ITEM 1. BUSINESS.
FORMATION OF THE COMPANY
The Company is a self-managed, self-administered, fully-integrated real estate company which is engaged in the ownership, operation, marketing, management, leasing, expansion, development, redevelopment, acquisition and financing of regional malls and community and neighborhood centers. CBL & Associates Properties, Inc. (the "Company") was incorporated on July 13, 1993 under the laws of the State of Delaware to acquire an interest in substantially all of the real estate properties owned by CBL & Associates, Inc. and its affiliates ("CBL") and to provide a public vehicle for the expansion of CBL's shopping center business.
The Company operates through its two wholly owned subsidiaries, CBL Holdings I, Inc., a Delaware corporation ("CBL Holdings I"), and CBL Holdings II, Inc., a Delaware corporation ("CBL Holdings II"). By transfers dated April 1, 1997, the Company assigned its interests in CBL & Associates Limited Partnership, a Delaware limited partnership (the "Operating Partnership"), to CBL Holdings I and CBL Holdings II, which resulted in CBL Holdings I becoming the 2.8% sole general partner of the Operating Partnership and CBL Holdings II becoming a 69% limited partner of the Operating Partnership. The Company conducts substantially all of its business through the Operating Partnership. To comply with certain technical requirements of the Internal Revenue Code of 1986, as amended (the "Code") applicable to Real Estate Investment Trusts' ("REIT's"), the Operating Partnership carries out the Company's property management and development activities through CBL & Associates Management, Inc. (the "Management Company").
On November 3, 1993, the Company completed initial public offerings, inside and outside the United States (the "Offering"), of 15,400,000 shares of its common stock, par value $.01 per share (the "Common Stock"). Simultaneously with the completion of the Offering, CBL transferred to the Operating Partnership substantially all of CBL's interests in its real estate properties and its management and development operations in exchange for an aggregate 35.4% limited partner interest in the Operating Partnership. CBL also acquired an additional 4.9% limited partner interest in the Operating Partnership for a cash payment of $24.4 million. Each of the partnership interests in the Operating Partnership may, at the election of its respective holder, be exchanged for shares of Common Stock of the Company, subject to certain limitations imposed by the Code. Following the Offering, the Company owned a 59.7% general partner interest in the Operating Partnership.
The Offering and the application of proceeds therefrom, including the Operating Partnership's acquisition of certain property interests, and the contribution by CBL of property interests to the Operating Partnership, are referred to herein as the "Formation."
In December 1993, CBL exercised its right under the Operating Partnership's partnership agreement to exchange a 4.7% limited partner interest in the Operating Partnership for 1,221,744 shares of Common Stock.
In October 1994, the Operating Partnership exercised its option to acquire from CBL the former Phar-Mor space at Valley Crossing in Hickory, North Carolina for a value of $3,575,400. The Operating Partnership issued a .5377% limited partnership interest (190,688 share equivalents) to CBL in return for the former Phar-Mor space.
In September 1995, the Company completed a follow-on offering of 4,163,500 shares of its Common Stock at $20.625 per share. CBL purchased 150,000 of these shares. The net proceeds of $80.7 million were used to to repay variable rate indebtedness incurred in the Company's development and acquisition program.
In August 1996, the Company exercised its option to acquire from CBL a parcel of land for the recently constructed Just for Feet on the periphery of Hamilton Place Mall in Chattanooga, Tennessee for a value of $780,053. The Operating Partnership issued a .0798% limited partner interest (34,246 share equivalents) to CBL in return for the parcel.
In January 1997, the Company completed a follow-on offering of 3,000,000 shares of its Common Stock at $26.125 per share. CBL purchased 55,000 of those shares as part of the offering. The net proceeds of $74.3 million, were used to repay variable rate indebtedness incurred in the Company's development and acquisition program.
In March 1997, the Company purchased from CBL a parcel of land for additional parking for the expansion and addition of Dillard's to Twin Peaks Mall in Longmont, Colorado for a value of $59,994. The Operating Partnership issued a .0057% limited partner interest (2,424 share equivalents) to CBL in return for the parcel.
In June 1997, the Company purchased from CBL a 49% general partnership interest in Governor's Plaza in Clarksville, Tennessee for a value of $1,512,976. The Operating Partnership issued a .1349% limited partner interest (65,426 share equivalents) to CBL in return for the partnership interest.
After giving effect to the above transactions, CBL holds a 28.25% limited partner interest in the Operating Partnership, and the Company holds a 71.75% general partner interest in the Operating Partnership. In addition, CBL holds approximately 1.7 million of the outstanding shares of Common Stock for a total ownership share of 33.18%.
GENERAL
The Company owns interests in a portfolio of properties, consisting of 22 enclosed regional malls (the "Malls"), 12 associated centers (the "Associated Centers"), each of which is part of a regional shopping mall complex, and 81 independent community and neighborhood shopping centers (the "Community Centers"). Except for five Malls, one Associated Center and two Community Centers which were acquired from third parties, each of these properties was developed by CBL or the Company.
Additionally, the Company owns one Mall, one Associated Center, one power center and two neighborhood shopping centers currently under construction (the "Construction Properties"). The Company also owns options to acquire certain shopping center development sites (the "Development Properties").
The Company also holds mortgages (the "Mortgages") on community and neighborhood shopping centers owned by non-CBL affiliates. The Mortgages were granted in connection with sales by CBL of certain properties previously developed by CBL. The Company also owns an interest in a three-story office building in Chattanooga, Tennessee, a portion of which serves as the Company's headquarters (the "Office Building"). The Malls, Associated Centers, Community Centers, Construction Properties, Development Properties, Mortgages and Office Building are collectively referred to herein as the "Properties" and individually as a "Property".
The Company has also entered into standby purchase agreements with third-party developers for the construction, development and potential ownership of two community and neighborhood centers in Georgia and Texas (the "Co-Development Projects"). The developers have utilized these standby purchase agreements as additional security for their lenders to fund the construction of the Co-Development Projects. The standby purchase agreements for each of the Co-Development Projects require the Company to purchase the related Co-Development Project upon such Co-Development Project meeting certain completion requirements and rental levels. In return for its commitment to purchase a Co-Development Project pursuant to a standby purchase agreement, the Company receives a fee as well as a participation interest in each Co-Development Project. In addition to the standby purchase agreements, the Company has extended secured credit to two of these developers to cover pre-development costs.
The Company and the Operating Partnership generally own a 100% interest in the Properties. With two exceptions, where the Company and the Operating Partnership own less than a 100% interest in a Property, the Operating Partnership is the sole general partner, managing general partner or managing member of the property partnership or limited liability company which owns such Property (each, a "Property Partnership"). For one Mall and its Associated Center, affiliates of the Operating Partnership are non-managing general partners in the two Property Partnerships owning those Properties.
For a full description of the Properties, see Item 2
ITEM 2. PROPERTIES.
MALLS
Each of the Malls is an enclosed regional shopping complex. Each Mall generally has at least three Anchors which own or lease their stores and numerous non-anchor stores with GLA less than 30,000 square feet ("Mall Stores"), most of which are national or regional retailers, located along enclosed malls connecting the Anchors. At most of the Malls, additional freestanding restaurants and retail stores are located on the periphery of the Mall complex. These freestanding stores are, in most cases, owned by their occupants. Eight of the Mall complexes include one or more Associated Centers.
The total GLA of the 22 Malls is approximately 16.1 million square feet or an average GLA of approximately 733,000 square feet per Mall. Mall store GLA is 3,503,490 square feet at December 31, 1997. The Stabilized Mall occupancy was 91.7% at December 31, 1997 (94.6% including leased Anchor GLA). The Company wholly owns all but six of its Malls and manages all but one of them.
In the years ended December 31, 1995, 1996 and 1997, Mall revenues represented approximately 72.5%, 72.8% and 72.9%, respectively, of total revenues from the Company's Properties.
Mall stores in the Stabilized Malls ("Stabilized Mall Stores") occupancy increased from 89.0% at December 31, 1996, to 91.7% at December 31, 1997. St. Clair Square and Foothills Mall, which were acquired during 1996, were included in the Stabilized Mall category at December 31, 1996.
In the years ended December 31, 1995, 1996 and 1997, average Stabilized Mall Store sales per square foot were approximately $237, $240 and $251, respectively (computed using a monthly weighted average). Average Stabilized Mall Store sales per square foot increased by 4.7% for the year ended December 31, 1997 as compared to the year ended December 31, 1996.
Average base rent per square foot at the Mall Stores decreased from $19.64 at December 31, 1996 to $18.98 at December 31, 1997. Average base rents decreased in the Mall Stores during 1997 due to the fact that several higher quality, larger space tenants leased space during the year. The revenue increases from increases in occupancy have more than made up for any reduction in revenues from average base rents going forward.
Occupancy costs as a percentage of sales for tenants in the Stabilized Malls (excluding St. Clair Square and Foothills Mall from 1995 and 1996) were 12.3%, 11.7% and 11.2% for the years 1995, 1996, and 1997, respectively.
The Malls are generally located in middle-markets. Management believes that the Malls have strong competitive positions because they generally are the only or largest enclosed malls within their respective trade areas. Trade areas have been identified by management based upon a number of sources of information, including the location of other malls, publicly available population information, customer surveys, surveys of customer automobile license plates as well as ZIP codes and third-party market studies.
The two largest revenue-producing Malls are Hamilton Place and CoolSprings Galleria. Hamilton Place is located on a 187-acre site in Chattanooga, Tennessee and represented, as of December 31, 1997, 4.67% of the Properties' total GLA, 5.48% of total Mall Store GLA and 8.0% of total revenues from the Company's Properties. CoolSprings Galleria is located on a 148-acre site in metropolitan Nashville, Tennessee and represented, as of December 31, 1997, 4.55% of the Properties' total GLA, 5.59% of total Mall Store GLA and 8.0% of total revenues from the Company's Properties.
Seventeen of the twenty-two Malls have undergone an expansion or remodeling since their opening, and all but one of the Malls have either been built or renovated in the last 10 years or are in the process of being renovated, including the renovation of Hamilton Place and a redevelopment and expansion of Springdale Mall. The Company plans to renovate Governor's Square beginning later in 1998 and plans to expand Lakeshore Mall in 1999 by adding a fifth department store. Two of the Malls have available Anchor pads providing expansion potential totaling approximately 205,700 buildable square feet at December 31, 1997. Eighteen existing Anchors at ten Malls have aggregate expansion potential at their existing stores of approximately 473,000 buildable square feet.
With the exception of WestGate Mall, St. Clair Square and Springdale Mall which were acquired by the Company in March 1995, November, 1996 and September 1997, respectively, each of the Malls was developed by the Company. The land underlying the Malls is owned in fee in all cases, except for Walnut Square, WestGate Mall, St. Clair Square, and Bonita Lakes MAll which are each subject to long-term ground leases for all or a portion of the land underlying these Malls.
The table on the following page sets forth certain information for each of the Malls as of December 31, 1997 and includes Asheville Mall and Burnsville Center, which were acquired in January 1998.
( 1) Includes the total square footage of the Anchors (whether owned or leased by the Anchor) and Mall Stores. Does not include future expansion areas. ( 2) Does not include Anchors. ( 3) Totals represent weighted averages. ( 4) Includes tenants paying rent for executed leases as of December 31, 1997. ( 5) The Company is the lessee under several ground leases for approximately 53% of the underlying land. The leases extend through October 31, 2084, including six ten-year renewal options. Rental amount is $130,000 per year. In addition to base rent, the landlord receives 20% of the percentage rents collected. The Company has a right of first refusal to purchase the fee. ( 6) Originally opened in 1983 and controlling interest acquired by the Company in December 1996. ( 7) Originally opened in 1960, was acquired by the Company in September 1997, and is currently under going expansion and renovation. ( 8) Originally opened in 1972, last renovation completed in 1994, and acquired by the Company in January 1998. ( 9) Beall Bros. operating in Texas is unrelated to Beall's operating in Florida. (10) Originally opened in 1974, last renovation completed in 1994, and acquired by the Company in November, 1996. (11) The Company is the lessee under a ground lease for 20 acres which extends through January 31, 2073, including 14 five-year renewal options and one four-year renewal option. Rental amount is $40,000 per year. In addition to base rent, the landlord receives .25% of Dillard's sales in excess of $16,200,000. (12) Originally opened in 1977, last renovation completed in 1989, and acquired by the Company in January 1998. (13) The Company is the lessee under several ground leases which extend through March 14, 2078, including six ten-year renewal options and one eight-year renewal option. Rental amount is $149,450 per year. In addition to base rent, the landlord receives 20% of the percentage rents collected. The Company has a right of first refusal to purchase the fee. (14) The Company is the lessee under a ground rent for 116.4 acres which extends through June 30, 2035. The average annual base rent is $77,509. (15) Center opened in fourth quarter of 1997.
Anchors. Anchors are a critical factor in a Mall's success because the public's identification with a property typically focuses on its Anchors. Mall Anchors generally are department stores whose merchandise appeals to a broad range of shoppers. Although the Malls derive a smaller percentage of their operating income from Anchor stores than from Mall Stores, strong Anchors play an important part in generating customer traffic and making the Malls desirable locations for Mall Store tenants.
Anchors either own their stores together with the land under them, sometimes with adjacent parking areas, or enter into long-term leases with respect to their stores at rental rates that are significantly lower than the rents charged to tenants of Mall Stores. Anchors which lease their stores account for approximately 12.0% of the total revenues from the Company's Properties. Each Anchor which owns its own store has entered into a reciprocal easement agreement with the Company covering, among other things, operating covenants, reciprocal easements, property operations, initial construction and future expansions.
The Malls have a total of 103 Anchors. No Anchor Stores at any of the Malls were vacant as of December 31, 1997. The following table indicates all Mall Anchors and sets forth the aggregate number of square feet owned or leased by Anchors in the Malls as of March 15, 1998.
MALL ANCHOR SUMMARY INFORMATION
(1) Includes all square footage owned by or leased to such Anchor including tire, battery and automotive facilities and storage square footage. (2) Proffitt's occupies two Anchor spaces at Foothills Mall and three at Hamilton Place Mall.
Mall Stores. The Malls have approximately 1,624 Mall Stores. National or regional chains (excluding individually franchised stores) lease approximately 82.0% of the occupied Mall Store GLA. Although Mall Stores occupy only 33.7% of total Mall GLA, for the year ended December 31, 1997, the Malls derived approximately 87.6% of their revenue from Mall Stores.
Among the companies with the largest representation among Mall Stores are: The Limited, Inc. stores /Intimate Brands (The Limited, Limited Too, Express, Lerner New York, Lane Bryant, Structure, Victoria Secret, and Bath and Body Works) and Woolworth Corporation (Footlocker, Lady Footlocker, Kinney Shoes, Champs Sports Stores, Afterthoughts Boutique and San Francisco Music Box). As of December 31, 1997, The Limited's Stores, Inc.'s and
Intimate Brands' 77 stores accounted for 13.1% of total leased GLA and 8.0% of total revenues from the Company's Properties. No single Mall Store retailer accounted for more than 13.1% of total leased GLA and no single Mall Store retailer accounted for more than 8.0% of total revenues from the Company's Properties.
The following table sets forth certain information for executed renewal leases with current tenants or leases of previously occupied space with new tenants at the Malls during the year ended December 31, 1997.
The following table sets forth the total Mall Store GLA, the total square footage of leased Mall Store GLA, the percentage of Mall Store GLA leased, the average base rent per square foot of Mall Store GLA and average Mall Store sales per square foot as of the end of each of the past five years.
STABILIZED MALL STORE SUMMARY INFORMATION
- ------------------- (1) Mall Store occupancy includes tenants with executed leases who are paying rent. (2) Average base rent per square foot is based on Mall Store GLA occupied as of the last day of the indicated period for the preceding twelve- month period. (3) Calculated for the preceding twelve-month period.
Lease Expirations. The following table shows the scheduled lease expirations for the Malls (assuming that none of the tenants exercise renewal options) for the year ending December 31, 1998 and for the next nine years for the Mall Stores.
MALL LEASE EXPIRATION
(1) Total annualized base rent for all leases executed as of December 31, 1997 includes rent for space that is leased but not yet occupied but excludes (i) percentage rents, (ii) additional payments by tenants for common area maintenance, real estate taxes and other expense reimbursements and (iii) contractual rent escalations and cost of living increases due after December 31, 1997.
Cost of Occupancy. Management believes that in order to maximize the Company's Funds from Operations, tenants in Mall Stores must be able to operate profitably. A major factor contributing to tenant profitability is the tenant's cost of occupancy.
The following table summarizes for Stabilized Mall Store tenants the occupancy costs under their leases as a percentage of total Mall Store sales for the last three years.
(1) Excludes Malls not open for full reporting period. (2) Consistent with industry practice, sales are based on reports by retailers (excluding theaters) leasing Mall Store GLA and occupying space for the reporting period. Represents 100% of sales for these Malls. In certain cases, the Company and the Operating Partnership will own less than 100% interest in these Malls. (3) Represents real estate tax and common area maintenance charges.
At December 31, 1997, the Company had investments in three malls in joint ventures with third parties, all of which are reflected using the equity method of accounting. Condensed combined results of operations for the three unconsolidated affiliates are presented in the following table (dollars in thousands).
ASSOCIATED CENTERS
The twelve Associated Centers are each part of a Mall complex and generally have one or two Anchor tenants and various smaller tenants. Anchor tenants in these centers include such retailers as Books-A-Million, Target, Toys "R" Us, TJ Maxx, and Service Merchandise which are category dominant retailers that benefit from the regional draw of the Malls. The Associated Centers also increase the draw to the total Mall complex.
Total leasable GLA of the twelve Associated Centers is approximately 0.9 million square feet, including Anchors, or an average of approximately 76,000 square feet per center. As of December 31, 1997, 83.3% of total leasable GLA at the Associated Centers was occupied. This decrease in occupancy is due to the Company relocating a tenant to a Mall store and the retenanting of Westgate Crossing.
In the years ended December 31, 1995, 1996, and 1997, revenues from the Associated Centers represented approximately 3.5%, 3.3% and 3.8%, respectively, of total revenues from the Company's Properties.
In the years ended December 31, 1995, 1996 and 1997, average tenant sales per square foot at the Associated Centers were approximately $215, $207 and $189, respectively.
Average base rent per square foot at the Associated Centers increased from $8.59 at December 31, 1996 to $9.43 at December 31, 1997.
Each of the Associated Centers was developed by the Company, except for WestGate Crossing which was acquired in August 1997. All of the land underlying the Associated Centers is owned in fee.
Lease Expirations. The following table shows for the Associated Centers (assuming that none of the tenants exercise renewal options) the scheduled lease expirations for the year ending December 31, 1998 and for the next nine years.
ASSOCIATED CENTER LEASE EXPIRATION
(1) Total annualized base rent for all leases executed as of December 31, 1997 includes 12 months of rent for space that is newly leased but not yet occupied but excludes (i) percentage rents, (ii) additional payments by tenants for common area maintenance, real estate taxes and other expenses reimbursements and (iii) contractual rent escalations and cost of living increases due after December 31, 1997.
The following table sets forth certain information for executed renewal leases with current tenants or leases of previously occupied space with new tenants at the Associated Centers during the year ended December 31, 1997.
The following table sets forth certain information for each of the Associated Centers as of December 31, 1997:
(1) Includes the total square footage of the Anchors (whether owned or leased by the Anchor) and shops. Does not include future expansion areas. (2) Includes leasable Anchors. (3) Includes tenants with executed leases at December 31, 1997. Calculation includes leased Anchors. (4) Total GLA includes and Total Leasable GLA and Percentage GLA Leased exclude a vacant former Hills Department Store (80,000 square feet of GLA), which is owned by senior management of the Company. The Company has a ten-year option (with approximately six years remaining) to acquire this property for a fixed acquisition price of $3,800,000. Carmike Cinemas is subject to a ground lease (30,000 square feet of GLA). (5) Originally opened in 1985, and was acquired by the Company in June 1997. (6) Eckerd has closed its store but is continuing to meet its financial obligations under its lease. (7) Center was renovated during 1995. (8) Originally opened in 1985, and was acquired by the Company in August 1997, and is currently under going expansion and renovations. (9) Circuit City has closed its store but is continuing to meet its financial obligations under its lease.
COMMUNITY AND POWER CENTERS
In addition to Mall development, the Company's development activities focus on Community Centers, and power centers. Community Centers pose fewer development risks than Malls because they have shorter development timetables and lower up-front costs. Community Centers also afford the Company the opportunity to meet the needs of retailers for whom a "convenience" type of location is more appropriate and the needs of customers whose trade areas cannot support a regional mall. Power centers are larger than other Community Centers, with several large anchor stores which draw shoppers from a wider geographic area.
The Company's Community Center developments in the 1980's were generally anchored by supermarkets, and, in certain cases, by drug stores. Management's current focus has expanded to include the development of larger centers, anchored by mass merchandisers and department stores, while continuing the development of smaller centers anchored by supermarkets and drug stores. Recently completed Community Centers include centers in Richmond, Virginia; Fort Smith, Arkansas, two centers in Virginia Beach, Virginia, and Richmond, Virginia. Anchors at these new centers include, Regal Cinema, Wal*Mart, Goody's and Hannaford Bros. The Company sold, in a tax deffered exchange, one free-standing Lowe's in Joplin, Missouri in the last quarter of 1997.
Community Centers, other than power centers, range in size from 25,000 square feet to in excess of 286,000 square feet. Anchors in Community Centers generally lease their store space and occupy 60-85% of a center's GLA. The number of stores in a Community Center ranges up to sixteen with an average of seven stores per center.
The Company's two power centers, which were completed and opened in 1997, average 785,000 square feet and have a average of nine major anchor stores and additional small shop space ranging from 38,000 square feet to 136,000 square feet. The projects include expansion area for additional major retailers and additional space in second phases some of which are currently being constructed. These power centers are included in the Community Center's classification in this report.
Total GLA of the 81 Community Centers is approximately 8.4 million square feet, or an average of approximately 84,000 square feet per center. As of December 31, 1997, 97.6% of total leasable GLA at the Community Centers was leased.
In the years ended December 31, 1995, 1996 and 1997, revenues from the Community Centers represented approximately 21.2%, 21.4% and 21.2%, respectively, of total revenues from the Company's Properties.
Occupancy at the Community Centers increased from 97.2% at December 31, 1996 to 97.6% at December 31, 1997.
Average base rent per square foot at the Community Centers increased from $6.94 at December 31, 1996, to $7.42 at December 31, 1997.
As of December 31, 1997, Food Lion, a major regional supermarket operator with headquarters in North Carolina served as an anchor tenant in 37 of the Company's Community Centers and in one Associated Center. For the year ended December 31, 1997, Food Lion accounted for approximately 4.4% of the revenues generated by the Company's Properties.
With the exception of Suburban Plaza and Sutton Plaza, which were acquired by the Company in March, 1995 and January, 1997 respectively, each of the Community Centers was developed by the Company.
The following table summarizes the percentage of total leasable GLA leased, average base rent per square foot (excluding percentage rent) and tenant sales per square foot at the Community Centers for each of the last five years. COMMUNITY CENTER SUMMARY INFORMATION
(1) Percentage leased includes tenants who have executed leases and are paying rent as of the specified date. (2) Average base rent per square foot is based on GLA occupied as of the last day of the indicated period. (3) Consistent with industry practice, sales are based on reports by retailers (excluding theaters) leasing GLA and occupying space for the 12 months ending on the last day of the indicated period.
Lease Expirations. The following table shows the scheduled lease expirations for the Community Centers (assuming that none of the tenants exercise renewal options) for the year ending December 31, 1998, and for the next nine years.
COMMUNITY CENTER LEASE EXPIRATION
(1) Total annualized base rent for all leases executed as of December 31, 1997 includes 12 months of rent for space that is newly leased but not yet occupied but excludes (i) percentage rents, (ii) additional payments by tenants for common area maintenance, real estate taxes and other expense reimbursements and (iii) contractual rent escalations and cost of living increases for periods after December 31, 1997.
The following table sets forth certain information for executed renewal leases with current tenants or leases of previously occupied space with new tenants at the Community Centers during the year ended December 31, 1997.
The following table sets forth certain information for each of the Company's Community Centers at December 31, 1997.
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( 1) Includes the total square footage of the Anchors (whether owned by others or leased by the Anchor) and shops. Does not include future expansion areas. ( 2) Includes leasable Anchors. ( 3) Includes tenants paying rent on executed leases on December 31, 1997. Calculation includes leased Anchors. ( 4) Tenant has closed its store but is continuing to meet its financial obligation and is sub-leasing the space ( 5) Ground Lease term extends to 2051 including four 10-year extensions. Lessee has an option to purchase and a right of first refusal to purchase the fee. ( 6) Ground Lease term extends to 2049 including three 10-year extensions. Lessor receives a share of percentage rents during initial term and extensions. Lessee has an option to purchase and a right of first refusal to purchase the fee. ( 7) Represents a tenant which has closed its store but is continuing to meet its financial obligations under its lease. ( 8) Ground Lease term extends to 2055 including two 20-year extensions. During extension periods, lessor receives a share of percentage rents. Lessee has a right of first refusal to purchase the fee. Lessor receives a share of sale proceeds upon sale of the center to a third party. ( 9) Bi-Lo is closed but continues to meet its financial obligations under its lease. (10) Ground lease extends to 2097 including 12 five year options. Lessor receives no additional rent. (11) Ground lease for an out-parcel extends to 2046 including 4 ten year options. Lessor receives 20% of percentage rentals. (12) Ground Lease term extends to 2049 including three 10-year extensions. Lessor receives a share of percentage rents during initial term and extensions. Lessee has a right of first refusal to purchase the fee. (13) Represents a Food World which has closed its store but is continuing to meet its financial obligations under its lease and is sub-leasing the space. (14) Signal Hills Village is part of Signal Hills Crossing, a Property on which the Company holds a Mortgage. (15) Ground Lease term extends to 2084. Rent for entire term has been prepaid. Lessee has an option to purchase the fee under certain circumstances. (16) Ground Lease term extends to 2055 including one 20-year extension. Commencing in 2005, rental will be the greater of base rent or a share of the revenue from the center. Lessee has a right of first refusal to purchase the fee. (17) Ground Lease term extends to 2048 including three 10-year extensions. Lessor receives a share of percentage rents during initial term and extensions. Lessee has a right of first refusal to purchase the fee. (18) Represents a space lease for this center. Lease term expires in 1999 with one 10-year extension option available. (19) Sutton Place opened in 1972 and was acquired by the Company in January, 1997. (20) Quality Stores has an option to purchase its 56,850 square foot store commencing in 1996 for a price based upon capitalizing minimum annual rent being paid at the time of exercise at a rate of 8.33%. (21) Wal*Mart who owns their one store has closed and has entered into a lease commitment with Sear's to occupy the space.
MORTGAGES
The Company owns certain Mortgages which were granted prior to the Offering in connection with sales by CBL of properties which it had previously developed.
The Company also holds fee mortgages on six community centers, which mortgages had, as of December 31, 1997, an aggregate outstanding principal of $7.9 million. Such mortgages entitle the Company to receive substantially all of such properties' current cash flow in the form of periodic debt service payments. The encumbered properties all opened between 1981 and 1984 and have no Anchor vacancies.
In the years ended December 31, 1995, 1996, and 1997, revenues from the Mortgages represented approximately 2.2%, 2.02%, and 0.7%, respectively, of total revenues from the Company's Properties. During 1997, a large proportion of the balances on two mortgages were repaid from the proceeds of institutional debt financing. The remaining balance on a second and third mortgage is to be repaid from the remaining cash flow after debt service. The Company's acquisition of a property at the end of 1996 on which the Company had a mortgage reduced income from mortgages in 1997.
The following table sets forth certain additional information regarding the Mortgages as of December 31, 1997.
(1) Includes Anchors. (2) Includes all leases executed on or before December 31, 1997. Leased GLA includes non-Anchor GLA and leased Anchor GLA. (3) The mortgage is on a month-to-month extension pending execution of extension agreement.
OFFICE BUILDING
The Company owns a 95% interest in a 49,082 square foot office building in Chattanooga, Tennessee in which the Company's headquarters are located. The Company occupies 27,088 square feet or 55% of the total square footage of the Office Building. The Office Building is 100% occupied.
TOP 25 TENANTS
The following table sets forth the Company's top 25 tenants based upon a percentage of total revenues from the Company's Properties in 1997.
MORTGAGE DEBT AND RATIO TO TOTAL MARKET CAPITALIZATION
As of December 31, 1997, the Operating Partnership's proportionate share of indebtedness of all Properties (whether or not consolidated for financial statement reporting purposes, including the Construction Properties) was approximately $761.4 million. The Company's total market capitalization (the aggregate market value of the Company's outstanding shares of Common Stock, assuming the full exchange of the limited partnership interests in the Operating Partnership for Common Stock, plus the $761.4 million total debt of the Operating Partnership) as of December 31, 1997 was $1.6 billion. Accordingly, the Company's debt to total market capitalization ratio as of December 31, 1997 was 47.9%. The debt to total market capitalization ratio, which is based upon the Company's proportionate share of consolidated and unconsolidated indebtedness and market values of equity, differs from debt-to-book capitalization ratios, which are based upon consolidated indebtedness and book values.
The following table sets forth certain information regarding the mortgages and secured lines of credit encumbering the Properties.
MORTGAGE DEBT (Dollars in thousands; numbers may not add due to rounding)
MORTGAGE LOANS OUTSTANDING IN WHOLE OR IN PART AT DECEMBER 31, 1997
(1) The amount listed includes 100% of the loan amount even though the Company and the Operating Partnership may own less than 100% of the property. (2) Interest has been computed by multiplying the annual interest rate by the outstanding principal balance as of December 31, 1997. (3) Unless otherwise noted, loans are prepayable at any time. (4) A replacement loan of $51 million with a two year term at 90 basis points over LIBOR closed in February 1998. (5) Prepayment premium is greater of 1% or yield maintenance for any prepayment prior to January, 1998; thereafter, the prepayment premium is 5%, decreasing by .5% per year to a minimum of 3%; there is no prepayment premium after July 15, 2002. (6) Prepayment premium is the greater of 1% or yield maintenance after October 1, 2000. (7) Prepayment premium is based on yield maintenance (not less than 1%) for any prepayment prior to January, 1997; thereafter, the prepayment premium is 5%, decreasing by 1% per year to a minimum of 1%; there is no prepayment premium during the last 120 days of the loan term. (8) Prepayment premium is based on the greater of yield maintenance or 2%. (9) Prepayment premium is the greater of 1% or yield maintenance. (10) Prepayment premium is based on yield maintenance; there is no prepayment premium after October 1, 2001. (11) Prepayment premium is the greater of 1% or yield maintenance. (12) This loan can be extended for 2 one year periods, the extension fee is 1/4 point for each extension. (13) Interest is floating at 1% over prime priced at December 31, 1997. (14) The interest rate is floating at 150 Basis points over LIBOR. Loan may be extended for 2 years with 90 days written notice prior to maturity date. Extension fee equal to 1/4% of the outstanding balance. (15) Prepayment premium is the greater of 1% or yield maintenance. (16) The loan is secured by a first mortgage lien on the land and improvements comprising the Goody's anchor store and no other property. (17) Prepayment premium is the greater of 1% or yield maintenance; there is no prepayment premium after November 1, 2007. (18) Interest is floating at 11/2% over prime priced at December 31, 1997. The maturity date is 90 days after notice. (19) Loan is closed to prepayment for the term. Lender shall adjust the interest rate every 5th year of the loan. If borrower does not except the new rate loan may be prepaid at that time without prepayment penalty. (20) Prepayment penalty is based on yield maintenance. (21) Prepayment premium is the greater of 1% or yield maintenance; there is no prepayment premium during the last 120 days of the loan term. (22) Prepayment premium is the greater of 1% or yield maintenance; there is no prepayment premium after November 1, 2003. (23) Prepayment premium is 5%, decreasing by 1% per year to a minimum of 2% there is no prepayment premium during the last 120 days of the loan term. (24) Lender has option to accelerate loan between March 1, 2001 and February 28, 2002; March 1, 2006 and February 28, 2007; and March 1, 2011 and February 28, 2012. (25) Prepayment premium is 7%, decreasing by 1% per year to a minimum of 3%. (26) Loan may not be prepaid. (27) Lender may accelerate the loan after September, 2006 upon expiration of the primary term of the lease of either Food Lion or Eckerd, unless both leases have been extended beyond January 1, 2010. (28) Lender may accelerate loan on July 1, 2007 unless Food Lion exercises an extension option. (29) Prepayment premium of 7% decreasing by 1% per year to a minimum of 2%; there is no prepayment premium during the last six months of the loan term. (30) Prepayment premium is 5%, decreasing 1% per year to a minimum of 1%; there is no prepayment premium during the last two years of the loan term. (31) Prepayment premium is 5% from July 1, 2000 to June 30, 2001; thereafter decreasing by 1% per year to a minimum of 2%; there is no prepayment premium after May 1, 2010. (32) Prepayment premium is the greater of 10% or 1/12 of the annual yield difference before Oct-2014. Thereafter the prepayment premium is 1%. (33) Loan may be prepaid after 9 years. The prepayment premium is the greater of 1% or yield maintenance.
(34) Lender may accelerate loan after January 1, 2008 unless Food Lion exercises an extension option beyond January 1, 2008. (35) Prepayment premium is the greater of 2% or yield maintenance before October, 1998, afterwards it is the greater of 1% or yield maintenance. (36) Prepayment premium is based on yield maintenance; there is no loan prepayment premium during the last 120 days of the loan term. (37) Prepayment premium is the greater of 1% or yield maintenance; there is no loan prepayment premium during the last three months of the loan term. (38) Prepayment premium is 5% from August 1, 2000 to July 30, 2001; thereafter decreasing by 1% per year to a minimum of 2%; there is no prepayment premium after May 1, 2010. (39) The note is secured by rent payable by the Food Lion Anchor store. (40) Prepayment premium is 5%, decreasing by 1% per year to a minimum of 2%. There is no loan prepayment premium during the last 90 days of the loan term. (41) Interest rates on the credit lines are at various spreads over LIBOR whose weighted average interest rate is 6.882% with various maturities through 1999. (42) Represents non-recourse indebtedness on Properties and reflects the less than 100% ownership of the Company and the Operating Partnership with respect to certain Properties subject to such indebtedness.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Operating Partnership are not currently involved in any material litigation nor, to management's knowledge, is any material litigation currently threatened against the Company, the Operating Partnership, the Property Partnerships or the Properties, other than litigation arising in the ordinary course of business, most of which is expected to be covered under liability insurance policies held by the Company or the Operating Partnership.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Market Information
The principal United States market in which the Common Stock is traded is the New York Stock Exchange.
The following table sets forth the high and low sales prices for the Common Stock for each quarter of the Company's two most recent fiscal years.
(b) Holders The approximate number of shareholders of record of the Common Stock was 370 as of March 20, 1998.
(c) Dividends
The following table sets forth the frequency and amounts of dividends declared and paid for each quarter of the Company's two most recent fiscal years.
Future dividend distributions are subject to the Company's actual results of operations, economic conditions and such other factors as the Board of Directors of the Company deems relevant. The Company's actual results of operations will be affected by a number of factors, including the revenues received from the Properties, the operating expenses of the Company, the Operating Partnership and the Property Partnerships, interest expense, the ability of the anchors and tenants at the Properties to meet their obligations and unanticipated capital expenditures.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial data of the Company, which should be read in conjunction with the financial statements and notes thereto (IN THOUSANDS, EXCEPT PER SHARE DATA).
(1) Represents the historical combined operations and combined financial position of CBL Properties, the predecessor entity. On November 3, 1993, the Company completed an initial public offering. (2) The dividend of $.31 declared in 1993 represents an annualized divided of $1.50 paid for the period November 3, 1993 through December 31, 1993. (3) Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for the definition of FFO. FFO does not represent cash flow from operations as defined by generally accepted accounting principles (GAAP) and is not necessarily indicative of the cash available to fund all cash requirements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the financial condition and results of operations should be read in conjunction with CBL & Associates Properties, Inc. Consolidated Financial Statements and Notes thereto.
Information included herein may contain "forward-looking statements" within the meaning of the federal securities laws. Such statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ materially from the events and results discussed in the forward-looking statements. We direct you to the Company's other filings with the Securities and Exchange Commission, including without limitation the Company's discussion of such risks and uncertainties elsewhere in this Annual Report on Form 10-K.
GENERAL BACKGROUND
The Company is the 100% owner of two qualified REIT subsidiaries, CBL Holdings I and CBL Holdings II, which are the sole general partner and majority owner, respectively, of the Operating Partnership. As a result, the CBL & Associates Properties, Inc. Consolidated Financial Statements and Notes thereto reflect the consolidated financial results of the Operating Partnership, which includes at December 31, 1997, the operations of a portfolio of properties consisting of seventeen Malls, eleven Associated Centers, eighty-one Community Centers, an Office Building, joint venture investments in three Malls and one Associated Center, and income from six Mortgages. The Operating Partnership currently has under construction one Mall, one Associated Center, one power center and two Community Centers and owns options to acquire certain shopping center development sites. The consolidated financial statements also include the results of the Management Company.
The Company classifies its regional malls into two categories - Stabilized Malls and New Malls. The New Mall category is presently comprised of WestGate Mall in Spartanburg, South Carolina, which was renovated and expanded and reopened in October 1996; Turtle Creek Mall in Hattiesburg, Mississippi which opened partially in October 1994 and the remainder in March 1995; Oak Hollow Mall in High Point, North Carolina which opened in August 1995; Springdale Mall in Mobile, Alabama which was acquired in September 1997 and is being redeveloped and retenanted; and Bonita Lakes Mall in Meridian, Mississippi which opened in October 1997.
On January 15, 1997, the Company completed a spot offering of 3,000,000 shares of common stock at $26.125. Management of the Company purchased 55,000 of those shares. The net proceeds of $74.3 million, after underwriters' discount, were used to repay variable rate indebtedness incurred in the development and acquisition program.
On January 2, 1998, the Company purchased the 823,916 square foot Asheville Mall in Asheville, North Carolina for $65 million, which was funded by a $48.9 million acquisition loan with the balance funded from the Company's credit lines. On January 30, 1998 the Company, purchased the 1,078,568 square foot Burnsville Center
in Burnsville (Minneapolis), Minnesota for $81 million which was funded by a $60.8 million acquisition loan with the balance funded from the Company's credit lines.
SALES Mall store sales, for those tenants who have reported, in the fifteen Stabilized Malls in the Company's portfolio, increased by 4.7% on a comparable per square foot basis as shown below:
Year Ended December 31, ------------------------- 1997 1996 -------- -------- Sales per square foot $251.73 $240.45
Total sales volume in the mall portfolio, including New Malls, increased 21.6% to $875.1 million in 1997 from $719.5 million in 1996.
Occupancy costs as a percentage of sales for the years ended December 31, 1997, 1996 and 1995 for the stabilized malls (excluding St. Clair Square and Foothills Mall from 1996 and 1995) were 11.2%, 11.7% and 12.3%, respectively. The decrease in occupancy costs as a percentage of sales from 1996 to 1997 was due to both the Company's policy of cost containment and increasing sales.
OCCUPANCY Occupancy remained stable for the Company's overall portfolio with a breakdown by asset category as follows:
LEASE ROLLOVERS On spaces previously occupied, the Company achieved the following results from rollover leasing for the year ended December 31, 1997 over and above the base and percentage rent being paid by the previous tenant:
(1) - Rental achieved for spaces previously occupied at the end of the lease including percentage rent. (2) - Average base rent over the term of the lease.
In 1997 and 1996, respectively, revenues from the Malls represented 72.9% and 72.8% of total revenues from the properties; revenues from Associated Centers represented 3.8% and 3.3%, respectively; revenues from Community Centers represented 21.2% and 21.4%, respectively; and revenues from Mortgages and the Office Building represented 2.1% and 2.5%, respectively. Accordingly, revenues and results of operations are disproportionately impacted by the Malls' achievements.
The Company's business is somewhat seasonal in nature with tenant sales achieving the highest levels during the fourth quarter because of the holiday season. The Malls earn most of their "temporary" rents (rents from short- term tenants) during the holiday period. Thus, occupancy levels and revenue production are generally the highest in the fourth quarter of each year. Results of operations realized in any one quarter may not be indicative of the results likely to be experienced over the course of the entire year.
COMPARISON OF RESULTS OF OPERATIONS FOR 1997 TO THE RESULTS OF OPERATIONS FOR 1996
Total revenues in 1997 increased by $30.8 million, or 21.0%, to $177.6 million as compared to $146.8 million in 1996. Of this increase, minimum rents increased by $22.4 million, or 24.0%, to $115.6 million as compared to $93.2 million in 1996, percentage rents increased by $1.0 million, or 37.0%, to $3.7 million as compared to $2.7 million in 1996, other rents increased by $0.1 million, or 5.6%, to $1.9 million as compared to $1.8 million in 1996, and tenant reimbursements increased by $8.9 million, or 21.0%, to $51.3 million as compared to $42.4 million in 1996.
Approximately $7.6 million of the increase in revenues resulted from a full year of operations at the one Mall and three new Community Centers opened during 1996 and $11.0 million from a full year of operations from St. Clair Square in Fairview Heights, Illinois. Approximately $10.2 million of the increase in revenues resulted from the nine new Community Centers and one Associated Center opened and the one Mall, one Associated Center and one Community Center acquired during 1997 offset by $1.9 million of revenues no longer received from five Community Centers sold in 1996. Improved occupancies and operations, expansions to existing properties, and increased rents in the Company's operating portfolio generated approximately $3.9 million of the increased revenues with Stabilized Malls contributing approximately $3.1 million and the Associated Center and Community Center portfolio contributing $0.8 million in increased revenues.
Management, development and leasing fees were $2.4 million in both 1997 and 1996. Managed properties continue to provide the majority of this revenue augmented by an increase in development fees. Interest and other
income decreased by $1.6 million to $2.7 million in 1997 from $4.3 million in 1996. This decrease was primarily due to the acquisition of a mortgaged property at the end of 1996 and the resulting elimination of interest income from the property.
Property operating expenses, including real estate taxes and maintenance and repairs, increased in 1997 by $10.9 million, or 24.3%, to $55.7 million as compared to $44.8 million in 1996. This increase is primarily the result of the opening of the thirteen new Properties over the past twenty four months and the acquisition of four Properties. The Company's cost recovery ratio decreased to 92.2% in 1997 as compared to 94.7% in 1996 primarily due the addition of properties with non-recoverable ground rent.
Depreciation and amortization increased in 1997 by $6.9 million, or 27.2%, to $32.3 million as compared to $25.4 million in 1996. This increase resulted primarily from depreciation and amortization on the thirteen new Properties opened and the acquisition of four Properties over the past twenty four months.
Interest expense increased in 1997 by $6.1 million or, 19.2%, to $37.8 million as compared to $31.7 million in 1996. This increase is primarily due to increased interest expense on the thirteen new Properties opened and the acquisition of four Properties over the past twenty four months offset by the reduction of variable rate debt with proceeds from the Company's follow-on offering in January 1997.
General and administrative expense was $9.0 million in 1997 as compared to $8.5 million in 1996. This increase was primarily due to increases in reserves for state tax expense and general increases in overhead.
Other expense was $0.3 million in 1997 and $0.6 million in 1996. These amounts represent the write-off of development projects which the Company has elected not to pursue.
Gain on sales of real estate assets was $6.0 million in 1997 as compared to $13.6 million in 1996. The majority of these gains in 1997 are from outparcel and pad sales at the Community Centers under development: Cortlandt Towne Center in Cortlandt, New York, Salem Crossing in Virginia Beach, Virginia and Springhurst Towne Center in Louisville, Kentucky. The gain on sales in 1997 also includes a $0.7 million gain on the sale of one completed Community Center. The majority of gain on sales in 1996 were from sales of five completed Community Centers for $7.6 million. Most of the remaining $6.0 million of outparcel sales in 1996 were in connection with the development of Springhurst Towne Center in Louisville, Kentucky and Massard Crossing in Ft. Smith, Arkansas.
The extraordinary loss in 1997 of $1.1 million resulted from the extinguishment of debt on a number of properties, the largest of which was Hamilton Place Mall in Chattanooga, Tennessee. The reduction in the interest rate on the refinanced debt on Hamilton Place was 2.25% per annum.
COMPARISON OF RESULTS OF OPERATIONS FOR 1996 TO THE RESULTS OF OPERATIONS FOR 1995
Total revenues in 1996 increased by $15.1 million, or 11.4%, to $146.8 million as compared to $131.7 million in 1995. Of this increase, minimum rents increased by $10.9 million, or 13.2%, to $93.2 million as compared to $82.3 million in 1995, percentage rents decreased by $0.1 million, or 3.1%, to $2.7 million as compared to $2.8 million in 1995, other rents increased by $0.3 million, or 16.6%, to $1.8 million as compared to $1.5 million in 1995, tenant reimbursements increased by $4.0 million, or 10.6%, to $42.4 million as compared to $38.4 million in 1995.
Approximately $8.2 million of the increase in revenues resulted from a full year of operations at the five Community Centers opened during 1995 and a full year of operations for Phase II of Turtle Creek Mall in Hattiesburg, Mississippi. The Mall and one Community Center the Company acquired on March 31, 1995 contributed
approximately $2.0 million of new revenues in 1996. The four Community Centers and one Mall opened during 1996 contributed approximately $0.7 million of new revenues during 1996. Those Properties are as follows: (i) 101,000-square-foot free-standing Lowe's in Adrian, Michigan, opened June 1996; (ii) 105,000-square-foot Devonshire Place in Cary, North Carolina, opened September 1996; (iii) 60,000-square-foot LaGrange Commons in LaGrange, New York, opened November 1996; (iv) 119,000-square- foot Kingston Overlook in Knoxville, Tennessee, opened November 1996 and (v) 1,100,000-square-foot WestGate Mall in Spartanburg, South Carolina, reopened October 1996.
St. Clair Square in Fairview Heights, Illinois, the Mall acquired on November 25, 1996, contributed $1.3 million of new revenues in 1996. Improved occupancies and operations, and increased rents in the Company's operating portfolio generated approximately $2.9 million of the new revenues with Stabilized Malls contributing approximately $1.8 million and the Associated Center and Community Center portfolio contributing $1.1 million in increased revenues.
Management, leasing and development fees decreased $0.1 million to $2.4 million in 1996 from $2.5 million in 1995. This decrease was primarily due to the curtailment of development fees earned in 1995 from Hannaford Bros. offset by the increase from a management contract for Ogden City Mall in Ogden, Utah and increased management and leasing fees from Madison Square Mall in Huntsville, Alabama, which the Company owns in a joint venture. Interest and other income increased by $0.1 million to $4.3 million in 1996 from $4.2 million in 1995.
Property operating expenses, including real estate taxes and maintenance and repairs, increased in 1996 by $4.1 million, or 10.0%, to $44.8 million as compared to $40.7 million in 1995. This increase is primarily the result of the opening of the nine new Community Centers and one Mall over the past twenty four months, the acquisition of the three Properties, and increases in maintenance and security in the Company's operating portfolio. The Company's cost recovery ratio increased slightly to approximately 94.7% in 1996 as compared to 94.3% in 1995.
Depreciation and amortization increased in 1996 by $2.6 million, or 11.4%, to $25.4 million as compared to $22.8 million in 1995. This increase resulted primarily from depreciation and amortization on the nine new Community Centers and one Mall opened and the acquisition of three Properties over the past twenty four months.
Interest expense decreased in 1996 by $0.3 million, or 0.8%, to $31.7 million as compared to $32.0 million in 1995. This decrease is primarily due to the conversion of variable rate debt to permanent rate debt, the reduction of variable rate debt with proceeds from the Company's follow-on offering in September 1995, and lower interest rates on variable rate debt offset by increased interest expense on the nine new Community Centers and one Mall opened and the acquisition of three Properties over the past twenty four months.
General and administrative expense was $8.5 million in 1996 as compared to $8.0 million in 1995. This increase was primarily due to increases in reserves for state tax expense and for payroll in management and leasing.
Other expense was $0.6 million in 1996 and 1995. These amounts represent the write-off of development projects which the Company has elected not to pursue.
Gain on sales of real estate assets was $13.6 million in 1996 as compared to $2.2 million in 1995. The majority of these gains were from sales of five completed Community Centers for $7.6 million. These Community Centers consist of: (i) Lowe's Plaza in Adrian, Michigan; (ii) Lowe's in Benton Harbor, Michigan; (iii) Hannaford Bros. in Richmond, Virginia; (iv) Chester Plaza in Chester, Virginia; and (v) Lakeshore Crossing in Gainesville, Georgia. Most of the remaining $6.0 million of outparcel sales in 1996 were in connection with the development of Springhurst Towne Center in Louisville, Kentucky and Massard Crossing in Fort Smith, Arkansas.
The extraordinary loss in 1996 of $0.8 million resulted from the Company's share of the early extinguishment of debt from its joint venture in Governor's Square in Clarksville, Tennessee. The reduction in the interest rate on the refinanced debt was 1.4% per annum.
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of the Company's liquidity and capital resources have historically been for property development, expansion and renovation programs, and debt repayment. To maintain its qualification as a REIT under the Internal Revenue Code, the Company is required to distribute to its shareholders at least 95% of its "Real Estate Investment Trust Taxable Income" as defined in the Code.
As of February 28, 1998, the Company had $12.7 million available in unfunded construction loans to be used for completion of the construction projects and replenishment of working capital previously used for construction. Additionally, as of February 28, 1998, the Company had obtained revolving credit lines and term loans totaling $187.5 million of which $36.1 million was available. Also, as a publicly traded company, the Company has access to capital through both the public equity and debt markets. The Company has filed a shelf registration statement authorizing shares of the Company's preferred stock, common stock and warrants to purchase shares of the Company's Common Stock with an aggregate public offering price of up to $350 million. The Company anticipates that the combination of these sources will, for the foreseeable future, provide adequate liquidity to enable it to continue its capital programs substantially as in the past and make distributions to its shareholders in accordance with the Code's requirements applicable to real estate investment trusts.
Management expects to refinance the majority of the mortgage notes payable maturing over the next five years with replacement loans.
The Company's current capital structure includes property specific mortgages, which are generally non-recourse, revolving lines of credit, common stock and a minority interest in the Operating Partnership. The minority interest in the Operating Partnership represents the 28.3% ownership interest in the Operating Partnership held by the Company's executive and senior officers and certain other persons which may be exchanged for approximately 9.5 million shares of Common Stock. Additionally, Company executive officers and directors own approximately 1.7 million shares of the outstanding common stock of the Company, for a combined total interest in the Operating Partnership of approximately 33.2%. Assuming the exchange of all limited partnership interests in the Operating Partnership for common stock, there would be outstanding approximately 33.5 million shares of Common Stock with a market value of approximately $828.0 million at December 31, 1997 (based on the closing price of $24.688 per share on December 31, 1997). The ownership interests in the Operating Partnership of the executive officers and directors of the Company and their affiliates had a market value of approximately $274.7 million at December 31, 1997.
Mortgage debt consists of debt on certain consolidated properties as well as on three properties in which the Company owns a non-controlling interest accounted for under the equity method of accounting. At December 31, 1997, the Company's share of funded mortgage debt on its consolidated properties adjusted for minority investors' interests in seven properties was $718.7 million and its pro rata share of mortgage debt on unconsolidated properties (accounted for under the equity method) was $42.7 million for total debt obligations of $761.4 million with a weighted average interest rate of 7.6%. Variable rate debt accounted for $349.7 million with a weighted average interest rate of 7.0%. Variable rate debt accounted for approximately 45.9% of the Company's total debt and 22.0% of its total capitalization. Of this variable rate debt, $159.5 million is related to construction projects. Periodically, the Company enters into interest rate cap and swap agreements to reduce interest rate risks on variable rate debt. The
Company has entered into interest rate cap and swap agreements for $155.2 million at year end and an additional $146 million in swaps in 1998 on the variable rate debt associated with operating properties. The Company's current exposure to interest rate fluctuations which could impact funds from operations is effectively eliminated after taking into account interest rate cap and swap agreements.
In April 1995, the Company executed a three-year interest rate swap agreement with First Union National Bank on $5.5 million of debt on its shopping center in Benton Charter Township, Michigan. This swap agreement effectively fixes the interest rate on the $5.5 million of debt at 8.5%. In June 1995, the Company executed a $50.0 million interest rate swap agreement with NationsBank N.A. for a three-year period whish has the effect of fixing $50 million of LIBOR-based variable rate debt at a LIBOR rate no greater than 5.52%. There were no fees charged to the Company related to these transactions. In December 1997, the Company obtained two one year $100 million caps which has the effect of fixing $100 million of LIBOR-based variable rate debt at a LIBOR rate no greater than 7% for 1998 and 7.5% for 1999. There was a fee paid to obtain these caps. In January 1998, the Company executed an interest rate swap agreement which has the effect of fixing the LIBOR component of $65 million of the company's LIBOR-based variable rate debt at 5.72% for a term of two years. In February 1998, the Company executed an interest rate swap agreement which has the effect of fixing the LIBOR component of $81 million of the company's LIBOR-based variable rate debt at 5.54% for a term of two years.
In February 1997, the Company added $38 million and one additional bank to its credit facilities. The Company has reduced the variable interest rate on all of its credit facilities to a weighted average interest rate of 99 basis points over LIBOR at January 31, 1998 from a weighted average interest rate of 144 basis points over LIBOR at December 31, 1996.
The following table sets forth the Company's credit facilities at January 31, 1998 as follows (in thousands):
The First Tennessee credit facility has $2.5 million of outstanding letters of credit which reduce the amount of available credit. Each of the credit facilities include covenants that require the Company to maintain minimum net worth levels, interest and debt coverage ratios, total obligations to capitalized value, and limitations on fixed rate debt. The credit facilities also require the Company's senior management continue to consist of certain individuals and to maintain certain levels of minority ownership in the Operating Partnership. The First Tennessee Bank credit facility provides that if the Company completes an offering of its securities, not less than 75% of the net proceeds of any such offering will be applied for the benfit of the Operating Partnership.
During March 1997, the Company closed on a ten-year loan on Hamilton Place Mall in Chattanooga, Tennessee, owned 90% by the Company, in the amount of $75 million at an interest rate of 7.0% and a twenty-year loan with a five-year rate reset option on WestGate Mall in Spartanburg, South Carolina in the amount of $52 million at an interest rate of 6.95%. The proceeds from these loans were used to repay existing fixed rate and variable rate debt.
On January 15, 1997, the Company completed a spot offering of 3,000,000 shares of common stock at $26.125. Management of the Company purchased 55,000 of those shares. The net proceeds of $74.3 million, after underwriters' discount, were used to repay variable rate indebtedness incurred in the development and acquisition
program. This transaction provided the Company with a stronger capital structure to pursue its new developments and acquisitions.
In January 1998, the Company extended a term loan with Compass Bank in the amount of $12.5 million at an interest rate of 50 basis points over LIBOR. The maturity of this facility has been extended to April 15, 1998. This loan was used to repay higher variable rate debt.
Based on the debt (including construction projects) and the market value of equity described above, the Company's debt to total market capitalization (debt plus market value equity) ratio was 47.9% at December 31, 1997, as compared to 43.8% at December 31, 1996.
DEVELOPMENT, EXPANSIONS AND ACQUISITIONS
During 1997, the Company opened approximately 3,166,000 square feet of new retail properties consisting of the following:
During 1997, the Company acquired 1,199,892 square feet consisting of the following:
During the first month of 1998, the Company acquired 1,902,484 square feet consisting of the following:
During 1997, the Company added more than 200,000 square feet to existing centers through expansions as follows:
The Company currently has approximately 1,900,000 square feet under construction consisting of:
The Company has also entered into a number of option agreements for the development of future regional malls and community centers. Except for these projects and as further described below, the Company currently has no other capital commitments.
It is management's expectation that the Company will continue to have access to the capital resources necessary to expand and grow its business. Future development and acquisition activities will be undertaken by the REIT as suitable opportunities arise. Such activities are not expected to be undertaken unless adequate sources of financing are available and a satisfactory budget with targeted returns on investment has been internally approved.
The Company will fund its major development, expansion and acquisition activity with its traditional sources of construction and permanent debt financing as well as from other debt and equity financings, including public financings, and its credit facilities.
OTHER CAPITAL EXPENDITURES
Management prepares an annual capital expenditure budget for each property which is intended to provide for all necessary recurring capital improvements. Management believes that its annual operating reserve for maintenance and recurring capital improvements and reimbursements from tenants will provide the necessary funding for such requirements. The Company intends to distribute approximately 70% to 90% of its funds from operations with the remaining 10% to 30% to be held as a reserve for capital expenditures and continued growth opportunities.
Major tenant finish costs for currently vacant space are expected to be funded with working capital, operating reserves, or revolving lines of credit, and a return on the funds so invested is expected to be earned.
For the year ended December 31, 1997, revenue generating capital expenditures or tenant allowances for improvements were $5.8 million. These capital expenditures generate a return by increased rents from these tenants
over the term of their leases. Revenue enhancing capital expenditures, or remodeling and renovation costs, were $3.8 million. Revenue neutral capital expenditures, such as parking lot and roof repairs, which are recovered from the tenants, were $6.1 million in 1997.
The Company believes that the Properties are in compliance in all material respects with all federal, state and local ordinances and regulations regarding the handling, discharge and emission of hazardous or toxic substances. The Company has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of its present or former properties. The Company has not recorded in its financial statements any material liability in connection with environmental matters.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on the Company because of the relatively low inflation rate. Substantially all tenant leases do, however, contain provisions designed to protect the Company from the impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. In addition, many of the leases are for terms of less than ten years which may enable the Company to replace existing leases with new leases at higher base and/or percentage rentals if rents from the existing leases are below the then-existing market rate. Most of the leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation.
YEAR 2000 ISSUES
The Company has certain existing computer programs that were written using two digits rather than four to define the applicable year. As a result, those computer programs have time sensitive software that recognizes a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send orders and invoices, or engage in similar normal business activities.
The Company has completed a program to identify its applications that are not year 2000 compliant. As a result of this identification program, the Company believes that while its core accounting application is year 2000 compliant, certain of its other applications are not yet year 2000 compliant. The Company has undertaken to correct or replace all non-compliant systems and applications. Given the information known at this time about the Company's systems that are noncompliant and the Company's ongoing efforts to correct or replace all non-compliant systems, Management does not expect the year 2000 compliance of the Company's systems to have a material effect on the Company's future liquidity or results of operations. No assurance can be given, however, that all of the Company's systems will be year 2000 compliant or that compliance costs or the impact of a failure by the Company to achieve substantial year 2000 compliance will not have a material adverse effect on the Company's future liquidity or results of operations.
The Company has initiated communications with its significant suppliers and tenants to determine the extent to which the Company is vulnerable to the failure of such parties to remediate their year 2000 compliance issues. No assurance can be given, however, that the systems of these outside parties will be made year 2000
compliant in a timely manner or that the noncompliance of the systems of any of these parties would not have a materially affect on the Company's liquidity or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt SFAS No. 130 for all periods ending after January 1, 1998. The adoption of SFAS No. 130 is not expected to have any material effect on the results of operations of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise & Related Information". This statement requires that segments of a business be disclosed in interim and annual financial statements. The Company will adopt SFAS No. 131 for all periods ending after January 1998.
CASH FLOWS
Cash flows provided by operating activities for 1997 increased by $6.1 million, or 11.1%, to $60.9 million from $54.8 million in 1996. This increase was primarily due to the cash provided from the operations of thirteen new Properties and the acquisition of four Properties in the last twenty-four months. Cash flows used in investing activities for 1997 increased by $27.9 million, or 12.8%, to $245.9 million compared to $218.0 million in 1996. This increase was due primarily to the borrowing and escrow of cash on December 31, 1997 to purchase Asheville Mall in Asheville, North Carolina on January 2, 1998, offset by a smaller dollar amount of acquisitions in 1997 as compared to 1996. Cash flows provided by financing activities for 1997 increased by $19.4 million, or 11.8%, compared to 1996 primarily due to increased borrowings related to the development and acquisition program offset by the January 1997 follow-on offering which was used to pay down borrowings.
FUNDS FROM OPERATIONS
Management believes that Funds from Operations as defined on page 9 provides an additional indicator of the financial performance of the Properties. Funds from Operations is defined by the Company as net income (loss) before property depreciation, other non-cash items (consisting of the effect of straight-lining of rents and the write-off of development projects not being pursued), gains or losses on sales of real estate assets and gains or losses on investments in marketable securities. The cost of interest rate caps and finance costs on the Company's lines of credit are amortized in interest expense and therefore reduces Funds from Operations. The Company's calculation of Funds from Operations excludes the difference in average rents (straight-lining) and actual rents received. Funds From Operations also includes the Company's share of Funds from Operations in unconsolidated properties and excludes minority interests' share of Funds From Operations in consolidated properties.
The use of Funds from Operations as an indicator of financial performance is influenced not only by the operations of the Properties, but also by the capital structure of the Operating Partnership and the Company. Accordingly, management expects that Funds from Operations will be one of the significant factors considered by the Board of Directors in determining the amount of cash distributions the Operating Partnership will make to its partners (including the Company). Management also believes that Funds from Operations is a widely used measure of the operating performance of REITs and provides a relevant basis for comparison among REITs. Funds From Operations does not represent cash flow from operations as defined by generally accepted accounting principles and is not necessarily indicative of cash from operations available to fund all cash flow needs and should not be considered
as an alternative to net income for purposes of evaluating the Company's operating performance or to cash flows as a measure of liquidity.
In 1997, Funds from Operations increased by $12.1 million, or 19.5%, to $74.1 million as compared to $62.0 million in 1996. The increase in Funds From Operations was primarily attributable to the continuing increase in revenues and income from operations, new developments and acquisitions.
Beginning with the first quarter of 1996 the Company complied with NAREIT's revised definition of Funds from Operations by not adding back depreciation and amortization of finance costs and non-real estate assets to income from operations. The Company has restated prior year's Funds From Operations to conform with the revised definition. Although NAREIT allows it the Company will continue to exclude outparcel sales (which would have added $5.3 million in 1997) and the effect of straight-line rents (which would have added $2.4 million in 1997) from its Funds from Operations calculation, even though the revised definition allows their inclusion.
The Company's calculation of Funds from Operations is as follows (dollars in thousands):
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Index to Financial statements contained in Item 14 on page 58.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None. PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference from the Company's definitive proxy statement filed on March 27, 1997 with the Securities and Exchange Commission (the "Commission") with respect to its Annual Meeting of Stockholders to be held on April 30, 1998.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Company's definitive proxy statement filed on March 27, 1998 with the Commission with respect to its Annual Meeting of Stockholders to be held on April 30, 1998.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference from the Company's definitive proxy statement filed on March 27, 1998 with the Commission with respect to its Annual Meeting of Stockholders to be held on April 30, 1998.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Company's definitive proxy statement filed on March 27, 1998 with the Commission with respect to its Annual Meeting of Stockholders to be held on April 30, 1998.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(1) Financial Statements Page
Report of Independent Public Accountants 59
CBL & Associates Properties, Inc. Consolidated Balance Sheets as of 60 December 31, 1997 and 1996.
CBL & Associates Properties, Inc. Consolidated Statements of 61 Operations for the Years Ended December 31, 1995, 1996 and 1997
CBL & Associates Properties, Inc. Consolidated Statements of 62 Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997
CBL & Associates Properties, Inc. Consolidated Statements of 63 Cash Flows for the Years Ended December 31, 1995, 1996 and 1997
Notes to Financial Statements 64
(2) Financial Statement Schedules
Schedule II Allowance for Credit Losses 77 Schedule III Real Estate and Accumulated Depreciation 78 Schedule IV Mortgage Loans on Real Estate 86
Financial Statement Schedules not listed herein are either not required or are not present in amounts sufficient to require submission of the schedule or the information required to be included therein is included in the Company's Consolidated Financial Statements in item 14 or are reported elseware.
(3) Exhibits
EXHIBIT NUMBER DESCRIPTION
3.1 -- Amended and Restated Certificate of Incorporation of the Company(a)
3.2 -- Certificate of Amendment to the Amended & Restated Certificate of Incorporation of the Company (b)
3.3 -- Amended and Restated Bylaws of the Company(a)
4 -- See Amended and Restated Certificate of Incorporation of the Company, relating to the Common Stock(a)
10.1 -- Partnership Agreement of the Operating Partnership(a)
10.2 -- Property Management Agreement between the Operating Partnership and the Management Company(a)
10.3 -- Property Management Agreement relating to Retained Properties(a)
10.4.1 -- CBL & Associates Properties, Inc. 1993 Stock Incentive Plan(a)dagger
10.4.2 -- Non-Qualified Stock Option Agreement, dated May 10, 1994, for Charles B. Lebovitz dagger
10.4.3 -- Non-Qualified Stock Option Agreement, dated May 10, 1994, for James L. Wolford dagger
10.4.4 -- Non-Qualified Stock Option Agreement, dated May 10, 1994, for John N. Foy dagger
10.4.5 -- Non-Qualified Stock Option Agreement, dated May 10, 1994, for Jay Wiston dagger
10.4.6 -- Non-Qualified Stock Option Agreement, dated May 10, 1994, for Ben S. Landress dagger
10.4.7 -- Non-Qualified Stock Option Agreement, dated May 10, 1994, for Stephen D. Lebovitz dagger
10.4.8 -- Stock Restriction Agreement, dated December 28, 1994, for Charles B. Lebovitz dagger
10.4.9 -- Stock Restriction Agreement, dated December 2, 1994, for John N. Foy dagger
10.4.10 -- Stock Restriction Agreement, dated December 2, 1994, for Jay Wiston dagger
10.4.11 -- Stock Restriction Agreement, dated December 2, 1994, for Ben S. Landress dagger
10.4.12 -- Stock Restriction Agreement, dated December 2, 1994, for Stephen D. Lebovitz dagger
10.5 -- Purchase Agreement relating to Frontier Mall(c)
10.6.1 -- Purchase Agreement relating to Georgia Square (JMB)(c)
10.6.2 -- Purchase Agreement Relating to Georgia Square (JCPenney)(c)
10.7 -- Purchase Agreement relating to Post Oak Mall(c)
10.8 -- Indemnification Agreements between the Company and the Management Company and their officers and directors(a)
10.9.1 -- Employment Agreement for Charles B. Lebovitz(a) dagger
10.9.2 -- Employment Agreement for James L. Wolford(a)dagger
10.9.3 -- Employment Agreement for John N. Foy(a)dagger
10.9.4 -- Employment Agreement for Jay Wiston(a)dagger
10.9.5 -- Employment Agreement for Ben S. Landress(a)dagger
10.9.6 -- Employment Agreement for Stephen D. Lebovitz(a)dagger
10.10 -- Subscription Agreement relating to purchase of the Common Stock and Preferred Stock of the Management Company(a)
10.11 -- Option Agreement relating to certain Retained Properties(a)
10.12 -- Option Agreement relating to Outparcels(a)
10.13.1 -- Property Partnership Agreement relating to Hamilton Place(a)
10.13.2 -- Property Partnership Agreement relating to CoolSprings Galleria(a)
10.14.1 -- Acquisition Option Agreement relating to Hamilton Place(a)
10.14.2 -- Acquisition Option Agreement relating to the Hamilton Place Centers(a)
10.14.3 -- Acquisition Option Agreement relating to the Office Building(a)
10.15 -- Revolving Credit Agreement between the Operating Partnership and First Tennessee Bank, National Association, dated as of March 2, 1994(d)
10.16 -- Revolving Credit Agreement, dated July 28, 1994, between the Operating Partnership and Wells Fargo Advisors Funding, Inc., NationsBank of Georgia, N.A. and First Bank National Association(e)
10.17 -- Revolving Credit Agreement, dated October 14, 1994, between the Operating Partnership and American National Bank and Trust Company of Chattanooga(f)
10.18 -- Revolving Credit Agreement, dated November 2, 1994, between the Operating Partnership and First Tennessee Bank National Association(f)
10.19 -- Promissory Note Agreement between the Operating Partnership and Union Bank of Switzerland dated May 5, 1995(g)
10.20 -- Amended and Restated Loan Agreement between the Operating Partnership and First Tennessee Bank National Association dated July 12, 1995(h)
10.21 -- Second Amendment to Credit Agreement between the Operating Partnership and Wells Fargo Realty Advisors Funding, Inc. dated July 5, 1995(h)
10.22 -- Consolidation, Amendment, Renewal, and Restatement of Notes between the Galleria Associates, L.P. and The Northwestern Mutual Life Insurance Company(i)
10.23 -- Promissory Note Agreement between High Point Development Limited Partnership and The Northwestern Mutual Life Insurance Company dated January 26, 1996(j)
10.24 -- Promissory Note Agreement between Turtle Creek Limited Partnership and Connecticut General Life Insurance Company dated February 14, 1996(j)
10.25 -- Amended and Restated Credit Agreement between the Operating Partnership and Wells Fargo Bank N.A. etal dated September 26, 1996. (k)
10.26 -- Promissory Note Agreement between the Operating Partnership and Compass Bank dated September 17, 1996. (k)
10.27 -- Promissory Note Agreement between St Clair Square Limited Partnership and Wells Fargo National Bank dated, December 11, 1996.(l)
10.28 -- Promissory Note Agreement between Lebcon Associates and Principal Mutual Life Insurance Company dated, March 18, 1997.(l)
10.29 -- Promissory Note Agreement between Westgate Mall Limited Partnership and Principal Mutual Life Insurance Company dated, February 16, 1997.(l)
10.30 -- Amended and Restated Credit Agreement between the Operating Partnership and First Tennessee Bank etal dated February 24, 1997.(l)
10.31 -- Amended and Restated Credit Agreement between the Operating Partnership and First Tennessee Bank etal dated July 29, 1997
10.32 -- Second Amended and Restated Credit Agreement between the Operating Partnership and Wells Fargo Bank N.A. etal dated June 5, 1997 Effective April 1,1997.
10.33 -- First Amendment to Second Amended and Restated Credit Agreement between the Operating Partnership and Wells Fargo Bank N.A. etal dated November 11, 1997.
10.34 -- Loan Agreement between Asheville LLC and Wells Fargo Bank N.A. dated February 17, 1998
10.35 -- Loan Agreement between Burnsville Minnesota LLC and U.S. Bank National Association dated January 30, 1998
10.36 -- Modification No. One to the Amended and Restated Agreement of Limited Partnership of CBL & Associates Limited Partnership Dated March 31, 1997.
10.37 -- Modification No. Two to the Amended and Restated Agreement of Limited Partnership of CBL & Associates Limited Partnership Dated February 19, 1998.
21 -- Subsidiaries of the Company
23 -- Consent of Arthur Andersen LLP
(a) Incorporated by reference to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-11 (No. 33-67372), as filed with the Commission on January 27, 1994.
(b) Incorporated by reference to Exhibit B to the Company's Definitive Schedule 14A, Dated April 1, 1996.
(c) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form S-11 (No. 33-67372), as filed with the Commission on October 26, 1993.
(d) Incorporated herein by reference to the Company's Annual Report in Form 10-K for the fiscal year ended December 31, 1993.
(e) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(f) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(g) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(h) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(i) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
(j) Incorporated by reference to the Company's Annual Report in Form 10-K for the fiscal year ended December 31, 1995.
(k) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(l) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
dagger A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this report.
(4) Reports on Form 8-K
Information on the Acquisition of Asheville Mall in Asheville, North Carolina was filed on January 16, 1998.
The outline from the Company's February 4, 1998 conference call with analysts regarding earnings (Item 5) was filed on February 4, 1998.
Information on the Acquisition of Burnsville Center in Burnsville, Minneapolis was filed on February 13, 1998.
Additional Information on the acquisition of Asheville Mall in Asheville, North Carolina was filed in an 8-K/A on February 18, 1998.
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.
CBL & ASSOCIATES PROPERTIES, INC. (Registrant)
By: /s/ Charles B. Lebovitz ------------------------ Charles B. Lebovitz Chairman of the Board, President and Chief Executive Officer
Dated: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------- ------ -----
/s/ Charles B. Lebovitz Chairman of the Board, March 30, 1998 - ------------------------ President and Chief Charles B. Lebovitz Executive Officer (Principal Executive Officer)
/s/ John N. Foy Director, Executive March 30, 1998 - ------------------------ Vice President, Chief John N. Foy Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer)
/s/ Stephen D. Lebovitz - ------------------------ Director, Senior Vice March 30, 1998 Stephen D. Lebovitz President and Treasurer
/s/ Claude M. Ballard Director March 30, 1998 - ------------------------ Claude M. Ballard
/s/ Leo Fields Director March 30, 1998 - ------------------------- Leo Fields
/s/ Willian J. Poorvu Director March 30, 1998 - ------------------------- William J. Poorvu
/s/ Winston W. Walker Director March 30, 1998 - ------------------------- Winston W. Walker
*By:/s/ Charles B. Lebovitz Attorney-in-Fact March 30, 1998 - -------------------------- Charles B. Lebovitz
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants 59
CBL & Associates Properties, Inc. Consolidated Balance Sheets as of 60 December 31, 1997 and 1996.
CBL & Associates Properties, Inc. Consolidated Statements of 61 Operations for the Years Ended December 31, 1995, 1996 and 1997
CBL & Associates Properties, Inc. Consolidated Statements of 62 Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997
CBL & Associates Properties, Inc. Consolidated Statements of Cash 63 Flows for the Years Ended December 31, 1995, 1996 and 1997
Notes to Financial Statements 64
Schedule II Allowance for Credit Losses 77
Schedule III-Real Estate and Accumulated Depreciation 78
Schedule IV- Mortgage Loans on Real Estate 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of CBL & Associates Properties, Inc.:
We have audited the accompanying consolidated balance sheets of CBL & ASSOCIATES PROPERTIES, INC. (a Delaware corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CBL & Associates Properties, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of financial statements are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Chattanooga, Tennessee February 3, 1998
CBL & ASSOCIATES PROPERTIES, INC. CONSOLDATED BALANCE SHEETS (In thousands, except share and per share data)
The accompanying notes are an integral part of these balance sheets.
CBL & ASSOCIATES PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
The accompanying notes are an integral part of these statements.
CBL & ASSOCIATES PROPERTIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share and per share data)
The accompanying notes are an integral part of these statements.
CBL & ASSOCIATES PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The accompanying notes are an integral part of these statements.
CBL & ASSOCIATES PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
CBL & Associates Properties, Inc. (the "REIT"), a Delaware corporation, is engaged in the development and operation of regional shopping malls and community centers, primarily in the southeast and northeast regions of the United States. During 1997, the REIT transferred its general partnership and majority ownership interest in CBL & Associates Properties Limited Partnership (the "Operating Partnership") to its newly formed and wholly owned qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL Holdings, II, Inc. This was treated similar to a pooling of interests. As a result, the REIT will continue to own and will conduct its business through the Operating Partnership, which at December 31, 1997, owns controlling interests in a portfolio of properties consisting of seventeen regional malls, eleven associated centers, each of which is part of a regional shopping mall complex, two power centers, seventy-nine community centers and one office building. Additionally, the Operating Partnership owns noncontrolling interests in three regional malls and one associated center. The Operating Partnership has one mall, one associated center, one power center and two community centers currently under construction and owns options to acquire certain development properties owned by third parties. At December 31, 1997, CBL Holdings I, Inc. owned a 2.8% general partnership interest and CBL Holdings II, Inc. owned a 68.95% limited partnership interest in the Operating Partnership for a combined interest held by the REIT of 71.75%.
The minority interest in the Operating Partnership is held primarily by CBL & Associates, Inc. and its affiliates (collectively "CBL") who contributed their interests in certain real estate properties and joint ventures to the Operating Partnership in exchange for a limited partnership interest in connection with the formation of the Operating Partnership in November 1993. At December 31, 1997, CBL owns a 28.25% limited partnership interest in the Operating Partnership (Note 9).
In September 1995, the REIT completed a follow-on offering of 4,163,500 shares of its common stock at $20.625 per share. The net proceeds of $80.7 million were used to repay variable rate indebtedness incurred in the REIT's development and acquisition program.
In January 1997, the REIT completed a spot offering of 3,000,000 shares of its common stock at $26.125 per share. The net proceeds of $74.3 million were used to repay variable rate indebtedness incurred in the REIT's development and acquisition program.
To comply with certain technical requirements of the Internal Revenue Code of 1986, as amended (the "Code"), the Operating Partnership carries out the REIT's property management and development activities through CBL & Associates Management, Inc. (the "Management Company"). The Operating Partnership holds 100% of the preferred stock and 5% of the common stock of the Management Company, with CBL holding the remaining 95% of the common stock. Through the ownership of the preferred stock, the Operating Partnership receives substantially all of the cash flow, and therefore enjoys substantially all of the economic benefits of the Management Company's operations. Due to the REIT's ability, as sole general partner, to control the Operating Partnership and Operating Partnership's rights to substantially all of the economic benefits of the Management Company, the accounts of each entity are included in the accompanying consolidated financial statements. The REIT, the Operating Partnership and the Management Company are referred to collectively as the "Company".
All significant intercompany balances and transactions have been eliminated in the consolidated presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets
Costs directly related to the acquisition and development of real estate assets, including overhead costs directly attributable to property development, are capitalized. Interest costs incurred during the development and construction period are capitalized.
Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis generally over forty years for buildings and improvements and seven to ten years for equipment and fixtures. Tenant improvements are capitalized and depreciated on a straight-line basis over the life of the related lease.
Long-Lived Assets
The Company periodically evaluates the carrying value of a long-lived asset to be held and used when events or changes in circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the projected undiscounted future cash flow of such asset is less than its carrying value. Management believes that no material impairment existed at December 31, 1997, and accordingly, no loss was recognized.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and cash equivalent investments with original maturities of three months or less, primarily consisting of demand deposits in banks.
Cash in Escrow
Cash in escrow includes cash deposited in escrow accounts which is to be used for the purchase of specific real estate assets.
Deferred Financing Costs
Deferred financing costs are included in other assets in the accompanying consolidated balance sheets and include fees and costs incurred to obtain long-term financing and are being amortized over the terms of the respective mortgage notes payable. Unamortized deferred financing costs are written off when mortgage notes payable are retired before the maturity date.
Revenue Recognition
Rental revenue attributable to operating leases is recognized on a straight-line basis over the initial term of the related leases. Certain tenants are required to pay additional rent if sales volume exceeds specified amounts. The Company recognizes this additional rent as revenue when such amounts become determinable. A substantial portion of the Company's rental income is derived from various national and regional retail companies.
Tenant Reimbursements
The Company receives reimbursements from tenants for certain costs as provided in the lease agreements. These costs consist of real estate taxes, common area maintenance and other recoverable costs. Tenant reimbursements are recognized as revenue in the period the costs are incurred.
Management, Development and Leasing Fees
Management fees are charged as a percentage of rentals and are recognized as revenue as they are earned. Leasing fees are charged for newly executed leases. These fees are recognized as revenues as they are earned. Development fees are recognized as revenue on a pro rata basis over the development period.
Gain on Sales of Real Estate Assets
Gain on sales of real estate assets are recognized at the time title to the asset is transferred to the buyer, subject to the adequacy of the buyer's initial and continuing investment and the assumption by the buyer of all future ownership risks of operations of the property.
Income Taxes
The REIT is qualified as a real estate investment trust under Section 856 through 860 of the Code and applicable treasury regulations. In order to maintain qualification as a real estate investment trust, the REIT is required to distribute at least 95% of its taxable income to shareholders and meet certain other asset and income tests as well as other requirements. As a real estate investment trust, the REIT will generally not be liable for federal corporate income taxes. Thus, no provision for federal income taxes has been included in the accompanying consolidated financial statements. If the REIT fails to qualify as a real estate investment trust in any taxable year, the REIT will be subject to federal income tax on its taxable income at regular corporate tax rates. Even if the REIT maintains its qualification for taxation as a real estate investment trust, the REIT may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income. State income taxes were not significant in 1997, 1996 and 1995.
Derivative Financial Instruments
Interest rate cap and swap agreements, which are principally used by the Company in the management of interest rate exposure, are accounted for on an accrual basis. Amounts to be paid or received under interest rate cap and swap agreements are recorded in interest expense in the period in which they accrue.
Concentration of Credit Risk
The Company's tenants consist of national, regional and local retailers. Financial instruments which subject the Company to concentrations of credit risk consist primarily of tenant receivables. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of tenants.
Earnings Per Common Share
Effective for the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which replaces the presentation of primary earnings per share ("EPS") and fully diluted EPS with a presentation of basic EPS and diluted EPS, respectively. Basic EPS excludes dilution and is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Similar to fully diluted EPS, diluted EPS assumes the issuance of common stock for all potentially dilutive equivalent shares outstanding. The right to convert CBL's minority interest in the Operating Partnership into shares of common stock is not dilutive (Note 9). All prior period EPS data have been restated. The difference in basic and diluted EPS was due to the assumed conversion of outstanding stock options resulting in 256,000, 132,000 and 29,000 equivalent shares in 1997, 1996 and 1995, respectively.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Effective in 1996, the Company adopted the disclosure option of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires companies that do not choose to account for stock-based compensation as prescribed by the statement to disclose the pro forma effects on net income and earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock-based compensation and the assumptions used to determine the pro forma effects of SFAS No. 123.
Use of Estimates
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
3. UNCONSOLIDATED AFFILIATES
The Company has investments in four partnerships and joint ventures, all of which are reflected on the equity method of accounting in the accompanying consolidated financial statements and consist of the following at December 31, 1997: Company's Partnership Property Name Interest
Governor's Square IB Governor's Plaza 49.0% Governor's Square Company Governor's Square 47.5% Madison Square Associates, Ltd. Madison Square 50.0% Mall Shopping Center Company Plaza Del Sol 50.6%
Condensed combined financial statement information of the partnerships and joint ventures are presented as follows (in thousands):
During 1996, the mortgage note payable on Governor's Square was refinanced with lower fixed rate debt. A prepayment penalty of approximately $1,727,000 was incurred in connection with the refinancing. The Company's share of this prepayment penalty has been reflected as extraordinary loss on extinguishment of debt in the accompanying consolidated statement of operations.
In general, contributions and distributions of capital or cash flows and allocations of income and expense are made on a pro rata basis in proportion to the equity interest held by each general or limited partner.
4. MORTGAGE AND OTHER NOTES PAYABLE
Mortgage and other notes payable consist of the following at December 31, 1997 and 1996 (in thousands):
Permanent Loans
Permanent loans consist of loans secured by properties held by the Company at December 31, 1997 with a carrying amount of $682,814,000. At December 31, 1997, permanent loans totaling $392,708,000 bear interest at fixed rates ranging from 6.95% to 10.625%. Permanent loans totaling $134,850,000 bear interest at variable interest rates indexed to the prime lending rate or LIBOR rate (6.77% to 8.50% at December 31, 1997). Permanent loans mature at various dates from 1998 through 2014. Extraordinary loss on extinguishment of debt consist of prepayment penalties on extinguishment of debt before maturity and the write off of related unamortized deferred finance costs.
Construction Loans
At December 31, 1997, the Company had construction loans on three properties, one of which was still under construction. The total commitment under the construction loans is $120,275,000, of which $100,321,000 is outstanding at December 31, 1997. The construction loans mature in 1998 (extention options are available on all three) and bear interest at variable interest rates indexed to the prime lending rate or LIBOR rate (7.00% to 7.37% at December 31, 1997).
Lines of Credit
The Company maintains line of credit agreements with banks for construction and working capital purposes. At December 31, 1997, the Company has $187,500,000 available under its line of credit agreements, of which $113,534,000 is outstanding. The lines expire at various dates through 1999 and bear interest at variable rates indexed to the prime lending rate or LIBOR rate (6.47% to 7.07% at December 31, 1997). At December 31, 1997, outstanding letters of credit issued under the line of credit agreements, not reflected in the accompanying consolidated balance sheet, total approximately $1,316,000. The line of credit agreements contain, among other restrictions, certain restrictive covenants including the maintenance of certain coverage ratios, minimum net worth and limitations on distributions.
Debt Maturities
As of December 31, 1997, the scheduled principal payments on all mortgage and other notes payable are as follows (in thousands):
5. MORTGAGE NOTES RECEIVABLE
Substantially all mortgage notes receivable are collateralized by wrap- around mortgages which are first mortgages on the underlying real estate and related improvements. Interest rates on these notes range from 9.5% to 11.0% at December 31, 1997.
6. MINIMUM RENTS
Tenant leases are usually for five to twenty year periods and generally provide for renewals and annual rentals which are subject to upward adjustments based on tenant sales volume. Future minimum rents are scheduled to be received under noncancellable tenant leases at December 31, 1997, as follows (in thousands):
No single tenant collectively accounts for more than 10% of the Company's total revenue.
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well defined interest rate risks.
Under interest rate swap agreements, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and variable rate interest amounts calculated by reference to an agreed-upon notional amount. At December 31, 1997, 1996 and 1995, the Company had two interest rate swap agreements outstanding with financial institutions, each expiring in 1998. One interest rate swap agreement fixes the LIBOR component on $50 million of the Company's LIBOR based variable rate debt at 5.52%. The Company will receive interest payments from the financial institution for the amount LIBOR exceeds 5.52% for each monthly settlement period. The second interest rate swap agreement has a notional amount of $5.2 million. Under this agreement, the Company will receive interest payments at a rate equal to LIBOR plus 140 basis points (7.36% at December 31, 1997) and will pay interest at a fixed rate of 8.5%.
In December, 1997, the Company obtained two $100 million interest rate caps on LIBOR based variable rate debt, one at 7.0% for 1998 and one at 7.5% for 1999. In January 1998, the Company executed an interest rate swap agreement which fixes the LIBOR component of $65 million of the company's LIBOR based variable rate debt at 5.72% for a term of two years. In February 1998, the Company executed an interest rate swap agreement which fixes the LIBOR component of $81 million of the company's LIBOR based variable rate debt at 5.54% for a term of two years.
The Company is exposed to credit losses in the event of nonperformance by the counterparties to its interest rate swap and cap agreements and nonderivative financial assets but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, cash in escrow, receivables, accounts payable and accrued liabilities are reasonable estimates of their fair values because of the short maturity of these financial instruments. Based on the interest rates for similar financial instruments, the carrying value of mortgage notes receivable is a reasonable estimation of fair value. The carrying value of mortgage and other notes payable, based on borrowing rates currently available to the Company, is a reasonable estimation of fair value at December 31, 1997 and 1996. The fair value of the interest rate swap and cap agreements, which represent the cash requirement if the existing agreements had been settled at year end, was not significant at December 31, 1997 and 1996.
9. CBL RIGHTS
Pursuant to the Operating Partnership agreement, the limited partners were granted rights (the "CBL Rights") to convert their limited partnership interests in the Operating Partnership into shares of common stock, subject to certain limits, and to sell to the REIT after November 3, 1996 part or all of their limited partnership interest in the Operating Partnership in exchange for shares of common stock or their cash equivalent at the REIT's election, as defined.
CBL sold properties to the Operating Partnership in exchange for 67,850 and 34,246 limited partnership units in the Operating Partnership during 1997 and 1996, respectively.
At December 31, 1997 and 1996, there remained outstanding CBL Rights to convert CBL's minority interest in the Operating Partnership to 9,475,856 and 9,408,006 shares of common stock, respectively.
10. 401(K) PROFIT SHARING PLAN
The Management Company maintains a 401(k) profit sharing plan, which is qualified under Section 401(a) and Section 401(k) of the Code to cover employees of the Management Company. All employees who have attained the age of 21 and have completed at least one year of service are eligible to participate in the plan. The plan provides for employer matching contributions on behalf of each participant equal to 50% of the portion of such participant's contribution which does not exceed 2.5% of such participant's compensation for the plan year. Additionally, the Management Company has the discretion to make additional profit-sharing-type contributions not related to participant elective contributions. Total contributions by the Management Company were not significant for 1997, 1996, and 1995.
11. STOCK INCENTIVE PLAN
The Company maintains the 1993 Stock Incentive Plan (the "Plan") which permits the issuance of stock options and common stock to selected officers, employees and directors of the Company, up to 2,800,000 shares of common stock. The Plan is administered by the Compensation Committee of the Board of Directors (the "Committee").
Stock options issued under the Plan allow for the purchase of common stock at the fair market value of the stock at the date of grant. Stock options granted to officers and employees under the Plan vest and become exercisable in installments on each of the first five anniversaries of the date of grant and expire ten years after the date of grant. Stock options granted to directors are fully vested upon grant, but may not be sold, pledged or otherwise transferred in any manner during the director's term or for one year thereafter.
The Company accounts for its stock-based compensation plans under APB No. 25, under which no compensation expense has been recognized for stock options granted as all employee options have been granted with an exercise price equal to the fair value of the Company's common stock on the date of grant. The Company adopted SFAS No. 123 for disclosure purposes only in 1996. For SFAS No. 123 purposes, the fair value of each employee option grant has been estimated as of the date of grant using the Black-Sholes option pricing model and the following weighted average assumptions for 1997, 1996 and 1995, respectively:
Using these assumptions, the fair value of the employee stock options granted in 1997, 1996 and 1995 is $989,000, $860,000 and $965,000, respectively, which would be amortized as compensation expense over the vesting period of the options. Had compensation cost for the plan been determined in accordance with SFAS No. 123, utilizing the assumptions detailed above, the Company's pro forma net income and net income per share would have been as follows for the years ended December 31, 1997, 1996 and 1995, respectively.
The pro forma effect on net income in this disclosure is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995.
A summary of the Company's stock option activity for 1997, 1996, and 1995 is as follows:
The weighted-average fair value of options granted during 1997, 1996 and 1995 was $1.84, $1.66 and $1.62, respectively.
Shares subject to options outstanding at December 31, 1997 have a weighted- average remaining contractual life of 8.0 years. Of the options outstanding at December 31, 1997, 381,000 are currently exercisable with a weighted- average exercise price of $19.83 per share.
Under the Plan, common stock may be awarded either alone, in addition to, or in tandem with other stock awards granted under the Plan. The Committee has the authority to determine eligible persons to whom common stock will be awarded, the number of shares to be awarded and the duration of the vesting period, as defined.
During 1997, the Company issued 31,745 shares of common stock under the Plan with a weighted-average grant-date fair value of $24.86 per share, of which 13,483 shares of common stock were immediately vested. The remaining 18,262 shares of common stock vest at various dates from 1998 to 1999.
During 1996, the Company issued 26,780 shares of common stock under the Plan with a weighted-average grant-date fair value of $23.35 per share, of which 12,391 shares of common stock were immediately vested. The remaining 14,389 shares of common stock vest at various dates from 1997 to 1999.
During 1995, the Company issued 28,606 shares of common stock under the Plan with a weighted-average grant-date fair value of $20.43 per share, of which 14,910 shares of common stock were immediately vested. The remaining 13,696 shares of common stock vest at various dates in 1997.
Deferred compensation related to the common stock issued under the Plan is reflected in the accompanying consolidated statements of shareholders' equity based on the market value of the common stock at the date of grant and is amortized ratably over the period the awards vest.
12. RELATED PARTY TRANSACTIONS
CBL and certain officers of the Company have a significant minority interest in the construction company that has been engaged by the Company in the building of substantially all of the properties.
The Management Company provides management and leasing services to affiliated partnerships and joint ventures not controlled by the Company. Revenue recognized for these services amounted to $837,000 in 1997, $1,537,000 in 1996, and $1,419,000 in 1995.
A company that provides security, maintenance, cleaning services and background music for certain of the real estate properties was majority owned by officers of the Company during a portion of 1997. The company was sold to an independent third party in 1997. Expenses related to these services were not significant in 1997, 1996 and 1995.
In 1995, officers of the Company had an ownership interest in a company engaged in the title insurance business that had written title insurance on certain of the real estate properties. Expenses related to these services were not significant in 1995.
An insurance agency that has served as agent with respect to the placing of insurance on certain of the real estate properties was majority owned by certain employees of the Management Company at December 31, 1996. Total insurance premiums paid by the Company to the related insurance agency were $2,229,000 in 1996 and $1,750,000 in 1995. Due to a change in insurance agent, no premiums were paid in 1997 to this agency.
13. COMMITMENTS AND CONTINGENCIES
The Company is currently involved in certain litigation arising in the ordinary course of business. In the opinion of management, the pending litigation will not materially affect the financial statements of the Company. Additionally, based on environmental studies completed to date on the real estate properties, management believes exposure related to environmental cleanup will be immaterial to the consolidated financial position and consolidated results of operations of the Company.
The Company has entered into standby purchase agreements with third-party developers (the "Developers") for the construction, development and potential ownership of two community centers in Georgia and Texas (the "Co- Development Projects"). The Developers have utilized theses standby purchase agreements to assist in obtaining financing to fund the construction of the Co-Development Projects. The standby purchase agreements, which expire in 1999, are dependent upon certain completion requirements, rental levels, the inability of the Developers to obtain adequate permanent financing and the inability to sell the Co-Development Project before the Company has to fund their equity contribution or purchase the Co-Development Project. In return for its commitment to purchase a Co-Development Project pursuant to a standby purchase agreement, the Company receives a fee as well as a participation interest in each Co- Development Project. In addition to the standby purchase agreements, the Company has extended secured credit to two of these developers to cover pre-development costs. The outstanding amount of purchase and secured credit agreements at December 31, 1997 is $52.8 million.
14. EVENTS SUBSEQUENT TO YEAR END
On January 2, 1998, the REIT purchased Asheville Mall in Asheville, North Carolina for $65 million, which was funded by a $48.9 million acquisition loan with the balance funded from the REIT's credit lines. On January 30, 1998, the REIT purchased Burnsville Center in Burnsville (Minneapolis), Minnesota for $81 million which was funded by a $60.8 million acquisition loan with the balance funded from the REIT's credit lines.
15. DIVIDENDS
The allocations of dividends declared and paid for income tax purposes are as follows:
16. OPERATING PARTNERSHIP
Condensed financial statement information for the Operating Partnership is presented as follows (in thousands):
17. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial information to conform with the 1997 presentation.
18. QUARTERLY INFORMATION (UNAUDITED) (in thousands, except per share amounts)
(1) The sum of quarterly earnings per share amounts may differ from annual earnings per share.
SCHEDULE II Allowance For Credit Losses (in thousands)
Year Ended Balance At Provision Balance At Beginning Of For Credit Account End of Year Losses Written Off Year
December 31, 1995 $ 0 $ 363 $ (363) $ 0 ====== ====== ====== =====
December 31, 1996 0 812 (362) 450 ====== ====== ====== =====
December 31, 1997 450 1,027 (177) 1,300 ====== ====== ====== =====
(A) Initial cost represents the total cost capitalized including carrying cost at the end of the first fiscal year in which the property opened or was aquired. (B) Encumbrances represent the mortgage notes payable balance at December 31, 1997. (C) The aggregate cost of land and buildings and improvements for federal income tax purposes is approximately $1.143 billion. (D) Depreciation for all properties is computed over the useful life which is generally forty years. (E) Property is pledged as collateral on the secured lines of credit used for development properties.
CBL & ASSOCIATES PROPERTIES, INC. REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
The changes in real estate assets and accumulated depreciation for the years ending December 31, 1997, 1996, and 1995 (dollars in thousands).
Schedule IV CBL & ASSOCIATES PROPERTIES, INC. MORTGAGE LOANS ON REAL ESTATE AT DECEMBER 31, 1997 (Dollars in thousands)
(1) Equal monthly installments comprised of principal and interest unless otherwise noted. (2) The aggregate carrying value for federal income tax purposes is approximately $11,678 at December 31, 1997. (3) Mortgage has been extended on a month to month basis at the same terms while renegotiating mortgage extension.
(a) Other reductions in 1996 represent the acquisition of Foothills Mall and conversion of the mortgage note receivable to the basis in the acquired asset.
EXHIBIT INDEX Exhibit Number Description Page
3.1 Amended and Restated Certificate of Incorporation of the Company(a)
3.2 Certificate of Amendment to the Amended & Restated Certificate of Incorporation of the Company (b)
3.3 Amended and Restated Bylaws of the Company(a)
4 See Amended and Restated Certificate of Incorporation of the Company, relating to the Common Stock(a)
10.1 Partnership Agreement of the Operating Partnership(a)
10.2 Property Management Agreement between the Operating Partnership and the Management Company(a)
10.3 Property Management Agreement relating to Retained Properties(a)
10.4.1 CBL & Associates Properties, Inc. 1993 Stock Incentive Plan(a)
10.4.2 Non-Qualified Stock Option Agreement, dated May 10, 1994, for Charles B. Lebovitz dagger
10.4.3 Non-Qualified Stock Option Agreement, dated May 10, 1994, for James L. Wolford dagger
10.4.4 Non-Qualified Stock Option Agreement, dated May 10, 1994, for John N. Foy dagger
10.4.5 Non-Qualified Stock Option Agreement, dated May 10, 1994, for Jay Wiston dagger
10.4.6 Non-Qualified Stock Option Agreement, dated May 10, 1994, for Ben S. Landress dagger
10.4.7 Non-Qualified Stock Option Agreement, dated May 10, 1994, for Stephen D. Lebovitz dagger
10.4.8 Stock Restriction Agreement, dated December 28, 1994, for Charles B. Lebovitz dagger
10.4.9 Stock Restriction Agreement, dated December 2, 1994, for John N. Foy dagger
10.4.10 Stock Restriction Agreement, dated December 2, 1994, for Jay Wiston dagger
10.4.11 Stock Restriction Agreement, dated December 2, 1994, for Ben S. Landress dagger
10.4.12 Stock Restriction Agreement, dated December 2, 1994, for Stephen D. Lebovitz dagger
10.5 Purchase Agreement relating to Frontier Mall(c)
10.6.1 Purchase Agreement relating to Georgia Square (JMB)(c)
10.6.2 Purchase Agreement Relating to Georgia Square (JCPenney)(c)
10.7 Purchase Agreement relating to Post Oak Mall(c)
10.8 Indemnification Agreements between the Company and the Management Company and their officers and directors(a)
10.9.1 Employment Agreement for Charles B. Lebovitz(a) dagger
10.9.2 Employment Agreement for James L. Wolford(a) dagger
10.9.3 Employment Agreement for John N. Foy(a) dagger
10.9.4 Employment Agreement for Jay Wiston(a) dagger
10.9.5 Employment Agreement for Ben S. Landress(a) dagger
10.9.6 Employment Agreement for Stephen D. Lebovitz(a) dagger
10.10 Subscription Agreement relating to purchase of the Common Stock and Preferred Stock of the Management Company(a)
10.11 Option Agreement relating to certain Retained Properties(a)
10.12 Option Agreement relating to Outparcels(a)
10.13.1 Property Partnership Agreement relating to Hamilton Place(a)
10.13.2 Property Partnership Agreement relating to CoolSprings Galleria(a)
10.14.1 Acquisition Option Agreement relating to Hamilton Place(a)
10.14.2 Acquisition Option Agreement relating to the Hamilton Place Centers(a)
10.14.3 Acquisition Option Agreement relating to the Office Building(a)
10.15 Revolving Credit Agreement between the Operating Partnership and First Tennessee Bank, National Association, dated as of March 2, 1994(d)
10.16 Revolving Credit Agreement, dated July 28, 1994, between the Operating Partnership and Wells Fargo Advisors Funding, Inc., NationsBank of Georgia, N.A. and First Bank National Association(e)
10.17 Revolving Credit Agreement, dated October 14, 1994, between the Operating Partnership and American National Bank and Trust Company of Chattanooga(f)
10.18 Revolving Credit Agreement, dated November 2, 1994, between the Operating Partnership and First Tennessee Bank National Association(f)
10.19 Promissory Note Agreement between the Operating Partnership and Union Bank of Switzerland dated May 5, 1995(g)
10.20 Amended and Restated Loan Agreement between the Operating Partnership and First Tennessee Bank National Association dated July 12, 1995(h)
10.21 Second Amendment to Credit Agreement between the Operating Partnership and Wells Fargo Realty Advisors Funding, Inc. dated July 5, 1995(h)
10.22 Consolidation, Amendment, Renewal, and Restatement of Notes between the Galleria Associates, L.P. and The Northwestern Mutual Life Insurance Company(i)
10.23 Promissory Note Agreement between High Point Development Limited Partnership and The Northwestern Mutual Life Insurance Company dated January 26, 1996(j)
10.24 Promissory Note Agreement between Turtle Creek Limited Partnership and Connecticut General Life Insurance Company dated February 14, 1996(j)
10.25 Amended and Restated Credit Agreement between the Operating Partnership and Wells Fargo Bank N.A. etal dated September 26, 1996. (k)
10.26 Promissory Note Agreement between the Operating Partnership and Compass Bank dated September 17, 1996. (k)
10.27 Promissory Note Agreement between St Clair Square Limited Partnership and and Wells Fargo National Bank dated, December 11, 1996.(l)
10.28 Promissory Note Agreement between Lebcon Associates and Principal Mutual Life Insurance Company dated, March 18, 1997.(l)
10.29 Promissory Note Agreement between Westgate Mall Limited Partnership and and Principal Mutual Life Insurance Company dated, February 16, 1997.(l)
10.30 Amended and Restated Credit Agreement between the Operating Partnership and First Tennessee Bank etal dated February 24, 1997.(l)
10.31 Amended and Restated Credit Agreement between the Operating Partnership and First Tennessee Bank etal dated July 29, 1997.
10.32 Second Amended and Restated Credit Agreement between the Operating Partnership and Wells Fargo Bank N.A. etal dated June 5, 1997 Effective April 1,1997.
10.33 First Amendment to Second Amended and Restated Credit Agreement between the Operating Partnership and Wells Fargo Bank N.A. etal dated November 11, 1997.
10.34 Loan Agreement between Ashville LLC and Wells Fargo Bank N.A. dated February 17, 1998
10.35 Loan Agreement between Burnsville Minnesota LLC and U.S. Bank National Association dated January 30, 1998
10.36 Modification No. One to the Amended and Restated Agreement of Limited Partnership of CBL & Associates Limited Partnership Dated March 31, 1997.
10.37 Modification No. Two to the Amended and Restated Agreement of Limited Partnership of CBL & Associates Limited Partnership Dated February 19, 1998.
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(a) Incorporated by reference to Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-11 (No. 33-67372), as filed with the Commission on January 27, 1994.
(b) Incorporated by reference to Exhibit B to the Company's Definitive Schedule 14A, Dated April 1, 1996. = (c) Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form S-11 (No. 33-67372), as filed with the Commission on October 26, 1993.
(d) Incorporated herein by reference to the Company's Annual Report in Form 10-K for the fiscal year ended December 31, 1993.
(e) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(f) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(g) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(h) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(i) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
(j) Incorporated by reference to the Company's Annual Report in Form 10-K for the fiscal year ended December 31, 1995.
(k) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(l) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
dagger A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of this report.