<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from____________to__________
Commission file number 1-11690
--------------------------------
DEVELOPERS DIVERSIFIED REALTY CORPORATION
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1723097
----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 Enterprise Parkway, Beachwood, Ohio 44122
----------------------------------------------------------------------
(Address of principal executive offices - zip code)
(216) 755-5500
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
34555 Chagrin Blvd., Moreland Hills, Ohio 44022
----------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicated by check x whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to
such filing requirements for the past 90 days Yes x No
APPLICABLE ONLY TO CORPORATE ISSUERS:
-------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes
of common shares as of the latest practicable date.
61,300,096 shares outstanding as of May 12, 1999
---------- ------------
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31,
1998.
Condensed Consolidated Statements of Operations for the Three Month Periods
ended March 31, 1999 and 1998.
Condensed Consolidated Statements of Cash Flows for the Three Month Periods
ended March 31, 1999 and 1998.
Notes to Condensed Consolidated Financial Statements.
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<PAGE> 3
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
<S> <C> <C>
Real estate rental property:
Land $ 333,993 $ 317,823
Buildings 1,436,866 1,404,734
Fixtures and tenant improvements 25,636 24,131
Land under development 20,882 34,534
Construction in progress 119,480 115,541
----------- -----------
1,936,857 1,896,763
Less accumulated depreciation (215,233) (203,097)
----------- -----------
Real estate, net 1,721,624 1,693,666
Cash and cash equivalents 2,774 2,260
Investments in and advances to joint ventures 288,538 266,257
Minority equity investment 133,159 80,710
Notes receivable 18,180 49,008
Other assets 38,205 34,623
----------- -----------
$ 2,202,480 $ 2,126,524
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unsecured indebtedness:
Fixed rate senior notes $ 592,193 $ 592,154
Revolving credit facility 197,000 132,000
Subordinated convertible debentures 40,065 40,065
----------- -----------
829,258 764,219
Secured indebtedness:
Mortgage indebtedness 238,570 236,262
Revolving credit facility 13,000 -
----------- -----------
Total indebtedness 1,080,828 1,000,481
Accounts payable and accrued expenses 48,800 50,380
Dividends payable 21,453 20,072
Other liabilities 12,347 11,878
----------- -----------
1,163,428 1,082,811
----------- -----------
Minority equity interest 8,191 8,177
Preferred operating partnership interests 32,101 32,101
Operating partnership minority interests 102,309 100,650
Commitments and contingencies
Shareholders' equity:
Class A - 9.5% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 421,500 shares
issued and outstanding at March 31, 1999 and December 31, 1998 105,375 105,375
Class B - 9.44% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 177,500 shares
issued and outstanding at March 31, 1999 and December 31, 1998 44,375 44,375
Class C - 8.375% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 400,000 shares
issued and outstanding at March 31, 1999 and December 31, 1998 100,000 100,000
Class D- 8.68% cumulative redeemable preferred shares, without par value,
$250 liquidation value; 1,500,000 shares authorized; 216,000 shares
issued and outstanding at March 31, 1999 and December 31, 1998 54,000 54,000
Common shares, without par value, $.10 stated value; 100,000,000 shares
authorized; 61,293,346 and 61,289,186 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively (Note 5) 6,129 6,129
Paid-in-capital 673,976 673,910
Accumulated dividends in excess of net income (87,097) (80,697)
----------- -----------
896,758 903,092
Less: Unearned compensation - restricted stock (307) (307)
----------- -----------
896,451 902,785
----------- -----------
$ 2,202,480 $ 2,126,524
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 4
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------------------
<S> <C> <C>
Revenues from operations:
Minimum rents $ 46,257 $ 36,132
Percentage and overage rents 1,750 1,103
Recoveries from tenants 11,655 9,038
Management fee income 1,298 796
Interest 2,194 912
Other 1,984 1,559
-------- --------
65,138 49,540
-------- --------
Rental operation expenses:
Operating and maintenance 6,086 4,095
Real estate taxes 6,468 5,959
General and administrative 4,644 2,932
Interest 17,274 11,453
Depreciation and amortization 12,640 9,136
-------- --------
47,112 33,575
-------- --------
Income before equity in net income of joint
ventures, minority equity investment, minority
interests and extraordinary item 18,026 15,965
Equity in net income of joint ventures 4,790 2,238
Equity in net income from minority equity investment 1,439 --
Minority interests (2,387) (189)
-------- --------
Income before extraordinary item 21,868 18,014
Extraordinary item -- (882)
-------- --------
Net income $ 21,868 $ 17,132
======== ========
Net income applicable to common shareholders $ 15,053 $ 13,582
======== ========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.25 $ 0.26
Extraordinary item -- (0.01)
-------- --------
Net income $ 0.25 $ 0.25
======== ========
Earnings per common share - diluted:
Income before extraordinary item $ 0.24 $ 0.25
Extraordinary item -- (0.01)
-------- --------
Net income 0.24 0.24
======== ========
Dividends declared $ 0.35 $ 0.3275
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 5
DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31,
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Net cash flow provided by operating activities $ 32,242 $ 29,600
--------- --------
Cash flow provided by (used for) investing activities:
Real estate developed or acquired (38,067) (60,848)
Investments in and advances to joint ventures and minority
equity investment, net (42,812) (11,873)
Acquisition of minority equity interest - (16,293)
Issuance of notes receivable (4,086) (911)
Proceeds from transfer of properties to joint ventures - 41,526
--------- --------
Net cash flow used for investing activities (84,965) (48,399)
--------- --------
Cash flow provided by (used for) financing activities:
Proceeds from (repayment of) revolving credit facilities, net 78,000 (44,700)
Proceeds from construction loans and other mortgage debt 8,636 -
Principal payments on rental property debt (6,328) (608)
Proceeds from issuance of Medium Term Notes, net of
underwriting commission, and $220 of offering expenses paid
in 1998 - 98,897
Payment of deferred finance costs (51) (426)
Proceeds from issuance of common shares in conjunction with
exercise of stock options, the Company's 401(k) plan, and
dividend reinvestment plan 66 1,433
Payment of distributions to operating partnership minority interests (198) -
Dividends paid (26,888) (21,714)
--------- --------
Net cash flow provided by financing activities 53,237 32,882
--------- --------
Increase in cash and cash equivalents 514 14,083
Cash and cash equivalents, beginning of period 2,260 18
--------- --------
Cash and cash equivalents, end of period $ 2,774 $ 14,101
========= ========
</TABLE>
Supplemental disclosure of non cash investing and financing activities:
In conjunction with the acquisition of certain shopping centers, the Company
recorded minority equity interests aggregating approximately $1.8 million during
the three month period ended March 31, 1999. In addition, included in accounts
payable was approximately $0.2 million relating to construction in progress and
$21.5 million of dividends declared. The foregoing transactions did not provide
for or require the use of cash.
In conjunction with the acquisition of certain shopping centers, the Company
assumed mortgage debt, liabilities and recorded a minority equity interest
aggregating approximately $51.6 million during the three month period ended
March 31, 1998. The Company also had approximately $2.7 million of debentures
converted into common shares of the Company, which did not require the use of
cash. In addition, included in accounts payable was approximately $0.2 million
relating to construction in progress. The foregoing transactions did not provide
for or require the use of cash.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE> 6
DEVELOPERS DIVERSIFIED REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION
Developers Diversified Realty Corporation, subsidiaries, (the "Company"
or "DDR") and related real estate joint ventures and its minority equity
investment are engaged in the business of acquiring, expanding, owning,
developing, managing and operating neighborhood and community shopping centers,
enclosed malls and business centers.
Reclassifications
Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentation.
Share Split
Effective August 3, 1998, the Company effected a two for one share
split to shareholders of record on July 27, 1998 in the form of a share
dividend. All per share amounts and the number of common shares outstanding
reflect this split, unless indicated otherwise.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
New Accounting Standard
In June 1998, the FASB issued SFAS No. 133 - Accounting for Derivative
Instruments and Hedging Activities. This statement requires fair value
accounting for all derivatives including recognizing all such instruments on the
balance sheet with an offsetting amount recorded in the income statement or as
part of comprehensive income. The new standard becomes effective for the Company
for the year ending December 31, 2000. The Company does not expect this
pronouncement to have a material impact on the Company's financial position or
cash flows.
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and all majority owned subsidiaries and
investees where the Company has financial and operating control. Investments in
real estate joint ventures and companies for which the Company has the ability
to exercise significant influence over but does not have financial operating
control are accounted for using the equity method of accounting. These financial
statements have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial information and the
applicable rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, in the opinion of management, the interim financial statements include
all adjustments, consisting of only normal recurring adjustments,
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<PAGE> 7
necessary for a fair presentation of the results of the periods presented. The
results of the operations for the three months ended March 31, 1999 and 1998 are
not necessarily indicative of the results that may be expected for the full
year. These condensed consolidated financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
2. EQUITY INVESTMENTS IN JOINT VENTURES:
The Company's equity investments in joint ventures at March 31, 1999 consisted
of the following:
- - A 50% joint venture interest in 23 operating shopping centers;
- - A 35% joint venture interest in one operating shopping center;
- - A 57% joint venture interest, which is developing one shopping center;
- - A 50% interest in six joint ventures each of which is developing a
shopping center;
- - An 80% joint venture interest in two operating shopping center
properties acquired in 1998;
- - A 25% joint venture interest in an opportunity fund formed in 1998
which acquired several retail sites which are being redeveloped;
- - A 50% joint venture interest in a real estate management company and a
development company, both acquired in 1998;
- - A 50% joint venture interest in a limited partnership acquired in 1998
which is developing seven shopping centers;
- - A 95% economic interest in a management service subsidiary formed in
1998 of which the Company owns 1% of the voting and 100% of the
non-voting common stock; and
- - An 81% economic interest in a management service subsidiary formed in
1998 of which the Company owns 9% of the voting and 100% of the
non-voting common stock.
Summarized combined financial information of the Company's joint venture
investments is as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
Combined Balance Sheets 1999 1998
----------- -----------
<S> <C> <C>
Land $ 229,765 $ 232,105
Buildings 830,253 826,521
Fixtures and tenant improvements 4,139 2,467
Construction in progress 96,987 67,898
----------- -----------
1,161,144 1,128,991
Less accumulated depreciation (65,080) (59,580)
----------- -----------
Real estate, net 1,096,064 1,069,411
Other assets 61,741 57,527
----------- -----------
$ 1,157,805 $ 1,126,938
=========== ===========
Mortgage debt $ 731,578 $ 718,846
Amounts payable to DDR 99,792 85,846
Other liabilities 21,289 21,193
----------- -----------
852,659 825,885
Accumulated equity 305,146 301,053
----------- -----------
$ 1,157,805 $ 1,126,938
=========== ===========
</TABLE>
-7-
<PAGE> 8
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
Combined Statements of Operations: 1999 1998
---------- -------
<S> <C> <C>
Revenues from operations $ 39,871 $ 20,509
-------- --------
Rental operation expenses 11,378 4,789
Depreciation and amortization expense 5,481 3,044
Interest expense 14,024 8,127
-------- --------
30,883 15,960
-------- --------
Income before gain on sale of real estate 8,988 4,549
Gain on sale of real estate 91 -
-------- --------
Net income $ 9,079 $ 4,549
======== ========
</TABLE>
Included in management fee income for the three month period ended
March 31, 1999 and 1998, is approximately $1.2 and $0.7 million, respectively,
of management fees earned by the Company for services rendered to the joint
ventures. Similarly, other income for the three month period ended March 31,
1999 and 1998, includes $0.5 million and $0.4 million, respectively, of
development fee income and commissions for services rendered to the joint
ventures.
In January 1999, the Company repaid a third party mortgage of a 50%
owned joint venture partnership aggregating approximately $49.2 million. The
joint venture entered into a corresponding mortgage note payable to the Company
bearing an interest rate of LIBOR plus 2.75%. In addition, the Company received
a loan origination fee for this transaction of $0.4 million. In March 1999, the
joint venture obtained a bridge loan and used the proceeds to repay the mortgage
note to the Company.
3. MINORITY EQUITY INVESTMENT:
On August 4, 1998 the Company, in a joint release with American
Industrial Properties REIT [NYSE:IND] ("AIP"), announced the execution of a
definitive agreement providing for the strategic investment in AIP by the
Company. At December 31, 1998, the Company owned 5,891,196 shares of AIP,
representing 34.5% of AIP's total outstanding common shares. In January 1999,
the Company acquired 1,543,005 shares of AIP's common stock at a price of $15.50
per share and 1,867,610 shares of AIP's common stock at a price of $14.93 per
common share. At March 31, 1999, the Company owned 9,301,817 common shares of
beneficial interest in AIP representing approximately 45.4% of AIP's total
outstanding shares.
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<PAGE> 9
Summarized financial information of AIP as of March 31, 1999 and for the three
month period ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Balance Sheet:
Land $ 146,321 $ 112,473
Buildings 490,082 392,562
--------- ---------
636,403 505,035
Less accumulated depreciation (36,791) (33,352)
--------- ---------
Real estate, net 599,612 471,683
Other assets 27,037 28,647
--------- ---------
$ 626,649 $ 500,330
========= =========
Mortgage debt $ 344,341 $ 252,481
Other liabilities 27,384 42,270
--------- ---------
371,725 294,751
Accumulated equity 254,924 205,579
--------- ---------
$ 626,649 $ 500,330
========= =========
For the three
month period ended
March 31, 1999
--------------
Statement of Operations:
Revenues from operations $ 20,323
---------
Rental operation expenses 7,250
Depreciation and amortization expense 3,473
Interest expense 6,270
---------
16,993
---------
3,330
Minority interests (44)
---------
Net income $ 3,286
=========
</TABLE>
4. PRO FORMA FINANCIAL INFORMATION
The following unaudited supplemental pro forma operating data is
presented for the three months ended March 31, 1998 as if each of the following
transactions had occurred on January 1, 1998; (i) the acquisition of all
properties acquired, or interests therein, by the Company in 1998; (ii) the
completion of the sale by the Company of 669,639 common shares (pre-split) in
April 1998; (iii) the completion of the sale by the Company of $200 million of
Medium Term Notes in January and July, 1998; (iv) the purchase by the Company of
the minority interest of a shopping center in Cleveland, Ohio in March 1998; (v)
the completion of the sale by the Company of 4,000,000 Class C Depositary shares
in July 1998 each representing 1/10 of a Class C Preferred Share; (vi) the
completion of the sale by the Company of 2,160,000 Class D Depositary shares in
August and September 1998 each representing 1/10 of a Class D Preferred Share;
(vii) the transfer of six properties owned by the Company into a 50% owned joint
venture in September 1998, and (viii) the completion of the sale by the Company
of 3,000,000 common shares in December 1998.
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<PAGE> 10
<TABLE>
<CAPTION>
Three Month Period Ended March 31,
----------------------------------
(in thousands, except per share)
1998
--------
<S> <C>
Pro forma revenues $ 52,560
========
Pro forma income before extraordinary item $ 19,388
========
Pro forma net income applicable
to common shareholders $ 12,649
========
Per share data:
Earnings per common share - basic:
Income before extraordinary item $ 0.24
Extraordinary item (0.01)
--------
Net income $ 0.23
========
Earnings per common share - diluted:
Income before extraordinary item $ 0.23
Extraordinary item (0.01)
--------
Net income $ 0.22
========
</TABLE>
The 1998 pro forma information above does not include revenues and
expenses for seven of the 41 properties acquired by the Company in 1998 prior to
their respective acquisition dates because these shopping centers were either
under development or in the lease-up phase and, accordingly, the related
operating information for such centers either does not exist or would not be
meaningful. Pro forma results for two shopping centers acquired in 1998 are not
presented since these centers were sold in 1998. In addition, the 1998 pro forma
information does not include the results of shopping center expansions occurring
at five of the shopping centers acquired by the Company.
5. SHAREHOLDERS' EQUITY AND OPERATING PARTNERSHIP UNITS:
The following table summarizes the changes in shareholders' equity
since December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Preferred Common Accumulated Unearned
Shares ($250 Shares Dividends in Compensation
Stated ($.10 stated Paid-in Excess of Restricted
Value) Value) Capital Net Income Stock Total
------------ ------------ ----------- ----------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 $ 303,750 $ 6,129 $ 673,910 $ (80,697) $ (307) $ 902,785
Net income 21,868 21,868
Dividends declared -
Common Shares (21,453) (21,453)
Dividends declared -
Preferred Shares (6,815) (6,815)
Issuance of common shares
related to exercise of stock
options, employee 401(k) plan
and dividend reinvestment plan 66 66
--------- ------- --------- --------- ------ ---------
Balance March 31, 1999 $ 303,750 $ 6,129 $ 673,976 $ (87,097) $ (307) $ 896,451
========= ======= ========= ========= ====== =========
</TABLE>
During the three month period ended March 31, 1999, in conjunction with
certain earnouts relating to the acquisition of two shopping centers which were
initially purchased in 1998, the Company issued operating partnership units ("OP
Units") which are exchangeable, under certain circumstances and at the option of
the Company, into 92,086 of the Company's common shares or for cash.
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<PAGE> 11
6. REVOLVING CREDIT FACILITIES:
The Company maintains a $375 million unsecured revolving credit
facility with a syndicate of financial institutions (the "Unsecured Credit
Facility") for a term through April 2001. The Unsecured Credit Facility
includes a competitive bid option for up to 50% of the facility amount. The
Company's borrowings under this facility bear interest at variable rates based
on the prime rate or LIBOR plus a specified spread (currently 0.85%), depending
on the Company's long term senior unsecured debt rating from Standard and
Poor's and Moody's Investors Service. The Unsecured Credit Facility is used to
finance the acquisition and development of properties, to provide working
capital and for general corporate purposes. At March 31, 1999, $197 million was
outstanding under this facility with a weighted average interest rate of 5.8%.
In March 1999, the Company amended its other unsecured revolving credit
facility with National City Bank to increase the available borrowings to $25
million from $20 million and to convert it to a secured revolving credit
facility. This credit facility is secured by certain partnership investments.
The Company maintains the right to reduce this facility to $20 million and to
convert the borrowings to an unsecured revolving credit facility. Borrowings
under this facility continue to bear interest at variable rates based on the
prime rate or LIBOR plus a specified spread (currently at 0.85%) depending on
the Company's long term senior unsecured debt rating from Standard and Poor's
and Moody's Investors Service. At March 31, 1999, $13 million was outstanding
under this facility with a weighted average interest rate of 5.8%.
7. RELATED PARTY TRANSACTIONS
In February 1998, the Company acquired a shopping center located in
Idaho Falls, Idaho from a limited partnership in which the Company's Chairman
Emeritus, Chairman of the Board and Chief Executive Officer, Vice-Chairman of
the Board and the Chief Investment Officer owned, in the aggregate, through a
separate partnership, a 1% general partnership interest. The shopping center
aggregates approximately 0.2 million square feet of Company GLA. The initial
purchase price of the property was approximately $6.5 million. In 1999, the
Company paid the seller an additional $0.6 million upon the leasing of vacant
space.
During 1999, the Company periodically advanced funds to the Chairman of
the Board and Chief Executive Officer in amounts up to $0.1 million. The
advances, which were made to reduce the outstanding principal balance of, and to
prevent the sale of common shares in the Company from, a margin account loan,
were outstanding for a period of up to 40 days with an interest rate of LIBOR
plus 0.85%.
In conjunction with the establishment of DDR's equity investment in
certain entities, the Company's Chairman and Chief Executive Officer owns voting
stock in these entities in order to comply with certain REIT qualification
requirements.
8. EARNINGS AND DIVIDENDS PER SHARE
Earnings per Share (EPS) have been computed pursuant to the provisions
of Statement of Financial Accounting Standards No. 128. Further, all per share
amounts and average shares outstanding have been restated to reflect the stock
split described in Note 1.
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<PAGE> 12
The following table provides a reconciliation of both income before
extraordinary item and the number of common shares used in the computations of
"basic" EPS, which utilized the weighted average number of common shares
outstanding without regard to dilutive potential common shares, and "diluted"
EPS, which includes all such shares.
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
---------------
(in thousands, except per share amounts)
1999 1998
-------- --------
<S> <C> <C>
Income before extraordinary item $ 21,868 $ 18,014
Less: Preferred stock dividend (6,815) (3,550)
-------- --------
Basic - Income before
extraordinary item applicable to
common shareholders 15,053 14,464
Effect of dilutive securities:
Joint venture partnerships - (314)
-------- --------
Diluted - Income before
extraordinary item applicable to
common shareholders plus
assumed conversions $ 15,053 $ 14,150
======== ========
NUMBER OF SHARES:
Basic - average shares outstanding 61,302 55,500
Effect of dilutive securities:
Joint venture partnerships 2,526 328
Stock options 187 898
Restricted stock 1 6
-------- --------
Diluted - average shares outstanding 64,016 56,732
======== ========
PER SHARE AMOUNT:
Income before extraordinary item
Basic $ 0.25 $ 0.26
======== ========
Diluted $ 0.24 $ 0.25
======== ========
</TABLE>
The conversion of the following potentially dilutive securities into
the Company's common shares were not included in the computation of diluted EPS
for the periods presented because the effect was antidilutive: performance
units, debentures, the Company's joint venture partner's interest in the Merriam
(dilutive 1998), San Antonio, Community Center and DDRA V (1999 only) joint
ventures and a joint venture with two operating properties, Minority Interest
(OP Units), and the redemption of preferred units through the exercise of the
warrant (1999 only).
9. SUBSEQUENT EVENTS
In April 1999, the Company acquired a 50% interest in a 206,000 square
foot shopping center in St. Louis, MO. The joint venture's aggregate purchase
price was $16.6 million.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements, the notes thereto and the comparative summary
of selected financial data appearing elsewhere in this report. Historical
results and percentage relationships set forth in the consolidated financial
statements, including trends which might appear, should not be taken as
indicative of future operations. The Company considers portions of this
information to be "forward-looking statements" within the meaning of Section 27A
of the Securities Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, both as amended, with respect to the Company's
expectations for future periods. Forward-looking statements include, without
limitation, statements related to acquisitions (including any related pro forma
financial information) and other business development activities, future capital
expenditures, financing sources and availability, the effects of environmental
and other regulations, as well as the costs, timing and effectiveness of year
2000 readiness. Although the Company believes that the expectations reflected in
those forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be achieved. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects", "seeks", "estimates", and
similar expressions are intended to identify forward-looking statements. Readers
should exercise caution in interpreting and relying on forward-looking
statements since they involve known and unknown risks, uncertainties and other
factors which are, in some cases, beyond the Company's control and could
materially affect the Company's actual results, performance or achievements.
Factors that could cause actual results, performance or achievements to
differ materially from those expressed or implied by forward-looking statements
include, but are not limited to, the following:
- The Company is subject to general risks affecting the real estate
industry, including the need to enter into new leases or renew leases on
favorable terms to generate rental revenues;
- The Company is subject to competition for tenants from other owners of
retail properties and its tenants are subject to competition from other
retailers and methods of distribution, the Company is dependent upon the
successful operations and financial condition of its tenants,
particularly certain of its major tenants, and could be adversely
affected by the bankruptcy of those tenants;
- The Company may fail to anticipate the effects on its properties of
changes in consumer buying practices and the resulting retailing
practices and space needs of its tenants;
- The Company may fail to identify, acquire, construct or develop
additional properties, the Company may develop or acquire properties
that do not produce a desired yield on invested capital, or the Company
may fail to effectively integrate acquisitions of properties or
portfolios of properties;
- Debt and equity financing may not be available, or may not be available
on favorable terms, for the Company to continue to grow and operate its
business;
- The Company must make distributions to shareholders to continue to
qualify as a REIT, and if the Company borrows funds to make
distributions then those borrowings may not be available on favorable
terms;
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<PAGE> 14
- The Company could be adversely affected by changes in the local markets
where its properties are located, as well as by adverse changes in
national economic and market conditions;
- The Company is subject to potential environmental liabilities;
- The Company is subject to complex regulations related to its status as a
real estate investment trust ("REIT") and would be adversely affected if
it failed to qualify as a REIT;
- The Company could be adversely affected by changes in government
regulations, including changes in environmental, zoning, tax and other
regulations;
- The Company, its tenants and its suppliers may experience unanticipated
delays or expenses related to achieving year 2000 readiness or resulting
from year 2000 related problems; and
- Changes in interest rates could adversely affect the market price for
the Company's common shares, as well as its performance and cash flow.
RESULTS OF OPERATIONS
Revenues from Operations
Total revenues increased $15.6 million, or 31.5%, to $65.1 million for
the three month period ended March 31, 1999 from $49.5 million for the same
period in 1998. Base and percentage rents for the three month period ended March
31, 1999 increased $10.8 million, or 28.9%, to $48.0 million as compared to
$37.2 million for the same period in 1998.
Approximately $1.8 million of the increase in base and percentage
rental income, for the three month period ended March 31, 1999 is the result of
new leasing, re-tenanting and expansion of the Core Portfolio Properties
(shopping center properties owned as of January 1, 1998), an increase of 6.4%
over 1998 revenues from Core Portfolio Properties. The 34 shopping centers
acquired by the Company in 1999 and 1998 contributed $14.0 million of additional
base and percentage rental revenue and the five new shopping center developments
contributed $0.8 million. These increases were offset by a decrease of $5.8
million relating to the transfer of six shopping center properties into a joint
venture in September 1998 and the transfer of five business center properties to
American Industrial Properties ("AIP") (NYSE: IND) in August 1998.
At March 31, 1999, the in-place occupancy rate of the Company's
portfolio was at 96.1% as compared to 95.5% at March 31, 1998. The average
annualized base rent per leased square foot, including those properties owned
through joint ventures, was $9.04 at March 31, 1999 as compared to $8.56 at
March 31, 1998. Same store sales, for those tenants required to report such
information, representing approximately 18.0 million square feet, increased 3.2%
to $231 per square foot as compared to $224 per square foot for the prior twelve
month period.
The increase in recoveries from tenants of $2.6 million is directly
related to the increase in operating and maintenance expenses and real estate
taxes primarily associated with the 1999 and 1998 shopping center acquisitions
and developments. Recoveries were approximately 92.8% of operating expenses and
real estate taxes for the three month period ended March 31, 1999 as compared to
90.3% for the same period in 1998. Management fee income and other income
increased by approximately $0.9 million which generally reflects an increase in
management, development and leasing fees from the Company's joint ventures.
-14-
<PAGE> 15
Other income was comprised of the following (in thousands):
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Temporary tenant
rentals (Kiosks) $ 82 $ 112
Lease termination fees 349 825
Development fees 783 362
Other 770 260
------- -------
$ 1,984 $ 1,559
======= =======
</TABLE>
Expenses from Operations
Rental operating and maintenance expenses for the three month period
ended March 31, 1999 increased $2.0 million, or 48.6% to $6.1 million as
compared to $4.1 million for the same period in 1998. An increase of $1.4
million is attributable to the 39 shopping centers acquired and developed in
1999 and 1998 and $1.1 million in the Core Portfolio Properties. These increases
were offset by a decrease of $0.5 million relating to the sale and transfer of
six shopping center properties into a joint venture in September 1998 and the
transfer of five business center properties to AIP in August 1998.
Real estate taxes increased $0.5 million, or 8.6%, to $6.5 million for
the three month period ended March 31, 1999 as compared to $6.0 million for the
same period in 1998. An increase of $1.7 million is related to the 39 shopping
centers acquired and developed in 1999 and 1998 and $0.1 million in the Core
Portfolio Properties. These increases were offset by a decrease of $1.3 million
relating to the transfer six shopping center properties into a joint venture in
September 1998 and the transfer of five business center properties to AIP in
August 1998.
General and administrative expenses increased $1.7 million, or 58.4%,
to $4.6 million for the three month period ended March 31, 1999 as compared to
$2.9 million in 1998. The increase is attributable to the growth of the Company
primarily related to acquisitions, expansions and developments and a severance
charge of $0.8 million. The Company continues to maintain a conservative policy
with regard to the expensing of all internal leasing salaries, legal salaries
and related expenses associated with the leasing and re-leasing of existing
space. Total general and administrative expenses were approximately 4.4% (3.7%
after excluding the severance charge) and 4.2% of total revenues, including
total revenues of joint ventures, for the three month period ended March 31,
1999 and 1998, respectively.
Depreciation and amortization expense increased $3.5 million, or 38.3%,
to $12.6 million for the three month period ended March 31, 1999 as compared to
$9.1 million for the same period in 1998. An increase of $3.8 million is related
to the 39 shopping centers acquired and developed in 1999 and 1998 and $1.1
million relating to Core Portfolio Properties. These increases were offset by a
decrease of $1.4 million relating to the transfer of six shopping center
properties into a joint venture in September 1998 and the transfer of five
business center properties to AIP in August 1998.
Interest expense increased $5.8 million, or 50.8%, to $17.3 million for
the three month period ended March 31, 1999 , as compared to $11.5 million for
the same period in 1998. The overall increase in interest expense for the three
month period ended March 31, 1999 as compared to the same period in 1998 is
primarily related to the acquisition and development of shopping centers during
1999 and 1998.
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<PAGE> 16
The weighted average debt outstanding during the three month period
ended March 31, 1999 and related weighted average interest rate was $1,114.8
million and 7.2%, respectively, compared to $702.1 million and 7.4%,
respectively, for the same period in 1998. Interest costs capitalized, in
conjunction with development and expansion projects, were $2.7 million for the
three month period ended March 31, 1999, as compared to $1.8 million for the
same period in 1998.
Equity in net income of joint ventures increased $2.6 million, or
114.0%, to $4.8 million for the three month period ended March 31, 1999 as
compared to $2.2 million for the same period in 1998. This increase is primarily
attributable to approximately $2.4 million of income from the Company's seven
joint venture interests acquired/formed during 1998. The remaining increase of
$0.2 million relates primarily to the Company's Community Center Joint Venture.
Equity in net income of minority equity investment of $1.4 million
relates to the Company's investment in AIP.
The minority equity interest expense increased $2.2 million, to $2.4
million for the three month period ended March 31, 1999, as compared to $0.2
million for the same period in 1998. The increase of the Company, relates to the
Company's purchase of 21 shopping centers in 1998 and as consideration, the
related issuance of operating partnership units ("OP Units") which are
exchangeable, in certain circumstances and at the option of the Company, into
4.6 million common shares of the Company or for cash. This expense represents
the income allocation associated with the priority distributions associated with
the minority equity interests.
The extraordinary item, which aggregated $0.9 million for the three
month period ended March 31, 1998, relates to the write-off of unamortized
deferred finance costs associated with the amended and restated $375 million
unsecured revolving credit agreement.
Net Income
Net income increased $4.8 million, or 27.6%, to $21.9 million for the
three month period ended March 31, 1999, as compared to net income of $17.1
million for the same period in 1998. The increase in net income of $4.8 million
is primarily attributable to increases in net operating revenues (total revenues
less operating and maintenance, real estate taxes and general and administrative
expense) aggregating $11.4 million, resulting from new leasing, retenanting and
expansion of Core Portfolio Properties and the shopping centers acquired and
developed in 1999 and 1998, an increase of $4.0 million relating to equity in
net income from joint ventures and minority equity investment and an increase of
$0.9 million relating to the 1998 extraordinary item. The aggregate increase in
net operating revenues, equity in net income from joint ventures and minority
equity investment and extraordinary item was offset by increases in
depreciation, interest and minority interest expense of $3.5 million, $5.8
million and $2.2 million, respectively.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") provides an
additional indicator of the financial performance of a Real Estate Investment
Trust. FFO is defined generally as net income applicable to common shareholders
excluding gains (losses) on sale of property, nonrecurring and extraordinary
items, adjusted for certain non-cash items, principally real property
depreciation and equity income (loss) from its joint ventures and adding the
Company's proportionate share of FFO of its unconsolidated joint ventures,
determined on a consistent basis. The Company calculates FFO in accordance with
the foregoing definition, which is substantially the same as the definition
currently used by the National Association of Real Estate Investment Trusts
("NAREIT"). Certain other real
-16-
<PAGE> 17
estate companies may calculate funds from operations in a different manner. For
the three month period ended March 31, 1999, FFO increased $9.2 million, or
36.6%, to $34.2 million as compared to $25.0 million for the same period in
1998. The increase is attributable to increases in revenues from Core Portfolio
Properties, acquisitions and developments. The Company's calculation of FFO is
as follows (in thousands):
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
1999 1998
-------- --------
<S> <C> <C>
Net income applicable to
common shareholders (1) $ 15,053 $ 13,582
Depreciation of real estate investments 12,463 9,035
Equity in net income of joint ventures (4,790) (2,238)
Equity in net income of minority equity investment (1,439) -
Joint Ventures' FFO (2) 7,575 3,731
Minority equity investment FFO 2,882 -
Minority interest expense (OP Units) 1,617 11
Extraordinary and non-recurring items 802 882
-------- --------
$ 34,163 $ 25,003
======== ========
</TABLE>
(1) Includes straight line rental revenues of approximately $1.0 million and
$0.7 million for the three month periods ended March 31, 1999 and 1998,
respectively, primarily related to recent acquisitions and new developments.
(2) Joint Ventures Funds From Operations are summarized as follows:
<TABLE>
<CAPTION>
Three Month Period
Ended March 31,
1999 1998
-------- -------
<S> <C> <C>
Net income (a) $ 9,079 $ 4,549
Gain on sales of real estate (91) -
Depreciation of real estate investments 5,481 3,044
-------- -------
$ 14,469 $ 7,593
======== =======
DDRC Ownership interests (b) $ 7,575 $ 3,731
======== =======
</TABLE>
(a) Includes straight line rental revenues of approximately $1.1
million and $0.6 million for the three month periods ended March
31, 1999 and 1998, respectively, of which the Company's
proportionate share is $0.5 million and $0.3 million, respectively.
(b) At March 31, 1999, the Company owned joint venture interests
relating to 26 operating shopping center properties, a 25% interest
in the Prudential Retail Value Fund and a 50% joint venture in a
real estate management company. At March 31, 1998 the Company owned
joint venture interests in 16 operating shopping center properties.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that cash flow from operating activities will
continue to provide adequate capital for all principal payments, recurring
tenant improvements, as well as dividend payments in accordance with REIT
requirements and that cash on hand, borrowings available under its existing
revolving credit facilities, as well as other debt and equity alternatives,
including the issuance
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<PAGE> 18
of operating partnership units and joint venture capital, will provide the
necessary capital to achieve continued growth. Cash flow from operating
activities for the three month period ended March 31, 1999 increased to $32.2
million as compared to $29.6 million for the same period in 1998. The increase
is attributable to the 39 shopping center acquisitions and developments
completed in 1999 and 1998, new leasing, expansion and re-tenanting of the core
portfolio properties.
An increase in the 1999 quarterly dividend per common share to $.35
from $.3275 was approved in February 1999 by the Company's Board of Directors.
The Company's common share dividend payout ratio for the first quarter of 1999
approximated 62.8% of the actual FFO as compared to 72.6% for the same period in
1998. It is anticipated that the current dividend level will result in a more
conservative payout ratio as compared to prior years. A lower payout ratio will
enable the Company to retain more capital which will be utilized for attractive
investment opportunities in the development, acquisition and expansion of
portfolio properties.
During the three month period ended March 31, 1999, the Company and its
joint ventures invested $100.9 million, net, to acquire, develop, expand,
improve and re-tenant its properties. The Company's expansion acquisition and
development activity is summarized below:
Expansions:
During 1999, the Company completed or partially completed four
expansion projects at an aggregate cost of $19.5 million. The Company is
currently expanding/redeveloping eleven of its shopping centers. The Company is
also scheduled to commence expansion/redevelopment projects during 1999 at five
additional shopping centers.
Acquisitions:
In April 1999, the Company acquired a 50% interest in a 206,000 square
foot shopping center in St. Louis, MO. The joint venture's aggregate purchase
price was $16.6 million.
In August 1998, the Company announced a strategic investment in AIP. In
January 1999, the Company acquired 3.4 million additional common shares of
beneficial interest of AIP for approximately $51.8 million. At March 31, 1999,
the Company's investment in AIP approximated $133.2 million. The Company
currently holds approximately 45.4% of the outstanding shares of beneficial
interest of AIP.
Developments:
In 1999, the Company had four shopping centers under construction. The
first center is a 185,000 square foot shopping center in Solon, Ohio, a portion
of which opened in the fourth quarter of 1998. Additionally, the Company
commenced the construction of a 200,000 gross square foot second phase at its
Erie, Pennsylvania center, a 280,000 square foot shopping center in Toledo,
Ohio, and a 210,000 square foot shopping center in Oviedo, Florida (a suburb of
Orlando). All four centers are scheduled for completion during 1999. The
Company is also in the initial phases of development relating to three
additional shopping centers located in Coon Rapids, MN; Riverdale, UT and
Meridian, ID.
During 1998, the Company entered into joint venture development
agreements for six additional projects with various developers throughout the
country at a projected cost aggregating approximately $229 million. Several of
these projects have commenced development and are currently scheduled for
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<PAGE> 19
completion in 1999 and 2000. The Company intends to finance its investment in
five of these developments through the Prudential/DDR Retail Value Fund.
FINANCING ACTIVITIES
The acquisitions, developments and expansions were financed through
cash provided from operating activities, revolving credit facilities and OP
Units. Total debt outstanding at March 31, 1999 was $1.1 billion compared to
$1.0 billion at December 31, 1998.
During the first quarter of 1999, the Company issued $1.8 million in OP
Units in conjunction with the purchase of certain expansion areas at two
recently acquired shopping centers. These OP Units are, in certain circumstances
and at the election of the Company, exchangeable into approximately 92,000
common shares of the Company or for cash.
In January 1999, the Company repaid a third party mortgage of a 50%
owned joint venture partnership aggregating approximately $49.2 million. The
joint venture entered into a corresponding mortgage note payable to the Company
bearing an interest rate of LIBOR plus 2.75%. In addition, the Company received
a loan origination fee for this transaction of $0.4 million. In March 1999, the
joint venture obtained a bridge loan and used the proceeds to repay the mortgage
note to the Company.
In February 1999, the Company's Board of Directors authorized the
executive officers of the Company the right to implement a common share
repurchase program in response to what the Company's executive committee and the
Board of Directors believe is a distinct undervaluation of the Company's common
shares. Under the terms authorized by the Company's Board, the Company may,
during the six month period beginning February 22, 1999, purchase in the open
market, subject to certain requirements, common shares of the Company, up to a
maximum aggregate value of $50 million. Repurchase of shares may also be made to
avoid shareholder dilution through the issuance of OP Units in conjunction with
property acquisitions. The Company may also use a portion of the proceeds from
the sale of properties, if any, in order to purchase its own shares. It is not
the Company's intention to increase the leverage on its balance sheet through
this share repurchase program. The Company has not purchased any shares pursuant
to this program as of May 12, 1999.
In March 1999, the Company filed a $750 million shelf registration
statement with the SEC in which the Company may issue common shares, preferred
shares, warrants for common shares or debt.
In March 1999, the Company amended its revolving credit facility with
National City Bank to increase the available borrowings to $25 million from $20
million and to convert it to a secured facility. The credit facility is secured
by certain partnership investments. The Company also maintains the right to
convert the credit facility back to an unsecured credit facility and to reduce
the credit facility amount to $20 million.
At March 31, 1999, the Company's capitalization consisted of $1.1
billion of debt (excluding the Company's proportionate share of joint venture
mortgage debt aggregating $376.1 million), $303.8 million of preferred shares
and $944.0 million of market equity (market equity is defined as common shares
and OP Units outstanding multiplied by the closing price per common share on the
New York Stock Exchange at March 31, 1999 of $14.3125) resulting in a debt to
total market capitalization ratio of 0.46 to 1. At March 31, 1999, the Company's
total debt consisted of $837.0 million of fixed rate debt and $243.8 million of
variable rate debt.
It is management's intention that the Company have access to the
capital resources necessary to expand and develop its business. Accordingly, the
Company may seek to obtain funds through
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<PAGE> 20
additional equity offerings or debt financing or joint venture capital in a
manner consistent with its intention to operate with a conservative debt
capitalization policy and maintain its investment grade ratings with Moody's
Investor Services and Standard and Poor's. As of March 31, 1999, the Company had
$750.0 million available under its shelf registration statement. In addition, as
of March 31, 1999, the Company had cash of $2.8 million and $178 million
available under its $375 million of unsecured revolving credit facility. On
March 31, 1999, the Company also had 107 operating properties with $47.0
million, or 68.4%, of the total revenue for the three month period ended March
31, 1999 which were unencumbered, thereby providing a potential collateral base
for future borrowings.
INFLATION
Substantially all of the Company's long-term leases contain provisions
designed to mitigate the adverse impact of inflation. Such provisions include
clauses enabling the Company to receive percentage rentals based on tenants'
gross sales, which generally increase as prices rise, and/or escalation clauses,
which generally increase rental rates during the terms of the leases. Such
escalation clauses are often related to increases in the consumer price index or
similar inflation indices. In addition, many of the Company's leases are for
terms of less than ten years, which permits the Company to seek increased rents
upon re-rental at market rates. Most of the Company's leases require the tenants
to pay their share of operating expenses, including common area maintenance,
real estate taxes, insurance and utilities, thereby reducing the Company's
exposure to increases in costs and operating expenses resulting from inflation.
ECONOMIC CONDITIONS
Historically, real estate has been subject to a wide range of cyclical
economic conditions which affect various real estate sectors and geographic
regions with differing intensities and at different times. Adverse changes in
general or local economic conditions, could result in the inability of some
existing tenants of the Company to meet their lease obligations and could
otherwise adversely affect the Company's ability to attract or retain tenants.
The shopping centers are typically anchored by discount department stores
(usually Wal-Mart, Kmart or J.C. Penney), supermarkets, and drug stores which
usually offer day-to-day necessities, rather than high-priced luxury items.
Since these merchants typically perform better in an economic recession than
those who market high priced luxury items, the percentage rents received by the
Company have remained relatively stable. In addition, the Company seeks to
reduce its operating and leasing risks through ownership of a portfolio of
properties with a diverse geographic and tenant base.
YEAR 2000
The Year 2000 issue ("Year 2000") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have time-sensitive hardware and
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, collect rents, or engage in similar normal business
activities.
The Company believes that is has identified all of its information
technology ("IT") and non-IT systems to assess their Year 2000 readiness.
Critical IT systems include, but are not limited to: accounts receivable and
rent collections, accounts payable and general ledger, human resources and
payroll (both property and corporate levels), cash management, fixed assets, all
IT hardware (such as desktop/laptop computers and data networking equipment).
Critical non-IT systems include telephone
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<PAGE> 21
systems, fax machines, copy machines as well as property environmental, health
safety and security systems (such as elevators and alarm systems).
The Company has conducted an assessment of its core internal and
external IT systems. The majority of these systems are currently Year 2000
compliant or are in the process of being modified to be compliant. The Company
is currently in the process of determining its exposure to any non-IT systems
that are not Year 2000 compliant and believes that all such systems will have
been identified, evaluated and completed with respect to their Year 2000
compliance by the close of the third quarter of 1999.
To date, the Company has expended approximately $40,000 and expects to
expend an additional $70,000 in connection with upgrading building management,
mechanical and computer systems. The costs of the project and the date on which
the Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
In some cases, various third party vendors have been queried on their
Year 2000 readiness. The Company continues to question its significant suppliers
and vendors to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. To date, the Company is not aware of any significant suppliers or
vendors with a Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources. However, there can be no
assurances that the systems of other companies, on which the Company's systems
rely, will be timely converted and would not have an adverse effect on the
Company's systems.
The Company believes it has an effective program in place that will
resolve the Year 2000 issue in a timely manner. Aside from catastrophic failure
of banks, utilities, or governmental agencies, the Company believes that it
could continue its normal business operations if compliance by the Company is
delayed. The Company does not intend to develop a formal contingency plan, as
the Company believes that all critical systems will be Year 2000 compliant. The
Company does not believe that the Year 2000 issue with materially impact its
results of operations, liquidity or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 1999, approximately 77.4% of the Company's debt (not
including joint venture debt) bore interest at fixed rates with a weighted
average maturity of approximately 7.3 years and a weighted average interest rate
of approximately 7.6%. The remainder of the Company's debt bears interest at
variable rates, with a weighted average maturity of approximately 2.0 years and
a weighted average interest rate of approximately 5.9%. As of March 31, 1999,
the Company's joint ventures indebtedness, not including the minority equity
investment, aggregated $656.7 million of fixed rate debt, of which the Company's
proportionate share was $337.5 million, and $74.9 million of variable rate debt,
of which the Company's proportionate share was $38.6 million. The Company
intends to utilize variable rate indebtedness available under its revolving
credit facilities to initially fund future acquisitions and developments. Thus,
to the extent that the Company incurs additional variable rate indebtedness, its
exposure to increases in interest rates in an inflationary period would
increase. The Company believes, however, that increases in interest expense as a
result of inflation would not significantly impact the Company's distributable
cash flow.
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<PAGE> 22
At March 31, 1999, the fair value of the Company's fixed rate debt
amounted to a liability of $826.7 million (excluding joint venture debt)
compared to its carrying amount of $837.0 million. The fair value of the
Company's proportionate share of joint venture fixed rate debt was $342.3
million compared to its carrying amount of $337.5 million. The Company estimates
that a 100 basis point decrease in market interest rate March 31, 1999 would
have changed the fair value of the Company's fixed rate debt and proportionate
share of joint ventures fixed rate debt to a liability of $868.1 million and
$346.2 million, respectively. The sensitivity to changes in interest rate of the
Company's fixed rate debt was determined with a valuation model based upon
changes that measure the net present value of such obligations which arise from
the hypothetical estimated discussed above.
The Company intends to continuously monitor and actively manage
interest costs on its variable rate debt portfolio and may enter into swap
positions based on market fluctuations. In addition, the Company believes that
it has the ability to obtain funds through additional equity and/or debt
offerings, including the issuance of medium term notes and joint venture
capital. Accordingly, the cost of obtaining such protection agreements in
relation to the Company's access to capital markets will continue to be
evaluated.
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<PAGE> 23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than routine litigation and administrative proceedings arising in
the ordinary course of business, the Company is not presently involved in any
litigation nor, to its knowledge, is any litigation threatened against the
Company or its properties, which is reasonably likely to have a material adverse
effect on the liquidity or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In 1999, the Company, through various transactions, issued limited
partnership units (the "Units") which are redeemable for an amount equal to the
value of approximately 92,086 of the Company's common shares. The Units are
redeemable, subject to the Company's right to purchase such units for cash or
for Company common shares on a one-for-one basis. This transaction was conducted
as a private placement in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits -
10.1 Formal Change of Control Agreement, dated as of March 24, 1999,
between the Company and each of Joan U. Allgood, Loren F. Henry,
John R. McGill, and William H. Schafer.
10.2 Agreement and Release between the Company and Richard J. Kaplan dated
as of March 9, 1999.
10.3 Formal Change of Control Agreement, dated as of March 24, 1999,
between the Company and each of Scott A. Wolstein and
James A. Schoff.
27 (a) Financial Data Schedule
b) Date of Report Items Reported
January 15, 1999 Item 2. Acquisition Disposition of Assets
February 24, 1999 Item 5. Other Events
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<PAGE> 24
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.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
May 17, 1999 /s/ Scott A. Wolstein
- ---------------- --------------------------------------------
(Date) Scott A. Wolstein, Chairman of the Board and
Chief Executive Officer
May 17, 1999 /s/ William H. Schafer
- ---------------- --------------------------------------------
(Date) William H. Schafer, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
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<PAGE> 1
EXHIBIT 10.1
(Form of Agreement for Joan U. Allgood, Loren F. Henry, John R. McGill and
William H. Schafer)
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT, is between Developers Diversified Realty Corporation,
an Ohio corporation (the "Employer"), and _____________. (the "Executive") made
this 24th day of March, 1999.
RECITALS
A. Executive is presently employed by Employer as its ________________.
B. Employer wishes to induce Executive to continue as its
________________ and, accordingly, to provide certain employment security to
Executive in the event of a "Change in Control" (as hereinafter defined);
C. Employer believes that it is in the best interest of its
shareholders for Executive to continue in his position on an objective and
impartial basis and without distraction or conflict of interest as a result of a
possible or actual Change in Control; and
D. In consideration of this Agreement Executive is willing to continue
as Employer's __________________.
NOW THEREFORE, IN CONSIDERATION OF EXECUTIVE CONTINUING AS THE
__________________ OF EMPLOYER AND OF THE MUTUAL PROMISES HEREIN CONTAINED,
EXECUTIVE AND EMPLOYER, INTENDING TO BE LEGALLY BOUND, HEREBY AGREE AS FOLLOWS;
ARTICLE I
DEFINITIONS
1. A "Change in Control" for the purpose of this Agreement will be
deemed to have occurred if, at any time:
(a) Any person or group of persons acting alone or together with any
of its affiliates or associates, acquires legal or beneficial ownership
interest, or voting rights, in twenty percent (20%) or more of the common voting
stock of Employer;
(b) At any time during a period of 24 consecutive months,
individuals who were directors at the beginning of the period no longer
constitute a majority of the members of the Board of Directors unless the
election, or the nomination for election by Employer's shareholders, of each
director who was not a director at the beginning of the period is approved by at
least a majority of the directors who are in office at the time of the election
or nomination and were directors at the beginning of the period; or
(c) A record date is established for determining shareholders of
Employer entitled to vote upon (i) a merger or consolidation of Employer with
another real estate investment trust, partnership, corporation or other entity
in which Employer is not the surviving or continuing entity or in which all or a
substantial part of the outstanding shares are to be converted into or exchanged
for cash, securities, or other property, (ii) a sale or other disposition of all
or substantially all of the assets of Employer or (iii) the dissolution of
Employer.
<PAGE> 2
2. A "Triggering Event" for the purpose of this Agreement will be
deemed to have occurred if:
(a) Within two years from the date on which the Change in Control
occurred, Employer terminates the employment of Executive, other than in the
case of a Termination For Cause, as herein defined;
(b) Within two years from the date on which the Change in Control
occurred, Employer reduces Executive's title, responsibilities, power or
authority in comparison with his title, responsibilities, power or authority at
the time of the Change in Control;
(c) Within two years from the date on which the Change in Control
occurred, Employer assigns Executive duties which are inconsistent with the
duties assigned to Executive on the date on which the Change in Control occurred
and which duties Employer persists in assigning to Executive despite the prior
written objection of Executive;
(d) Within two years from the date on which the Change in Control
occurred, Employer reduces Executive's base compensation, his group health,
life, disability or other insurance programs (including any such benefits
provided to Executive's family), his pension, retirement or profit-sharing
benefits or any benefits provided by Employer's Equity-Based Award Plan, or any
substitute therefor, or excludes him from any plan, program or arrangement in
which the other executive officers of Employer are included; or
(e) Within two years from the date on which the Change in Control
occurred, Employer requires Executive to be based at or generally work from any
location more than fifty miles from the geographical center of Cleveland, Ohio.
3. A "Termination For Cause" for the purposes of this Agreement will be
deemed to have occurred if, and only if, Executive has committed a felony under
the laws of the United States of America, or of any state or territory thereof,
and has been convicted of that felony, or has pled guilty or nolo contendere
with respect to that felony, and the commission of that felony resulted in, or
was intended to result in, a loss (monetary or otherwise) to Employer or its
clients, customers, directors, officers or employees.
4. "Executive's Annual Bonus" means Executive's annual bonus at the
time of a Triggering Event calculated on the basis of the maximum bonus
available to Executive and the assumption that all performance goals have been
or will be achieved by Employer in the year in which the Triggering Event
occurred.
5. "Executive's Annual Salary" means Executive's annual base salary at
the time of a Triggering Event.
ARTICLE II
SEVERANCE PAYMENT
1. Upon the occurrence of a Triggering Event, Employer shall pay to
Executive a lump sum severance benefit which will be in addition to any other
compensation or remuneration to which Executive is, or becomes, entitled to
receive from Employer. This lump sum severance payment will be
- --------------------------------------------------------------------------------
Page 2
<PAGE> 3
paid by Employer to Executive within 30 days after the occurrence of a
Triggering Event in immediately available funds in an amount equal to the sum of
(i) two times Executive's Annual Bonus plus (ii) two times Executive's Annual
Compensation. In addition, Employer shall, at its expense, provide Executive,
and his family, with life, health, disability and accidental death and
dismemberment insurance in an amount not less than that provided on the date on
which the Change in Control occurred, until the earlier of (i) in the event that
Executive shall become employed by another employer after a Triggering Event,
the date on which Executive shall be eligible to receive benefits from such
employer which are substantially equivalent to or greater than the benefits
Executive and his family received from Employer or (ii) the second anniversary
of the date of the Triggering Event.
2. Employer shall provide Executive, at Employer's expense, with
outplacement services and support, the scope and provider of which will be
selected by Executive, for a period of one year following the date of the
Triggering Event.
ARTICLE III
SETOFF
No amounts otherwise due or payable under this Agreement will be
subject to setoff or counterclaim by either party hereto.
ARTICLE IV
ATTORNEY'S FEES
All attorney's fees and related expenses incurred by Executive in
connection with or relating to the enforcement by him of his rights under this
Agreement will be paid for by Employer.
ARTICLE V
SUCCESSORS AND PARTIES IN INTEREST
This Agreement will be binding upon and will inure to the benefit of
Employer and its successors and assigns, including, without limitation, any
corporation which acquires, directly or indirectly, by purchase, merger,
consolidation or otherwise, all or substantially all of the business or assets
of Employer. Without limitation of the foregoing, Employer will require any such
successor, by agreement in form and substance satisfactory to Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that it is required to be performed by Employer. This
Agreement will be binding upon and will inure to the benefit of Executive, his
heirs at law and his personal representatives.
ARTICLE VI
ATTACHMENT
Neither this Agreement nor any benefits payable hereunder will be
subject to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge or to execution, attachment, levy or similar process at
law, whether voluntary or involuntary.
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Page 3
<PAGE> 4
ARTICLE VII
EMPLOYMENT CONTRACT
This Agreement will not in any way constitute an employment agreement
between Employer and Executive and it will not oblige Executive to continue in
the employ of Employer, nor will it oblige Employer to continue to employ
Executive, but it will merely require Employer to pay severance benefits to
Executive under certain circumstances, as aforesaid. In addition, this Agreement
will be considered terminated, and of no further force and effect, if Executive
ceases to be a Board-elected officer or an appointed officer or a key employee
(as determined by the Board of Directors of Employer in its sole discretion and
reflected in the minutes of Board of Directors after notice to such Employee) of
Employer prior to a Change in Control of Employer.
ARTICLE VIII
RIGHTS UNDER OTHER PLANS AND AGREEMENTS
1. The severance benefits herein provided will be in addition to, and
are not intended to reduce, restrict or eliminate any benefit to which Executive
may otherwise be entitled by virtue of his termination of employment or
otherwise.
2. Notwithstanding the foregoing, Employer agrees that until such time
as all of the executive loans are paid in full pursuant to the personal loan
program, dated November 16, 1998, provided by The First National Bank of
Chicago, as agent, and certain other lenders to executive officers of Employer,
Employer will (i) continue all guarantees made by Employer and its subsidiaries
under that loan program and (ii) not direct or take any action to cause
Executive's loan under that program to be accelerated or called prior to its
scheduled maturity date.
ARTICLE IX
NOTICES
All notices and other communications required to be given hereunder
shall be in writing and will be deemed to have been delivered or made when
mailed, by certified mail, return receipt requested, if to Executive, to the
last address which Executive shall provide to Employer, in writing, for this
purpose, but if Executive has not then provided such an address, then to the
last address of Executive then on file with Employer; and if to Employer, then
to the last address which Employer shall provide to Executive, in writing, for
this purpose, but if Employer has not then provided Executive with such an
address, then to:
Corporate Secretary
Developers Diversified Realty Corporation
3300 Enterprise Parkway
Beachwood, Ohio 44122
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Page 4
<PAGE> 5
ARTICLE X
GOVERNING LAW AND JURISDICTION
This Agreement will be governed by, and construed in accordance with,
the laws of the State of Ohio, except for the laws governing conflict of laws.
If either party institutes a suit or other legal proceedings, whether in law or
equity, Executive and Employer hereby irrevocably consent to the jurisdiction of
the Common Pleas Court of the State of Ohio (Cuyahoga County) or the United
States District Court for the Northern District of Ohio.
ARTICLE XI
ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between Employer
and Executive concerning the subject matter hereof and supersedes all prior
written or oral agreements or understandings between the parties hereto. No term
or provision of this Agreement may be changed, waived, amended or terminated
except by a written instrument.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this
Agreement, the parties have hereunto set their hands as of the date and year
first above written.
DEVELOPERS DIVERSIFIED
REALTY CORPORATION
By
-----------------------------
-------------------------------
EXECUTIVE
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Page 5
<PAGE> 1
EXHIBIT 10.2
(DDRC Letterhead)
March 9, 1999
Richard J. Kaplan
14906 Hillbrook Circle
Novelty, Ohio 44072
Dear Mr. Kaplan:
This Agreement and Release (this "Agreement") sets forth our
mutual understanding and our commitments related to your resignation as of March
1, 1999. This Agreement is final and binding on you and Developers Diversified
Realty Corporation, an Ohio corporation (the "Company"). You and the Company are
parties to an employment agreement dated as of March 6, 1998 (your "Employment
Agreement"). No commitment, obligation or claim arising out of or related to
your employment relationship with the Company, your separation from employment
or your Employment Agreement not contained herein will be asserted, supported or
permitted by you or recognized by the Company.
1. EFFECTIVE DATE. The effective date of your resignation,
which is hereby accepted by the Company, is March 1, 1999.
2. TERMINATION PAYMENTS. As consideration for your promises
contained in this Agreement and the continuation of all of the provisions of
Paragraph 6, entitled "Covenants and Confidential Information," of your
Employment Agreement, as described in Paragraph 13:
a. On or before April 5, 1999, if you do not cancel this
Agreement on or before that date, you will receive a one-time,
lump sum termination payment of $802,500, representing all
bonuses due and payable under your Employment Agreement, the
advance payment of the base pay under your Employment
Agreement through December 31, 2000 and bonuses that could be
payable under your Employment Agreement, as well as
consideration for your execution of this Agreement; and
b. The Company will accept your resignation from employment
effective March 1, 1999 and will maintain your current salary
and benefits including commission until that date.
3. COBRA. The Company will provide you with the necessary
information and forms related to your option to purchase continued medical
coverage for up to 18 months, beginning March 1, 1999, under the applicable
provisions of the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). All
insurance, including medical, dental and life, that has covered you while
employed by the Company will be discontinued as of March 1, 1999. As partial
consideration for your execution of this Agreement, applicable COBRA premiums to
provide coverage for you will be paid by the Company until December 31, 1999, so
long as you continue to qualify for COBRA coverage during that period.
4. VACATION. You agree that the payments made pursuant to
Paragraph 2 cover the value of any accrued vacation owed to you.
5. TAXES. All payments made under this Agreement shall be
subject to applicable taxes and minimum withholding as prescribed by law. You
agree that you will be solely responsible for the payment of any taxes that may
be required to be paid by you or on your behalf based on, or as a result of,
payments made in accordance with this Agreement.
<PAGE> 2
Richard J. Kaplan
March 9, 1999
Page 2 of 5
6. TERMINATION OF BENEFITS. You agree that the Company may
terminate the payments and benefits due under this Agreement if you breach the
terms of this Agreement in any material respect and such breach is not cured by
you within 30 days after your receipt of written notice from the Company.
7. RELEASE. Other than as set forth in this Agreement, you
have no further monies, bonuses, benefits or entitlements coming or accruing
from the Company or the Released Parties (as defined herein).
In consideration of the payments and agreements described in
this Agreement, you, for yourself and for your executors, administrators,
assigns and heirs (including your spouse and family members), fully and forever
release the Company and the Released Parties, from and of any and all actions,
suits, claims, issues, charges, allegations, demands, disputes, liabilities,
debts or sums of money of any kind or nature whatever, which you have or may
have, on or prior to the date hereof, including but not limited to, those
arising directly or indirectly as a result of or out of your employment by the
Company, your Employment Agreement or your separation from employment.
This release specifically includes any actions sounding in or
related to tort, contract or discrimination of any kind, including but not
limited to any and all claims arising under any federal, state or local laws
prohibiting age, race, sex, disability and other forms of discrimination,
including but not limited to age discrimination claims under the Age
Discrimination in Employment Act, claims under Title VII of the 1964 Civil
Rights Act, the Americans with Disabilities Act, the Employee Retirement Income
Security Act, or arising under any other federal, state or local statute
relating to employment.
You understand that you may be replaced by a younger
individual and expressly agree that among the claims being released herein are
any and all claims that might arise out of any such action by the Company or the
Released Parties. You voluntarily waive any right to seek reemployment by the
Company.
You also agree that neither you nor anyone acting on your
behalf will file, claim, sue, or cause or permit to be filed or claimed, any
action for damages or other relief against the Company or the Released Parties
involving any matter occurring prior to the date of this Agreement, or involving
the effects of actions or practices which arose prior to the date of this
Agreement. You further agree that you will neither seek nor accept any further
benefit or consideration from any source whatsoever in respect to any claims
which you have asserted or could have asserted against the Company or the
Released Parties.
Further, you agree that this Agreement meets the requirements
of the Age Discrimination in Employment Act of 1967 ("ADEA"), as amended by the
Older Workers' Benefit Protection Act of 1990 ("OWBPA"), including the
provisions of 29 U.S.C. sec. 626(f)(1) regarding specific requirements for the
waiver of rights and claims thereunder in any way arising prior to the execution
of this Agreement. Those requirements include that you understand and
acknowledge that by executing this Agreement:
a. You are knowingly and voluntarily waiving any and
all rights and claims you may have under the ADEA and OWBPA;
b. You are receiving hereunder consideration in
addition to anything of value to which you are already
entitled;
c. You have been advised to consult with an attorney
of your choice prior to executing this Agreement;
d. You have carefully read this Agreement, know and
understand its contents and its significance, and intend to be
bound by its terms;
<PAGE> 3
Richard J. Kaplan
March 9, 1999
Page 3 of 5
e. You have been given a period of 21 days, if
needed, to consider this Agreement and its contents and
ramifications; and
f. You will be given seven days following execution
of this Agreement to revoke it, since it will not become
effective or enforceable and no payments will be made under
this Agreement until that seven day revocation period has
expired.
You agree that the contents of this Paragraph 7 not only
release the Company and the Released Parties from any and all claims as stated
herein which you could or may make on your own behalf, but also those claims
which could or may be made by any other person or entity (including your spouse
and family members).
It is further understood and agreed that this entire Agreement
is not to be construed as an admission of liability by the Company or the
Released Parties. Further, the payment of monies under this Agreement does not
constitute an admission by or on behalf of the Company or the Released Parties
that you are entitled to such payment pursuant to any policy or practice.
8. DEFERRED COMPENSATION PLANS. You were a participant in the
Company's Elective Deferred Compensation Plan. You are entitled to amounts due
under that plan, if any, in accordance with the distribution, withdrawal and
vesting rules under that plan. The Company will provide you with information
regarding that plan prior to April 15, 1999.
9. OPTIONS. You were granted options to purchase the Company's
common shares, without par value, pursuant to plans maintained by the Company
for that purpose. You acknowledge and agree that, under the terms of the options
granted to you, all of your options will be forfeited on the date of your
resignation.
10. LOAN FROM THE FIRST NATIONAL BANK OF CHICAGO, AS AGENT.
You agree to offer to the Company's executive officers all of the shares of the
Company you purchased in November 1998 under the personal loan program provided
by The First National Bank of Chicago, as agent, and certain other lenders to
executive officers of the Company, provided that any executive officer
purchasing shares from you shall agree to assume and release you from a pro rata
share of your obligations under that loan program. If all of the shares you
purchased under that loan program are not acquired, and all of your obligations
are not assumed, by the Company's executive officers, the Company agrees that
until such time as all of the other executive loans are paid in full pursuant to
that loan program, the Company will (i) continue all guarantees made by the
Company and its subsidiaries under that loan program and (ii) not direct or take
any action to cause your loan under that program to be accelerated or called
prior to its scheduled maturity date.
11. CONSULTATION. You agree to make yourself available on a
mutually agreeable basis to consult with the Company in connection with certain
current or prospective matters between March 1, 1999 and December 31, 1999, and
you will receive $1,000 per month during that period for this consulting.
12. COMPANY PROPERTY. You agree to repay to the Company any
outstanding debts or non-reimbursable expenses, and to return all computer
equipment, credit cards, telephone cards, cellular telephones, keys and other
equipment or property of the Company in your possession prior to March 15, 1999.
13. NO FURTHER OBLIGATIONS. You expressly acknowledge that the
Company has no further obligations to you pursuant to your Employment Agreement,
which Employment Agreement is agreed void and of no further effect as of March
1, 1999, except for all of the provisions of Paragraph 6,
<PAGE> 4
Richard J. Kaplan
March 9, 1999
Page 4 of 5
entitled "Covenants and Confidential Information," of your Employment Agreement
which shall continue in effect until December 31, 2000. The Company's
obligations are only as detailed in this Agreement.
14. ACKNOWLEDGMENT. You acknowledge that the payment referred
to in Paragraph 2 and the benefits provided under Paragraph 3 are solely in
exchange for the promises in this Agreement and are not normally available under
the Company's policies to employees. You further acknowledge that such payments
and benefits do not constitute an admission by the Company or the Released
Parties of liability or of violation of any applicable law or regulation. The
Company expressly denies any liability or alleged violation and states that
payments and promises are being made solely for the purpose of effectuating a
mutually amicable separation of you from your employment with the Company.
15. NON-DISPARAGEMENT. You agree not to disparage, directly or
indirectly, the Company or the Released Parties or any of their personnel,
management, products, services or practices.
16. CONFIDENTIALITY OF AGREEMENT. You agree to keep all
provisions, terms and conditions of the Agreement confidential, and you shall
not disclose them to any person not a party hereto other than your counsel,
spouse and tax advisor, under any circumstances, except as required by law.
17. NO FURTHER PROMISES. You agree that no promise has been
made to you except those contained in this Agreement which sets forth the entire
understandings of the parties.
18. REVOCATION OF AGREEMENT. You may revoke and cancel this
Agreement in writing at any time within seven days after your execution of this
Agreement by providing written notice of revocation to the Company. If you do so
revoke, this Agreement will be null and void and the Company will have no
obligation to make the payments or fulfill the obligations contained herein.
This Agreement shall not become effective and enforceable until after the
expiration of that seven day revocation period. After such time, if there has
been no revocation, this Agreement shall be fully effective and enforceable.
19. SUCCESSORS AND ASSIGNS. This Agreement will also be
binding on you, and your heirs, successors and assigns. This Agreement releases
the Company and its successors, assigns, divisions, parents or affiliates,
officers, directors, shareholders, members, employees, heirs, agents and
counsel, including, without limitation, any and all management and supervisory
employees (collectively, the "Released Parties").
20. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties and this Agreement cannot be modified, varied or
altered, except in a writing signed by both parties hereto.
21. ENFORCEABILITY. If any provision of this Agreement is
declared invalid or unenforceable, the remaining portions of the Agreement shall
not be affected thereby and shall be enforced.
22. OHIO LAW. This Agreement shall be governed by the laws of
the State of Ohio.
<PAGE> 5
Richard J. Kaplan
March 9, 1999
Page 5 of 5
Please confirm that the foregoing correctly states the
understanding between us by signing and returning to the Company a counterpart
hereof.
DEVELOPERS DIVERSIFIED REALTY CORPORATION
By: /s/ James A. Schoff
Name: James A. Schoff
Title: Vice Chairman and Chief Investment Officer
Accepted and agreed to as of the date hereof:
/s/ Richard J. Kaplan
- ------------------------------
Richard J. Kaplan
<PAGE> 1
EXHIBIT 10.3
(Form of Agreement for Scott A. Wolstein and James A. Schoff)
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT, is between Developers Diversified Realty Corporation,
an Ohio corporation (the "Employer"), and _______________ (the "Executive") made
this 24th day of March, 1999.
RECITALS
A. Executive is presently employed by Employer as its _________________
B. Employer wishes to induce Executive to continue as its
________________ and, accordingly, to provide certain employment security to
Executive in the event of a "Change in Control" (as hereinafter defined);
C. Employer believes that it is in the best interest of its
shareholders for Executive to continue in his position on an objective and
impartial basis and without distraction or conflict of interest as a result of a
possible or actual Change in Control; and
D. In consideration of this Agreement Executive is willing to continue
as Employer's _______________________________-
NOW THEREFORE, IN CONSIDERATION OF EXECUTIVE CONTINUING AS THE
________________________________________ OF EMPLOYER AND OF THE MUTUAL PROMISES
HEREIN CONTAINED, EXECUTIVE AND EMPLOYER, INTENDING TO BE LEGALLY BOUND, HEREBY
AGREE AS FOLLOWS;
ARTICLE I
DEFINITIONS
1. A "Change in Control" for the purpose of this Agreement will be
deemed to have occurred if, at any time:
(a) Any person or group of persons acting alone or together
with any of its affiliates or associates, acquires legal or beneficial ownership
interest, or voting rights, in twenty percent (20%) or more of the common voting
stock of Employer;
(b) At any time during a period of 24 consecutive months,
individuals who were directors at the beginning of the period no longer
constitute a majority of the members of the Board of Directors unless the
election, or the nomination for election by Employer's shareholders, of each
director who was not a director at the beginning of the period is approved by at
least a majority of the directors who are in office at the time of the election
or nomination and were directors at the beginning of the period; or
(c) A record date is established for determining shareholders
of Employer entitled to vote upon (i) a merger or consolidation of Employer with
another real estate investment trust, partnership, corporation or other entity
in which Employer is not the surviving or continuing entity or in which all or a
substantial part of the outstanding shares are to be converted into or exchanged
for cash, securities, or other property, (ii) a sale or other disposition of all
or substantially all of the assets of Employer or
<PAGE> 2
(iii) the dissolution of Employer.
2. A "Triggering Event" for the purpose of this Agreement will be
deemed to have occurred if:
(a) Within three years from the date on which the Change in
Control occurred, Employer terminates the employment of Executive, other than in
the case of a Termination For Cause, as herein defined;
(b) Within three years from the date on which the Change in
Control occurred, Employer reduces Executive's title, responsibilities, power or
authority in comparison with his title, responsibilities, power or authority at
the time of the Change in Control;
(c) Within three years from the date on which the Change in
Control occurred, Employer assigns Executive duties which are inconsistent with
the duties assigned to Executive on the date on which the Change in Control
occurred and which duties Employer persists in assigning to Executive despite
the prior written objection of Executive;
(d) Within three years from the date on which the Change in
Control occurred, Employer reduces Executive's base compensation, his group
health, life, disability or other insurance programs (including any such
benefits provided to Executive's family), his pension, retirement or
profit-sharing benefits or any benefits provided by Employer's Equity-Based
Award Plan, or any substitute therefor, or excludes him from any plan, program
or arrangement in which the other executive officers of Employer are included;
or
(e) Within three years from the date on which the Change in
Control occurred, Employer requires Executive to be based at or generally work
from any location more than fifty miles from the geographical center of
Cleveland, Ohio.
3. A "Termination For Cause" for the purposes of this Agreement
will be deemed to have occurred if, and only if, Executive has committed a
felony under the laws of the United States of America, or of any state or
territory thereof, and has been convicted of that felony, or has pled guilty or
nolo contendere with respect to that felony, and the commission of that felony
resulted in, or was intended to result in, a loss (monetary or otherwise) to
Employer or its clients, customers, directors, officers or employees.
4. "Executive's Annual Bonus" means Executive's annual bonus at
the time of a Triggering Event calculated on the basis of the maximum bonus
available to Executive and the assumption that all performance goals have been
or will be achieved by Employer in the year in which the Triggering Event
occurred.
5. "Executive's Annual Salary" means Executive's annual base
salary at the time of a Triggering Event.
ARTICLE II
SEVERANCE PAYMENT
1. Upon the occurrence of a Triggering Event, Employer shall pay
to Executive a lump sum severance benefit which will be in addition to any other
compensation or remuneration to which
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Page 2
<PAGE> 3
Executive is, or becomes, entitled to receive from Employer. This lump sum
severance payment will be paid by Employer to Executive within 30 days after the
occurrence of a Triggering Event in immediately available funds in an amount
equal to the sum of (i) three times Executive's Annual Bonus plus (ii) three
times Executive's Annual Compensation. In addition, Employer shall, at its
expense, provide Executive, and his family, with life, health, disability and
accidental death and dismemberment insurance in an amount not less than that
provided on the date on which the Change in Control occurred, until the earlier
of (i) in the event that Executive shall become employed by another employer
after a Triggering Event, the date on which Executive shall be eligible to
receive benefits from such employer which are substantially equivalent to or
greater than the benefits Executive and his family received from Employer or
(ii) the second anniversary of the date of the Triggering Event.
2. Employer shall provide Executive, at Employer's expense, with
outplacement services and support, the scope and provider of which will be
selected by Executive, for a period of one year following the date of the
Triggering Event.
ARTICLE III
SETOFF
No amounts otherwise due or payable under this Agreement will be
subject to setoff or counterclaim by either party hereto.
ARTICLE IV
TAX ADJUSTMENT PAYMENTS
If all or any portion of the amounts payable to the Executive under
this Agreement (together with all other payments of cash or property, whether
pursuant to this Agreement or otherwise, including, without limitation, the
issuance of common stock of the Company, or the granting, exercise or
termination of options therefor) constitutes "excess parachute payments" within
the meaning of Section 280G of the Code that are subject to the excise tax
imposed by Section 4999 of the Code (or any similar tax or assessment), the
amounts payable hereunder shall be increased to the extent necessary to place
the Executive in the same after-tax position as he would have been in had no
such tax assessment been imposed on any such payment paid or payable to the
Executive under this Agreement or any other payment that the Executive may
receive in connection therewith. The determination of the amount of any such tax
or assessment and the incremental payment required hereby in connection
therewith shall be made by the accounting firm employed by the Executive within
thirty (30) calendar days after such payment and said incremental payment shall
be made within five (5) calendar days after determination has been made. If,
after the date upon which the payment required by this Article IV has been made,
it is determined (pursuant to final regulations or published rulings of the
Internal Revenue Service, final judgment of a court of competent jurisdiction,
Internal Revenue Service audit assessment, or otherwise) that the amount of
excise or other similar taxes or assessments payable by the Executive is greater
than the amount initially so determined, then the Company shall pay the
Executive an amount equal to the sum of: (i) such additional excise or other
taxes, PLUS (ii) any interest, fines and penalties resulting from such
underpayment, PLUS (iii) an amount necessary to reimburse the Executive for any
income, excise or other tax assessment payable by the Executive with respect to
the amounts specified in (i) and (ii) above, and the reimbursement provided by
this clause (iii), in the manner described above in this Article IV. Payment
thereof shall be made within five (5) calendar days after the date upon which
such subsequent determination is made.
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<PAGE> 4
ARTICLE V
ATTORNEY'S FEES
All attorney's fees and related expenses incurred by Executive in
connection with or relating to the enforcement by him of his rights under this
Agreement will be paid for by Employer.
ARTICLE VI
SUCCESSORS AND PARTIES IN INTEREST
This Agreement will be binding upon and will inure to the benefit of
Employer and its successors and assigns, including, without limitation, any
corporation which acquires, directly or indirectly, by purchase, merger,
consolidation or otherwise, all or substantially all of the business or assets
of Employer. Without limitation of the foregoing, Employer will require any such
successor, by agreement in form and substance satisfactory to Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that it is required to be performed by Employer. This
Agreement will be binding upon and will inure to the benefit of Executive, his
heirs at law and his personal representatives.
ARTICLE VII
ATTACHMENT
Neither this Agreement nor any benefits payable hereunder will be
subject to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge or to execution, attachment, levy or similar process at
law, whether voluntary or involuntary.
ARTICLE VIII
EMPLOYMENT CONTRACT
This Agreement will not in any way constitute an employment agreement
between Employer and Executive and it will not oblige Executive to continue in
the employ of Employer, nor will it oblige Employer to continue to employ
Executive, but it will merely require Employer to pay severance benefits to
Executive under certain circumstances, as aforesaid. In addition, this Agreement
will be considered terminated, and of no further force and effect, if Executive
ceases to be a Board-elected officer or an appointed officer or a key employee
(as determined by the Board of Directors of Employer in its sole discretion and
reflected in the minutes of Board of Directors after notice to such Employee) of
Employer prior to a Change in Control of Employer.
ARTICLE IX
RIGHTS UNDER OTHER PLANS AND AGREEMENTS
1. The severance benefits herein provided will be in addition to, and
are not intended to reduce, restrict or eliminate any benefit to which Executive
may otherwise be entitled by virtue of his termination of employment or
otherwise.
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<PAGE> 5
2. Notwithstanding the foregoing, Employer agrees that until such time
as all of the executive loans are paid in full pursuant to the personal loan
program, dated November 16, 1998, provided by The First National Bank of
Chicago, as agent, and certain other lenders to executive officers of Employer,
Employer will (i) continue all guarantees made by Employer and its subsidiaries
under that loan program and (ii) not direct or take any action to cause
Executive's loan under that program to be accelerated or called prior to its
scheduled maturity date.
ARTICLE X
NOTICES
All notices and other communications required to be given hereunder
shall be in writing and will be deemed to have been delivered or made when
mailed, by certified mail, return receipt requested, if to Executive, to the
last address which Executive shall provide to Employer, in writing, for this
purpose, but if Executive has not then provided such an address, then to the
last address of Executive then on file with Employer; and if to Employer, then
to the last address which Employer shall provide to Executive, in writing, for
this purpose, but if Employer has not then provided Executive with such an
address, then to:
Corporate Secretary
Developers Diversified Realty Corporation
3300 Enterprise Parkway
Beachwood, Ohio 44122
ARTICLE XI
GOVERNING LAW AND JURISDICTION
This Agreement will be governed by, and construed in accordance with,
the laws of the State of Ohio, except for the laws governing conflict of laws.
If either party institutes a suit or other legal proceedings, whether in law or
equity, Executive and Employer hereby irrevocably consent to the jurisdiction of
the Common Pleas Court of the State of Ohio (Cuyahoga County) or the United
States District Court for the Northern District of Ohio.
ARTICLE XII
ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between Employer
and Executive concerning the subject matter hereof and supersedes all prior
written or oral agreements or understandings between the parties hereto. No term
or provision of this Agreement may be changed, waived, amended or terminated
except by a written instrument.
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<PAGE> 6
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of this
Agreement, the parties have hereunto set their hands as of the date and year
first above written.
DEVELOPERS DIVERSIFIED
REALTY CORPORATION
By________________________
__________________________
EXECUTIVE
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Page 6
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