UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 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 SEPTEMBER 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO __________
COMMISSION FILE NUMBER 1-13355
SECURITY CAPITAL GROUP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 36-3692698
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
125 LINCOLN AVENUE, SANTA FE, NEW MEXICO 87501
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(505) 982-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
Yes X No____
The number of shares outstanding of the Registrant's common stock as of
October 31, 1999 was:
Class A Common Shares, $.01 par value - 1,272,799 shares
Class B Common Shares, $.01 par value - 55,066,892 shares
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
INDEX
PAGE
NUMBER(S)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1999
(unaudited)and December 31, 1998...................... 1
Consolidated Statements of Operations - Three and
nine months ended September 30, 1999
and 1998 (unaudited).....;;........................... 2-3
Consolidated Statement of Shareholders' Equity
- Nine months ended September 30, 1999 (unaudited).... 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 (unaudited)............... 5-6
Notes to Consolidated Financial Statements (unaudited)..... 7-21
Report of Independent Public Accountants.................... 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................... 23-37
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 37-38
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 39
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investments, at equity:
Archstone Communities Trust $ 827,195 $ 827,977
ProLogis Trust 604,454 623,715
Security Capital European Realty 391,360 379,971
Security Capital Preferred Growth Incorporated 76,905 77,782
Security Capital U.S. Realty 750,470 791,562
Strategic Hotel Capital Incorporated -- 370,197
-------------- ------------
2,650,384 3,071,204
Real estate, less accumulated depreciation 1,130,376 1,164,869
Investments in publicly traded real estate securities, at market value 73,440 117,878
-------------- ------------
Total real estate investments 3,854,200 4,353,951
Cash and cash equivalents 98,208 13,209
Other assets 142,822 142,629
-------------- ------------
Total assets $ 4,095,230 $ 4,509,789
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit $ 193,050 $ 520,480
Mortgage notes payable 228,616 343,362
Long-term debt 699,588 614,236
Convertible debentures 320,751 322,774
Capital lease obligations 141,756 --
Accounts payable and accrued expenses 143,663 118,152
Deferred income tax liability 8,129 35,457
-------------- ------------
Total liabilities 1,735,553 1,954,461
Minority interests 87,049 132,718
Shareholders' Equity:
Class A (NYSE: SCZ.A) Shares, $.01 par value; 20,000,000 shares
authorized; 1,308,506 and 1,487,109 shares issued and outstanding
in 1999 and 1998, respectively 13 15
Class B (NYSE: SCZ) Shares, $.01 par value; 229,537,385 shares
authorized; 55,477,900 and 47,628,481 shares issued and outstanding
in 1999 and 1998, respectively 555 476
Series B Preferred Shares, $.01 par value; 257,642 shares
issued and outstanding in 1999 and 1998; stated liquidation
preference of $1,000 per share 257,642 257,642
Additional paid-in capital 2,400,360 2,416,123
Accumulated deficit (385,942) (251,646)
-------------- ------------
Total shareholders' equity 2,272,628 2,422,610
-------------- ------------
Total liabilities and shareholders' equity $ 4,095,230 $ 4,509,789
============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 1 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
INCOME:
Equity in earnings (loss) of:
Archstone Communities Trust $ 25,449 $ 16,273 $ 59,758 $ 51,672
ProLogis Trust 24,536 (3,588) 29,861 17,744
Security Capital European Realty 11,890 574 (14,356) (785)
Security Capital Preferred Growth Incorporated (2,535) (4,589) 2,980 (3,959)
Security Capital U.S. Realty (61,537) (109,359) (42,779) (163,294)
Strategic Hotel Capital Incorporated -- (102) 11,247 5,469
Realized capital gains, net 983 (13,922) 4,346 (11,447)
Change in unrealized gain or loss on investments (5,645) (8,024) (1,076) (17,403)
Financial Services Division revenues from
related parties 34,655 22,375 74,084 70,684
Other income, net 1,258 4,423 6,465 10,169
Property revenue 61,168 39,741 165,589 100,979
---------------- ---------------- ---------------- ----------
90,222 (56,198) 296,119 59,829
---------------- ---------------- ---------------- ----------
EXPENSES:
Interest expense 35,233 23,947 101,333 54,038
Financial Services Division expenses 26,724 18,841 66,458 50,487
General, administrative and other 11,793 14,195 46,188 40,858
Depreciation and amortization 10,375 9,239 32,785 24,087
Property expenses 23,015 17,158 74,053 43,456
Homestead special charge -- -- 65,296 --
Loss on sale of investment -- -- 55,245 --
---------------- ---------------- ---------------- ----------
107,140 83,380 441,358 212,926
---------------- ---------------- ---------------- ----------
Loss from operations (16,918) (139,578) (145,239) (153,097)
Provision for income tax (expense) benefit
Current (4,356) 1,525 (7,666) (5,859)
Deferred 14,302 45,259 27,328 55,241
---------------- ---------------- ---------------- ----------
Total income tax (expense) benefit 9,946 46,784 19,662 49,382
---------------- ---------------- ---------------- ----------
Minority interests in net (earnings) loss
of subsidiaries (30) (107) 20,809 (1,159)
---------------- ---------------- ---------------- ----------
Loss before extraordinary charge and change in
accounting principle (7,002) (92,901) (104,768) (104,874)
Extraordinary charge - loss on early
extinguishment of debt, net of minority interests -- (17,657) -- (17,657)
Change in accounting principle - cumulative
effect on prior years of expensing costs of
start-up activities, net of minority interest -- -- (16,002) --
---------------- ---------------- ---------------- ----------
Net loss (7,002) (110,558) (120,770) (122,531)
Preferred Share dividends (4,509) (4,509) (13,526) (30,579)
---------------- ---------------- ---------------- ----------
Net loss attributable to common shares $ (11,511) $ (115,067) $ (134,296) $ (153,110)
================ ================ ================ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS - (CONTINUED)
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ---------
<S> <C> <C> <C> <C>
Weighted-average Class B common shares outstanding:
Basic 120,414 120,184 120,418 121,706
================ ================ ================ =========
Diluted 120,414 120,184 120,418 121,706
================ ================ ================ =========
Loss per share:
Basic net loss before extraordinary
charge and change in accounting principle $ (0.10) $ (0.81) $ (0.99) $ (1.11)
Extraordinary charge - loss on early
extinguishment of debt -- (0.15) -- (0.15)
Change in accounting principle - expensing
costs of start-up activities -- -- (0.13) --
---------------- ---------------- ---------------- ---------
Basic net loss attributable to
common shares $ (0.10) $ (0.96) $ (1.12) $ (1.26)
================ ================ =============== =========
Diluted net loss before extraordinary
charge and change in accounting principle $ (0.10) $ (0.81) $ (0.99) $ (1.11)
Extraordinary charge - loss on early
extinguishment of debt -- (0.15) -- (0.15)
Change in accounting principle - expensing
costs of start-up activities -- -- (0.13) --
---------------- ---------------- --------------- ---------
Diluted net loss attributable to
common shares $ (0.10) $ (0.96) $ (1.12) $ (1.26)
================ ================ =============== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(In thousands, except shares)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------
Class A Class B Series B
--------------------- --------------------- Preferred Stock Additional Total
Shares Shares At Liquidation Paid-in Accumulated Shareholders'
Outstanding Par Value Outstanding Par Value Value Capital Deficit Equity
----------- --------- ----------- --------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 1,487,109 $ 15 47,628,481 $ 476 $ 257,642 $ 2,416,123 $ (251,646) $ 2,422,610
Conversion of Class A Shares to
Class B Shares (182,541) (2) 9,127,022 91 -- (89) -- --
Conversion of 2016 Convertible
Debentures to Class B Shares -- -- 87,629 1 -- 2,022 -- 2,023
Share repurchase program (900) (1,391,250) (14) (20,792) (20,806)
Issuance of Shares, net 4,838 -- 26,018 1 -- 3,096 -- 3,097
Net loss -- -- -- -- -- -- (120,770) (120,770)
Preferred Share dividends -- -- -- -- -- -- (13,526) (13,526)
--------- --------- ---------- -------- -------------- ----------- ----------- ----------
Balances at September 30, 1999 1,308,506 $ 13 55,477,900 $ 555 $ 257,642 $ 2,400,360 $ (385,942) $2,272,628
========= ========= ========== ======== ============== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------------- --------------
<S> <C> <C>
Operating Activities:
Net loss $ (120,770) $ (122,531)
Adjustments to reconcile net loss to cash flows
provided by operating activities:
Loss on sale of investment 55,245 --
Homestead special charge 51,587 --
Deferred income tax benefit (27,328) (55,241)
Minority interests (20,809) 1,159
Extraordinary charge - loss on early extinguishment of
debt, net of minority interest -- 17,657
Cumulative effect on prior years of expensing costs
of start-up activities, net of minority interests 16,002 --
Equity in (earnings) loss of unconsolidated investees (40,170) 101,025
Distributions from unconsolidated investees 112,938 107,702
Change in unrealized gain or loss on investments 1,076 17,403
Depreciation and amortization 32,785 24,087
Other 1,776 4,340
Increase in other assets (3,912) (39,105)
Increase in accounts payable and accrued expenses 43,215 72,105
-------------- --------------
Net cash flows provided by operating activities 101,635 128,601
-------------- --------------
Investing Activities:
Real estate investments (112,366) (414,841)
Redemptions from (investments in):
Security Capital U.S. Realty (1,686) (37,484)
Security Capital European Realty (25,928) (336,396)
Strategic Hotel Capital Incorporated 329,451 (175,000)
Security Capital Preferred Growth Incorporated -- (25,000)
Publicly traded real estate securities, net 43,582 (36,595)
Other 4,665 (3,907)
-------------- --------------
Net cash flows provided (used) by investing activities 237,718 (1,029,223)
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------------- --------------
<S> <C> <C>
Financing Activities:
Proceeds from lines of credit $ 355,730 $ 1,111,772
Payments on lines of credit (683,160) (726,500)
Proceeds from long-term debt offerings 85,317 499,613
Proceeds from unsecured note and mortgage notes payable 7,282 163,041
Payments on mortgage notes payable (122,028) (122,028)
Repurchase of common shares (21,020) --
Proceeds from issuance of common shares to minority
interest holders 17,357 32,205
Sale of real estate, net 127,261 --
Preferred dividends paid (13,526) (10,736)
Debt issuance costs (7,156) (19,252)
Homestead payment to extinguish debt -- (25,344)
Other (411) 3,107
-------------- --------------
Net cash flows provided (used) by financing activities (254,354) 905,878
-------------- --------------
Net increase in cash and cash equivalents 84,999 5,256
Cash and cash equivalents, beginning of period 13,209 11,454
-------------- --------------
Cash and cash equivalents, end of period $ 98,208 $ 16,710
============== ==============
Non-Cash Investing and Financing Activities:
Increase in property and equipment from capital lease $ 145,000 $ --
============== ==============
Conversions of 2016 Convertible Debentures $ 2,023 $ --
============== ==============
Receipt of Security Capital European Realty
shares in satisfaction of indebtedness $ -- $ 70,772
============== ==============
Issuance of Series B Preferred Shares:
Series B Preferred Shares issued $ -- $ 257,642
Series A Preferred Shares retired -- (139,000)
Fair value of Class B Common Shares retired -- (98,799)
Series A Preferred dividend recorded -- (19,843)
-------------- --------------
$ -- $ --
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 6 -
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL
Security Capital Group Incorporated ("Security Capital") is a global real
estate research, investment and operating management company. Its strategy is to
create the optimal organization to hold significant ownership positions in real
estate operating companies that generate substantial internal growth, enhance
their real estate returns by generating significant levels of third-party
service income and are able to become market leaders by creating brand value.
Security Capital operates its business through two divisions. The Capital
Division provides operational and capital deployment oversight to direct and
indirect investments in real estate investment trusts ("REITs") and real estate
operating companies. The Capital Division generates earnings principally from
its ownership of these affiliates (see note 2). The Financial Services Division
generates fees from capital management, capital markets activities, corporate
services and research services, primarily for the companies in which Security
Capital and its affiliates have invested.
The accompanying consolidated financial statements include the results of
Security Capital, its wholly owned Financial Services Division subsidiaries and
its majority-owned Capital Division investees which include BelmontCorp
("Belmont"), Homestead Village Incorporated ("Homestead"), Security Capital
European Real Estate Shares ("SC-European Real Estate Shares") and Security
Capital U.S. Real Estate Shares ("SC-US Real Estate Shares"). All significant
intercompany accounts and transactions have been eliminated in consolidation. At
September 30, 1999, minority interest relates mainly to Homestead and SC-US Real
Estate Shares.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of Security Capital's
consolidated financial statements for the interim periods presented. Certain
reclassifications have been made in the 1998 consolidated financial statements
and notes to consolidated financial statements in order to conform to the 1999
presentation. The results of operations for the nine-month period ended
September 30, 1999, are not necessarily indicative of the results to be expected
for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses recognized during
the reporting period. Actual results could differ from those estimates.
The consolidated financial statements of Security Capital as of September
30, 1999, are unaudited and, pursuant to the rules of the Securities and
Exchange Commission ("SEC"), certain information and footnote disclosures
normally included in financial statements have been omitted. While management of
Security Capital believes that the disclosures presented are adequate, these
interim consolidated financial statements should be read in conjunction with
Security Capital's 1998 audited consolidated financial statements contained in
Security Capital's 1998 Annual Report on Form 10-K.
-7-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) CAPITAL DIVISION
Security Capital holds the following real estate investments at September
30, 1999, and December 31, 1998:
<TABLE>
<CAPTION>
% Ownership Security Capital's Net
As Of Investments (Redemptions)
September 30, December 31, For The Nine Months
Investment Type Of Entity 1999 1998 Ended September 30, 1999
- ------------------------------------------- -------------------- -------------- -------------- -------------------------
(in thousands)
<S> <C> <C> <C> <C>
EQUITY-METHOD INVESTEES:
Archstone Communities Trust Apartment REIT 39.0% 38.1% $ --
- --------------------------- (publicly traded)
("Archstone")
ProLogis Trust("ProLogis")(a) Industrial REIT 30.9% 40.4% --
- -------------- (publicly traded)
Security Capital European Realty Global real estate 34.6% 34.6% 25,928
- -------------------------------- investments
("SC-European Realty") (private entity)
Security Capital Preferred Growth Convertible security 9.3% 9.8% --
- ---------------------------------- investments in real
Incorporated ("SC-Preferred Growth") estate companies
------------- (private REIT)
Security Capital U.S. Realty U.S. real estate 38.9% 35.0% 1,686
- ----------------------------- investments
("SC-U.S.Realty") (publicly traded)
Strategic Hotel Capital Incorporated (b) Luxury and -- 30.4% (329,451)
- ---------------------------------------- upscate hotels
("Strategic Hotel") (private entity)
CONSOLIDATED INVESTEES:
BelmontCorp Senior assisted living 100% 100% 24,221
- ----------- (private entity)
Homestead Village Incorporated (c) Extended-stay lodging 87.0% 69.8% 213,810
- ------------------------------ (publicly traded)
Security Capital European Real Estate European real 99.9% 99.9% 2,000
- -------------------------------------- estate securities fund
Shares (investment fund)
------
Security Capital U.S. Real Estate U.S. real estate 67.3% 89.9% (48,800)
- ---------------------------------- securities fund
Shares (investment fund)
------
</TABLE>
(a) On March 30, 1999, ProLogis merged with Meridian Industrial Trust, Inc.
Security Capital continues to be ProLogis' largest shareholder.
(b) On September 10, 1999, Security Capital sold its entire ownership position
in Strategic Hotel. See note 8 for further discussion.
(c) In May 1999 Security Capital invested $213,810 in Homestead through
participation in a common stock rights offering.
-8-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Security Capital received dividends and interest from its investees for the
three and nine months ended September 30, 1999 and 1998, as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Dividends Received (In Thousands)
---------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Dividends:
Archstone/Security Capital
Atlantic Incorporated (a) $ 20,180 $ 19,361 $ 60,540 $ 59,312
ProLogis 16,328 15,885 48,541 45,991
SC-European Real Estate Shares -- -- 143 --
SC-Preferred Growth 1,299 984 3,857 2,397
SC-US Real Estate Shares 473 965 1,732 5,693
-------------- -------------- --------------- --------------
38,280 37,195 114,813 113,393
-------------- -------------- --------------- --------------
Interest:
Strategic Hotel (b) -- 3,217 6,541 7,872
-------------- -------------- --------------- --------------
$ 38,280 $ 40,412 $ 121,354 $ 121,265
============== ============== =============== ==============
Dividend Amount Per Investee Share
---------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
Archstone $ 0.3700 $ 0.3550 $ 1.1100 $ 1.0350
Security Capital Atlantic
Incorporated (a) -- -- -- 0.8000
ProLogis 0.3272 0.3183 0.9727 0.9216
SC-European Real Estate Shares -- -- 0.1355 --
SC-Preferred Growth 0.3300 0.2500 0.9800 0.6400
SC-US Real Estate Shares 0.1225 0.1000 0.3642 0.5902
</TABLE>
(a) Security Capital Atlantic Incorporated ("Atlantic") merged into Archstone
in July 1998.
(b) Includes deferred interest income from Strategic Hotel of $3,041 and
$4,001 for the nine months ended September 30, 1999 and 1998, respectively.
See note 8 for discussion of the sale of Strategic Hotel.
-9-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is summarized earnings information for Security Capital's
equity-method investees for the nine months ended September 30, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
Archstone/Atlantic(a) Prologis Strategic Hotel(c)
---------------------------- ---------------------------- ------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rental revenue and other
income, net $ 493,576 $ 454,364 406,679 $ 271,425 $ 350,133 $ 384,907
Expenses 368,470 334,378 297,627 193,971 329,222 385,235
------------- ------------- ------------- ------------- ------------- ---------
Net earnings before minority
interest 125,106 119,986 109,052 77,454 20,911 (328)
Minority interest share of
net earnings -- -- 3,742 3,101 5,449 6,820
------------- ------------- ------------- ------------- ------------- ---------
Net earnings from operations 125,106 119,986 105,310 74,353 15,462 (7,148)
Gain on disposition of
real estate 46,887 36,688 26,358 4,278 -- --
------------- ------------- ------------- ------------- ------------- ---------
Net earnings (loss) before
extraordinary item and change
in accounting principle 171,993 156,674 131,668 78,631 15,462 (7,148)
Less: Loss on early extinguishment
of debt 1,113 -- -- -- -- --
------------- ------------- ------------- ------------- ------------- ---------
Net earnings (loss) before change
in accounting principle 170,880 156,674 131,668 78,631 15,462 (7,148)
Less Preferred Share dividends 17,342 17,348 42,391 35,543 -- --
------------- ------------- ------------- ------------- ------------- ---------
Net earnings (loss) attributable to
common shares before change in
accounting principle $ 153,538 $ 139,326 $ 89,277 $ 43,088 $ 15,462 $ (7,148)
============= ============= ============= ============= ============= =========
Security Capital share of net earnings
(loss) before change in
accounting principle $ 59,758 $ 51,672 $ 29,861 $ 17,744 $ 4,706 $ (2,403)
============= ============= ============= ============= ============= =========
Interest income from affiliate $ -- $ -- $ -- $ -- $ 6,541 $ 7,872
============= ============= ============= ============= ============= =========
</TABLE>
<TABLE>
<CAPTION>
SC-European Realty(b) SC-Preferred Growth SC-U.S.Realty
-------------------------- ------------------------- ------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $ (12,808) $ (9,709) $ 40,787 $ 24,174 $ 49,168 $ 59,652
Realized gains (losses) on investments 3,192 -- (16,337) -- 1,420 32,763
Change in unrealized gain or loss on investments (31,936) 7,432 6,612 (56,139) (163,261) (601,047)
Eliminations -- -- -- -- (5,617) 26,808
----------- ----------- ----------- ----------- ----------- ----------
Adjusted net earnings (loss) $ (41,552) $ (2,277) $ 31,062 $ (31,965) $ (118,290) $ (481,824)
=========== =========== =========== =========== =========== ==========
Security Capital share of adjusted net
earnings (loss) $ (14,356) $ (785) $ 2,980 $ (3,959) $ (42,779) $ (163,294)
=========== =========== =========== =========== =========== ==========
</TABLE>
(a) Atlantic merged into Archstone in July 1998.
(b) SC-European Realty commenced operations in April 1998.
(c) Subsequent to the second quarter of 1999, Security Capital no longer
recorded equity in earnings from Strategic Hotel as a result of the
write-down in carrying value to net sales value as of June 28, 1999.
Therefore, the 1999 summarized earnings results only include Strategic
Hotel through June 30, 1999.
-10-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A condensed consolidating balance sheet for Security Capital as of
September 30, 1999, follows (in thousands):
<TABLE>
<CAPTION>
Investment
Security Capital(a) Homestead (b) Funds(b)(c) Consolidated(d)
------------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
Investments, at equity $ 3,215,261 $ -- $ -- $ 2,650,384
Net real estate investments 58,158 1,115,065 -- 1,130,376
Investments in publicly traded real estate
securities, at market value -- -- 73,440 73,440
Cash and other assets 183,912 99,077 2,596 241,030
------------------- ------------- ----------- ---------------
Total assets $ 3,457,331 $ 1,214,142 $ 76,036 $ 4,095,230
=================== ============= =========== ===============
Lines of credit $ -- $ 193,050 $ -- $ 193,050
Long-term debt 1,027,621 363,090 -- 1,390,711
Other liabilities 134,852 59,067 915 151,792
------------------- ------------- ----------- ---------------
Total liabilities 1,162,473 615,207 915 1,735,553
Minority interests 18,984 -- -- 87,049
Shareholders' equity 2,275,874 598,935 75,121 2,272,628
------------------- ------------- ----------- ---------------
Total liabilities and
shareholders' equity $ 3,457,331 $ 1,214,142 $ 76,036 $ 4,095,230
=================== ============= =========== ===============
</TABLE>
- ------------------
(a) Includes Homestead and the Investment Funds accounted for using the equity
method and Belmont on a consolidated basis.
(b) Reflects the carrying amount prior to elimination entries.
(c) The Investment Funds, which invest in securities of real estate companies,
include SC-US Real Estate Shares and SC-European Real Estate Shares.
(d) Consolidated amounts include effect of elimination entries.
-11-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A condensed consolidating statement of operations for Security Capital for
the nine months ended September 30, 1999, follows (in thousands):
<TABLE>
<CAPTION>
Security Investment
Capital(a) Homestead (b) Funds(b)(c) Consolidated(d)
------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Equity in earnings of investees $ 4,665 $ -- $ -- $ 46,711
Financial Services Division revenues from
related parties 78,809 -- -- 74,084
Property revenue 1,877 163,712 -- 165,589
Other income 4,550 2,238 4,809 9,735
------------- ------------ ------------ --------------
89,901 165,950 4,809 296,119
------------- ------------ ------------ --------------
Interest expense 63,296 38,178 -- 101,333
Financial Services Division expenses 66,458 -- -- 66,458
General, administrative and other 23,416 26,238 913 46,188
Depreciation and amortization 5,123 31,120 -- 32,785
Property expenses 2,295 71,758 -- 74,053
Homestead special charge -- 65,296 -- 65,296
Loss on sale of investment 55,241 -- -- 55,245
------------- ------------ ------------ --------------
215,829 232,590 913 441,358
------------- ------------ ------------ --------------
Earnings (loss) before income taxes,
minority interests and change in
accounting principle (125,928) (66,640) 3,896 (145,239)
Income tax benefit 19,662 -- -- 19,662
Minority interests -- -- -- 20,809
------------- ------------ ------------- --------------
Net earnings (loss) before change in
accounting principle (106,266) (66,640) 3,896 (104,768)
Change in accounting principle -
Cumulative effect on prior years of
expensing costs of start-up activities,
net of minority interests (16,002) (14,230) -- (16,002)
------------- ------------ ------------- --------------
Net loss (122,268) (80,870) 3,896 (120,770)
Preferred Share dividends (13,526) -- -- (13,526)
------------- ------------ ------------- --------------
Net earnings (loss) attributable to
common shares $ (135,794) $ (80,870) $ 3,896 $ (134,296)
============= ============ ============= ==============
</TABLE>
- --------------------
(a) Includes Homestead and the Investment Funds accounted for using the equity
method and Belmont on a consolidated basis.
(b) Reflects the carrying amount prior to elimination entries.
(c) The Investment Funds, which invest in securities of real estate companies,
include SC-US Real Estate Shares and SC-European Real Estate Shares.
(d) Consolidated amounts include effect of elimination entries.
-12-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) FINANCIAL SERVICES DIVISION
Financial Services Division revenues for the three and nine months ended
September 30, 1999 and 1998, were earned from the following sources (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Capital Markets fees $ 16,433 $ 5,153 $ 20,616 $ 26,336
Corporate Services fees 4,564 4,950 14,235 12,776
Global Capital Management Group fees 14,585 13,420 43,367 35,001
Real Estate Research fees 554 352 950 924
-------------- -------------- --------------- --------------
Total Financial Services Division
revenues from related parties 36,136 23,875 79,168 75,037
Less amounts eliminated in
consolidation (1,481) (1,500) (5,084) (4,353)
-------------- -------------- --------------- --------------
Consolidated Financial Services
Division revenue from related parties $ 34,655 $ 22,375 $ 74,084 $ 70,684
============== ============== =============== ==============
</TABLE>
(4) SEGMENT REPORTING
For internal management purposes, Security Capital uses Earnings Before
Depreciation, Amortization and Deferred Taxes ("EBDADT") to measure its
performance. Security Capital believes that EBDADT is the best measure of
operating performance for Security Capital and its affiliates. For EBDADT
purposes, all investees (including consolidated investees) are accounted for on
the equity method. In general, EBDADT is defined for Security Capital and its
consolidated and equity-method investees as follows:
Net earnings plus or minus:
Plus Real estate depreciation (depreciation will not be
added back for non-real estate assets whose value
is declining over time)
Plus Amortization of real estate related non-cash items
(e.g., goodwill)
Plus EBDADT, net of dividends received by SC-U.S.Realty and
SC-European Realty from their strategic investees
Plus Other non-cash, non-recurring expenses
Plus/minus Deferred tax expense (benefit)
Plus/minus Losses(gains)on the disposition of depreciated real estate
Plus/minus Unrealized losses (gains) on non-strategic investments
With respect to Security Capital investees in which Security Capital has
less than a 20% interest, and does not have the ability to significantly
influence management, Security Capital includes only dividends or interest
received in its EBDADT. SC-U.S.Realty and SC-European Realty use the same
approach for investees in which they own less than 20%.
The EBDADT measure presented by Security Capital will not be comparable
with other entities that do not compute EBDADT in a manner consistent with
Security Capital.
-13-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is a Statement of EBDADT by reportable segment for the
three and nine months ended September 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Capital Division:
Equity in Investees' EBDADT $ 85,528 $ 65,737 $ 264,353 $ 225,774
Interest and other income 1,223 417 2,906 1,714
-------------- -------------- --------------- -----------
86,751 66,154 267,259 227,488
-------------- -------------- --------------- -----------
Operating expenses 6,328 10,573 26,478 26,662
Interest expense 22,323 17,369 63,271 40,338
Current income tax expense (benefit) 3,574 (1,585) 6,313 4,212
Convertible preferred share dividends 4,509 4,509 13,526 10,736
-------------- -------------- --------------- -----------
Capital Division EBDADT(1) 50,017 35,288 157,671 145,540
-------------- -------------- --------------- -----------
Financial Services Division:
Revenues 36,136 23,875 79,168 75,037
-------------- -------------- --------------- -----------
Operating expenses 25,231 16,976 63,411 49,887
Current income tax expense 782 60 1,353 1,647
-------------- -------------- --------------- -----------
Financial Services Division EBDADT 10,123 6,839 14,404 23,503
-------------- -------------- --------------- -----------
EBDADT before special items
Homestead special charge -- -- 45,581 --
Strategic Hotel provision -- -- 55,288 --
-------------- -------------- --------------- -----------
EBDADT $ 60,140 $ 42,127 $ 71,206 $ 169,043
============== ============== =============== ===========
</TABLE>
(1) For purposes of calculating Capital Division EBDADT, Security Capital
applies all interest expense, preferred share dividends and similar charges
for invested capital to the Capital Division. Operating expenses include
the direct costs of personnel assigned to the Capital Division plus a
proportionate share of general and administrative costs based on revenues.
-14-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is a reconciliation of net loss to EBDADT for the three and
nine months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C>
Net loss attributable
to common shares $ (11,511) $ (115,067) $ (134,296) $ (153,110)
Investee reconciling items:
Real estate depreciation 38,894 40,413 130,162 110,636
Gains on sale of depreciated real estate (19,442) (4,610) (27,071) (14,128)
Unrealized losses 56,378 128,175 77,178 216,867
EBDADT, net of dividends, from
Strategic Investees of SC-U.S.Realty
and SC-European Realty 10,763 9,191 36,048 16,651
Interest rate hedge expense 83 14,349 316 14,349
Loss on extinguishment of debt -- 17,657 432 17,657
Other 1,372 (7,133) 2,515 (4,065)
---------------- ---------------- ---------------- -----------
88,048 198,042 219,580 357,967
---------------- ---------------- ---------------- -----------
Security Capital reconciling items:
Deferred tax benefit (14,302) (45,258) (27,328) (55,241)
Adoption of an accounting principle -- -- 16,002 --
Non-cash preferred share dividends -- -- -- 19,842
Other (2,095) 4,410 (2,752) (415)
---------------- ---------------- ---------------- -----------
(16,397) (40,848) (14,078) (35,814)
---------------- ---------------- ---------------- -----------
EBDADT $ 60,140 $ 42,127 $ 71,206 $ 169,043
================ ================ ================ ===========
</TABLE>
-15-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below is a reconciliation of segment assets at fair value, as
used for internal management purposes, to assets presented in accordance with
generally accepted accounting principles ("GAAP") as of September 30, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Capital Division assets at fair value (1) $ 3,638,332 $ 3,973,091
Excess of assets at fair value over cost
of unconsolidated GAAP assets (169,894) (300,707)
Consolidation of Homestead and
investment funds 670,444 847,584
Proceeds from assumed exercise
of options and warrants (2) (43,652) (10,179)
---------------- ----------------
GAAP Assets $ 4,095,230 $ 4,509,789
================ ================
</TABLE>
(1) Assets are valued using the stock exchange closing prices for publicly
traded investments. For private investments, cost is used, unless the
investee has raised significant third party equity at a different price, in
which case such price is used. Security Capital will revalue an investment
downward if the investee experiences sustained degradation of operating
performance or if changed circumstances indicate the last offering price
does not reflect fair value. No value is assigned to the Financial Services
Division.
(2) Includes only those options and warrants whose exercise price is equal
to or less than market value as of these dates.
(5) INDEBTEDNESS
Lines Of Credit:
At September 30, 1999, Security Capital had a $470,000,000 unsecured
revolving line of credit with Wells Fargo Bank, National Association (Wells
Fargo), as agent for a group of lenders, which is effective through April 6,
2002, with an option to renew for successive one-year periods with the approval
of lenders. Borrowings accrue interest at LIBOR plus a margin (1.30% as of
September 30, 1999) based upon Security Capital's credit rating or a Base Rate
(defined as the higher of Wells Fargo prime rate or the Federal Funds rate plus
.50%). As of September 30, 1999, there was no outstanding balance on Security
Capital's line of credit.
Commitment fees on the amended line range from 0.125% to 0.20% per annum
based on the average unfunded line of credit balance. The line is guaranteed by
SC Realty Incorporated and SC Realty Shares Limited, each of which is a wholly
owned subsidiary of Security Capital.
-16-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 18, 1999, Homestead executed an agreement with its bank lenders
to renew and amend their Working Capital Facilities. Homestead's lines of credit
as of September 30, 1999, are summarized as follows:
<TABLE>
<CAPTION>
Fee On Average
Amount Maturity Interest Rate Range Unfunded Balances Collateral
- --------------- ------------------ ---------------------------- -------------------- ---------------------------------------
<S> <C> <C> <C> <C>
$ 170,000,000 December 31, 2000 2.0% to 3.0% over LIBOR 0.375% Suburban real estate properties
and 1.0% to 2.0% over
prime or 1.5% to 2.5% over
the federal funds rate
$ 30,000,000 December 31, 2000 3.0% over LIBOR and 2.0% N/A Urban real estate properties
over prime or 2.5% over
the federal funds rate
</TABLE>
As Of September 30, 1999, Homestead has an outstanding balance of
$193,050,000 under the Working Capital Facilities. Subsequent to quarter end,
the line secured by suburban real estate properties was reduced to $166,200,000
and the line secured by urban real estate properties was paid in full with the
net proceeds from the sales of land (See Note 7).
Each Line Of Credit Requires Maintenance Of Certain Financial Covenants.
Security Capital, SC Realty, SC Realty Shares Limited And Homestead Were In
Compliance With All Such Covenants At September 30, 1999.
Senior Unsecured Notes:
Under its medium-term note program, in the first quarter of 1999, Security
Capital issued $5,000,000 of 7.75% Senior Unsecured Notes due January 11, 2005;
$54,550,000 of 7.80% Senior Unsecured Notes, due January 12, 2005; and
$25,750,000 of 7.80% Senior Unsecured Notes due January 19, 2005. The total
outstanding principal balance of Senior Unsecured Notes was $700,000,000 as of
September 30, 1999.
All of the Notes are redeemable at any time at the option of Security
Capital, in whole or in part, at a redemption price equal to the sum of the
principal amount of the Notes being redeemed plus accrued interest thereon to
the redemption date plus an adjustment, if any, based on the yield to maturity
relative to market yields available at redemption.
Capital Lease Obligation:
On February 23, 1999, Homestead completed a sale and leaseback of 18 of the
26 Homestead properties collaterizing the $122,000,000 mortgage note, which was
due June 1999. Hospitality Properties Trust purchased the properties for
$145,000,000. Homestead will continue to operate the properties under a
long-term lease through December 2015 and pay a minimum rent of approximately
$16,000,000 per year. Homestead posted a security deposit equal to one year's
rent. The majority of the proceeds from the sale were used to repay the
$122,000,000 mortgage note and to post the approximate $16,000,000 security
deposit.
The lease is considered a capital lease for financial reporting purposes
and thus the present value of the minimum lease payments, discounted at
-17-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
approximately 9.8%, has been recorded as an asset of $145,000,000 to be
amortized over the lease term, and an obligation, which will be reduced over the
term of the lease by allocating rent payments between interest expense and
reduction of the lease obligation. The balance of the lease obligation at
September 30, 1999, was $141,756,000.
The lease also provides for two extension periods of 15 years each at the
option of Homestead, requires payment of percentage rents beginning July 2000
based on increases in revenues over a base period, and requires a percentage of
revenues be paid to a furniture, fixtures and equipment reserve to be used for
capital expenditures.
Homestead Convertible Mortgage Notes Payable:
At September 30, 1999, Homestead had outstanding convertible mortgage notes
in the principal amount of $221,334,000, all of which were held by Archstone.
The notes are collateralized by 54 Homestead properties with a historical cost
of $358,800,000. The notes accrue interest at 9.0% on the principal amount and
require interest only payments every six months on May 28 and November 28 of
each year. The notes are due October 31, 2006, and are callable on or after May
28, 2001. The notes are convertible, at the option of the holder, into
21,191,262 shares of Homestead common stock (a conversion ratio equal to one
share of common stock for every approximate $10.44 of principal amount
outstanding). The conversion ratio was adjusted in accordance with the terms of
the notes upon the issuance of shares in the May 1999 rights offering.
Previously the conversion ratio was $11.50 (19,246,402 shares). Deferred
financing costs and the discount on the respective fundings have been fully
amortized. No further funding commitment is available under the mortgage notes.
Belmont Mortgage Notes Payable:
Belmont obtained construction loans from a bank in September 1999 on two
communities under construction. The loans are in conjunction with a $15,665,000
commitment, with interest payable monthly at variable interest rates of 30-day
LIBOR plus 2.5% during the construction period and 30-day LIBOR plus 2.35% after
issuance of certificate of occupancy and operating licenses. The outstanding
balance and weighted average interest rate as of September 30, 1999, was
$7,282,000 and 7.88%, respectively. The loans have a maturity date of September
2001 and are secured by a deed of trust on land, building, furniture and
fixtures and an assignment of rents and leases.
-18-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest:
Presented below are the interest costs incurred by Security Capital and
its consolidated subsidiaries for the three and nine months ended September 30,
1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Total interest incurred $ 36,212 $ 31,001 $ 108,936 $ 75,249
============== ============== =============== ==============
Homestead and Belmont capitalized interest
included in total interest incurred $ 979 $ 7,054 $ 7,603 $ 21,211
============== ============== =============== ==============
Interest paid in cash $ 16,241 $ 11,302 $ 83,043 $ 45,367
============== ============== =============== ==============
Amortization of deferred financing costs
included in interest incurred $ 1,198 $ 2,334 $ 4,597 $ 5,133
============== ============== =============== ==============
</TABLE>
(6) SHAREHOLDERS' EQUITY
Share Repurchase Program:
In August 1999, Security Capital's Board of Directors authorized the
repurchase of up to $100,000,000 of Class A Common Stock, Class B Common Stock
and 6.5% Convertible Subordinated Debentures Due 2016 ("2016 Debentures") of
Security Capital. Through November 8, 1999, under the share repurchase program,
Security Capital had repurchased 16,192 Class A Common Shares and 2,805,150
Class B Common Shares for a combined purchase price of $51,160,000. In addition,
Security Capital repurchased $2,500,000 principal amount of 2016 Debentures
during the third quarter, which were convertible into 2,167 Class A Common
Shares.
-19-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Per Share Data:
The following is a reconciliation of the numerators and denominators used
to calculate basic and diluted earnings per Class B Common Share for income
before extraordinary item and change in accounting principle, under Statement of
Financial Accounting Standards 128 ("SFAS 128") for the periods indicated (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Loss before extraordinary charge and
change in accounting principle $ (7,002) $ (92,901) $ (104,768) $ (104,874)
Preferred Share dividends (4,509) (4,509) (13,526) (30,579)
------------- ------------ ---------------- ----------------
Net loss attributable to common shares
and assumed conversions before
extraordinary charge and change
in accounting principle $ (11,511) $ (97,410) $ (118,294) $ (135,453)
============== ============ ================ ================
Basic and diluted weighted-average
Class B common shares outstanding 120,414 120,184 120,418 121,706
============== ============ ================ ================
Per share net earnings (loss) attributable
to Class B common shares:
Basic $ (0.10) $ (0.81) $ (0.99) $ (1.11)
=============== ============ ================ ================
Diluted $ (0.10) $ (0.81) $ (0.99) $ (1.11)
=============== ============ ================ ================
</TABLE>
For all periods the convertible debentures and the Convertible Preferred
Shares are not assumed converted and the conversion of options and warrants are
not assumed exercised for the purpose of calculating diluted earnings per Class
B Common Share as the effects are anti-dilutive.
(7) HOMESTEAD SPECIAL CHARGE
In the second quarter of 1999, Homestead determined, based on its inability
to obtain financing for development of sites beyond those already in
construction, to further curtail its development program. As of the beginning of
the second quarter, Homestead had substantial investments in ownership of land
for development and in costs of pursuit of additional development sites. All
land previously held for development is now held for sale, all pursuits for
acquisition of additional sites for development were abandoned, and Homestead
reduced overhead costs and personnel to reflect a company with stabilized
operations of 136 properties. Homestead recorded a special charge of $65,296,000
in May 1999 consisting of approximately $43,500,000 for write-downs of the
carrying cost of land held for sale to its estimated fair value less estimated
costs to dispose, approximately $7,100,000 for write-offs of costs of pursuits
and loss of non-refundable earnest money deposits, approximately $5,500,000 for
closing of administrative offices and discontinued new initiatives, and
approximately $9,200,000 for the costs of severance of personnel. Revisions to
these estimates may be required based upon the ultimate sale of the properties.
Carrying costs on the land sites, such as interest and property taxes, have
been expensed since April 1999, and will continue until the sites are disposed
of and will adversely affect earnings until disposal. The majority of the land
sites are subject to the security interests of the lenders under the Working
-20-
<PAGE>
SECURITY CAPITAL GROUP INCORPORATED
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capital Facilities and any sale of the encumbered sites requires the consent of
the lenders. Upon sale, the proceeds will be used to repay the Working Capital
Facilities.
Homestead's land held for sale consisted of 23 parcels at September 30,
1999. One parcel held for sale was sold in the third quarter of 1999 and five
parcels were sold subsequent to the end of the quarter. The six land sales
resulted in net proceeds of $50,500,000 of which $32,800,000 has been used to
repay outstanding balances on Homestead's lines of credit.
(8) STRATEGIC HOTEL
On June 28, 1999, Security Capital's board of directors approved the
sale of its entire ownership position to Strategic Hotel. The sale closed on
September 10, 1999, for net proceeds of approximately $329,000,000. A provision
for loss on the sale of Strategic Hotel of $55,245,000 was recorded as of June
28, 1999. In conjunction with the provision, a capital loss tax benefit of
$19,336,000 was recorded. However, a valuation allowance of $18,126,000 was
provided against the tax benefit because Security Capital currently has no plans
to sell any of the assets which would generate sufficient taxable capital gains
to offset this loss.
As a result of the write-down in carrying value of Strategic Hotel to
its net sales value, equity in earnings from Strategic Hotel were not recorded
after the second quarter of 1999.
(9) COMMITMENTS AND CONTINGENCIES
Security Capital and its affiliates have committed to invest up to
$518,258,000 in equity securities of SC-European Realty. As of September 30,
1999, $401,665,000 had been funded by Security Capital and its affiliates. As of
September 30, 1999, $62,517,000 had been funded by Security Capital to
Belmont and an additional $20,483,000 of unfunded commitments remained. At
September 30, 1999, Belmont had approximately $15,300,000 of unfunded
commitments for developments under construction.
(10) RECENT ACCOUNTING PRONOUNCEMENT
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities,"
("SOP 98-5"), establishing accounting standards requiring the expensing of
organizational, pre-opening and start-up costs. Security Capital adopted SOP
98-5 effective January 1, 1999. Upon adoption, any material unamortized
organizational, pre-opening and start-up costs were written off as a cumulative
effect of adoption of an accounting standard. The cumulative impact of the
adoption of SOP 98-5 on Security Capital's results of operation and financial
position was $16,002,000 in the first quarter of 1999, primarily related to
Homestead and Belmont. No financial statement amounts were restated upon
adoption of the new standard.
-21-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Security Capital Group Incorporated:
We have reviewed the accompanying consolidated balance sheet of Security Capital
Group Incorporated and subsidiaries (see note 1) as of September 30, 1999, and
the related consolidated statements of operations for the three- and nine-month
periods ended September 30, 1999 and 1998, the consolidated statement of
shareholders' equity for the nine-month period ended September 30, 1999, and the
consolidated statements of cash flows for the nine-month periods ended September
30, 1999 and 1998. These financial statements are the responsibility of the
Management of the Company. We were furnished with the reports of other
accountants on their reviews of the financial statements of Archstone
Communities Trust and Security Capital Atlantic Incorporated, whose total assets
represent 20.2% of the total assets of Security Capital Group Incorporated and
subsidiaries as of September 30, 1999, and whose income represent 14.5% and
11.4% of the total income in the consolidated statements of operations of
Security Capital Group Incorporated and subsidiaries for the nine-month periods
ended September 30, 1999 and 1998, respectively.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review and the reports of other accountants, we are not aware of
any material modifications that should be made to the financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Security Capital Group Incorporated
and subsidiaries as of December 31, 1998, and, in our report dated March 10,
1999, we expressed an unqualified opinion on that statement based on our audit
and reports of other auditors. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1998, is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 11, 1999
-22-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Security
Capital's consolidated financial statements and the notes thereto in Item 1 of
this report. See Security Capital's 1998 Annual Report on Form 10-K for a
discussion of various risk factors associated with forward looking statements
made in this document.
Overview
Security Capital is a global real estate research, investment and
operating management company. Security Capital operates its business and
generates earnings through two divisions. The Capital Division provides
operational and capital deployment oversight to direct and indirect investments
in real estate investment trusts and real estate operating companies, generating
earnings principally from its ownership of these affiliates. The Financial
Services Division generates fees and earnings from capital management, capital
markets activities, corporate services and research services primarily for the
companies in which Security Capital and its affiliates have invested. Revenues
from Capital Markets Group, Corporate Services, Global Capital Management Group
and Real Estate Research are all included in the Financial Services Division and
are only reflected in Security Capital's consolidated financial statements if
they were earned from investees not consolidated in the financial statements.
Financial Services Division revenues earned from consolidated investees
(Belmont, Homestead, SC-European Real Estate Shares and SC-US Real Estate
Shares) are eliminated in Security Capital's consolidated financial statements.
Results Of Operations
Three And Nine Months Ended September 30, 1999 Compared To Three And Nine Months
Ended September 30, 1998
Capital Division Investments
Dividends Received
Security Capital's dividends received increased from $37.2 million to
$38.3 million, for the three months ended September 30, 1999, compared to the
same period in 1998 and increased from $113.4 million to $114.8 million, for the
nine months ended September 30, 1999, compared to the same period in 1998. The
increases for the three and nine month periods resulted primarily from an
increase in the dividend rates from Archstone, ProLogis and SC-Preferred Growth,
slightly offset by the decrease in dividends received from SC-US Real Estate
Shares. The decrease in dividends from SC-US Real Estate Shares is primarily due
to Security Capital redemptions totaling $58.3 million since the fourth quarter
of 1998. For the nine months ended September 30, 1999, there was also a decrease
in the dividend rate of SC-US Real Estate Shares (see "dividends per investee
share" chart in note 2 to the consolidated financial statements).
Equity In Earnings Of Investees
Security Capital includes in its earnings its share of the earnings of
its unconsolidated investees. The equity in earnings of SC-European Realty,
SC-U.S.Realty and SC-Preferred Growth, and the earnings of SC-US Real Estate
Shares and SC-European Real Estate Shares, in accordance with generally accepted
accounting principles, include the change in unrealized gains or losses on their
investments in their earnings. This component of earnings or loss fluctuates
with changes in the prevailing market prices for the shares of the real estate
companies in which they invest. The fluctuation in market prices does not have
an impact on cash flow, but the general decline in real estate equity security
prices through the first nine months of 1999 had a significant adverse impact on
Security Capital's equity in earnings of these investees.
-23-
<PAGE>
Presented below is Security Capital's equity in earnings (loss) of
affiliates for the three months and nine months ended September 30, 1999 and
1998, and Security Capital's common share ownership interest in affiliates as of
September 30, 1999 and 1998 (dollar amounts in millions):
<TABLE>
<CAPTION>
Equity In Earnings (Loss)
-------------------------------------------------------------------- % Ownership
Three Months Ended Nine Months Ended as of
September 30, September 30, September 30,
------------------------------- ----------------------------- -------------------
1999 1998 1999 1998 1999 1998
---------- ----------- ----------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Archstone $ 25.4 $ 16.3 $ 59.8 $ 51.7 39.0% 38.1%
ProLogis 24.5 (3.6) 29.9 17.7 30.9 40.5
SC-European Realty 11.9 0.6 (14.4) (0.8) 34.6 34.6
SC-Preferred Growth (2.5) (4.6) 3.0 (4.0) 9.3 10.7
SC-U.S.Realty (61.5) (109.4) (42.8) (163.3) 38.9 34.5
Strategic Hotel:
Earnings -- (3.3) 4.7 (2.4) -- 30.4
Interest income -- 3.2 6.5 7.9
--------- ---------- ----------- ----------
$ (2.2) $ (100.8) $ 46.7 $ (93.2)
========= ========== =========== ==========
</TABLE>
Atlantic was merged into Archstone in July of 1998. For purposes of the
table above Security Capital has combined the results of Archstone and Atlantic
for the nine months ended September 30, 1998. The increase in Security Capital's
equity in Archstone's earnings for the three months ended September 30, 1999,
compared to the same period in 1998, is primarily due to (i) a $6.7 million
increase in net gains on dispositions of depreciated real estate and (ii) an
increase in net operating income of $11.9 million attributable to an increase in
rental revenues from operating communities and the successful lease-up of
development communities. The increase in Security Capital's equity in
Archstone's earnings for the nine months ended September 30, 1999, compared to
the same period in 1998, is primarily due to (i) an increase in gains on
disposition of real estate of $10.2 million and (ii) an increase in rental
revenues due to the increase in the number of operating communities.
The increase in Security Capital's equity in ProLogis' earnings for the
three and nine months ended September 30, 1999, compared to the same period in
1998, is primarily due to (i) a net increase in income generated by ProLogis'
unconsolidated subsidiaries in 1999, primarily due to the recognition of a full
three and nine months of income from ProLogis Kingspark in 1999 compared to 1998
(ProLogis Kingspark was acquired on August 14, 1998) and (ii) an increase in net
operating income, primarily the result of the increased number of distribution
facilities in operation in 1999 as compared to 1998, partially offset by net
foreign currency exchange losses recognized by ProLogis in 1999 and increases in
1999 in general and administrative expenses.
Security Capital's decreased ownership in ProLogis is due to ProLogis'
merger with Meridian Industrial Trust, Inc. which was effective March 30, 1999,
whereby ProLogis acquired Meridian through the issuance of new shares.
Security Capital continues to be ProLogis' largest shareholder.
SC-European Realty commenced operations in April 1998. Security
Capital's weighted average investment increased to $391.3 million from $213.9
million for the three months ended September 30, 1999, compared to the same
period in 1998 and increased to $381.9 million from $95.5 million for the nine
months ended September 30, 1999, compared to the same period in 1998.
SC-European Realty's current investments are primarily in prestabilized
operating and development companies. The current year losses relate primarily to
foreign exchange fluctuations.
-24-
<PAGE>
The increase in Security Capital's equity in SC-Preferred Growth's
earnings for the three and nine months ended September 30, 1999, compared to the
same period in 1998, is primarily due to changes in unrealized gains or losses
on investments. The value of SC-Preferred Growth's investment portfolio
fluctuated as follows: a $34.5 million decline in value for the third quarter
and a $6.6 million increase in value for the first nine months of 1999, and a
$45.7 million decline in value for the third quarter and a $56.1 million
decline in value for the first nine months of 1998. The overall increase for the
first nine months of 1999 was partially offset by a realized loss of $16.3
million.
The decrease in Security Capital's equity in SC-U.S.Realty's losses for
the three and nine months ended September 30, 1999, compared to the same periods
in 1998, is primarily due to the change in unrealized losses on investments
($190.2 million decline in value and $388.1 million decline in value for the
three months ended September 30, 1999 and 1998, respectively, and $163.3 million
decline in value and $601.0 million decline in value for the nine months ended
September 30, 1999 and 1998, respectively), due to the overall decrease in the
market value of REIT stocks owned by SC-U.S. Realty in 1999 compared to 1998.
SC-U.S.Realty's realized gains on its non-strategic real estate portfolio
investments decreased by $2.0 million and $31.3 million for the three and nine
months ended September 30, 1999, respectively, compared to the same periods in
1998. SC-U.S.Realty's net investment income (defined as dividends and other
investment income net of administrative expenses, advisor fees, taxes and
interest) increased by $1.9 million and decreased by $10.5 million for the three
and nine months ended 1999, respectively, compared to the same periods in 1998.
Security Capital's increased ownership in SC-U.S.Realty is due to a
reduction in the number of outstanding common shares of SC-U.S.Realty caused by
SC-U.S.Realty's share repurchase program, which commenced in February 1999.
Security Capital sold its investment in Strategic Hotel for net sale
proceeds of $329 million, resulting in a loss of $55.2 million. As a result of
this sale, no equity in earnings of Strategic Hotel were recorded after the
second quarter of 1999. The increase in Security Capital's equity in Strategic
Hotel's earnings for the nine months ended September 30, 1999, compared to
the same period in 1998, is primarily due to additional property acquisitions by
Strategic Hotel in 1998 and the first six months of 1999 and an increase in net
operating income, partially offset by equity in earnings not being recorded
after the second quarter of 1999.
The decline in the real estate equity markets during 1998 and into 1999
may impact the ability of operating affiliates of Security Capital to access the
equity and debt markets, which could adversely impact their ability to maintain
their historical growth rates. However, this should be partially mitigated by
the affiliates' ability to maximize the performance of their portfolio of
operating properties.
Property Revenue And Expenses And Homestead Special Charge
Homestead's room revenue increased from $39.7 million to $60.4 million,
a 52% increase for the three months ended September 30, 1999, compared to the
same period in 1998, and increased from $101.0 million to $163.7 million, a 62%
increase for the nine months ended September 30, 1999, compared to the same
period in 1998. Homestead's rental expenses increased from $17.2 million to
$22.1 million, a 28% increase for the three months ended September 30, 1999,
compared to the same period in 1998 and increased from $43.5 million to $71.8
million, a 65% increase for the nine months ended September 30, 1999, compared
to the same period in 1998. The increase in property revenue and expenses for
the three and nine months is primarily related to the opening of 25 new
Homestead properties from the end of the third quarter of 1998 through the end
of the third quarter of 1999 and higher weekly rates partially offset by lower
occupancy levels.
Homestead's results for the first nine months of 1999 were below
management's prior expectations. Lower than expected occupancy rates in certain
markets has led to lower than expected revenues for certain properties. Lower
than expected increases in occupancy rates for newly-opened properties in the
northeast and mid-west also are expected to impact revenues. These lower than
expected results have adversely affected Security Capital's results in 1999.
-25-
<PAGE>
Beginning in the latter part of the second quarter of 1999, management
of Homestead introduced rate changes in selected markets and managerial
incentive programs to improve occupancy and collections. Compared to the second
quarter average occupancy of 70.9% for the total portfolio, occupancy for the
third quarter of 1999 was 75.2%, which compared favorably with third quarter
1998 total portfolio occupancy of 73.9%.
In the second quarter of 1999, Homestead determined, based on its
inability to obtain financing for development beyond those properties already in
construction, to further curtail its development program. All land previously
held for development is held for sale, all pursuits for acquisition of
additional sites for development were abandoned, and Homestead has reduced
overhead costs and personnel to reflect a company with stabilized operations of
136 properties. A special charge of $65.3 million was recorded in the second
quarter of 1999 for write-downs of land held for sale, write-offs of costs of
pursuits, and the costs of severance of personnel. See footnote 7 to the
consolidated financial statements for details of the special charge.
Financial Services Division Revenues
The components of Financial Services Division revenues were as follows
for the three and nine months ended September 30, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Capital Markets $ 16.4 $ 5.2 $ 20.6 $ 26.3
Corporate Services 4.6 4.9 14.2 12.8
Global Capital Management Group 14.6 13.4 43.4 35.0
Real Estate Research 0.6 0.4 1.0 0.9
------------- ------------- ------------ ------------
Total Financial Services Division revenues 36.2 23.9 79.2 75.0
Less amounts eliminated in consolidation (1.5) (1.5) (5.1) (4.3)
------------- ------------- ------------ ------------
Consolidated Financial Services
Division revenues $ 34.7 $ 22.4 $ 74.1 $ 70.7
============= ============= ============ ============
</TABLE>
The increase in Financial Services Division revenues for the three
months ended September 30, 1999, compared to the same period in 1998 was
primarily attibutable to the increase in Capital Markets revenues. The increase
in Financial Services Division revenues for the nine months ended September 30,
1999, compared to the same period in 1998 was primarily attributable to the
increase in Global Capital Management Group's revenues due to the growth in
assets managed (shown in the following table), partially offset by a decrease in
Capital Markets revenue. Capital Markets revenues are transactional in nature
and influenced by the general REIT equity market conditions and so may fluctuate
from period to period.
The following table reflects the market value of assets under
management by the Global Capital Management Group as of September 30, 1999 and
1998 (in millions):
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
SC-European Realty $ 1,218 $ 1,014
SC-Preferred Growth 819 736
SC-U.S.Realty 2,664 2,922
Investment Funds 75 142
Other 384 --
------------ ----------
$ 5,160 $ 4,814
============ ==========
</TABLE>
-26-
<PAGE>
Growth in Financial Services Division revenues is expected to come
primarily from management and advisory revenues earned by the Global Capital
Management Group and fees earned by Capital Markets, Corporate Services and Real
Estate Research. The decline in real estate security stock prices in 1998 and
1999 has made it more difficult to attract assets to the company's investment
funds and investees, and to execute Capital Markets transactions, which has, in
turn, impacted revenue growth for the Global Capital Management Group and
Capital Markets. Additionally, the decline in real estate securities prices in
1998 and 1999 reduced the value of assets under management in some of Security
Capital's closed-end managed entities, thereby decreasing fee income to Security
Capital for managing such entities. Any reduced growth could be partially
offset, over the long-term, by increases in other Financial Services revenues as
Security Capital continues to expand in this area, although no assurance of this
growth can be given.
Realized Capital Gains
Realized capital gains increased from a $13.9 million loss for the
three months ended September 30, 1998, to a $1.0 million gain for the three
months ended September 30, 1999, and increased from a $11.4 million loss for
the nine months ended September 30, 1998, to a $4.3 million gain for the nine
months ended September 30, 1999. These increases were primarily due to increases
in the market value of SC-US Real Estate Shares' investments that were sold.
Change In Unrealized Gain Or Loss On Investments
The change in unrealized gain or loss on investments was a decrease of
$5.6 million and $1.1 million for the three and nine months ended September 30,
1999, compared to a decrease of $8.0 million and $17.4 million for the same
periods in 1998. The change in unrealized gains or losses varies depending on
changes in real estate equity markets.
At September 30, 1999, SC-US Real Estate Shares had investments at cost
and fair market value of approximately $56.8 million and $54.7 million,
respectively. At September 30, 1999, SC-European Real Estate Shares had
investments at cost and fair market value of approximately $18.8 million.
Other Income, Net
Other income decreased from $4.4 million to $1.3 million, a 70%
decrease for the three months ended September 30, 1999, compared to the same
period in 1998, and decreased from $10.2 million to $6.5 million, a 36% decrease
for the nine months ended September 30, 1999, compared to the same period in
1998. The decrease for the three and nine months is primarily due to decreased
dividend income in the investment funds due to a reduction in Security
Capital's investment in SC-US Real Estate Shares by $58.3 million since the
fourth quarter of 1998.
Financial Services Division Expenses
Financial Services Division expenses increased from $18.8 million to
$26.7 million, a 42% increase for the three months ended September 30, 1999,
compared to the same period in 1998, and increased from $50.5 million to $66.5
million, a 32% increase for the nine months ended September 30, 1999, compared
to the same period in 1998. During the third quarter of 1999 there were $6.1
million of non-recurring costs related to personnel reductions and certain
activities which will result in future overhead reductions. The increase for the
nine months primarily resulted from increased personnel in the Global Capital
Management Group and the Capital Markets Group during the second half of 1998,
primarily due to the establishment of European-based capabilities for Capital
Markets activities.
-27-
<PAGE>
General, Administrative And Other
General, administrative and other expenses decreased from $14.2 million
to $11.8 million, a 17% decrease for the three months ended September 30, 1999,
compared to the same period in 1998 and increased from $40.9 million to $46.2
million, a 13% increase for the nine months ended September 30, 1999, compared
to the same period in 1998. The decrease for the three months relates to
personnel reductions and other cost controls that decreased expenses for the
third quarter compared to 1998. The year to date increases resulted primarily
from costs incurred related to personnel reductions and certain activities which
will result in future overhead reductions.
Interest Expense
Interest expense for the three months ended September 30, 1999 and
1998, is summarized as follows (in millions):
<TABLE>
<CAPTION>
Security Capital Homestead Total
------------------ ------------------ -----------------
1999 1998 1999 1998 1999 1998
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Convertible debentures $ 5.2 $ 5.2 $ -- $ -- $ 5.2 $ 5.2
Lines of credit 4.1 3.5 4.3 4.9 8.4 8.4
Senior unsecured notes 13.4 9.1 -- -- 13.4 9.1
Mortgage notes payable -- -- 5.7 8.3 5.7 8.3
Capital lease -- -- 3.5 -- 3.5 --
Capitalized interest (0.6) (0.5) (0.4) (6.6) (1.0) (7.1)
-------- -------- -------- -------- -------- -------
Total $ 22.1 $ 17.3 $ 13.1 $ 6.6 $ 35.2 $ 23.9
======== ======== ======== ======== ======== =======
</TABLE>
Interest expense for the nine months ended September 30, 1999 and 1998,
is summarized as follows (in millions):
<TABLE>
<CAPTION>
Security Capital Homestead Total
------------------ ------------------ -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Convertible debentures $ 15.7 $ 15.7 $ -- $ -- $ 15.7 $ 15.7
Lines of credit 8.9 15.6 19.2 9.7 28.1 25.3
Senior unsecured notes 39.7 9.9 -- -- 39.7 9.9
Mortgage notes payable -- -- 17.0 24.3 17.0 24.3
Capital lease -- -- 8.4 -- 8.4 --
Capitalized interest (1.2) (0.9) (6.4) (20.3) (7.6) (21.2)
-------- -------- -------- -------- -------- ---------
Total $ 63.1 $ 40.3 $ 38.2 $ 13.7 $ 101.3 $ 54.0
======== ======== ======== ======== ======== =========
</TABLE>
The increase in Security Capital's net interest expense is primarily
due to the issuance of additional debt to fund investments. Interest will
decrease for the foreseeable future due to the repayment of debt with proceeds
from the sale of Security Capital's investment in Strategic Hotel. The increase
in Homestead's net interest expense is primarily due to increased line of credit
borrowings used to fund developments partially offset by a decrease in
capitalized interest due to less development activity during 1999 as compared to
1998. By the end of the third quarter of 1999 all development has been completed
and Homestead does not anticipate any additional capitalization of interest for
the remainder of 1999.
-28-
<PAGE>
Depreciation And Amortization
Depreciation and amortization increased from $9.2 million to $10.4
million, a 13% increase for the three months ended September 30, 1999, compared
to the same period in 1998 and increased from $24.1 million to $32.8 million, a
36% increase for the nine months ended September 30, 1999, compared to the same
period in 1998. These increases primarily resulted from additional Homestead
properties and, to a lesser degree, additional computer hardware, software and
office leasehold improvements in the Financial Services Division.
Provision For Income Taxes
The effective tax benefit rate for the three months ended September
30, 1999, is greater than 35%. The increased benefit rate is primarily created
by a reduction in a tax valuation allowance at Homestead and income generated on
permanently invested capital in a foreign jurisdiction that has a substantially
lower tax rate. The effective tax benefit rates for the nine months ended
September 30, 1999, and the three and nine months ended September 30, 1998, are
less than 35%. The reduced benefit rates are primarily created by the change in
unbenefitted net deferred tax assets in consolidated subsidiaries partially
offset by income generated on permanently invested capital in a foreign
jurisdiction that has a substantially lower tax rate.
If Security Capital sells any investments, it will be taxed on any
realized gains at the federal corporate tax rate of 35%. Realized gains will be
measured based upon the excess of the fair market value of any consideration
Security Capital receives in such disposition over Security Capital's tax basis
at the time of disposition. Any realized losses, for tax purposes, may be
carried back three years, or forward five years, to offset taxable gains, if
any. Realized losses can not typically be offset against ordinary taxable
income.
Security Capital generated a capital loss of approximately $55.2
million in the second quarter of 1999, with the sale of Strategic Hotel. This
will generate a tax benefit of $19.3 million if Security Capital realizes
comparable taxable capital gains over the next five years. Security Capital has
provided a reserve against $18.1 million of this benefit because it has no
current plans to sell any of the assets which would generate sufficient taxable
gains to offset this loss. Security Capital's plans could change in the future
due to changes in market conditions or strategy.
Security Capital's tax basis in any investee is generally equal to its
original cost basis for such asset, reduced by the portion of the cumulative
dividends received from such investee which have been characterized for tax
purposes as return of capital.
Security Capital's tax basis in its strategic investees at September
30, 1999, was as follows (in thousands):
Archstone $ 757,020
ProLogis 643,092
SC-European Realty 401,660
SC-U.S. Realty 733,645
On May 28, 1999, Security Capital increased its ownership in Homestead
to 87%. So long as Security Capital owns more than 80% of Homestead, Security
Capital will consolidate Homestead in Security Capital's federal tax return. Any
net operating losses, for federal tax purposes, generated by Homestead during
the consolidation period will reduce the income tax liability of Security
Capital, and any taxable income generated by Homestead will increase Security
Capital's taxable income. Due to its recent restructuring and development
completions, Homestead is expected to generate net operating losses for the
balance of 1999 and at least some portion of 2000.
-29-
<PAGE>
If Security Capital were to dispose of its interest in Homestead, any
taxable gain or loss would be based upon the form of such transaction and
certain other facts and circumstances at the time, and cannot be predicted with
certainty.
Loss on sale of investment
On June 28, 1999, Security Capital's board of directors approved the
sale of its entire ownership position to Strategic Hotel. The sale closed
September 10, 1999, for net proceeds of $329 million. A provision for loss on
the sale of Strategic Hotel of $55.2 million was recorded as of June 28, 1999.
Preferred Share Dividends
Preferred Share dividends stayed constant at $4.5 million for the three
months ended September 30, 1999, compared to the same period in 1998 and
decreased from $30.6 million to $13.5 million for the nine months ended
September 30, 1999, compared to the same period in 1998. The decrease is due to
a $19.8 million non-cash dividend incurred in conjunction with the exchange of
Series A Preferred Shares and certain Class B Common Shares for Series B
Preferred Shares in May 1998.
Change in accounting principle
The net loss for the nine months ended September 30, 1999, includes the
cumulative effect of a change in accounting principle of $16.0 million,
primarily related to Homestead and Belmont's adoption of the Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). Upon
adoption on January 1, 1999, any material unamortized organizational,
pre-opening and start-up costs were written off.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Security Capital's investment activities consist primarily of
investments in the common shares of its Capital Division investees and research
and capital expenditures relating to expansion of its Financial Services
Division business. The investment activities of Security Capital's investee
operating companies consist primarily of the acquisition and development of real
estate, or strategic ownership positions in companies that conduct such
activities. Other affiliates make portfolio investments in the securities of
publicly traded real estate companies and/or intermediate-term investments,
primarily in the convertible securities of publicly-traded real estate operating
companies. Security Capital has historically financed its investment activities
through cash from operations, the sale of stock and convertible securities,
borrowings under lines of credit and issuance of unsecured long-term debt.
Operating Activities
Cash provided by operating activities decreased by $27.0 million during
the nine months ended September 30, 1999, compared to the same period in 1998.
This decrease is primarily due to higher interest expense due to increased debt
used to fund investments in non-dividend paying investees and to a lesser extent
by reduced capital markets fees.
-30-
<PAGE>
Investing And Financing Activities
Security Capital's investing activities provided approximately $320.9
million of cash and Homestead's used approximately $83.2 million for the nine
months ended September 30, 1999, compared to $636.5 million used by Security
Capital and $392.7 million used by Homestead, for the nine months ended
September 30, 1998. Security Capital's investing activities during the nine
months ended September 30, 1999, primarily consisted of (i) $329.5 million
proceeds from the sale of Strategic Hotel (ii) $25.9 million invested in
SC-European Realty, (iii) $25.5 million investment by Belmont in real estate;
and (iv) $43.6 million net redemption of publicly traded real estate securities.
Security Capital also invested $213.8 million in Homestead during 1999, but this
amount is not reflected above as it is eliminated in consolidation. Homestead
used these funds to reduce its lines of credit. Security Capital's investing
activities during the nine months ended September 30, 1998, consisted primarily
of (i) $573.9 million investment in securities of various affiliates; (ii) $21.7
million investment by Belmont in real estate and (iii) $36.6 million investment
in securities of other publicly traded real estate securities.
Security Capital used approximately $259 million of the $329 million
proceeds from the sale of Strategic Hotel to pay down its line of credit to
zero. Security Capital is using the remaining cash, plus additional borrowings
on its line of credit, to repurchase $100 million of its common stock and
debentures in the open market. Through November 8, 1999, under the share
repurchase program, Security Capital had repurchased 3,614,750 Class B common
stock equivalents (comprised of 16,192 Class A Common Shares and 2,805,150 Class
B Common Shares) for a combined purchase price of $51.2 million. In addition,
Security Capital repurchased $2.5 million principal amount of 2016 Debentures
during the third quarter, which were convertible into 2,167 Class A Common
Shares.
Financing activities used net cash of $254.4 million for the nine months
ended September 30, 1999, compared to providing cash of $905.9 million for the
nine months ended September 30, 1998. Financing activities for the nine months
ended September 30, 1999, primarily consisted of: (i) net reduction of the lines
of credit borrowings of $327.4 million; (ii) net proceeds from Security
Capital's issuance of senior unsecured notes of $85.3 million; (iii) Homestead's
payment on mortgage notes payable of $122.0 million; (iv) Homestead's net
proceeds on the sale and leaseback of properties of $127.3 million; (v) payment
for the repurchase of Security Capital common stock of $21.0 million; and (vi)
proceeds from the sale of common stock to minority interest holders (Homestead)
of $17.4 million. Financing activities for the nine months ended September 30,
1998, primarily consisted of: (i) $385.3 million of net proceeds from the
borrowings under lines of credit; (ii) net proceeds from Security Capital's
issuance of senior unsecured notes of $499.6 million and (iii) proceeds from the
sale of common stock to minority interest holders (Homestead) of $32.2 million.
Security Capital and its subsidiaries have committed to $518.3 million in
equity subscriptions to SC-European Realty, of which $401.7 million had been
funded as of September 30, 1999. In addition, as of September 30, 1999, Security
Capital has committed to invest an additional $20.5 million in Belmont.
Based on Security Capital's current level of operations and anticipated
growth as a result of pending new business initiatives, Security Capital expects
that cash flows from operations (including dividends and fees received from its
operating companies) and funds currently available under its revolving line of
credit will be sufficient to enable Security Capital to satisfy its anticipated
cash requirements for operations and currently committed investments. In the
longer term, Security Capital intends to finance its business activities
(including investments in new business initiatives, additional investments in
existing affiliates and additional potential repurchases of shares) through the
selective sale of assets and redeployment of capital, internally generated cash
flow, its line of credit and future issuances of equity and debt securities. In
addition, Security Capital anticipates that its operating affiliates will
separately finance their activities through cash flow from operations, selective
sales of assets and redeployment of capital, sales of equity and debt securities
and the incurrence of mortgage debt or line of credit borrowings.
-31-
<PAGE>
Security Capital's consolidated investee, Homestead, had the following
financing activities:
On February 23, 1999, Homestead completed a sale and leaseback of 18 of
the 26 properties previously collaterizing a $122 million mortgage note
held by Merrill Lynch Mortgage Capital Inc. ("MLMC"). Hospitality
Properties Trust purchased the properties for $145 million. Proceeds
from the sale were used to repay the $122 million debt that was due
June 1999. Homestead will continue to operate the properties under a
long-term lease through 2015 with options to renew through 2045 and pay
minimum rent of approximately $16 million per year, which rent may
increase based on payment of percentage rents beginning July 2000 based
on increases in revenues over a base period. Homestead also posted a
security deposit equal to one year's rent. As a result of payment of
the $122 million mortgage note, eight properties which were used as
collateral for the mortgage note were subsequently pledged as
collateral for its Working Capital Facilities, described below under
"Lines of Credit - Homestead", enabling Homestead to draw approximately
$21 million in additional borrowings under the line.
On March 18, 1999, Homestead renewed its Working Capital Facilities
with an extension of the maturity date to December 31, 2000. In
addition to the renewal, Homestead's lines of credit were amended. See
"Lines of Credit - Homestead," below.
On March 25, 1999, Homestead announced a rights offering for $225
million of common stock, the proceeds of which were used to repay
Homestead's $200 million bridge facility and for purposes allowed under
the Working Capital Facilities. Security Capital participated in the
rights offering, which closed on May 28, 1999, purchasing $213.8
million shares of Homestead common stock.
In the third quarter of 1999 Homestead sold one urban parcel held for sale
and used the net proceeds of $6.0 million to pay down its lines of credit debt.
Subsequent to the end of the third quarter of 1999, Homestead generated
additional net proceeds of $44.5 million from the sale of two suburban parcels
and three urban parcels. Homestead used $26.9 million of these net proceeds to
further pay down its lines of credit debt. Thus, subsequent to the end of the
quarter the balance on the $170 million revolving line of credit secured by
suburban real estate was reduced to an outstanding balance of $166.2 million and
the $23.1 million balance of the line secured by urban real estate was paid in
full. Homestead may re-borrow on the line secured by suburban real estate,
subject to collateral requirements. Repayments of all borrowings on the line
secured by urban real estate canceled the commitment.
With the completion of development of all sites which were in construction,
termination of plans to develop all other land owned, and with no further
pursuit of acquisition of sites for development, Homestead's needs for financing
are substantially reduced. Homestead believes it will have adequate cash
resources from cash on hand and cash flow from operations to fund its needs for
debt service, payment of severances, and payment of the remaining construction
retainage. In addition, Homestead may generate cash flow by the sale of
unencumbered land sites, but no assurance can be given that such sales will
occur or provide significant net proceeds. While Homestead believes it will
continue to generate positive cash flow from operation of its properties, there
can be no assurance of generation of cash from future operations due to the
risks of operation of lodging properties including competitive pressures, rates,
occupancies, and costs of operation. Additionally, Homestead's ability to meet
its obligations could be adversely affected by increases in interest rates.
-32-
<PAGE>
Lines of Credit
Security Capital
Security Capital's line of credit with Wells Fargo, was amended and
extended on April 13, 1999. The unsecured line was decreased to $470 million
from $650 million to match Security Capital's anticipated intermediate-term
requirements. The agreement is effective through April 6, 2002, with an option
to renew for successive one-year periods with the approval of Wells Fargo and
participating lenders. Borrowings accrue interest at LIBOR plus a margin (1.30%)
based upon Security Capital's credit rating or a Base Rate (defined as the
higher of Wells Fargo prime rate or the Federal Funds rate plus .50%).
Commitment fees on the amended line range from 0.125% to 0.20% per annum based
on the average unfunded line of credit balance. The line of credit is guaranteed
by SC Realty and SC Realty Shares Limited, each of which is a wholly owned
subsidiary of Security Capital.
The line of credit contains various financial and other covenants
applicable to Security Capital, including a minimum shareholders' equity test, a
total liabilities-to-net-worth ratio, a cash flow to fixed charge coverage
ratio, a secured debt limit, an unsecured liabilities to unencumbered pool value
ratio, as well as restrictions on Security Capital's ability to incur
indebtedness and effect consolidations, mergers (other than a consolidation or
merger in which Security Capital is the surviving entity) and sales of assets.
The agreement provides that so long as no event of default has occurred and is
continuing, Security Capital may pay cash dividends in an aggregate amount not
to exceed 50% of cash flow available for distribution and pay cash dividends to
the holders of the Series B Preferred Shares. As of September 30, 1999, there
was no balance outstanding under this line of credit and Security Capital, SC
Realty and SC Realty Shares Limited were in compliance with all financial
covenants.
Homestead
Homestead's Working Capital Facilities were amended along with the
extension of the lines on March 18, 1999. The line secured by suburban
properties was increased to $170 million total borrowing capacity and the
sliding interest terms amended to 3.0% over LIBOR and 2% over prime or 2.5% over
the federal funds rate. Future additional collateral will be limited to suburban
properties which are construction complete and stabilized. The line secured by
urban properties has been decreased to $30 million total borrowing capacity and
the interest terms amended to 3.0% over LIBOR and 2.0% over prime or 2.5% over
the federal funds rate.
The amended and restated Working Capital Facilities require maintenance
of the following financial covenants effective with the first quarter of 1999:
limiting total liabilities to no more than 55% of gross asset value,
as defined;
limiting total indebtedness to no more than 50% of gross asset value,
as defined;
maintaining a ratio of earnings before interest, taxes, depreciation
and amortization, as defined, to interest expense ranging from
1.25 to 1.0 for the first quarter 1999 up to 1.90 to 1.0 by the
fourth quarter of 2000;
maintaining a ratio of earnings before interest, taxes, depreciation
and amortization, as defined, to debt service and preferred
stock dividends ranging from 1.0 to 1.0 for the first quarter of
1999 to 1.25 to 1.0 by the fourth quarter of 2000;
maintaining a ratio of net property operating income to implied debt
service, as defined, ranging from 1.4 to 1.0 for the first
quarter of 1999 to 2.25 to 1.0 by the fourth quarter of 2000;
maintaining a minimum tangible net worth, as defined, of no less than
85% of the year end 1998 amount, as defined, adjusted for net
proceeds of equity offerings, and
maintaining positive net sources and uses of funds.
-33-
<PAGE>
In addition, under the renewed and amended Working Capital Facilities
distributions or dividends on equity are prohibited; total cost, as defined, of
projects in development cannot exceed 25% of gross asset value, as defined, in
1999 or 15% in 2000; and Homestead's business activities will be limited to
development, ownership and operation of extended stay hotels. As of September
30, 1999, Homestead had $193.1 million outstanding under this line of credit and
was in compliance with all financial covenants.
With the second quarter 1999 decision to cease development of all land
sites owned, other than those already in construction, and to cease pursuit of
acquisition of additional sites for development, Homestead's needs for financing
are reduced. Funding needs are primarily for operations, the completion of the
properties in construction, funding of the severance of personnel and debt
service.
Senior Unsecured Notes
Under the medium-term note program, in the first quarter of 1999,
Security Capital issued $5.0 million of 7.75% Senior Unsecured Notes due January
11, 2005; $54.55 million of 7.80% Senior Unsecured Notes due January 12, 2005;
and $25.75 million of 7.80% Senior Unsecured Notes due January 19, 2005. The
total outstanding principal balance of Senior Unsecured Notes was $700 million
as of September 30, 1999.
All of the foregoing Senior Unsecured Notes are redeemable at any time
at the option of Security Capital, in whole or in part, at a redemption price
equal to the sum of the principal amount of the Senior Unsecured Notes being
redeemed plus accrued interest thereon to the redemption date plus an
adjustment, if any, based on the yield to maturity relative to market yields
available at redemption. The securities are governed by the terms and provisions
of the indentures applicable to all of Security Capital's debt securities.
Mortgage Notes Payable
Homestead has $221.3 million of convertible mortgage notes which are
convertible, at the option of Archstone, into shares of Homestead common stock.
The conversion price is equal to one share of Homestead common stock for every
$10.44 of principal amount outstanding.
On February 23, 1999, Homestead completed the sale and leaseback of 18
Homestead Village properties with Hospitality Properties Trust. Hospitality
Properties Trust purchased the properties for $145 million. Homestead will
continue to operate the properties under a long-term lease through December 2015
and pay a minimum rent of approximately $16 million per year. Homestead has
posted a security deposit equal to one year's rent. The properties sold were
among the 26 properties pledged as collateral for a $122 million mortgage note,
which was due to mature in June 1999. The $122 million mortgage note was repaid
in February 1999 with a portion of the proceeds of the sale and leaseback
transaction between Homestead and Hospitality Properties Trust.
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES ("EBDADT")
Basic EBDADT increased from $42.1 million to $60.1 million, a 43%
increase for the three months ended September 30, 1999, compared to the same
period in 1998. For the nine months ended September 30, 1999, EBDADT was $71.2
million compared to $169.0 million for the same period in 1998, a 58%
decrease. The increase for the three months ended September 30, 1999, was
primarily due to higher equity in EBDADT from Archstone, Homestead and ProLogis
and an increase in Capital Markets revenues, partially offset by no equity in
EBDADT from Strategic Hotel in the third quarter of 1999 due to the sale. The
decrease for the nine months ended September 30, 1999, was primarily due to the
second quarter special charges related to Homestead and Strategic Hotel of
$100.9 million, lower Capital Markets revenues and higher interest expense,
partially offset by higher equity in EBDADT from affiliates and Global Capital
Management revenues.
-34-
<PAGE>
EBDADT represents net earnings before gains/losses on dispositions of
depreciated property, plus real estate depreciation and amortization, plus
deferred tax expense, plus/minus unrealized losses/gains on non-strategic
investments, and plus other non-cash, non-recurring items. Consistent with the
equity method of accounting under generally accepted accounting principles,
Security Capital reflects in its EBDADT its share of basic EBDADT of each
investee. EBDADT for SC-U.S.Realty and SC-European Realty consists of EBDADT
from their strategic investees, net of operating expenses for those two
entities. Management considers EBDADT to be the appropriate measure of its
ownership of real estate enterprises, as it most clearly reflects the impact of
both operating performance and capital structure. With respect to Security
Capital investees in which Security Capital has less than a 20% interest, and
does not have the ability to significantly influence management, Security
Capital includes only dividends or interest received in its EBDADT.
SC-U.S.Realty and SC-European Realty use the same approach for investees in
which they own less than 20%.
The EBDADT measure presented by Security Capital will not be comparable
with other entities that do not compute EBDADT in a manner consistent with
Security Capital. EBDADT should not be considered as an alternative to net
earnings or any other GAAP measure of performance as an indicator of Security
Capital's operating performance, or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity.
Presented below is a reconciliation of net earnings (loss) to EBDADT for
the three and nine months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net loss attributable to common shares $ (11,511) $ (115,067) $ (134,296) $ (153,110)
Investee reconciling items:
Real estate depreciation 38,894 40,413 130,162 110,636
Gain on sale of depreciated real estate (19,442) (4,610) (27,071) (14,128)
Unrealized losses 56,378 128,175 77,178 216,867
EBDADT, net of dividends, from
Strategic Investees of SC-U.S.Realty
and SC-European Realty 10,763 9,191 36,048 16,651
Interest rate hedge expense 83 14,349 316 14,349
Loss on extinguishment of debt -- 17,657 432 17,657
Other 1,372 (7,133) 2,515 (4,065)
---------------- ---------------- ---------------- --------------
88,048 198,042 219,580 357,967
---------------- ---------------- ---------------- --------------
Security Capital reconciling items:
Deferred tax benefit (14,302) (45,258) (27,328) (55,241)
Adoption of an accounting principle -- -- 16,002 --
Non-cash preferred share dividend -- -- -- 19,842
Other (2,095) 4,410 (2,752) (415)
---------------- ---------------- ---------------- --------------
(16,397) (40,848) (14,078) (35,814)
---------------- ---------------- ---------------- --------------
EBDADT $ 60,140 $ 42,127 $ 71,206 $ 169,043
================ ================ ================ ==============
</TABLE>
-35-
<PAGE>
YEAR 2000 ISSUE
The "Year 2000 Issue" has arisen because many existing computer
programs and chip-based embedded technology systems use only the last two digits
to refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. The following disclosure
provides information regarding the current status of Security Capital's Year
2000 compliance program.
Security Capital has been working on the Year 2000 issue since July
1997. Security Capital and most of its affiliates have had action programs since
that time to certify or replace all technology systems that might be affected,
including "embedded" systems such as elevators and HVAC equipment. As of
November 8, 1999, Security Capital has either certified or replaced all of its
critical systems with Year 2000 compliant systems. Among Security Capital's
affiliates, none have any critical Year 2000 issues and most have certified all
of their systems; the remaining affiliates expect to be fully compliant prior to
December 31, 1999.
Security Capital, as a real estate research, investment and operating
management company, believes that it has relatively modest potential exposure to
Year 2000 issues. Security Capital intends to focus its efforts to ensure that
none of its affiliates will encounter the Year 2000 issue, including providing
advice to those companies.
The majority of the operating and financial management functions of the
affiliated operating companies supported by computer systems are billing tenants
and leasing space. Neither of these functions is likely in the worst case
scenarios to represent a serious financial impact since they could be manually
corrected or circumvented without significant revenue loss to the affiliated
operating companies.
Exposure to embedded system problems in elevators, HVAC, access control
and refrigeration systems for affiliated operating companies is expected to be
minimal. Most of these systems are no more than six years old and surveys
conducted by affiliates show that these systems are already compliant or can be
readily upgraded to Year 2000 compliant versions. Most of the potential costs
for determining compliance of embedded systems is due to the internal and
external staffing costs to identify, survey and test each system.
Assessing suppliers' readiness for Year 2000 has not been completed.
Security Capital and its affiliates have numerous properties throughout the
United States and in Europe and Mexico serviced by many generic service
providers such as utilities and telecommunications. In general, tenants have
individual contracts for generic services, so Security Capital's affiliates'
exposure is generally limited to "common area" facilities. Security Capital and
its affiliates have little influence over utility providers and local exchange
carriers; however, Security Capital expects little potential risk in this highly
scrutinized area.
Specialty (as opposed to commodity) services providers such as banks
and benefit administration companies have responded to surveys stating that they
are Year 2000 compliant. There are no commodity or specialty services provided
to Security Capital or its affiliates that are believed to represent a material
risk or result in a material adverse financial impact in the most likely worst
case scenario.
Security Capital provides shared service functions to a number of
affiliated companies. These services include accounting, cash management, human
resources and benefits administration, information systems, internal audit, risk
management, tax planning and compliance services. All of the internal computer
systems used to provide these services are Year 2000 compliant. Outside
suppliers of services that support the shared service functions, such as banks
that perform electronic funds transfers, have been surveyed to determine their
Year 2000 compliance level. The survey process has been substantially completed,
and all respondents so far have stated that they are Year 2000 compliant.
Security Capital believes that there are no outside suppliers that have not yet
responded that represent a material risk to the provision of shared services to
its affiliates.
-36-
<PAGE>
All of the major systems used by Security Capital are Year 2000
compliant, specifically the corporate accounting, mutual fund management and
cash management systems. Security Capital is a tenant in a number of office
buildings in the United States and Europe. Landlord and supplier surveys for
those buildings are not yet complete, but no material impact is expected to be
caused by building related problems.
Third party costs to address the Year 2000 issue have been less than
$100,000 to date and are not expected to exceed this amount. Security Capital's
internal costs incurred for Year 2000 compliance issues have been less than
$100,000 to date. Such costs are principally the related payroll costs of its
information technology group. Security Capital's investment in new accounting,
payroll and cash management systems is due to rapid growth over the last five
years and a desire to automate a greater number of processes, and is not
attributable to Year 2000 issues. However, in considering and implementing these
new systems, Security Capital believes it took all appropriate steps to ensure
that these new systems are Year 2000 compliant.
Contingency plans to deal with unexpected and undetected problems
caused by the Year 2000 issue are focused on manual correction and rework. No
material revenue loss is expected to be caused by late billings or accounting
entries.
Potential liabilities to third parties would be limited to private and
public investors, because Security Capital is not providing management or
operating real estate. There is no "reasonably likely worst case" known or
apparent to Security Capital that would result in a material liability to a
third party. The risk of increased cost or lost revenue in the event of the most
reasonably likely worst case scenario is not expected to be material in any
series of events or potential problems caused by the Year 2000 issue, either for
Security Capital directly or to any of its affiliated companies.
There can be no assurance that the Year 2000 issue remediation by
Security Capital and its affiliates or third parties will be properly and timely
completed and failure to do so could have a material adverse effect on Security
Capital, its business and its financial condition. Security Capital cannot
predict the actual effects to it of the Year 2000 issue, which depends on
numerous uncertainties, many of which are outside its control, such as (i)
whether significant third parties, such as banks and utilities, properly and
timely address the Year 2000 issue and (ii) whether broad-based or systemic
economic failures may occur. Security Capital will continue to monitor these
issues through its Year 2000 compliance program.
Item 3. Quantitative And Qualitative Disclosure About Market Risk
Security Capital's exposures to market risks consist of interest rate
risks related primarily to its variable rate line of credit, equity price risks
related to its investments in marketable equity securities and interest rate
risk related to its consolidated investment in Homestead described below, none
of which have changed significantly since December 31, 1998, except as noted
below for Homestead.
Homestead's Interest Rate Risk
Homestead's exposure to market risk for changes in interest rates
relates primarily to its line of credit facilities. Homestead has no involvement
with derivative financial instruments.
-37-
<PAGE>
The table below presents the: (i) effective interest rates; (ii)
expected maturity/principal repayment schedules; (iii) carrying values; and (iv)
estimated fair values for Homestead's interest rate sensitive liabilities as of
September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayment
---------------------------------------------------------------------------------------
Nominal
Interest Total Fair
Rate 1999(2) 2000 2001 2002 2003 Thereafter Balance Value(2)
---------- ---------- ---------- ---------- --------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Liabilities:
Lines of Credit Facilities -
variable rate (1) 8.54% $ -- $ 193,050 $ -- $ -- $ -- $ -- $ 193,050 $ 193,050
Convertible Mortgage Notes - 9.00% $ -- $ -- $ -- $ -- $ -- $ 221,334 $ 221,334 $ 218,363
fixed rate
Capital lease obligation - 9.80% $ 902 $ 3,837 $ 4,230 $ 4,663 $ 5,141 $ 122,983 $ 141,756 $ 141,756
fixed rate
Other Long-Term Obligation - 9.74% $ 3 $ 13 $ 14 $ 16 $ 17 $ 7,850 $ 7,913 $ 7,904
fixed rate
</TABLE>
(1) On March 18, 1999, Homestead renewed and amended its lines of credit
Working Capital Facilities ($193 million outstanding in the above table),
to a December 31, 2000, due date.
(2) Amounts represent expected maturities and principal repayment for the
three months remaining for 1999.
-38-
<PAGE>
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
10.1 Purchase and Sale Agreement, dated as of August 12, 1999,
between Security Capital Group Incorporated and Strategic Hotel
Capital Incorporated (incorporated by reference to Exhibit 10.22
to Security Capital's Current Report on Form 8-K, dated
September 10, 1999)
10.2 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and William D. Sanders
10.3 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and C. Ronald Blankenship
10.4 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and Thomas G. Wattles
10.5 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and Anthony R. Manno, Jr.
10.6 Change in Control Agreement, dated as of May 18, 1999, between
Security Capital Group Incorporated and Donald E. Suter
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Share Dividends
15 Letter from Arthur Andersen LLP, dated November 11, 1999,
regarding unaudited financial information
27 Financial data schedule
(b) Reports On Form 8-K
Date Items Reported
---- --------------
September 10, 1999 Item 2, Item 7
-39-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SECURITY CAPITAL GROUP INCORPORATED
/S/ PAUL E. SZUREK
_______________________________________
Paul E. Szurek, CHIEF FINANCIAL OFFICER
(Principal Financial Officer)
/S/ JAMES C. SWAIM
_______________________________________
James C. Swaim, SR. VICE PRESIDENT
(Principal Accounting Officer)
Date: November 12, 1999
-40-
Exhibit 10.2
CHANGE IN CONTROL AGREEMENT
This Agreement entered into as of the 18th day of May, 1999, by and between
Security Capital Group Incorporated, a Maryland corporation (the "Company"), and
William D. Sanders (the "Executive").
WHEREAS, the Company wishes to assure itself of the continuity of the
Executive's services in the event of any actual change in control of the
Company; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. The "Term" of this Agreement shall commence on the
date hereof and shall continue through December 31, 2001; provided, however,
that on such date and on each December 31 thereafter, the Term of this Agreement
shall automatically be extended for one additional year unless, not later than
the preceding January 1 either party shall have given notice that such party
does not wish to extend the Term; and provided, further, that if a Change in
Control (as defined in paragraph 3 below) shall have occurred during the
original or any extended Term of this Agreement, the Term of this Agreement
shall continue for a period of twenty-four calendar months beyond the calendar
month in which such Change in Control occurs.
2. Employment After a Change in Control. If the Executive is in the employ
of the Company on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ for the period commencing on the date of
the Change in Control and ending on the last day of the Term of this Agreement.
During the period of employment described in the foregoing provisions of this
paragraph 2 (the "Employment Period"), the Executive shall hold such position
with the Company and exercise such authority and perform such executive duties
as are commensurate with the Executive's position, authority and duties
immediately prior to the Change in Control. The Executive agrees that during the
Employment Period the Executive shall devote full business time exclusively to
the executive duties described herein and perform such duties faithfully and
efficiently; provided, however, that nothing in this Agreement shall prevent the
Executive from voluntarily resigning from employment upon 60 days' written
notice to the Company under circumstances which do not constitute a Termination
(as defined below in paragraph 5).
3. Change in Control. For purposes of the Plan, a "Change in Control" means
the happening of any of the following:
a. the stockholders of the Company approve a definitive agreement to merge the
Company into or consolidate the Company with another entity, sell or
otherwise dispose of all or substantially all of its assets or adopt a plan
of liquidation, provided, however, that a Change in Control shall not be
deemed to have occurred by reason of a transaction, or a substantially
concurrent or otherwise related series of transactions, upon the completion
of which 50% or more of the beneficial ownership of the voting power of the
Company, the surviving corporation or corporation directly or indirectly
controlling the Company or the surviving corporation, as the case may be,
is held by the same persons (as defined below) (although not necessarily in
the same proportion) as held the beneficial ownership of the voting power
of the Company immediately prior to the transaction or the substantially
concurrent or otherwise related series of transactions, except that upon
the completion thereof, employees or employee benefit plans of the Company
may be a new holder of such beneficial ownership; provided, further, that a
transaction with an "Affiliate" of the Company (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall not
be treated as a Change in Control; or
b. the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange
Act) of securities representing 50% or more of the combined voting power of
the Company is acquired, other than from the Company, by any "person" as
defined in Sections 13(d) and 14(d) of the Exchange Act (other than by an
Affiliate or any trustee or other fiduciary holding securities under an
employee benefit or other similar stock plan of the Company); or
c. at any time during any period of two consecutive years, individuals who at
the beginning of such period were members of the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
stockholders, of each new Director was approved by a vote of at least
two-thirds of the Directors still in office at the time of such election or
nomination who were Directors at the beginning of such period).
4. Compensation During the Employment Period. During the Employment Period,
the Executive shall be compensated as follows:
a. the Executive shall receive an annual salary which is not less than his
annual salary immediately prior to the Employment Period and shall be
eligible to receive an increase in annual salary which is not materially
less favorable to the Executive than increases in salary granted by the
Company for executives with comparable duties;
b. the Executive shall be eligible to participate in short-term and long-term
cash-based incentive compensation plans which, in the aggregate, provide
bonus opportunities which are not materially less favorable to the
Executive than the greater of (i) the opportunities provided by the Company
for executives with comparable duties; and (ii) the opportunities provided
to the Executive under all such plans in which the Executive was
participating prior to the Employment Period;
c. the Executive shall be eligible to participate in stock option, performance
awards, restricted stock and other equity-based incentive compensation
plans on a basis not materially less favorable to the Executive than that
applicable (i) to the Executive immediately prior to the Employment Period
or (ii) to other executives of the Company with comparable duties; and
d. the Executive shall be eligible to receive employee benefits (including,
but not limited to, tax-qualified and nonqualified savings plan benefits,
medical insurance, disability income protection, life insurance coverage
and death benefits) and perquisites which are not materially less favorable
to the Executive than (i) the employee benefits and perquisites provided by
the Company to executives with comparable duties or (ii) the employee
benefits and perquisites to which the Executive would be entitled under the
Company's employee benefit plans and perquisites as in effect immediately
prior to the Employment Period.
5. Termination. For purposes of this Agreement, the term "Termination"
shall mean termination of the employment of the Executive during the Employment
Period (i) by the Company, for any reason other than death, Disability (as
defined below), or Cause (as described below), or (ii) by resignation of the
Executive upon the occurrence of one of the following events:
a. a significant change in the nature or scope of the Executive's authorities
or duties from those described in paragraph 2 above, a breach of any of the
subparagraphs of paragraph 4 above, or the breach by the Company of any
other provision of this Agreement;
b. the relocation of the Executive's office to a location more than fifty
miles from the location of the Executive's office immediately prior to the
Employment Period;
c. a reasonable determination by the Executive that, as a result of a Change
in Control and a change in circumstances thereafter significantly affecting
the nature and scope of Executive's authorities and duties from those
described in paragraph 2 above, the Executive is unable to exercise the
authorities, powers, functions or duties associated with the Executive's
position as contemplated by paragraph 2 above; or
d. the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement as contemplated in
paragraph 18 below.
The date of the Executive's Termination under this paragraph 5 shall be the date
specified by the Executive or the Company, as the case may be, in a written
notice to the other party complying with the requirements of paragraph 14 below.
For purposes of this Agreement, the Executive shall be considered to have a
"Disability" during the period in which the Executive is unable, by reason of a
medically determinable physical or mental impairment, to engage in the material
and substantial duties of his regular occupation, which condition is expected to
be permanent. For purposes of this Agreement, the term "Cause" means, in the
reasonable judgment of the Board of Directors of the Company, (i) the willful
and continued failure by the Executive to substantially perform the Executive's
duties with the Company after written notification by the Company, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
6. Severance Payments. Subject to the provisions of paragraph 10 below, in
the event of a Termination described in paragraph 5 above, in lieu of the amount
otherwise payable under paragraph 4 above, the Executive shall continue to
receive medical insurance, disability income protection, life insurance coverage
and death benefits and perquisites in accordance with subparagraph 4(d) above
for a period of 36 months after the date of Termination, and shall be entitled
to a lump sum payment in cash no later than ten business days after the date of
Termination equal to the sum of:
a. the Executive's unpaid salary, accrued vacation pay and unreimbursed
business expenses through and including the date of Termination;
b. an amount equal to three times the Executive's annual salary rate in effect
immediately prior to the date of Termination;
c. an amount equal to three times the target bonus award for the Executive for
the year of Termination;
d. an amount equal to the assigned target bonus for the Executive for the year
of Termination prorated through the date of Termination.
7. Make-Whole Payments. Subject to the last three sentences of this
paragraph 7, if any payment or benefit to which the Executive is entitled,
whether under this Agreement or otherwise, in connection with a Change in
Control or the Executive's termination of employment (a "Payment") is subject to
any tax under section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar federal or state law (an "Excise Tax"), the Company
shall pay to the Executive an additional amount (the "Make Whole-Amount") which
is equal to (i) the amount of the Excise Tax, plus (ii) the aggregate amount of
any interest, penalties, fines or additions to any tax which are imposed in
connection with the imposition of such Excise Tax, plus (iii) all income, excise
and other applicable taxes imposed on the Executive under the laws of any
Federal, state or local government or taxing authority by reason of the payments
required under clause (i) and clause (ii) and this clause (iii). Such Make
Whole-Amount will not be paid to the Executive if the Payment is less than 10
percent above the maximum amount that may be paid without incurring Excise Tax.
In the event that the Payment is greater than the maximum amount that may be
paid without incurring Excise Tax, but less than 10 percent greater than the
maximum amount, then the Payments shall be capped at the maximum amount that may
be paid without incurring Excise Tax. In such event, the cash severance payments
provided in paragraph 6 above and/or the outplacement services provided in
paragraph 8 below, at the Executive's election, shall be reduced to a level that
results in the total Payment being equal to the maximum amount that may be paid
without incurring Excise Tax.
a. For purposes of determining the Make-Whole Amount, the Executive shall be
deemed to be taxed at the highest marginal rate under all applicable local,
state, federal and foreign income tax laws for the year in which the
Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an
Excise Tax shall be paid by the Company coincident with the Payment with
respect to which such Excise Tax relates.
b. All calculations under this paragraph 7 shall be made initially by the
Company and the Company shall provide prompt written notice thereof to the
Executive to enable the Executive to timely file all applicable tax
returns. Upon request of the Executive, the Company shall provide the
Executive with sufficient tax and compensation data to enable the Executive
or his tax advisor to independently make the calculations described in
subparagraph (a) above and the Company shall reimburse the Executive for
reasonable fees and expenses incurred for any such verification.
c. If the Executive gives written notice to the Company of any objection to
the results of the Company's calculations within 60 days of the Executive's
receipt of written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent auditors of the
Company ("Tax Counsel"). The Company shall pay all reasonable fees and
expenses of such Tax Counsel. Pending such determination by Tax Counsel,
the Company shall pay the Executive the Make-Whole Amount as determined by
it in good faith. The Company shall pay the Executive any additional amount
determined by Tax Counsel to be due under this paragraph 7 (together with
interest thereon at a rate equal to 120% of the Federal short-term rate
determined under section 1274(d) of the Code) promptly after such
determination.
d. The determination by Tax Counsel shall be conclusive and binding upon all
parties unless the Internal Revenue Service, a court of competent
jurisdiction, or such other duly empowered governmental body or agency (a
"Tax Authority") determines that the Executive owes a greater or lesser
amount of Excise Tax with respect to any Payment than the amount determined
by Tax Counsel.
e. If a Taxing Authority makes a claim against the Executive which, if
successful, would require the Company to make a payment under this
paragraph 7, the Executive agrees to contest the claim, with counsel
reasonably satisfactory to the Company, on request of the Company subject
to the following conditions:
(i) The Executive shall notify the Company of any such claim
within 10 days of becoming aware thereof. In the event that the
Company desires the claim to be contested, it shall promptly (but in
no event more than 30 days after the notice from the Executive or such
shorter time as the Taxing Authority may specify for responding to
such claim) request the Executive to contest the claim. The Executive
shall not make any payment of any tax which is the subject of the
claim before the Executive has given the notice or during the 30-day
period thereafter unless the Executive receives written instructions
from the Company to make such payment together with an advance of
funds sufficient to make the requested payment plus any amounts
payable under this paragraph 7 determined as if such advance were an
Excise Tax, in which case the Executive will act promptly in
accordance with such instructions.
(ii) If the Company so requests, the Executive will contest the
claim by either paying the tax claimed and suing for a refund in the
appropriate court or contesting the claim in the United States Tax
Court or other appropriate court, as directed by the Company;
provided, however, that any request by the Company for the Executive
to pay the tax shall be accompanied by an advance from the Company to
the Executive of funds sufficient to make the requested payment plus
any amounts payable under this paragraph 7 determined as if such
advance were an Excise Tax. If directed by the Company in writing the
Executive will take all action necessary to compromise or settle the
claim, but in no event will the Executive compromise or settle the
claim or cease to contest the claim without the written consent of the
Company; provided, however, that the Executive may take any such
action if the Executive waives in writing his right to a payment under
this paragraph 7 for any amounts payable in connection with such
claim. The Executive agrees to cooperate in good faith with the
Company in contesting the claim and to comply with any reasonable
request from the Company concerning the contest of the claim,
including the pursuit of administrative remedies, the appropriate
forum for any judicial proceedings, and the legal basis for contesting
the claim. Upon request of the Company, the Executive shall take
appropriate appeals of any judgment or decision that would require the
Company to make a payment under this paragraph 7. Provided that the
Executive is in compliance with the provisions of this section, the
Company shall be liable for and indemnify the Executive against any
loss in connection with, and all costs and expenses, including
attorneys' fees, which may be incurred as a result of, contesting the
claim, and shall provide to the Executive within 30 days after each
written request therefore by the Executive cash advances or
reimbursement for all such costs and expenses actually incurred or
reasonably expected to be incurred by the Executive as a result of
contesting the claim.
f. Should a Tax Authority finally determine that an additional Excise Tax is
owed, then the Company shall pay an additional Make-Up Amount to the
Executive in a manner consistent with this paragraph 7 with respect to any
additional Excise Tax and any assessed interest, fines, or penalties. If
any Excise Tax as calculated by the Company or Tax Counsel, as the case may
be, is finally determined by a Tax Authority to exceed the amount required
to be paid under applicable law, then the Executive shall repay such excess
to the Company within 30 days of such determination; provided that such
repayment shall be reduced by the amount of any taxes paid by the Executive
on such excess which is not offset by the tax benefit attributable to the
repayment.
8. Outplacement Services. If the Executive's Termination occurs during the
Employment Period, at the election of the Executive, the Company shall provide
the Executive with outplacement service of an experienced firm selected by the
Company and acceptable to the Executive located not more than fifty miles from
the location of Executive's office immediately prior to the Employment Period,
provided that the cost of such services shall not exceed $25,000 and such
services shall not extend beyond 36 months from Executive's Termination
9. Pooling of Interests Accounting Treatment. If the application of any
provision of this Agreement, or of the Agreement in its entirety, would preclude
the use of pooling of interests accounting treatment with respect to a
transaction for which such treatment otherwise is available and to be adopted by
the Company, this Agreement, upon the determination of the Board, shall be
modified as it applies to such transaction, to the minimum extent necessary to
prevent such impact.
10. Withholding. All payments to the Executive under this Agreement will be
subject to all applicable withholding of state and federal taxes.
11. Confidentiality, Non-Solicitation and Non-Competition. The Executive
agrees that:
a. Except as may be required by the lawful order of a court or agency of
competent jurisdiction, or except to the extent that the Executive has
express authorization from the Company, the Executive agrees to keep secret
and confidential indefinitely all non-public information concerning the
Company or any affiliate thereof which was acquired by or disclosed to the
Executive during the course of the Executive's employment with the Company
or any affiliate thereof, and not to disclose the same, either directly or
indirectly, to any other person, firm or business entity or to use it in
any way.
b. While the Executive is employed by the Company or any affiliate and for a
period of one year after the date of the Executive's Termination, the
Executive covenants and agrees that Executive will not, whether for
Executive or for any other person, business, partnership, association,
firm, company or corporation, initiate contact with, solicit, divert or
take away any of the customers (entities or individuals from which the
Company or any of its affiliates receives rents or payment for services) of
the Company or any affiliate thereof or employees of the Company or any
affiliate thereof in existence from time to time during Executive's
employment with the Company or any affiliate thereof and at the time of
such initiation, solicitation or diversion.
c. While the Executive is employed by the Company or any affiliate thereof,
the Executive covenants and agrees that Executive will not, directly or
indirectly, engage in, assist, perform services for, plan for, establish or
open, or have any financial interest (other than (i) ownership of 1% or
less of the outstanding stock of any corporation listed on the New York or
American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System or (ii) ownership of
securities in any entity affiliated with the Company) in any person, firm,
corporation, or business entity (whether as an employee, officer, director
or consultant) that engages in an activity which is the same as, similar
to, or competitive with, the Company or any affiliate thereof.
12. Arbitration of All Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in Chicago, Illinois, in accordance with the laws of the State of Illinois, by
three arbitrators appointed by the parties. If the parties cannot agree on the
appointment of the arbitrators, one shall be appointed by the Company and one by
the Executive and the third shall be appointed by the first two arbitrators. If
the first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the Chief Judge of the United
States Court of Appeals for the Seventh Circuit. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as provided
in this paragraph 12. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel or incur other
costs and expenses in connection with enforcement of his rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his reasonable attorneys' fees and costs
and expenses in connection with enforcement of his rights (including the
enforcement of any arbitration award in court). Payments shall be made to the
Executive at the time such fees, costs and expenses are incurred. If, however,
the arbitrators shall determine that, under the circumstances, payment by the
Company of all or a part of any such fees and costs and expenses would be
unjust, the Executive shall repay such amounts to the Company in accordance with
the order of the arbitrators. Any award of the arbitrators shall include
interest at a rate or rates considered just under the circumstances by the
arbitrators.
13. Mitigation and Set-Off. The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise. The Company shall not be entitled to set off against
the amounts payable to the Executive under this Agreement any amounts owed to
the Company by the Executive, any amounts earned by the Executive in other
employment after termination of his employment with the Company, or any amounts
which might have been earned by the Executive in other employment had he sought
such other employment.
14. Notices. Any notice of Termination of the Executive's employment by the
Company or the Executive for any reason shall be upon no less than 15 days' and
no greater than 45 days' advance written notice to the other party. Any notices,
requests, demand and other communications provided for by this Agreement shall
be sufficient if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the Company or, in
the case of the Company, to the attention of the Secretary of the Company, at
its principal executive offices.
15. Non-Alienation. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law. Nothing in this paragraph shall limit the Executive's rights or powers
to dispose of his property by will or limit any rights or powers which his
executor or administrator would otherwise have. This Agreement shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If the Executive should die while any amount is still
payable to the Executive hereunder had the Executive continued to live, all such
amounts shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee, or if there is no such
designee, to the Executive's estate.
16. Governing Law. The provisions of this Agreement shall be construed in
accordance with the laws of the State of Illinois, without application of
conflict of laws provisions thereunder.
17. Amendment. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
18. Successors to the Company. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no succession had taken place.
19. Employment Status. Nothing herein contained shall be deemed to create
an employment agreement between the Company and the Executive, providing for the
employment of the Executive by the Company for any fixed period of time. The
Executive's employment with the Company is terminable at will by the Company or
the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 14, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Upon a
termination of the Executive's employment prior to the date of a Change in
Control, there shall be no further rights under this Agreement.
20. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
21. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which shall be deemed the original without reference to
the others.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name and on its behalf, all as of the day and
year first above written.
/S/ WILLIAM D. SANDERS
__________________________________________
William D. Sanders
SECURITY CAPITAL GROUP INCORPORATED
/S/ JEFFREY A. KLOPF
__________________________________________
Jeffrey A. Klopf
Senior Vice President and Secretary
Exhibit 10.3
CHANGE IN CONTROL AGREEMENT
This Agreement entered into as of the 18th day of May, 1999, by and between
Security Capital Group Incorporated, a Maryland corporation (the "Company"), and
C. Ronald Blankenship (the "Executive").
WHEREAS, the Company wishes to assure itself of the continuity of the
Executive's services in the event of any actual change in control of the
Company; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. The "Term" of this Agreement shall commence on the
date hereof and shall continue through December 31, 2001; provided, however,
that on such date and on each December 31 thereafter, the Term of this Agreement
shall automatically be extended for one additional year unless, not later than
the preceding January 1 either party shall have given notice that such party
does not wish to extend the Term; and provided, further, that if a Change in
Control (as defined in paragraph 3 below) shall have occurred during the
original or any extended Term of this Agreement, the Term of this Agreement
shall continue for a period of twenty-four calendar months beyond the calendar
month in which such Change in Control occurs.
2. Employment After a Change in Control. If the Executive is in the employ
of the Company on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ for the period commencing on the date of
the Change in Control and ending on the last day of the Term of this Agreement.
During the period of employment described in the foregoing provisions of this
paragraph 2 (the "Employment Period"), the Executive shall hold such position
with the Company and exercise such authority and perform such executive duties
as are commensurate with the Executive's position, authority and duties
immediately prior to the Change in Control. The Executive agrees that during the
Employment Period the Executive shall devote full business time exclusively to
the executive duties described herein and perform such duties faithfully and
efficiently; provided, however, that nothing in this Agreement shall prevent the
Executive from voluntarily resigning from employment upon 60 days' written
notice to the Company under circumstances which do not constitute a Termination
(as defined below in paragraph 5).
3. Change in Control. For purposes of the Plan, a "Change in Control" means
the happening of any of the following:
a. the stockholders of the Company approve a definitive agreement to merge the
Company into or consolidate the Company with another entity, sell or
otherwise dispose of all or substantially all of its assets or adopt a plan
of liquidation, provided, however, that a Change in Control shall not be
deemed to have occurred by reason of a transaction, or a substantially
concurrent or otherwise related series of transactions, upon the completion
of which 50% or more of the beneficial ownership of the voting power of the
Company, the surviving corporation or corporation directly or indirectly
controlling the Company or the surviving corporation, as the case may be,
is held by the same persons (as defined below) (although not necessarily in
the same proportion) as held the beneficial ownership of the voting power
of the Company immediately prior to the transaction or the substantially
concurrent or otherwise related series of transactions, except that upon
the completion thereof, employees or employee benefit plans of the Company
may be a new holder of such beneficial ownership; provided, further, that a
transaction with an "Affiliate" of the Company (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall not
be treated as a Change in Control; or
b. the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange
Act) of securities representing 50% or more of the combined voting power of
the Company is acquired, other than from the Company, by any "person" as
defined in Sections 13(d) and 14(d) of the Exchange Act (other than by an
Affiliate or any trustee or other fiduciary holding securities under an
employee benefit or other similar stock plan of the Company); or
c. at any time during any period of two consecutive years, individuals who at
the beginning of such period were members of the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
stockholders, of each new Director was approved by a vote of at least
two-thirds of the Directors still in office at the time of such election or
nomination who were Directors at the beginning of such period).
4. Compensation During the Employment Period. During the Employment Period,
the Executive shall be compensated as follows:
a. the Executive shall receive an annual salary which is not less than his
annual salary immediately prior to the Employment Period and shall be
eligible to receive an increase in annual salary which is not materially
less favorable to the Executive than increases in salary granted by the
Company for executives with comparable duties;
b. the Executive shall be eligible to participate in short-term and long-term
cash-based incentive compensation plans which, in the aggregate, provide
bonus opportunities which are not materially less favorable to the
Executive than the greater of (i) the opportunities provided by the Company
for executives with comparable duties; and (ii) the opportunities provided
to the Executive under all such plans in which the Executive was
participating prior to the Employment Period;
c. the Executive shall be eligible to participate in stock option, performance
awards, restricted stock and other equity-based incentive compensation
plans on a basis not materially less favorable to the Executive than that
applicable (i) to the Executive immediately prior to the Employment Period
or (ii) to other executives of the Company with comparable duties; and
d. the Executive shall be eligible to receive employee benefits (including,
but not limited to, tax-qualified and nonqualified savings plan benefits,
medical insurance, disability income protection, life insurance coverage
and death benefits) and perquisites which are not materially less favorable
to the Executive than (i) the employee benefits and perquisites provided by
the Company to executives with comparable duties or (ii) the employee
benefits and perquisites to which the Executive would be entitled under the
Company's employee benefit plans and perquisites as in effect immediately
prior to the Employment Period.
5. Termination. For purposes of this Agreement, the term "Termination"
shall mean termination of the employment of the Executive during the Employment
Period (i) by the Company, for any reason other than death, Disability (as
defined below), or Cause (as described below), or (ii) by resignation of the
Executive upon the occurrence of one of the following events:
a. a significant change in the nature or scope of the Executive's authorities
or duties from those described in paragraph 2 above, a breach of any of the
subparagraphs of paragraph 4 above, or the breach by the Company of any
other provision of this Agreement;
b. the relocation of the Executive's office to a location more than fifty
miles from the location of the Executive's office immediately prior to the
Employment Period;
c. a reasonable determination by the Executive that, as a result of a Change
in Control and a change in circumstances thereafter significantly affecting
the nature and scope of Executive's authorities and duties from those
described in paragraph 2 above, the Executive is unable to exercise the
authorities, powers, functions or duties associated with the Executive's
position as contemplated by paragraph 2 above; or
d. the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement as contemplated in
paragraph 18 below.
The date of the Executive's Termination under this paragraph 5 shall be the
date specified by the Executive or the Company, as the case may be, in a written
notice to the other party complying with the requirements of paragraph 14 below.
For purposes of this Agreement, the Executive shall be considered to have a
"Disability" during the period in which the Executive is unable, by reason of a
medically determinable physical or mental impairment, to engage in the material
and substantial duties of his regular occupation, which condition is expected to
be permanent. For purposes of this Agreement, the term "Cause" means, in the
reasonable judgment of the Board of Directors of the Company, (i) the willful
and continued failure by the Executive to substantially perform the Executive's
duties with the Company after written notification by the Company, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
6. Severance Payments. Subject to the provisions of paragraph 10 below, in
the event of a Termination described in paragraph 5 above, in lieu of the amount
otherwise payable under paragraph 4 above, the Executive shall continue to
receive medical insurance, disability income protection, life insurance coverage
and death benefits and perquisites in accordance with subparagraph 4(d) above
for a period of 36 months after the date of Termination, and shall be entitled
to a lump sum payment in cash no later than ten business days after the date of
Termination equal to the sum of:
a. the Executive's unpaid salary, accrued vacation pay and unreimbursed
business expenses through and including the date of Termination;
b. an amount equal to three times the Executive's annual salary rate in effect
immediately prior to the date of Termination;
c. an amount equal to three times the target bonus award for the Executive for
the year of Termination;
d. an amount equal to the assigned target bonus for the Executive for the year
of Termination prorated through the date of Termination.
7. Make-Whole Payments. Subject to the last three sentences of this
paragraph 7, if any payment or benefit to which the Executive is entitled,
whether under this Agreement or otherwise, in connection with a Change in
Control or the Executive's termination of employment (a "Payment") is subject to
any tax under section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar federal or state law (an "Excise Tax"), the Company
shall pay to the Executive an additional amount (the "Make Whole-Amount") which
is equal to (i) the amount of the Excise Tax, plus (ii) the aggregate amount of
any interest, penalties, fines or additions to any tax which are imposed in
connection with the imposition of such Excise Tax, plus (iii) all income, excise
and other applicable taxes imposed on the Executive under the laws of any
Federal, state or local government or taxing authority by reason of the payments
required under clause (i) and clause (ii) and this clause (iii). Such Make
Whole-Amount will not be paid to the Executive if the Payment is less than 10
percent above the maximum amount that may be paid without incurring Excise Tax.
In the event that the Payment is greater than the maximum amount that may be
paid without incurring Excise Tax, but less than 10 percent greater than the
maximum amount, then the Payments shall be capped at the maximum amount that may
be paid without incurring Excise Tax. In such event, the cash severance payments
provided in paragraph 6 above and/or the outplacement services provided in
paragraph 8 below, at the Executive's election, shall be reduced to a level that
results in the total Payment being equal to the maximum amount that may be paid
without incurring Excise Tax.
a. For purposes of determining the Make-Whole Amount, the Executive shall be
deemed to be taxed at the highest marginal rate under all applicable local,
state, federal and foreign income tax laws for the year in which the
Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an
Excise Tax shall be paid by the Company coincident with the Payment with
respect to which such Excise Tax relates.
b. All calculations under this paragraph 7 shall be made initially by the
Company and the Company shall provide prompt written notice thereof to the
Executive to enable the Executive to timely file all applicable tax
returns. Upon request of the Executive, the Company shall provide the
Executive with sufficient tax and compensation data to enable the Executive
or his tax advisor to independently make the calculations described in
subparagraph (a) above and the Company shall reimburse the Executive for
reasonable fees and expenses incurred for any such verification.
c. If the Executive gives written notice to the Company of any objection to
the results of the Company's calculations within 60 days of the Executive's
receipt of written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent auditors of the
Company ("Tax Counsel"). The Company shall pay all reasonable fees and
expenses of such Tax Counsel. Pending such determination by Tax Counsel,
the Company shall pay the Executive the Make-Whole Amount as determined by
it in good faith. The Company shall pay the Executive any additional amount
determined by Tax Counsel to be due under this paragraph 7 (together with
interest thereon at a rate equal to 120% of the Federal short-term rate
determined under section 1274(d) of the Code) promptly after such
determination.
d. The determination by Tax Counsel shall be conclusive and binding upon all
parties unless the Internal Revenue Service, a court of competent
jurisdiction, or such other duly empowered governmental body or agency (a
"Tax Authority") determines that the Executive owes a greater or lesser
amount of Excise Tax with respect to any Payment than the amount determined
by Tax Counsel.
e. If a Taxing Authority makes a claim against the Executive which, if
successful, would require the Company to make a payment under this
paragraph 7, the Executive agrees to contest the claim, with counsel
reasonably satisfactory to the Company, on request of the Company subject
to the following conditions:
(i) The Executive shall notify the Company of any such claim
within 10 days of becoming aware thereof. In the event that the
Company desires the claim to be contested, it shall promptly (but in
no event more than 30 days after the notice from the Executive or such
shorter time as the Taxing Authority may specify for responding to
such claim) request the Executive to contest the claim. The Executive
shall not make any payment of any tax which is the subject of the
claim before the Executive has given the notice or during the 30-day
period thereafter unless the Executive receives written instructions
from the Company to make such payment together with an advance of
funds sufficient to make the requested payment plus any amounts
payable under this paragraph 7 determined as if such advance were an
Excise Tax, in which case the Executive will act promptly in
accordance with such instructions.
(ii) If the Company so requests, the Executive will contest the
claim by either paying the tax claimed and suing for a refund in the
appropriate court or contesting the claim in the United States Tax
Court or other appropriate court, as directed by the Company;
provided, however, that any request by the Company for the Executive
to pay the tax shall be accompanied by an advance from the Company to
the Executive of funds sufficient to make the requested payment plus
any amounts payable under this paragraph 7 determined as if such
advance were an Excise Tax. If directed by the Company in writing the
Executive will take all action necessary to compromise or settle the
claim, but in no event will the Executive compromise or settle the
claim or cease to contest the claim without the written consent of the
Company; provided, however, that the Executive may take any such
action if the Executive waives in writing his right to a payment under
this paragraph 7 for any amounts payable in connection with such
claim. The Executive agrees to cooperate in good faith with the
Company in contesting the claim and to comply with any reasonable
request from the Company concerning the contest of the claim,
including the pursuit of administrative remedies, the appropriate
forum for any judicial proceedings, and the legal basis for contesting
the claim. Upon request of the Company, the Executive shall take
appropriate appeals of any judgment or decision that would require the
Company to make a payment under this paragraph 7. Provided that the
Executive is in compliance with the provisions of this section, the
Company shall be liable for and indemnify the Executive against any
loss in connection with, and all costs and expenses, including
attorneys' fees, which may be incurred as a result of, contesting the
claim, and shall provide to the Executive within 30 days after each
written request therefore by the Executive cash advances or
reimbursement for all such costs and expenses actually incurred or
reasonably expected to be incurred by the Executive as a result of
contesting the claim.
f. Should a Tax Authority finally determine that an additional Excise Tax is
owed, then the Company shall pay an additional Make-Up Amount to the
Executive in a manner consistent with this paragraph 7 with respect to any
additional Excise Tax and any assessed interest, fines, or penalties. If
any Excise Tax as calculated by the Company or Tax Counsel, as the case may
be, is finally determined by a Tax Authority to exceed the amount required
to be paid under applicable law, then the Executive shall repay such excess
to the Company within 30 days of such determination; provided that such
repayment shall be reduced by the amount of any taxes paid by the Executive
on such excess which is not offset by the tax benefit attributable to the
repayment.
8. Outplacement Services. If the Executive's Termination occurs during the
Employment Period, at the election of the Executive, the Company shall provide
the Executive with outplacement service of an experienced firm selected by the
Company and acceptable to the Executive located not more than fifty miles from
the location of Executive's office immediately prior to the Employment Period,
provided that the cost of such services shall not exceed $25,000 and such
services shall not extend beyond 36 months from Executive's Termination.
9. Pooling of Interests Accounting Treatment. If the application of any
provision of this Agreement, or of the Agreement in its entirety, would preclude
the use of pooling of interests accounting treatment with respect to a
transaction for which such treatment otherwise is available and to be adopted by
the Company, this Agreement, upon the determination of the Board, shall be
modified as it applies to such transaction, to the minimum extent necessary to
prevent such impact.
10. Withholding. All payments to the Executive under this Agreement will be
subject to all applicable withholding of state and federal taxes.
11. Confidentiality, Non-Solicitation and Non-Competition. The Executive
agrees that:
a. Except as may be required by the lawful order of a court or agency of
competent jurisdiction, or except to the extent that the Executive has
express authorization from the Company, the Executive agrees to keep secret
and confidential indefinitely all non-public information concerning the
Company or any affiliate thereof which was acquired by or disclosed to the
Executive during the course of the Executive's employment with the Company
or any affiliate thereof, and not to disclose the same, either directly or
indirectly, to any other person, firm or business entity or to use it in
any way.
b. While the Executive is employed by the Company or any affiliate and for a
period of one year after the date of the Executive's Termination, the
Executive covenants and agrees that Executive will not, whether for
Executive or for any other person, business, partnership, association,
firm, company or corporation, initiate contact with, solicit, divert or
take away any of the customers (entities or individuals from which the
Company or any of its affiliates receives rents or payment for services) of
the Company or any affiliate thereof or employees of the Company or any
affiliate thereof in existence from time to time during Executive's
employment with the Company or any affiliate thereof and at the time of
such initiation, solicitation or diversion.
c. While the Executive is employed by the Company or any affiliate thereof,
the Executive covenants and agrees that Executive will not, directly or
indirectly, engage in, assist, perform services for, plan for, establish or
open, or have any financial interest (other than (i) ownership of 1% or
less of the outstanding stock of any corporation listed on the New York or
American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System or (ii) ownership of
securities in any entity affiliated with the Company) in any person, firm,
corporation, or business entity (whether as an employee, officer, director
or consultant) that engages in an activity which is the same as, similar
to, or competitive with, the Company or any affiliate thereof.
12. Arbitration of All Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in Chicago, Illinois, in accordance with the laws of the State of Illinois, by
three arbitrators appointed by the parties. If the parties cannot agree on the
appointment of the arbitrators, one shall be appointed by the Company and one by
the Executive and the third shall be appointed by the first two arbitrators. If
the first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the Chief Judge of the United
States Court of Appeals for the Seventh Circuit. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as provided
in this paragraph 12. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel or incur other
costs and expenses in connection with enforcement of his rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his reasonable attorneys' fees and costs
and expenses in connection with enforcement of his rights (including the
enforcement of any arbitration award in court). Payments shall be made to the
Executive at the time such fees, costs and expenses are incurred. If, however,
the arbitrators shall determine that, under the circumstances, payment by the
Company of all or a part of any such fees and costs and expenses would be
unjust, the Executive shall repay such amounts to the Company in accordance with
the order of the arbitrators. Any award of the arbitrators shall include
interest at a rate or rates considered just under the circumstances by the
arbitrators.
13. Mitigation and Set-Off. The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise. The Company shall not be entitled to set off against
the amounts payable to the Executive under this Agreement any amounts owed to
the Company by the Executive, any amounts earned by the Executive in other
employment after termination of his employment with the Company, or any amounts
which might have been earned by the Executive in other employment had he sought
such other employment.
14. Notices. Any notice of Termination of the Executive's employment by the
Company or the Executive for any reason shall be upon no less than 15 days' and
no greater than 45 days' advance written notice to the other party. Any notices,
requests, demand and other communications provided for by this Agreement shall
be sufficient if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the Company or, in
the case of the Company, to the attention of the Secretary of the Company, at
its principal executive offices.
15. Non-Alienation. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law. Nothing in this paragraph shall limit the Executive's rights or powers
to dispose of his property by will or limit any rights or powers which his
executor or administrator would otherwise have. This Agreement shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If the Executive should die while any amount is still
payable to the Executive hereunder had the Executive continued to live, all such
amounts shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee, or if there is no such
designee, to the Executive's estate.
16. Governing Law. The provisions of this Agreement shall be construed in
accordance with the laws of the State of Illinois, without application of
conflict of laws provisions thereunder.
17. Amendment. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
18. Successors to the Company. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no succession had taken place.
19. Employment Status. Nothing herein contained shall be deemed to create
an employment agreement between the Company and the Executive, providing for the
employment of the Executive by the Company for any fixed period of time. The
Executive's employment with the Company is terminable at will by the Company or
the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 14, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Upon a
termination of the Executive's employment prior to the date of a Change in
Control, there shall be no further rights under this Agreement.
20. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
21. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which shall be deemed the original without reference to
the others.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name and on its behalf, all as of the day and
year first above written.
/S/ C. RONALD BLANKENSHIP
__________________________________________
C. Ronald Blankenship
SECURITY CAPITAL GROUP INCORPORATED
/S/ JEFFREY A. KLOPF
__________________________________________
Jeffrey A. Klopf
Senior Vice President and Secretary
Exhibit 10.4
CHANGE IN CONTROL AGREEMENT
This Agreement entered into as of the 18th day of May, 1999, by and between
Security Capital Group Incorporated, a Maryland corporation (the "Company"), and
Thomas G. Wattles (the "Executive").
WHEREAS, the Company wishes to assure itself of the continuity of the
Executive's services in the event of any actual change in control of the
Company; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. The "Term" of this Agreement shall commence on the
date hereof and shall continue through December 31, 2001; provided, however,
that on such date and on each December 31 thereafter, the Term of this Agreement
shall automatically be extended for one additional year unless, not later than
the preceding January 1 either party shall have given notice that such party
does not wish to extend the Term; and provided, further, that if a Change in
Control (as defined in paragraph 3 below) shall have occurred during the
original or any extended Term of this Agreement, the Term of this Agreement
shall continue for a period of twenty-four calendar months beyond the calendar
month in which such Change in Control occurs.
2. Employment After a Change in Control. If the Executive is in the employ
of the Company on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ for the period commencing on the date of
the Change in Control and ending on the last day of the Term of this Agreement.
During the period of employment described in the foregoing provisions of this
paragraph 2 (the "Employment Period"), the Executive shall hold such position
with the Company and exercise such authority and perform such executive duties
as are commensurate with the Executive's position, authority and duties
immediately prior to the Change in Control. The Executive agrees that during the
Employment Period the Executive shall devote full business time exclusively to
the executive duties described herein and perform such duties faithfully and
efficiently; provided, however, that nothing in this Agreement shall prevent the
Executive from voluntarily resigning from employment upon 60 days' written
notice to the Company under circumstances which do not constitute a Termination
(as defined below in paragraph 5).
3. Change in Control. For purposes of the Plan, a "Change in Control" means
the happening of any of the following:
a. the stockholders of the Company approve a definitive agreement to merge the
Company into or consolidate the Company with another entity, sell or
otherwise dispose of all or substantially all of its assets or adopt a plan
of liquidation, provided, however, that a Change in Control shall not be
deemed to have occurred by reason of a transaction, or a substantially
concurrent or otherwise related series of transactions, upon the completion
of which 50% or more of the beneficial ownership of the voting power of the
Company, the surviving corporation or corporation directly or indirectly
controlling the Company or the surviving corporation, as the case may be,
is held by the same persons (as defined below) (although not necessarily in
the same proportion) as held the beneficial ownership of the voting power
of the Company immediately prior to the transaction or the substantially
concurrent or otherwise related series of transactions, except that upon
the completion thereof, employees or employee benefit plans of the Company
may be a new holder of such beneficial ownership; provided, further, that a
transaction with an "Affiliate" of the Company (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall not
be treated as a Change in Control; or
b. the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange
Act) of securities representing 50% or more of the combined voting power of
the Company is acquired, other than from the Company, by any "person" as
defined in Sections 13(d) and 14(d) of the Exchange Act (other than by an
Affiliate or any trustee or other fiduciary holding securities under an
employee benefit or other similar stock plan of the Company); or
c. at any time during any period of two consecutive years, individuals who at
the beginning of such period were members of the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
stockholders, of each new Director was approved by a vote of at least
two-thirds of the Directors still in office at the time of such election or
nomination who were Directors at the beginning of such period).
4. Compensation During the Employment Period. During the Employment Period,
the Executive shall be compensated as follows:
a. the Executive shall receive an annual salary which is not less than his
annual salary immediately prior to the Employment Period and shall be
eligible to receive an increase in annual salary which is not materially
less favorable to the Executive than increases in salary granted by the
Company for executives with comparable duties;
b. the Executive shall be eligible to participate in short-term and long-term
cash-based incentive compensation plans which, in the aggregate, provide
bonus opportunities which are not materially less favorable to the
Executive than the greater of (i) the opportunities provided by the Company
for executives with comparable duties; and (ii) the opportunities provided
to the Executive under all such plans in which the Executive was
participating prior to the Employment Period;
c. the Executive shall be eligible to participate in stock option, performance
awards, restricted stock and other equity-based incentive compensation
plans on a basis not materially less favorable to the Executive than that
applicable (i) to the Executive immediately prior to the Employment Period
or (ii) to other executives of the Company with comparable duties; and
d. the Executive shall be eligible to receive employee benefits (including,
but not limited to, tax-qualified and nonqualified savings plan benefits,
medical insurance, disability income protection, life insurance coverage
and death benefits) and perquisites which are not materially less favorable
to the Executive than (i) the employee benefits and perquisites provided by
the Company to executives with comparable duties or (ii) the employee
benefits and perquisites to which the Executive would be entitled under the
Company's employee benefit plans and perquisites as in effect immediately
prior to the Employment Period.
5. Termination. For purposes of this Agreement, the term "Termination"
shall mean termination of the employment of the Executive during the Employment
Period (i) by the Company, for any reason other than death, Disability (as
defined below), or Cause (as described below), or (ii) by resignation of the
Executive upon the occurrence of one of the following events:
a. a significant change in the nature or scope of the Executive's authorities
or duties from those described in paragraph 2 above, a breach of any of the
subparagraphs of paragraph 4 above, or the breach by the Company of any
other provision of this Agreement;
b. the relocation of the Executive's office to a location more than fifty
miles from the location of the Executive's office immediately prior to the
Employment Period;
c. a reasonable determination by the Executive that, as a result of a Change
in Control and a change in circumstances thereafter significantly affecting
the nature and scope of Executive's authorities and duties from those
described in paragraph 2 above, the Executive is unable to exercise the
authorities, powers, functions or duties associated with the Executive's
position as contemplated by paragraph 2 above; or
d. the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement as contemplated in
paragraph 18 below.
The date of the Executive's Termination under this paragraph 5 shall be the date
specified by the Executive or the Company, as the case may be, in a written
notice to the other party complying with the requirements of paragraph 14 below.
For purposes of this Agreement, the Executive shall be considered to have a
"Disability" during the period in which the Executive is unable, by reason of a
medically determinable physical or mental impairment, to engage in the material
and substantial duties of his regular occupation, which condition is expected to
be permanent. For purposes of this Agreement, the term "Cause" means, in the
reasonable judgment of the Board of Directors of the Company, (i) the willful
and continued failure by the Executive to substantially perform the Executive's
duties with the Company after written notification by the Company, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
6. Severance Payments. Subject to the provisions of paragraph 10 below, in
the event of a Termination described in paragraph 5 above, in lieu of the amount
otherwise payable under paragraph 4 above, the Executive shall continue to
receive medical insurance, disability income protection, life insurance coverage
and death benefits and perquisites in accordance with subparagraph 4(d) above
for a period of 36 months after the date of Termination, and shall be entitled
to a lump sum payment in cash no later than ten business days after the date of
Termination equal to the sum of:
a. the Executive's unpaid salary, accrued vacation pay and unreimbursed
business expenses through and including the date of Termination;
b. an amount equal to three times the Executive's annual salary rate in effect
immediately prior to the date of Termination;
c. an amount equal to three times the target bonus award for the Executive for
the year of Termination;
d. an amount equal to the assigned target bonus for the Executive for the year
of Termination prorated through the date of Termination.
7. Make-Whole Payments. Subject to the last three sentences of this
paragraph 7, if any payment or benefit to which the Executive is entitled,
whether under this Agreement or otherwise, in connection with a Change in
Control or the Executive's termination of employment (a "Payment") is subject to
any tax under section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar federal or state law (an "Excise Tax"), the Company
shall pay to the Executive an additional amount (the "Make Whole-Amount") which
is equal to (i) the amount of the Excise Tax, plus (ii) the aggregate amount of
any interest, penalties, fines or additions to any tax which are imposed in
connection with the imposition of such Excise Tax, plus (iii) all income, excise
and other applicable taxes imposed on the Executive under the laws of any
Federal, state or local government or taxing authority by reason of the payments
required under clause (i) and clause (ii) and this clause (iii). Such Make
Whole-Amount will not be paid to the Executive if the Payment is less than 10
percent above the maximum amount that may be paid without incurring Excise Tax.
In the event that the Payment is greater than the maximum amount that may be
paid without incurring Excise Tax, but less than 10 percent greater than the
maximum amount, then the Payments shall be capped at the maximum amount that may
be paid without incurring Excise Tax. In such event, the cash severance payments
provided in paragraph 6 above and/or the outplacement services provided in
paragraph 8 below, at the Executive's election, shall be reduced to a level that
results in the total Payment being equal to the maximum amount that may be paid
without incurring Excise Tax.
a. For purposes of determining the Make-Whole Amount, the Executive shall be
deemed to be taxed at the highest marginal rate under all applicable local,
state, federal and foreign income tax laws for the year in which the
Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an
Excise Tax shall be paid by the Company coincident with the Payment with
respect to which such Excise Tax relates.
b. All calculations under this paragraph 7 shall be made initially by the
Company and the Company shall provide prompt written notice thereof to the
Executive to enable the Executive to timely file all applicable tax
returns. Upon request of the Executive, the Company shall provide the
Executive with sufficient tax and compensation data to enable the Executive
or his tax advisor to independently make the calculations described in
subparagraph (a) above and the Company shall reimburse the Executive for
reasonable fees and expenses incurred for any such verification.
c. If the Executive gives written notice to the Company of any objection to
the results of the Company's calculations within 60 days of the Executive's
receipt of written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent auditors of the
Company ("Tax Counsel"). The Company shall pay all reasonable fees and
expenses of such Tax Counsel. Pending such determination by Tax Counsel,
the Company shall pay the Executive the Make-Whole Amount as determined by
it in good faith. The Company shall pay the Executive any additional amount
determined by Tax Counsel to be due under this paragraph 7 (together with
interest thereon at a rate equal to 120% of the Federal short-term rate
determined under section 1274(d) of the Code) promptly after such
determination.
d. The determination by Tax Counsel shall be conclusive and binding upon all
parties unless the Internal Revenue Service, a court of competent
jurisdiction, or such other duly empowered governmental body or agency (a
"Tax Authority") determines that the Executive owes a greater or lesser
amount of Excise Tax with respect to any Payment than the amount determined
by Tax Counsel.
e. If a Taxing Authority makes a claim against the Executive which, if
successful, would require the Company to make a payment under this
paragraph 7, the Executive agrees to contest the claim, with counsel
reasonably satisfactory to the Company, on request of the Company subject
to the following conditions:
(i) The Executive shall notify the Company of any such claim within 10
days of becoming aware thereof. In the event that the Company desires the
claim to be contested, it shall promptly (but in no event more than 30 days
after the notice from the Executive or such shorter time as the Taxing
Authority may specify for responding to such claim) request the Executive
to contest the claim. The Executive shall not make any payment of any tax
which is the subject of the claim before the Executive has given the notice
or during the 30-day period thereafter unless the Executive receives
written instructions from the Company to make such payment together with an
advance of funds sufficient to make the requested payment plus any amounts
payable under this paragraph 7 determined as if such advance were an Excise
Tax, in which case the Executive will act promptly in accordance with such
instructions.
(ii) If the Company so requests, the Executive will contest the claim
by either paying the tax claimed and suing for a refund in the appropriate
court or contesting the claim in the United States Tax Court or other
appropriate court, as directed by the Company; provided, however, that any
request by the Company for the Executive to pay the tax shall be
accompanied by an advance from the Company to the Executive of funds
sufficient to make the requested payment plus any amounts payable under
this paragraph 7 determined as if such advance were an Excise Tax. If
directed by the Company in writing the Executive will take all action
necessary to compromise or settle the claim, but in no event will the
Executive compromise or settle the claim or cease to contest the claim
without the written consent of the Company; provided, however, that the
Executive may take any such action if the Executive waives in writing his
right to a payment under this paragraph 7 for any amounts payable in
connection with such claim. The Executive agrees to cooperate in good faith
with the Company in contesting the claim and to comply with any reasonable
request from the Company concerning the contest of the claim, including the
pursuit of administrative remedies, the appropriate forum for any judicial
proceedings, and the legal basis for contesting the claim. Upon request of
the Company, the Executive shall take appropriate appeals of any judgment
or decision that would require the Company to make a payment under this
paragraph 7. Provided that the Executive is in compliance with the
provisions of this section, the Company shall be liable for and indemnify
the Executive against any loss in connection with, and all costs and
expenses, including attorneys' fees, which may be incurred as a result of,
contesting the claim, and shall provide to the Executive within 30 days
after each written request therefore by the Executive cash advances or
reimbursement for all such costs and expenses actually incurred or
reasonably expected to be incurred by the Executive as a result of
contesting the claim.
f. Should a Tax Authority finally determine that an additional Excise Tax is
owed, then the Company shall pay an additional Make-Up Amount to the
Executive in a manner consistent with this paragraph 7 with respect to any
additional Excise Tax and any assessed interest, fines, or penalties. If
any Excise Tax as calculated by the Company or Tax Counsel, as the case may
be, is finally determined by a Tax Authority to exceed the amount required
to be paid under applicable law, then the Executive shall repay such excess
to the Company within 30 days of such determination; provided that such
repayment shall be reduced by the amount of any taxes paid by the Executive
on such excess which is not offset by the tax benefit attributable to the
repayment.
8. Outplacement Services. If the Executive's Termination occurs during the
Employment Period, at the election of the Executive, the Company shall provide
the Executive with outplacement service of an experienced firm selected by the
Company and acceptable to the Executive located not more than fifty miles from
the location of Executive's office immediately prior to the Employment Period,
provided that the cost of such services shall not exceed $25,000 and such
services shall not extend beyond 36 months from Executive's Termination.
9. Pooling of Interests Accounting Treatment. If the application of any
provision of this Agreement, or of the Agreement in its entirety, would preclude
the use of pooling of interests accounting treatment with respect to a
transaction for which such treatment otherwise is available and to be adopted by
the Company, this Agreement, upon the determination of the Board, shall be
modified as it applies to such transaction, to the minimum extent necessary to
prevent such impact.
10. Withholding. All payments to the Executive under this Agreement will be
subject to all applicable withholding of state and federal taxes.
11. Confidentiality, Non-Solicitation and Non-Competition. The Executive
agrees that:
a. Except as may be required by the lawful order of a court or agency of
competent jurisdiction, or except to the extent that the Executive has
express authorization from the Company, the Executive agrees to keep secret
and confidential indefinitely all non-public information concerning the
Company or any affiliate thereof which was acquired by or disclosed to the
Executive during the course of the Executive's employment with the Company
or any affiliate thereof, and not to disclose the same, either directly or
indirectly, to any other person, firm or business entity or to use it in
any way.
b. While the Executive is employed by the Company or any affiliate and for a
period of one year after the date of the Executive's Termination, the
Executive covenants and agrees that Executive will not, whether for
Executive or for any other person, business, partnership, association,
firm, company or corporation, initiate contact with, solicit, divert or
take away any of the customers (entities or individuals from which the
Company or any of its affiliates receives rents or payment for services) of
the Company or any affiliate thereof or employees of the Company or any
affiliate thereof in existence from time to time during Executive's
employment with the Company or any affiliate thereof and at the time of
such initiation, solicitation or diversion.
c. While the Executive is employed by the Company or any affiliate thereof,
the Executive covenants and agrees that Executive will not, directly or
indirectly, engage in, assist, perform services for, plan for, establish or
open, or have any financial interest (other than (i) ownership of 1% or
less of the outstanding stock of any corporation listed on the New York or
American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System or (ii) ownership of
securities in any entity affiliated with the Company) in any person, firm,
corporation, or business entity (whether as an employee, officer, director
or consultant) that engages in an activity which is the same as, similar
to, or competitive with, the Company or any affiliate thereof.
12. Arbitration of All Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in Chicago, Illinois, in accordance with the laws of the State of Illinois, by
three arbitrators appointed by the parties. If the parties cannot agree on the
appointment of the arbitrators, one shall be appointed by the Company and one by
the Executive and the third shall be appointed by the first two arbitrators. If
the first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the Chief Judge of the United
States Court of Appeals for the Seventh Circuit. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as provided
in this paragraph 12. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel or incur other
costs and expenses in connection with enforcement of his rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his reasonable attorneys' fees and costs
and expenses in connection with enforcement of his rights (including the
enforcement of any arbitration award in court). Payments shall be made to the
Executive at the time such fees, costs and expenses are incurred. If, however,
the arbitrators shall determine that, under the circumstances, payment by the
Company of all or a part of any such fees and costs and expenses would be
unjust, the Executive shall repay such amounts to the Company in accordance with
the order of the arbitrators. Any award of the arbitrators shall include
interest at a rate or rates considered just under the circumstances by the
arbitrators.
13. Mitigation and Set-Off. The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise. The Company shall not be entitled to set off against
the amounts payable to the Executive under this Agreement any amounts owed to
the Company by the Executive, any amounts earned by the Executive in other
employment after termination of his employment with the Company, or any amounts
which might have been earned by the Executive in other employment had he sought
such other employment.
14. Notices. Any notice of Termination of the Executive's employment by the
Company or the Executive for any reason shall be upon no less than 15 days' and
no greater than 45 days' advance written notice to the other party. Any notices,
requests, demand and other communications provided for by this Agreement shall
be sufficient if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the Company or, in
the case of the Company, to the attention of the Secretary of the Company, at
its principal executive offices.
15. Non-Alienation. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law. Nothing in this paragraph shall limit the Executive's rights or powers
to dispose of his property by will or limit any rights or powers which his
executor or administrator would otherwise have. This Agreement shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If the Executive should die while any amount is still
payable to the Executive hereunder had the Executive continued to live, all such
amounts shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee, or if there is no such
designee, to the Executive's estate.
16. Governing Law. The provisions of this Agreement shall be construed in
accordance with the laws of the State of Illinois, without application of
conflict of laws provisions thereunder.
17. Amendment. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
18. Successors to the Company. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no succession had taken place.
19. Employment Status. Nothing herein contained shall be deemed to create
an employment agreement between the Company and the Executive, providing for the
employment of the Executive by the Company for any fixed period of time. The
Executive's employment with the Company is terminable at will by the Company or
the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 14, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Upon a
termination of the Executive's employment prior to the date of a Change in
Control, there shall be no further rights under this Agreement.
20. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
21. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which shall be deemed the original without reference to
the others.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name and on its behalf, all as of the day and
year first above written.
/S/ THOMAS G. WATTLES
__________________________________________
Thomas G. Wattles
SECURITY CAPITAL GROUP INCORPORATED
/S/ JEFFREY A. KLOPF
__________________________________________
Jeffrey A. Klopf
Senior Vice President and Secretary
Exhibit 10.5
CHANGE IN CONTROL AGREEMENT
This Agreement entered into as of the 18th day of May, 1999, by and between
Security Capital Group Incorporated, a Maryland corporation (the "Company"), and
Anthony R. Manno, Jr. (the "Executive").
WHEREAS, the Company wishes to assure itself of the continuity of the
Executive's services in the event of any actual change in control of the
Company; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. The "Term" of this Agreement shall commence on the
date hereof and shall continue through December 31, 2001; provided, however,
that on such date and on each December 31 thereafter, the Term of this Agreement
shall automatically be extended for one additional year unless, not later than
the preceding January 1 either party shall have given notice that such party
does not wish to extend the Term; and provided, further, that if a Change in
Control (as defined in paragraph 3 below) shall have occurred during the
original or any extended Term of this Agreement, the Term of this Agreement
shall continue for a period of twenty-four calendar months beyond the calendar
month in which such Change in Control occurs.
2. Employment After a Change in Control. If the Executive is in the employ
of the Company on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ for the period commencing on the date of
the Change in Control and ending on the last day of the Term of this Agreement.
During the period of employment described in the foregoing provisions of this
paragraph 2 (the "Employment Period"), the Executive shall hold such position
with the Company and exercise such authority and perform such executive duties
as are commensurate with the Executive's position, authority and duties
immediately prior to the Change in Control. The Executive agrees that during the
Employment Period the Executive shall devote full business time exclusively to
the executive duties described herein and perform such duties faithfully and
efficiently; provided, however, that nothing in this Agreement shall prevent the
Executive from voluntarily resigning from employment upon 60 days' written
notice to the Company under circumstances which do not constitute a Termination
(as defined below in paragraph 5).
3. Change in Control. For purposes of the Plan, a "Change in Control" means
the happening of any of the following:
a. the stockholders of the Company approve a definitive agreement to merge the
Company into or consolidate the Company with another entity, sell or
otherwise dispose of all or substantially all of its assets or adopt a plan
of liquidation, provided, however, that a Change in Control shall not be
deemed to have occurred by reason of a transaction, or a substantially
concurrent or otherwise related series of transactions, upon the completion
of which 50% or more of the beneficial ownership of the voting power of the
Company, the surviving corporation or corporation directly or indirectly
controlling the Company or the surviving corporation, as the case may be,
is held by the same persons (as defined below) (although not necessarily in
the same proportion) as held the beneficial ownership of the voting power
of the Company immediately prior to the transaction or the substantially
concurrent or otherwise related series of transactions, except that upon
the completion thereof, employees or employee benefit plans of the Company
may be a new holder of such beneficial ownership; provided, further, that a
transaction with an "Affiliate" of the Company (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall not
be treated as a Change in Control; or
b. the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange
Act) of securities representing 50% or more of the combined voting power of
the Company is acquired, other than from the Company, by any "person" as
defined in Sections 13(d) and 14(d) of the Exchange Act (other than by an
Affiliate or any trustee or other fiduciary holding securities under an
employee benefit or other similar stock plan of the Company); or
c. at any time during any period of two consecutive years, individuals who at
the beginning of such period were members of the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
stockholders, of each new Director was approved by a vote of at least
two-thirds of the Directors still in office at the time of such election or
nomination who were Directors at the beginning of such period).
4. Compensation During the Employment Period. During the Employment Period,
the Executive shall be compensated as follows:
a. the Executive shall receive an annual salary which is not less than his
annual salary immediately prior to the Employment Period and shall be
eligible to receive an increase in annual salary which is not materially
less favorable to the Executive than increases in salary granted by the
Company for executives with comparable duties;
b. the Executive shall be eligible to participate in short-term and long-term
cash-based incentive compensation plans which, in the aggregate, provide
bonus opportunities which are not materially less favorable to the
Executive than the greater of (i) the opportunities provided by the Company
for executives with comparable duties; and (ii) the opportunities provided
to the Executive under all such plans in which the Executive was
participating prior to the Employment Period;
c. the Executive shall be eligible to participate in stock option, performance
awards, restricted stock and other equity-based incentive compensation
plans on a basis not materially less favorable to the Executive than that
applicable (i) to the Executive immediately prior to the Employment Period
or (ii) to other executives of the Company with comparable duties; and
d. the Executive shall be eligible to receive employee benefits (including,
but not limited to, tax-qualified and nonqualified savings plan benefits,
medical insurance, disability income protection, life insurance coverage
and death benefits) and perquisites which are not materially less favorable
to the Executive than (i) the employee benefits and perquisites provided by
the Company to executives with comparable duties or (ii) the employee
benefits and perquisites to which the Executive would be entitled under the
Company's employee benefit plans and perquisites as in effect immediately
prior to the Employment Period.
5. Termination. For purposes of this Agreement, the term "Termination"
shall mean termination of the employment of the Executive during the Employment
Period (i) by the Company, for any reason other than death, Disability (as
defined below), or Cause (as described below), or (ii) by resignation of the
Executive upon the occurrence of one of the following events:
a. a significant change in the nature or scope of the Executive's authorities
or duties from those described in paragraph 2 above, a breach of any of the
subparagraphs of paragraph 4 above, or the breach by the Company of any
other provision of this Agreement;
b. the relocation of the Executive's office to a location more than fifty
miles from the location of the Executive's office immediately prior to the
Employment Period;
c. a reasonable determination by the Executive that, as a result of a Change
in Control and a change in circumstances thereafter significantly affecting
the nature and scope of Executive's authorities and duties from those
described in paragraph 2 above, the Executive is unable to exercise the
authorities, powers, functions or duties associated with the Executive's
position as contemplated by paragraph 2 above; or
d. the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement as contemplated in
paragraph 18 below.
The date of the Executive's Termination under this paragraph 5 shall be the
date specified by the Executive or the Company, as the case may be, in a written
notice to the other party complying with the requirements of paragraph 14 below.
For purposes of this Agreement, the Executive shall be considered to have a
"Disability" during the period in which the Executive is unable, by reason of a
medically determinable physical or mental impairment, to engage in the material
and substantial duties of his regular occupation, which condition is expected to
be permanent. For purposes of this Agreement, the term "Cause" means, in the
reasonable judgment of the Board of Directors of the Company, (i) the willful
and continued failure by the Executive to substantially perform the Executive's
duties with the Company after written notification by the Company, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
6. Severance Payments. Subject to the provisions of paragraph 10 below, in
the event of a Termination described in paragraph 5 above, in lieu of the amount
otherwise payable under paragraph 4 above, the Executive shall continue to
receive medical insurance, disability income protection, life insurance coverage
and death benefits and perquisites in accordance with subparagraph 4(d) above
for a period of 24 months after the date of Termination, and shall be entitled
to a lump sum payment in cash no later than ten business days after the date of
Termination equal to the sum of:
a. the Executive's unpaid salary, accrued vacation pay and unreimbursed
business expenses through and including the date of Termination;
b. an amount equal to two times the Executive's annual salary rate in effect
immediately prior to the date of Termination;
c. an amount equal to two times the target bonus award for the Executive for
the year of Termination;
d. an amount equal to the assigned target bonus for the Executive for the year
of Termination prorated through the date of Termination.
7. Make-Whole Payments. Subject to the last three sentences of this
paragraph 7, if any payment or benefit to which the Executive is entitled,
whether under this Agreement or otherwise, in connection with a Change in
Control or the Executive's termination of employment (a "Payment") is subject to
any tax under section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar federal or state law (an "Excise Tax"), the Company
shall pay to the Executive an additional amount (the "Make Whole-Amount") which
is equal to (i) the amount of the Excise Tax, plus (ii) the aggregate amount of
any interest, penalties, fines or additions to any tax which are imposed in
connection with the imposition of such Excise Tax, plus (iii) all income, excise
and other applicable taxes imposed on the Executive under the laws of any
Federal, state or local government or taxing authority by reason of the payments
required under clause (i) and clause (ii) and this clause (iii). Such Make
Whole-Amount will not be paid to the Executive if the Payment is less than 10
percent above the maximum amount that may be paid without incurring Excise Tax.
In the event that the Payment is greater than the maximum amount that may be
paid without incurring Excise Tax, but less than 10 percent greater than the
maximum amount, then the Payments shall be capped at the maximum amount that may
be paid without incurring Excise Tax. In such event, the cash severance payments
provided in paragraph 6 above and/or the outplacement services provided in
paragraph 8 below, at the Executive's election, shall be reduced to a level that
results in the total Payment being equal to the maximum amount that may be paid
without incurring Excise Tax.
a. For purposes of determining the Make-Whole Amount, the Executive shall be
deemed to be taxed at the highest marginal rate under all applicable local,
state, federal and foreign income tax laws for the year in which the
Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an
Excise Tax shall be paid by the Company coincident with the Payment with
respect to which such Excise Tax relates.
b. All calculations under this paragraph 7 shall be made initially by the
Company and the Company shall provide prompt written notice thereof to the
Executive to enable the Executive to timely file all applicable tax
returns. Upon request of the Executive, the Company shall provide the
Executive with sufficient tax and compensation data to enable the Executive
or his tax advisor to independently make the calculations described in
subparagraph (a) above and the Company shall reimburse the Executive for
reasonable fees and expenses incurred for any such verification.
c. If the Executive gives written notice to the Company of any objection to
the results of the Company's calculations within 60 days of the Executive's
receipt of written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent auditors of the
Company ("Tax Counsel"). The Company shall pay all reasonable fees and
expenses of such Tax Counsel. Pending such determination by Tax Counsel,
the Company shall pay the Executive the Make-Whole Amount as determined by
it in good faith. The Company shall pay the Executive any additional amount
determined by Tax Counsel to be due under this paragraph 7 (together with
interest thereon at a rate equal to 120% of the Federal short-term rate
determined under section 1274(d) of the Code) promptly after such
determination.
d. The determination by Tax Counsel shall be conclusive and binding upon all
parties unless the Internal Revenue Service, a court of competent
jurisdiction, or such other duly empowered governmental body or agency (a
"Tax Authority") determines that the Executive owes a greater or lesser
amount of Excise Tax with respect to any Payment than the amount determined
by Tax Counsel.
e. If a Taxing Authority makes a claim against the Executive which, if
successful, would require the Company to make a payment under this
paragraph 7, the Executive agrees to contest the claim, with counsel
reasonably satisfactory to the Company, on request of the Company subject
to the following conditions:
(i) The Executive shall notify the Company of any such claim within 10
days of becoming aware thereof. In the event that the Company desires the
claim to be contested, it shall promptly (but in no event more than 30 days
after the notice from the Executive or such shorter time as the Taxing
Authority may specify for responding to such claim) request the Executive
to contest the claim. The Executive shall not make any payment of any tax
which is the subject of the claim before the Executive has given the notice
or during the 30-day period thereafter unless the Executive receives
written instructions from the Company to make such payment together with an
advance of funds sufficient to make the requested payment plus any amounts
payable under this paragraph 7 determined as if such advance were an Excise
Tax, in which case the Executive will act promptly in accordance with such
instructions.
(ii) If the Company so requests, the Executive will contest the claim
by either paying the tax claimed and suing for a refund in the appropriate
court or contesting the claim in the United States Tax Court or other
appropriate court, as directed by the Company; provided, however, that any
request by the Company for the Executive to pay the tax shall be
accompanied by an advance from the Company to the Executive of funds
sufficient to make the requested payment plus any amounts payable under
this paragraph 7 determined as if such advance were an Excise Tax. If
directed by the Company in writing the Executive will take all action
necessary to compromise or settle the claim, but in no event will the
Executive compromise or settle the claim or cease to contest the claim
without the written consent of the Company; provided, however, that the
Executive may take any such action if the Executive waives in writing his
right to a payment under this paragraph 7 for any amounts payable in
connection with such claim. The Executive agrees to cooperate in good faith
with the Company in contesting the claim and to comply with any reasonable
request from the Company concerning the contest of the claim, including the
pursuit of administrative remedies, the appropriate forum for any judicial
proceedings, and the legal basis for contesting the claim. Upon request of
the Company, the Executive shall take appropriate appeals of any judgment
or decision that would require the Company to make a payment under this
paragraph 7. Provided that the Executive is in compliance with the
provisions of this section, the Company shall be liable for and indemnify
the Executive against any loss in connection with, and all costs and
expenses, including attorneys' fees, which may be incurred as a result of,
contesting the claim, and shall provide to the Executive within 30 days
after each written request therefore by the Executive cash advances or
reimbursement for all such costs and expenses actually incurred or
reasonably expected to be incurred by the Executive as a result of
contesting the claim.
f. Should a Tax Authority finally determine that an additional Excise Tax
is owed, then the Company shall pay an additional Make-Up Amount to the
Executive in a manner consistent with this paragraph 7 with respect to any
additional Excise Tax and any assessed interest, fines, or penalties. If any
Excise Tax as calculated by the Company or Tax Counsel, as the case may be, is
finally determined by a Tax Authority to exceed the amount required to be paid
under applicable law, then the Executive shall repay such excess to the Company
within 30 days of such determination; provided that such repayment shall be
reduced by the amount of any taxes paid by the Executive on such excess which is
not offset by the tax benefit attributable to the repayment.
8. Outplacement Services. If the Executive's Termination occurs during the
Employment Period, at the election of the Executive, the Company shall provide
the Executive with outplacement service of an experienced firm selected by the
Company and acceptable to the Executive located not more than fifty miles from
the location of Executive's office immediately prior to the Employment Period,
provided that the cost of such services shall not exceed $20,000 and such
services shall not extend beyond 24 months from Executive's Termination.
9. Pooling of Interests Accounting Treatment. If the application of any
provision of this Agreement, or of the Agreement in its entirety, would preclude
the use of pooling of interests accounting treatment with respect to a
transaction for which such treatment otherwise is available and to be adopted by
the Company, this Agreement, upon the determination of the Board, shall be
modified as it applies to such transaction, to the minimum extent necessary to
prevent such impact.
10. Withholding. All payments to the Executive under this Agreement will be
subject to all applicable withholding of state and federal taxes.
11. Confidentiality, Non-Solicitation and Non-Competition. The Executive
agrees that:
a. Except as may be required by the lawful order of a court or agency of
competent jurisdiction, or except to the extent that the Executive has
express authorization from the Company, the Executive agrees to keep secret
and confidential indefinitely all non-public information concerning the
Company or any affiliate thereof which was acquired by or disclosed to the
Executive during the course of the Executive's employment with the Company
or any affiliate thereof, and not to disclose the same, either directly or
indirectly, to any other person, firm or business entity or to use it in
any way.
b. While the Executive is employed by the Company or any affiliate and for a
period of one year after the date of the Executive's Termination, the
Executive covenants and agrees that Executive will not, whether for
Executive or for any other person, business, partnership, association,
firm, company or corporation, initiate contact with, solicit, divert or
take away any of the customers (entities or individuals from which the
Company or any of its affiliates receives rents or payment for services) of
the Company or any affiliate thereof or employees of the Company or any
affiliate thereof in existence from time to time during Executive's
employment with the Company or any affiliate thereof and at the time of
such initiation, solicitation or diversion.
c. While the Executive is employed by the Company or any affiliate thereof,
the Executive covenants and agrees that Executive will not, directly or
indirectly, engage in, assist, perform services for, plan for, establish or
open, or have any financial interest (other than (i) ownership of 1% or
less of the outstanding stock of any corporation listed on the New York or
American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System or (ii) ownership of
securities in any entity affiliated with the Company) in any person, firm,
corporation, or business entity (whether as an employee, officer, director
or consultant) that engages in an activity which is the same as, similar
to, or competitive with, the Company or any affiliate thereof.
12. Arbitration of All Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in Chicago, Illinois, in accordance with the laws of the State of Illinois, by
three arbitrators appointed by the parties. If the parties cannot agree on the
appointment of the arbitrators, one shall be appointed by the Company and one by
the Executive and the third shall be appointed by the first two arbitrators. If
the first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the Chief Judge of the United
States Court of Appeals for the Seventh Circuit. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as provided
in this paragraph 12. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel or incur other
costs and expenses in connection with enforcement of his rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his reasonable attorneys' fees and costs
and expenses in connection with enforcement of his rights (including the
enforcement of any arbitration award in court). Payments shall be made to the
Executive at the time such fees, costs and expenses are incurred. If, however,
the arbitrators shall determine that, under the circumstances, payment by the
Company of all or a part of any such fees and costs and expenses would be
unjust, the Executive shall repay such amounts to the Company in accordance with
the order of the arbitrators. Any award of the arbitrators shall include
interest at a rate or rates considered just under the circumstances by the
arbitrators.
13. Mitigation and Set-Off. The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise. The Company shall not be entitled to set off against
the amounts payable to the Executive under this Agreement any amounts owed to
the Company by the Executive, any amounts earned by the Executive in other
employment after termination of his employment with the Company, or any amounts
which might have been earned by the Executive in other employment had he sought
such other employment.
14. Notices. Any notice of Termination of the Executive's employment by the
Company or the Executive for any reason shall be upon no less than 15 days' and
no greater than 45 days' advance written notice to the other party. Any notices,
requests, demand and other communications provided for by this Agreement shall
be sufficient if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the Company or, in
the case of the Company, to the attention of the Secretary of the Company, at
its principal executive offices.
15. Non-Alienation. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law. Nothing in this paragraph shall limit the Executive's rights or powers
to dispose of his property by will or limit any rights or powers which his
executor or administrator would otherwise have. This Agreement shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If the Executive should die while any amount is still
payable to the Executive hereunder had the Executive continued to live, all such
amounts shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee, or if there is no such
designee, to the Executive's estate.
16. Governing Law. The provisions of this Agreement shall be construed in
accordance with the laws of the State of Illinois, without application of
conflict of laws provisions thereunder.
17. Amendment. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
18. Successors to the Company. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no succession had taken place.
19. Employment Status. Nothing herein contained shall be deemed to create
an employment agreement between the Company and the Executive, providing for the
employment of the Executive by the Company for any fixed period of time. The
Executive's employment with the Company is terminable at will by the Company or
the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 14, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Upon a
termination of the Executive's employment prior to the date of a Change in
Control, there shall be no further rights under this Agreement.
20. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
21. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which shall be deemed the original without reference to
the others.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name and on its behalf, all as of the day and
year first above written.
/S/ ANTHONY R. MANNO, JR.
_________________________________________
Anthony R. Manno, Jr.
SECURITY CAPITAL GROUP INCORPORATED
/S/ JEFFREY A. KLOPF
_________________________________________
Jeffrey A. Klopf
Senior Vice President and Secretary
Exhibit 10.6
CHANGE IN CONTROL AGREEMENT
This Agreement entered into as of the 18th day of May, 1999, by and between
Security Capital Group Incorporated, a Maryland corporation (the "Company"), and
Donald E. Suter (the "Executive").
WHEREAS, the Company wishes to assure itself of the continuity of the
Executive's services in the event of any actual change in control of the
Company; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. The "Term" of this Agreement shall commence on the
date hereof and shall continue through December 31, 2001; provided, however,
that on such date and on each December 31 thereafter, the Term of this Agreement
shall automatically be extended for one additional year unless, not later than
the preceding January 1 either party shall have given notice that such party
does not wish to extend the Term; and provided, further, that if a Change in
Control (as defined in paragraph 3 below) shall have occurred during the
original or any extended Term of this Agreement, the Term of this Agreement
shall continue for a period of twenty-four calendar months beyond the calendar
month in which such Change in Control occurs.
2. Employment After a Change in Control. If the Executive is in the employ
of the Company on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ for the period commencing on the date of
the Change in Control and ending on the last day of the Term of this Agreement.
During the period of employment described in the foregoing provisions of this
paragraph 2 (the "Employment Period"), the Executive shall hold such position
with the Company and exercise such authority and perform such executive duties
as are commensurate with the Executive's position, authority and duties
immediately prior to the Change in Control. The Executive agrees that during the
Employment Period the Executive shall devote full business time exclusively to
the executive duties described herein and perform such duties faithfully and
efficiently; provided, however, that nothing in this Agreement shall prevent the
Executive from voluntarily resigning from employment upon 60 days' written
notice to the Company under circumstances which do not constitute a Termination
(as defined below in paragraph 5).
3. Change in Control. For purposes of the Plan, a "Change in Control" means
the happening of any of the following:
a. the stockholders of the Company approve a definitive agreement to merge the
Company into or consolidate the Company with another entity, sell or
otherwise dispose of all or substantially all of its assets or adopt a plan
of liquidation, provided, however, that a Change in Control shall not be
deemed to have occurred by reason of a transaction, or a substantially
concurrent or otherwise related series of transactions, upon the completion
of which 50% or more of the beneficial ownership of the voting power of the
Company, the surviving corporation or corporation directly or indirectly
controlling the Company or the surviving corporation, as the case may be,
is held by the same persons (as defined below) (although not necessarily in
the same proportion) as held the beneficial ownership of the voting power
of the Company immediately prior to the transaction or the substantially
concurrent or otherwise related series of transactions, except that upon
the completion thereof, employees or employee benefit plans of the Company
may be a new holder of such beneficial ownership; provided, further, that a
transaction with an "Affiliate" of the Company (as defined in the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall not
be treated as a Change in Control; or
b. the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange
Act) of securities representing 50% or more of the combined voting power of
the Company is acquired, other than from the Company, by any "person" as
defined in Sections 13(d) and 14(d) of the Exchange Act (other than by an
Affiliate or any trustee or other fiduciary holding securities under an
employee benefit or other similar stock plan of the Company); or
c. at any time during any period of two consecutive years, individuals who at
the beginning of such period were members of the Board of Directors of the
Company cease for any reason to constitute at least a majority thereof
(unless the election, or the nomination for election by the Company's
stockholders, of each new Director was approved by a vote of at least
two-thirds of the Directors still in office at the time of such election or
nomination who were Directors at the beginning of such period).
4. Compensation During the Employment Period. During the Employment Period,
the Executive shall be compensated as follows:
a. the Executive shall receive an annual salary which is not less than his
annual salary immediately prior to the Employment Period and shall be
eligible to receive an increase in annual salary which is not materially
less favorable to the Executive than increases in salary granted by the
Company for executives with comparable duties;
b. the Executive shall be eligible to participate in short-term and long-term
cash-based incentive compensation plans which, in the aggregate, provide
bonus opportunities which are not materially less favorable to the
Executive than the greater of (i) the opportunities provided by the Company
for executives with comparable duties; and (ii) the opportunities provided
to the Executive under all such plans in which the Executive was
participating prior to the Employment Period;
c. the Executive shall be eligible to participate in stock option, performance
awards, restricted stock and other equity-based incentive compensation
plans on a basis not materially less favorable to the Executive than that
applicable (i) to the Executive immediately prior to the Employment Period
or (ii) to other executives of the Company with comparable duties; and
d. the Executive shall be eligible to receive employee benefits (including,
but not limited to, tax-qualified and nonqualified savings plan benefits,
medical insurance, disability income protection, life insurance coverage
and death benefits) and perquisites which are not materially less favorable
to the Executive than (i) the employee benefits and perquisites provided by
the Company to executives with comparable duties or (ii) the employee
benefits and perquisites to which the Executive would be entitled under the
Company's employee benefit plans and perquisites as in effect immediately
prior to the Employment Period.
5. Termination. For purposes of this Agreement, the term "Termination"
shall mean termination of the employment of the Executive during the Employment
Period (i) by the Company, for any reason other than death, Disability (as
defined below), or Cause (as described below), or (ii) by resignation of the
Executive upon the occurrence of one of the following events:
a. a significant change in the nature or scope of the Executive's authorities
or duties from those described in paragraph 2 above, a breach of any of the
subparagraphs of paragraph 4 above, or the breach by the Company of any
other provision of this Agreement;
b. the relocation of the Executive's office to a location more than fifty
miles from the location of the Executive's office immediately prior to the
Employment Period;
c. a reasonable determination by the Executive that, as a result of a Change
in Control and a change in circumstances thereafter significantly affecting
the nature and scope of Executive's authorities and duties from those
described in paragraph 2 above, the Executive is unable to exercise the
authorities, powers, functions or duties associated with the Executive's
position as contemplated by paragraph 2 above; or
d. the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform this Agreement as contemplated in
paragraph 18 below.
The date of the Executive's Termination under this paragraph 5 shall be the
date specified by the Executive or the Company, as the case may be, in a written
notice to the other party complying with the requirements of paragraph 14 below.
For purposes of this Agreement, the Executive shall be considered to have a
"Disability" during the period in which the Executive is unable, by reason of a
medically determinable physical or mental impairment, to engage in the material
and substantial duties of his regular occupation, which condition is expected to
be permanent. For purposes of this Agreement, the term "Cause" means, in the
reasonable judgment of the Board of Directors of the Company, (i) the willful
and continued failure by the Executive to substantially perform the Executive's
duties with the Company after written notification by the Company, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
6. Severance Payments. Subject to the provisions of paragraph 10 below, in
the event of a Termination described in paragraph 5 above, in lieu of the amount
otherwise payable under paragraph 4 above, the Executive shall continue to
receive medical insurance, disability income protection, life insurance coverage
and death benefits and perquisites in accordance with subparagraph 4(d) above
for a period of 24 months after the date of Termination, and shall be entitled
to a lump sum payment in cash no later than ten business days after the date of
Termination equal to the sum of:
a. the Executive's unpaid salary, accrued vacation pay and unreimbursed
business expenses through and including the date of Termination;
b. an amount equal to two times the Executive's annual salary rate in effect
immediately prior to the date of Termination;
c. an amount equal to two times the target bonus award for the Executive for
the year of Termination;
d. an amount equal to the assigned target bonus for the Executive for the year
of Termination prorated through the date of Termination.
7. Make-Whole Payments. Subject to the last three sentences of this
paragraph 7, if any payment or benefit to which the Executive is entitled,
whether under this Agreement or otherwise, in connection with a Change in
Control or the Executive's termination of employment (a "Payment") is subject to
any tax under section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"), or any similar federal or state law (an "Excise Tax"), the Company
shall pay to the Executive an additional amount (the "Make Whole-Amount") which
is equal to (i) the amount of the Excise Tax, plus (ii) the aggregate amount of
any interest, penalties, fines or additions to any tax which are imposed in
connection with the imposition of such Excise Tax, plus (iii) all income, excise
and other applicable taxes imposed on the Executive under the laws of any
Federal, state or local government or taxing authority by reason of the payments
required under clause (i) and clause (ii) and this clause (iii). Such Make
Whole-Amount will not be paid to the Executive if the Payment is less than 10
percent above the maximum amount that may be paid without incurring Excise Tax.
In the event that the Payment is greater than the maximum amount that may be
paid without incurring Excise Tax, but less than 10 percent greater than the
maximum amount, then the Payments shall be capped at the maximum amount that may
be paid without incurring Excise Tax. In such event, the cash severance payments
provided in paragraph 6 above and/or the outplacement services provided in
paragraph 8 below, at the Executive's election, shall be reduced to a level that
results in the total Payment being equal to the maximum amount that may be paid
without incurring Excise Tax.
a. For purposes of determining the Make-Whole Amount, the Executive shall be
deemed to be taxed at the highest marginal rate under all applicable local,
state, federal and foreign income tax laws for the year in which the
Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an
Excise Tax shall be paid by the Company coincident with the Payment with
respect to which such Excise Tax relates.
b. All calculations under this paragraph 7 shall be made initially by the
Company and the Company shall provide prompt written notice thereof to the
Executive to enable the Executive to timely file all applicable tax
returns. Upon request of the Executive, the Company shall provide the
Executive with sufficient tax and compensation data to enable the Executive
or his tax advisor to independently make the calculations described in
subparagraph (a) above and the Company shall reimburse the Executive for
reasonable fees and expenses incurred for any such verification.
c. If the Executive gives written notice to the Company of any objection to
the results of the Company's calculations within 60 days of the Executive's
receipt of written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent auditors of the
Company ("Tax Counsel"). The Company shall pay all reasonable fees and
expenses of such Tax Counsel. Pending such determination by Tax Counsel,
the Company shall pay the Executive the Make-Whole Amount as determined by
it in good faith. The Company shall pay the Executive any additional amount
determined by Tax Counsel to be due under this paragraph 7 (together with
interest thereon at a rate equal to 120% of the Federal short-term rate
determined under section 1274(d) of the Code) promptly after such
determination.
d. The determination by Tax Counsel shall be conclusive and binding upon all
parties unless the Internal Revenue Service, a court of competent
jurisdiction, or such other duly empowered governmental body or agency (a
"Tax Authority") determines that the Executive owes a greater or lesser
amount of Excise Tax with respect to any Payment than the amount determined
by Tax Counsel.
e. If a Taxing Authority makes a claim against the Executive which, if
successful, would require the Company to make a payment under this
paragraph 7, the Executive agrees to contest the claim, with counsel
reasonably satisfactory to the Company, on request of the Company subject
to the following conditions:
(i) The Executive shall notify the Company of any such claim within 10
days of becoming aware thereof. In the event that the Company desires the
claim to be contested, it shall promptly (but in no event more than 30 days
after the notice from the Executive or such shorter time as the Taxing
Authority may specify for responding to such claim) request the Executive
to contest the claim. The Executive shall not make any payment of any tax
which is the subject of the claim before the Executive has given the notice
or during the 30-day period thereafter unless the Executive receives
written instructions from the Company to make such payment together with an
advance of funds sufficient to make the requested payment plus any amounts
payable under this paragraph 7 determined as if such advance were an Excise
Tax, in which case the Executive will act promptly in accordance with such
instructions.
(ii) If the Company so requests, the Executive will contest the claim
by either paying the tax claimed and suing for a refund in the appropriate
court or contesting the claim in the United States Tax Court or other
appropriate court, as directed by the Company; provided, however, that any
request by the Company for the Executive to pay the tax shall be
accompanied by an advance from the Company to the Executive of funds
sufficient to make the requested payment plus any amounts payable under
this paragraph 7 determined as if such advance were an Excise Tax. If
directed by the Company in writing the Executive will take all action
necessary to compromise or settle the claim, but in no event will the
Executive compromise or settle the claim or cease to contest the claim
without the written consent of the Company; provided, however, that the
Executive may take any such action if the Executive waives in writing his
right to a payment under this paragraph 7 for any amounts payable in
connection with such claim. The Executive agrees to cooperate in good faith
with the Company in contesting the claim and to comply with any reasonable
request from the Company concerning the contest of the claim, including the
pursuit of administrative remedies, the appropriate forum for any judicial
proceedings, and the legal basis for contesting the claim. Upon request of
the Company, the Executive shall take appropriate appeals of any judgment
or decision that would require the Company to make a payment under this
paragraph 7. Provided that the Executive is in compliance with the
provisions of this section, the Company shall be liable for and indemnify
the Executive against any loss in connection with, and all costs and
expenses, including attorneys' fees, which may be incurred as a result of,
contesting the claim, and shall provide to the Executive within 30 days
after each written request therefore by the Executive cash advances or
reimbursement for all such costs and expenses actually incurred or
reasonably expected to be incurred by the Executive as a result of
contesting the claim.
f. Should a Tax Authority finally determine that an additional Excise Tax is
owed, then the Company shall pay an additional Make-Up Amount to the
Executive in a manner consistent with this paragraph 7 with respect to any
additional Excise Tax and any assessed interest, fines, or penalties. If
any Excise Tax as calculated by the Company or Tax Counsel, as the case may
be, is finally determined by a Tax Authority to exceed the amount required
to be paid under applicable law, then the Executive shall repay such excess
to the Company within 30 days of such determination; provided that such
repayment shall be reduced by the amount of any taxes paid by the Executive
on such excess which is not offset by the tax benefit attributable to the
repayment.
8. Outplacement Services. If the Executive's Termination occurs during the
Employment Period, at the election of the Executive, the Company shall provide
the Executive with outplacement service of an experienced firm selected by the
Company and acceptable to the Executive located not more than fifty miles from
the location of Executive's office immediately prior to the Employment Period,
provided that the cost of such services shall not exceed $20,000 and such
services shall not extend beyond 24 months from Executive's Termination.
9. Pooling of Interests Accounting Treatment. If the application of any
provision of this Agreement, or of the Agreement in its entirety, would preclude
the use of pooling of interests accounting treatment with respect to a
transaction for which such treatment otherwise is available and to be adopted by
the Company, this Agreement, upon the determination of the Board, shall be
modified as it applies to such transaction, to the minimum extent necessary to
prevent such impact.
10. Withholding. All payments to the Executive under this Agreement will be
subject to all applicable withholding of state and federal taxes.
11. Confidentiality, Non-Solicitation and Non-Competition. The Executive
agrees that:
a. Except as may be required by the lawful order of a court or agency of
competent jurisdiction, or except to the extent that the Executive has
express authorization from the Company, the Executive agrees to keep secret
and confidential indefinitely all non-public information concerning the
Company or any affiliate thereof which was acquired by or disclosed to the
Executive during the course of the Executive's employment with the Company
or any affiliate thereof, and not to disclose the same, either directly or
indirectly, to any other person, firm or business entity or to use it in
any way.
b. While the Executive is employed by the Company or any affiliate and for a
period of one year after the date of the Executive's Termination, the
Executive covenants and agrees that Executive will not, whether for
Executive or for any other person, business, partnership, association,
firm, company or corporation, initiate contact with, solicit, divert or
take away any of the customers (entities or individuals from which the
Company or any of its affiliates receives rents or payment for services) of
the Company or any affiliate thereof or employees of the Company or any
affiliate thereof in existence from time to time during Executive's
employment with the Company or any affiliate thereof and at the time of
such initiation, solicitation or diversion.
c. While the Executive is employed by the Company or any affiliate thereof,
the Executive covenants and agrees that Executive will not, directly or
indirectly, engage in, assist, perform services for, plan for, establish or
open, or have any financial interest (other than (i) ownership of 1% or
less of the outstanding stock of any corporation listed on the New York or
American Stock Exchange or included in the National Association of
Securities Dealers Automated Quotation System or (ii) ownership of
securities in any entity affiliated with the Company) in any person, firm,
corporation, or business entity (whether as an employee, officer, director
or consultant) that engages in an activity which is the same as, similar
to, or competitive with, the Company or any affiliate thereof.
12. Arbitration of All Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in Chicago, Illinois, in accordance with the laws of the State of Illinois, by
three arbitrators appointed by the parties. If the parties cannot agree on the
appointment of the arbitrators, one shall be appointed by the Company and one by
the Executive and the third shall be appointed by the first two arbitrators. If
the first two arbitrators cannot agree on the appointment of a third arbitrator,
then the third arbitrator shall be appointed by the Chief Judge of the United
States Court of Appeals for the Seventh Circuit. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of arbitrators which shall be as provided
in this paragraph 12. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel or incur other
costs and expenses in connection with enforcement of his rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his reasonable attorneys' fees and costs
and expenses in connection with enforcement of his rights (including the
enforcement of any arbitration award in court). Payments shall be made to the
Executive at the time such fees, costs and expenses are incurred. If, however,
the arbitrators shall determine that, under the circumstances, payment by the
Company of all or a part of any such fees and costs and expenses would be
unjust, the Executive shall repay such amounts to the Company in accordance with
the order of the arbitrators. Any award of the arbitrators shall include
interest at a rate or rates considered just under the circumstances by the
arbitrators.
13. Mitigation and Set-Off. The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise. The Company shall not be entitled to set off against
the amounts payable to the Executive under this Agreement any amounts owed to
the Company by the Executive, any amounts earned by the Executive in other
employment after termination of his employment with the Company, or any amounts
which might have been earned by the Executive in other employment had he sought
such other employment.
14. Notices. Any notice of Termination of the Executive's employment by the
Company or the Executive for any reason shall be upon no less than 15 days' and
no greater than 45 days' advance written notice to the other party. Any notices,
requests, demand and other communications provided for by this Agreement shall
be sufficient if in writing and if sent by registered or certified mail to the
Executive at the last address he has filed in writing with the Company or, in
the case of the Company, to the attention of the Secretary of the Company, at
its principal executive offices.
15. Non-Alienation. The Executive shall not have any right to pledge,
hypothecate, anticipate or in any way create a lien upon any amounts provided
under this Agreement; and no benefits payable hereunder shall be assignable in
anticipation of payment either by voluntary or involuntary acts, or by operation
of law. Nothing in this paragraph shall limit the Executive's rights or powers
to dispose of his property by will or limit any rights or powers which his
executor or administrator would otherwise have. This Agreement shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees, and legatees. If the Executive should die while any amount is still
payable to the Executive hereunder had the Executive continued to live, all such
amounts shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee, or if there is no such
designee, to the Executive's estate.
16. Governing Law. The provisions of this Agreement shall be construed in
accordance with the laws of the State of Illinois, without application of
conflict of laws provisions thereunder.
17. Amendment. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other person and,
so long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
18. Successors to the Company. This Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company. The
Company shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no succession had taken place.
19. Employment Status. Nothing herein contained shall be deemed to create
an employment agreement between the Company and the Executive, providing for the
employment of the Executive by the Company for any fixed period of time. The
Executive's employment with the Company is terminable at will by the Company or
the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 14, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Upon a
termination of the Executive's employment prior to the date of a Change in
Control, there shall be no further rights under this Agreement.
20. Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
21. Counterparts. This Agreement may be executed in two or more
counterparts, any one of which shall be deemed the original without reference to
the others.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed in its name and on its behalf, all as of the day and
year first above written.
/S/ DONALD E. SUTER
_________________________________________
Donald E. Suter
SECURITY CAPITAL GROUP INCORPORATED
/S/ JEFFREY A. KLOPF
_________________________________________
Jeffrey A. Klopf
Senior Vice President and Secretary
Exhibit 12.1
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------------- ------------------------------------------------------------------
1999 1998 1998 1997 1996 1995(a) 1994
----------- ----------- ------------ ----------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ (70,597) $ 61,321 $ 67,480 $ 38,241 $ (9,693) $ (21,274) $ 11,849
Add:
Interest Expense 101,333 54,038 82,203 104,434 117,224 103,804 53,789
----------- ----------- ------------ ----------- ----------- ----------- ---------
Earnings as Adjusted $ 30,736 $ 115,359 $ 149,683 $ 142,675 $ 107,531 $ 82,530 $ 65,638
=========== =========== ============ =========== =========== =========== =========
Fixed Charges:
Interest Expense $ 101,333 $ 54,038 $ 82,203 $ 104,434 $ 117,224 $ 103,804 $ 53,789
Capitalized Interest 7,603 21,211 26,703 69,883 11,448 4,404 3,184
----------- ----------- ------------ ----------- ----------- ----------- ---------
Total Fixed Charges $ 108,936 $ 75,249 $ 108,906 $ 174,317 $ 128,672 $ 108,208 $ 56,973
=========== =========== ============ =========== =========== =========== =========
Ratio of Earnings to Fixed Charges 0.3 1.5 1.4 0.8 0.8 0.8 1.2
=========== =========== ============ =========== =========== =========== =========
<FN>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
</FN>
</TABLE>
Exhibit 12.2
SECURITY CAPITAL GROUP INCORPORATED
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED SHARE DIVIDENDS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------- --------------------------------------------------------------------
1999 1998 1998 1997 1996 1995(a) 1994
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (loss) from Operations $ (70,597) $ 61,321 $ 67,480 $ 38,241 $ (9,693) $ (21,274) $ 11,849
Add:
Interest Expense 101,333 54,038 82,203 104,434 117,224 103,804 53,789
----------- ----------- ------------ ----------- ----------- ----------- -----------
Earnings as Adjusted $ 30,736 $ 115,359 $ 149,683 $ 142,675 $ 107,531 $ 82,530 $ 65,638
=========== =========== ============ =========== =========== =========== ===========
Combined Fixed Charges and
Preferred Share Dividends:
Interest Expense $ 101,333 $ 54,038 $ 82,203 $ 104,434 $ 117,224 $ 103,804 $ 53,789
Capitalized Interest 7,603 21,211 26,703 69,883 11,448 4,404 3,184
----------- ----------- ------------ ----------- ----------- ----------- -----------
108,936 75,249 108,906 174,317 128,672 108,208 56,973
Preferred Share Dividends(b)(c) 15,644 15,848(d) 22,315(d) 15,416 12,352 -- --
----------- ----------- ------------ ----------- ----------- ----------- -----------
Combined Fixed Charges and
Preferred Share Dividends $ 124,580 $ 91,097 $ 131,221 $ 189,733 $ 141,024 $ 108,208 $ 56,973
=========== =========== ============ =========== =========== =========== ===========
Ratio of Earnings to Combined Fixed
Charges and Preferred Share
Dividends 0.2 1.3 1.1 0.8 0.8 0.8 1.2
=========== =========== ============ =========== =========== =========== ===========
<FN>
(a) Excludes a one-time non-cash expense item ($158.4 million) incurred in
acquiring the Financial Services Division from a related party.
(b) The Preferred dividends have been increased to show a pretax basis.
(c) Security Capital had no preferred dividends prior to 1996.
(d) Excludes a one-time non-cash dividend of $19.8 million incurred in
conjunction with the exchange of Series A Preferred Shares for Series B
Preferred Shares.
</FN>
</TABLE>
Exhibit 15
November 11, 1999
Board of Directors and Shareholders
of Security Capital Group Incorporated:
We are aware that Security Capital Group Incorporated has incorporated by
reference in its Registration Statement Nos. 333-38521, 333-38523, 333-38525,
333-38527, 333-38531, 333-38533, 333-38537, 333-38539, 333-48167, 333-61395,
333-61401 and 333-64979 its Form 10-Q for the nine months ended September 30,
1999, which includes our report dated November 11, 1999 covering the unaudited
interim financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933 (the "Act"), that report is not considered a part of the
registration statements prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from the
Form 10-Q for the nine months ended September 30, 1999, and is qualified in its
entirety by reference to such financial statements.)
</LEGEND>
<CIK> 0000923687
<NAME> SECURITY CAPITAL GROUP INCORPORATED
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 98,208
<SECURITIES> 73,440
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,192,488
<DEPRECIATION> 62,112
<TOTAL-ASSETS> 4,095,230
<CURRENT-LIABILITIES> 0
<BONDS> 1,390,711
0
257,642
<COMMON> 568
<OTHER-SE> 2,014,418
<TOTAL-LIABILITY-AND-EQUITY> 4,095,230
<SALES> 0
<TOTAL-REVENUES> 296,119
<CGS> 0
<TOTAL-COSTS> 340,025
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,333
<INCOME-PRETAX> (145,239)
<INCOME-TAX> (19,662)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 16,002
<NET-INCOME> (134,296)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
