<PAGE>
S E C U R I T Y C A P I T A L
================================================================================
1999 ANNUAL REPORT
[SECURITY CAPITAL LOGO]
SECURITY CAPITAL
<PAGE>
T A B L E 0 F C 0 N T E N T S
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Corporate Profile 1
Operating Performance 2
Letter to Shareholders 5
Implementation of New Strategy 7
1999 Operations 10
The Future 11
Key Business Principles 12
Form 10-K 15
Shareholder Information Inside back cover
<PAGE>
C O R P O R A T E P R O F I L E
================================================================================
Security Capital Group Incorporated is an international real estate
research, investment and operating management company. 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 operating companies, generating earnings
principally from its ownership of these affiliates. Currently, the Capital
Division has investments in 16 real estate operating companies. The
Financial Services Division generates fees principally from capital
management and capital markets activities. 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.
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[LOGO]
SECURITY CAPITAL
CAPITAL DIVISION* FINANCIAL SERVICES DIVISION
Proactive Ownership in High-Growth Market-Responsive Global Real Estate
Real Estate Operating Companies Services Organization
================================================================================
6 Public Companies Capital Markets Group
10 Private Companies Global Capital Management Group
Mutual Funds/Separate Accounts
Managed Entities
$24 Billion Total Market Capitalization $5 Billion Under Management
*Represents 98.8% of SCZ assets.
<PAGE>
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SECURITY CAPITAL'S OPERATING COMPANY, MANAGED ENTITY AND
INTERMEDIATE-TERM INVESTMENTS AND FINANCIAL SERVICES
DIVISION AT DECEMBER 31, 1999/1/
(In thousands, except per-share data)
<TABLE>
<CAPTION>
Per-Share Total Unrealized
Ownership Cost Market Value Market Value Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Division
Operating Company Investments
Public Strategic Operating Companies
Archstone Communities Trust (NYSE: ASN) 39.2% $ 799,154 $20.50 $1,118,076 $ 318,922
Homestead Village Incorporated (NYSE: HSD) 87.0% 532,985 2.13 221,949 (311,036)
ProLogis Trust (NYSE: PLD) 30.8% 657,800 19.25 960,648 302,848
Private Strategic Operating Companies
BelmontCorp* 100.0% 78,052 10.00 78,052 --
Managed Entities
Security Capital European Realty* 34.6% 440,542 20.00 440,542 --
Security Capital Preferred Growth Incorporated* 9.3% 79,850 20.95 82,455 2,605
Security Capital U.S. Realty (NYSE: RTY) 39.6% 733,645 14.20 431,704 (301,941)
Intermediate-term Investments -- 43,000 -- 36,805 (6,195)
Financial Services Division/2/ 100.0% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Totals $3,365,028 $3,370,231 $ 5,203
</TABLE>
*Currently a private company.
/1/Investments in public companies and intermediate-term investments are listed
at stock exchange values. Investments in private companies are listed at the
last offering price.
/2/The Financial Services Division generates revenue principally from capital
markets and capital management activities. Security Capital does not assign a
value to the Financial Services Division.
2
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STATEMENTS OF EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND
DEFERRED TAXES
(EBDADT)
(In thousands, except per-share data)
<TABLE>
<CAPTION>
Investees' Total EBDADT
1999 1998 1997/1/ 1996/1/ 1995/1/
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Division
Operating Company Investments
Public Strategic Operating Companies
Archstone Communities Trust/1/ $278,155 $261,917 $214,221 $181,838 $148,926
Homestead Village Incorporated 43,244 37,197 18,190 931 --
ProLogis Trust/1/ 320,199 228,378 165,563 123,182 84,686
Private Strategic Operating Companies
BelmontCorp (9,864) (5,095) (214) -- --
Strategic Hotel Capital Incorporated/2/ 80,827 147,237 8,880 -- --
Managed Entities
Security Capital European Realty 39,509 11,447 -- -- --
Security Capital Preferred
Growth Incorporated 53,767 35,238 1,482 -- --
Security Capital U.S. Realty 150,993 133,997 88,179 30,356 240
Intermediate-term Investments/3/ 3,993 6,237 5,157 -- --
- -------------------------------------------------------------------------------------------------------------------
Financial Services Division Revenues/4/
Interest and other income
Operating expenses
Interest expense
Income tax benefit (expense)
Convertible preferred share dividends
- -------------------------------------------------------------------------------------------------------------------
EBDADT before special items
- -------------------------------------------------------------------------------------------------------------------
Special charges/5/ (65,296) (7,240) -- -- --
Strategic Hotel Capital loss/2/ -- -- -- -- --
Realized gains (losses) (81,790) 20,224 49,098 3,480 --
Extraordinary gain on retirement of debt -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
EBDADT after special items
- -------------------------------------------------------------------------------------------------------------------
EBDADT per share before special items/6/
===================================================================================================================
EBDADT per share after special items/6/
</TABLE>
/1/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 Communities occurred as of the
beginning of 1995.
/2/Security Capital sold its investment in Strategic Hotel Capital for net
sale proceeds of $329 million, resulting in a loss of $55 million. As a
result of the sale, no equity in EBDADT was recorded after June 28, 1999.
/3/Includes dividends from investees in which Security Capital has less than
a 20% ownership and no substantial influence as the manager or advisor,
and realized gains (losses) on the sale of securities.
3
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<TABLE>
<CAPTION>
Security Capital's Share of EBDADT
1999 1998 1997/1/ 1996/1/ 1995/1/
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 108,516 $ 99,647 $ 88,338 $ 84,536 $ 73,629
36,461 25,532 11,799 546 --
104,842 91,730 69,172 55,358 39,225
(9,864) (5,095) (214) -- --
31,145 36,776 2,898 -- --
13,674 3,951 -- -- --
5,120 4,302 180 -- --
54,464 43,980 28,705 11,832 76
2,601 5,450 5,104 -- --
- ------------------------------------------------------------------------------------------------------
99,258 99,395 53,411 19,183 6,626
3,596 2,238 4,085 2,911 1,811
(112,014) (106,458) (62,887) (32,391) (21,167)
(82,303) (59,220) (27,248) (6,227) (5,956)
785 (4,698) (575) -- --
(18,035) (15,245) (10,425) -- --
- ------------------------------------------------------------------------------------------------------
$ 238,246 $ 222,285 $162,343 $135,748 $ 94,244
- ------------------------------------------------------------------------------------------------------
(45,581) (8,449) -- -- --
(55,288) -- --
(25,826) (409) 21,724 1,330
10,942 -- -- --
- ------------------------------------------------------------------------------------------------------
$ 122,493 $ 213,427 $184,067 $137,078 $ 94,244
- ------------------------------------------------------------------------------------------------------
$ 1.98 $ 1.78 $ 1.50 $ 1.37 $ 1.19
======================================================================================================
$ 1.02 $ 1.72 $ 1.66 $ 1.39 $ 1.19
</TABLE>
/4/The Financial Services Division generates revenue principally from capital
markets and capital management activities. Security Capital does not
assign a value to the Financial Services Division.
/5/The 1999 special charge relates to Homestead's land write-downs, employee
severance and other expenses related to terminating its development
program. The 1998 special charge consists of Security Capital's portion
($4.7 million) of Homestead's special charges related to a reduction in
its development program and $3.8 million of Security Capital's special
charges related to personnel and overhead reductions.
/6/Security Capital measures EBDADT per share assuming conversion into common
stock of all convertible securities that are dilutive (except for the 12%
convertible debentures prior to 1998) plus the effect of options and
warrants, using the treasury stock method, whose exercise price is below
Security Capital's common share price.
4
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L E T T E R T O S H A R E H O L D E R S O F
S E C U R I T Y C A P I T A L G R O U P
================================================================================
[OFFICERS PHOTO HERE]
From left: Thomas G. Wattles, Managing Director; William D. Sanders,
Chairman; C. Ronald Blankenship, Vice Chairman.
1999 was a critical turning point for Security Capital Group. The wide
disparity between the private and public market valuations of Security
Capital created a powerful dynamic that required management to formulate a
very focused strategy to narrow this gap. On February 1, 1999, Security
Capital's Board of Directors approved a new strategic plan designed to
intelligently unlock shareholder value. This plan concentrates primarily on
actions related to the Capital Division, where over 98% of Security
Capital's assets are held; the Financial Services Division continues in its
efforts to broaden the scope of its businesses.
Integral to the development of the new strategy was the realization that,
since February 1998, the availability and cost of equity capital in the
public real estate markets required Security Capital to adjust its
historical approach to capital allocation. In sum, Security Capital will
focus its investment only in "leadership" companies that generate internal
earnings growth through property development activities and produce
substantial third-party service income. These companies must also be able
to create measurable brand value and hold one of the top two market
positions in their respective niches.
To achieve these objectives, Security Capital is in the process of
intelligently repositioning or selling its investment in companies that do
not meet these criteria, working jointly with the management teams of these
companies to maximize value for shareholders. Capital generated as a result
of these efforts is being reallocated to the SCZ stock repurchase program
and prudent
5
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repayment of debt, as well as to increasing our ownership positions in those
few companies that meet Security Capital's stated objectives. In addition,
we are supporting actions taken by our affiliates to optimize investments to
repurchase their own undervalued stock or profitably expand their core
business.
To ensure that shareholder value is maximized, the refocusing process
cannot take place overnight. This process is expected to result in a
simplified structure and eliminate the gap between the public market price
of our stock and private market valuation of our underlying assets. Although
we are in the very early stages, substantial progress has been made by
Security Capital and its affiliates. Specifically, actions have been focused
in these key areas:
. Sizing overhead to align with new business strategy.
. Selling/repositioning of investments not meeting ownership criteria.
Reallocating capital generated by Security Capital and affiliates to
repurchase stock, prudently repay debt, profitably expand the core
business and increase Security Capital's ownership in "leadership"
companies.
. Simplifying structure to eliminate the public/private market discount and
clarify public market perception.
SCZ Stock Price History and Management's Response
[GRAPH APPEARS HERE]
6
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IMPLEMENTATION OF NEW STRATEGY
Sizing overhead to align with new business strategy.
. In February, Security Capital implemented an overhead reduction program to
align and size the organization with the new business strategy. By the end
of 1999, annualized operating expenses were less than $85 million, a
reduction of $32 million from levels anticipated for the year.
. A major operational and strategic restructuring of Homestead Village
Incorporated was initiated in May. Homestead exited the development
business and sold land inventory, aligning its overhead to match the
requirements of the new business plan. Overhead was reduced from an
annualized rate of $49 million in the first quarter of 1999 to $25 million
in the first quarter of 2000. Bank debt was reduced from $399 million at
the end of the first quarter of 1999 to $125 million at year-end 1999. Cash
flow grew from $35 million in 1999 to a current annualized rate of $54
million. Weekly revenue per available room increased 15.6% to $245 in 1999,
compared to $212 in 1998.
Selling/repositioning of investments not meeting ownership criteria.
Reallocating capital generated by Security Capital and affiliates to
repurchase stock, prudently repay debt, profitably expand the core business
and increase Security Capital's ownership in "leadership" companies.
Actions taken by Security Capital
---------------------------------
. Security Capital's Board of Directors determined that an investment in
Strategic Hotel Capital was no longer consistent with the company's long-
term strategy since there was no opportunity for Strategic Hotel Capital to
generate significant service or development profits. In September, Security
Capital closed the sale of its 23.6% interest in Strategic Hotel Capital
for $329 million in cash. Proceeds were utilized to reduce short-term debt
and initiate the firm's stock repurchase program.
. Security Capital initiated a $100 million share repurchase program in
September, which was expanded to $200 million in December. As of March 1,
2000, the company had repurchased $164 million, the equivalent of
approximately 12.6 million SCZ shares, or 10.3% of shares outstanding when
the program was initiated. We remain confident our stock represents value
unparalleled in the public real estate market and that, through share
repurchase, we are investing in an opportunity with substantial potential
for growth.
7
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Actions taken by Affiliates
---------------------------
. Archstone Communities announced a $100 million share repurchase program in
February, and commenced an additional $50 million buyback program in
September. As of March 1, 2000, approximately 6.1 million shares or 4.3% of
Archstone's shares outstanding were repurchased through both programs, which
were funded primarily through the disposition of low-growth or non-strategic
assets. As a result, Security Capital's ownership position in Archstone
increased from 38.1% to 39.2%.
. An initial $100 million share repurchase program announced by Security
Capital U.S. Realty in May was increased to $200 million in June. As of
March 1, 2000, SC-U.S. Realty had repurchased 10.7 million shares for an
aggregate cost of $195 million, representing approximately 12.3% of SC-U.S.
Realty's shares outstanding when the program was initiated. As a result,
Security Capital's ownership position in SC-U.S. Realty increased from 35.0%
to 40.1%.
. In September, ProLogis successfully tapped the private equity market by
forming a $1.3 billion European Properties Fund, which when fully funded
will contain approximately $3 billion of new facilities located throughout
Europe. By placing its stabilized European assets in this fund, ProLogis is
able to reallocate capital in the expansion of new markets and services to
continue to grow the business.
. Regency Realty announced a $65 million share repurchase program in October.
The program was completed in February when Regency had repurchased
approximately 3.3 million shares representing 5.5% of the shares outstanding
at the beginning of the program. The share repurchased was funded primarily
by the proceeds from Regency's for-sale development program and the sale of
low-growth, non-strategic operating properties.
. In November, Storage USA announced two joint ventures with GE Capital for
the acquisition and development of self-storage facilities. The joint
ventures efficiently raised capital that allows Storage USA to expand its
national presence as well as fund the repurchase of up to 5% of its shares
outstanding.
. In January, CarrAmerica's Board authorized the repurchase of up to $100
million of its outstanding common shares. The share repurchase program will
be funded from the $380 million proceeds received from the merger
transaction of its executive office suites affiliate.
8
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Simplifying structure to eliminate the public/private market discount and
clarify public perception.
[CHART APPEARS HERE]
It is important to note that implementation of our new business strategy
will continue to unfold for the foreseeable future. While excellent progress
has been made this past year, it is only the beginning, and much remains to
be done.
Security Capital and our affiliates will continue to take advantage of the
unprecedented public/private market opportunity to simplify our structure as
well as to buy back undervalued stock, raise capital to expand growth
opportunities and unlock significant shareholder value. Through purposeful
execution of this plan, we will simplify Security Capital's structure and
create a valuable currency in SCZ stock by making it the best way to invest
in our family of outstanding high-growth real estate operating companies.
It is management's goal that Security Capital will come to be known as a
focused operating company with strong earnings performance, an investment
appealing to the growth investor.
9
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1999 OPERATIONS
Security Capital's financial performance for the year improved
significantly as the company began to benefit from the implementation of the new
business strategy as well as several key initiatives to deliver improved
operating profitability.
Earnings before depreciation, amortization and deferred taxes (EBDADT)
before special items for the year was $238.2 million, or $1.98 per share,
compared to $222.3 million, or $1.78 per share, in 1998. On a per share basis,
diluted EBDADT before special items increased by 11.2% for the year. After
special items, the company's EBDADT for the year was $122.5 million compared to
$213.4 million for 1998.
The Capital Division produced $222.7 million of EBDADT before special items
for the year, an increase of $28.0 million over 1998. This performance is
attributable to the strong internal growth achieved by the Capital Division's
affiliates, in which 98.8% of the firm's capital is invested. Solid real estate
fundamentals -- with supply and demand in a healthy ratio -- combined with
excellent results from newly completed development properties and significant
reductions in operating expenses contributed to their performance. Development
will continue to be a driver of growth in the future as 21.6% of the total
capital invested by our affiliates is in pre-stabilized assets or properties
under development.
The Financial Services Division produced EBDADT of $15.5 million for the
year. The Capital Markets Group broadened the scope of its transactions with
clients in the United States and Europe. The Global Capital Management Group was
awarded $324.9 million of new separate account business in 1999 and executed two
new institutional accounts in March of 2000. Capital funding from the new
accounts is expected to increase assets under management by the Global Capital
Management Group by more than $200 million by year end. In addition, as of
January 31, 2000, one of its mutual funds, Security Capital U.S. Real Estate
Shares (SUSIX), achieved a ranking by an independent information provider in the
top 5% of all real estate mutual funds for its three-year average annual return.
Security Capital remains focused on maintaining a strong balance sheet. At
year end, total outstanding indebtedness was $1.1 billion of which $1.0 billion
was fixed-rate debt with an average maturity of 13.2 years and an average
interest rate of 7.2%. The company's only floating-rate indebtedness was its
revolving line of credit, which had an outstanding balance of $90.9 million at
year end. Security Capital's coverage ratio continues to improve, and debt
ratings are investment-grade.
[CHART APPEARS HERE]
Growth in EBDADT Per Share
(before special items)
13.6% Average Annual Growth
1995 $1.19
1996 $1.37
1997 $1.50
1998 $1.78
1999 $1.98
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Embedded Growth in Real Estate Portfolio
at 12/31/99
21.6%/1/ Pre-Stabilized
78.4% Stabilized
/1/Represents portion of investee's real estate assets in development stage or
lease-up phase of operations.
- --------------------------------------------------------------------------------
[CHART APPEARS HERE]
Balance Sheet
Capitalization
(cost basis)
(in millions)
32.9% $3,254
67.1% 1999 Actual
[X] Equity [_] Debt/1/
/1/Debt includes Security Capital's line of credit, long-term debt and
convertible debentures.
10
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THE FUTURE
Management's perspective of the future has both an immediate and
intermediate-term horizon. During the next four quarters, the focus is
clearly to sell or reposition investments in companies not meeting Security
Capital's ownership criteria. The capital generated will be reallocated to
repurchase SCZ stock, increase ownership in our "leadership" companies and,
in the process, reduce debt to maintain an investment-grade rating. All
operating companies will be urged to sell stabilized, non-strategic assets
and/or create funds and joint ventures to repurchase stock or expand their
core business activities. This process will result in a simplified structure
designed to clarify public market perception and eliminate the deep discount
that exists between the private market value of our assets and the current
stock price.
Over the intermediate term, Security Capital will continue to
transition to a more focused company with larger positions in fewer
companies that can be classified as the new "leadership" companies we have
described throughout this letter. These remaining companies will have
significant growth opportunities in both the United States and Europe.
The Annual Meeting of Shareholders will take place in Chicago on
Thursday, May 25, 2000, at 9:30 a.m. Central Time at the Fairmont Hotel, 200
North Columbus Drive. This year, we will begin a new annual meeting format
consisting of a brief business presentation with the balance of time allowed
for questions and answers.
On behalf of the Board of Directors, the management team and
colleagues of Security Capital, we would like to thank you for your past
support, and assure you that we are fully committed to expeditiously
executing the strategy and unlocking value for our shareholders.
William D. Sanders C. Ronald Blankenship
Chairman Vice Chairman
March 14, 2000
11
<PAGE>
PRINCIPLES KEY TO SECURITY CAPITAL'S
OPERATING PHILOSOPHY
================================================================================
Excerpts from previous annual reports that provide insight into the
company's differentiated strategy and value-added approach to operating the
business.
LEADING REAL ESTATE OPERATING COMPANIES (1995)
The industry is in the very early stages of really understanding how it
will operate and what it will look like in the future. The preeminent real
estate operating companies will emulate operating characteristics of the
leading value-added operating companies in other highly competitive
industries. Historically, the real estate industry has had unlimited
capital and hence was not disciplined. With securitization doling out
capital in a more rational manner, leading companies in this industry will
find it imperative to commit significant dollars to research and
development in order to create value-added operating systems that will
dominate carefully selected, focused target markets.
CUSTOMER FOCUS (1996)
The highest sustainable returns in this industry will be achieved by fully
integrated, value-added operating companies focused on their customers.
Continuing to build a superior management team to implement the strategies
that evolve out of an intense focus on research and development creates a
very valuable growth platform for Security Capital.
GLOBALIZATION (1997)
The early results generated by fully integrated, value-added operating
companies will begin to influence real estate trends on an international
basis by the end of the current decade. Underlying the upcoming
transformation of the global real estate industry is a powerful set of
socioeconomic factors, which will create substantial growth and profit
opportunities for the leaders among public real estate operating companies.
Positive population demographics,
12
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strong economic growth and a restructuring of the trade environment within
EU Europe and the "new-NATO" member countries will create a business
climate that compares very favorably with return opportunities in the
United States.
STRATEGY (1998)
You will see Security Capital return to the company's roots of being an
"incubator venture capitalist" of real estate operating companies with high
return potential. The firm's role is to create new start-up private
companies and be actively involved in building and growing these
businesses. Existing and new companies will have an intense drive for
internal growth. Their focus will be on research-based development and
capital redeployment, as well as the creation of operating systems that
deliver extra measures of value to their customer. This will position
Security Capital to create more growth in earnings to enhance shareholder
value.
UNLOCKING SHAREHOLDER VALUE (1998)
You should measure the future performance of management by its
effectiveness in unlocking substantial shareholder value. The company will
reallocate capital into investments that provide the most attractive
returns. On the operating side, the focus will be on driving the internal
growth of investees, creating exciting new industry-leading private
enterprises and on maintaining an operating cost structure that is in
balance with growth prospects. Security Capital has built an exceptional
operating platform that is expected to yield exciting new growth and result
in superior returns to shareholders.
13
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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:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -----------------------
<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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<PAGE>
TABLE OF CONTENTS
<TABLE>
<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........................ 29
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
</TABLE>
<PAGE>
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
<TABLE>
<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
</TABLE>
- --------
. Directly owned by Security Capital
s Indirectly owned through Security Capital European Realty
. Indirectly owned through Security Capital U.S. Realty
1
<PAGE>
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:
<TABLE>
<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>
- --------
(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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<PAGE>
. 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
5
<PAGE>
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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<PAGE>
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,
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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
</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.
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>
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.
63
<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>
64
<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>
65
<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>
66
<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>
67
<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>
68
<PAGE>
================================================================================
D I R E C T 0 R S
<TABLE>
<CAPTION>
<S> <C> <C>
C. RONALD BLANKENSHIP/(S)/ CYRUS F. FREIDHEIM, JR./+/ WILLIAM D. SANDERS/(S)/
Vice Chairman Vice Chairman Chairman
Security Capital Group Incorporated Booz . Allen & Hamilton, Inc. Security Capital Group Incorporated
SAMUEL W. BODMAN/*./ H. LAURANCE FULLER/+./ PETER S. WILLMOTT/+/
Chairman and Chief Executive Officer Corporate Director Chairman and Chief Executive Officer
Cabot Corporation Willmott Services, Inc.
HERMANN BUERGER/+/ RAY L. HUNT/(S)./ /+/Audit Committee
Executive Vice President Chairman, President and /(S)/Executive Committee
Commerzbank AG Chief Executive Officer /*/Management Development and Compensation
Hunt Consolidated, Inc. Committee
. Nominating Committee
JOHN P. FRAZEE, JR./(S)*./ JOHN T. KELLEY, III/*/
Chairman, President and Corporate Director
Chief Executive Officer
Paging Network Incorporated
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SECURITY CAPITAL PRINCIPAL OFFICES
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BRUSSELS LONDON SANTA FE
Chaussee de la Hulpe 166 7 Clifford Street 125 Lincoln Avenue
1170 Brussels, Belgium London, England WIX 2US Santa Fe, New Mexico 87501
Telephone: (322) 679-3900 Telephone: (44) 207-534-5600 Telephone: (505) 982-9292
CHICAGO LUXEMBOURG
11 S. LaSalle Street 25b, Boulevard Royal
Chicago, Illinois 60603 L-2449 Luxembourg
Telephone: (312) 345-5800 Telephone: (352) 46-37-561
EL PASO NEW YORK
7777 Market Center Avenue 399 Park Avenue
El Paso, Texas 79912 New York, New York 10022
Telephone: (915) 877-3900 Telephone: (212) 838-9292
SHAREHOLDER INFORMATION
Notice of Annual Meeting New York Stock Exchange Symbols Shareholder Account Inquiries
The Annual Meeting of Shareholders SCZ Class B Stock EquiServe
of Security Capital will be held at SCZ.A Class A Stock c/o Fleet National Bank
the Fairmont Hotel, 200 N. Columbus P.O. Box 8040
Drive, Chicago, Illinois, at 9:30 a.m. Boston, Massachusetts 02266-8040
(Central Time) on Thursday, May 25, (800) 730-6001
2000. Your proxy materials will explain www.equiserve.com
how you can obtain the card you will
need for admission. For further Investor Relations
information, including hotel (800) 988-4304
reservations, please call (800) Email: [email protected]
988-4307.
Web Site
www.securitycapital.com
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SECURITY CAPITAL
