<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT
REPORTED):
APRIL 24, 1998
SECURITY CAPITAL ATLANTIC INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 1-2303 85-0415503
(STATE OR OTHER (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
JURISDICTION IDENTIFICATION NO.)
OF INCORPORATION)
SIX PIEDMONT CENTER, SUITE 600 30305
ATLANTA, GEORGIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 237-9292
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
================================================================================
<PAGE>
ITEM 5. OTHER EVENTS
This Current Report on Form 8-K is being filed by Security Capital Atlantic
Incorporated ("ATLANTIC") to report significant changes in ATLANTIC's portfolio
of multifamily communities, and contains audited financial information for
certain of the multifamily communities acquired by ATLANTIC.
ACQUISITIONS
The following acquisitions of multifamily communities were made by ATLANTIC
from unrelated parties. ATLANTIC acquired the following communities because
ATLANTIC believes that these communities represent excellent opportunities for
long-term growth in per share cash flow.
ATLANTIC acquired Shadowbluff apartments on August 26, 1997. Shadowbluff
is a 220 unit, moderate income community located in Nashville, Tennessee.
Shadowbluff was purchased for approximately $8.1 million. At the date of
purchase, the community's occupancy rate was 95%. ATLANTIC assumed
approximately $5.5 million of mortgage debt in connection with the
acquisition of Shadowbluff.
ATLANTIC acquired Bryn Athyn apartments on September 19, 1997. Bryn Athyn
is a 172 unit, moderate income community located in Raleigh, North
Carolina. Bryn Athyn was purchased for approximately $9.0 million. At the
date of purchase, the community's occupancy rate was 90%.
ATLANTIC acquired Cameron at Palm Harbor apartments (formerly Coral Lakes
Landing) on October 17, 1997. Cameron at Palm Harbor is a 168 unit,
moderate income community located in Tampa, Florida. Cameron at Palm Harbor
was purchased for approximately $7.3 million. At the date of purchase, the
community's occupancy rate was 98%. ATLANTIC assumed approximately $5.3
million of mortgage debt in connection with the acquisition of Cameron at
Palm Harbor.
ATLANTIC acquired Arbors of Dublin apartments on October 22, 1997. Arbors
of Dublin is a 288 unit, moderate income community located in Columbus,
Ohio. Arbors of Dublin was purchased for approximately $14.6 million. At
the date of purchase, the community's occupancy rate was 91%.
ATLANTIC acquired Cameron Hidden Harbor apartments (formerly Hidden
Harbor) on December 2, 1997. Cameron Hidden Harbor is a 200 unit, moderate
income community located in West Palm Beach, Florida. Cameron Hidden Harbor
was purchased for approximately $10.9 million. At the date of purchase, the
community's occupancy rate was 95%. ATLANTIC assumed approximately $5.5
million of mortgage debt in connection with the acquisition of Cameron
Hidden Harbor.
ATLANTIC acquired Cameron Lake II apartments (formerly Cooper's Pond) on
December 4, 1997. Cameron Lake II is a 172 unit, moderate income community
located in Raleigh, North Carolina. Cameron Lake II was purchased for
approximately $9.2 million. At the date of purchase, the community's
occupancy rate was 97%.
ATLANTIC acquired Arbor Green apartments on March 31, 1998. Arbor Green is
a 208 unit, moderate income community located in Indianapolis, Indiana.
Arbor Green was purchased for approximately $10.4 million. At the date of
purchase, the community's occupancy rate was 97%.
2
<PAGE>
PROBABLE ACQUISITIONS
The following multifamily communities are under contract to be acquired by
ATLANTIC through a series of transactions with an unrelated party. These
acquisitions will be owned by a partnership entity, of which ATLANTIC will own
approximately 71%. The minority partner's interest in the partnership will be
approximately 29% and will be convertible into shares of ATLANTIC common stock.
<TABLE>
<CAPTION>
ANTICIPATED
PRODUCT ACQUISITION ACQUISITION
NAME UNITS LOCATION TYPE COST ($000) DATE OCCUPANCY
- ----------------------- ------ --------------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Eastover Glen 128 Charlotte, NC Middle 9,303 May 1998 95%
Reafield Ridge I & II 324 Charlotte, NC Middle 19,274 May 1998 94%
Springs at Steele Creek 264 Charlotte, NC Moderate 16,878 May 1998 94%
Cornerstone 302 Raleigh, NC Moderate 24,728 May 1998 90%
Poplar Place 230 Raleigh, NC Middle 14,165 May 1998 91%
Halton Place 246 Greenville, SC Moderate 12,028 May 1998 90%
Pinnacle at Northcross 312 Charlotte, NC Moderate 23,841 July 1998 74% (1)
Conifer Glen 186 Raleigh, NC Moderate 14,705 July 1998 79% (1)
Forest at Biltmore I & II 392 Asheville, NC Moderate 26,956 January 1999 89% (2)
</TABLE>
- --------
(1) Community is currently in lease-up.
(2) Occupancy is for Phase I, which has 200 units; Phase II is under
construction.
DISPOSITIONS
ATLANTIC's real estate investments are made with a view to effective
long-term operation and ownership. Based upon ATLANTIC's market research and in
an effort to optimize its portfolio composition, ATLANTIC disposed of certain
assets in 1997 that no longer met its investment criteria and redeployed the
proceeds therefrom into assets which management believes have better prospects
for long-term growth.
As a result of this asset optimization strategy, ATLANTIC disposed of the
following communities:
ATLANTIC disposed of Park Hill apartments on April 4, 1997. Park Hill is a
264 unit, moderate income community located in Miami, Florida. The gross
proceeds from the Park Hill disposition were approximately $8.7 million. A
loss of approximately $2.7 million was recognized on this disposition, all
of which was recorded as a provision for possible loss in the historical
financial statements.
ATLANTIC disposed of Summer Chase apartments on June 26, 1997. Summer
Chase is a 96 unit, moderate income community located in Tampa, Florida.
The gross proceeds from the Summer Chase disposition were approximately
$3.9 million, and a gain of approximately $0.3 million was recognized.
ATLANTIC disposed of Stonegate apartments and Cameron at Kirby Parkway
apartments on October 30, 1997. Stonegate is a 208 unit, moderate income
community located in Memphis, Tennessee. Cameron at Kirby Parkway is a 324
unit, moderate income community also located in Memphis, Tennessee. The
aggregate gross proceeds from the combined dispositions were approximately
$17.7 million, and an aggregate gain of approximately $1.3 million was
recognized.
3
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements:
Combined Historical Summary of Gross Income and Direct
Operating Expenses with Report of Independent Auditors--Group
F Communities
Historical Summary of Gross Income and Direct Operating
Expenses with Report of Independent Auditors--Arbor Green
Community
b. Pro Forma Financial Information:
Pro Forma Condensed Balance Sheet as of December 31, 1997
(unaudited)
Pro Forma Condensed Statement of Earnings for the year ended
December 31, 1997 (unaudited)
Notes to Pro Forma Condensed Financial Statements
c. Exhibits:
Exhibit 23.1--Consent of Independent Auditors
4
<PAGE>
SIGNATURES
Pursuant to the requirements 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 Atlantic Incorporated
By: /S/ CONSTANCE B. MOORE
Constance B. Moore
CO-CHAIRMAN AND CHIEF OPERATING
OFFICER
/S/ WILLIAM KELL
William Kell
SENIOR VICE PRESIDENT AND
CONTROLLER (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
Date: April 24, 1998
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying combined Historical Summary of Gross
Income and Direct Operating Expenses (the Historical Summary) of the Group F
Communities described in Note 1 for the year ended December 31, 1996. This
combined Historical Summary is the responsibility of the Group F Communities'
management. Our responsibility is to express an opinion on this combined
Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined Historical Summary is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined Historical Summary. An
audit also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall presentation of
the combined Historical Summary. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the report on Form 8-K of Security Capital
Atlantic Incorporated as described in Note 1 to the combined Historical Summary
of the Group F Communities and is not intended to be a complete presentation of
the income and expenses of the Group F Communities.
In our opinion, the combined Historical Summary referred to above presents
fairly, in all material respects, the combined gross income and direct operating
expenses of the Group F Communities as described in Note 1 for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
December 31, 1997
6
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP F COMMUNITIES
COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
JANUARY 1, 1997 THROUGH THE DATE OF ACQUISITION
<TABLE>
<CAPTION>
1996 1997
------------------ ----------------
(Unaudited
<S> <C> <C>
Gross income:
Rental.............................................................. $ 7,350,600 $ 5,971,834
Other............................................................... 221,836 147,292
----------------- ----------------
Total gross income.............................................. 7,572,436 6,119,126
----------------- ----------------
Direct operating expenses:
Utilities and other operating expenses.............................. 1,291,415 1,172,158
Real estate taxes................................................... 674,299 584,295
Repairs and maintenance............................................. 1,197,579 633,307
Management fees..................................................... 321,777 253,223
Interest on certain obligations assumed............................. 979,142 1,039,188
Advertising......................................................... 142,664 138,817
Insurance........................................................... 141,660 75,012
------------------ ----------------
Total direct operating expenses................................. 4,748,536 3,896,000
------------------ ----------------
Excess of gross income over direct operating expenses.................. $ 2,823,900 $ 2,223,126
================== ================
</TABLE>
7
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP F COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
JANUARY 1, 1997 THROUGH THE DATE OF ACQUISITION (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined Historical Summary of Gross Income and Direct Operating
Expenses (the "Historical Summary") relates to the operations of the following
Group F Communities which were acquired from unaffiliated parties by Security
Capital Atlantic Incorporated ("ATLANTIC") between January 1, 1997 and December
2, 1997.
<TABLE>
<CAPTION>
Date of Acquisition Community Name Location Acquisition Cost
- --------------------------- ------------------------------- --------------------------- ------------------
(in 000s)
<S> <C> <C> <C>
August 26, 1997 Shadowbluff Nashville, Tennessee $ 8,070
September 19, 1997 Bryn Athyn Raleigh, North Carolina 9,044
October 17, 1997 Cameron at Palm Harbor Tampa, Florida 7,323
(formerly Coral Lakes
Landing)
October 22, 1997 Arbors of Dublin Columbus, Ohio 14,611
December 2, 1997 Cameron Hidden Harbor West Palm Beach, Florida 10,938
(formerly Hidden Harbor)
</TABLE>
The accompanying combined Historical Summary has been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the report on Form 8-K of ATLANTIC. The
combined Historical Summary is not intended to be a complete presentation of
combined income and expenses of the Group F Communities as certain costs such as
depreciation, amortization, certain mortgage interest, professional fees and
other costs not considered comparable to the future operations of the Group F
Communities have been excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Rental income from leasing activities consists of lease payments earned
from tenants under lease agreements with terms of one year or less.
CAPITALIZATION POLICY
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred.
8
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
GROUP F COMMUNITIES
NOTES TO COMBINED HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
JANUARY 1, 1997 THROUGH THE DATE OF ACQUISITION (UNAUDITED)
USE OF ESTIMATES
The preparation of the combined Historical Summary in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined Historical
Summary and accompanying notes. Actual results could differ from those
estimates.
3. RELATED PARTY TRANSACTIONS
Management fees of $233,386 and $181,414 in 1996 and 1997, respectively,
were paid to affiliates of the prior owners under property management contracts.
4. DEBT ASSUMPTION
ATLANTIC assumed outstanding debt in connection with the acquisition of the
Shadowbluff, Cameron at Palm Harbor and Cameron Hidden Harbor communities. An
8.05% mortgage note with an outstanding balance of $5,520,673 at August 26, 1997
(the date of acquisition) collateralized by the Shadowbluff community matures on
December 1, 2005. The note requires monthly principal and interest payments of
$41,286.
An 8.04% mortgage note with an outstanding balance of $5,259,872 at October
17, 1997 (the date of acquisition) collateralized by the Cameron at Palm Harbor
community matures on November 1, 2006. The note requires monthly principal and
interest payments of $39,037.
A 7.93% mortgage note with an outstanding balance of $5,504,439 at December
2, 1997 (the date of acquisition) collateralized by the Cameron Hidden Harbor
community matures on May 12, 2001. The note requires monthly principal and
interest payments of $49,926.
ATLANTIC's assumption of these mortgage notes did not provide for
modification of the original terms of the notes; therefore, interest expense
incurred prior to ATLANTIC's assumption is representative of future interest
expense. Accordingly, 1996 interest expense of $448,805 and $456,950 for
Shadowbluff and Cameron at Hidden Harbor, respectively, is recognized in the
combined Historical Summary. The mortgage note related to Cameron at Palm Harbor
was executed by the prior owner on October 30, 1996 and interest expense of
$73,387 for the two months subsequent is recognized in the combined Historical
Summary. Interest expense of $291,109, $407,286, and $340,793 for the three
communities, respectively, is recognized for the period from January 1, 1997
through the respective Date of Acquisition.
9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Security Capital Atlantic Incorporated
We have audited the accompanying Historical Summary of Gross Income and
Direct Operating Expenses (the Historical Summary) of the Arbor Green Community
(the "Community") for the year ended December 31, 1997. This Historical Summary
is the responsibility of the Community's management. Our responsibility is to
express an opinion on this Historical Summary based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summary. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall presentation of the Historical
Summary. We believe that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the report on Form 8-K of Security Capital Atlantic
Incorporated as described in Note 1 to the Historical Summary and is not
intended to be a complete presentation of the income and expenses of the
Community.
In our opinion, the Historical Summary referred to above presents fairly,
in all material respects, the gross income and direct operating expenses of the
Community as described in Note 1 for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
April 7, 1998
10
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
ARBOR GREEN COMMUNITY
HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1997
Gross income:
Rental..................................................... $ 1,392,014
Other...................................................... 102,958
--------------
Total gross income..................................... 1,494,972
Direct operating expenses:
Utilities and other expenses............................... 282,336
Real estate taxes.......................................... 134,933
Repairs and maintenance.................................... 143,528
Management fees............................................ 74,397
Advertising................................................ 34,952
Insurance.................................................. 12,811
--------------
Total direct operating expense......................... 682,957
--------------
Excess of gross income over direct operating expenses......... $ 812,015
==============
11
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
ARBOR GREEN COMMUNITY
NOTES TO HISTORICAL SUMMARY OF GROSS
INCOME AND DIRECT OPERATING EXPENSES
YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
The Historical Summary of Gross Income and Direct Operating Expenses (the
"Historical Summary") relates to the operations of the Arbor Green Community
(the "Community"), located in Indianapolis, Indiana which was acquired from an
unaffiliated party by Security Capital Atlantic Incorporated ("ATLANTIC") on
March 31, 1998 for $10,439,000.
The accompanying Historical Summary has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in the report on Form 8-K of ATLANTIC. The Historical
Summary is not intended to be a complete presentation of income and expenses of
the Community, as certain costs such as depreciation, amortization, mortgage
interest, professional fees and other costs not considered comparable to the
future operations of the Community have been excluded.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Rental income from leasing activities consists of lease payments earned
from tenants under lease agreements with terms of one year or less.
CAPITALIZATION POLICY
Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments are capitalized.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred.
USE OF ESTIMATES
The preparation of the Historical Summary in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the Historical Summary and
accompanying notes. Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
Management fees of $74,397 were paid to affiliates of the prior owners
under property management contracts.
12
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying pro forma condensed financial statements for Security
Capital Atlantic Incorporated ("ATLANTIC") have been prepared based on certain
pro forma adjustments to ATLANTIC's historical financial statements. The pro
forma condensed financial statements reflect the multifamily community
acquisitions and dispositions disclosed in Item 5 of this Form 8-K and reflect
the transaction whereby ATLANTIC became an internally managed real estate
investment trust ("REIT").
The accompanying pro forma condensed balance sheet as of December 31, 1997
has been prepared as if the acquisition of the one community acquired by
ATLANTIC subsequent to December 31, 1997 had been acquired as of that date. In
addition, the pro forma condensed balance sheet reflects the probable
acquisition of nine communities through the formation of a partnership entity as
if this transaction had occurred as of December 31, 1997.
The accompanying pro forma condensed statement of earnings for the year
ended December 31, 1997 has been prepared as if the transaction, which was
consummated on September 9, 1997 pursuant to which ATLANTIC acquired the
operations and business of Security Capital (Atlantic) Incorporated ("the REIT
Manager") and SCG Realty Services Atlantic Incorporated (the "Property Manager")
in exchange for shares of Atlantic common stock, par value $0.01 per share
("Common Shares") (the "Transaction"), had occurred as of January 1, 1997 and
also reflects:
(i) the acquisition and disposition by ATLANTIC of all operating
communities acquired or disposed of subsequent to December 31,
1996 as if these communities had been acquired or disposed of as
of January 1, 1997;
(ii) the assumption of certain mortgage debt associated with the
acquisition of the operating communities acquired subsequent to
December 31, 1996 as if this mortgage debt had been assumed on
January 1, 1997;
(iii) the probable acquisition of nine operating communities as if the
acquisition of these communities through the formation of the
partnership entity had occurred as of January 1, 1997;
(iv) the sale of Common Shares, preferred stock and senior unsecured
notes subsequent to December 31, 1996, necessary to fund pro forma
acquisitions as if the securities had been sold as of January 1,
1997.
The pro forma condensed financial statements do not purport to be
indicative of the financial position or results of operations which would
actually have been obtained had the transactions described above been completed
on the dates indicated or which may be obtained in the future. The pro forma
condensed financial statements should be read in conjunction with the Historical
Summaries of Gross Income and Direct Operating Expenses included herein and the
historical financial statements included in ATLANTIC's 1997 Form 10-K. In
management's opinion all material adjustments necessary to reflect the effects
of these transactions have been made to the pro forma financial statements.
13
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS HISTORICAL ACQUISITIONS PRO FORMA
------ ---------------- --------------- ----------------
<S> <C> <C> <C>
Real estate................................................... .....$ 1,364,572 $ 172,317(a) $ 1,536,889
Less accumulated depreciation....................................... 65,626 -- 65,626
---------------- --------------- ----------------
1,298,946 172,317 1,471,263
Homestead Convertible Mortgages..................................... 122,482 -- 122,482
---------------- --------------- ----------------
Net investments.................................................. 1,421,428 172,317 1,593,745
Cash and cash equivalents........................................... 1,273 -- 1,273
Other assets........................................................ 18,710 -- 18,710
---------------- --------------- ----------------
Total assets................................................$ 1,441,411 $ 172,317 $ 1,613,728
================ =============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Lines of credit................................................$ 164,743 $ 125,439(b) $ 290,182
Notes payable.................................................. 150,000 -- 150,000
Mortgages payable.............................................. 170,525 -- 170,525
Distributions payable.......................................... 19,104 -- 19,104
Accounts payable............................................... 22,774 -- 22,774
Accrued expense and other liabilities.......................... 23,284 -- 23,284
---------------- --------------- ----------------
Total liabilities.......................................... 550,430 125,439 675,869
---------------- --------------- ----------------
Minority interest................................................... -- 46,878(c) 46,878
Shareholders' equity (250,000,000 total shares authorized):
Series A preferred shares (2,000,000 shares issued and
outstanding at December 31, 1997; stated liquidation
preference of $25 per share).................................. 50,000 -- 50,000
Common Shares (47,760,580 issued and outstanding).............. 478 -- 478
Additional paid-in capital..................................... 904,668 -- 904,668
Employee stock purchase notes.................................. (12,347) -- (12,347)
Unrealized gains on Homestead Convertible Mortgages............ 16,707 -- 16,707
Distributions in excess of net earnings........................ (68,525) -- (68,525)
---------------- --------------- ----------------
Total shareholders' equity................................. 890,981 -- 890,981
---------------- --------------- ----------------
Total liabilities and shareholders' equity................ $ 1,441,411 $ 172,317 $ 1,613,728
================ =============== ================
</TABLE>
The accompanying notes are an integral part of the pro forma
condensed financial statements.
14
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PROFORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUISITIONS/DISPOSITIONS, NET
------------------------------
ATLANTIC PRO FORMA THE ATLANTIC
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION (D) PRO FORMA
------------ ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income...................................$ 168,459 $ 17,300 (e) $ -- $ -- $ 185,759
Homestead Convertible Mortgage interest income.. 4,453 -- -- -- 4,453
Other interest income........................... 637 -- -- -- 637
------------ ------------- ------------- --------------- -------------
173,549 17,300 -- -- 190,849
------------ ------------- ------------- --------------- -------------
Expenses:
Rental expenses:
Paid to affiliate............................ 274 -- -- 1,596 (d)(i) 1,870
Paid to third parties........................ 44,488 4,548 (e) (86) (f) 3,778 (d)(i) 52,728
Real estate taxes............................... 14,693 1,031 (e) -- -- 15,724
Property management fees:
Paid to affiliate............................ 3,848 910 (e) (203) (f) (4,555)(d)(ii) --
Paid to third parties........................ 629 -- -- -- 629
Depreciation.................................... 26,994 -- 3,203 (g) 247 (d)(iii) 30,444
Interest:
Mortgages.................................... 11,062 1,039 (h) 15 (h) -- 12,116
Line of credit and notes payable............. 9,230 -- 5,906 (i) -- 15,136
REIT management fee paid to affiliate.............. 8,548 -- 404 (j) (8,952)(d)(ii) --
General and administrative expenses:
Paid to affiliate............................ 316 -- -- 1,059 (d)(iv) 1,375
Paid to third parties........................ 2,046 -- -- 2,820 (d)(iv) 4,866
Provision for possible loss on investments......... 200 -- -- -- 200
Other.............................................. 106 -- -- -- 106
------------ ------------- ------------- --------------- -------------
122,434 7,528 9,239 (4,007) 135,194
------------ ------------- ------------- --------------- -------------
</TABLE>
The accompanying notes are an integral part of the pro forma
condensed financial statements. (Continued)
15
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
PROFORMA CONDENSED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACQUISITIONS/DISPOSITIONS, NET
------------------------------
ATLANTIC PRO FORMA THE ATLANTIC
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION (D) PRO FORMA
------------ ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings from operations before minority
interest, excluding gains on dispositions.........$ 51,115 $ 9,772 $ (9,239) $ 4,007 $ 55,655
Minority interest share in net earnings............. -- -- 2,203 (k) -- 2,203
------------ ------------- ------------- -------------- ------------
Earnings from operations excluding gains on
dispositions...................................... 51,115 9,772 (11,442) 4,007 53,452
Less preferred share dividends.................. 1,569 -- 69 (l) -- 1,638
------------ ------------ ------------ ------------ ------------
Net earnings attributable to Common Shares..........$ 49,546 $ 9,772 $ (11,511) $ 4,007 $ 51,814
============ ============= ============= ============== ============
Per Common Share amounts:
Basic net earnings attributable to
Common Shares..................................$ 1.17 $ 1.17
============ ============
Diluted net earnings attributable to Common
Shares............................................$ 1.17 $ 1.17
============ ============
Weighted-average Common Shares outstanding -
basic............................................. 42,449 -- 89 (m) 1,586 (d)(v) 44,124
============ ============== ============== ============= ============
Weighted-average Common Shares outstanding -
diluted (n)....................................... 42,450 -- 89 1,586 (d)(v) 44,125
============ ============== ============== ============= ============
Reconciliation of net earnings attributable to
Common Shares to funds from operations:
Net earnings attributable to Common Shares......$ 49,546 $ 9,772 $ (11,511) $ 4,007 $ 51,814
Add (Deduct):
Real estate depreciation........................ 26,963 -- 3,203 -- 30,166
Provision for possible loss on investments...... 200 -- -- -- 200
Non-cash interest income........................ (486) -- -- -- (486)
Minority interest............................... -- -- 2,203 -- 2,203
------------ ------------- ------------- -------------- ------------
Funds from operations (o).......................$ 76,223 $ 9,772 $ (6,105) $ 4,007 $ 83,897
============ ============= ============= ============== ============
Weighted-average Common Shares outstanding -
basic (p)......................................... 42,449 -- 1,501 1,586 (d)(v) 45,536
============ ============= ============= ============== ============
Weighted-average Common Shares outstanding -
diluted (p)....................................... 42,450 -- 1,501 1,586 (d)(v) 45,537
============ ============= ============= ============== ============
Cash Flow Summary:
Net cash provided by operating activities......$ 83,122 $ 9,772 $ (6,105) $ 2,023 $ 88,812
Net cash used by investing activities.......... (295,606) -- (125,439) -- (421,045)
Net cash provided by financing activities...... 209,418 -- 125,439 -- 334,857
</TABLE>
The accompanying notes are an integral part of the pro forma
condensed financial statements.
16
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(a) As described in Item 5 to this Form 8-K, represents (i) the acquisition of
one community on March 31, 1998 and (ii) the probable acquisition of nine
communities.
(b) Reflects the use of line of credit borrowings to fund the cash portion of
the acquisitions discussed in note (a).
(c) Represents the minority interest that will result from ATLANTIC's probable
acquisition of nine communities. In exchange for contributing $115.0
million in cash, ATLANTIC will own approximately 71% of the partnership
entity that will own these communities (the "Partnership"). The minority
interest will be exchangeable for Common Shares beginning on the first
anniversary date of its issuance.
(d) On September 9, 1997, ATLANTIC acquired the operations and business of the
REIT Manager and the Property Manager, in exchange for Common Shares. As a
result of the Transaction, ATLANTIC became an internally managed REIT. The
adjustments discussed below reflect ATLANTIC's operating results for 1997
as if the Transaction had been consummated as of January 1, 1997.
(i) Reflects the historical operating expenses of the Property Manager
which were directly related to providing services to ATLANTIC for
the period from January 1, 1997 to September 9, 1997 and certain
pro forma adjusments. The amounts designated as being "paid to
affiliate" represent administrative services provided by Security
Capital Group Incorporated ("Security Capital"), the owner of the
REIT Manager and Property Manager and ATLANTIC's principal
shareholder. Security Capital has been providing these services to
ATLANTIC since September 9, 1997 under an administrative services
agreement;
(ii) Reflects the elimination of ATLANTIC's historical expenses,
including pro forma adjustments, related to REIT management fees
and property management fees;
(iii)Reflects the historical depreciation expense of $184 for the
period from January 1, 1997 to September 9, 1997 directly related
to fixed assets acquired from the REIT Manager and the Property
Manager (primarily computer equipment and software), as adjusted
by $63 for the estimated increase in depreciation expense that
would result from the capitalization of development-related costs
for the period from January 1, 1997 to September 9, 1997 as
discussed below. These capitalized costs will be depreciated
utilizing the same lives and methods currently utilized by
ATLANTIC;
(iv) Reflects the historical general and administrative costs of the
REIT Manager of $5,051 which were associated with providing
services to ATLANTIC for the period from January 1, 1997 to
September 9, 1997, reduced for the pro forma adjustment to
capitalize qualifying direct and incremental costs relating
primarily to the development of real estate investments of $2,379
that would have been capitalized by ATLANTIC under generally
accepted accounting principles ("GAAP"), had the Transaction
occurred as of January 1, 1997. This amount is net of a $148
adjustment related to the pro forma reduction of internal costs
capitalized in connection with ATLANTIC's operating community
acquisitions for the period from September 9, 1997 to December 31,
1997. The pro forma reduction results from a March 1998 accounting
rule requiring that internal acquisition costs be expensed as
incurred. Prior to consummation of the Transaction on September 9,
1997, ATLANTIC was not able, under GAAP, to capitalize internal
development-related costs because the REIT management fee paid was
not a direct reimbursement of these costs.
The amounts designated as being "paid to affiliate" represent
administrative services provided by Security Capital. Security
Capital has been providing these services to ATLANTIC since
September 9, 1997 under an administrative services agreement.
17
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(v) Reflects the increase in weighted-average Common Shares
outstanding that would result if the 2,307 Common Shares issued to
Security Capital as consideration for the purchase of the net
tangible assets of the REIT Manager and the Property Manager had
been issued as of January 1, 1997. The number of shares shown is
based on the 2,307 Common Shares actually issued to Security
Capital on September 9, 1997, calculated as: 2,307 x 251 days /
365 days = 1,586 weighted-average incremental Common Shares.
(e) All of ATLANTIC's acquisitions and probable acquisitions subsequent to
December 31, 1996 were or will be acquired from unaffiliated third parties.
These acquisitions are described in Item 5 of this Form 8-K. These amounts
reflect historical gross income and certain expenses for all communities
acquired subsequent to December 31, 1996 for the period from January 1,
1997 to the respective dates of acquisition (results of operations after
the date of acquisition are included in ATLANTIC's historical operating
results). The adjustments also reflect the removal from ATLANTIC's
historical balances of gross income and certain expenses for all
communities disposed of subsequent to December 31, 1996 for the period from
January 1, 1997 to the respective dates of disposition. The historical
gross income and expenses relating to the period prior to ATLANTIC's
acquisition of the communities exclude amounts which would not be
comparable to the proposed future operations of the communities.
The following tables summarize the historical income and expense amounts
shown on the pro forma condensed statement of earnings for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
REAL PROPERTY
RENTAL RENTAL ESTATE MANAGEMENT
INCOME EXPENSES TAXES FEES
------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997:
Group F Communities (see
reconciliation to audited results
below)............................... $ 7,748 $ 2,404 $ 720 $ 298
Arbor Green Community (audited
results)............................. 1,495 474 135 74
Other community acquired in 1997....... 1,340 356 74 62
Probable community acquisitions........ 13,476 3,478 751 724
------------ ------------ ----------- ---------------
Totals for the year.................. 24,059 6,712 1,680 1,158
Less: Post acquisition amounts
already included in ATLANTIC's
historical balances............ (1,733) (410) (141) (45)
Less: Dispositions.................... (5,026) (1,754) (508) (203)
Net adjustment to ATLANTIC's ------------ ------------ ------------ ---------------
historical balances.................. $ 17,300 $ 4,548 $ 1,031 $ 910
============ =========== ============ ===============
</TABLE>
The following analysis reconciles the audited information for the Group F
Communities to the amounts contained in the pro forma condensed statement
of earnings (in thousands):
18
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
REAL PROPERTY
RENTAL RENTAL ESTATE MANAGEMENT
INCOME EXPENSES TAXES FEES
------------ ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Group F Communities: Audited results of
operations for the year ended December
31, 1996................................. $ 7,572 $ 2,773 $ 674 $ 322
Incremental income and expense
amounts necessary to reconcile the
1996 audited results with the 1997
actual results....................... 176 (369) 46 (24)
------------ ----------- ------------ -----------------
Total 1997 Group F................ $ 7,748 $ 2,404 $ 720 $ 298
============ =========== ============ =================
</TABLE>
(f) Represents the adjustment to historical rental and property management
expenses to reflect these expenses at the level they would have been had
ATLANTIC owned the communities as of January 1, 1997.
(g) Reflects (i) the removal of $582 of depreciation expense recognized on
communities disposed of subsequent to December 31, 1996 which is included
in ATLANTIC's 1997 historical balances and (ii) the recognition of $3,785
of depreciation expense for the period from January 1, 1997 through the
respective acquisition dates related to the communities acquired subsequent
to December 31, 1996. Depreciation expense after the date of acquisition is
included in ATLANTIC's historical operating results. This depreciation
adjustment is based on ATLANTIC's purchase cost assuming asset lives of ten
to 40 years. Depreciation is computed using a straight-line method.
(h) Reflects historical interest expense of $1,039 for the period from January
1, 1997 through the date the three mortgage notes related to 1997
acquisitions were assumed by ATLANTIC. Additionally, a pro forma adjustment
of $15 has been recognized to reflect interest expense on the three
mortgage notes at ATLANTIC's effective interest rate. The interest rates on
the mortgage notes vary from 7.93% to 8.05%.
(i) Represents the increase in interest expense on the portion of ATLANTIC's
senior unsecured notes issued on August 20, 1997 (the "Notes") that is
assumed to have been issued as of January 1, 1997 to the extent necessary
to fund pro forma acquisitions. The pro forma adjustment assumes that the
probable acquisitions described in note (e) are funded entirely with
proceeds from the Notes. The remaining pro forma acquisitions described in
note (e) are assumed to be funded with proceeds from the sale of Common
Shares, preferred stock and the Notes on a pro rata basis. See notes (l)
and (m). The weighted-average effective interest rate on the Notes of 7.66%
was used to calculate the pro forma adjustment.
(j) Reflects the additional REIT management fee that would have been incurred
had the pro forma acquisitions and dispositions occurred as of January 1,
1997.
(k) Reflects the minority partner's approximately 29% interest in the net
earnings of the Partnership. See note (c).
(l) Reflects an increase in preferred share dividends on the portion of
ATLANTIC's Series A Cumulative Redeemable Preferred Stock issued on August
20, 1997 that is assumed to have been issued as of January 1, 1997 to the
extent necessary to fund pro forma acquisitions. See note (i).
(m) The number of Common Shares used in the calculating of the pro forma basic
net earnings per Common Share was based on the weighted-average number of
Common Shares outstanding during the period, adjusted to give effect to the
Common Shares assumed to have been issued as of January 1, 1997 to the
extent necessary to fund the pro forma acquisitions. See note (i).
19
<PAGE>
SECURITY CAPITAL ATLANTIC
INCORPORATED
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(n) Diluted earnings per share ("EPS") has not been calculated assuming
conversion of the minority partner's interest in the Partnership because
the effect on EPS would be anti-dilutive. The diluted EPS calculation does
include the effect of dilutive stock options.
(o) Funds from operations represents ATLANTIC's net earnings computed in
accordance with GAAP, before minority interest, excluding gains (or losses)
from real estate transactions, provision for possible losses, extraordinary
items, non-cash interest income and real estate depreciation. Funds from
operations should not be considered as an alternative to net earnings or
any other GAAP measurement of performance as an indicator of ATLANTIC's
operating performance or as an alternative to cash flows from operating,
investing or financing activities as a measure of liquidity. ATLANTIC
believes that funds from operations is helpful to a reader as a measure of
the performance of an equity REIT because, along with cash flow from
operating activities, financing activities and investing activities, it
provides a reader with an indication of the ability of ATLANTIC to incur
and service debt, to make capital expenditures and to fund other cash
needs. The funds from operations measure presented by ATLANTIC, while
consistent with the National Association of Real Estate Investment Trusts'
definition, may not be comparable to similarly titled measures of other
REITs which do not compute funds from operations in a manner consistent
with ATLANTIC. Funds from operations is not intended to represent cash made
available to shareholders. Furthermore, management believes that an
understanding of funds from operations will enhance the reader's
comprehension of the impact of the Transaction to ATLANTIC which was a
specific consideration of ATLANTIC's Board of Directors in approving the
Transaction.
(p) The exchange of the minority partner's interest in the Partnership for
Common Shares is assumed for purposes of presenting basic and diluted
weighted-average Common Shares outstanding with respect to funds from
operations.
20
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-38477) of Security Capital Atlantic Incorporated ("ATLANTIC") and in
the related Prospectus and the Registration Statements (Form S-8 No. 333-43761,
333-31419, and 333-25993) pertaining to the Security Capital Atlantic
Incorporated 401(K) Savings Plan, the Security Capital Atlantic Incorporated
Long-Term Incentive Plan and the Security Capital Atlantic Incorporated Share
Option Plan for Outside Directors of our report dated December 31, 1997, with
respect to the combined Historical Summary of Gross Income and Direct Operating
Expenses of the Group F Communities and our report dated April 7, 1998, with
respect to the Historical Summary of Gross Income and Direct Operating Expenses
of the Arbor Green Community, both of which are included in the Report on Form
8-K to be filed by ATLANTIC on or about April 22, 1998.
ERNST & YOUNG LLP
Dallas, Texas
April 22, 1998
