,335,000
(including $45,000 related to foreign currency put option contracts--see Note
16) and $289,000 for the years ended December 31, 1999 and 1998, respectively.
ProLogis did not incur transaction gains or losses in 1997 due to its limited
foreign operations in that year.
During 1999, ProLogis entered into foreign currency put option contracts
related to its operations in Europe. These put option contracts do not qualify
for hedge accounting treatment, therefore, ProLogis recognized net mark to
market losses related to the contracts of $47,000 for 1999. See Note 16.
Revenue Recognition
ProLogis leases its operating facilities under operating leases and
recognizes the total lease payments provided for under the leases on a
straight-line basis over the lease term. A provision for possible loss is made
when collection of receivables is considered doubtful.
Gains or losses on the disposition of real estate are recorded when the
recognition criteria set forth under GAAP have been met, generally at the time
title is transferred and ProLogis has no future obligations under the
contract.
112
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental Expenses
Rental expenses include costs of on-site and property management personnel,
utilities, repairs and maintenance, property insurance and real estate taxes,
net of amounts recovered from tenants under the terms of the respective
leases.
Stock-Based Compensation
ProLogis adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
which allows ProLogis to continue to account for its various stock-based
compensation plans using Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. Under
APB No. 25, if the exercise price of the stock options issued equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized. However, certain pro forma earnings per
share disclosures are required and are presented in Note 13.
Comprehensive Income
ProLogis adopted SFAS No. 130, "Reporting Comprehensive Income", on January
1, 1998. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is the total of
net earnings attributable to Common Shares and other comprehensive income.
The adoption of this standard did not have a significant effect on the
consolidated financial position, results of operations or financial statement
disclosures of ProLogis. For the years ended December 31, 1999, 1998 and 1997,
ProLogis had one item of other comprehensive income, the cumulative
translation adjustments account. This account has been recognized as a
component of shareholders' equity. ProLogis displays comprehensive income and
its components in its consolidated statements of shareholders' equity.
Earnings Per Share
SFAS No. 128, "Earnings Per Share" was adopted in 1997. SFAS No. 128
replaced the presentation of primary and fully diluted earnings per share with
a presentation of basic and diluted earnings per share. Diluted earnings per
share reflects the potential dilution that would result if securities or other
contracts to issue Common Shares were exercised or converted to Common Shares
or resulted in the issuance of Common Shares that then shared in earnings. See
Note 11.
Cost of Start-Up Activities
Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities", which requires that costs associated with organization, pre-
opening, and start-up activities be expensed as incurred was adopted by
ProLogis on January 1, 1999. Through December 31, 1998, ProLogis capitalized
costs associated with start-up activities and amortized such costs over an
appropriate period, generally five years. In 1999, ProLogis expensed all
unamortized organization and start-up costs, approximating $1.4 million, as a
cumulative effect of a change in accounting principle. In 1999, such costs
incurred have been expensed.
3. Meridian Merger
On March 30, 1999, Meridian Industrial Trust, Inc. ("Meridian"), a publicly
traded REIT that owned industrial distribution facilities in the United
States, was merged with and into ProLogis (the "Meridian Merger"). In
accordance with the terms of the Agreement and Plan of Merger dated as of
November 16, 1998, as amended (the "Merger Agreement"), the approximately 33.8
million outstanding shares of Meridian common
113
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock were exchanged (on a 1.10 for one basis) into approximately 37.2 million
ProLogis Common Shares. In addition, the holders of Meridian common stock
received $2.00 in cash per outstanding share, approximately $67.6 million in
total. The holders of Meridian's Series D cumulative redeemable preferred
stock received a new series of ProLogis cumulative redeemable preferred
shares, Series E preferred shares, on a one for one basis. The Series E
preferred shares have a 8.75% annual dividend rate ($2.1875 per share) and an
aggregate liquidation value of $50.0 million. The total purchase price of
Meridian was approximately $1.54 billion, which included the assumption of the
outstanding debt and liabilities of Meridian as of March 30, 1999 and the
issuance of approximately 1.1 million stock options each to acquire 1.1
ProLogis Common Shares and $2.00 in cash. The assets acquired from Meridian
included approximately $1.44 billion of real estate assets, an interest in a
temperature-controlled distribution business of $28.7 million and cash and
other assets aggregating $72.3 million. The transaction was structured as a
tax-free merger and was accounted for under the purchase method.
The following summarized pro forma unaudited information represents the
combined historical operating results of ProLogis and Meridian with the
appropriate purchase accounting adjustments, assuming the Meridian Merger had
occurred on January 1, 1998. The pro forma financial information presented is
not necessarily indicative of what ProLogis' actual operating results would
have been had ProLogis and Meridian constituted a single entity during such
periods (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Rental income......................................... $525,340 $464,034
Earnings from operations.............................. $170,681 $124,928
Earnings attributable to Common Shares before
cumulative effect of accounting change............... $136,461 $ 78,847
Net earnings attributable to Common Shares............ $135,021 $ 78,847
Weighted average Common Shares outstanding:
Basic............................................... 160,705 155,923
Diluted............................................. 161,044 156,680
Basic per share net earnings attributable to Common
Shares before cumulative effect of accounting change. $ 0.85 $ 0.51
Cumulative effect of accounting change................ (0.01) --
-------- --------
Basic per share net earnings attributable to Common
Shares $ 0.84 $ 0.51
======== ========
Diluted per share net earnings attributable to Common
Shares before cumulative effect of accounting change. $ 0.85 $ 0.50
Cumulative effect of accounting change................ (0.01) --
-------- --------
Diluted per share net earnings attributable to Common
Shares............................................... $ 0.84 $ 0.50
======== ========
</TABLE>
114
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Real Estate
Investments in Real Estate
Real estate investments consisting of income producing industrial
distribution facilities, facilities under development and land held for future
development, at cost, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Operating facilities:
Improved land......................... $ 736,605(1) $ 517,803(1)
Buildings and improvements............ 3,871,396(1) 2,731,203(1)
---------- ----------
4,608,001 3,249,006
---------- ----------
Facilities under development (including
cost of land).......................... 186,169(2)(3) 209,670(2)
Land held for development............... 163,696(4) 180,796(4)
Capitalized preacquisition costs........ 17,085(5) 18,028(5)
---------- ----------
Total real estate................... 4,974,951 3,657,500
Less accumulated depreciation........... 366,703 254,288
---------- ----------
Net real estate..................... $4,608,248(6) $3,403,212
========== ==========
</TABLE>
- --------
(1) As of December 31, 1999 and December 31, 1998, ProLogis had 1,328 and
1,099 operating buildings, respectively, consisting of 133,689,000 and
104,540,000 square feet, respectively.
(2) Facilities under development consist of 51 buildings aggregating
10,721,000 square feet as of December 31, 1999 and 55 buildings
aggregating 8,022,000 square feet as of December 31, 1998.
(3) In addition to the December 31, 1999 construction payable of $23.1
million, ProLogis had unfunded commitments on its contracts for facilities
under construction totaling $247.6 million.
(4) Land held for future development consisted of 1,798 acres as of December
31, 1999 and 1,673 acres as of December 31, 1998.
(5) Capitalized preacquisition costs include $6,253,000 and $2,199,000 of
funds on deposit with title companies as of December 31, 1999 and December
31, 1998, respectively.
(6) On January 7, 2000, ProLogis contributed 50.1% of the common stock of one
of its wholly owned European entities that owned real estate with a net
book value of $334.9 million as of December 31, 1999 to the ProLogis
European Properties Fund. ProLogis is committed to contributing the
remaining 49.9% of the common stock to the ProLogis European Properties
Fund in January 2001. See Note 5.
ProLogis' operating facilities, facilities under development and land held
for future development are located in North America and Europe. No individual
market represents more than 10% of ProLogis' real estate assets.
Operating Lease Agreements
ProLogis leases its facilities to customers under agreements which are
classified as operating leases. The leases generally provide for payment of
all or a portion of utilities, property taxes and insurance by the tenant. As
of December 31, 1999, minimum lease payments on leases with lease periods
greater than one year are as follows (in thousands):
<TABLE>
<S> <C>
2000.............................. $ 484,346
2001.............................. 406,946
2002.............................. 325,825
2003.............................. 244,484
2004.............................. 174,656
2005 and thereafter............... 544,468
----------
$2,180,725
==========
</TABLE>
115
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ProLogis' largest customer (based on rental income) accounted for 1.81% of
ProLogis' rental income (on a annualized basis) for the year ended December 31,
1999. The annualized base rent for ProLogis' 20 largest customers (based on
rental income) accounted for 13.95% of ProLogis' rental income (on an
annualized basis) for the year ended December 31, 1999.
5. Unconsolidated Entities:
Investments in and advances to unconsolidated entities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Insight(1)..................................... $ 2,442 $ 1,520
-------- --------
ProLogis Logistics:
Investment(2)(3)............................. 40,210 13,241
Note receivable.............................. 130,135 128,634
Accrued interest and other receivables....... 22,262 9,146
-------- --------
192,607 151,021
-------- --------
Frigoscandia S.A.:
Investment(2)................................ (17,396) 2,900
Notes receivable............................. 209,314 206,667
Accrued interest and other receivables....... 22,090 11,998
-------- --------
214,008 221,565
-------- --------
Kingspark S.A.:
Investment(2)................................ 23,584 22,413
Notes receivable............................. 197,611 146,135
Mortgage notes receivable.................... 140,668 52,371
Accrued interest and other receivables....... 19,908 3,850
-------- --------
381,771 224,769
-------- --------
ProLogis California:
Investment(4)................................ 121,325 --
Other receivable............................. 3,235 --
-------- --------
124,560 --
-------- --------
ProLogis European Properties Fund:
Investment(5)................................ 32,800 --
Other payables............................... (7,824) --
-------- --------
24,976 --
-------- --------
Garonor Holdings (6):
Investment(2)................................ -- 5,508
Note receivable.............................. -- 129,395
Accrued interest receivable.................. -- 85
-------- --------
-- 134,988
-------- --------
Total...................................... $940,364 $733,863
======== ========
</TABLE>
- --------
(1) Investment represents ProLogis' investment in the common stock of Insight,
Inc. ("Insight") as adjusted for ProLogis' share of Insight's earnings or
loss.
116
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Investment represents ProLogis' investment in the preferred stock of the
respective companies including acquisition costs, as adjusted for
ProLogis' share of each company's earnings or loss and cumulative
translation adjustments, as appropriate.
(3) Includes $28.7 million representing an equity interest in and notes from
Meridian Refrigerated Incorporated ("MRI") that were acquired as part of
the Meridian Merger (see Note 3). CS Integrated LLC ("CSI"), which is
owned by ProLogis Logistics Services Incorporated ("ProLogis Logistics")
also acquired an equity interest in MRI on March 30, 1999. Subsequent to
December 31, 1999, ProLogis contributed its interest in MRI to CSI.
(4) Investment represents ProLogis' equity investment in ProLogis California I
LLC ("ProLogis California"), a limited liability company that began
operations on August 26, 1999, including acquisition costs, as adjusted
for ProLogis' share of the earnings of ProLogis California and for the
portion of the gain from the disposition of properties from ProLogis to
ProLogis California that does not qualify for income recognition due to
ProLogis' continuing ownership in ProLogis California.
(5) The ProLogis European Properties Fund was formed on September 16, 1999 and
began operations on September 23, 1999 with the purchase of facilities
from ProLogis and Kingspark Group Holdings Limited ("ProLogis Kingspark").
Additional facilities were acquired from ProLogis and ProLogis Kingspark
in December 1999. Investment represents ProLogis' equity investment in the
ProLogis European Properties Fund including acquisition costs, as adjusted
for ProLogis' share of the earnings of the ProLogis European Properties
Fund and for the portion of the gain from the disposition of facilities to
the ProLogis European Properties Fund that does not qualify for income
recognition due to ProLogis' continuing ownership in the ProLogis European
Properties Fund.
(6) Garonor Holdings was acquired on December 29, 1998 and was accounted for
under the equity method from that date to June 29, 1999. After June 29,
1999, Garonor Holdings is consolidated with the accounts of ProLogis. See
Note 2.
Insight
As of December 31, 1999, ProLogis Development Services had a 33.3%
ownership interest in Insight, a privately owned logistics optimization
consulting company. ProLogis is not required to make additional investments in
Insight. This investment is accounted for under the equity method. ProLogis
recognized a loss of $78,000 and income of $20,000 from its investment in
Insight for the years ended December 31, 1999 and 1998, respectively. Prior to
July 1, 1998, this investment was accounted for under the cost method.
ProLogis Logistics
ProLogis owns 100% of the preferred stock of ProLogis Logistics. On April
24, 1997, ProLogis Logistics acquired a 60% interest in CSI, a temperature-
controlled distribution company operating in the United States and Canada.
From that date to June 12, 1998, ProLogis Logistics owned, at various points
in time, between 60.0% and 77.1% of CSI. On June 12, 1998, ProLogis Logistics
increased its ownership interest in CSI to 100%. As of December 31, 1999,
ProLogis had invested $19.9 million in the preferred stock of ProLogis
Logistics and ProLogis' investment in MRI aggregated $28.7 million. As of
December 31, 1999, CSI owned or operated temperature-controlled distribution
facilities aggregating 172.4 million cubic feet (including 35.5 million cubic
feet of dry distribution space located in temperature-controlled facilities)
of the total, 4.8 million cubic feet was under development. The common stock
of ProLogis Logistics is owned by an unrelated party. ProLogis recognizes 95%
of the economic benefits of the activities of ProLogis Logistics and its
subsidiaries.
As of December 31, 1999, ProLogis had a $130.1 million note receivable from
ProLogis Logistics. The note is unsecured, bears interest at 8.0% per annum
and matures on April 24, 2002.
117
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ProLogis accounts for its investment in ProLogis Logistics under the equity
method. ProLogis recognized income (including interest income on the note
receivable and a management fee payable from CSI through June 1998) from its
investment in ProLogis Logistics of $10.8 million, $7.3 million and $3.3
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Frigoscandia S.A.
On January 16, 1998, ProLogis invested in Frigoscandia S.A. by acquiring
100% of its preferred stock. Also on January 16, 1998, Frigoscandia S.A., a
Luxembourg company, acquired Frigoscandia AB, a refrigerated distribution
company headquartered in Sweden. Frigoscandia AB is 100% owned by Frigoscandia
Holding AB, which is 100% owned by a wholly owned subsidiary of Frigoscandia
S.A. As of December 31, 1999, Frigoscandia AB, which operates in nine European
countries, owned or operated 193.6 million cubic feet of refrigerated
distribution facilities (including 1.3 million cubic feet under development).
As of December 31, 1999, ProLogis had invested $28.5 million in the preferred
stock of Frigoscandia S.A. The common stock of Frigoscandia S.A. is owned by a
limited liability company, in which unrelated parties own 100% of the voting
interests and Security Capital owns 100% of the non-voting interests. ProLogis
recognizes 95% of the economic benefits of the activities of Frigoscandia S.A.
and its subsidiaries.
As of December 31, 1999, ProLogis had the following notes receivable
outstanding:
. $91.5 million unsecured note from Frigoscandia Holding AB; interest at
5.0% per annum; due on demand;
. $87.8 million unsecured note from Frigoscandia S.A.; interest at 5.0% per
annum; $80.0 million due July 15, 2008 with the remainder due on demand;
and
. $30.0 million unsecured, non-interest bearing note from a subsidiary of
Frigoscandia Holding AB; due on demand.
ProLogis accounts for its investment in Frigoscandia S.A. under the equity
method. ProLogis recognized losses of $4.4 million and of $7.5 million for the
years ended December 31, 1999 and 1998, respectively, (including interest
income on the mortgage notes and notes receivable).
Frigoscandia AB has a multi-currency, three-year revolving credit agreement
through a consortium of 11 European banks in the currency equivalent of
approximately $186.0 million as of December 31, 1999. The loan bears interest
at the relevant index (LIBOR or Euribor based on the currency borrowed) rate
plus 0.65%. ProLogis has entered into a guaranty agreement for 25% of the loan
balance.
Kingspark S.A.
On August 14, 1998, ProLogis invested in Kingspark Holding S.A. ("Kingspark
S.A.") by acquiring 100% of its preferred stock. Also on August 14, 1998,
Kingspark S.A., a Luxembourg company, acquired an industrial distribution real
estate development company operating in the United Kingdom, ProLogis
Kingspark. As of December 31, 1999, ProLogis Kingspark had 550,000 square feet
of operating facilities, 2,202,000 square feet of facilities under development
and 844,000 square feet of facilities that it was developing under development
management agreements. Additionally, as of December 31, 1999, ProLogis
Kingspark owned 397 acres and controlled 1,415 acres of land through purchase
options, letters of intent or contingent contracts. The land owned and
controlled by ProLogis Kingspark has the capacity for the future development
of 21.4 million square feet of facilities. As of December 31, 1999, ProLogis
had invested $24.0 million in the preferred stock of Kingspark S.A. The common
stock of Kingspark S.A. is owned by a limited liability company, in which
unrelated third
118
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
parties own 100% of the voting interests and Security Capital owns 100% of the
non-voting interests. ProLogis recognizes 95% of the economic benefits of the
activities of Kingspark S.A. and its subsidiaries.
ProLogis Kingspark has a loan facility with ProLogis which provides for
borrowings of up to 200 million pounds sterling. This facility is available as
a line of credit, has an interest rate of 8.0% per annum and is due on demand.
As of December 31, 1999, the currency equivalent of $81.2 million of
borrowings were outstanding on the loan facility. ProLogis also had the
following notes and mortgage notes receivable outstanding as of December 31,
1999:
. $116.4 million unsecured note receivable from Kingspark S.A.; interest at
5.0% per annum; due on demand;
. $75.9 million mortgage note receivable from ProLogis Kingspark; interest
at 8.0% per annum; secured by land parcels; due on demand; and
. $64.8 million of mortgage notes receivable from subsidiaries of Kingspark
S.A.; interest at 7.0% per annum; secured by land parcels; due on demand.
ProLogis accounts for its investment in Kingspark S.A. under the equity
method. ProLogis recognized income of $23.9 million and $2.9 million for the
years ended December 31, 1999 and 1998, respectively, (including interest
income on the mortgage notes and notes receivable and the line of credit) from
its investment in Kingspark S.A. ProLogis' share of Kingspark S.A.'s income
for the year ended December 31, 1999 includes a net gain of $4.5 million from
the disposition of facilities developed by ProLogis Kingspark to the ProLogis
European Properties Fund. The gain recognized is net of $1.1 million which did
not qualify for income recognition by ProLogis due to ProLogis' continuing
ownership in the ProLogis European Properties Fund. The ProLogis European
Properties Fund is discussed below.
ProLogis Kingspark has a line of credit agreement with a bank in the United
Kingdom. The credit agreement, which provides for borrowings of up to 10.0
million pounds sterling (the currency equivalent of approximately $16.1
million as of December 31, 1999). The line of credit, which was increased to
15.0 million pounds sterling in February 2000, has been guaranteed by
ProLogis. As of December 31, 1999, no borrowings were outstanding on the line
of credit. However, as of December 31, 1999, ProLogis Kingspark had the
currency equivalent of approximately $7.9 million of letters of credit
outstanding that reduce the amount of available borrowings on the line of
credit. Additionally, ProLogis has an agreement whereby it has guaranteed the
performance and obligations of ProLogis Kingspark with respect to an
infrastructure agreement entered into by ProLogis Kingspark related to the
development of a land parcel. As of December 31, 1999, ProLogis had an
unfunded commitment on this guarantee agreement in the currency equivalent of
approximately $9.0 million.
ProLogis California I LLC
ProLogis California began operations on August 26, 1999 as a limited
liability company whose members are ProLogis and New York State Common
Retirement Fund ("NYSCRF"). ProLogis California acquired 78 operating
facilities aggregating 11.5 million square feet, two facilities under
development and two land parcels from ProLogis, all in the Los Angeles market
for $558.2 million and ProLogis received net cash of $210.0 million. In
addition, ProLogis California assumed $199.25 million of ProLogis' mortgage
debt secured by the facilities acquired. As of December 31, 1999, ProLogis and
NYSCRF each had an equity interest in ProLogis California of $143.1 million.
ProLogis received distributions aggregating $9.7 million in 1999. ProLogis
provides property management, leasing and development management services to
ProLogis California and earns fees for these services.
119
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ProLogis' investment in ProLogis California as of December 31, 1999
consisted of (in millions):
<TABLE>
<S> <C>
Equity interest, net of distributions............................ $143.1
Adjustment to carrying value(1).................................. (26.0)
ProLogis' share of ProLogis California's earnings, excluding fees
earned.......................................................... 2.9
Other, including acquisition costs............................... 1.3
------
$121.3
======
</TABLE>
- --------
(1) Reflects the reduction in carrying value for amount of net gain on the
disposition of properties to ProLogis California that does not qualify for
income recognition due to ProLogis' continuing ownership in ProLogis
California.
ProLogis accounts for its investment in ProLogis California under the
equity method and recognized $3.9 million of income for 1999 from its
investment in ProLogis California, including management, leasing and
development fees of $930,000.
ProLogis European Properties Fund
The ProLogis European Properties Fund was formed on September 16, 1999 and
began operations on September 23, 1999 when the ProLogis European Properties
Fund acquired 12 operating facilities aggregating 2.2 million square feet from
ProLogis and ProLogis Kingspark. In December 1999, the ProLogis European
Properties Fund acquired an additional six facilities from ProLogis and
ProLogis Kingspark aggregating 1.1 million square feet. Third parties (19
institutional investors) have invested 182.6 million euros (the currency
equivalent of approximately $184.0 million as of December 31, 1999) in the
ProLogis European Properties Fund and have committed to fund an additional
877.7 million euros (the currency equivalent of approximately $884.0 million
as of December 31, 1999) through 2002.
The ProLogis European Properties Fund intends to acquire additional
stabilized operating facilities from ProLogis, ProLogis Kingspark and
unrelated parties, including facilities to be developed by ProLogis and
ProLogis Kingspark in the future. Stabilized facilities have been defined for
purposes of the ProLogis European Properties Fund as facilities that meet
minimum leasing criteria and minimum net operating income yields, as defined
and established by agreement for each country. The ProLogis European
Properties Fund has the right to refuse to acquire facilities that ProLogis
and ProLogis Kingspark have developed if they do not meet the established
criteria. ProLogis has an agreement to manage the ProLogis European Properties
Fund for a fee pursuant to a 20-year management agreement.
In October 1999, the ProLogis European Properties Fund entered into an
agreement with two international banks for a three-year 500.0 million euro
revolving credit facility. The facility is secured by certain assets of the
ProLogis European Properties Fund. Borrowings can be denominated in sterling
currencies or the euro, and will bear interest at rates above the relevant
index (LIBOR or Euribor).
ProLogis' investment in the ProLogis European Properties Fund as of
December 31, 1999 consisted of (in millions of U.S. dollars):
<TABLE>
<S> <C>
Equity interest................................................... $38.4
Adjustment to carrying value(1)................................... (6.7)
ProLogis' share of the ProLogis European Properties Fund's
earnings, excluding fees earned.................................. 0.5
Other acquisition costs........................................... 0.6
-----
$32.8
=====
</TABLE>
120
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------
(1) Reflects the reduction in carrying value for amount of net gain on the
disposition of facilities to the ProLogis European Properties Fund that
does not qualify for income recognition due to ProLogis' continuing
ownership in the ProLogis European Properties Fund.
On January 7, 2000, ProLogis increased its equity investment in the
ProLogis European Properties Fund through the contribution of 50.1% of the
common stock of one of its wholly owned European entities, which included
ProLogis Garonor. This entity owned 6.8 million square feet of operating
facilities with a net book value of $334.9 million and held third party debt
of $173.6 million as of December 31, 1999. ProLogis is committed to
contributing the remaining 49.9% of the common stock to the ProLogis European
Properties Fund in January 2001. ProLogis has also entered into a subscription
agreement to make capital contributions of 109.2 million euros (the currency
equivalent of approximately $110.0 million as of December 31, 1999) to the
ProLogis European Properties Fund through 2002.
ProLogis accounts for its investment in the ProLogis European Properties
Fund under the equity method and recognized $820,000 of income, including
management fees of $269,000 and interest income of $86,000 on a note
receivable, for the year ended December 31, 1999 from its investment in the
ProLogis European Properties Fund.
Summarized Financial Information
Summarized financial information for ProLogis' unconsolidated entities as
of and for the year ended December 31, 1999 is presented below (in millions of
U.S. dollars). The information presented is for the entire entity.
<TABLE>
<CAPTION>
ProLogis
ProLogis European
Logistics Frigoscandia Kingspark ProLogis Properties
(1)(2) S.A.(1) S.A.(1) California(3) Fund(4)
--------- ------------ --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Total assets............ $351.8 $558.0 $443.7 $563.5 $333.9(5)
Total liabilities(6).... $340.4 $580.6 $417.6 $271.9 $110.1
Minority interest....... $ -- $ 1.3 $ -- $ -- $ --
Equity.................. $ 11.4 $(23.9) $ 26.1 $291.6 $223.8
Revenues................ $276.0 $426.0 $ 37.4(7) $ 20.2 $ 6.2
Adjusted EBITDA(8)...... $ 34.9 $ 49.8 $ 30.5 $ 16.8 $ 3.0
Net earnings
(loss)(9)(10).......... $ (2.7) $(14.7)(11) $ 4.6(12) $ 5.4 $ 2.5(13)
</TABLE>
- --------
(1) ProLogis has a 95% economic interest in each entity as of December 31,
1999.
(2) ProLogis Logistics' balances include MRI, which was acquired on March 30,
1999. See Note 3.
(3) ProLogis has a 50% equity interest as of December 31, 1999. ProLogis
California began operations on August 26, 1999.
(4) ProLogis has a 19.68% equity interest as of December 31, 1999. The
ProLogis European Properties Fund began operations on September 23, 1999.
(5) Includes $7.8 million due from ProLogis.
(6) Includes amounts due to ProLogis of $192.2 million from ProLogis
Logistics, $231.4 million from Frigoscandia S.A., and $358.2 million from
Kingspark S.A. and loans from third parties (including accrued interest)
of $102.0 million for ProLogis Logistics, $210.9 million for Frigoscandia
S.A., $262.9 million for ProLogis California and $88.2 million for the
ProLogis European Properties Fund.
121
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Includes $25.8 million of gains related to the disposition of facilities,
including $5.5 million from the disposition of facilities to the ProLogis
European Properties Fund.
(8) Adjusted EBITDA represents earnings from operations before interest
expense, interest income, current and deferred income taxes,
depreciation, amortization, cumulative effect of accounting changes, non-
recurring items and foreign currency exchange gains and losses.
(9) ProLogis' share of the net earnings (loss) of the respective entities and
interest income on intercompany notes and mortgage notes receivable are
recognized in the Consolidated Statements of Earnings as "Income from
unconsolidated entities".
(10) The net earnings (loss) of each company includes interest expense on
intercompany notes and mortgage notes due to ProLogis, as applicable.
(11) Includes a net foreign currency exchange loss of $1.4 million.
(12) Includes a net foreign currency exchange loss of $1.6 million.
(13) Includes a net foreign currency exchange gain of $1.8 million.
6. Borrowings:
Unsecured Lines of Credit
ProLogis has an unsecured credit agreement with Bank of America, N.A.
("Bank of America"), Commerzbank AG and Chase Bank of Texas, National
Association, as agents for a bank group that provides for a $550.0 million
unsecured revolving line of credit. Borrowings bear interest, at ProLogis'
option, at either (a) the greater of the federal funds rate plus 0.5% and the
prime rate, or (b) LIBOR plus 1.00% based upon ProLogis' current senior debt
ratings. ProLogis' borrowings are primarily at the 30-day LIBOR rate plus
1.00% (6.8225% as of December 31, 1999). Additionally, the credit agreement
provides for a facility fee of 0.20% per annum. The line of credit matures on
March 29, 2001 and may be extended for an additional year at ProLogis' option.
As of December 31, 1999, $45.0 million of borrowings were outstanding on the
line of credit and ProLogis was in compliance with all covenants contained in
the credit agreement.
The $550.0 million unsecured line of credit replaced ProLogis' previous
$350.0 million unsecured line of credit that was put into place in August
1998. ProLogis' entered into the new credit agreement in March 1999 to provide
for increased borrowing capacity following the Meridian Merger. See Note 3.
As of December 31, 1998, ProLogis had an agreement that provided for a term
loan of $150.0 million. The term loan was repaid on April 26, 1999 and the
agreement was terminated. ProLogis paid interest at LIBOR plus 1.00% on the
term loan borrowings.
In addition, ProLogis has a $25.0 million unsecured discretionary line of
credit with Bank of America that matures on October 1, 2000. By agreement
between ProLogis and Bank of America, the rate of interest on and the maturity
date of each advance are determined at the time of each advance. There were no
borrowings outstanding on the line of credit as of December 31, 1999.
On December 17, 1999, ProLogis obtained a multi-currency, unsecured
revolving line of credit in the currency equivalent of 325.0 million euros
(the currency equivalent of approximately $327.3 million as of December 31,
1999) through a group of 17 banks, on whose behalf ABN AMRO Bank, N.V. acted
as agent. The line of credit was obtained for the purpose of funding ProLogis'
European development activities. The interest rate on this multi-currency,
four-year revolving line of credit is Euribor plus 0.75% or Sterling LIBOR
plus 0.75% (borrowings outstanding as of December 31, 1999 were at a weighted
average interest rate of 4.25%). As of December 31, 1999, the currency
equivalent of approximately $53.7 million of borrowings were outstanding on
the line of credit and ProLogis was in compliance with all covenants contained
in the credit agreement.
122
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of ProLogis' unsecured lines of credit borrowings is as follows
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Weighted average daily interest rate....... 6.13% 6.46% 6.75%
Borrowings outstanding as of December 31... $ 98,700 $344,300 $ --
Weighted average daily borrowings.......... $232,821 $174,901 $ 56,938
Maximum borrowings outstanding at any month
end....................................... $440,100 $344,300 $143,800
Total borrowing capacity on all lines of
credit as of
December 31............................... $902,340 $375,000 $375,000
</TABLE>
Senior Unsecured Notes
ProLogis has issued senior unsecured notes and medium-term unsecured notes
that bear interest at fixed rates, payable semi-annually (the "Notes"). The
Notes are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Principal
Outstanding at Principal
Original Coupon Maturity December 31, Payment
Date of Issuance Principal Rate Date 1999(1) Requirement
---------------- ---------- ------ -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
May 16, 1995............... $ 17,500 7.250% 05/15/00 $ 17,494 (2)
May 16, 1995............... 17,500 7.300% 05/15/01 17,477 (2)
May 17, 1996............... 50,000 7.250% 05/15/02 37,486 (3)
October 9, 1998............ 125,000 7.000% 10/01/03 125,000 (2)
April 26, 1999............. 250,000 6.700% 04/15/04 249,604 (2)
July 20, 1998.............. 250,000 7.050% 07/15/06 249,555 (2)
November 20, 1997(4)...........135,000.7.250% 11/20/07 134,023 (2)
April 26, 1999............. 250,000 7.100% 04/15/08 249,932 (2)
May 17, 1996............... 100,000 7.950% 05/15/08 99,876 (5)
March 2, 1995.............. 150,000 8.720% 03/01/09 150,000 (6)
May 16, 1995............... 75,000 7.875% 05/15/09 74,757 (7)
November 20, 1997(4)............25,000 7.300% 11/20/09 24,771 (2)
February 4, 1997........... 100,000 7.810% 02/01/15 100,000 (8)
March 2, 1995.............. 50,000 9.340% 03/01/15 50,000 (9)
May 17, 1996............... 50,000 8.650% 05/15/16 49,870 (10)
July 11, 1997.............. 100,000 7.625% 07/01/17 99,785 (2)
---------- ----------
$1,745,000 $1,729,630
========== ==========
</TABLE>
- --------
(1)Amounts are net of applicable unamortized original issue discount.
(2)Principal due at maturity.
(3)Annual principal payments of $12.5 million from 5/15/00 to 5/15/02.
(4) Senior unsecured notes assumed by ProLogis in March 1999 in connection
with the Meridian Merger. See Note 3.
(5)Annual principal payments of $25.0 million from 5/15/05 to 5/15/08.
(6)Annual principal payments of $18.75 million from 3/1/02 to 3/1/09.
(7)Annual principal payments of $9.375 million from 5/15/02 to 5/15/09.
(8)Annual principal payments ranging from $10.0 million to $20.0 million from
2/1/10 to 2/1/15.
123
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9)Annual principal payments ranging from $5.0 million to $12.5 million from
3/1/10 to 3/1/15.
(10)Annual principal payments ranging from $5.0 million to $12.5 million from
5/15/10 to 5/15/16.
The Notes rank equally with all other unsecured and unsubordinated
indebtedness of ProLogis from time to time outstanding. The Notes are
redeemable at any time at the option of ProLogis. Such redemption and other
terms are governed by the provisions of an indenture agreement or, with
respect to the notes assumed in connection with the Meridian Merger, note
purchase agreements. Under the terms of the indenture agreement and note
purchase agreements, ProLogis must meet certain financial covenants and
ProLogis was in compliance with all such covenants as of December 31, 1999.
Other Unsecured Debt
ProLogis has an unsecured term loan in the amount of 200.0 million French
francs (the currency equivalent of approximately $30.9 million as of December
31, 1999). The loan bears interest at a variable rate (Euribor plus 1.20%)
that has been fixed through maturity at 3.62% through an interest rate swap
agreement. See Note 16. Annual payments are due on the loan commencing in the
year 2001, with the final payment due in 2006. The term loan prohibits
distributions from the entity that holds the debt unless certain principal
reductions are made. ProLogis contributed 50.1% of the common stock of the
wholly owned entity holding this debt to the ProLogis European Properties Fund
on January 7, 2000. ProLogis is committed to contributing the remaining 49.9%
of the common stock to the ProLogis European Properties Fund in January 2001.
See Note 5.
Mortgage Notes, Assessment Bonds and Securitized Debt
Mortgage notes, assessment bonds and securitized debt consisted of the
following as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Balloon
Periodic Payment
Interest Maturity Payment Principal Due at
Description Rate(1) Date Date Balance Maturity
----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Mortgage notes:
Platte Valley Industrial
Center #1.................... 9.750% 03/01/00 (2) $ 264 $ 256
West One Business Center #1... 8.250 09/01/00 (2) 4,327 4,252
Tampa West Distribution Center
#20.......................... 9.125 11/30/00 (3) 52 --
Rio Grande Industrial Center
#1........................... 8.875 09/01/01 (2) 2,878 2,544
Titusville Industrial Center
#1........................... 10.000 09/01/01 (2) 4,494 4,181
Prudential Insurance(4)....... 8.590 04/01/03 (2) 26,078 23,505
Sullivan 75 Distribution
Center #1.................... 9.960 04/01/04 (2) 1,793 1,663
Charter American Mortgage(4).. 8.750 08/01/04 (2) 7,180 5,819
West One Business Center #3... 9.000 09/01/04 (2) 4,318 3,847
Raines Distribution Center.... 9.500 01/01/05 (2) 5,259 4,402
Prudential Insurance(4)(5).... 6.850 03/01/05 (6) 53,111 48,850
Consulate Distribution Center
#300(5)...................... 6.970 02/01/06 (2) 3,740 367
Plano Distribution Center #7(5)... 7.020 04/15/06 (2) 3,785 3,200
Societe Generale(4)(7)........ 4.790(8) 12/29/06 (2) 14,041 5,307
Societe Generale(4)(7)........ 4.800(9) 12/29/06 (2) 115,769 78,235
Connecticut General Life
Insurance(4)................. 7.080 03/01/07 (2) 148,757 134,431
Vista Del Sol Industrial
Center #1 & 2................ 9.680 08/01/07 (3) 3,446 --
Credit Lyonnais(4)(7)......... 8.600 07/21/08 (3) 12,921 --
State Farm Insurance(4)(5).... 7.100 11/01/08 (2) 15,467 13,698
Placid Street Distribution
Center #1(5)................. 7.180 12/01/09 (2) 7,829 5,142
</TABLE>
124
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Balloon
Periodic Payment
Interest Maturity Payment Principal Due at
Description Rate(1) Date Date Balance Maturity
----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Earth City Industrial Center
#4............................ 8.500% 07/01/10 (3) $ 1,933 $ --
GMAC Commercial Mortgage(4).... 7.750 10/01/10 (3) 7,974 --
Executive Park Distribution
Center #3..................... 8.190 03/01/11 (3) 1,053 --
Cameron Business Center #1(5)......7.230 07/01/11 (2) 6,162 4,028
Platte Valley Industrial Center
#9............................ 8.100 04/01/17 (3) 3,248 --
Platte Valley Industrial Center
#4............................ 10.100 11/01/21 (3) 2,034 --
Morgan Guaranty Trust(4)....... 7.584 04/01/24 (10) 200,000 127,187
--------
$657,913
========
Assessment bonds:
City of Wilsonville............ 6.820% 08/19/04 (3) $ 111 --
City of Kent................... 5.500 05/01/05 (3) 16 --
City of Kent................... 7.850 06/20/05 (3) 84 --
City of Portland............... 8.330 11/17/07 (3) 6 --
City of Kent................... 7.980 05/20/09 (3) 64 --
City of Fremont................ 7.000 03/01/11 (3) 9,348 --
City of Las Vegas.............. 8.750 10/01/13 (3) 720 --
City of Kent................... 6.210 01/15/15 (3) 75 --
City of Portland............... 7.250 11/07/15 (3) 86 --
City of Portland............... 7.250 09/15/16 (3) 211 --
--------
$ 10,721
========
Securitized debt:
Tranche A...................... 7.740% 02/01/04 (2) $ 18,995 $ 15,214
Tranche B...................... 9.940 02/01/04 (2) 7,957 7,215
--------
$ 26,952
========
</TABLE>
- --------
(1) The weighted average interest rates for mortgage notes, assessment bonds
and securitized debt were 6.99%, 7.13% and 8.39%, respectively as of
December 31, 1999.
(2) Monthly amortization with a balloon payment due at maturity.
(3) Fully amortizing.
(4) Secured by various distribution facilities.
(5) Mortgage note was assumed by ProLogis in connection with the Meridian
Merger. See Note 3. Under purchase accounting, the mortgage note was
recorded at its fair value. Accordingly, a premium or discount was
recognized, where applicable.
(6) Carrying value includes premium, interest only with stated principal
amount due at maturity.
(7) On January 7, 2000, ProLogis contributed 50.1% of the common stock of the
wholly owned entity holding this debt to the ProLogis European Properties
Fund. ProLogis is committed to contributing the remaining 49.9% in
January 2001. See Note 5.
(8) Variable rate provided by loan agreement is Euribor plus 1.20%. The
Euribor rate has been fixed through January 2004 at 3.59% through
interest rate swap agreement. See Note 16.
(9) Variable rate provided by loan agreement is Euribor plus 1.20%. The
Euribor rate has been fixed through January 2004 at 3.60% through
interest rate swap agreement. See Note 16.
(10) Monthly interest only payments through May 2005, monthly principal and
interest payments from June 2005 to April 2024 with a balloon payment due
at maturity.
125
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage notes are secured by real estate with an aggregate undepreciated
cost of $1.21 billion as of December 31, 1999. Assessment bonds are secured by
real estate with an aggregate undepreciated cost of $226.9 million as of
December 31, 1999. Securitized debt is collateralized by real estate with an
aggregate undepreciated cost of $63.4 million as of December 31, 1999.
Long-Term Debt Maturities
Approximate principal payments due on senior unsecured notes, other
unsecured debt, mortgage notes, assessment bonds and securitized debt during
each of the years in the five-year period ending December 31, 2004 and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
2000.......................................................... $ 43,455
2001.......................................................... 53,027
2002.......................................................... 64,767
2003.......................................................... 202,429
2004.......................................................... 336,520
2005 and thereafter........................................... 1,758,780
----------
Total principal due....................................... 2,458,978
Less: Original issue discount................................. (2,870)
----------
Total carrying value...................................... $2,456,108
==========
</TABLE>
Interest Expense
For 1999, 1998 and 1997, interest expense was $170.7 million, $77.7 million
and $52.7 million, respectively, which is net of capitalized interest of $16.0
million, $19.2 million and $18.4 million, respectively. Amortization of
deferred loan costs included in interest expense was $4.4 million, $2.2
million and $2.0 million for 1999, 1998 and 1997, respectively. The total
interest paid in cash on all outstanding debt was $169.8 million, $83.2
million and $61.3 million during 1999, 1998 and 1997, respectively.
7. Minority Interest:
Minority interest represents the limited partners' interests in real estate
partnerships controlled by ProLogis. With respect to each of the partnerships
either ProLogis or a subsidiary of ProLogis is the sole general partner with
all management powers over the business and affairs of the partnership. The
limited partners of each partnership generally do not have the right to
participate in or exercise management control over the business and affairs of
the partnership. With respect to each partnership the general partner may not,
without the written consent of all of the limited partners, take any action
that would prevent such partnership from conducting its business, possess the
property of the partnership, admit an additional partner or subject a limited
partner to the liability of a general partner.
ProLogis sold its 70.0% general partnership interest in Red Mountain Joint
Venture in March 1999 and recognized a gain of $715,000. As of December 31,
1999, ProLogis is the controlling general partner in six partnerships,
including two partnerships (MDN/JSC II Limited Partnership and Meridian Realty
Partners, L.P.) acquired in the Meridian Merger (see Note 3). In each of these
partnerships, the limited partners are entitled to exchange partnership units
for Common Shares (5,055,704 on a one for one basis and 483,087 at a rate of
1.10 Common Share per partnership unit, plus $2.00). Additionally, the limited
partners are entitled to receive preferential cumulative quarterly
distributions per unit equal to the quarterly distributions in respect of
Common Shares.
126
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The six partnerships are as follows:
. ProLogis Limited Partnership-I, which owned approximately $209.6 million
of industrial distribution facilities located primarily in the San
Francisco Bay market as of December 31, 1999, was formed in December
1993. ProLogis had a 68.7% controlling general partnership interest and
there were 4,520,532 limited partnership units outstanding as of December
31, 1999. These facilities cannot be sold, prior to the occurrence of
certain events, without the consent of the limited partners thereto,
other than in tax-deferred exchanges.
. ProLogis Limited Partnership-II, which owned approximately $56.8 million
of industrial distribution facilities located primarily in the Charlotte,
Dallas/Fort Worth, Denver, El Paso, St. Louis, Washington D.C./Baltimore
and the San Francisco Bay markets as of December 31, 1999, was formed in
May 1994. ProLogis' initial 81.2% controlling general partnership
interest has subsequently been increased to 97.8% (the ownership interest
as of December 31, 1999) due to the conversion of limited partnership
units into Common Shares. There were 90,213 limited partnership units
outstanding as of December 31, 1999.
. ProLogis Limited Partnership-III, which owned approximately $51.7 million
of industrial distribution facilities located primarily in the San
Antonio, Orlando, Miami/Ft. Lauderdale and Tampa markets as of December
31, 1999, was formed in October 1994. ProLogis had a 50.4% controlling
general partnership interest at formation, which has subsequently been
increased to 88.2% (the ownership interest as of December 31, 1999) as
the result of additional contributions by ProLogis and the conversion of
limited partnership units into Common Shares. There were 376,347 limited
partnership units outstanding as of December 31, 1999.
. ProLogis Limited Partnership-IV, which owned approximately $94.8 million
of industrial distribution facilities located primarily in the
Cincinnati, Dallas/Fort Worth, Miami/Ft. Lauderdale, Orlando and Tampa
markets as of December 31, 1999, was formed in October 1994 through a
cash contribution from a wholly owned subsidiary of ProLogis, ProLogis
IV, Inc., and the contribution of industrial distribution facilities from
the limited partner. ProLogis' initial 96.4% controlling general
partnership interest has been increased to 98.2% (the ownership interest
as of December 31, 1999) as the result of additional contributions by
ProLogis. There were 68,612 limited partnership units outstanding as of
December 31, 1999.
. ProLogis Limited Partnership-IV and ProLogis IV, Inc. are legal entities
separate and distinct from ProLogis, its affiliates and each other, and
each has separate assets, liabilities, business functions and operations.
The sole assets of ProLogis IV, Inc. are its general partner advances to
and its interest in ProLogis Limited Partnership-IV. As of December 31,
1999, ProLogis Limited Partnership-IV had outstanding borrowings from
ProLogis IV, Inc. of $0.7 million and ProLogis IV, Inc. had outstanding
borrowings from ProLogis and its affiliates of $0.7 million.
. Meridian Realty Partners, L.P. owned a $10.3 million industrial
distribution facility located in the Los Angeles market as of December
31, 1999. ProLogis had an 88.0% controlling general partnership interest
and there were 29,712 limited partnership units outstanding as of
December 31, 1999.
. MDN/JSC II Limited Partnership owned approximately $62.1 million of
industrial distribution facilities located in the Dallas and Las Vegas
markets as of December 31, 1999. ProLogis had a 67.4% controlling general
partnership interest and there were 453,375 limited partnership units
outstanding as of December 31, 1999.
For financial reporting purposes, the assets, liabilities, results of
operations and cash flows of each of the six partnerships are included in
ProLogis' consolidated financial statements, and the interests of the limited
partners are reflected as minority interest.
127
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Shareholders' Equity:
Shares Authorized
As of December 31, 1999, 275,000,000 shares were authorized (increased from
230,000,000 shares on June 24, 1999 through a shareholder-approved amendment
to ProLogis' Declaration of Trust). ProLogis' Board of Trustees (the "Board")
may increase the number of authorized shares and may classify or reclassify
any unissued shares of ProLogis stock from time to time by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as of distributions, qualifications and terms or conditions of
redemption of such shares.
Preferred Shares
As of December 31, 1999, ProLogis had four series of cumulative redeemable
preferred shares of beneficial interest outstanding (Series A, C, D and E) and
one series of cumulative convertible redeemable preferred shares of beneficial
interest outstanding (Series B). Holders of each series of preferred shares
have, subject to certain conditions, limited voting rights. The holders of the
preferred shares are entitled to receive cumulative preferential dividends
based upon each series' respective liquidation preference. Such dividends are
payable quarterly in arrears on the last day of March, June, September and
December for all series of preferred shares, with the exception of Series E,
which are payable quarterly on the last day of January, April, July and
October, when, and if, declared by the Board, out of funds legally available
for payment of dividends. After the respective redemption dates, each series
can be redeemed for a cash redemption price which (other than the portion
consisting of accrued and unpaid dividends) is payable solely out of the sales
proceeds of other capital shares of ProLogis, which may include shares of
other series of preferred shares. With respect to payment of dividends, each
series of preferred shares ranks on parity with ProLogis' other series of
preferred shares.
The Series B preferred shares are convertible at any time, unless
previously redeemed, at the option of the holders thereof into Common Shares
at a conversion price of $19.50 per share (equivalent to a conversion rate of
1.282 Common Shares for each Series B preferred share).
ProLogis' preferred shares are summarized as follows:
<TABLE>
<CAPTION>
Equivalent
Number of Shares Stated Based on Optional
Outstanding as of Liquidation Dividend Liquidation Redemption
December 31, 1999 Preference Rate Preference Date(1)
----------------- ----------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Series A................ 5,400,000 $25.00 9.40% $2.35 per share 06/21/00
Series B(2)............. 7,020,703 $25.00 7.00% $1.75 per share 02/21/01
Series C................ 2,000,000 $50.00 8.54% $4.27 per share 11/13/26
Series D................ 10,000,000 $25.00 7.92% $1.98 per share 04/13/03
Series E................ 2,000,000 $25.00 8.75% $2.19 per share 06/30/03
</TABLE>
- --------
(1) After this date, the preferred shares can be redeemed at ProLogis' option.
(2) During 1999 and 1998, Series B preferred shares of 516,897 and 462,700,
respectively, were converted into 662,661 and 593,181 Common Shares,
respectively.
Issuance of Common Shares
The purchase agreement of ProLogis Kingspark contained a provision that
allowed for additional contingent consideration, to be settled by the issuance
of Common Shares, upon the achievement of a specified level of earnings by
ProLogis Kingspark. The conditions precedent to the issuance of the Common
Shares were met in 1999. ProLogis recognized a liability of $3.9 million
related to the additional purchase price as of December 31, 1999. In
settlement of this liability, 200,535 Common Shares were issued in February
2000.
128
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shelf Registration
In June 1999, ProLogis filed a $500.0 million shelf registration statement
with the Securities and Exchange Commission supplementing its existing shelf
registration. The shelf registration allows ProLogis to issue securities in
the form of debt securities, preferred shares, Common Shares, rights to
purchase Common Shares and preferred share purchase rights on an as-needed
basis. As of December 31, 1999, ProLogis had $608.0 million of shelf-
registered securities available for issuance, subject to ProLogis' ability to
effect an offering on satisfactory terms.
Ownership Restrictions and Significant Shareholder
For ProLogis to qualify as a REIT under the Code, not more than 50% in
value of its outstanding shares of stock may be owned by five or fewer
individuals at any time during the last half of ProLogis' taxable year.
Therefore, ProLogis' Declaration of Trust restricts beneficial ownership (or
ownership generally attributed to a person under the REIT tax rules) of
ProLogis' outstanding shares by a single person, or persons acting as a group,
to 9.8% of ProLogis' outstanding shares. This provision assists ProLogis in
protecting and preserving its REIT status and protects the interest of
shareholders in takeover transactions by preventing the acquisition of a
substantial block of shares.
Shares owned by a person or group of persons in excess of these limits are
subject to redemption by ProLogis. The provision does not apply where a
majority of the Board, in its sole and absolute discretion, waives such limit
after determining that the status of ProLogis as a REIT for federal income tax
purposes will not be jeopardized or the disqualification of ProLogis as a REIT
is advantageous to the shareholders.
Security Capital is exempt from the ownership restrictions described above.
Security Capital owned 30.8% of the outstanding Common Shares as of December
31, 1999. For tax purposes, Security Capital's ownership is attributed to its
shareholders.
Dividend Reinvestment and Share Purchase Plan
In March 1995, ProLogis adopted a Dividend Reinvestment and Share Purchase
Plan (the "1995 Plan"), which commenced in April 1995. The 1995 Plan allowed
holders of Common Shares the opportunity to acquire additional Common Shares
by automatically reinvesting distributions. Holders of Common Shares who do
not participate in the 1995 Plan continue to receive distributions as
declared. The 1995 Plan also allowed participating holders of Common Shares to
purchase a limited number of additional Common Shares by making optional cash
payments, without payment of any brokerage commission or service charge.
Common Shares are acquired pursuant to the 1995 Plan at a price equal to 98%
of the market price of such Common Shares, without payment of any brokerage
commission or service charge.
The 1995 Plan was amended in June 1999 by the 1999 Dividend Reinvestment
and Share Purchase Plan (the "1999 Plan"). The primary change effective with
the 1999 Plan allows persons who are not holders of Common Shares to
participate in the share purchase plan.
Shareholder Purchase Rights
On December 7, 1993, the Board declared a dividend of one preferred share
purchase right ("Right") for each outstanding Common Share to be distributed
to all holders of record of the Common Shares on December 31, 1993. Each Right
entitles the registered holder to purchase one-hundredth of a Participating
Preferred Share for an exercise price of $40.00 per one-hundredth of a
Participating Preferred Share, subject to
129
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
adjustment as provided in the Rights Agreement. The Rights will generally be
exercisable only if a person or group (other than certain affiliates of
ProLogis) acquires 20% or more of the Common Shares or announces a tender
offer for 25% or more of the Common Shares. Under certain circumstances, upon
a shareholder acquisition of 20% or more of the Common Shares (other than
certain affiliates of ProLogis), each Right will entitle the holder to
purchase, at the Right's then-current exercise price, a number of Common
Shares having a market value of twice the Right's exercise price. The
acquisition of ProLogis pursuant to certain mergers or other business
transactions will entitle each holder of a Right to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at that time equal to twice the Right's exercise price.
The Rights held by certain 20% shareholders will not be exercisable. The
Rights will expire on December 7, 2003, unless the expiration date of the
Rights is extended, and the Rights are subject to redemption at a price of
$0.01 per Right under certain circumstances.
9. Distributions and Dividends:
Common Distributions
ProLogis' annual distribution per Common Share was $1.30 in 1999, $1.24 in
1998 and $1.07 in 1997. For Federal income tax purposes, the following
summarizes the taxability of cash distributions paid on Common Shares in 1998
and 1997 and the estimated taxability for 1999:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Per Common Share:
Ordinary income....................................... $0.84 $1.12 $1.07
Capital gains......................................... 0.35 -- --
Return of capital..................................... 0.11 0.12 --
----- ----- -----
Total............................................... $1.30 $1.24 $1.07
===== ===== =====
</TABLE>
The distribution level for 2000 was set at $1.34 per Common Share by the
Board in December 1999. Additionally, on December 16, 1999, ProLogis declared
a distribution of $0.335 per Common Share payable on February 23, 2000 to
shareholders of record as of February 9, 2000.
On May 3, 1999, ProLogis paid a common distribution to holders of Meridian
common stock as of March 19, 1999. This distribution, which was declared by
the Meridian Board of Directors prior to the closing of the Meridian Merger,
related to the first quarter of 1999 and aggregated $11.1 million. This
liability was assumed by ProLogis in connection with the Meridian Merger. See
Note 3.
In connection with the 1997 Merger discussed in Note 10, Security Capital
issued warrants to acquire 3,608,202 shares of Class B common stock of
Security Capital pro rata to holders of Common Shares (other than Security
Capital), Series B preferred shares and limited partnership units. Holders of
Common Shares and holders of limited partnership units received 0.046549
warrants for each Common Share or unit held and holders of Series B preferred
shares received 0.059676 warrants for each preferred share held. Each warrant
was exercisable into one share of Security Capital Class B common stock at an
exercise price of $28.00 per share. The warrants expired in September 1998.
Security Capital issued the warrants as an incentive to ProLogis' shareholders
to vote in favor of the 1997 Merger and to raise additional equity capital at
a relatively low cost, in addition to other benefits.
130
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Dividends
The annual dividends per preferred share are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999(1) 1998(2) 1997(2)
------- ------- -------
<S> <C> <C> <C>
Series A...................................... $2.35 $2.35 $2.35
Series B...................................... 1.75 1.75 1.75
Series C...................................... 4.27 4.27 4.27
Series D...................................... 1.98 1.42(3) --
Series E...................................... 1.64(4) -- --
</TABLE>
- --------
(1) For federal income tax purposes $1.65 of the Series A dividend, $1.23 of
the Series B dividend, $3.00 of the Series C dividend, $1.39 of the Series
D dividend and $1.15 of the Series E dividend are treated as ordinary
income to the holders. The remaining portion of each dividend represents
capital gains.
(2) For federal income tax purposes these dividends are treated as ordinary
income to the holders.
(3) For the period from date of issuance to December 31, 1998.
(4) For the period from date of issuance to December 31, 1999.
On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million on
the Series E preferred shares ($0.5469 per share), of which $729,200 related
to Meridian's series D preferred stock that was accrued by Meridian prior to
the closing of the Meridian Merger. See Note 3.
Pursuant to the terms of its preferred shares, ProLogis is restricted from
declaring or paying any distribution with respect to the Common Shares unless
all cumulative dividends with respect to the preferred shares have been paid
and sufficient funds have been set aside for dividends that have been declared
for the then-current dividend period with respect to the preferred shares.
ProLogis' tax return for the year ended December 31, 1999 has not been
filed. The taxability information for 1999 is based upon the best available
data. ProLogis' tax returns have not been examined by the Internal Revenue
Service. Consequently, the taxability of distributions and dividends is
subject to change.
10. 1997 Merger Transaction:
On September 8, 1997, ProLogis' shareholders approved an agreement with
Security Capital to exchange Security Capital's REIT management and property
management companies for 3,692,023 Common Shares (the "1997 Merger"). As a
result, ProLogis became an internally managed REIT on September 9, 1997 with
Security Capital remaining as ProLogis' largest shareholder. The $81.9 million
value of the management companies was approved by the independent members of
the Board and a fairness opinion was obtained from a third party financial
advisor. The number of Common Shares issued to Security Capital was based on
the average market price of the Common Shares ($22.175) over the five-day
period prior to the August 6, 1997 record date for determining the ProLogis
shareholders entitled to vote on the 1997 Merger. The market value of the
Common Shares issued to Security Capital on September 9, 1997 was $79.8
million, of which $4.4 million was allocated to the net tangible assets
acquired and the $75.4 million difference was accounted for as the cost
incurred in acquiring the management companies. Because the management
companies did not have significant operations other than the management of
ProLogis and ProLogis' assets, the transaction did not qualify as the
acquisition of a business for purposes of applying APB Opinion No. 16,
"Business Combinations". Consequently, the market value of the Common Shares
issued in excess of the fair value of the net tangible assets acquired was
charged to operating income rather than capitalized as goodwill.
131
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the 1997 Merger, ProLogis terminated the REIT management and
property management agreements that were in place while Security Capital owned
the management companies. All employees of the management companies became
employees of ProLogis and ProLogis directly incurs the personnel and other
costs related to these functions. The costs relating to property management
are recorded as rental expenses whereas the costs associated with managing the
corporate entity are recorded as general and administrative expenses.
11. Earnings Per Common Share:
A reconciliation of the denominator used to calculate basic earnings per
Common Share to the denominator used to calculate diluted earnings per Common
Share for the years indicated (in thousands, except per share amounts) is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings attributable to Common Shares.... $123,999 $ 62,231 $ 4,431
======== ======== ========
Weighted average Common Shares outstanding--
Basic........................................ 152,412 121,721 100,729
Incremental effect of common stock equivalents
and contingently issuable shares (see Note
8)........................................... 327 307 140
-------- -------- --------
Adjusted weighted average Common Shares
outstanding--Diluted......................... 152,739 122,028 100,869
======== ======== ========
Per share net earnings attributable to Common
Shares:
Basic....................................... $ 0.81 $ 0.51 $ 0.04
======== ======== ========
Diluted..................................... $ 0.81 $ 0.51 $ 0.04
======== ======== ========
</TABLE>
For the year ended December 31, 1999, basic and diluted per share net
earnings attributable to Common Shares before the cumulative effect of
accounting change were $0.82. The following convertible securities were not
included in the calculation of diluted net earnings per Common Share as the
effect, on an as-converted basis, was antidilutive (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Series B preferred shares............................. 9,221 10,055 10,319
===== ====== ======
Limited partnership units............................. 5,461 5,070 5,190
===== ====== ======
</TABLE>
12. Supplemental Cash Flow Information
Non-cash investing and financing activities for the years ended December
31, 1999, 1998 and 1997 are as follows:
. In connection with the Meridian Merger discussed in Note 3, ProLogis
issued approximately 37.2 million Common Shares and 2.0 million Series E
preferred shares, assumed approximately 1.1 million stock options and
assumed outstanding debt and liabilities of Meridian for an aggregate
purchase price of approximately $1.54 billion in exchange for the assets
of Meridian (including cash balances acquired of $49.0 million).
132
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. ProLogis disposed of properties to ProLogis California as discussed in
Note 5 and received $148.2 million of the proceeds in the form of an
equity interest.
. In connection with the formation of the ProLogis European Properties Fund
as discussed in Note 5, ProLogis received $23.4 million of the proceeds
from its disposition of facilities to the ProLogis European Properties
Fund in the form of an equity interest.
. Series B preferred shares aggregating $12.9 million, $11.6 million and
$1.2 million were converted into Common Shares in 1999, 1998 and 1997,
respectively.
. Limited partnership units aggregating $205,000, $302,000 and $1,588,000
were converted into Common Shares in 1999, 1998 and 1997, respectively.
. Net foreign currency translation adjustments of $9,788,000, $(86,000) and
$63,000 were recognized in 1999, 1998 and 1997, respectively.
. Mortgage notes in the amount of $39.8 million and $12.8 million were
assumed in connection with the acquisition of real estate in 1998 and
1997, respectively.
. Common Shares in the amount of $1.0 million were issued in connection of
the acquisition of real estate in 1997.
. In connection with the 1997 Merger discussed in Note 10, $79.8 million of
Common Shares were issued in exchange for $4.4 million of net tangible
assets in 1997.
. Employee share purchase notes in the amount of $27.3 million were
received for Common Shares issued under the employee share purchase plan
in 1997. See Note 13.
. Employee share purchase notes in the amount of $1.8 million and $0.1
million were retired in 1998 and 1997, respectively. See Note 13.
13. Long-Term Compensation
Long-Term Incentive Plan and Share Option Plan for Outside Trustees
ProLogis has a long-term incentive plan (the "Incentive Plan"), which
includes an employee share purchase plan, a stock option plan, a restricted
share unit plan and a performance share plan. No more than 9,410,000 Common
Shares in the aggregate may be awarded under the Incentive Plan and no
individual may be granted awards with respect to more than 500,000 Common
Shares in any one-year period. The Incentive Plan has a ten-year term.
Additionally, ProLogis has 100,000 Common Shares authorized for issuance under
its Share Option Plan for Outside Trustees (the "Outside Trustees Plan").
Employee Share Purchase Plan
Under the employee share purchase plan certain employees of ProLogis
purchased 1,356,834 Common Shares on September 8, 1997 at a price of $21.21875
per share. ProLogis financed 95% of the total purchase price through ten-year,
recourse notes to the participants aggregating $27.3 million. The loans, which
have been recognized as a deduction from shareholders' equity, bear interest
at the lower of ProLogis' annual dividend yield on Common Shares or 6% per
annum. The loans are secured by the Common Shares purchased. For each Common
Share purchased, participants were granted two options to purchase Common
Shares at a price of $21.21875. As of December 31, 1999, there were 1,154,349
Common Shares securing the employee share purchase notes.
The outstanding notes receivable at December 31, 1999 of $22,906,000
include $20,277,000 due from officers of ProLogis.
133
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
ProLogis has granted stock options under the Incentive Plan and the Outside
Trustees Plan. Stock options outstanding as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Expiration Remaining
Options Exercise Price(1) Date Life
--------- ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Outside Trustees Plan(2). 65,000 $ 16.00-$ 25.00 2000-2009 6.1 years
Employee stock purchase
plan(3)................. 2,244,586 $21.21875 2007 7.5 years
Stock option plan(2)(3):
1997 awards............ 285,321 $21.21875-$23.96875 2007 7.7 years
1998 awards............ 1,397,879 $ 20.9375-$ 24.625 2008 8.7 years
1999 awards............ 1,459,753 $17.1875-$ 19.71875 2009 9.7 years
Meridian options(4)...... 1,025,850 $ 15.125-$ 23.9375 2004 4.2 years
Options sold to
unconsolidated
entities(2)............. 984,819 $18.625-$24.5625 2008-2009 9.2 years
---------
Total................ 7,463,208
=========
</TABLE>
- --------
(1) Exercise price was equal to the average of the high and low market price
on the date of grant.
(2) The holders are awarded dividend equivalent units each year of the plan,
except for holders of 30,000 options issued under the Outside Trustees
Plan prior to 1999.
(3) Graded vesting at various rates over periods from one to ten years,
subject to certain conditions.
(4) Options are fully exercisable. Options issued to holders of Meridian
options are exercisable into 1.10 Common Shares plus $2.00. See Note 3.
134
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of the stock options issued under the
Incentive Plan to ProLogis' employees, issued under the Outside Trustees Plan
and sold to unconsolidated entities during 1999 was $2.99 per option
(excluding the value of the DEUs to be earned). The activity with respect to
ProLogis' stock option plans for the years ended December 31, 1999, 1998 and
1997 is presented below.
<TABLE>
<CAPTION>
Weighted
Average Number of
Number of Exercise Options
Options Price Exercisable
--------- -------- -----------
<S> <C> <C> <C>
Balance at December 31,
1996..................... 18,000 $16.56 18,000
Granted................. 3,097,012 21.24 710,473
Exercised............... -- -- --
Forfeited............... (11,721) 21.22 --
--------- ------ ---------
Balance at December 31,
1997..................... 3,103,291 21.21 728,473
Granted/Sold............ 2,011,392 21.17 504,513
Exercised............... -- -- --
Forfeited............... (251,473) 21.22 --
--------- ------ ---------
Balance at December 31,
1998..................... 4,863,210 21.19 1,232,986
Granted/Sold............ 2,066,133 20.41 --
Issued in Meridian
Merger (see Note 3).... 1,025,850 20.13 1,025,850
Exercised............... (4,000) 15.50 (4,000)
Forfeited............... (487,985) 21.02 --
--------- ------ ---------
Balance at December 31,
1999..................... 7,463,208 $20.37 2,254,836
========= ====== =========
</TABLE>
ProLogis did not recognize compensation expense in 1999, 1998 or 1997
related to stock options granted as the exercise price of all options granted
was equal to the average of the high and low market price on the date of
grant. Had compensation expense for these plans been determined using an
option valuation model as provided in SFAS No. 123, ProLogis net earnings
attributable to Common Shares and net earnings per Common Share would change
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Net earnings attributable to Common Shares:
As reported.................................... $123,999 $62,231 $4,431
Pro forma...................................... 121,767 60,805 4,016
Basic and diluted net earnings per Common Share:
As reported.................................... $ 0.81 $ 0.51 $ 0.04
Pro forma...................................... 0.80 0.50 0.04
</TABLE>
Since stock options vest over several years and additional grants are
likely to be made in future years, the pro forma compensation cost may not be
representative of that to be expected in future years.
The pro forma amounts above were calculated using the Black-Scholes model
and the following assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate............... 6.58% 4.74% 6.35%
Forecasted dividend yield............. 6.10% 7.36% 7.36%
Volatility............................ 23.01% 27.37% 19.20%
Weighted average option life.......... 6.25 years 6.75 years 6.75 years
</TABLE>
135
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividend Equivalent Units ("DEUs")
DEUs in the form of Common Shares are awarded at a rate of one Common Share
per DEU on December 31st of each year the stock options are outstanding and
are vested to the same extent the underlying stock options are vested. The
DEUs are valued on the award date based upon the market price of the Common
Shares on that date and ProLogis recognizes that value as compensation expense
over the underlying vesting period of the related stock options. As of
December 31, 1999, there were 171,677 DEUs outstanding. ProLogis recognized
compensation expense related to the DEUs of $103,000 and $5,000 in 1999 and
1998, respectively, net of amounts capitalized. ProLogis did not incur
compensation expense related to the DEUs in 1997 as the DEUs were awarded on
December 31, 1997.
Restricted Share Units
On October 15, 1998, the Board granted 377,500 restricted share units
("RSU") to twelve officers of ProLogis. The RSUs vest 25% per year beginning
December 31, 1999 through December 31, 2002 and earn DEUs in accordance with
the DEU awards under the Incentive Plan. The RSUs are valued on the award date
based upon the market price of Common Shares on that date and ProLogis
recognizes that value as compensation expense over the underlying vesting
period. The RSUs granted in 1998 were valued at $8.0 million, of which
ProLogis recognized $1.6 million and $0.3 million of compensation expense in
1999 and 1998, respectively, net of amounts capitalized.
Performance Share Plan
In September 1999, the Board approved a performance share plan whereby
certain employees can be awarded Common Shares if performance criteria is met.
Common Shares will be awarded on December 31, 2000 based upon the criteria set
for 2000, but will not vest to the employee until December 31, 2002.
401(k) Savings Plan and Trust
ProLogis has a 401(k) Savings Plan and Trust ("401(k) Plan"), that provides
for matching employer contributions in Common Shares of 50 cents for every
dollar contributed by an employee, up to 6% of the employees' annual
compensation (within the statutory compensation limit). The vesting of
contributed Common Shares is based on the employees' years of service, with
20% vesting each year of service, over a five-year period. Through December
31, 1999, no Common Shares have been issued under the 401(k) Plan as all
matching contributions have been made with Common Shares purchased in the
public market. A total of 190,000 Common Shares have been authorized for
issuance under the 401(k) Plan.
Nonqualified Savings Plan
Effective January 1, 1998, ProLogis established the Nonqualified Savings
Plan to provide benefits for a select group of management. The purpose of this
plan is to allow highly compensated employees the opportunity to defer the
receipt and income taxation of a certain portion of their compensation in
excess of the amount permitted under the 401(k) Plan. ProLogis will match the
lesser of (a) 50% of the sum of deferrals under both the 401(k) Plan and this
plan, and (b) 3% of total compensation up to certain levels. The matching
account will vest in the same manner as the 401(k) Plan.
Warrants
During 1998, warrants were exercised into 11,764 Common Shares at an
exercise price of $10.00. There were no outstanding warrants as of December
31, 1999.
136
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Selected Quarterly Financial Data (Unaudited):
Selected quarterly financial data (in thousands, except for per share
amounts) for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended,
-------------------------------------------------------
March 31, June 30, September 30, December 31, Total
--------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
1999:
Rental income.......... $97,161 $131,251 $135,503 $127,911 $491,826
======= ======== ======== ======== ========
Earnings from
operations............ $25,046 $ 33,290 $ 58,674 $ 49,539 $166,549
Minority interest
share in earnings..... 1,169 1,434 1,139 1,237 4,979
Gain on disposition of
real estate........... 715 -- 25,643 12,636 38,994
Foreign currency
exchange gains
(losses), net......... (8,283) (4,012) 5,830 (10,353) (16,818)
Income tax expense
(benefit)............. 374 585 534 (21) 1,472
------- -------- -------- -------- --------
Earnings before
cumulative effect in
accounting change..... 15,935 27,259 88,474 50,606 182,274
Cumulative effect of
accounting change..... 1,440 -- -- -- 1,440
------- -------- -------- -------- --------
Net earnings........... 14,495 27,259 88,474 50,606 180,834
Less preferred share
dividends............. 13,445 14,493 14,453 14,444 56,835
------- -------- -------- -------- --------
Net earnings
attributable to
Common Shares......... $ 1,050 $ 12,766 $ 74,021 $ 36,162 $123,999
======= ======== ======== ======== ========
Per Common Share:
Basic earnings
attributable to
Common Shares before
cumulative effect of
accounting change... $ 0.02 $ 0.08 $ 0.46 $ 0.22 $ 0.82
Cumulative effect of
accounting change... (0.01) -- -- -- (0.01)
------- -------- -------- -------- --------
Basic net earnings
attributable to
Common Shares....... $ 0.01 $ 0.08 $ 0.46 $ 0.22 0.81
------- -------- -------- -------- --------
Diluted earnings
attributable to
Common Shares before
cumulative effect of
accounting change... $ 0.02 $ 0.08 $ 0.44 $ 0.22 $ 0.82
Cumulative effect of
accounting change... (0.01) -- -- -- (0.01)
------- -------- -------- -------- --------
Diluted net earnings
attributable to
Common Shares....... $ 0.01 $ 0.08 $ 0.44 $ 0.22 $ 0.81
======= ======== ======== ======== ========
1998:
Rental income.......... $78,565 $ 84,353 $ 88,687 $ 93,441 $345,046
======= ======== ======== ======== ========
Earnings from
operations............ $34,041 $ 35,143 $ 3,132 $ 35,301 $107,617
Minority interest
share in earnings..... 979 1,075 1,047 1,580 4,681
Gain on disposition of
real estate........... 2,066 2,212 -- 1,287 5,565
Foreign currency
exchange gains
(losses), net......... 1,607 453 3,277 (345) 4,992
Income tax expense..... 190 7 2 1,965 2,164
------- -------- -------- -------- --------
Net earnings........... 36,545 36,726 5,360 32,698 111,329
Less preferred share
dividends............. 8,799 13,075 13,669 13,555 49,098
------- -------- -------- -------- --------
Net earnings (loss)
attributable to
Common Shares......... $27,746 $ 23,651 $ (8,309) $ 19,143 $ 62,231
======= ======== ======== ======== ========
Per Common Share:
Basic net earnings
(loss) attributable
to Common Shares.... $ 0.24 0.19 $ (0.07) $ 0.16 $ 0.51
======= ======== ======== ======== ========
Diluted net earnings
(loss) attributable
to Common Shares.... $ 0.23 $ 0.19 $ (0.07) $ 0.16 $ 0.51
======= ======== ======== ======== ========
</TABLE>
15. Related Party Transactions:
ProLogis leases space to Security Capital and certain of its affiliates on
market terms that management believes are no less favorable to ProLogis than
those that could be obtained with unaffiliated third parties.
ProLogis' rental income related to these leases were $756,000, $717,000 and
$1,528,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999, 109,804 square feet were leased to related parties.
The annualized rental revenues for these leases are $746,000.
137
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 8, 1997, ProLogis and Security Capital entered into an
administrative services agreement (the "ASA"). Under the ASA, Security Capital
provides ProLogis with certain administrative and other services as determined
by ProLogis (certain services originally provided under the ASA are now being
performed by ProLogis employees). ProLogis' fees under the ASA were $3.4
million, $3.7 million and $1.1 million for 1999, 1998 and for the period from
September 9, 1997 to December 31, 1997, respectively. Of these fees, $0.6
million, $0.7 million and $0.2 million were capitalized in 1999, 1998 and for
the period from September 9, 1997 to December 31, 1997, respectively. ProLogis
recognizes the ASA fees related to property management activities as a
component of rental expenses. The ASA expires on December 31, 2000.
During 1999, ProLogis paid investment advisory fees to Security Capital
Markets Group Incorporated, a registered broker-dealer subsidiary of Security
Capital, aggregating $15.6 million. The fees were incurred in connection with
the Meridian Merger ($1.54 billion purchase price -- see Note 3), the
formation of ProLogis California which generated $148.2 million of outside
equity capital to ProLogis (see Note 5) and the formation of the ProLogis
European Properties Fund (the currency equivalent as of December 31, 1999 of
over $1 billion of third party capital invested or committed -- see Note 5).
16. Financial Instruments:
Fair Value of Financial Instruments
The following estimates of the fair value of financial instruments have
been determined by ProLogis using available market information and valuation
methodologies believed to be appropriate for these purposes. Considerable
judgement and a high degree of subjectivity are involved in developing these
estimates and, accordingly, they are not necessarily indicative of amounts
ProLogis would realize upon disposition.
As of December 31, 1999 and 1998, the carrying amounts of certain financial
instruments employed by ProLogis, including cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses were representative
of their fair values because of the short-term maturity of these instruments.
Similarly, the carrying values of the lines of credit and short-term
borrowings balances approximate fair value as of those dates since the
interest rate fluctuates based on published market rates. As of December 31,
1999 and 1998, the fair values of the senior unsecured debt and the secured
debt (including mortgage notes, assessment bonds and securitized debt) have
been estimated based upon quoted market prices for the same or similar issues
or by discounting the future cash flows using rates currently available for
debt with similar terms and maturities. The differences in the fair value of
ProLogis' senior unsecured debt and secured debt from the carrying value in
the table below are the result of variances in the interest rates available to
ProLogis as of December 31, 1999 and 1998, from the interest rates in effect
at the dates of issuance. The senior unsecured debt and many of the secured
debt issues contain pre-payment penalties or yield maintenance provisions
which would make the cost of refinancing exceed the benefit of refinancing at
the lower rates.
As of December 31, 1999 and 1998, the fair value of ProLogis' derivative
financial instruments are the amounts at which they could be settled, based on
quoted market prices or estimates obtained from brokers or dealers.
138
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table reflects the carrying amount and estimated fair value
of ProLogis' financial instruments (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998
--------------------- ----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance sheet financial
instruments:
Senior unsecured debt....... $1,729,630 $1,656,445 $1,083,641 $1,108,692
Secured debt (fixed rate
debt)...................... $ 565,776 $ 547,428 $ 227,804 $ 232,809
Derivative financial
instruments:
Interest rate contracts..... $ -- $ -- $ (26,050) $ (26,050)
Foreign currency put option
contracts.................. $ 628 $ 628 $ -- $ --
Interest rate swap
agreements................. $ -- $ 7,998 $ -- $ --
</TABLE>
Derivative Financial Instruments
ProLogis uses derivative financial instruments as hedges to manage well-
defined risk associated with interest and foreign currency rate fluctuations
on existing or anticipated obligations and transactions. ProLogis does not use
derivative financial instruments for trading purposes.
The primary risks associated with derivative instruments are market risk
and credit risk. Market risk is defined as the potential for loss in the value
of the derivative due to adverse changes in market prices (interest rates or
foreign currency rates). The use of derivative financial instruments allows
ProLogis to manage the risks of increases in interest rates and fluctuations
in foreign currency exchange rates with respect to the effects these
fluctuations would have on ProLogis' income and cash flows.
Credit risk is the risk that one of the parties to a derivative contract
fails to perform or meet their financial obligation under the contract.
ProLogis does not obtain collateral to support financial instruments subject
to credit risk but monitors the credit standing of counterparties. ProLogis
does not anticipate non-performance by any of the counterparties to its
derivative contracts. Should a counterparty fail to perform, however, ProLogis
would incur a financial loss to the extent of the positive fair market value
of the derivative instruments, if any.
The following table summarizes the activity in derivative financial
instruments for the years ended December 31, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
Interest Foreign
Interest Rate Rate Swap Currency Put
Contracts Agreements Options (1)
------------- ---------- ------------
<S> <C> <C> <C>
Notional amounts as of December
31, 1997........................ $ 75.0(2) $ 75.0(2) $ --
New contracts.................... -- -- --
Matured or expired contracts..... -- -- --
Terminated contracts............. -- -- --
------ ------ -----
Notional amounts as of December
31, 1998........................ 75.0 $ 75.0 --
------ ------ -----
New contracts.................... -- 169.9(3) 27.1
Matured or expired contracts..... -- -- (3.9)
Terminated contracts............. (75.0) (75.0) --
------ ------ -----
Notional amounts as of December
31, 1999........................ $ -- $169.9 $23.2
====== ====== =====
</TABLE>
139
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------
(1) ProLogis entered into foreign currency put option contracts during 1999
related to its operations in Europe. The notional amount as of December
31, 1999 represents the U.S. dollar equivalent related to the put option
contracts with notional amounts of 23.0 million euros. The outstanding
contracts do not qualify for hedge accounting treatment and were marked to
market as of December 31, 1999. ProLogis recognized an aggregate expense
of $92,000 on the put option contracts including the mark to market
adjustment of $47,000. The put option contracts provide ProLogis with the
option to exchange euros for U.S. dollars at a fixed exchange rate such
that if the euro were to depreciate against the U.S. dollar to
predetermined levels as set by the contracts, ProLogis could exercise its
options and mitigate its foreign currency exchange losses.
(2) In October 1997, in anticipation of debt offerings in 1998, ProLogis
entered into two interest rate protection agreements which were renewed
past the original termination dates. These agreements were entered into by
ProLogis to fix the interest rate on anticipated financings.
During the third quarter of 1998, ProLogis determined that the interest
rate protection agreements would no longer qualify for hedge accounting
treatment under GAAP based upon the following:
. Due to changing conditions in the public debt markets, it was no longer
considered probable that ProLogis would complete the anticipated 1998
longer term debt offerings that prompted ProLogis to enter into these
interest rate protection agreements in 1997 (i.e., ProLogis would not be
exposed to the interest rate risk that these instruments were intended to
hedge); and
. ProLogis determined, through internal analysis and through communications
with independent third parties, that a high degree of correlation no
longer existed between changes in the market values of these interest
rate protection agreements and the "market values" of the anticipated
debt offerings (i.e., the interest rate at which the debt could be issued
by ProLogis under existing market conditions).
Accordingly, ProLogis began marking these agreements to market as of
September 30, 1998. For 1998, ProLogis recognized a non-cash expense of
$26.1 million. These agreements were terminated in February 1999 at a cost
of $27.0 million and were used to set the interest rate associated with the
$200.0 million secured financing transaction with MGT that was completed in
March 1999.
(3) ProLogis has interest rate swap agreements related to variable rate
mortgage notes and other unsecured debt in the currency equivalent of
approximately $169.9 million as of December 31, 1999. The swap agreements
have a combined notional amount of 1.1 billion French francs and fix the
Euribor rate at 3.62% through December 2003 on a notional amount in the
currency equivalent of approximately $30.9 million, at 3.60% through
January 2004 on a notional amount in the currency equivalent of
approximately $118.9 million and at 3.59% through January 2004 on a
notional amount in the currency equivalent of approximately $20.1 million.
In December 1999, a principal paydown was made on the underlying debt
resulting in a notional amount of the swap agreements in excess of the
principal balances. Consequently, swap agreements with a notional amount
in the currency equivalent of approximately $26.2 million were cancelled
in January 2000 at a gain to ProLogis in the currency equivalent of
approximately $1.4 million. ProLogis contributed 50.1% of the common stock
of the wholly owned entity that holds the debt related to the swap
agreements to the ProLogis European Properties Fund on January 7, 2000.
ProLogis is committed to contributing the remaining 49.9% of the common
stock to the ProLogis European Properties Fund in January 2001. See Note
5.
On December 22, 1997, ProLogis entered into two separate contracts to (i)
exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange 310.0
million German marks for $175.0 million in anticipation of the January 1998
acquisition and planned European currency denominated financing of
Frigoscandia AB by Frigoscandia S.A., ProLogis' unconsolidated entity. The
contracts were marked to market as of December 31, 1997 and ProLogis
recognized a net loss of $6.0 million in 1997. Both contracts were settled
during the first quarter of 1998 at a net loss of $4.0 million. Accordingly,
ProLogis recognized a net gain of $2.0 million in 1998. These foreign currency
exchange hedges were one-time, non-recurring contracts that fixed the exchange
rate between the U.S. dollar and the Swedish krona and German mark. ProLogis
executed these hedges after the
140
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
execution of the purchase agreement to acquire Frigoscandia AB, which required
payment in Swedish krona. The contracts were executed exclusively for the
acquisition and financing of Frigoscandia AB and were not entered into to
hedge on-going income in foreign currencies.
17. Commitments and Contingencies:
Environmental Matters
All of the facilities acquired by ProLogis have been subjected to
environmental reviews by ProLogis or predecessor owners. While some of these
assessments have led to further investigation and sampling, none of the
environmental assessments has revealed, nor is ProLogis aware of any
environmental liability (including asbestos related liability) that ProLogis
believes would have a material adverse effect on ProLogis' business, financial
condition or results of operations.
18. Business Segments:
ProLogis has three reportable business segments:
. Property operations represents the long-term ownership and leasing of
industrial distribution facilities in North America (a portion of which
is owned through ProLogis California--See Note 5) and Europe (a portion
of which is owned through Garonor Holdings, a subsidiary that was
recognized under the equity method of accounting until June 29, 1999 and
a portion of which is owned through the ProLogis European Properties
Fund--See Note 5); each operating facility is considered to be an
individual operating segment having similar economic characteristics
which are combined within the reportable segment based upon geographic
location;
. Corporate distribution facilities services business represents the
development of distribution facilities for future sale to third parties
or entities in which ProLogis has an ownership interest or on a fee basis
for third parties in North America and in Europe (a portion of which is
owned through Kingspark S.A.); the development activities of ProLogis and
Kingspark S.A. are considered to be individual operating segments having
similar economic characteristics which are combined within the reportable
segment based upon geographic location; and
. Temperature-controlled distribution operations represents the operation
of a temperature-controlled distribution and logistics network through
investments in unconsolidated entities in North America (ProLogis
Logistics and MRI) and Europe (Frigoscandia S.A.); each company's
operating facilities are considered to be individual operating segments
having similar economic characteristics which are combined within the
reportable segment based upon geographic location.
141
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reconciliations of the three reportable segments: (i) income from external
customers to ProLogis' total income; (ii) net operating income from external
customers to ProLogis' earnings from operations (ProLogis' chief operating
decision makers rely primarily on net operating income to make decisions about
allocating resources and assessing segment performance); and (iii) assets to
ProLogis' total assets are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income:
Property operations:
United States(1).......................... $457,592 $333,494 $283,909
Mexico.................................... 10,503 3,499 624
Europe(2)................................. 16,045 8,059 --
-------- -------- --------
Total property operations segment....... 484,140 345,052 284,533
-------- -------- --------
Corporate distribution facilities services
business:
United States............................. 28,783 17,441 12,374
Mexico.................................... -- 133 (83)
Europe(3)(4).............................. 41,673 2,915 --
-------- -------- --------
Total corporate distribution facilities
services business segment.............. 70,456 20,489 12,291
-------- -------- --------
Temperature-controlled distribution
operations:
North America(5).......................... 10,791 7,349 3,278
Europe(6)................................. (4,364) (7,535) --
-------- -------- --------
Total temperature-controlled
distribution operations segment........ 6,427 (186) 3,278
-------- -------- --------
Reconciling items:
Interest income........................... 6,369 2,752 2,392
-------- -------- --------
Total income............................ $567,392 $368,107 $302,494
======== ======== ========
Net operating income:
Property operations:
United States(1).......................... $424,633 $306,920 $256,953
Mexico.................................... 10,569 3,302 572
Europe(2)................................. 15,437 7,710 --
-------- -------- --------
Total property operations segment....... 450,639 317,932 257,525
-------- -------- --------
Corporate distribution facilities services
business:
United States............................. 28,783 17,441 12,374
Mexico.................................... -- 133 (83)
Europe(3)(4).............................. 41,673 2,915 --
-------- -------- --------
Total corporate distribution facilities
services business segment.............. 70,456 20,489 12,291
-------- -------- --------
Temperature-controlled distribution
operations:
North America(5).......................... 10,791 7,349 3,278
Europe(6)................................. (4,364) (7,535) --
-------- -------- --------
Total temperature-controlled
distribution operations segment........ 6,427 (186) 3,278
-------- -------- --------
</TABLE>
142
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Reconciling items:
Interest income..................... 6,369 2,752 2,392
General and administrative expense.. (38,284) (22,893) (6,770)
REIT management fee paid to
affiliate.......................... -- -- (17,791)
Depreciation and amortization....... (152,447) (100,590) (76,562)
Interest expense.................... (170,746) (77,650) (52,704)
Interest rate hedge expense......... (945) (26,050) --
Costs incurred in acquiring
management companies............... -- -- (75,376)
Other expenses...................... (4,920) (6,187) (3,891)
---------- ---------- ----------
Total reconciling items........... (360,973) (230,618) (230,702)
---------- ---------- ----------
Earnings from operations.......... $ 166,549 $ 107,617 $ 42,392
========== ========== ==========
Assets:
Property operations:
United States(7).................... $4,017,702 $3,073,248 $2,787,118
Mexico.............................. 154,701 74,494 27,828
Europe(7)........................... 387,362 309,639 --
---------- ---------- ----------
Total property operations segment. 4,559,765 3,457,381 2,814,946
---------- ---------- ----------
Corporate distribution facilities
services business:
United States....................... 212,530 149,521 86,415
Mexico.............................. 36,801 16,465 3,522
Europe(7)........................... 432,455 224,769 --
---------- ---------- ----------
Total corporate distribution
facilities services business
segment.......................... 681,786 390,755 89,937
---------- ---------- ----------
Temperature controlled distribution
operations:
North America(7).................... 192,607 151,021 85,639
Europe(7)........................... 214,008 221,566 --
---------- ---------- ----------
Total temperature controlled
distribution operations segment.. 406,615 372,587 85,639
---------- ---------- ----------
Reconciling items:
Cash................................ 69,338 63,140 25,009
Accounts and notes receivable....... 31,084 1,313 167
Other assets........................ 99,452 45,553 18,255
---------- ---------- ----------
Total reconciling items........... 199,874 110,006 43,431
---------- ---------- ----------
Total assets...................... $5,848,040 $4,330,729 $3,033,953
========== ========== ==========
</TABLE>
- --------
(1) Includes an amount recognized under the equity method related to ProLogis'
investment in ProLogis California in 1999 in addition to the operations of
ProLogis that are reported on a consolidated basis. See Note 5 for
summarized financial information of ProLogis California.
(2) Includes amounts recognized under the equity method related to ProLogis'
investments in Garonor Holdings in 1999 and 1998 (including a $13.0
million net foreign currency exchange loss in 1999) and in the ProLogis
European Properties Fund in 1999 (including a net foreign currency
exchange gain of $0.3 million), in
143
<PAGE>
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
addition to the operations of ProLogis that are reported on a consolidated
basis. See Note 5 for summarized financial information of the ProLogis
European Properties Fund and Note 2 for a discussion of Garonor Holdings.
(3) Includes amounts recognized under the equity method related to ProLogis'
investment in Kingspark S.A. in 1999 and 1998 (including $1.5 million and
$0.9 million of net foreign currency exchange losses in 1999 and 1998,
respectively. See Note 5 for summarized financial information of Kingspark
S.A.
(4) In 1999, includes $17.3 million of net gain recognized by ProLogis related
to the disposition of facilities to the ProLogis European Properties Fund.
Also, in 1999, includes $4.5 million of net gain recognized under the
equity method related to ProLogis Kingspark's disposition of facilities to
the ProLogis European Properties Fund.
(5) Represents amounts recognized under the equity method related to ProLogis'
investment in ProLogis Logistics in each year. See Note 5 for summarized
financial information of ProLogis Logistics.
(6) Represents amounts recognized under the equity method related to ProLogis'
investment in Frigoscandia S.A. in 1999 and 1998 (including $1.3 million
and $11.4 million of net foreign currency exchange losses in 1999 and
1998, respectively). See Note 5 for summarized financial information of
Frigoscandia S.A.
(7) Amounts include investments in unconsolidated entities accounted for under
the equity method. See footnotes (2), (3), (4) and (5) above. See also
Note 5 for summarized financial information of the unconsolidated entities
as of and for the year ended December 31, 1999.
144
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
ProLogis Trust:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of ProLogis Trust included in this Form 10-K, and
have issued our report thereon dated March 21, 2000. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
supplemental Schedule III--Real Estate and Accumulated Depreciation ("Schedule
III") is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
Schedule III has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen, LLP
Chicago, Illinois
March 21, 2000
145
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(In thousands)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Properties
Atlanta, Georgia
Atlanta Airport
Distribution
Center......... 6 $ 3,437 $ -- $ 14,658 $ 5,188 $ 12,907 $ 18,095 $(1,005) 1996,1997,1998
Atlanta NE at
Sugarloaf...... 4 2,453 -- 16,227 3,613 15,067 18,680 (249) 1999
Atlanta NE
Distribution
Center 8 (d) 5,582 3,047 24,237 6,276 26,590 32,866 (2,761) 1996,1997
Atlanta West
Distribution
Center......... 20 6,771 34,785 11,852 6,776 46,632 53,408 (7,194) 1994,1996
Carter-Pacific
Business
Center......... 3 556 3,151 744 556 3,895 4,451 (553) 1995
Cedars
Distribution
Center......... 2 2,915 16,516 157 2,915 16,673 19,588 (396) 1999
Cobb Place
Distribution
Center......... 2 1,579 -- 7,862 2,096 7,345 9,441 (128) 1999
International
Airport
Industrial
Center......... 9 (e) 2,939 14,146 5,056 2,972 19,169 22,141 (3,198) 1994,1995
LaGrange
Distribution
Center......... 1 174 986 128 174 1,114 1,288 (207) 1994
McLarinn
Distribution
Center......... 1 3,038 17,217 26 3,038 17,243 20,281 (408) 1999
Northeast
Industrial
Center......... 4 1,109 6,283 191 1,050 6,533 7,583 (862) 1996
Northmont
Industrial
Center......... 1 566 3,209 219 566 3,428 3,994 (608) 1994
Oakcliff
Industrial
Center......... 3 608 3,446 429 608 3,875 4,483 (614) 1995
Olympic
Industrial
Center......... 2 698 3,956 1,632 757 5,529 6,286 (746) 1996
Peachtree
Commerce
Business
Center......... 4 (e) 707 4,004 756 707 4,760 5,467 (889) 1994
Peachtree
Distribution
Center......... 1 302 1,709 48 302 1,757 2,059 (292) 1994
Piedmont Court
Distribution
Center......... 2 885 5,013 1,064 885 6,077 6,962 (526) 1997
Plaza Industrial
Center......... 1 66 372 86 66 458 524 (74) 1995
Pleasantdale
Industrial
Center......... 2 541 3,184 438 541 3,622 4,163 (611) 1995
Riverside
Distribution
Center......... 4 3,063 15,821 2,979 3,086 18,777 21,863 (378) 1997,1999
Sullivan 75
Distribution
Center 3 (f) 728 4,123 1,389 728 5,512 6,240 (902) 1994,1995
Tradeport
Distribution
Center......... 3 1,464 4,563 5,509 1,479 10,057 11,536 (1,398) 1994,1996
Weaver
Distribution
Center......... 2 935 5,182 618 935 5,800 6,735 (965) 1995
Westfork
Industrial
Center......... 10 2,483 14,115 918 2,483 15,033 17,516 (2,275) 1995
Zip Industrial
Center......... 4 533 3,023 9 485 3,080 3,565 -- 1996
Austin, Texas
Corridor Park
Corporate
Center......... 6 2,109 1,681 12,883 2,113 14,560 16,673 (1,877) 1995,1996
Montopolis
Distribution
Center......... 1 580 3,384 669 580 4,053 4,633 (853) 1994
Rutland
Distribution
Center......... 2 460 2,617 248 462 2,863 3,325 (577) 1993
Southpark
Corporate
Center......... 7 1,946 -- 15,051 1,946 15,051 16,997 (2,160) 1994,1995,1996
Walnut Creek
Corporate
Center......... 17 3,626 5,649 26,145 3,685 31,735 35,420 (3,182) 1994,1995,1996,1999
Birmingham,
Alabama
Oxmoor
Distribution
Center......... 4 2,398 13,591 902 2,398 14,493 16,891 (2,757) 1994
Perimeter
Distribution
Center......... 2 2,489 14,109 902 2,490 15,010 17,500 (2,823) 1994
Charlotte, North
Carolina
Barringer
Industrial
Center......... 3 308 1,746 516 308 2,262 2,570 (431) 1994
Bond
Distribution
Center......... 2 905 5,126 905 905 6,031 6,936 (1,149) 1994
</TABLE>
146
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Carowinds
Distribution
Center......... 1 $ 3,239 $ 18,353 $ -- $ 3,239 $ 18,353 $ 21,592 $ (434) 1999
Charlotte
Commerce
Center......... 10 (d) 4,341 24,954 2,565 4,342 27,518 31,860 (5,182) 1994
Charlotte
Distribution
Center......... 9 (d) 4,579 -- 24,218 6,096 22,701 28,797 (2,483) 1995,1996,1997,1998
Charlotte
Distribution
Center South... 1 309 -- 4,094 1,072 3,331 4,403 (80) 1999
Interstate North
Business Park.. 2 535 3,030 269 535 3,299 3,834 (315) 1997
Northpark
Distribution
Center 2 (d) 1,183 6,707 468 1,184 7,174 8,358 (673) 1994,1998
Chattanooga,
Tennessee
Stone Fort
Distribution
Center......... 4 2,063 11,688 245 2,063 11,933 13,996 (2,096) 1994
Tiftonia
Distribution
Center......... 1 146 829 184 146 1,013 1,159 (158) 1995
Chicago, Illinois
Addison
Distribution
Center......... 1 646 3,662 393 640 4,061 4,701 (457) 1997
Alsip
Distribution
Center......... 2 (f) 2,076 11,766 6,709 2,533 18,018 20,551 (1,079) 1998,1999
Bedford Park
Distribution
Center......... 2 1,115 6,318 11 1,115 6,329 7,444 (375) 1996,1999
Bensenville
Distribution
Center......... 2 1,668 9,448 2,846 1,667 12,295 13,962 (1,064) 1997,1998
Bloomingdale 100
Business
Center......... 1 940 -- 4,917 1,531 4,326 5,857 -- 1999
Bolingbrook
Distribution
Center......... 2 4,488 25,435 326 4,489 25,760 30,249 (642) 1999
Bridgeview
Distribution
Center......... 4 1,302 7,378 785 1,303 8,162 9,465 (976) 1996
Des Plaines
Distribution
Center......... 3 2,158 12,232 752 2,159 12,983 15,142 (1,657) 1995,1996
Elk Grove
Distribution
Center 20 (e)(f) 7,755 43,940 4,256 7,754 48,197 55,951 (3,708) 1995,1996,1997,
1998,1999
Elmhurst
Distribution
Center......... 1 713 4,043 94 713 4,137 4,850 (357) 1997
Glendale Heights
Distribution
Center......... 3 3,844 21,782 177 3,844 21,959 25,803 (556) 1999
Glenview
Distribution
Center......... 2 (e)(f) 1,140 6,459 611 1,138 7,072 8,210 (281) 1996,1999
Itasca
Distribution
Center......... 3 1,613 9,143 279 1,613 9,422 11,035 (637) 1996,1997,1998
Lombard
Distribution
Center......... 1 (f) 1,144 6,485 2 1,144 6,487 7,631 (154) 1999
Mitchell
Distribution
Center......... 1 (e) 1,236 7,004 1,045 1,236 8,049 9,285 (967) 1996
North Avenue
Distribution
Center......... 3 3,201 -- 19,994 3,948 19,247 23,195 (883) 1997,1998
Northlake
Distribution
Center......... 1 372 2,106 63 372 2,169 2,541 (267) 1996
O'Hare Cargo
Distribution
Center......... 2 3,566 -- 14,885 5,924 12,527 18,451 (416) 1997
Pleasant Prairie
Distribution
Center......... 1 1,274 7,222 -- 1,274 7,222 8,496 (171) 1999
Remington Lakes
Business Park.. 1 1,023 -- 6,914 1,193 6,744 7,937 -- 1998
Romeoville
Distribution
Center......... 2 1,080 6,120 -- 1,080 6,120 7,200 (153) 1999
South Holland
Distribution
Center......... 2 (f) 1,132 6,415 103 1,132 6,518 7,650 (154) 1999
Tri-Center
Distribution
Center......... 3 889 5,038 421 890 5,458 6,348 (603) 1996
Woodale
Distribution
Center......... 1 263 1,490 81 263 1,571 1,834 (140) 1997
</TABLE>
147
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cincinnati, Ohio
Airpark
Distribution
Center......... 5 (d) $ 2,986 $ -- $ 20,298 $ 3,719 $ 19,565 $ 23,284 $ (1,665) 1996,1998,1999
Blue
Ash/Interstate
Distribution
Center......... 1 144 817 520 144 1,337 1,481 (184) 1995
Capital
Distribution
Center I....... 4 (d) 1,750 9,922 1,205 1,751 11,126 12,877 (1,853) 1994
Capital
Distribution
Center II...... 5 (d) 1,953 11,067 1,789 1,953 12,856 14,809 (2,223) 1994
Capital
Industrial
Center I....... 10 (d) 1,039 5,885 1,720 1,039 7,605 8,644 (1,276) 1994,1995
Constitution
Distribution
Center......... 1 1,434 8,124 1 1,434 8,125 9,559 (192) 1999
Empire
Distribution
Center......... 3 (d) 529 2,995 495 529 3,490 4,019 (527) 1995
Kentucky Drive
Business
Center......... 4 553 3,134 823 553 3,957 4,510 (432) 1997
Princeton
Distribution
Center......... 1 816 -- 4,031 1,075 3,772 4,847 -- 1997
Production
Distribution
Center......... 2 (g) 717 2,717 2,406 785 5,055 5,840 (548) 1994,1998
Sharonville
Distribution
Center......... 3 (d) 1,761 -- 11,295 2,424 10,632 13,056 (524) 1997,1998
Springdale
Commerce
Center......... 3 421 2,384 1,025 421 3,409 3,830 (487) 1996
Union Center
Business Park.. 3 2,852 -- 36,686 3,438 36,100 39,538 (121) 1998,1999
Columbus, Ohio
Canal Pointe
Distribution
Center......... 1 1,619 9,174 -- 1,619 9,174 10,793 (217) 1999
Capital Park
South
Distribution
Center......... 5 (d) 2,551 -- 29,504 2,615 29,440 32,055 (2,796) 1996,1998,1999
Charter Street
Distribution
Center......... 1 (f) 1,770 10,027 -- 1,770 10,027 11,797 (237) 1999
Columbus West
Industrial
Center......... 3 (d) 645 3,655 881 645 4,536 5,181 (684) 1995
Corporate Park
West........... 2 (d) 679 3,849 271 679 4,120 4,799 (500) 1996
Crosswinds
Distribution
Center 1 (f) 4,046 22,929 -- 4,046 22,929 26,975 (543) 1999
Fisher
Distribution
Center......... 1 1,197 6,785 1,550 1,197 8,335 9,532 (1,308) 1995
Foreign Trade
Center I....... 6 11,820 66,979 275 11,853 67,221 79,074 (1,592) 1999
International
Street Commerce 2 455 -- 6,828 483 6,800 7,283 (117) 1997,1999
McCormick
Distribution
Center......... 5 1,664 9,429 1,329 1,664 10,758 12,422 (1,826) 1994
New World
Distribution
Center......... 1 207 1,173 681 207 1,854 2,061 (324) 1994
South Park
Distribution
Center......... 1 1,069 6,056 -- 1,069 6,056 7,125 (143) 1999
Westbelt
Business
Center......... 2 (d) 466 2,635 213 465 2,849 3,314 (160) 1998
Dallas/Fort
Worth, Texas
Carter
Industrial
Center......... 1 334 -- 2,497 334 2,497 2,831 (283) 1996
Centerport
Distribution
Center......... 2 (f) 1,901 10,775 6 1,901 10,781 12,682 (255) 1999
Dallas Corporate
Center......... 11 (e) 5,714 -- 33,568 6,012 33,270 39,282 (2,498) 1996,1997,1998,1999
Enterprise
Distribution
Center......... 3 2,719 15,410 -- 2,719 15,410 18,129 (365) 1999
Franklin
Distribution
Center......... 2 528 2,991 803 528 3,794 4,322 (743) 1994
Freeport
Distribution
Center......... 4 1,393 5,549 4,078 1,440 9,580 11,020 (708) 1996,1997,1998
Great Southwest
Corporate
Center......... 3 2,330 -- 11,001 2,401 10,930 13,331 (235) 1999
Great Southwest
Distribution
Center......... 32 (e)(f) 16,266 79,396 16,867 16,558 95,971 112,529 (4,821) 1994,1995,1996,
1997,1998,1999
</TABLE>
148
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Great Southwest
Industrial
Center I....... 2 (e) $ 308 $ 1,744 $ 267 $ 308 $ 2,011 $ 2,319 $ (279) 1995
Lone Star
Distribution
Center......... 2 967 5,477 243 967 5,720 6,687 (706) 1996
Metropolitan
Distribution
Center......... 1 201 1,097 723 297 1,724 2,021 (251) 1995
Northgate
Distribution
Center 10 (f) 4,398 24,924 1,376 4,398 26,300 30,698 (2,191) 1994,1996,1999
Northpark
Business
Center......... 2 467 2,648 282 467 2,930 3,397 (377) 1995,1996
Plano
Distribution
Center......... 7 (f) 3,787 21,462 1 3,787 21,463 25,250 (508) 1999
Redbird
Distribution
Center......... 2 1,022 5,796 96 1,023 5,891 6,914 (350) 1994,1999
Royal Commerce
Center......... 4 (c) 1,975 11,190 534 1,975 11,724 13,699 (950) 1997
Stemmons
Distribution
Center 1 272 1,544 467 272 2,011 2,283 (309) 1995
Stemmons
Industrial
Center......... 15 2,244 12,715 2,008 2,244 14,723 16,967 (1,745) 1994,1995,1996,1999
Trinity Mills
Distribution
Center......... 7 (e) 5,322 30,157 1,358 5,322 31,515 36,837 (1,894) 1996,1999
Valwood
Distribution
Center......... 7 (f) 4,248 24,071 26 4,248 24,097 28,345 (571) 1999
Denver, Colorado
Denver Business 7 2,144 7,486 13,798 2,243 21,185 23,428 (2,466) 1992,1994,1996,
Center......... 1998,1999
Downing
Distribution
Center......... 1 -- 3,877 48 -- 3,925 3,925 (50) 1999
Havana
Distribution
Center......... 1 401 2,281 302 401 2,583 2,984 (557) 1993
Moline
Distribution
Center......... 1 327 1,850 165 327 2,015 2,342 (397) 1994
Moncrieff
Distribution
Center......... 1 314 2,493 428 314 2,921 3,235 (678) 1992
Pagosa
Distribution
Center......... 1 406 2,322 412 406 2,734 3,140 (644) 1993
Peoria
Distribution
Center......... 2 1,363 -- 9,642 1,635 9,370 11,005 (234) 1999
Upland
Distribution
Center I....... 6 820 5,710 7,977 821 13,686 14,507 (2,749) 1992,1994,1995
Upland
Distribution
Center II...... 6 2,456 13,946 1,355 2,489 15,268 17,757 (3,174) 1993,1994
Detroit, Michigan
H & J Industrial
Center......... 4 510 2,890 6 510 2,896 3,406 (69) 1999
Huron Commerce
Center I....... 3 2,014 11,413 160 2,014 11,573 13,587 (270) 1999
Metro
Distribution
Center......... 4 671 3,801 573 671 4,374 5,045 -- 1996
Pontiac
Distribution
Center......... 1 441 2,497 -- 441 2,497 2,938 (59) 1999
Southfield
Commerce
Center......... 2 575 3,261 18 575 3,279 3,854 (78) 1999
Troy Tech II
Service Center. 5 1,142 6,474 9 1,142 6,483 7,625 (154) 1999
Westhills
Commerce Center
I.............. 2 454 2,575 54 454 2,629 3,083 (62) 1999
East Bay (San
Francisco),
California
Barrington
Business
Center......... 3 1,714 9,710 125 1,714 9,835 11,549 (233) 1999
Central Valley
Distribution
Center......... 3 5,082 28,801 2 5,082 28,803 33,885 (682) 1999
Central Valley
Industrial
Center......... 3 7,621 43,184 -- 7,621 43,184 50,805 (1,022) 1999
East Bay
Industrial
Center......... 1 531 3,009 359 531 3,368 3,899 (604) 1994
Eigenbrodt Way
Distribution
Center......... 1 (f) 393 2,228 114 393 2,342 2,735 (475) 1993
Hayward Commerce
Center......... 4 1,933 10,955 637 1,933 11,592 13,525 (2,314) 1993
Hayward Commerce
Park........... 9 2,764 15,661 1,990 2,764 17,651 20,415 (3,521) 1994
Hayward
Distribution
Center......... 6 2,906 19,165 1,435 3,327 20,179 23,506 (3,981) 1993
Hayward
Industrial
Center......... 13 (f) 4,481 25,393 1,896 4,481 27,289 31,770 (5,495) 1993
Patterson Pass
Business
Center......... 7 3,340 4,885 13,322 3,698 17,849 21,547 (1,794) 1993,1997,1998
San Leandro
Distribution
Center......... 3 1,387 7,862 468 1,387 8,330 9,717 (1,682) 1993
</TABLE>
149
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated
No. of Encum- Improve- To Improve- Total Depreciation
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c)
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
El Paso, Texas
Billy the Kid
Distribution
Center......... 1 $ 273 $ 1,547 $ 533 $ 273 $ 2,080 $ 2,353 $ (379)
Broadbent
Industrial
Center......... 3 676 5,183 996 676 6,179 6,855 (1,319)
Goodyear
Distribution
Center......... 1 511 2,899 66 511 2,965 3,476 (613)
Northwestern
Corporate
Center......... 6 1,552 -- 16,467 2,205 15,814 18,019 (2,048)
Vista Corporate
Center......... 4 1,945 -- 10,890 1,946 10,889 12,835 (1,563)
Vista Del Sol
Industrial
Center......... 5 (f) 1,245 -- 20,117 2,637 18,725 21,362 (1,822)
Fort
Lauderdale/Miami,
Florida
Airport West
Distribution
Center......... 2 1,253 3,825 3,244 1,974 6,348 8,322 (608)
CenterPort
Distribution
Center......... 4 3,300 12,989 3,564 3,515 16,338 19,853 (378)
Copans
Distribution
Center......... 2 504 2,857 296 504 3,153 3,657 (305)
North Andrews
Distribution
Center......... 1 (g) 698 3,956 97 698 4,053 4,751 (699)
Port Lauderdale
Distribution
Center......... 5 4,874 6,654 19,208 6,531 24,205 30,736 (1,881)
Houston, Texas
Brittmore
Distribution
Center......... 2 1,713 9,708 633 1,713 10,341 12,054 (253)
Crosstimbers
Distribution
Center......... 1 359 2,035 442 359 2,477 2,836 (471)
Hempstead
Distribution
Center......... 3 1,013 5,740 744 1,013 6,484 7,497 (1,250)
I-10 Central
Distribution
Center......... 2 181 1,023 239 181 1,262 1,443 (245)
I-10 Central
Service Center. 1 58 330 111 58 441 499 (90)
Jersey Village
Corporate
Center......... 1 1,536 -- 12,505 2,063 11,978 14,041 --
Perimeter
Distribution
Center......... 2 744 4,216 10 744 4,226 4,970 (100)
Pine Forest
Business Center 18 (e) 4,859 27,557 2,852 4,859 30,409 35,268 (4,936)
Pine North
Distribution
Center......... 2 789 4,469 230 789 4,699 5,488 (111)
Pine Timbers
Distribution
Center......... 2 2,570 14,566 915 2,570 15,481 18,051 (372)
Pinemont
Distribution
Center......... 2 590 3,342 216 590 3,558 4,148 (83)
Post Oak
Business Center 15 (e) 3,005 15,378 3,430 3,005 18,808 21,813 (3,779)
Post Oak
Distribution
Center 7 (e) 2,115 12,017 3,068 2,115 15,085 17,200 (3,092)
South Loop
Distribution
Center......... 5 1,051 5,964 1,724 1,052 7,687 8,739 (1,402)
Southwest
Freeway
Industrial
Center......... 1 84 476 166 84 642 726 (114)
West by
Northwest
Industrial
Center......... 18 4,749 8,382 40,308 5,135 48,304 53,439 (4,895)
White Street
Distribution
Center......... 1 469 2,656 288 469 2,944 3,413 (476)
World Houston... 1 425 -- 3,210 508 3,127 3,635 --
<CAPTION>
Date of
Construction/
Description Acquisition
- ----------- --------------------
<S> <C>
El Paso, Texas
Billy the Kid
Distribution
Center......... 1994
Broadbent
Industrial
Center......... 1993
Goodyear
Distribution
Center......... 1994
Northwestern
Corporate
Center......... 1992,1993,1994,
1997,1998
Vista Corporate
Center......... 1994,1995,1996
Vista Del Sol
Industrial
Center......... 1995,1997,1998
Fort
Lauderdale/Miami,
Florida
Airport West
Distribution
Center......... 1995,1998
CenterPort
Distribution
Center......... 1999
Copans
Distribution
Center......... 1997,1998
North Andrews
Distribution
Center......... 1994
Port Lauderdale
Distribution
Center......... 1995,1997,1998
Houston, Texas
Brittmore
Distribution
Center......... 1999
Crosstimbers
Distribution
Center......... 1994
Hempstead
Distribution
Center......... 1994
I-10 Central
Distribution
Center......... 1994
I-10 Central
Service Center. 1994
Jersey Village
Corporate
Center......... 1999
Perimeter
Distribution
Center......... 1999
Pine Forest
Business Center 1993,1994,1995
Pine North
Distribution
Center......... 1999
Pine Timbers
Distribution
Center......... 1999
Pinemont
Distribution
Center......... 1999
Post Oak
Business Center 1993,1994,1996
Post Oak
Distribution
Center 1993,1994
South Loop
Distribution
Center......... 1994
Southwest
Freeway
Industrial
Center......... 1994
West by
Northwest
Industrial
Center......... 1993,1994,1995,1996,
White Street
Distribution
Center......... 1995
World Houston... 1999
</TABLE>
150
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I-95 Corridor,
New Jersey
Amerisource
Distribution
Center......... 1 $ 1,406 $ 7,969 $ 1 $ 1,406 $ 7,970 $ 9,376 $ (189) 1999
Bellmawr
Distribution
Center......... 1 226 1,278 54 226 1,332 1,558 (32) 1999
Brunswick
Distribution
Center......... 2 870 4,928 1,515 870 6,443 7,313 (805) 1997
Clearview
Distribution
Center......... 1 2,232 12,648 375 2,232 13,023 15,255 (1,379) 1996
Cranbury
Business Park.. 3 4,015 -- 29,513 7,376 26,152 33,528 (947) 1998,1999
Kilmer
Distribution
Center 4 (d) 2,526 14,313 683 2,526 14,996 17,522 (1,675) 1996
Kraft
Distribution
Center......... 2 6,092 34,519 -- 6,092 34,519 40,611 (817) 1999
Meadowland
Industrial
Center......... 8 (d) 5,676 32,167 11,851 5,677 44,017 49,694 (4,641) 1996,1998
Mt. Laurel
Distribution
Center......... 3 877 4,968 18 877 4,986 5,863 (118) 1999
National
Distribution
Center......... 2 513 2,908 1,040 513 3,948 4,461 (278) 1998
Newark
Distribution
Center......... 1 260 1,472 2 260 1,474 1,734 (35) 1999
Pennsauken
Distribution
Center......... 4 522 2,957 4 522 2,961 3,483 (70) 1999
Indianapolis,
Indiana
Airport Business
Center......... 2 847 4,801 1,427 904 6,171 7,075 (140) 1999
Eastside
Distribution
Center......... 3 1,418 8,032 345 1,418 8,377 9,795 (542) 1995,1999
North by
Northeast
Distribution
Center......... 1 1,058 -- 6,135 1,059 6,134 7,193 (1,063) 1995
North Plainfield
Park
Distribution
Center......... 1 849 -- 7,370 1,330 6,889 8,219 (1) 1999
Park 100
Industrial
Center......... 25 10,733 60,828 5,438 10,628 66,371 76,999 (9,203) 1994,1995,1999
Park Fletcher
Distribution
Center......... 9 2,687 15,224 2,924 2,776 18,059 20,835 (2,425) 1994,1995,1996
Plainfield Park
Distribution
Center......... 1 885 -- 8,512 1,389 8,008 9,397 -- 1997
Shadeland
Industrial
Center......... 3 428 2,431 635 429 3,065 3,494 (478) 1995
Juarez, Mexico
Salvacar
Industrial
Center......... 4 1,685 -- 8,236 2,811 7,110 9,921 (358) 1998,1999
Los Aztecas
Industrial
Center......... 1 148 837 5 148 842 990 (3) 1999
Kansas City,
Kansas/Missouri
44th Street
Business
Center......... 1 143 813 383 143 1,196 1,339 (150) 1996
Congleton
Distribution
Center......... 3 518 2,937 419 518 3,356 3,874 (607) 1994
Executive Park
Distribution
Center......... 1 (f) 258 1,463 51 258 1,514 1,772 (72) 1998
Lamar
Distribution
Center......... 1 323 1,829 638 323 2,467 2,790 (483) 1994
Macon Bedford
Distribution
Center......... 1 304 1,725 473 304 2,198 2,502 (299) 1996
Platte Valley
Industrial
Center......... 11 (f) 3,867 20,017 6,886 4,002 26,768 30,770 (4,024) 1994,1997
Riverside
Distribution
Center......... 5 (f) 533 3,024 835 534 3,858 4,392 (715) 1994
Riverside
Industrial
Center......... 5 (f) 1,012 5,736 789 1,012 6,525 7,537 (1,099) 1994
Terrace &
Lackman
Distribution
Center......... 1 285 1,615 444 285 2,059 2,344 (392) 1994
Las Vegas, Nevada
Black Mountain
Distribution
Center......... 2 1,108 -- 6,892 1,206 6,794 8,000 (578) 1997
Cameron Business
Center 1 (f) 2,228 12,625 -- 2,228 12,625 14,853 (299) 1999
Hughes Airport
Center......... 1 876 -- 3,274 910 3,240 4,150 (614) 1994
Las Vegas
Corporate
Center......... 7 (h) 4,157 -- 21,729 4,763 21,123 25,886 (2,753) 1994,1995,1996,1997
</TABLE>
151
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Placid Street
Distribution
Center......... 1 (f) $ 2,579 $ 14,615 $ -- $ 2,579 $ 14,615 $ 17,194 $ (346) 1999
South Arville
Center......... 1 1,966 11,140 -- 1,966 11,140 13,106 (264) 1999
West One
Business
Center......... 4 (f) 2,468 13,985 787 2,468 14,772 17,240 (1,667) 1996
Lille, France
Lille Business
Park........... 1 90 510 123 108 615 723 (22) 1999
Lille
Distribution
Center......... 1 1,143 5,592 -- 1,143 5,592 6,735 (12) 1999
Los
Angeles/Orange
County,
California
Camarillo
Distribution
Center......... 1 926 5,246 4,371 1,491 9,052 10,543 (223) 1999
Chatsworth
Distribution
Center......... 1 241 1,364 1,312 438 2,479 2,917 (62) 1999
Inland Empire
Distribution
Center ........ 1 889 5,037 4,390 1,546 8,770 10,316 (220) 1999
Louisville,
Kentucky
Airpark Commerce
Center......... 4 1,583 8,971 2,851 1,583 11,822 13,405 (721) 1998,1999
Louisville
Distribution
Center......... 2 680 3,402 4,525 689 7,918 8,607 (703) 1995,1998
Riverport
Distribution
Center......... 2 (f) 2,262 10,682 5,073 2,378 15,639 18,017 (255) 1999
Lyon, France
L'Isle d'Abeau
Distribution
Center......... 1 (f) 1,240 6,617 -- 1,240 6,617 7,857 (462) 1997
Memphis,
Tennessee
Airport
Distribution
Center......... 20 7,066 40,041 6,211 7,066 46,252 53,318 (4,547) 1995,1996,1999
Delp
Distribution
Center......... 10 (f) 4,827 27,354 3,174 4,827 30,528 35,355 (2,811) 1995,1997,1999
Fred Jones
Distribution
Center......... 1 125 707 111 125 818 943 (144) 1994
Olive Branch
Distribution
Center......... 2 (f) 2,786 15,787 58 2,786 15,845 18,631 (377) 1999
Raines
Distribution
Center......... 1 (f) 1,635 9,264 2,868 1,635 12,132 13,767 (990) 1998
Southwide
Industrial
Center......... 4 696 3,943 75 696 4,018 4,714 (95) 1999
Willow Lake
Distribution
Center......... 1 (f) 604 3,425 -- 604 3,425 4,029 (81) 1999
Monterrey, Mexico
Monterrey
Industrial
Park........... 7 4,353 3,785 22,213 7,143 23,208 30,351 (1,061) 1997,1998,1999
Ojo de Agua
Industrial
Center......... 1 983 -- 6,731 1,880 5,834 7,714 (176) 1998
Nashville,
Tennessee
Bakertown
Distribution
Center......... 2 463 2,626 226 463 2,852 3,315 (397) 1995
I-40 Industrial
Center......... 4 1,687 9,564 371 1,688 9,934 11,622 (772) 1995,1996,1999
Interchange City
Distribution
Center......... 7 3,524 12,585 10,236 4,279 22,066 26,345 (2,161) 1994,1995,1996,
1997,1998
Nashville/I-24
Distribution
Center......... 1 380 -- 7,809 1,659 6,530 8,189 -- 1999
Space Park South
Distribution
Center......... 15 3,499 19,830 2,963 3,499 22,793 26,292 (4,024) 1994
Oklahoma City,
Oklahoma
Melcat
Distribution
Center......... 1 240 1,363 465 240 1,828 2,068 (323) 1994
Meridian
Business
Center......... 2 195 1,109 655 196 1,763 1,959 (306) 1994
Oklahoma
Distribution
Center......... 3 893 5,082 673 893 5,755 6,648 (1,251) 1993
Orlando, Florida
33rd Street
Industrial
Center......... 9 (f)(g) 1,980 11,237 1,128 1,980 12,365 14,345 (1,813) 1994,1995,1996
Chancellor
Distribution
Center......... 1 380 2,156 1,105 380 3,261 3,641 (486) 1994
Consulate
Distribution
Center......... 5 (f) 5,482 31,062 948 5,482 32,010 37,492 (756) 1999
La Quinta
Distribution
Center......... 1 354 2,006 661 354 2,667 3,021 (410) 1994
Orlando Central
Park........... 3 1,378 -- 9,084 1,871 8,591 10,462 (526) 1997,1998
Orlando
Corporate
Center......... 2 1,081 -- 6,525 1,477 6,129 7,606 (155) 1999
Princeton Oaks
Distribution
Center......... 1 (f) 1,223 6,930 -- 1,223 6,930 8,153 (164) 1999
Titusville
Industrial
Center......... 1 (f) 283 1,603 91 283 1,694 1,977 (289) 1994
</TABLE>
152
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Paris, France
Annecy
Distribution
Center......... 1 (f) $ 313 $ 1,052 $ 280 $ 377 $ 1,268 $ 1,645 $ (58) 1999
Aulnay
Distribution
Center......... 28 (f) 55,417 117,082 35,331 66,767 141,063 207,830 (4,402) 1999
Aulnay Office
Complex........ 9 (f) 2,174 4,485 1,364 2,619 5,404 8,023 (173) 1999
Aulnay-
Balladines..... 1 (f) 275 568 172 331 684 1,015 (22) 1999
Cergy-Pontoise.. 5 (f) 6,257 13,325 4,050 7,538 16,094 23,632 (573) 1999
Epone
Distribution
Center......... 1 457 1,586 1,397 463 2,977 3,440 (108) 1998
Longjumeau
Distribution
Center......... 1 (f) 1,160 6,592 -- 1,160 6,592 7,752 (363) 1998
Mitry Mory
Distribution
Center......... 1 (f) 1,083 6,137 379 1,134 6,465 7,599 (528) 1997
Oceanie
Distribution
Center......... 1 323 5,866 404 602 5,991 6,593 (234) 1998
Senart
Distribution
Center......... 3 (f) 4,233 8,885 2,687 5,100 10,705 15,805 (373) 1999
Vitrolles
Distribution
Center......... 3 (f) 1,949 4,197 1,259 2,348 5,057 7,405 (508) 1999
Phoenix, Arizona
24th Street
Industrial
Center......... 2 503 2,852 396 503 3,248 3,751 (653) 1994
Alameda
Distribution
Center......... 2 820 4,977 795 820 5,772 6,592 (875) 1992,1998
Black Canyon
Business
Center......... 3 704 3,990 11 704 4,001 4,705 (95) 1999
Brookridge
Distribution
Center......... 1 1,592 9,022 -- 1,592 9,022 10,614 (214) 1999
Hohokam 10
Industrial
Center......... 6 4,237 7,348 11,371 4,237 18,719 22,956 (1,739) 1996,1999
I-10 West
Business
Center......... 3 263 1,525 262 263 1,787 2,050 (381) 1993
Kyrene Commons
Distribution
Center......... 4 2,361 8,294 2,697 2,385 10,967 13,352 (914) 1992,1998,1999
Kyrene Commons
South
Distribution
Center......... 2 1,096 -- 5,035 1,163 4,968 6,131 (222) 1998
Martin Van Buren
Distribution
Center......... 6 572 3,285 728 572 4,013 4,585 (766) 1993,1994
Papago
Distribution
Center......... 1 420 2,383 165 420 2,548 2,968 (483) 1994
Pima
Distribution
Center......... 1 306 1,742 239 306 1,981 2,287 (405) 1993
Watkins
Distribution
Center......... 1 242 1,375 214 243 1,588 1,831 (267) 1995
Portland, Oregon
Argyle
Distribution
Center......... 3 946 5,388 567 946 5,955 6,901 (1,210) 1993
Columbia
Distribution
Center......... 2 550 3,121 256 551 3,376 3,927 (581) 1994
Jennifer
Distribution
Center......... 2 1,712 -- 7,426 2,289 6,849 9,138 (350) 1998,1999
PDX Corporate
Center East.... 6 (h) 3,288 -- 20,348 4,470 19,166 23,636 (1,187) 1997,1998,1999
PDX Corporate
Center North... 7 (h) 2,405 -- 10,653 2,542 10,516 13,058 (1,554) 1995,1996
Wilsonville
Corporate
Center......... 6 (h) 2,963 -- 11,712 2,964 11,711 14,675 (1,731) 1995,1996
Reno, Nevada
Golden Valley
Distribution
Center......... 2 560 -- 10,067 2,035 8,592 10,627 (837) 1996,1998
Meredith Kleppe
Business
Center......... 5 1,573 8,949 1,299 1,573 10,248 11,821 (2,084) 1993
Pacific
Industrial
Center......... 4 2,501 -- 10,630 2,501 10,630 13,131 (1,598) 1994,1995
Packer Way
Business
Center......... 3 458 2,604 685 458 3,289 3,747 (666) 1993
Packer Way
Distribution
Center......... 2 506 2,879 474 506 3,353 3,859 (709) 1993
Spice Island
Distribution
Center......... 1 435 2,466 1,112 435 3,578 4,013 (379) 1996
Reynosa, Mexico
Colonial
Industrial
Center......... 1 278 1,574 3 278 1,577 1,855 (7) 1999
Del Norte
Industrial
Center......... 2 809 -- 6,253 1,065 5,997 7,062 (176) 1998
Reynosa
Industrial
Center......... 6 2,035 1,038 13,390 2,070 14,393 16,463 (576) 1997,1998,1999
Rio Grande
Valley, Texas
Rio Grande
Distribution
Center......... 5 (f) 527 2,987 755 527 3,742 4,269 (573) 1995
Rio Grande
Industrial
Center......... 8 (f) 2,188 12,399 1,890 2,188 14,289 16,477 (2,248) 1995
Valley
Industrial
Center......... 1 230 -- 3,739 363 3,606 3,969 (237) 1997
Rotterdam,
Netherlands
DistriPark
Maasvlakte..... 1 -- -- 8,684 -- 8,684 8,684 -- 1999
Eamhaven
Industrial
Park........... 1 -- 6,149 594 -- 6,743 6,743 (75) 1997
</TABLE>
153
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salt Lake City,
Utah
Centennial
Distribution
Center......... 2 $ 1,149 $ -- $ 8,216 $ 1,149 $ 8,216 $ 9,365 $(1,127) 1995
Clearfield
Distribution
Center......... 2 2,500 14,165 646 2,481 14,830 17,311 (2,051) 1995
Crossroads
Corporate
Center......... 2 1,260 -- 9,055 1,392 8,923 10,315 -- 1998,1999
Salt Lake
International
Distribution
Center......... 3 1,892 2,792 11,334 1,973 14,045 16,018 (1,462) 1994,1996,1999
San Antonio,
Texas
10711
Distribution
Center......... 2 582 3,301 518 582 3,819 4,401 (787) 1994
Coliseum
Distribution
Center......... 2 1,102 2,380 10,378 1,613 12,247 13,860 (2,142) 1994,1995
Distribution
Drive Center... 1 473 2,680 634 473 3,314 3,787 (795) 1992
Downtown
Distribution
Center......... 1 241 1,364 244 241 1,608 1,849 (334) 1994
I-10 Central
Distribution
Center......... 1 223 1,275 216 240 1,474 1,714 (377) 1992
I-35 Business
Center......... 4 663 3,773 837 663 4,610 5,273 (996) 1993
Landmark One
Distribution
Center......... 1 341 1,933 389 341 2,322 2,663 (409) 1994
Macro
Distribution
Center......... 1 225 1,282 227 225 1,509 1,734 (354) 1993
Perrin Creek
Corporate
Center......... 6 1,547 -- 9,879 1,634 9,792 11,426 (1,130) 1995,1996
San Antonio
Distribution
Center I.. 13 2,154 12,247 3,077 2,154 15,324 17,478 (3,743) 1992,1993,1994
San Antonio
Distribution
Center II...... 3 945 -- 5,769 885 5,829 6,714 (1,099) 1994
San Antonio
Distribution
Center III..... 8 2,539 9,684 7,307 2,720 16,810 19,530 (1,662) 1996,1998,1999
Tri-County
Distribution
Center......... 1 496 -- 5,838 680 5,654 6,334 -- 1997
Woodlake
Distribution
Center......... 2 248 1,405 122 248 1,527 1,775 (292) 1994
Seattle,
Washington
Andover East
Business
Center......... 2 535 3,033 255 535 3,288 3,823 (594) 1994
Fife Corporate
Center......... 3 4,059 -- 10,274 4,209 10,124 14,333 (1,075) 1996
Kent Corporate
Center......... 2 (h) 2,882 1,987 8,502 3,216 10,155 13,371 (1,696) 1995
Park at
Woodinville A.. 5 (f) 1,905 10,797 195 1,905 10,992 12,897 (257) 1999
Van Doren's
Distribution
Center......... 3 (h) 3,663 -- 12,823 4,108 12,378 16,486 (997) 1995,1997,1999
South Bay (San Francisco), California
Bayside Business
Center......... 2 (h) 2,088 -- 4,446 2,088 4,446 6,534 (566) 1996
Bayside
Corporate
Center......... 7 (h) 4,365 -- 15,729 4,365 15,729 20,094 (2,862) 1995,1996
Bayside Plaza I. 12 (h) 5,212 18,008 875 5,216 18,879 24,095 (3,815) 1993
Bayside Plaza
II............. 2 (h) 634 -- 2,826 634 2,826 3,460 (824) 1994
Gateway
Corporate
Center......... 11 (f)(h) 7,575 24,746 4,438 7,575 29,184 36,759 (6,159) 1993,1996
Mowry Business
Center......... 4 5,933 -- 18,163 7,815 16,281 24,096 (919) 1997,1998
North First
Distribution
Center......... 1 1,171 6,638 38 1,171 6,676 7,847 (159) 1999
Overlook
Distribution
Center......... 1 1,552 8,794 -- 1,552 8,794 10,346 (208) 1999
Shoreline
Business
Center......... 8 (h) 4,328 16,101 489 4,328 16,590 20,918 (3,369) 1993
Shoreline
Business Center
II............. 2 (h) 922 -- 4,643 922 4,643 5,565 (1,046) 1995
Spinnaker
Business
Center......... 12 (h) 7,043 25,220 1,282 7,043 26,502 33,545 (5,415) 1993
Thornton
Business
Center......... 5 (f) 3,988 11,706 6,278 3,989 17,983 21,972 (3,062) 1993,1996
Trimble
Distribution
Center......... 5 2,836 16,067 1,082 2,836 17,149 19,985 (3,386) 1994
St. Louis, Missouri
Earth City
Industrial
Center......... 10 (f) 5,750 19,144 11,801 5,886 30,809 36,695 (1,917) 1997,1998,1999
Hazelwood
Distribution
Center......... 2 (f) 830 4,707 82 831 4,788 5,619 (192) 1997,1999
Westport
Distribution
Center......... 3 (f) 761 4,310 247 761 4,557 5,318 (359) 1997
Tampa, Florida
Adamo
Distribution
Center......... 1 105 595 334 105 929 1,034 (104) 1995
Clearwater
Distribution
Center......... 2 (g) 92 524 88 92 612 704 (106) 1994
Commerce Park
Distribution
Center......... 4 811 4,597 708 811 5,305 6,116 (880) 1994
Eastwood
Distribution
Center......... 1 (g) 122 690 95 122 785 907 (139) 1994
Joe's Creek
Distribution
Center......... 2 (g) 161 909 134 160 1,044 1,204 (188) 1994
</TABLE>
154
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lakeland
Distribution
Center........... 1 $ 938 $ 5,313 $ 578 $ 938 $ 5,891 $ 6,829 $ (1,084) 1994
Orchid Lake
Industrial
Center........... 1 41 235 12 41 247 288 (43) 1994
Plant City
Distribution
Center........... 1 (g) 206 1,169 125 206 1,294 1,500 (215) 1994
Sabal Park
Distribution
Center........... 7 (d) 2,449 6,224 11,308 2,678 17,303 19,981 (1,068) 1996,1997,1998
Silo Bend
Distribution
Center........... 4 (g) 2,887 16,358 976 2,887 17,334 20,221 (2,869) 1994
Silo Bend
Industrial
Center........... 1 (g) 525 2,975 363 525 3,338 3,863 (569) 1994
St. Petersburg
Service Center... 1 35 197 22 35 219 254 (37) 1994
Tampa East
Distribution
Center........... 11 (g) 2,700 15,302 2,463 2,700 17,765 20,465 (3,004) 1994
Tampa East
Industrial
Center........... 2 (g) 332 1,880 329 332 2,209 2,541 (362) 1994
Tampa West
Distribution
Center........... 15 (f)(g) 3,273 18,659 2,480 3,319 21,093 24,412 (3,570) 1994,1995
Tampa West
Industrial
Center........... 4 (g) 437 471 5,647 717 5,838 6,555 (583) 1994,1996,1998
Tampa West Service
Center........... 3 (g) 613 3,472 312 613 3,784 4,397 (635) 1994
Tijuana, Mexico
Tijuana Industrial
Center........... 2 2,389 -- 6,784 3,121 6,052 9,173 (179) 1999
Tulsa, Oklahoma
52nd Street
Distribution
Center........... 1 340 1,924 207 340 2,131 2,471 (393) 1994
70th East
Distribution
Center........... 1 129 733 316 129 1,049 1,178 (167) 1994
Expressway
Distribution
Center........... 4 573 3,280 736 573 4,016 4,589 (910) 1993
Henshaw
Distribution
Center........... 3 500 2,829 187 499 3,017 3,516 (538) 1994
Warsaw, Poland
Blonie Industrial
Park............. 1 1,378 -- 7,602 1,450 7,530 8,980 -- 1999
Warsaw Industrial
Center........... 4 2,668 24,586 3,192 824 29,622 30,446 (1,549) 1998
Washington, D.C./Baltimore, Maryland
Airport Commons
Distribution
Center........... 2 (d) 2.320 -- 9,244 2,360 9,204 11,564 (906) 1997
Ardmore
Distribution
Center........... 3 1,431 8,110 649 1,431 8,759 10,190 (1,460) 1994
Ardmore Industrial
Center........... 2 984 5,581 784 985 6,364 7,349 (1,032) 1994
Concorde
Industrial
Center........... 4 (d) 1,538 8,717 920 1,538 9,637 11,175 (1,469) 1995
De Soto Business
Park............. 5 1,774 10,055 3,648 1,774 13,703 15,477 (2,005) 1996
Eisenhower
Industrial
Center........... 3 (d) 1,240 7,025 1,535 1,240 8,560 9,800 (1,485) 1994
Fleet Distribution
Center........... 8 (d) 3,198 18,121 1,345 3,198 19,466 22,664 (2,625) 1996
Gateway
Distribution
Center........... 3 774 -- 7,293 1,410 6,657 8,067 (277) 1998
Hampton Central
Distribution
Center........... 3 3,067 -- 16,804 4,619 15,252 19,871 (930) 1996,1997,1999
Meadowridge
Distribution
Center........... 1 (d) 1,757 -- 5,675 1,897 5,535 7,432 (303) 1998
Patapsco
Distribution
Center........... 1 270 1,528 1,074 270 2,602 2,872 (373) 1995
Sunnyside
Industrial
Center........... 3 1,541 8,733 1,360 1,541 10,093 11,634 (1,724) 1994
Other.............. 3 (g) 994 5,664 8 994 5,672 6,666 (383) 1994,1999
----- --------- ---------- ---------- -------- ---------- ---------- ---------
Total Operating
Properties..... 1,328 $ 676,530 $2,577,782 $1,346,024 $736,604 $3,863,732 $4,600,336 $(366,703)
----- --------- ---------- ---------- -------- ---------- ---------- ---------
Facilities Under
Development
Amsterdam,
Netherlands
Schiphol
Distribution
Center........... 3,269 -- 1,765 5,034 -- 5,034 -- 1998
Atlanta, Georgia
Atlanta NE at
Sugarloaf........ 203 -- 1,424 1,627 -- 1,627 -- 1998
Charlotte, North
Carolina
Charlotte
Distribution
Center........... 895 -- 3,545 4,440 -- 4,440 -- 1996
Cincinnati, Ohio
Union Center
Commerce Park.... 681 -- 3,677 4,358 -- 4,358 -- 1997
</TABLE>
155
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cologne, Germany
Cologne Eifeltor
Distribution
Center......... $ 2,443 $ -- $ 648 $ 3,091 $ -- $ 3,091 $-- 1998
Columbus, Ohio
Capital Park
South
Distribution
Center......... 2,203 -- 3,251 5,454 -- 5,454 -- 1996
Dallas/Fort
Worth, Texas
Arlington
Corporate
Center......... 1,906 639 2,545 2,545 1999
Freeport
Corporate
Center......... 2,173 -- 1,569 3,742 -- 3,742 -- 1997
Denver, Colorado
Upland
Distribution
Center......... 1,128 -- 3,182 4,310 -- 4,310 -- 1994
East Bay (San
Francisco),
California
Patterson Pass
Business
Center......... 1,277 -- 3,645 4,922 -- 4,922 -- 1999
El Paso, Texas
Northwestern
Corporate
Center......... 84 -- 327 411 -- 411 -- 1991
Vista Del Sol
Industrial
Center III..... 1,365 -- 2,288 3,653 -- 3,653 -- 1999
Fort
Lauderdale/Miami,
Florida
Port Lauderdale
Distribution
Center......... 2,509 -- 5,004 7,513 -- 7,513 -- 1998
I-95 Corridor,
New Jersey
Cranbury
Business Park.. 1,496 -- 10,465 11,961 -- 11,961 -- 1997
Meadowland
Industrial
Center......... 1,600 -- 6,772 8,372 -- 8,372 -- 1997
Juarez, Mexico
Salvacar
Industrial
Center......... 490 -- 1,588 2,078 -- 2,078 -- 1997
Las Vegas, Nevada
Las Vegas
Corporate
Center......... 1,053 -- 908 1,961 -- 1,961 -- 1995
Los
Angeles/Orange
County,
California
Milliken
Distribution
Center......... 5,963 -- 1,771 7,734 -- 7,734 -- 1998
Louisville,
Kentucky
Airpark Commerce
Center......... 700 -- 4,359 5,059 -- 5,059 -- 1998
Riverport
Distribution
Center......... 842 -- 8,701 9,543 -- 9,543 -- 1998
Lyon, France
Isle d'Abeau
Distribution
Center......... 739 -- 7,433 8,172 -- 8,172 -- 1998
Memphis,
Tennessee
Memphis
Industrial
Park........... 655 -- 1,141 1,796 -- 1,796 -- 1997
Monterrey, Mexico
Monterrey
Industrial
Park........... 867 -- 2,689 3,556 -- 3,556 -- 1998
Nashville,
Tennessee
Nashville/I-24
Distribution
Center......... 396 -- 5,643 6,039 -- 6,039 -- 1996
Paris, France
Aulnay
Distribution
Center......... 4,474 -- 6,647 11,121 -- 11,121 -- 1999
Senart
Distribution
Center......... 1,515 -- 190 1,705 -- 1,705 -- 1999
Reno, Nevada
Damonte Ranch
Distribution
Center......... 4,579 -- 17,036 21,615 -- 21,615 -- 1998
Reynosa, Mexico
Colonial
Industrial
Center......... 666 -- 42 708 -- 708 -- 1999
Del Norte
Industrial
Center II...... 675 -- 567 1,242 -- 1,242 -- 1998
Reynosa
Industrial
Center III..... 401 -- 2,588 2,989 -- 2,989 -- 1998
</TABLE>
156
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rotterdam,
Netherlands
Moerdijk
Distribution
Center........... $ 1,469 -- $ 674 $ 2,143 $ -- $ 2,143 $-- 1998
Salt Lake City,
Utah
Crossroads
Corporate Center. 642 -- 2,546 3,188 -- 3,188 -- 1996
San Antonio, Texas
Tri-County
Distribution
Center........... 672 -- 3,486 4,158 -- 4,158 -- 1999
Tampa, Florida
Sabal Park
Distribution
Center........... 728 -- 783 1,511 -- 1,511 -- 1997
Tijuana, Mexico
Tijuana Industrial
Center........... 3,216 -- 2,058 5,274 -- 5,274 -- 1998
Warsaw, Poland
Teresin
Distribution
Center........... 4,086 -- -- 4,086 -- 4,086 -- 1999
Washington
D.C./Baltimore,
Maryland
Meadowridge
Distribution
Center........... 2,995 -- 6,063 9,058 -- 9,058 -- 1996
--------- ---------- ---------- -------- ---------- ---------- ----
Total Facilities
Under
Development.... 61,055 -- 125,114 186,169 -- 186,169 --
--------- ---------- ---------- -------- ---------- ---------- ----
Land Held for
Development
Amsterdam,
Netherlands
Tilburg
Distribution
Center........... 3,000 517 3,517 3,517 -- 1999
Atlanta, Georgia
Atlanta NE at
Sugarloaf........ 90 -- 37 127 -- 127 -- 1998
Atlanta West
Distribution
Center........... 713 -- 39 752 -- 752 -- 1994
Breckenridge
Distribution
Center........... 5,378 -- 9 5,387 -- 5,387 -- 1997,1998
Riverside
Distribution
Center........... 1,107 -- 96 1,203 -- 1,203 -- 1996
Austin, Texas
Corridor Park
Corporate Center. 1,289 -- 89 1,378 -- 1,378 -- 1994
Southpark
Corporate Center. 525 -- 63 588 -- 588 -- 1996
Walnut Creek
Corporate Center. 135 -- 40 175 -- 175 -- 1994,1996
Charlotte, North
Carolina
Charlotte
Distribution
Center South..... 666 -- 1,429 2,095 -- 2,095 -- 1997
Interstate North
Business Park.... 343 -- 8 351 -- 351 -- 1997
Chicago, Illinois
Bloomingdale 100
Business Center.. 4,857 -- 2,879 7,736 -- 7,736 -- 1997
Bolingbrook
Distribution
Center........... 4,621 -- 95 4,716 -- 4,716 -- 1999
O'Hare Cargo
Distribution
Center........... 8,949 -- 4,615 13,564 -- 13,564 -- 1996,1997
Remington Lakes
Business Park.... 3,236 -- 304 3,540 -- 3,540 -- 1997
Cincinnati, Ohio
Airpark
International
Distribution
Center........... 1,771 -- 461 2,232 -- 2,232 -- 1999
Union Center
Commerce Park.... 1,595 -- 348 1,943 -- 1,943 -- 1997
Columbus, Ohio
Capital Park South
Distribution
Center........... 2,735 -- 28 2,763 -- 2,763 -- 1994,1995,1996,
1997,1998,1999
International
Street Commerce
Center........... 101 -- 8 109 -- 109 -- 1996
</TABLE>
157
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dallas/Fort
Worth, Texas
Freeport
Corporate
Center......... $ 1,705 $ -- $ 10 $ 1,715 $ -- $ 1,715 $-- 1999
Great Southwest
Industrial
Center I....... 492 -- 52 544 -- 544 -- 1996
Plano
Distribution
Center......... 1,165 -- -- 1,165 -- 1,165 -- 1999
Royal Lane
Distribution
Center......... 1,010 -- -- 1,010 -- 1,010 -- 1997
Denver, Colorado
Denver Business
Center Land.... 856 -- -- 856 -- 856 -- 1998
Upland
Distribution
Center I....... 519 -- 31 550 -- 550 -- 1994,1997
Detroit, Michigan
Huron Commerce
Center I....... 2,801 -- 17 2,818 -- 2,818 -- 1999
East Bay (San
Francisco),
California
Patterson Pass
Business
Center......... 5,079 -- -- 5,079 -- 5,079 -- 1999
El Paso, Texas
Northwestern
Corporate
Center......... 2,545 -- 1,170 3,715 -- 3,715 -- 1991,1992
Vista Corporate
Center......... 351 -- 123 474 -- 474 -- 1993
Vista Del Sol
Industrial
Center......... 1,727 -- 273 2,000 -- 2,000 -- 1994,1996
Vista Del Sol
Industrial
Center III..... 306 -- -- 306 -- 306 -- 1999
Fort
Lauderdale/Miami,
Florida
Center Port
Land........... 1,006 -- 214 1,220 -- 1,220 -- 1998
Houston, Texas
Jersey Village
Corporate
Center......... 3,217 -- 1,045 4,262 -- 4,262 -- 1997
West by
Northwest
Industrial
Center......... 812 -- 216 1,028 -- 1,028 -- 1993
I-95 Corridor,
New Jersey
Cranbury
Business Park.. 4,895 -- 194 5,089 -- 5,089 -- 1997,1999
Indianapolis,
Indiana
Airport Business
Center......... 4,056 -- 100 4,156 -- 4,156 -- 1999
Lebanon Commerce
Park Land...... 827 -- 666 1,493 -- 1,493 -- 1998
North by
Northeast
Distribution
Center......... 437 -- 54 491 -- 491 -- 1994
Plainfield Park
Distribution
Center......... 1,082 -- 568 1,650 -- 1,650 -- 1996
Juarez, Mexico
Los Aztecas
Industrial
Center......... 669 -- -- 669 -- 669 -- 1999
Salvacar
Industrial
Park........... 1,993 -- 247 2,240 -- 2,240 -- 1997
Kansas City,
Missouri
Executive Park.. 1,267 -- 244 1,511 -- 1,511 -- 1998
Las Vegas, Nevada
Black Mountain
Distribution
Center......... 2,845 -- 164 3,009 -- 3,009 -- 1995,1996
Hughes Airport
Center......... 263 -- 11 274 -- 274 -- 1997
Las Vegas
Corporate
Center......... (h) 4,015 -- 44 4,059 -- 4,059 -- 1993,1995,1997
Le Havre, France
Le Havre........ 1,135 -- -- 1,135 -- 1,135 -- 1999
Los
Angeles/Orange
County,
California
Anaheim
Industrial
Center......... 3,103 -- 3 3,106 -- 3,106 -- 1999
Magnolia
Business
Center......... 4,232 -- 27 4,259 -- 4,259 -- 1999
Ontario
Distribution
Center......... 1,565 -- 176 1,741 -- 1,741 -- 1999
</TABLE>
158
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized ------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- -------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Louisville,
Kentucky
Riverport
Distribution
Center......... $ 780 $ -- $ 28 $ 808 $ -- $ 808 $-- 1998,1999
Memphis,
Tennessee
Memphis
Industrial
Park........... 1,000 -- 975 1,975 -- 1,975 -- 1997
Milan, Italy
Piacenza
Distribution
Center......... 394 -- 1,234 1,628 -- 1,628 -- 1999
Monterrey, Mexico
Monterrey
Industrial
Park........... 126 -- -- 126 -- 126 -- 1998
Orlando, Florida
Orlando Central
Park........... 2,152 -- 637 2,789 -- 2,789 -- 1996
Paris, France
Annecy
Distribution
Center......... -- -- 216 -- -- -- -- 1999
Aulnay
Distribution
Center......... 1,170 -- 240 1,410 -- 1,410 -- 1999
Portland, Oregon
Jennifer
Distribution
Center......... 2,139 -- 718 2,857 -- 2,857 -- 1997
Reno, Nevada
Damonte Ranch... 5,949 -- 1,827 7,776 -- 7,776 -- 1998
Golden Valley
Distribution
Center......... 347 -- 602 949 -- 949 -- 1995
Reynosa, Mexico
Del Norte
Industrial
Center II...... 643 -- -- 643 -- 643 -- 1999
Reynosa
Industrial
Center III..... 1,449 -- -- 1,449 -- 1,449 -- 1998
Reynosa
Industrial
Park........... 362 -- 31 393 -- 393 -- 1999
Rio Grande
Valley, Texas
Rio Grande
Distribution
Center......... 429 -- 10 439 -- 439 -- 1995
Rotterdam,
Netherlands
DistriPark
Maasvlakte..... -- -- 16 -- -- -- -- 1999
Moerdijk
Distribution
Center......... 1,057 -- 451 1,508 -- 1,508 -- 1999
Salt Lake City,
Utah
Centennial
Distribution
Center......... 824 -- 105 929 -- 929 -- 1996
Clearfield
Industrial
Center......... 125 -- 14 139 -- 139 -- 1997
Salt Lake
International
Distribution
Center......... 746 -- 1,096 1,842 -- 1,842 -- 1994,1995
San Antonio,
Texas
Coliseum
Distribution
Center......... 611 -- 335 946 -- 946 -- 1994
Landmark........ 127 -- 5 132 -- 132 -- 1997
Perrin Creek
Corporate
Center......... 2,637 -- 243 2,880 -- 2,880 -- 1996
San Antonio
Distribution
Center III..... 458 -- 56 514 -- 514 -- 1996
Seattle,
Washington
Port of Tacoma.. 1,539 -- 378 1,917 -- 1,917 -- 1998
Tampa, Florida
Sabal Park
Distribution
Center......... 1,170 -- 150 1,320 -- 1,320 -- 1995,1997
Tampa East
Distribution
Center......... 2,711 -- -- 2,711 -- 2,711 -- 1994
Tijuana, Mexico
Tijuana
Industrial
Center......... 2,736 -- 134 2,870 -- 2,870 -- 1998
Warsaw, Poland
Blonie
Industrial
Park........... 1,118 -- 1,922 3,040 -- 3,040 -- 1998
</TABLE>
159
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<CAPTION>
Initial Cost to Gross Amounts At Which Carried
ProLogis Costs as of December 31, 1999
-------------------- Capitalized --------------------------------
Building & Subsequent Building & Accumulated Date of
No. of Encum- Improve- To Improve- Total Depreciation Construction/
Description Bldgs. brances Land ments Acquisition Land ments (a,b) (c) Acquisition
- ----------- ------ ------- --------- ---------- ----------- ---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Washington,
D.C./Baltimore,
Maryland
Meadowridge
Distribution
Center........... $ 865 $ -- $ 289 $ 1,154 $ -- $ 1,154 $ -- 1996
Troy Hill
Distribution
Center........... 4,483 -- 37 4,520 -- 4,520 -- 1999
--------- ---------- ---------- ---------- ---------- ---------- ---------
Total Land Held
for
Development.... 135,233 -- 28,463 163,696 -- 163,696 --
--------- ---------- ---------- ---------- ---------- ---------- ---------
GRAND TOTAL........ $ 872,818 $2,577,782 $1,499,601 $1,086,469 $3,863,732 $4,950,201 $(366,703)
========= ========== ========== ========== ========== ========== =========
</TABLE>
- -------
(a) Reconciliation of total cost to real estate balance sheet caption as of
December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Total per Schedule III..................................... $4,950,201
Minority interest in real estate company................... 7,665
Capitalized preacquisition costs........................... 17,085
----------
Total real estate...................................... $4,974,951(i)
==========
</TABLE>
(b) The aggregate cost for federal income tax purposes was approximately
$3,870,487,908.
(c) Buildings are depreciated over their estimated useful lives (30 years for
acquisitions, 40 years for developments).
(d) $335,688,418 of these facilities will secure $200,000,000 of mortgage
notes.
(e) $210,096,463 of these facilities secure $148,757,098 of mortgage notes.
(f) $666,638,421 of these facilities secure $309,155,427 of mortgage notes.
(g) $63,387,124 of these facilities secure $26,951,687 of securitized debt.
(h) $226,928,339 of these facilities secure $10,721,327 of assessment bonds.
(i) A summary of activity for real estate and accumulated depreciation as of
December 31, 1999 is as follows (in thousands):
160
<PAGE>
PROLOGIS TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION--(Continued)
<TABLE>
<S> <C>
Real estate
Balance at beginning of year................................ $3,657,500
Additions, including development completions................ 2,196,374
Dispositions................................................ (848,844)
Change in construction in progress balance.................. (29,135)
Change in capitalized preacquisition costs balance.......... (944)
----------
Balance at end of year...................................... $4,974,951
==========
Accumulated depreciation
Balance at beginning of year................................ $ 254,288
Depreciation expense........................................ 134,055
Accumulated depreciation associated with dispositions....... (21,640)
----------
Balance at end of year...................................... $ 366,703
==========
</TABLE>
161
<PAGE>
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.
Supplementary information included in the annual financial report has been
reviewed in the context of our mandate but has not been subject to specific
audit procedures carried out in accordance with the standards described above.
Consequently, we express no opinion on such information. We have no
observation to make concerning such information in the context of the
consolidated financial statements taken as a whole.
PricewaterhouseCoopers S.a.r.l. Luxembourg, 25 February 2000
Reviseur d'enterprises
Represented by
Pascal Rakovsky Thierry Blondeau
162
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF NET ASSETS
At 31 December 1999
(in thousands U.S. $, except per-share amounts)
Audited
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Strategic investment positions at value (Note 3):
CarrAmerica (Cost $699,905; $699,851,
respectively)..................................... $ 604,247 $ 686,482
City Center Retail (Cost $304,132; $304,035,
respectively)..................................... 304,132 304,035
CWS Communities (Cost $236,488; $153,563,
respectively) 236,488 153,563
Regency (Cost $759,807; $759,788, respectively)
(Note 3A)......................................... 685,465 762,580
Storage USA (Cost $394,362; $394,272, respectively) 355,911 380,178
Urban Growth Property (Cost $188,582; $181,082,
respectively) 188,582 181,082
Other investment positions at value (Note 3):
Security Capital Group Incorporated (Cost $165,000;
$165,000, respectively)........................... 95,780 116,245
Private investment positions (Cost $42,019;
$15,275, respectively)............................ 42,019 15,275
Public special opportunity positions (Cost $0;
$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
========== ==========
Authorised 250,000,000 shares of $4.00 par value,
86,561,872 shares issued and 76,700,437
outstanding at 31 December 1999 and 86,561,872
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) --
---------- ----------
SHAREHOLDERS' EQUITY................................... $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.
163
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended 31 December 1999, 1998 and 1997
(in thousands U.S. $, except per-share amounts)
Audited
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
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
========= ========= ========
</TABLE>
The accompanying notes form an integral part of the financial statements.
164
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended 31 December 1999, 1998 and 1997
(in thousands U.S. $, except per-share amounts)
Audited
<TABLE>
<CAPTION>
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 shares offering......... $ -- $ -- $ 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 the financial statements.
165
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the years ended 31 December 1999, 1998 and 1997
(in thousands U.S. $, except per-share amounts)
Audited
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<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 for 1999, $148,152 for 1998, and
$73,324 for 1997).......................... $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
For the years ended 31 December 1999, 1998 and 1997
Audited
<TABLE>
<CAPTION>
Number of shares
---------------------------------
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>
166
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED FINANCIAL HIGHLIGHTS
For the years ended 31 December 1999, 1998 and 1997
Audited
<TABLE>
<CAPTION>
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>
CONSOLIDATED SCHEDULES OF STRATEGIC INVESTMENT POSITIONS
At 31 December 1999
(in thousands U.S. $, except shares held and %)
Audited
<TABLE>
<CAPTION>
Number of
Strategic Investment Security Shares Percentage of
Positions Type Held Cost Value 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 (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 positions.... $2,583,276 $2,374,825 93.8%
========== ========== ====
</TABLE>
At 31 December 1998
(in thousands U.S. $, except shares held and %)
Audited
<TABLE>
<CAPTION>
Number of
Strategic Investment Security Shares Percentage of
Positions Type Held Cost Value Total 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 positions.... $2,492,591 $2,467,920 85.9%
========== ========== ====
</TABLE>
The accompanying notes form an integral part of the financial statements.
167
<PAGE>
SECURITY CAPITAL U.S. REALTY
CONSOLIDATED SCHEDULES OF OTHER INVESTMENT POSITIONS
At 31 December 1999
(in thousands U.S. $, except %)
Audited
<TABLE>
<CAPTION>
Percentage of
Property Type Cost Value Total Assets
- ------------- -------- -------- -------------
<S> <C> <C> <C>
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 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%
======== ======== ====
At 31 December 1998
(in thousands U.S. $, except %)
Audited
<CAPTION>
Percentage of
Property Type Cost Value Total Assets
- ------------- -------- -------- -------------
<S> <C> <C> <C>
Private investment positions
Companies in which SC-U.S. Realty owns a 5%
or 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 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 form an integral part of the financial statements.
168
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANISATION
Security Capital U.S. Realty (the "Company") (NYSE: RTY) (Amsterdam AEX
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. 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).
On 24 June 1999 the Company's ADRs began trading on the New York Stock
Exchange ("NYSE") under the ticker symbol "RTY".
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"). All accounts of HOLDINGS have
been consolidated with the Company and all significant intercompany
transactions have been eliminated upon consolidation. References herein 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 the Company's 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
SC-U.S. Realty 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"). Thus, SC-U.S. Realty's investments in
publicly traded companies are valued at market determined by using closing
market prices on the NYSE, or other recognised stock exchange when
appropriate, as of the balance sheet date, subject to an appropriate
adjustment for transfer restrictions, if any. For privately held investments
in which SC-U.S. Realty has an ownership interest, SC-U.S. Realty 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 assets of the Company.
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
SC-U.S. Realty'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 SC-U.S. Realty's operating methods and plans, SC-
U.S. Realty's investment gains generally are not subject to income taxes.
As of 31 December 1999 and 1998, 30.5% and 22.8%, respectively, of SC-U.S.
Realty's 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
169
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 SC-U.S. Realty's 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
SC-U.S. Realty considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
D. Deferred Financing Costs/Discounts
Underwriting fees relating to the issuance of the $450 million aggregate
principal amount at maturity of the Company's 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 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.
F. Reclassification
Certain 1997 numbers have been reclassified to conform to the 1999
presentation.
NOTE 3--INVESTMENTS
SC-U.S. Realty 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 SC-U.S. Realty sponsors, it expects to own substantially more than 50%
of the voting shares. SC-U.S. Realty 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.
170
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 ("REITs") under the Code 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 SC-
U.S. Realty believes possess the requisite fundamentals to generate strong
cash flow growth and/or value appreciation. In exceptional circumstances, and
to a very limited extent, SC-U.S. Realty has made investments in companies
that are not publicly traded. Typically such an investment has been in a
company that does not at the time of investment fulfill the criteria for a
strategic investment position.
As of 31 December 1999 and 1998, SC-U.S. Realty had deployed a total of
$165.0 million in securities of Security Capital Group Incorporated ("Security
Capital Group"). This amount is made up of an investment of $110.0 million
(representing 52,430.9 shares of Class A common stock and $55.0 million
aggregate principal amount of 6.5% convertible subordinated debentures due
2016) and an additional $55.0 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 31 December
---------------
1999 1998
------- -------
(in thousands
U.S. $)
<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 the Convertible Notes (see Note 7). The fees have been deferred and
will be fully amortised over a period of five years starting from the
issue date of 22 May 1998.
171
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
At 31 December
----------------------
1999 1998
---------- -----------
(in thousands U.S. $)
<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 credit 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 Ratings 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.
SC-U.S. Realty's 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 Lines of Credit was $297.9 million for
the year ended 31 December 1999. Average daily borrowings under the Company
Line and the old HOLDINGS Line was $274.4 million for
172
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the year ended 31 December 1998. The weighted average interest rates for these
same periods were 6.60% per annum and 6.67% per annum, respectively.
NOTE 7--CONVERTIBLE NOTES
<TABLE>
<CAPTION>
At 31 December
1999
---------------------
(in thousands U.S. $)
<S> <C>
Convertible Notes proceeds................................ $360,554
Accumulated accretion on Convertible Notes................ 25,603
--------
$386,157
========
</TABLE>
The Company completed a convertible debt offering in May 1998. The
Convertible Notes are convertible at the option of the holder at any time
prior to maturity at a conversion rate equal to 26.39095 shares (giving effect
to the reverse stock split) of the Company, each having a par value of $4.00
(the "Shares"), per $1,000 aggregate principal amount at maturity of the
Convertible Notes. Interest is payable semi-annually at the rate of 2.0% 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% per annum 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 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.
Conversion of the Convertible Notes would be anti-dilutive for the year
ended 31 December 1999.
NOTE 8--ADVISORY AGREEMENT
SC-U.S. Realty has 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 SC-U.S. Realty with advice with respect to strategy, investments,
financing and certain other administrative matters affecting SC-U.S. Realty.
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 SC-U.S. Realty 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). SC-U.S. Realty pays its 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
the average monthly value of invested assets (excluding investments in
Security Capital Group 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 0.08%, 0.09% and 0.13% for the
years ended 31 December 1999, 1998 and 1997, respectively.
173
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SC-U.S. Realty 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 SC-U.S. Realty's gross assets.
NOTE 9--TAXATION
The Company, as separate from HOLDINGS, is not liable for any Luxembourg
tax on income. The Company is liable in Luxembourg for a capital tax of 0.06%
per annum of its net asset value. Cash dividends and interest received by the
Company or HOLDINGS on their investments may be subject to non-recoverable
withholding or other taxes in the countries of origin. U.S. withholding tax
rates of 15% were 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.
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' taxable income.
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 years ended
31 December
-----------------------
1999 1998 1997
------- ------- -------
(in thousands U.S. $)
<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>
174
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--DIRECTORS' SHARE OPTION EQUIVALENTS
Each of the Company's 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 the Company, 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 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 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 the 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 a 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. The Company accrues a liability
for the total SOEs granted. Since the SOEs are redeemable in cash, this
accrual is adjusted for changes in the Company's net asset value or closing
stock price, as the case may be, 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 were
$(256,000), $561,000 and $526,500 for the years ended 31 December 1999, 1998
and 1997, respectively.
175
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--COMMITMENTS
SC-U.S. Realty's 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 U.S. $)
<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....................... 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.
SC-U.S. Realty's existing and committed fundings at cost as of 31 December
1998 were as follows:
<TABLE>
<CAPTION>
Total Total Cost Amount
Amount (Amount to be
Committed Funded)(1) Funded(1)
---------- ---------- ---------
(in thousands U.S. $)
<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(2)
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....................... 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.
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.
176
<PAGE>
SECURITY CAPITAL U.S. REALTY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 SPILT
On 17 May 1999, SC-U.S. Realty's shareholders approved a one-for-two
reverse stock split. The effective date of the reverse stock split was 18 June
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, SC-U.S. Realty announced that its 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.
177
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Security Capital Group
Incorporated, a Maryland corporation, and the undersigned Directors and
officers of Security Capital Group Incorporated, hereby constitutes and
appoints William D. Sanders, C. Ronald Blankenship, Thomas G. Wattles, Paul E.
Szurek, James C. Swaim, Jeffrey A. Klopf and Edward J. Schneidman its or his
true and lawful attorneys-in-fact and agents, for it or him and in its or his
name, place and stead, in any and all capacities, with full power to act
alone, to sign any and all amendments to this report, and to file each such
amendment to this report, with all exhibits thereto, and any and all documents
in connection therewith, with the Securities and Exchange Commission, hereby
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as it or he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them may
lawfully do or cause to be done by virtue hereof.
178
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Security Capital Group Incorporated
/s/ William D. Sanders
By: _________________________________
William D. Sanders
Chairman, Director and
Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William D. Sanders Chairman, Director and Chief March 27, 2000
____________________________________ Executive Officer
William D. Sanders (Principal Executive
Officer)
/s/ Paul E. Szurek Chief Financial Officer March 27, 2000
____________________________________ (Principal Financial
Paul E. Szurek Officer)
/s/ James C. Swaim Principal Accounting Officer March 27, 2000
____________________________________
James C. Swaim
/s/ C. Ronald Blankenship Director, Vice Chairman March 27, 2000
____________________________________
C. Ronald Blankenship
/s/ Samuel W. Bodman Director March 27, 2000
____________________________________
Samuel W. Bodman
/s/ Hermann Buerger Director March 27, 2000
____________________________________
Hermann Buerger
/s/ John P. Frazee, Jr. Director March 27, 2000
____________________________________
John P. Frazee, Jr.
/s/ Cyrus F. Freidheim, Jr. Director March 27, 2000
____________________________________
Cyrus F. Freidheim, Jr.
/s/ H. Laurance Fuller Director March 27, 2000
____________________________________
H. Laurance Fuller
/s/ Ray L. Hunt Director March 27, 2000
____________________________________
Ray L. Hunt
/s/ John T. Kelley III Director March 27, 2000
____________________________________
John T. Kelley III
/s/ Peter S. Willmott Director March 27, 2000
____________________________________
Peter S. Willmott
</TABLE>
179
<PAGE>
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain other of the
following documents have been previously filed with the Securities and
Exchange Commission and, pursuant to Rule 12b-32, are incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<C> <S> <C>
3.1 Security Capital Articles of Amendment and Restatement
(incorporated by reference to Exhibit 4.1 to Security
Capital's registration statement on Form S-11 (File No. 333-
26037))
3.2 Security Capital Articles Supplementary--Series B Cumulative
Convertible Redeemable Voting Preferred Stock (incorporated by
reference to Exhibit 3 to Security Capital's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1998)
3.3 Security Capital Amended and Restated Bylaws (incorporated by
reference to Exhibit 4.2 to Security Capital's Registration
Statement on Form S-11 (File No. 333-26037))
3.4 Bylaw Amendments (incorporated by reference to Exhibit 3.1 to
Security Capital's Current Report on Form 8-K, dated December
10, 1998)
3.5 Bylaw Amendments (incorporated by reference to Exhibit 3.1 to
Security Capital's Current Report on Form 8-K, dated December
9, 1999)
4.1 Rights Agreement, dated as of April 21, 1997, between Security
Capital and The First National Bank of Boston, as rights
Agent, including form of Rights Certificate (incorporated by
reference to Exhibit 4.1 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997)
4.2 Form of stock certificate for shares of Class A common stock
of Security Capital (incorporated by reference to Exhibit 4.4
to Security Capital's registration statement on Form S-11
(File No. 333-26037))
4.3 Form of stock certificate for shares of Class B common stock
of Security Capital (incorporated by reference to Exhibit 4.5
to Security Capital's registration statement on Form S-11
(File No. 333-26037))
4.4 Form of 6.50% Convertible Subordinated Debentures due March
29, 2016 (incorporated by reference to Exhibit 4.7 to Security
Capital's registration statement on Form S-11 (File No. 333-
26037))
4.5 Exchange Agreement and Registration Rights Agreement, dated
May 7, 1998, between Security Capital and Commerzbank
Aktiengesellschaft, Grand Cayman Branch (incorporated by
reference to Exhibits 4.1 and 4.2 to Security Capital's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998)
4.6 Indenture, dated June 18, 1998, from Security Capital to State
Street Bank and Trust Company, as trustee (incorporated by
reference to Exhibit 4.1 to Security Capital's registration
statement on Form S-4 (File No. 333-61401))
4.7 Form of 6.95% Exchange Notes due 2005 (incorporated by
reference to Exhibit 4.2 to Security Capital's registration
statement on Form S-4 (File No. 333-61401))
4.8 Form of 7.15% Exchange Notes due 2007 (incorporated by
reference to Exhibit 4.3 to Security Capital's registration
statement on Form S-4 (File No. 333-61401))
4.9 Form of 7.70% Exchange Notes due 2028 (incorporated by
reference to Exhibit 4.4 to Security Capital's registration
statement on Form S-4 (File No. 333-61401))
4.10 Indenture, dated as of November 16, 1998, from Security
Capital to State Street Bank and Trust Company, as trustee
(incorporated by reference to Exhibit 4.10 to Security
Capital's Annual Report on Form 10-K for the year ended
December 31, 1998)
</TABLE>
180
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<C> <S> <C>
4.11 Resolution of the Board of Directors of Security Capital
adopted November 16, 1998, pursuant to Section 301 of the
Indenture, dated as of November 16, 1998, from Security
Capital to State Street Bank and Trust Company, as trustee
(incorporated by reference to Exhibit 4.11 to Security
Capital's Annual Report on Form 10-K for the year ended
December 31, 1998)
4.12 Form of Fixed Rate Note under the Indenture, dated as of
November 16, 1998, from Security Capital to State Street Bank
and Trust Company, as trustee (incorporated by reference to
Exhibit 4.12 to Security Capital's Annual Report on Form 10-K
for the year ended December 31, 1998)
4.13 Form of Floating Rate Note under the Indenture, dated as of
November 16, 1998, from Security Capital to State Street Bank
and Trust, as trustee (incorporated by reference to Exhibit
4.13 to Security Capital's Annual Report on Form 10-K for the
year ended December 31, 1998)
10.1 Investor Agreement, dated as of October 17, 1996, by and
between Homestead and Security Capital (incorporated by
reference to Exhibit 10.2 to Homestead's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1996)
10.2 Amendment No. 1 to Investor Agreement, dated as of April 5,
1999 by and between Homestead and Security Capital
(incorporated by reference to Exhibit 99.1 to Homestead Form
8-K, dated April 14, 1999)
10.3 Third Amended and Restated Investor Agreement, dated September
9, 1997, between Archstone and Security Capital (incorporated
by reference to Exhibit 10.2 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997)
10.4 Third Amended and Restated Investor Agreement, dated September
9, 1997, between ProLogis and Security Capital (incorporated
by reference to Exhibit 10.3 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997)
10.5 Administrative Services Agreement, dated as of October 17,
1996, between Homestead and Security Capital (incorporated by
reference to Exhibit 10.11 to Homestead's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1996)
10.6 Administrative Services Agreement, dated September 9, 1997,
between Archstone and Security Capital (incorporated by
reference to Exhibit 10.5 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997)
10.7 Administrative Services Agreement, dated September 9, 1997,
between ProLogis and Security Capital (incorporated by
reference to Exhibit 10.6 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997)
10.8 Advisory Agreement dated July 1, 1997, between Security
Capital U.S. Realty, Security Capital Holdings, S.A. and
Security Capital (EU) Management S.A. (incorporated by
reference to Exhibit 10.21 to Security Capital's registration
statement on Form S-11 (File No. 333-26037))
10.9 Credit Agreement, dated as of June 5, 1998, among Security
Capital and Chase Bank of Texas, National Association, and
Wells Fargo Bank, National Association, as agents for the
financial institutions identified therein (incorporated by
reference to Exhibit 10.1 to Security Capital's registration
statement on Form S-4 (File No. 333-61401))
10.10 Form of Indemnification Agreement entered into between
Security Capital and each of its directors and officers
(incorporated by reference to Exhibit 10.26 to Security
Capital's registration statement on Form S-11 (File No. 333-
26037))
</TABLE>
181
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<C> <S> <C>
10.11 Security Capital Group Incorporated 1998 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.11 to Security
Capital's Annual Report on Form 10-K for the year ended
December 31, 1998)
10.12 1996 Security Capital Outside Directors Plan (incorporated by
reference to Exhibit 10.27 to Security Capital's Registration
Statement on Form S-11 (File No. 333-26037))
10.13 Security Capital 1995 Option Plan (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.28 to Security Capital's Registration Statement
on Form S-11 (File No. 333-26037))
10.14 Security Capital Deferred Fee Plan for Directors (incorporated
by reference to Exhibit 10.29 to Form S-11 to Security
Capital's Registration Statement on Form S-11 (File No.
333-26037)
10.15 Security Capital 1991 Option Plan A (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.30 to Security Capital's Registration Statement
on Form S-11 (File No. 333-26037))
10.16 Security Capital 1991 Option Plan B (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.31 to Security Capital's Registration Statement
on Form S-11 (File No. 333-26037))
10.17 Security Capital 1992 Option Plan A (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.32 to Security Capital's Registration Statement
on Form S-11 (File No. 333-26037))
10.18 Security Capital 1992 Option Plan B (as amended and restated
effective as of December 3, 1996) (incorporated by reference
to Exhibit 10.33 to Security Capital's Registration Statement
on Form S-11 (File No. 333-26037))
10.19 Security Capital Realty Investors 1991 Option Plan A (as
amended and restated effective December 3, 1996) (incorporated
by reference to Exhibit 10.34 to Security Capital's
Registration Statement on Form S-11 (File No. 333-26037))
10.20 Security Capital Realty Investors 1991 Option Plan B (as
amended and restated effective December 3, 1996) (incorporated
by reference to Exhibit 10.35 to Security Capital's
Registration Statement on Form S-11 (File No. 333-26037))
10.21 Form of Secured Promissory Note from certain executive
officers to Security Capital (incorporated by reference to
Exhibit 10.36 to Security Capital's Registration Statement on
Form S-11 (File No. 333-26037))
10.22 Purchase and Sale Agreement, dated as of August 12, 1999,
between Security Capital and Strategic Hotel Capital
Incorporated (incorporated by reference to Exhibit 10.22 to
Security Capital's Current Report on Form 8-K, dated September
10, 1999)
10.23 First amendment to credit agreement dated as of October 15,
1998, by and among Security Capital Group Incorporated, the
financial institutions party thereto and, Chase Bank of Texas,
National Association, as Documentation Agent and Wells Fargo
Bank, National Association, as Agent (incorporated by
reference to Exhibit 10.1 to Security Capital's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1999)
10.24 Second amendment to credit agreement dated as of April 13,
1999, by and among Security Capital Group Incorporated, the
financial institutions party thereto and Wells Fargo Bank,
National Association, as Agent (incorporated by reference to
Exhibit 10.1 to Security Capital's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999)
10.25 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and William D. Sanders
(incorporated by reference to Exhibit 10.2 to Security
Capital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999)
</TABLE>
182
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Document Description
------- --------------------
<C> <S> <C>
10.26 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and C. Ronald Blankenship
(incorporated by reference to Exhibit 10.3 to Security
Capital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999)
10.27 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and Thomas G. Wattles
(incorporated by reference to Exhibit 10.4 to Security
Capital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999)
10.28 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and Anthony R. Manno Jr.
(incorporated by reference to Exhibit 10.5 to Security
Capital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999)
10.29 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and Donald E. Suter
(incorporated by reference to Exhibit 10.6 to Security
Capital's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999)
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends
21 Subsidiaries of Security Capital
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP
23.4 Consent of KPMG AB
23.5 Opinion of KPMG AB
23.6 Consent of KPMG LLP
23.7 Opinion of KPMG LLP
23.8 Consent of PricewaterhouseCoopers S.a.r.l.
23.9 Consent of PricewaterhouseCoopers S.a.r.l.
23.10 Opinion of PricewaterhouseCoopers S.a.r.l.
24 Power of Attorney (included at page 178)
27.1 Financial Data Schedule--Year Ended December 31, 1999
27.2 Financial Data Schedule--Year Ended December 31, 1998
</TABLE>
183
<PAGE>
Exhibit 12.1
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997 1996 1995 (a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $(59,666) $ 67,480 $ 38,241 $ (9,693) $(21,274)
Add:
Interest Expense 133,454 82,203 104,434 117,224 103,804
-------- -------- -------- -------- --------
Earnings as Adjusted $ 73,788 $149,683 $142,675 $107,531 $ 82,530
======== ======== ======== ======== ========
Fixed Charges:
Interest Expense $133,454 $ 82,203 $104,434 $117,224 $103,804
Capitalized Interest 8,209 26,703 69,883 11,448 4,404
-------- -------- -------- -------- --------
Total Fixed Charges $141,663 $108,906 $174,317 $128,672 $108,208
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 0.5 1.4 0.8 0.8 0.8
======== ======== ======== ======== ========
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
<PAGE>
Exhibit 12.2
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995 (a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $(59,666) $ 67,480 $ 38,241 $ (9,693) $(21,274)
Add:
Interest Expense 133,454 82,203 104,434 117,224 103,804
-------- -------- -------- -------- --------
Earnings as Adjusted $ 73,788 $149,683 $142,675 $107,531 $ 82,530
======== ======== ======== ======== ========
Combined Fixed Charges and
Preferred Share Dividends:
Interest Expense $133,454 $ 82,203 $104,434 $117,224 $103,804
Capitalized Interest 8,209 26,703 69,883 11,448 4,404
-------- -------- -------- -------- --------
141,663 108,906 174,317 128,672 108,208
Preferred Share Dividends (b) (c) 20,280 22,368(d) 15,416 12,352 --
-------- -------- -------- -------- --------
Combined Fixed Charges and
Preferred Share Dividends $161,943 $131,274 $189,733 $141,024 $108,208
======== ======== ======== ======== ========
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Dividends 0.5 1.1 0.8 0.8 0.8
======== ======== ======== ======== ========
</TABLE>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
(b) The Preferred dividends are on a pretax basis.
(c) Security Capital had no preferred dividends prior to 1996.
(d) Excludes a one-time non-cash dividend of $19.8 million incurred in
conjunction with the exchange of Series A Preferred Shares for Series B
Preferred Shares.
<PAGE>
<TABLE>
<CAPTION>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
NAME OF ENTITY
(AND OTHER NAMES, IF ANY,
UNDER WHICH SUCH JURISDICTION
ENTITY DOES BUSINESS) OF ORGANIZATION
- -------------------- ---------------
<S> <C>
BelmontCorp Maryland
Capital Division Incorporated Maryland
Real Estate Protection Mutual Limited Bermuda
SC Group Incorporated Texas
SC Realty Incorporated Nevada
SC Realty Shares Limited Bermuda
Security Capital BVI Holdings Incorporated Maryland
Security Capital Financial Services Group Incorporated Delaware
Security Capital Global Capital Management Group Incorporated Delaware
Security Capital Investment Research Incorporated Delaware
Security Capital Markets Group Incorporated Delaware
Security Capital Real Estate Mutual Funds Incorporated Maryland
Security Capital Real Estate Research Group Incorporated Maryland
Ameriton Properties LLC Delaware
Frigoscandia Holdings, LLC Delaware
Kingspark Holdings, LLC Delaware
Security Capital (EU) Management Holdings S.A. Luxembourg
Security Capital Markets Group Limited United Kingdom
Security Capital Global Capital Management Group (Europe) S.A. Belgium
Security Capital (UK) Management Limited United Kingdom
Security Capital U.S. Realty Management S.A Luxembourg
Security Capital European Services S.A. Luxembourg
Archstone Communities Trust Maryland
Homestead Village Incorporated Maryland
ProLogis Trust Maryland
ProLogis International Incorporated Delaware
Prologis b.v. Netherlands
Frigoscandia S.A. Luxembourg
ProLogis Logistics Services Incorporated Delaware
Garonor Holdings S.A. Luxembourg
Kingspark Holding S.A. 1929 Holding Company
CS Integrated LLC (refrigerated warehousing) Delaware
Security Capital Preferred Growth Incorporated Maryland
Security Capital U.S. Realty Luxembourg
Security Capital Holdings S.A. Luxembourg
CarrAmerica Realty Corporation Maryland
City Center Retail Trust Maryland
CWS Communities Trust Maryland
Urban Growth Property Trust Maryland
Storage USA, Inc. Tennessee
Regency Realty Corporation Florida
Security Capital European Realty Luxembourg
Access Self Storage S.A. Luxembourg
Akeler S.A. Luxembourg
Bernheim-Comofi S.A. Luxembourg
Interparking S.A. Luxembourg
City & West End Properties S.A. Luxembourg
London and Henley S.A. Luxembourg
Millers Storage S.A. Luxembourg
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report on Security Capital Group Incorporated dated March 23, 2000 and
our reports on ProLogis Trust dated March 21, 2000 into Security Capital Group
Incorporated's previously filed Registration Statements File Nos. 333-38521,
333-38523, 333-38525, 333-38527, 333-38531, 333-38533, 333-38537, 333-38539,
333-48167, 333-61395, 333-61401 and 333-64979.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 23, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this Form 10-K of our reports dated March 21, 2000 on ProLogis Trust. It should
be noted that we have not audited any financial statements of ProLogis Trust
subsequent to December 31, 1999 or performed any audit procedures subsequent to
the date of our reports.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 23, 2000
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
of Security Capital Group Incorporated:
We consent to the use of our reports dated January 27, 2000, except as to
Note 16, which is as of February 4, 2000, with respect to the balance sheets of
Archstone Communties Trust as of December 31, 1999 and 1998, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1999, and the related
schedule, which reports appear in the December 31, 1999 annual report on Form
10-K of Security Capital Group Incorporated. Further, we consent to the
incorporation by reference of the aforementioned reports into the registration
statements filed by Security Capital Group Incorporated on Form S-8 No's. 333-
38521, 333-38523, 333-38525, 333-38527, 333-38531, 333-38533, 333-38537, 333-
48167, 333-38539, 333-61395, Form S-4 No. 333-61401 and Form S-3 No. 333-64979.
KPMG LLP
Chicago, Illinois
March 24, 2000
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants of Frigoscandia Holding AB, we hereby consent
to the use of our report dated January 24, 2000, included in the Security
Capital Group Incorporated Form 10-K for the year ended December 31, 1999. It
should be noted that we have not audited any financial statements of the company
subsequent to December 31, 1999, or performed any audit procedures subsequent to
the date of our report.
Stockholm, March 24, 2000
KPMG AB
<PAGE>
Exhibit 23.5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
AUDIT REPORT
To the general meeting of the shareholders of Frigoscandia Holding AB
Corporate identity number 556542-7704
We have audited the annual accounts, the consolidated accounts, the accounting
records and the administration of the board of directors and the managing
director of Frigoscandia Holding AB for the year 1999. These accounts and the
administration of the company are the responsibility of the board of directors
and the managing director. Our responsibility is to express an opinion on the
annual accounts, the consolidated accounts and the administration based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards
in Sweden. Those standards require that we plan and perform the audit to obtain
reasonable assurance that the annual accounts and the consolidated accounts are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the accounts. An audit also
includes assessing the accounting principles used and their application by the
board of directors and the managing director, as well as evaluating the overall
presentation of information in the annual accounts and the consolidated
accounts. As in basis for our opinion concerning discharge from liability, we
examined significant decisions, actions taken and circumstances of the company
in order to be able to determine the liability, if any, to the company of any
board member or the managing director. We also examined whether any board member
or the managing director has, in any other way, acted in contravention of the
Companies Act, the Annual Accounts Act or the Articles of Association. We
believe that our audit provides a reasonable basis for our opinion set out
below.
The annual accounts and the consolidated accounts have been prepared in
accordance with the Annual Accounts Act, and, thereby, give a true and fair view
of the company's and the group's financial position and results of operations in
accordance with generally accepted accounting principles in Sweden.
We recommend to the general meeting of the shareholders that the income
statements and balance sheets of the parent company and the group be adopted,
that the profit for the parent company be dealt with in accordance with the
proposal in the administration report and that the members of the board of
directors and the managing director be discharged from liability for the
financial year.
Stockholm January 24, 2000
KPMG AB
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated January 24, 2000, except as to
the fourth paragraph of Note 4 which is as of March 21, 2000, relating to the
consolidated balance sheets of CS Integrated LLC and subsidiaries as of December
31, 1999 and 1998 and the related consolidated statements of income, changes in
members' equity, and cash flows for the years then ended included in the
December 31, 1999 Annual Report on Form 10-K of Security Capital Group
Incorporated. Further, we consent to the incorporation by reference of the
aforementioned report in the registration statements filed by Security Capital
Group Incorporated on Form S-8 No's 333-38521, 333-38523, 333-32525, 333-38527,
333-38531, 333-38533, 333-38537, 333-48167, 333-38539, 333-61395, Form S-4 No.
333-61401, and Form S-3 No. 333-64979.
KPMG LLP
New York, New York
March 24, 2000
<PAGE>
EXHIBIT 23.7
INDEPENDENT AUDITORS' REPORT
The Management of
CS Integrated LLC and Subsidiaries
We have audited the accompanying consolidated balance sheets of CS Integrated
LLC (a Limited Liability Company) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in members'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CS Integrated LLC
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
January 24, 2000, except as to the
fourth paragraph of note 4 which is
as of March 21, 2000
<PAGE>
Exhibit 23.8
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-38521, 333-38523, 333-38525, 333-38527, 333-
38531, 333-38533, 333-38537, 333-38539, 333-48167 and 333-61395), Form S-4 (No.
333-61401) and Form S-3 (No. 333-64979) of Security Capital Group Incorporated
of our report dated February 25, 2000 relating to the financial statements of
Security Capital U.S. Realty, which is incorporated in the Security Capital
Group Incorporated Annual Report on Form 10-K.
PricewaterhouseCoopers S.a.r.l. Luxembourg, March 24, 2000
Reviseur d'entreprises
Represented by
Pascal Rakovsky
<PAGE>
Exhibit 23.9
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-38521, 333-38523, 333-38525, 333-38527, 333-
38531, 333-38533, 333-38537, 333-38539, 333-48167 and 333-61395), Form S-4 (No.
333-61401) and Form S-3 (No. 333-64979) of Security Capital Group Incorporated
of our report dated February 25, 2000 relating to the financial statements of
Security Capital (EU) Management Holdings S.A., which is incorporated in the
Security Capital Group Incorporated Annual Report on Form 10-K.
PricewaterhouseCoopers S.a.r.l. Luxembourg, March 24, 2000
Reviseur d'entreprises
Represented by
Pascal Rakovsky
<PAGE>
Exhibit 23.10
To the Shareholders of
SECURITY CAPITAL (EU) MANAGEMENT HOLDINGS S.A.
We have audited the annual accounts of Security Capital (EU) Management Holdings
S.A. for the year ended 31 December 1999. These annual accounts are the
responsibility of the Board of Directors. Our responsibility is to express an
opinion based on our audit.
We conducted our audit in accordance with International Standards on Auditing.
Those Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the annual accounts are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the annual accounts. An audit also includes assessing the
accounting principles used and significant estimates made by the Board of
Directors, as well as evaluating the overall annual accounts presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the attached annual accounts give, in conformity with the
Luxembourg legal and regulatory requirements, a true and fair view of the
financial position of Security Capital (EU) Management Holdings S.A. as of 31
December 1999 and of the results of its operations for the year then ended.
PricewaterhouseCoopers S.a.r.l. Luxembourg, 25 February 2000
Reviseur d'entreprises
Represented by
Pascal Rakovsky
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Form 10-K for year ended December 31, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 30,567
<SECURITIES> 59,971
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,146,208
<DEPRECIATION> 72,734
<TOTAL-ASSETS> 3,957,151
<CURRENT-LIABILITIES> 0
<BONDS> 1,356,767
0
257,642
<COMMON> 539
<OTHER-SE> 1,922,606
<TOTAL-LIABILITY-AND-EQUITY> 3,957,151
<SALES> 0
<TOTAL-REVENUES> 409,945
<CGS> 0
<TOTAL-COSTS> 410,626
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133,454
<INCOME-PRETAX> (134,135)
<INCOME-TAX> (14,849)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (16,032)
<CHANGES> 16,136
<NET-INCOME> (116,996)
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Form 10-K for year ended December 31, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,209
<SECURITIES> 117,878
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,213,685
<DEPRECIATION> 48,816
<TOTAL-ASSETS> 4,510,357
<CURRENT-LIABILITIES> 0
<BONDS> 1,280,372
0
257,642
<COMMON> 491
<OTHER-SE> 2,164,846
<TOTAL-LIABILITY-AND-EQUITY> 4,510,357
<SALES> 0
<TOTAL-REVENUES> 165,477
<CGS> 0
<TOTAL-COSTS> 239,625
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82,203
<INCOME-PRETAX> (156,351)
<INCOME-TAX> (49,790)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 17,657
<CHANGES> 0
<NET-INCOME> (157,104)
<EPS-BASIC> (1.29)
<EPS-DILUTED> (1.29)
</TABLE>
