UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File Number 1-13355
SECURITY CAPITAL GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 36-3692698
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
125 Lincoln Avenue, Santa Fe, New Mexico 87501
(Address of principal executive offices) (Zip Code)
(505) 982-9292
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the Registrant's common stock as of
November 8, 2000 was:
Class A Common Shares, $.01 par value - 1,043,969 shares
Class B Common Shares, $.01 par value - 50,794,625 shares
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
INDEX
Page
Number(s)
---------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2000 (unaudited) and
December 31, 1999.............................................. 1
Consolidated Statements of Operations and Comprehensive Income -
Three and nine months ended September 30, 2000 and 1999
(unaudited).................................................... 2
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2000 and 1999 (unaudited)....................... 4
Notes to Consolidated Financial Statements (unaudited)............. 6
Report of Independent Public Accountants........................... 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......... 21
PART II. Other Information
Item 1. Legal Proceedings.................................................. 21
Item 6. Exhibits and Reports on Form 8-K................................... 22
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- --------------
ASSETS (unaudited)
------
<S> <C> <C>
Investments, at equity:
Archstone Communities Trust $ 549,546 $ 826,957
ProLogis Trust 560,698 591,449
Security Capital European Realty 377,529 419,039
Security Capital Preferred Growth Incorporated 90,662 75,504
Security Capital U.S. Realty 871,982 746,449
SC-US Real Estate Shares 14,351 --
------------- --------------
2,464,768 2,659,398
------------- --------------
Real estate, less accumulated depreciation 987,198 1,073,474
Investments in publicly traded real estate securities, at market value 10,148 10,505
SC-US Real Estate Shares, at market value -- 49,466
------------- --------------
Total real estate investments 3,462,114 3,792,843
Cash and cash equivalents 48,058 30,567
Other assets 127,380 133,741
------------- --------------
Total assets $ 3,637,552 $ 3,957,151
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Lines of credit $ 70,500 $ 216,349
Mortgage and construction notes payable 26,115 237,356
Long-term debt 699,658 699,606
Convertible debentures 230,742 278,951
Capital lease obligation 138,012 140,854
Accounts payable and accrued expenses 159,729 96,300
Deferred income taxes 32,194 12,225
------------- --------------
Total liabilities 1,356,950 1,681,641
Minority interests 62 94,723
Shareholders' Equity:
Class A Common Shares, $.01 par value; 20,000,000 shares authorized;
1,085,172 and 1,218,411 shares issued and outstanding in
2000 and 1999, respectively 11 12
Class B Common Shares, $.01 par value; 229,537,385 shares authorized;
53,483,797 and 52,695,620 shares issued and outstanding in
2000 and 1999, respectively 535 527
Series B Preferred Shares, $.01 par value; 257,642 shares issued and
outstanding in 2000 and 1999; stated liquidation preference of
$1,000 per share 257,642 257,642
Additional paid-in capital 2,213,546 2,308,274
Accumulated other comprehensive loss (50,091) (12,020)
Accumulated deficit (141,103) (373,648)
------------- --------------
Total shareholders' equity 2,280,540 2,180,787
------------- --------------
Total liabilities and shareholders' equity $ 3,637,552 $ 3,957,151
============= ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-1-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
INCOME:
<S> <C> <C> <C> <C>
Equity in earnings (loss) of:
Archstone Communities Trust $ 25,248 $ 25,449 $ 71,361 $ 59,758
ProLogis Trust 14,749 24,536 34,539 29,861
Security Capital European Realty 1,384 (1,858) 1,968 (2,691)
Security Capital Preferred Growth
Incorporated 8,860 (2,535) 18,861 2,980
Security Capital U.S. Realty 33,511 (61,537) 153,066 (42,779)
SC-US Real Estate Shares 2,041 -- 6,077 --
Strategic Hotel Capital Incorporated -- -- -- 11,247
Realized capital gains, net 117,104 144 125,685 1,038
Change in unrealized gain (loss) on investments (120) 697 (165) 1,643
Financial Services Division revenues from
related parties 24,718 34,788 64,638 74,525
Property revenue 72,210 61,168 204,303 165,589
Other income, net 1,536 (4,429) 4,235 6,444
--------- --------- --------- ---------
301,241 76,423 684,568 307,615
--------- --------- --------- ---------
EXPENSES:
Financial Services Division expenses 18,771 26,724 51,574 66,458
General, administrative and other expenses 10,917 11,742 32,730 46,019
Depreciation and amortization 10,498 10,375 34,358 32,785
Interest expense 25,451 35,233 88,462 101,333
Property expenses 29,999 23,015 86,688 74,053
Provision for loss on real estate -- -- 71,000 --
Homestead special charge (credit) (337) -- (1,519) 65,296
Provision for loss on sale of Strategic Hotel -- -- -- 55,245
--------- --------- --------- ---------
95,299 107,089 363,293 441,189
--------- --------- --------- ---------
Earnings (loss) from operations 205,942 (30,666) 321,275 (133,574)
Provision for income tax expense (benefit) 66,456 (14,758) 94,865 (15,579)
Minority interests in net earnings
(loss) of subsidiaries 4 30 2,153 (20,809)
--------- --------- --------- ---------
Earnings (loss) before extraordinary item and
change in accounting principle 139,482 (15,938) 224,257 (97,186)
Extraordinary item - gain on early
extinguishment of debt, net of tax 15,662 -- 21,814 --
Change in accounting principle - cumulative
effect on prior years of expensing costs
of start-up activities, net of minority
interest -- -- -- (16,136)
--------- --------- --------- ---------
Net earnings (loss) 155,144 (15,938) 246,071 (113,322)
Less Preferred Share dividends (4,509) (4,509) (13,526) (13,526)
--------- --------- --------- ---------
Net earnings (loss) attributable to common shares $ 150,635 $ (20,447) $ 232,545 $(126,848)
========== ========= ========= =========
Other comprehensive income (loss):
Foreign currency translation adjustments (20,024) 12,902 (38,071) (13,127)
---------- --------- --------- ---------
Comprehensive income (loss) $ 130,611 $ (7,545) $ 194,474 $(139,975)
========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-2-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME - (Continued)
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Basic earnings (loss) before extraordinary
item and change in accounting principle $ 1.25 $ (0.17) $ 1.93 $ (0.92)
Extraordinary item-gain on early
extinguishment of debt, net of tax $ 0.15 $ -- $ 0.21 $ --
Change in accounting principle-cumulative
effect of expensing cost of start-up
activities $ -- $ -- $ -- $ (0.13)
--------- ---------- ---------- ----------
Basic net earnings (loss) attributable to
common shares $ 1.40 $ (0.17) $ 2.14 $ (1.05)
========= ========== ========== ==========
Diluted earnings (loss) before extraordinary
item and change in accounting principle $ 1.12 $ (0.17) $ 1.81 $ (0.92)
Extraordinary item-gain on early
extinguishment of debt, net of tax $ 0.12 $ -- $ 0.18 $ --
Change in accounting principle-cumulative
effect of expensing cost of start-up
activities $ -- $ -- $ -- $ (0.13)
--------- ---------- ---------- ----------
Diluted net earnings (loss) attributable to
common shares $ 1.24 $ (0.17) $ 1.99 $ (1.05)
======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
--------- -----------
<S> <C> <C>
Operating Activities:
Net earnings (loss) $ 246,071 $ (113,322)
Adjustments to reconcile net earnings (loss) to cash flows
provided by operating activities:
Deferred income tax expense (benefit) 47,899 (23,245)
Minority interests 2,153 (20,809)
Gain on early extinguishment of debt, net of tax (21,814) --
Cumulative effect on prior years of expensing costs of
start-up activities, net of minority interests -- 16,136
Equity in earnings of unconsolidated investees in excess
of distributions (175,907) 61,103
Realized capital gains, net (125,685) (1,038)
Depreciation and amortization 34,358 32,785
Provision for loss on real estate 71,000 --
Homestead special charge -- 51,587
Provision for loss on sale of Strategic Hotel -- 55,245
Other 2,370 133
(Increase) decrease in other assets 3,677 (6,682)
Increase in accounts payable and accrued expenses 64,180 47,015
Net operating cash flows of SC-US Real Estate Shares -- 2,727
--------- -----------
Net cash flows provided by operating activities 148,302 101,635
--------- -----------
Investing Activities:
Real estate investments (45,246) (112,366)
Proceeds from sale of land 22,089 6,346
Purchase of minority interest in Homestead (65,319) --
Redemptions from (investments in):
Security Capital U.S. Realty -- (1,686)
Archstone Communities Trust 178,666 --
SC-US Real Estate Shares 16,250 6,861
Strategic Hotel -- 329,451
European Realty -- (25,928)
Other (2,329) (1,681)
Net investing cash flows of SC-US Real Estate Shares -- 36,721
--------- -----------
Net cash flows provided by investing activities 104,111 237,718
--------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Financing Activities:
Proceeds from lines of credit $ 265,900 $ 355,730
Payments on lines of credit (411,749) (683,160)
Proceeds from mortgage notes 10,093 7,282
Proceeds from long-term debt offerings -- 85,317
Payments on mortgage notes -- (122,028)
Proceeds from issuance of shares to minority
interest holders -- 17,357
Repurchase of common shares (84,146) (21,020)
Preferred dividends paid (13,526) (13,526)
Sale of real estate, net -- 127,261
Other (1,494) (7,029)
Net financing cash flows of SC-US Real Estate Shares -- (538)
------------ -----------
Net cash flows used in financing activities (234,922) (254,354)
------------ -----------
Net increase in cash and cash equivalents 17,491 84,999
Cash and cash equivalents, beginning of period 30,567 13,209
------------ -----------
Cash and cash equivalents, end of period $ 48,058 $ 98,208
============ ===========
Non-Cash Investing and Financing Activities:
Increase in property and equipment and lease obligation
from capital lease $ -- $ 145,000
============ ===========
Effect of affiliate's sale of shares $ 13,756 $ --
============ ===========
Exchange of Convertible Debentures for Archstone shares $ 42,500 $ --
============ ===========
Homestead convertible mortgages received and extinguished,
as consideration for Archstone shares $ 221,334 $ --
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
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") and Security Capital
European Real Estate Shares ("SC-European Real Estate Shares"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of Security Capital's
consolidated financial statements for the interim periods presented. Certain
reclassifications have been made in the 1999 consolidated financial statements
and notes to consolidated financial statements in order to conform to the 2000
presentation. The results of operations for the nine-month period ended
September 30, 2000, are not necessarily indicative of the results to be expected
for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, 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.
The consolidated financial statements of Security Capital as of
September 30, 2000, are unaudited and, pursuant to the rules of the Securities
and Exchange Commission, certain information and footnote disclosures normally
included in financial statements have been omitted. While management of Security
Capital believes that the disclosures presented are adequate, these interim
consolidated financial statements should be read in conjunction with Security
Capital's 1999 audited consolidated financial statements contained in Security
Capital's 1999 Annual Report on Form 10-K.
Restatement of prior period results
As discussed in Security Capital's 1999 Annual Report in Form 10-K,
SC-European Realty changed its basis of accounting from fair value accounting to
historical cost accounting. 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. Accordingly, Security Capital
has restated its September 30, 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 nine months ended September 30, 1999, is as follows
(in thousands, except per share data):
-6-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
As Previously
Reported Restated
------------- ------------
<S> <C> <C>
Consolidated Statement of Operations and
Comprehensive Income:
Revenues, including equity in earnings $ 296,119 $ 307,615
Loss from operations (145,239) (133,574)
Net loss attributable to common shares (134,296) (126,848)
Basic loss per Class B Share $ (1.12) $ (1.05)
Diluted loss per Class B Share $ (1.12) $ (1.05)
</TABLE>
Real Estate and Depreciation
Real estate is stated at cost. Direct and certain related indirect
costs associated with the successful acquisition and development of land are
capitalized. Costs associated with unsuccessful land acquisitions are expensed
at the time the pursuit is abandoned. Maintenance and repairs are charged to
operations as incurred.
Properties under the capital lease at Homestead are stated at the net
present value of minimum lease payments, and are being amortized over the
approximate 17-year lease term. Renewals and improvements are funded by monies
paid into an escrow account for that purpose, and, as ownership of the leased
properties and equipment and the renewals and improvements escrow account remain
with the lessor at the end of the lease, no such amounts are capitalized.
(2) Dividends and Interest Income
Security Capital received dividends and interest (Strategic Hotel
Capital ("Strategic Hotel") only in 1999) from its investees as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Dividends and Interest Received
------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Dividends:
Archstone $ 13,656 $ 20,180 $ 55,040 $ 60,540
Homestead 12,500 -- 37,500 --
ProLogis 16,718 16,328 50,153 48,541
SC-European Real Estate Shares -- -- 51 143
SC-Preferred Growth 1,323 1,299 3,969 3,857
SC-US Real Estate Shares 208 473 803 1,732
---------- ---------- ---------- ----------
44,405 38,280 147,516 114,813
---------- ---------- ---------- ----------
Interest:
Homestead 3,871 -- 3,871 --
Strategic Hotel -- -- -- 6,541
---------- ---------- ------------ -----------
$ 48,276 $ 38,280 $ 151,387 $ 121,354
========== ========== ============ ===========
</TABLE>
-7-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Dividend Amount Per Investee Share
-----------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Dividends:
Archstone $ 0.3850 $ 0.3700 $ 1.1550 $ 1.1100
Homestead 0.1041 -- 0.3124 --
ProLogis 0.3350 0.3272 1.0050 0.9727
SC-European Real Estate Shares -- -- 0.0501 0.1355
SC-Preferred Growth 0.3350 0.3300 1.0050 0.9800
SC-US Real Estate Shares 0.1548 0.1225 0.4035 0.3642
</TABLE>
On July 24, 2000, Security Capital exchanged with Archstone approximately 17.5
million shares of its Archstone common shares for $178.7 million in cash and
$221.3 million face amount of Homestead convertible mortgage notes held by
Archstone (valued at $205.2 million). Immediately after completion of the
transaction, Security Capital owned approximately 29.1% of Archstone's
outstanding common shares.
(3) Real Estate Investments
At September 30, 2000 and December 31, 1999, the composition of real
estate was:
<TABLE>
<CAPTION>
Estimated
Useful September 30, December 31,
Lives 2000 1999
------------------ ----------------- ------------------
<S> <C> <C> <C>
Extended Stay Lodging properties:
Land -- $ 161,013 $ 197,226
Buildings and improvements 20 - 40 years 489,072 616,187
Furniture, fixtures and equipment 3 - 10 years 65,814 88,145
----------------- ------------------
Subtotal, owned properties 715,899 901,558
Properties under a capital lease 17 years 145,000 145,000
----------------- ------------------
860,899 1,046,558
Less accumulated depreciation (76,766) (72,008)
Properties held for sale 90,347 22,960
----------------- ------------------
874,480 997,510
Senior assisted living properties 20 - 40 years 112,718 75,964
----------------- ------------------
$ 987,198 $ 1,073,474
================= ==================
</TABLE>
In June 2000, certain extended stay lodging properties were classified as
held for sale and a provision for loss of $71 million was recorded to reduce the
properties' carrying value to their estimated fair value, less cost to sell. The
earnings from operations for these properties, which are included in Security
Capital's earnings from operations for the nine months ended September 30, 2000
and 1999, are $12.1 million and $10.9 million, respectively, and $3.7 million
and $3.9 million for the three months ended September 30, 2000 and 1999,
respectively.
-8-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Segment Reporting
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' earnings before depreciation,
amortization and deferred taxes ("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.
Presented below is a statement of EBDADT by reportable segment (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended, Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Capital Division:
Equity in Investees' EBDADT(1) $ 104,027 $ 85,546 $ 296,221 $ 260,807
---------- --------- ---------- ----------
Capital Division EBDADT(2) 80,288 50,035 205,222 153,784
---------- --------- ---------- ----------
Financial Services Division:
Revenues 25,945 36,136 68,129 79,168
---------- --------- ---------- ----------
Financial Services Division EBDADT 6,046 10,123 14,696 14,404
---------- --------- ---------- ----------
EBDADT before special items 86,334 60,158 219,918 168,188
Realized gains (losses) 217 46 (351) 1,613
Extraordinary gain on retirement of debt,
net of tax -- -- 6,152 --
Gain on sale of Archstone stock, net of tax 94,101 -- 102,848 --
Homestead special (charge) credit(3) 337 -- 1,519 (45,581)
Strategic Hotel provision -- -- -- (55,288)
---------- --------- ---------- ----------
Basic EBDADT $ 180,989 $ 60,204 $ 330,086 $ 68,932
Investee reconciling items:
Real estate depreciation (37,491) (40,786) (122,051) (140,491)
Gains on sale of depreciated property 12,309 19,478 29,914 27,343
Provision for loss on real estate -- -- (71,000) --
Unrealized gains, including foreign currency 33,735 (72,411) 144,218 (66,603)
EBDADT, net of dividends, from strategic
investees of SC-U.S. Realty (10,482) (6,501) (28,184) (22,111)
Other (2,548) (1,640) (3,310) (3,779)
--------- --------- ---------- -----------
(4,477) (101,860) (50,413) (205,641)
--------- -------- ---------- -----------
Security Capital reconciling items:
Deferred tax expense (benefit) (26,791) 19,114 (47,899) 23,245
Change in accounting principle -- -- -- (16,136)
Other 914 2,095 771 2,752
---------- --------- ----------- -----------
Net earnings (loss) attributable
to common shares $ 150,635 $ (20,447) $ 232,545 $ (126,848)
========== ========= =========== ===========
</TABLE>
-9-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) 1999 equity in Capital Division EBDADT has been restated to conform 1999
results with the new definition of Funds From Operations, which was revised
by the National Association of Real Estate Investment Trusts effective
January 1, 2000. In addition, SC-U.S. Realty restated its 1999 results to
reflect discontinued operations at one of its investees.
(2) 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's 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.
(3) The special (charge) credit in 2000 represents the excess of Homestead's
1999 original special charge over current estimates. The special charge
originally recorded by Homestead through the third quarter of 1999 was for
land write-downs, employee severances and other expenses related to
terminating its development program.
(5) Indebtedness
A summary of indebtedness as of September 30, 2000, is as follows (in
thousands):
<TABLE>
<CAPTION>
Security
Capital Belmont Homestead Total
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Lines of credit $ -- $ -- $ 70,500 $ 70,500
Mortgage and construction
notes payable -- 26,115 -- 26,115
Long-term debt 699,658 -- -- 699,658
Convertible debentures 230,742 -- -- 230,742
Capital lease obligation -- -- 138,012 138,012
</TABLE>
On July 24, 2000, Security Capital exchanged shares of its Archstone
stock for cash and the Homestead mortgage notes with Archstone (see note 2). As
a result of the transaction, the Homestead mortgage notes are eliminated in
consolidation and an extraordinary gain of $15.7 million, net of tax, was
recorded.
During the second quarter of 2000, Security Capital exchanged, with an
unaffiliated party, 1,589,776 shares of Archstone for $42.5 million face value
of convertible debentures, resulting in an extraordinary gain of $6.1 million,
net of tax, on the retirement of the convertible debentures.
(6) Shareholders' Equity
Share Repurchase Program:
On September 26, 2000, Security Capital's Board of Directors authorized
an additional $350 million for stock repurchases (including up to $200 million
for payments to dissenting shareholders who properly elect to receive cash in
Security Capital's planned acquisition of U.S. Realty (see note 9)). This
authorization is in addition to the $100 million authorization approved on May
10, 2000. As of September 30, 2000, under the share repurchase programs,
Security Capital had repurchased 102,413 Class A Shares and 10,154,847 Class B
Shares for a combined purchase price of $203,194,000.
-10-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Affiliate Sale of Security Capital Shares:
In March 2000, SC-U.S. Realty sold its holding in Security Capital's
common stock to an unrelated party at a loss of $52,987,000. Security Capital's
pro rata portion of this loss ($21,163,000) was recorded as a reduction to
additional paid-in capital.
Per Share Data:
The following is a reconciliation of the numerators and denominators
used to calculate basic and diluted earnings per Class B Common Share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) before extraordinary item
and change in accounting principle
attributable to Common Shares-Basic $ 134,973 $ (20,447) $ 210,731 $ (110,712)
Convertible debenture interest expense, net of tax 2,560 -- 7,950 --
Preferred share dividends 4,509 -- -- --
-------- ----------- ---------- ----------
Net income (loss) before extraordinary item
and change in accounting principle
attributable to Common Shares-Diluted $ 142,042 $ (20,447) $ 218,681 $ (110,712)
========= =========== ========== ==========
Weighted-average Class B Common
Shares outstanding-Basic 107,879 120,414 108,625 120,418
Increase in shares which would result from:
Exercise of options and warrants 1,989 -- 1,424 --
Conversion of convertible debentures 10,224 -- 10,689 --
Conversion of Preferred B Shares 6,606 -- -- --
--------- ----------- ---------- ---------
Weighted-average Class B Common
Shares outstanding-Diluted 126,698 120,414 120,738 120,418
========= =========== ========== =========
</TABLE>
For the three months and nine months ended September 30, 2000, the
convertible debentures are assumed converted as the effect is dilutive. The
convertible preferred shares are not assumed converted in 1999 and for the nine
months ended September 30, 2000, as the effects are anti-dilutive. For loss
periods, the options and warrants are not assumed exercised as the effects are
anti-dilutive.
(7) Commitments and Contingencies
Security Capital and its affiliates have committed to invest up to
$518,258,000 in Security Capital European Realty. As of September 30, 2000,
$440,542,000 had been funded by Security Capital and its affiliates. As of
September 30, 2000, $101,826,000 had been funded by Security Capital to Belmont
and an additional $8,129,000 of unfunded commitments remained. At September 30,
2000, Belmont had approximately $41,184,000 of unfunded commitments for
developments under construction.
-11-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) Homestead Merger
On June 8, 2000, Security Capital completed a cash tender offer and a
merger for substantially all the publicly-held shares of Homestead's common
stock and the associated preferred share purchase rights for $4.10 per share. In
connection therewith, Security Capital acquired 15,529,803 shares of Homestead
for a total cost of $65,294,000, including acquisition-related costs. Security
Capital's ownership in Homestead is now 99.9%.
(9) U.S. Realty Combination
On September 26, 2000, Security Capital Group Incorporated, SC Realty
Incorporated, an indirect wholly owned subsidiary of Security Capital Group, and
Security Capital U.S. Realty ("U.S. Realty"), an entity formed under the laws of
Luxembourg as a Societe d' Investissement a Capital Fixe, entered into a
definitive Transaction Agreement, providing for, among other things:
o The purchase by SC-Realty of all of the assets of U.S. Realty,
which will consist primarily of the outstanding capital stock
of Security Capital Holdings S.A., a Luxembourg corporation
("Holdings"), in exchange for shares of Class B Common Stock of
Security Capital Group ("Class B Common Shares"), and cash to fund
payments to dissenting stockholders and to satisfy and discharge
the Indenture under which U.S. Realty's outstanding 2% Senior
Unsecured Convertible Notes Due 2003 were issued.
o The distribution to stockholders of U.S. Realty, in respect of
each share of common stock of U.S. Realty, of 1.15 Class B Common
Shares or, as to stockholders who vote their shares against the
transaction proposal to be submitted to U.S. Realty stockholders
and validly elect to receive cash instead of Class B Common
Shares, an amount of cash equal to the product of 1.15 multiplied
by the average of the daily high and low per share sales prices of
the Class B Common Shares on the New York Stock Exchange during
the fifteen trading days ending on the sixth trading day before
the U.S. Realty stockholder meeting called to consider the
transaction, net of any required withholding taxes. U.S. Realty
will then be liquidated. Security Capital must make available
up to $200 million for dissenting U.S. Realty shareholders that
elect to receive cash in lieu of Class B Common Shares.
Security Capital will not be obligated to proceed with the
transaction should shareholder elections require cash payments
in excess of $200 million.
The transition is subject to approval by the U.S. Realty shareholders
and the issuance of the Class B Common Shares is subject to approval by
the Security Capital shareholders. The transaction is also subject to various
conditions to closing.
-12-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Security Capital Group Incorporated:
We have reviewed the accompanying consolidated balance sheet of Security Capital
Group Incorporated and subsidiaries (see note 1) as of September 30, 2000, and
the related consolidated statements of operations and comprehensive income for
the three month and nine month periods ended September 30, 2000 and 1999, and
the consolidated statements of cash flows for the nine month periods ended
September 30, 2000 and 1999. These financial statements are the responsibility
of the Management of the Company. We were furnished with the reports of other
accountants on their reviews of the financial statements of Archstone
Communities Trust whose total assets represent 15.1% of the total assets of
Security Capital Group Incorporated and subsidiaries as of September 30, 2000,
and whose income represents 10.4% and 15.0% of the total income in the
consolidated statements of operations of Security Capital Group Incorporated and
subsidiaries for the nine month period ended September 30, 2000 and 1999,
respectively.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review and the reports of other accountants, we are not aware of
any material modifications that should be made to the financial statements
referred to above for them to be in conformity with the accounting principles
generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Security
Capital Group Incorporated and subsidiaries as of December 31, 1999, and, in our
report dated March 23, 2000, we expressed an unqualified opinion on that
statement based on our audit and reports of other auditors. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1999, is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 13, 2000
-13-
<PAGE>
Item 2. 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, except as required by
law.
See Security Capital's 1999 Annual Report on Form 10-K for a discussion
of various risk factors associated with forward-looking statements made in this
document.
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 and Security Capital's 1999 Annual Report on Form 10-K.
Results of Operations
Three and Nine Months Ended September 30, 2000 Compared to Three and Nine Months
Ended September 30, 1999
A substantial portion of Security Capital's earnings are generated by
transactional activities in its investees and in the Financial Services
Division. The timing and frequency of these activities are difficult to predict,
which may lead to variations in consolidated results quarter to quarter.
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 and SC-European Real Estate Shares. Cash flow for the
Capital Division is generated through receipt of dividends. (See note 2 to the
consolidated financial statements for detail of dividends received.)
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,
SC-Preferred Growth and SC-US Real Estate Shares in 2000. 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 these investees' use
of fair value accounting. Fluctuations in market prices do not have an impact on
cash flow. Declines in real estate equity security prices in 1999 materially
adversely affected Security Capital's equity in earnings of SC-U.S. Realty
during 1999 and rising security prices in 2000 have materially positively
affected such equity in earnings.
-14-
<PAGE>
Presented below is Security Capital's equity in earnings (loss) and
common share ownership interest in unconsolidated investees for the periods
indicated. Explanations of earnings changes at the investee level, which
materially impacted Security Capital's equity in earnings, follow the table
(dollar amounts in millions).
<TABLE>
<CAPTION>
Equity in Earnings (Loss)
--------------------------------------------------
Three Months Ended Nine Months Ended % Ownership
September 30, September 30, as of September 30,
---------------------- ---------------------- ---------------------------
2000 1999 2000 1999 2000 1999
----------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Archstone $ 25.2 $ 25.4 $ 71.3 $ 59.8 29.0% 39.0%
ProLogis 14.7 24.5 34.5 29.9 30.3% 30.9%
SC-European Realty 1.4 (1.9) 2.0 (2.7) 34.6% 34.6%
SC-Preferred Growth 8.9 (2.5) 18.9 3.0 9.2% 9.3%
SC-U.S. Realty 33.5 (61.5) 153.1 (42.8) 40.6% 38.9%
SC-US Real Estate
Shares 2.1 -- 6.1 -- 17.5% 67.3%
Strategic Hotel -- -- -- 11.2 -- --
-------- --------- --------- ----------
$ 85.8 $ (16.0) $ 285.9 $ 58.4
======== ========= ========= ==========
</TABLE>
Archstone
The decline in Security Capital's equity in earnings from Archstone for
the three months ended September 30, 2000 compared to the same period in 1999 is
due to a decrease in Security Capital's ownership to 29.0% at September 30, 2000
compared to 39.0% at September 30, 1999. Archstone had an increase in earnings
for the three and nine months ended September 30, 2000 compared to the same
periods in 1999 due primarily to increases in gains on dispositions of real
estate of $9.6 million and $36.6 million, respectively. In addition, for the
three and nine months ended September 30, 2000 compared to the same periods in
1999, rental revenues increased by $11.3 million and $44.9 million,
respectively, which were partially offset by increases in depreciation and
interest expense.
ProLogis
ProLogis' earnings decreased for the three months ended September 30,
2000 from the same period in 1999 due to a decrease in income from its
temperature-controlled distribution operations, increased foreign exchange
losses, and a reduction in gain recognized on sales of properties, partially
offset by reductions in depreciation and interest expense. ProLogis' increase in
earnings for the nine months ended September 30, 2000 compared to the same
period in 1999 was due to an increase in income from its corporate distribution
facilities business (which provides build-to-suit services) and its property
operations segment, partially offset by increased foreign currency exchange
losses, a decrease in income from its temperature-controlled distribution
operations and a reduction in the gains recognized on sales of properties.
SC-European Realty
SC-European Realty's current investments are primarily in operating and
development companies with significant pre-stabilized assets. The improvement in
earnings for the three and nine months ended September 30, 2000 compared to the
same period in 1999 was due to improved operating performance from its storage
and parking affiliates and gains on sales of properties. It is expected that
earnings, excluding the impact of property sales, for SC-European Realty will
increase as additional properties reach stabilization.
-15-
<PAGE>
SC-Preferred Growth
SC-Preferred Growth's increase in earnings for the three and nine
months ended September 30, 2000, compared to the same periods in 1999, were due
primarily to changes in unrealized gains or losses on investments as a result of
overall changes in the market prices of its investments.
SC-U.S. Realty
SC-U.S. Realty accounts for its investments at fair value; therefore,
market value fluctuations affect net income. For the three months ended
September 30, 2000, the increase in market prices for its investees increased by
$61.4 million compared to a decrease in market prices for its investees of
$190.2 million during the same period in 1999. The increase in Security
Capital's equity in earnings in SC-U.S. Realty is also due to Security Capital's
increased ownership position. As of September 30, 2000, Security Capital's
ownership position in SC-U.S. Realty increased to 40.6% as SC-U.S. Realty
repurchased approximately 13.5% of its outstanding shares during the period
from May 1999 through March 2000. SC-U.S. Realty's increase in net earnings
for the nine months ended September 30, 2000 compared to 1999 is due to market
prices of its investees increasing in 2000 and a decrease in interest expense.
SC-US Real Estate Shares
Effective with the first quarter of 2000, Security Capital's ownership
of SC-US Real Estate Shares fell below 50%, and, therefore its earnings are
recorded on the equity method in 2000 compared to being consolidated in 1999.
The decrease in earnings for the three and nine months ended September 30, 2000
compared to the same periods in 1999 were due to Security Capital's decrease in
ownership.
Strategic Hotel
In September 1999, Security Capital sold its entire ownership in
Strategic Hotel for net proceeds of approximately $329 million. As a result of
the sale, no equity in earnings from Strategic Hotel were recorded after the
second quarter of 1999.
Financial Services Division
The primary components of the Financial Services Division are the
Capital Markets Group (investment banking and capital raising) and the Global
Capital Management Group (management of investments in real estate securities).
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 to benefit from economies of scale. Revenues for the Financial
Services Division were earned from the following sources (in millions):
-16-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Capital Markets Group $ 5.8 $ 16.4 $ 10.9 $ 20.6
Global Capital Management Group 16.4 14.6 45.5 43.4
Corporate Services Group 3.5 4.2 11.2 13.8
Technology Business 0.1 0.4 0.2 0.4
Real Estate Research Group 0.1 0.5 0.3 1.0
------- --------- --------- ---------
Total Financial Services
Division Revenues 25.9 36.1 68.1 79.2
Less amounts eliminated in consolidation (1.2) (1.3) (3.5) (4.7)
------- --------- --------- ---------
Consolidated Financial Services
Division revenues from related parties $ 24.7 $ 34.8 $ 64.6 $ 74.5
======= ========= ========= =========
</TABLE>
The decline in real estate security prices in 1999 adversely affected
the growth of assets under management and the pace of capital markets
transactions. These factors moderated revenues for the Global Capital Management
Group and the Capital Markets Group and future growth in revenues may be
affected by changes in real estate security prices.
During the later half of 1999, the Global Capital Management Group
became increasingly successful in adding new investment management clients,
which has continued in the first nine months of 2000. Assets managed for
separate accounts increased from $384.5 million at September 30, 1999 to $876.6
million at September 30, 2000. Additionally, during 2000, real estate equity
prices have begun to increase, modestly increasing the value of the asset base
on which fees are earned, partially offset by the sale of SC-U.S. Realty's
special opportunity investments.
Capital Markets revenues have declined from 1999 due to market
conditions which limit the amount of capital affiliated entities can raise and
greater reliance by affiliates on capital markets products provided by
unaffiliated third parties.
Consolidated Investments
Homestead
Overall property level results for Homestead are summarized below (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Total Room Revenue $ 69.3 $ 60.8 $ 197.2 $ 164.4
Total Room Expense (27.4) (24.3) (79.3) (71.8)
--------- --------- ---------- ---------
Net operating income $ 41.9 $ 36.5 $ 117.9 $ 92.6
========= ========= ========= =========
</TABLE>
The increase in net operating income from 1999 to 2000 was due to an
increase in occupancy and the number of operating facilities, as well as the
impact of restructuring operations in 1999. Average occupancy increased to 81.9%
and 75.2% for the three months and nine months ended September 30, 2000,
respectively, from 78.6% and 69.8%, for the three months and nine months ended
September 30, 1999, respectively. Homestead had 136 operating properties at
September 30, 2000 and 1999.
-17-
<PAGE>
Interest Expense
Consolidated interest expense was $25.5 million and $88.5 million for
the three and nine months ended September 30, 2000, respectively, compared to
$35.2 million and $101.3 million for the three and nine months ended September
30, 1999, respectively. The decrease is due to a decline in outstanding
indebtedness to $1.17 billion at September 30, 2000 compared to $1.58 billion at
September 30, 1999.
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
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, 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.
Components of EBDADT before special items are:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Capital Division $ 80,288 $ 50,035 $ 205,222 $ 153,784
Financial Services Division 6,046 10,123 14,696 14,404
--------- --------- --------- ----------
EBDADT before special items $ 86,334 $ 60,158 $ 219,918 $ 168,188
========= ========= ========= ==========
</TABLE>
Provision for Income Taxes
The effective tax rate for the first nine months of 2000 varied from
the expected corporate tax rate of 35% primarily due to reduction in the
valuation reserve relating to a capital loss carryforward due to a capital gain
recognized in the second and third quarters of 2000 and non-taxable earnings of
a foreign subsidiary. The effective tax rate benefit for the first nine months
of 1999 was lower than the expected corporate tax rate of 35% primarily due to
losses in subsidiaries which are consolidated for financial reporting purposes,
but not for tax purposes.
Security Capital's tax basis in any investee is generally equal to its
original cost basis for such asset, reduced by the portion of the cumulative
dividends received from such investee which have been characterized for tax
purposes as return on capital.
-18-
<PAGE>
Security Capital's basis on which taxes would be calculated upon a sale
of the investments in its strategic investees at September 30, 2000, was as
follows (in thousands):
Archstone $480,636
ProLogis 633,967
SC-European Realty 440,548
SC-U.S. Realty 733,645
SC-Preferred Growth 78,137
Homestead(1) 542,457
Belmont 74,243
(1) Reflects underlying estimated tax basis if assets are sold.
The effective tax rate for 2001 is likely to increase as net operating
loss carryforwards are utilized, which may impact earnings.
Liquidity and Capital Resources
Investment Activity
Security Capital's investment activity primarily consists of
allocations to and redemptions from its capital in its various affiliates. The
following table summarizes Security Capital's capital allocations to and
(redemptions from) its primary investments (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2000 1999 2000 1999
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Archstone $(383,801) $ -- $ (416,491) $ --
SC-US Real Estate Shares (9,000) (7,300) (16,250) (48,800)
SC-European Real Estate Shares -- -- -- 2,000
Security Capital U.S. Realty -- -- -- 1,686
SC-European Realty -- 25,928 -- 25,928
Strategic Hotel -- (329,451) -- (329,451)
Real estate investments:
Homestead 2,973 9,951 7,028 86,854
Belmont 18,971 12,151 38,218 25,512
Homestead proceeds from sale of land (2,467) 6,346 (22,089) 6,346
</TABLE>
Real estate investments reflect development activity at Homestead and Belmont.
Archstone has filed a registration statement with the Securities and Exchange
Commission for all Archstone shares held by Security Capital which would
enable Security Capital to pursue the potential sale of Archstone shares to
institutions who are unwilling to purchase unregistered shares.
-19-
<PAGE>
Financing Activity
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.
Cash from Operations
Cash provided by operating activities increased by $46.7 million in the
first nine months of 2000 compared to the first nine months of 1999. This
increase is primarily due to a $32.8 million increase in Homestead's room
revenues, and reductions in Financial Services Division expenses as well as
general and administrative and other expenses of $14.9 million and $13.3
million, respectively.
Stock and Debenture Repurchase Programs
On September 26, 2000, Security Capital's Board of Directors authorized
an additional $350 million for stock repurchases (including up to $200 million
for payments to dissenting shareholders who properly elect to receive cash in
Security Capital's planned acquisition of U.S. Realty (see note 9 to the
consolidated financial statements)). The authorization is in addition to the
$100 million authorization approved on May 10, 2000. As of November 3, 2000,
Security Capital had repurchased $294.3 million of Class B common stock
equivalents (comprised of Class A Shares and Class B Shares) and $60 million
of 6.5% convertible subordinated debentures ($80.5 million principal amount).
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 September 30, 2000. In
addition, as of September 30, 2000, Security Capital has committed to invest an
additional $8.1 million in Belmont.
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 and, together with a transaction
loan provided by Chase Manhattan Bank, Wells Fargo Bank, and Bank of America to
finance the cash requirements of the combination with U.S. Realty. 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 and properties held for
sale, but no assurance can be given that such sales will occur or provide
significant net proceeds.
-20-
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
See Form 10-K "Item 7A. Quantitative and Qualitative Disclosures About
Market Risk" for a more complete discussion of Security Capital's exposure to
interest rate and equity price risks. As of September 30, 2000, there have been
no material changes in the fair values of assets and liabilities disclosed in
"Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in
Security Capital's 1999 Form 10-K, as compared to their respective book values.
PART II
Item 1. Legal Proceedings
As a result of the announcement on March 23, 2000, of Security Capital's
proposal to Homestead to purchase all shares of Homestead common stock not
already owned by Security Capital for $3.40 per share, and before the Homestead
Board of Directors took any action with respect to the proposal, several
lawsuits were filed against Homestead, Security Capital and Homestead's
directors. Homestead, Security Capital, and Homestead's directors have been
named as defendants in four purported stockholder class actions. Three of these
actions have been filed in the Circuit Court for Baltimore City, Maryland, and
are captioned Earl Joseph Maisonneuve v. Eugene B. Vesell, et al.; Robert
Merritt v. Security Capital Group Incorporated; and Harold McClintock v. C.
Ronald Blankenship, et al. One of these actions has been filed in the Circuit
Court for Montgomery County, Maryland, and is captioned Aaron Rubin v. Homestead
Village, Inc. et al. The allegations in all four cases (the "Actions") are
substantially similar, and each complaint in the Actions alleges that (a)
Security Capital's proposal of $3.40 in cash per share was unfair, (b) Security
Capital and the Homestead directors were breaching their duties to the
stockholders of Homestead not affiliated with Security Capital in connection
with the Homestead proposal, and (c) appropriate steps were not being taken to
insure that the stockholders of Homestead not affiliated with Security Capital
would receive fair value for their Homestead shares in any transaction that
might occur. As relief, the complaints in the Actions sought, among other
things, damages in an unspecified amount and rescission of the transaction, if
effected. In addition, the action brought by Harold McClintock was also filed in
a Georgia court and is captioned Harold McClintock v. C. Ronald Blankenship. The
plaintiff has filed a motion to dismiss the Georgia action; however, the court
has not yet granted the motion.
In May 2000, Security Capital increased its offer price to $4.10 per share
and Homestead and Security Capital executed an agreement of merger. On May 2,
2000, as the result of negotiations between counsel for parties in the Actions,
a memorandum of understanding was entered into among counsel for the parties
providing for the settlement of the Actions in exchange for payment of fees and
expenses of plaintiffs' counsel, subject to Court approval, among other things.
The parties intend to submit a proposed settlement of the Actions to a
court in Baltimore County, Maryland and will send notice to all former
shareholders of Homestead of the proposed settlement.
-21-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement dated July 19, 2000 between Security Capital Group
Incorporated and Archstone Communities Trust (previously filed
as Exhibit 2 to Security Capital's Form 8-K dated July 19,
2000 which is incorporated by reference).
10.2 Transaction Agreement dated as of September 26,2000 by and among
Security Capital Group Incorporated, SC Realty Incorporated and
Security Capital U.S. Realty (previously filed as Appendix A to
Security Capital's Registration Statement on Form S-4
(No. 333-47926) which is incorporated by reference).
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends
15 Letter from Arthur Andersen LLP, dated November 13, 2000,
regarding unaudited financial information
27 Financial Data Schedule
(b) Reports on Form 8-K
Date Items Reported
---- --------------
July 19, 2000 Item 5, Item 7
September 26, 2000 Item 5, Item 7
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SECURITY CAPITAL GROUP INCORPORATED
/s/ Paul E. Szurek
---------------------------------------
Paul E. Szurek, Chief Financial Officer
(Principal Financial Officer)
/s/ James C. Swaim
---------------------------------------
James C. Swaim, Senior Vice President
(Principal Accounting Officer)
Date: November 14, 2000
-23-
