Item 1. Business
Background
Simon Property Group, Inc. ("SPG"), a Delaware corporation, is a self- administered and self-managed, real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Each share of common stock of SPG is paired with a beneficial interest in 1/100th of a share of common stock of SPG Realty Consultants, Inc., also a Delaware corporation ("SRC" and together with SPG, the "Companies").
Simon Property Group, L.P. (the "SPG Operating Partnership"), formerly known as Simon DeBartolo Group, L.P. ("SDG, LP"), is the primary subsidiary of SPG. Units of ownership interest ("Units") in the SPG Operating Partnership are paired with a beneficial interest in 1/100th of a Unit in SPG Realty Consultants, L.P. (the "SRC Operating Partnership" and together with the SPG Operating Partnership, the "Operating Partnerships"). The SRC Operating Partnership is the primary subsidiary of SRC. The Companies together with the Operating Partnerships are hereafter referred to as "Simon Group".
The Companies, primarily through the Operating Partnerships, are engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of real estate properties, primarily regional malls and community shopping centers. As of December 31, 1998, Simon Group owned or held an interest in 242 income-producing properties, which consist of 153 regional malls, 77 community shopping centers, three specialty retail centers, six office and mixed-use properties and three value-oriented super-regional malls in 35 states (the "Properties"). Simon Group also owned interests in one regional mall, one value-oriented super-regional mall, one specialty center and three community centers currently under construction and twelve parcels of land held for future development (collectively, the "Development Properties", and together with the Properties, the "Portfolio Properties"). At December 31, 1998 and 1997, the Companies' direct and indirect ownership interests in the Operating Partnerships were 71.6% and 63.9%, respectively. The SPG Operating Partnership also holds substantially all of the economic interest in M.S. Management Associates, Inc. (the "Management Company"). The Management Company manages Properties generally not wholly-owned by the SPG Operating Partnership and certain other properties, and also engages in certain property development activities. The SPG Operating Partnership also holds substantially all of the economic interest in, and the Management Company holds substantially all of the voting stock of, DeBartolo Properties Management, Inc. ("DPMI"), which provides architectural, design, construction and other services to substantially all of the Portfolio Properties, as well as certain other regional malls and community shopping centers owned by third parties.
The CPI Merger
For financial reporting purposes, as of the close of business on September 24, 1998, pursuant to the Agreement and Plan of Merger dated February 18, 1998, Simon DeBartolo Group, Inc. ("SDG"), Corporate Property Investors, Inc. ("CPI"), and Corporate Realty Consultants, Inc ("CRC") combined their business operations (the "CPI Merger"). Pursuant to the terms of the CPI Merger, SPG Merger Sub, Inc., a substantially wholly-owned subsidiary of CPI, merged with and into SDG with SDG continuing as the surviving company. SDG became a majority-owned subsidiary of CPI. The outstanding shares of common stock of SDG were exchanged for a like number of shares of CPI. Beneficial interests in CRC were acquired for $14 million in order to pair the common stock of CPI with 1/100th of a share of common stock of CRC, the paired share affiliate.
Immediately prior to the consummation of the CPI Merger, the holders of CPI common stock were paid a merger dividend consisting of (i) $90 in cash, (ii) 1.0818 additional shares of CPI common stock and (iii) 0.19 shares of 6.50% Series B convertible preferred stock of CPI per share of CPI common stock. Immediately prior to the CPI Merger, there were 25,496,476 shares of CPI common stock outstanding. The aggregate value associated with the completion of the CPI Merger was approximately $5.9 billion including transaction costs and liabilities assumed.
In connection with the CPI Merger, CPI was renamed "Simon Property Group, Inc.". CRC was renamed "SPG Realty Consultants, Inc.". In addition SDG and SDG, LP were renamed "SPG Properties, Inc.", and "Simon Property Group, L.P.", respectively.
Upon completion of the CPI Merger, SPG transferred substantially all of the CPI assets acquired, which consisted primarily of 23 regional malls, one community center, two office buildings and one regional mall under construction (other than one regional mall, Ocean County Mall, and certain net leased properties valued at approximately $153 million) and liabilities assumed (except that SPG remains a co-obligor with respect to the Merger Facility (see Note 9 to the financial statements)) of approximately $2.3 billion to SPG Operating Partnership or one or more subsidiaries of the SPG Operating Partnership in exchange for 47,790,550 limited partnership interests and 5,053,580 preferred partnership interests in the SPG Operating Partnership. The preferred partnership interests carry substantially the same economic terms and equal the number of preferred shares issued and outstanding as a direct result of the CPI Merger. Likewise, the net assets of SRC, with a carrying value of approximately $14.8 million, were transferred to the SRC Operating Partnership in exchange for partnership interests.
For additional information concerning the CPI Merger, please see Note 3 to the financial statements.
The DRC Merger
On August 9, 1996, SPG acquired the national shopping center business of DeBartolo Realty Corporation ("DRC") for an aggregate value of $3.0 billion (the "DRC Merger"). The acquired portfolio consisted of 49 regional malls, 11 community centers and 1 mixed-use Property. These Properties included 47,052,267 square feet of retail space gross leasable area ("GLA") and 558,636 of office GLA. Pursuant to the DRC Merger, SPG issued a total of 37,873,965 shares of common stock to the DRC shareholders. DRC became a 99.9% subsidiary of the SPG. SPG changed its name to "Simon DeBartolo Group, Inc." In addition, the Management Company purchased from The Edward J. DeBartolo Corporation all of the voting stock of DPMI, for $2.5 million in cash.
For additional information concerning the DRC Merger, please see Note 4 to the financial statements.
General
As of December 31, 1998, Simon Group owned or held interests in a diversified portfolio of 242 income-producing Properties, including 153 regional malls, 77 community shopping centers, three specialty retail centers, six office and mixed-use properties and three value-oriented super-regional malls located in 35 states. Regional malls (including specialty retail centers, and retail space in the mixed-use Properties), community centers and the remaining portfolio comprised 90.3%, 6.0%, and 3.7%, respectively of consolidated total rent revenues and tenant reimbursements in 1998. The value-oriented super- regional malls are not included in consolidated rent revenues and tenant reimbursements as they are all accounted for using the equity method of accounting. The Properties contain an aggregate of approximately 165.9 million square feet of GLA, of which 98.2 million square feet is owned by Simon Group ("Owned GLA"). More than 4,400 different retailers occupy more than 18,400 stores in the Properties. Total estimated retail sales at the Properties exceeded $31 billion in 1998.
SPG and certain of its subsidiaries are taxed as REITs under sections 856 through 860 of the Code, and applicable Treasury regulations relating to REIT qualification. SPG is self-administered and self-managed and does not engage or pay a REIT advisor. SPG provides management, development, leasing, accounting, finance and legal, design and construction expertise through its own personnel or, where appropriate, through outside professionals.
Operating Strategies
Simon Group's primary business objectives are to increase per share cash generated from operations and the value of the Portfolio Properties and operations. Simon Group plans to achieve these objectives through a variety of methods discussed below, although no assurance can be made that such objectives will be achieved.
Leasing. Simon Group pursues an active leasing strategy, which includes aggressively marketing available space; renewing existing leases at higher base rents per square foot; and continuing to sign leases that provide for percentage rents and/or regular or periodic fixed contractual increases in base rents.
Management. Drawing upon the expertise gained through management of a geographically diverse portfolio nationally recognized as high quality retail and mixed-use Properties, Simon Group seeks to maximize cash flow through a combination of an active merchandising program to maintain its shopping centers as inviting shopping destinations, continuation of its successful efforts to minimize overhead and operating costs, coordinated marketing
and promotional activities directed towards establishing and maintaining customer loyalty, and systematic planning and monitoring of results.
Acquisitions. Simon Group intends to selectively acquire individual properties and portfolios of properties that meet its investment criteria as opportunities arise. Management believes that consolidation will continue to occur within the shopping center industry, creating opportunities for Simon Group to acquire additional portfolios of shopping centers and increase operating profit margins. Management also believes that its extensive experience in the shopping center business, access to capital markets, national operating scope, familiarity with real estate markets and advanced management systems will allow it to evaluate and execute acquisitions competitively. Additionally, Simon Group may be able to acquire properties on a tax-advantaged basis for the transferors.
Development. Simon Group's focus is to selectively develop new properties in major metropolitan areas that exhibit strong population and economic growth. During 1998, Simon Group opened two new community shopping centers. In March of 1998, Simon Group opened the approximately $13.3 million Muncie Plaza in Muncie, Indiana. Simon Group owns 100% of this 196,000 square-foot community center. In addition, phase I of the approximately $34.0 million Lakeline Plaza opened in April 1998 in Austin, Texas. Phase II of this 360,000 square-foot community center is scheduled to open in 1999. Each of these new community centers is adjacent to an existing regional mall in Simon Group's portfolio. In addition, The Shops at Sunset Place, a destination-oriented retail and entertainment project containing approximately 510,000 square feet of GLA opened in January of 1999 in South Miami, Florida. Simon Group owns a noncontrolling 37.5% of this specialty retail center.
Construction also continues on the following projects, which have an aggregate construction cost of approximately $620 million, Simon Group's share of which is approximately $347 million:
. Concord Mills, a 37.5%-owned value-oriented super regional mall project, containing approximately 1.4 million square feet of GLA, is scheduled to open in September of 1999 in Concord (Charlotte), North Carolina.
. The Mall of Georgia, an approximately 1.5 million square foot regional mall project, is scheduled to open in August of 1999. Adjacent to the regional mall, The Mall of Georgia Crossing is an approximately 444,000 square-foot community shopping center project, which is scheduled to open in October of 1999. Simon Group has a noncontrolling 50% ownership interest in each of these development projects.
. In addition to Mall of Georgia Crossing, two other new community center projects are under construction: The Shops at North East Plaza and Waterford Lakes at a combined 1,243,000 square feet of GLA.
Simon Group also has direct or indirect interests in twelve other parcels of land being held for future development in nine states totaling approximately 942 acres. Management believes Simon Group is well positioned to pursue future development opportunities as conditions warrant.
Strategic Expansions and Renovations. A key objective of Simon Group is to increase the profitability and market share of the Properties through the completion of strategic renovations and expansions. In 1998, Simon Group completed construction and opened nine new expansion and/or renovation projects: Aventura Mall in Miami, Florida; Castleton Square in Indianapolis, Indiana; Independence Center in Independence, Missouri; Irving Mall in Irving, Texas; Prien Lake Mall in Lake Charles, Louisiana; Richardson Square in Dallas, Texas; Tyrone Square in St. Petersburg, Florida; Walt Whitman Mall in Huntington, New York; and West Town Mall in Knoxville, Tennessee.
Simon Group has a number of renovation and/or expansion projects currently under construction, or in preconstruction development. Simon Group expects to commence construction on many of these projects in the next 12 to 24 months.
Competition
Simon Group believes that it has a competitive advantage in the retail real estate business as a result of (i) its use of innovative retailing concepts, (ii) its management and operational expertise, (iii) its extensive experience and relationship with retailers and lenders, (iv) the size, quality and diversity of its Properties and (v) the mall marketing initiatives of Simon Brand
Ventures, which Simon Group believes is the world's largest and most sophisticated mall marketing initiative. Management believes that the Properties are the largest, as measured by GLA, of any publicly traded REIT, with more regional malls than any other publicly traded REIT. For these reasons, management believes Simon Group to be the leader in the industry.
All of the Portfolio Properties are located in developed areas. With respect to certain of such properties, there are other properties of the same type within the market area. The existence of competitive properties could have a material effect on Simon Group's ability to lease space and on the level of rents Simon Group can obtain.
There are numerous commercial developers, real estate companies and other owners of real estate that compete with Simon Group in its trade areas. This results in competition for both acquisition of prime sites (including land for development and operating properties) and for tenants to occupy the space that Simon Group and its competitors develop and manage.
Environmental Matters
General Compliance. Management believes that the Portfolio Properties are in compliance, in all material respects, with all Federal, state and local environmental laws, ordinances and regulations regarding hazardous or toxic substances (see Item 3. Legal Proceedings). Nearly all of the Portfolio Properties have been subjected to Phase I or similar environmental audits (which generally involve only a review of records and visual inspection of the property without soil sampling or ground water analysis) by independent environmental consultants. The Phase I environmental audits are intended to discover information regarding, and to evaluate the environmental condition of, the surveyed properties and surrounding properties. The environmental audits have not revealed, nor is management aware of, any environmental liability that management believes will have a material adverse effect on Simon Group. No assurance can be given that existing environmental studies with respect to the Portfolio Properties reveal all potential environmental liabilities; that any previous owner, occupant or tenant of a Portfolio Property did not create any material environmental condition not known to management; that the current environmental condition of the Portfolio Properties will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties; or that future uses or condition (including, without limitation, changes in applicable environmental laws and regulations or the interpretation thereof) will not result in imposition of additional environmental liability.
Asbestos-Containing Materials. Asbestos-containing materials are present in most of the Properties, primarily in the form of vinyl asbestos tile, mastics and roofing materials, which are generally in good condition. Fireproofing and insulation containing asbestos is also present in certain Properties in limited concentrations or in limited areas. The presence of such asbestos-containing materials does not violate currently applicable laws. Asbestos-containing materials will be removed by Simon Group in the ordinary course of any renovation, reconstruction and expansion, and in connection with the retenanting of space.
Underground Storage Tanks. Several of the Portfolio Properties contain or at one time contained, underground storage tanks used to store waste oils or other petroleum products primarily related to auto services center establishments or emergency electrical generation equipment. All such tanks have been or are being removed, upgraded or abandoned in place in accordance with applicable environmental laws. Site assessments have revealed certain soil and groundwater contamination associated with such tanks at some of these Properties. Subsurface investigations (Phase II assessments) and remediation activities are either ongoing or scheduled to be conducted at such Properties. The cost of remediation with respect to such matters have not been and are not expected to be material.
Properties to be Developed or Acquired. Land being held for shopping mall development or that may be acquired for development may contain residues or debris associated with the use of the land by prior owners or third parties. In certain instances, such residues or debris could be or contain hazardous wastes or hazardous substances. Prior to exercising any option to acquire any of the optioned properties, Simon Group will conduct environmental due diligence consistent with past practice.
Employees
Simon Group and its affiliates employ approximately, 6,300 persons at various centers and offices throughout the United States. Approximately 935 of such employees are located at Simon Group's headquarters in Indianapolis, Indiana, and approximately 1,075 of all employees are part-time.
Insurance
Simon Group has comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its Properties. Management believes that such insurance provides adequate coverage.
Corporate Headquarters
Simon Group's executive offices are located at National City Center, 115 West Washington Street, Indianapolis, Indiana 46204, and its telephone number is (317) 636-1600.
Executive Officers of the Registrant
The following table sets forth certain information with respect to the executive officers of the Companies as of December 31, 1998.
(1) Melvin Simon is the brother of Herbert Simon and the father of David Simon.
Set forth below is a summary of the business experience of the executive officers of the Companies. The executive officers of the Companies serve at the pleasure of the Board of Directors and have served in such capacities since the formation of SPG in 1993, with the exception of Mr. Mautner, who has held his office since the CPI Merger and Mr. Sokolov and Mr. Giuliano who have held their offices since the DRC Merger. For biographical information of Melvin Simon, Herbert Simon, David Simon, Hans C. Mautner, and Richard Sokolov, see Item 10 of this report.
Mr. Foxworthy is the Executive Vice President - Corporate Development of the Companies. Mr. Foxworthy joined Melvin Simon & Associates, Inc. ("MSA") in 1980 and has been an Executive Vice President in charge of Corporate Development of MSA since 1986 and has held the same position with the Companies since SPG's formation in 1993.
Mr. Garvey is the Executive Vice President - Property Development of the Companies. Mr. Garvey, who was Executive Vice President and Director of Development at MSA, joined MSA in 1979 and held various positions with MSA.
Mr. Napoli is the Executive Vice President - Leasing of the Companies. Mr. Napoli also served as Executive Vice President and Director of Leasing of MSA, which he joined in 1989.
Mr. Neutzling is the Executive Vice President - Property Management of the Companies. Mr. Neutzling has also been an Executive Vice President of MSA since 1992 overseeing all property and asset management functions. He joined MSA in 1974 and has held various positions with MSA.
Mr. Barkley serves as the Companies' General Counsel and Secretary. Mr. Barkley holds the same position for MSA. He joined MSA in 1978 as Assistant General Counsel for Development Activity.
Mr. Sterrett serves as the Companies' Treasurer. He joined MSA in 1989 and has held various positions with MSA.
Mr. Rulli holds the position of Senior Vice President - Human Resources and Corporate Operations. He joined MSA in 1988 and has held various positions with MSA.
Mr. Giuliano has served as Senior Vice President since the DRC Merger. He joined DRC in 1993, where he served as Senior Vice President and Chief Financial Officer up to the DRC Merger.
Item 2.
Item 2. Properties
Portfolio Properties
The Properties primarily consist of two types: regional malls and community shopping centers. Regional malls contain two or more anchors and a wide variety of smaller stores ("Mall" stores) located in enclosed malls connecting the anchors. Additional stores ("Freestanding" stores) are usually located along the perimeter of the parking area. The 153 regional malls in the Properties range in size from approximately 200,000 to 2.2 million square feet of GLA, with all but three regional malls over 400,000 square feet. These regional malls contain in the aggregate nearly 16,000 occupied stores, including over 600 anchors which are mostly national retailers. As of December 31, 1998, regional malls (including specialty retail centers, and retail space in the mixed-use Properties) represented 85.1% of total GLA, 79.9% of Owned GLA and 85.9% of total annualized base rent of the Properties.
Community shopping centers are generally unenclosed and smaller than regional malls. Most of the 77 community shopping centers in the Properties range in size from approximately 100,000 to 400,000 square feet of GLA. Community shopping centers generally are of two types: (i) traditional community centers, which focus primarily on value-oriented and convenience goods and services, are usually anchored by a supermarket, drugstore or discount retailer and are designed to service a neighborhood area; and (ii) power centers, which are designed to serve a larger trade area and contain at least two anchors that are usually national retailers among the leaders in their markets and occupy more than 70% of the GLA in the center. As of December 31, 1998, community shopping centers represented 11.0% of total GLA, 13.6% of Owned GLA and 6.5% of the total annualized base rent of the Properties.
Simon Group also has an interest in three specialty retail centers, six office and mixed-use Properties and three value-oriented super-regional malls. The specialty retail centers contain approximately 763,000 square feet of GLA and do not have anchors; instead, they feature retailers and entertainment facilities in a distinctive shopping environment and location. The six office and mixed-use Properties range in size from approximately 137,000 to 1,033,000 square feet of GLA. Two of these Properties are regional malls with connected office buildings, two are located in mixed-use developments and contain primarily office space and the remaining two are solely office space. The value- oriented super-regional malls are each joint venture partnerships ranging in size from approximately 1.2 million to 1.3 million square feet of GLA. These include Arizona Mills, Grapevine Mills and Ontario Mills. These Properties combine retail outlets, manufacturers, off-price stores and other value-oriented tenants. As of December 31, 1998, value-oriented super-regional malls represented 2.3% of total GLA, 3.7% of Owned GLA and 4.0% of the total annualized base rent of the Properties.
As of December 31, 1998, approximately 90.0% of the Mall and Freestanding Owned GLA in regional malls, specialty retail centers and the retail space in the mixed use Properties was leased, approximately 98.2% of the Owned GLA in the value-oriented super-regional malls was leased, and approximately 91.4% of Owned GLA in the community shopping centers was leased.
Of the 242 Properties, 174 are owned 100% by Simon Group and the remainder are held as joint venture interests. Simon Group is the managing or co-managing general partner of all but eight of the Properties held as joint venture interests.
Additional Information ----------------------
The following table sets forth certain information, as of December 31, 1998, regarding the Properties:
(1) The date listed is the expiration date of the last renewal option available to the SPG Operating Partnership under the ground lease. In a majority of the ground leases, the lessee has either a right of first refusal or the right to purchase the lessor's interest. Unless otherwise indicated, each ground lease listed in this column covers at least 50% of its respective Property. (2) The SPG Operating Partnership's interests in some of the Properties held as joint venture interests are subject to preferences on distributions in favor of other partners. (3) This retailer operates two stores at this Property. (4) This Property is managed by a third party. (5) Indicates anchor is currently under construction. (6) Indicates ground lease covers less than 15% of the acreage of this Property. (7) The SPG Operating Partnership receives substantially all of the economic benefit of these Properties. (8) Effective March 1, 1999, the SPG Operating Partnership acquired the remaining 50% interest in Century III Mall. (9) Indicates ground lease(s) cover(s) less than 50% of the acreage of the Property. (10) Includes an anchor space currently vacant. (11) Indicates anchor has closed, but the SPG Operating Partnership still collects rents and/or fees under an agreement (12) Effective January 29, 1999, the SPG Operating Partnership acquired the remaining 15% interest in Lakeline Mall and Lakeline Plaza. (13) Indicates ground lease covers all of the Property except for parcels owned in fee by anchors. (14) Primarily retail space with approximately 59,174 square feet of office space. (15) Primarily retail space with approximately 69,876 square feet of office space. (16) Primarily retail space with approximately 119,964 square feet of office space. (17) Primarily retail space with approximately 77,371 square feet of office space. (18) Indicates one ground lease covers substantially all of the Property and a second ground lease covers the remainder. (19) Includes outlots in which the SPG Operating Partnership has an 85% interest and which represent less than 3% of the GLA and total annualized base rent for the Property. (20) The SPG Operating Partnership purchased the management contract on this Property during 1998. (21) The SPG Operating Partnership owns 60% of the original phase of this Property and 55% of phase II, which opened in August 1997. (22) Indicates a ground lease covers a pedestrian walkway and steps at this Property. The SPG Operating Partnership, as ground lessee, has the right to successive five-year renewal options, subject to specified exceptions. (23) Primarily retail space with approximately 167,150 square feet of office space. (24) Primarily retail space with 491,489 square feet of office space. (25) Primarily office space with approximately 12,800 square feet of retail space. (26) Primarily office space with approximately 24,300 square feet of retail space. (27) Indicates ground lease covers outparcel. (28) Effective December 31, 1997, Eastgate Consumer Mall, Glen Burnie Mall, Century Mall and Wichita Mall have been reclassified as community centers. These Properties are currently being operated and marketed to tenant operations which are typically included in community centers. (29) The SPG Operating Partnership demolished the previously existing regional mall, Charles Towne Square, and is in the process of rebuilding this community center and a cinema on the land. (30) Subleased from TJX Companies. (31) Scheduled to open during September 1999. (32) Scheduled to open during August 1999. (33) Scheduled to open during October 1999. (34) Scheduled to open during November 1999. (35) This Property opened in January 1999. (36) Scheduled to open during November 1999.
Land Held for Development
Simon Group has direct or indirect ownership interests in twelve parcels of land being held for future development, containing an aggregate of approximately 942 acres located in nine states, and, through the Management Company, interest in a mortgage on a parcel of land held for development containing approximately 134 acres. Management believes that Simon Group's significant base of commercially zoned land, together with Simon Group's status as a fully integrated real estate firm, gives it a competitive advantage in future development activities over other commercial real estate development companies in its principal markets.
The following table describes the acreage of the parcels of land being held for future development in which Simon Group has an ownership interest, as well as the ownership percentage of Simon Group's direct or indirect interest in each parcel:
(1) The Operating Partnerships have a direct ownership interest in each parcel except Duluth, MN and Mt. Juliet, TN. The SPG Operating Partnership has the option to acquire those parcels from the Management Company.
The Management Company has granted options to the SPG Operating Partnership (for no additional consideration) to acquire for a period of ten years (expiring December 2003) the Management Company's interest in the two parcels of land held for development, indicated in footnote (1) to the above table, at a price equal to the actual cost incurred to acquire and carry such properties. The Management Company may not sell its interest in any parcel subject to option without providing certain notice and first purchase rights to the SPG Operating Partnership.
The Management Company also holds indebtedness secured by 134 acres of land held for development, Lakeview at Gwinnett ("Lakeview") in Gwinnett County, Georgia, in which Melvin Simon, Herbert Simon and certain of their affiliates (the "Simons") hold a 64% partnership interest. In addition, the Management Company holds unsecured debt owed by the Simons as partners of this partnership. The Management Company has an option to acquire the Simons' partnership interests in Lakeview for nominal consideration in the event the requisite partner consents to such transfers are obtained. The Management Company is required to fund certain operating expenses and carrying costs of the partnership that are owed by the Simons as partners thereof. The Management Company has granted to the SPG Operating Partnership the option to acquire (i) the Simons' partnership interests and the secured debt or (ii) the property, if the Management Company forecloses the secured indebtedness, for nominal consideration plus the amount of all advances and outstanding debt.
Joint Ventures
At certain of the Properties held as joint-ventures, Simon Group and its partners each have rights of first refusal, subject to certain conditions, to acquire additional ownership in the Property should the other partner decide to sell its ownership interest. In addition, certain of the Properties held as joint ventures contain "buy-sell" provisions, which gives the partners the right to trigger a purchase or sale of ownership interest amongst the partners.
Mortgage Financing on Properties
The following table sets forth certain information regarding the mortgages and other debt encumbering the Properties. All mortgage and property related debt is nonrecourse, although certain Unitholders have guaranteed a portion of the property related debt in the aggregate amount of $706.0 million.
MORTGAGE AND OTHER DEBT ON PORTFOLIO PROPERTIES (Dollars in thousands)
(Footnotes on following page)
Item 3.
Item 3. Legal Proceedings
Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. On September 3, 1998, a complaint was filed in the Court of Common Pleas in Cuyahoga County, Ohio, captioned Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. The plaintiffs are all principals or affiliates of The Richard E. Jacobs Group, Inc. The plaintiffs allege in their complaint that the SPG Operating Partnership engaged in malicious prosecution, abuse of process, defamation, libel, injurious falsehood/unlawful disparagement, deceptive trade practices under Ohio law, tortious interference and unfair competition in connection with the SPG Operating Partnership's acquisition by tender offer of shares in RPT, a Massachusetts business trust, and certain litigation instituted in September, 1997, by the SPG Operating Partnership against Jacobs in federal district court in New York, wherein the SPG Operating Partnership alleged that Jacobs and other parties had engaged, or were engaging in activity which violated Section 10(b) of the Securities Exchange Act of 1934, as well as certain rules promulgated thereunder. Plaintiffs in the Ohio action are seeking compensatory damages in excess of $200 million, punitive damages and reimbursement for fees and expenses. It is difficult to predict the ultimate outcome of this action and there can be no assurance that the SPG Operating Partnership will receive a favorable verdict. Based upon the information known at this time, in the opinion of management, it is not expected that this action will have a material adverse effect on the Companies.
Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. On October 16, 1996, a complaint was filed in the Court of Common Pleas of Mahoning County, Ohio, captioned Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. The named defendants are SD Property Group, Inc., an indirect 99%-owned subsidiary of SPG, and DPMI, and the plaintiffs are 27 former employees of the defendants. In the complaint, the plaintiffs allege that they were recipients of deferred stock grants under the DRC stock incentive plan (the "DRC Plan") and that these grants immediately vested under the DRC Plan's "change in control" provision as a result of the DRC Merger. Plaintiffs assert that the defendants' refusal to issue them approximately 661,000 shares of DRC common stock, which is equivalent to approximately 450,000 shares of common stock of SPG computed at the 0.68 Exchange Ratio used in the DRC Merger, constitutes a breach of contract and a breach of the implied covenant of good faith and fair dealing under Ohio law. Plaintiffs seek damages equal to such number of shares of DRC common stock, or cash in lieu thereof, equal to all deferred stock ever granted to them under the DRC Plan, dividends on such stock from the time of the grants, compensatory damages for breach of the implied covenant of good faith and fair dealing, and punitive damages. The complaint was served on the defendants on October 28, 1996. The plaintiffs and SPG each filed motions for summary judgment. On October 31, 1997, the Court entered a judgment in favor of SPG granting SPG's motion for summary judgment. The plaintiffs have appealed this judgment and the matter is pending. While it is difficult to predict the ultimate outcome of this action, based on the information known to SPG to date, it is not expected that this action will have a material adverse effect on the Companies.
Roel Vento et al v. Tom Taylor et al. An affiliate of SPG is a defendant in litigation entitled Roel Vento et al v. Tom Taylor et al, in the District Court of Cameron County, Texas, in which a judgment in the amount of $7.8 million has been entered against all defendants. This judgment includes approximately $6.5 million of punitive damages and is based upon a jury's findings on four separate theories of liability including fraud, intentional infliction of emotional distress, tortuous interference with contract and civil conspiracy arising out of the sale of a business operating under a temporary license agreement at Valle Vista Mall in Harlingen, Texas. SPG is seeking to overturn the award and has appealed the verdict. SPG's appeal is pending. Although SPG is optimistic that it may be able to reverse or reduce the verdict, there can be no assurance thereof. Management, based upon the advice of counsel, believes that the ultimate outcome of this action will not have a material adverse effect on the Companies.
Browning-Ferris Industries of Illinois, et al. v. Richard Ter Maat, et al. v. Craig J. Cain, et al., Case No. 92 C 20259. On April 4, 1994, a third-party action was filed by Richard Ter Maat and five other parties (collectively referred to as "Third-Party Plaintiffs") named as defendants in the above referenced litigation, which had begun in 1992, against Machesney Park Associates (the "Affiliate") and approximately 74 other parties (collectively referred to as "Third-Party Defendants"). That third-party action alleged generally that the Third-Party Defendants are liable under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. section 9601 et seq., and under Illinois statutory and common law for certain response costs expended and to be expended by Third-Party Plaintiffs in connection with the claims asserted by Browning-Ferris Industries of Illinois and approximately 20 other parties (collectively referred to as "Plaintiffs") against the Third-Party Plaintiffs. In the original lawsuit, Plaintiffs sought reimbursement of response costs they allegedly incurred and will incur in response to the release or threat of release of hazardous substances from the M.I.G./Dewane Landfill located one mile east of the City of Belvidere, in Boone County, Illinois (the "Site"), and declaratory judgment on liability against Defendants for such response costs. To date, the Plaintiffs have alleged response costs in excess of $5.0 million in connection
with the Site. In February 1996, the Affiliate settled this pending litigation by the payment of $40,000 to the original Plaintiffs. Since that date, SPG's third party casualty insurer responded to SPG's demand, has reimbursed SPG for its costs expended to date, and has further agreed to defend and indemnify the SPG against any further loss, cost, or damage with respect to this matter.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Market Information
The Companies' paired-shares of common stock trade on the New York Stock Exchange ("NYSE") under the symbol "SPG". The quarterly price range on the NYSE for the shares of SPG common stock prior to the CPI Merger and the paired shares of common stock after the CPI Merger and the distributions declared per share for each quarter in the last two fiscal years are shown below:
(1) Includes a $0.4721 distribution declared in the third quarter of 1998, but not payable until the fourth quarter of 1998, related to the CPI Merger, designated to align the time periods of distribution payments of the merged companies. The current annual distribution rate is $2.02 per share.
There is no established public trading market for SPG's Class B common stock or Class C common stock. Distributions per share of the Class B and Class C common stock were identical to those for the Companies' common stock.
Holders
The number of holders of record of the shares of common stock was 2,488 as of March 18, 1999. Additionally, the Class B common stock is held entirely by a voting trust to which the Simons are parties and are exchangeable on a one-for- one basis into common stock, and the Class C common stock is held entirely by The Edward J. DeBartolo Corporation and are also exchangeable on a one-for-one basis into common stock.
Distributions
SPG qualifies as a REIT under the Code. To maintain its status as a REIT, SPG is required each year to distribute to its shareholders at least 95% of its taxable income after certain adjustments.
Future distributions paid by the Companies will be at the discretion of the Boards of Directors and will depend on the actual cash flow of the Companies, its financial condition, capital requirements, the annual REIT distribution requirements and such other factors as the Board of Directors of the Companies deem relevant.
The Companies have an Automatic Dividend Reinvestment Plan (the "Plan") which allows shareholders to acquire additional shares of common stock by automatically reinvesting cash dividends. Common stock is acquired pursuant to the Plan at a price equal to the prevailing market price of such common stock, without payment of any brokerage commission or service charge. Shareholders who do not participate in the Plan continue to receive cash dividends, as declared.
Unregistered Sales of Equity Securities
None.
Item 6.
Item 6. Selected Financial Data
The following tables set forth selected combined and separate financial data for the Companies. The financial data should be read in conjunction with the combined financial statements and notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations.
Other data management believes is important in understanding trends in the Companies' business is also included in the tables.
Simon Property Group, Inc. and SPG Realty Consultants, Inc. Combined: - ---------------------------------------------------------------------
Notes - -------------------------------------------------------------------------------- (1) Notes 3, 4 and 7 to the accompanying financial statements describe the CPI Merger and the DRC Merger, which occurred on September 24, 1998 and August 9, 1996, respectively, and other 1998, 1997 and 1996 real estate acquisitions and development. Note 2 to the accompanying financial statements describes the basis of presentation. (2) Represents distributions declared per period, which, in 1996, includes a distribution of $0.1515 per share declared on August 9, 1996, in connection with the DRC Merger, designated to align the time periods of distributions of the merged companies. The current annual distribution rate is $2.02 per paired share. SPG Realty Consultants, Inc.'s distributions were declared prior to the CPI Merger. (3) Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations for a definition of Funds from Operations.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED
The following discussion should be read in conjunction with the Selected Financial Data, and all of the financial statements and notes thereto included elsewhere herein. Certain statements made in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Simon Group (see below) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, which will, among other things, affect demand for retail space or retail goods, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies and technology; risks of real estate development and acquisition; governmental actions and initiatives; substantial indebtedness; conflicts of interests; maintenance of REIT status; and environmental/safety requirements.
Overview
Simon Property Group, Inc. ("SPG"), a Delaware corporation, is a self- administered and self-managed real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Each share of common stock of SPG is paired with 1/100th of a share of common stock of SPG Realty Consultants, Inc. ("SRC" and together with SPG, the "Companies").
Simon Property Group, L.P. (the "SPG Operating Partnership"), formerly known as Simon DeBartolo Group, L.P. ("SDG, LP"), is the primary subsidiary of SPG. Units of ownership interest ("Units") in the SPG Operating Partnership are paired with 1/100th of a Unit in SPG Realty Consultants, L.P. (the "SRC Operating Partnership" and together with the SPG Operating Partnership, the "Operating Partnerships"). The SRC Operating Partnership is the primary subsidiary of SRC. The Companies together with the Operating Partnerships are hereafter referred to as "Simon Group", which prior to the CPI Merger (see below) refers to Simon DeBartolo Group, Inc. ("SDG") and the SPG Operating Partnership.
The Companies, primarily through the Operating Partnerships, are engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of real estate properties, primarily regional malls and community shopping centers. As of December 31, 1998, Simon Group owns or holds an interest in 242 income-producing properties, which consist of 153 regional malls, 77 community shopping centers, three specialty retail centers, six office and mixed-use properties and three value-oriented super-regional malls in 35 states (the "Properties"). Simon Group also owns interests in one regional mall, one value-oriented super-regional mall, one specialty retail center and three community centers currently under construction and twelve parcels of land held for future development (collectively, the "Development Properties", and together with the Properties, the "Portfolio Properties"). At December 31, 1998 and 1997, the Companies' direct and indirect ownership interest in the Operating Partnerships was 71.6% and 63.9%, respectively. The SPG Operating Partnership also holds substantially all of the economic interest in M.S. Management Associates, Inc. (the "Management Company"). See Note 8 to the attached financial statements for a description of the activities of the Management Company.
Operating results of Simon Group for the two years ended December 31, 1998 and 1997, and their comparability to the respective prior periods, have been significantly impacted by a number of Property acquisitions and openings beginning in 1996. The greatest impact on results of operations has come from the CPI Merger (see Liquidity and Capital Resources), which was consummated as of the close of business on September 24, 1998, the merger with DeBartolo Realty Corporation (the "DRC Merger") which was completed on August 9, 1996, and the acquisition of Shopping Center Associates (the "SCA Acquisition"), which included a series of transactions from September 29, 1997 to June 1, 1998. In addition, Simon Group acquired ownership interests in or commenced operations of several other Properties throughout the comparative periods and, as a result, increased the number of Properties it accounts for using the consolidated method of accounting (the "Property Transactions"). The following is a listing of such transactions: On April 11, 1996, Simon Group acquired the remaining 50% economic ownership interest in Ross Park Mall for approximately $101 million. On July 31, 1996, Simon Group opened the approximately $75 million wholly-owned Cottonwood Mall in Albuquerque, New Mexico. On August 29, 1997, Simon Group opened the 55%- owned, $89 million phase II expansion of The Forum Shops at Caesar's. On December 30, 1997, Simon Group acquired 100% of The Fashion Mall at Keystone at the Crossing, along with an adjacent community center, in
Indianapolis, Indiana for $124.5 million. On January 26, 1998, Simon Group acquired 100% of Cordova Mall in Pensacola, Florida for approximately $87.3 million. On May 5, 1998, in a series of transactions, Simon Group acquired the remaining 50.1% interest in Rolling Oaks Mall for 519,889 shares of SPG's common stock, valued at approximately $17.2 million. Please refer to "Liquidity and Capital Resources" for additional information on 1998 activity.
Results of Operations
Year Ended December 31, 1998 vs. Year Ended December 31, 1997
Total revenue increased $351.4 million or 33.3% in 1998 as compared to 1997. This increase is primarily the result of the CPI Merger ($136.3 million), the SCA Acquisition ($121.7 million), the Property Transactions ($48.2 million) and approximately $12.9 million of consolidated revenues realized from marketing initiatives throughout the portfolio from Simon Group's strategic marketing division, Simon Brand Ventures ("SBV"). Excluding these transactions, total revenues increased $32.3 million, primarily due to a $20.2 million increase in minimum rent, a $10.1 million increase in other income and a $3.8 million increase in tenant reimbursements. The increase in minimum rents results from increased occupancy levels, the replacement of expiring tenant leases with renewal leases at higher minimum base rents, and a $4.3 million increase in rents from tenants operating under license agreements. The increase in other income is primarily the result of increases in gains from sales of peripheral properties ($3.4 million) and interest income ($2.8 million) and a fee ($2.5 million) earned from CPI in connection with the sale of the General Motors Building in New York, New York. The increase in tenant reimbursements is offset by a $4.6 million increase in property operating expenses for comparable properties.
Total operating expenses increased $186.2 million, or 32.3%, in 1998 as compared to 1997. This increase is primarily the result of the CPI Merger ($73.8 million, including $27.5 million of depreciation and amortization), the SCA Acquisition ($66.6 million, including $20.9 million of depreciation and amortization) and the Property Transactions ($29.7 million, including $12.9 million of depreciation and amortization). Excluding these transactions, operating expenses increased $16.1 million or 2.8%, primarily due to increases in depreciation and amortization ($6.3 million), property operating expenses ($4.6 million) and advertising and promotion ($3.7 million). The increase in depreciation and amortization is primarily due to an increase in depreciable real estate realized through renovation and expansion activities. The increase in property operating expenses is offset by a $3.8 million net increase in tenant reimbursements.
Interest expense increased $132.1 million, or 45.9% in 1998 as compared to 1997. This increase is primarily as a result of the CPI Merger ($45.5 million), the SCA Acquisition ($59.1 million) and the Property Transactions ($15.0 million) and incremental interest ($12.7 million) on borrowings under the Credit Facility to acquire the IBM Properties (see Note 7 to the financial statements).
The $7.3 million loss on the sale of an asset in 1998 is the result of the June 30, 1998 sale of Southtown Mall for $3.3 million.
Income from unconsolidated entities increased $9.4 million from $19.2 million in 1997 to $28.6 million in 1998, resulting from an increase in the Operating Partnerships' share of income from partnerships and joint ventures ($14.0 million), partially offset by a decrease in the Operating Partnerships' share of income from M.S. Management Associates Inc. (the "Management Company") ($4.6 million). The increase in the Operating Partnerships' share of income from partnerships and joint ventures is primarily the result of the addition of the IBM Properties ($14.5 million) and the CPI Merger ($7.2 million), partially offset by the increase in the amortization of the excess of the Operating Partnerships' investment over their share of the equity in the underlying net assets of unconsolidated joint-venture Properties ($8.7 million). The decrease in Management Company includes a $6.0 million decrease in development fee income.
The $7.1 million loss from extraordinary items in 1998 is the result of prepayment penalties and write-offs of mortgage costs associated with early extinguishments of debt.
Income before allocation to limited partners was $243.4 million in 1998, as compared to $203.2 million in 1997, reflecting an increase of $40.2 million, for the reasons discussed above, and was allocated to the Companies based on the Companies' direct ownership of Ocean County Mall and certain net lease assets, and the Companies' preferred unit preference and weighted average ownership interest in the Operating Partnerships during the year.
Preferred distributions of subsidiary represent distributions on preferred stock of SPG Properties, Inc. (formerly "Simon DeBartolo Group, Inc." prior to the CPI Merger), a 99.999% owned subsidiary of SPG.
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
Total revenue increased $306.5 million or 41.0% in 1997 as compared to 1996. This increase is primarily the result of the DRC Merger ($234.1 million), the SCA Acquisition ($30.6 million) and the Property Transactions ($28.4 million). Excluding these transactions, total revenues increased $13.4 million, which includes a $15.4 million increase in minimum rent and a $7.1 million increase in tenant reimbursements, partially offset by a $7.5 million decrease in other income. The $15.4 million increase in minimum rents results from increased occupancy levels, the replacement of expiring tenant leases with renewal leases at higher minimum base rents, and a $4.4 million increase in rents from tenants operating under license agreements. The $7.1 million increase in tenant reimbursements is partially offset by a net increase in recoverable expenses. The $7.5 million decrease in other income is primarily the result of decreases in lease settlement income ($3.0 million), interest income ($1.3 million) and gains from sales of peripheral properties ($1.7 million).
Total operating expenses increased $160.9 million, or 38.7%, in 1997 as compared to 1996. This increase is primarily the result of the DRC Merger ($113.5 million), the SCA Acquisition ($15.9 million), the Property Transactions ($17.3 million), and the increase in depreciation and amortization ($10.1 million), primarily due to an increase in depreciable real estate realized through renovation and expansion activities.
Interest expense increased $85.6 million, or 42.4% in 1997 as compared to 1996. This increase is primarily as a result of the DRC Merger ($61.1 million), the SCA Acquisition ($13.9 million) and the Property Transactions ($9.1 million).
The $0.1 million gain from extraordinary items in 1997 is the net result of gains realized on the forgiveness of debt ($31.1 million) and the write-off of net unamortized debt premiums ($8.4 million), partially offset by the acquisition of the contingent interest feature on four loans ($21.0 million) and prepayment penalties and write-offs of mortgage costs associated with early extinguishments of debt ($18.4 million). The $3.5 million extraordinary loss in 1996 is the result of write-offs of mortgage costs associated with early extinguishments of debt.
Income from unconsolidated entities increased from $9.5 million in 1996 to $19.2 million in 1997, resulting from an increase in the SPG Operating Partnership's share of the Management Company's income ($5.0 million) and an increase in its share of income from partnerships and joint ventures ($4.6 million). The increase in Management Company income is primarily the result of income realized through marketing initiatives ($2.0 million) and the SPG Operating Partnership's share of the Management Company's gains on sales of peripheral property ($1.9 million). The increase in the SPG Operating Partnership's share of income from partnerships and joint ventures is primarily the result of the DRC Merger ($4.9 million), the SCA Acquisition ($3.2 million), and the nonconsolidated joint-venture Properties acquired or commencing operations during 1997 ($5.0 million), partially offset by the increase in the amortization of the excess of the SPG Operating Partnership's investment over its share of the equity in the underlying net assets of unconsolidated joint- venture Properties ($8.8 million).
Income before allocation to limited partners was $203.2 million in 1997, as compared to $131.1 million in 1996, reflecting an increase of $72.0 million, for the reasons discussed above, and was allocated to SPG based on SPG's preferred unit preference and weighted average ownership interest in the SPG Operating Partnership during the year.
Preferred distributions increased by $16.6 million to $29.2 million in 1997 as a result of SPG's issuance of $200 million of 8 3/4% Series B cumulative redeemable preferred stock on September 27, 1996 and $150 million of 7.89% Series C Cumulative Step-Up Premium RateSM Preferred Stock on July 9, 1997, partially offset by a reduction in preferred distributions ($2.0 million) resulting from the conversion of the $100 million 8 1/8% Series A convertible preferred stock into 3,809,523 shares of common stock on November 11, 1997.
Liquidity and Capital Resources
As of December 31, 1998, Simon Group's balance of unrestricted cash and cash equivalents was $129.2 million. In addition to its cash balance, Simon Group has a $1.25 billion unsecured revolving credit facility (the "Credit Facility") which had $880.8 million available after outstanding borrowings and letters of credit at December 31, 1998. The Credit Facility bears interest at LIBOR plus 65 basis points and has an initial maturity of September 1999, with a one-year extension available at Simon Group's option. SPG and the SPG Operating Partnership also have access to public equity and debt markets.
Management anticipates that cash generated from operating performance will provide the necessary funds on a short- and long-term basis for its operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures, and distributions to shareholders in accordance with REIT requirements. Sources of capital for nonrecurring capital expenditures, such as major building renovations and expansions, as well as for scheduled principal payments, including balloon payments, on outstanding indebtedness are expected to be obtained from: (i) excess cash generated from operating performance; (ii) working capital reserves; (iii) additional debt financing; and (iv) additional equity raised in the public markets.
Sensitivity Analysis. The Operating Partnerships' combined future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, primarily LIBOR. Based upon consolidated indebtedness and interest rates at December 31, 1998, a 1% increase in the market rates of interest would decrease future earnings and cash flows by approximately $15.5 million, and would decrease the fair value of debt by approximately $800 million. A 1% decrease in the market rates of interest would increase future earnings and cash flows by approximately $15.5 million, and would increase the fair value of debt by approximately $1.1 billion.
Financing and Debt
At December 31, 1998, Simon Group had combined consolidated debt of $7,973 million, of which $5,670 million is fixed-rate debt bearing interest at a weighted average rate of 7.3% and $2,303 million is variable-rate debt bearing interest at a weighted average rate of 6.1%. As of December 31, 1998, Simon Group had interest rate protection agreements related to $938 million of combined consolidated variable-rate debt. Simon Group's hedging activity as a result of these interest rate protection agreements resulted in net interest savings of $263 thousand for the year ended December 31, 1998. This did not materially impact Simon Group's weighted average borrowing rates.
Simon Group's share of total scheduled principal payments of mortgage and other indebtedness, including unconsolidated joint venture indebtedness over the next five years is $4,729 million, with $4,315 million thereafter. Simon Group's ratio of consolidated debt-to-market capitalization was 51.2% and 46.0% at December 31, 1998 and 1997, respectively. The increase is primarily the result of a 12.8% decrease in the Companies' common stock price in 1998.
The following summarizes significant financing and refinancing transactions completed in 1998:
Financings related to the CPI Merger. The cost of the CPI Merger (see below) included the issuance of 53,078,564 shares of common stock and 4,844,331 shares of 6.50% Series B Convertible Preferred Stock to the CPI shareholders. Each share of Series B Convertible Preferred Stock is convertible into 2.586 paired shares of common stock of the Companies, subject to adjustment under certain circumstances described in Note 11 of the financial statements. Also resulting from the CPI Merger, SPG became the issuer of 209,249 shares of 6.50% Series A Convertible Preferred Stock. Each share of which is convertible into 37.995 paired shares of the Companies' common stock, subject to adjustment under the same circumstances as SPG's 6.50% Series B Convertible Preferred Stock described above. On February 26, 1999, 150,000 of such shares were converted.
To finance the cash portion of the CPI Merger, the SPG Operating Partnership and SPG, as co-obligors, obtained a $1.4 billion unsecured bridge loan (the "Merger Facility"). The Merger Facility bears interest at a base rate of LIBOR plus 65 basis points and has stated maturities at the following intervals (i) $450 million on June 24, 1999 (ii) $450 million on March 24, 2000 and (iii) $500 million on September 24, 2000. In February 1999 the initial $450 million maturity was retired with proceeds from an unsecured debt offering, which is described below. The Merger Facility is subject to covenants and conditions substantially identical to those of the Credit Facility. Simon Group drew the entire $1.4 billion available on the Merger Facility, along with $237 million on the Credit Facility, to pay for the cash portion of the dividend declared in conjunction with the CPI Merger, as well as closing costs associated with the CPI Merger. Financing costs of $9.5 million, which were incurred to obtain the Merger Facility, are being amortized over 18 months.
Also in conjunction with the CPI Merger, the SPG Operating Partnership transferred substantially all of the CPI assets and $825 million of unsecured notes (the "CPI Notes") to Retail Property Trust ("RPT"), a 99.999% owned REIT subsidiary of the SPG Operating Partnership. As a result, the CPI Notes are structurally senior in right of payment to holders of other Simon Group unsecured notes to the extent of the assets of RPT only, with over 99.999% of the excess cash flow plus any capital event transactions available for the other Simon Group unsecured notes. The CPI Notes pay interest semiannually, and bear interest ranging from 7.05% to 9.00% (weighted average of 8.03%), and have various due dates through 2016 (average maturity of 9.1 years). The CPI Notes contain leverage ratios, annual real property appraisal requirements, debt service
coverage ratios and minimum net worth ratios. Additionally, consolidated mortgages totaling $2.1 million, and a pro-rata share of $143.5 million of nonconsolidated joint venture indebtedness was assumed in the CPI Merger, and as a result of acquiring the remaining interest in Palm Beach Mall, Simon Group began accounting for that Property using the consolidated method of accounting, adding $50.7 million to consolidated indebtedness. A net premium of $19.2 million was recorded in accordance with the purchase method of accounting to adjust the CPI Notes and mortgage indebtedness assumed in the CPI Merger to fair value, which is being amortized over the remaining lives of the related indebtedness.
Secured Indebtedness. During 1998, Simon Group refinanced approximately $545 million of mortgage indebtedness on 19 of its Properties into four separate cross-collateralized and cross-defaulted pools. These refinancings included additional borrowings of approximately $270 million, which Simon Group used primarily to paydown the Credit Facility and for general working capital needs. The weighted average maturity of the indebtedness increased from approximately 5.6 years to 7.1 years, while the weighted average interest rates decreased from approximately 7.6% to 7.3%.
Credit Facility. The maximum and average amounts outstanding during 1998 under the Credit Facility were $992 million and $584 million, respectively.
Equity Financings. During 1998, SPG issued 2,957,335 shares of its common stock in offerings generating aggregate net proceeds of approximately $91.4 million. The net proceeds were contributed to the SPG Operating Partnership in exchange for a like number of Units. The SPG Operating Partnership used the net proceeds for general working capital purposes. In addition, SPG issued 519,889 shares of common stock valued at $17.2 million to acquire the remaining 50.1% interest in Rolling Oaks Mall.
Unsecured Notes. On June 22, 1998, Simon Group completed the sale of $1.075 billion of senior unsecured debt securities. The issuance included three tranches of notes as follows (1) $375 million bearing interest at 6.625% and maturing on June 15, 2003 (2) $300 million bearing interest at 6.75% and maturing on June 15, 2005 and (3) $200 million bearing interest at 7.375% and maturing on June 15, 2018. This offering also included a fourth tranche of $200 million of 7.00% Mandatory Par Put Remarketed Securities due June 15, 2028, which are subject to redemption on June 16, 2008. The net proceeds of approximately $1.062 billion were combined with $40 million of working capital and used to retire and terminate a $300 million unsecured revolving credit facility and to reduce the outstanding balance of the Credit Facility.
Additionally, on February 4, 1999, the SPG Operating Partnership completed the sale of $600 million of senior unsecured notes. The notes include two $300 million tranches. The first tranche bears interest at 6.75% and matures on February 4, 2004 and the second tranche bears interest at 7.125% and matures on February 4, 2009. The SPG Operating Partnership used the net proceeds of approximately $594 million to retire the $450 million initial tranche of the Merger Facility and to pay $142 million on the outstanding balance of the Credit Facility. Following this offering, the SPG Operating Partnership had remaining $250 million on its debt shelf registration, under which debt securities may be issued.
The CPI Merger
For financial reporting purposes, as of the close of business on September 24, 1998, pursuant to the Agreement and Plan of Merger dated February 18, 1998, among Simon DeBartolo Group, Inc., Corporate Property Investors, Inc., and Corporate Realty Consultants, Inc., the CPI Merger was consummated. As a result, the consolidated results of operations include an additional 17 regional malls, two office buildings and one community center, with an additional six regional malls being accounted for using the equity method of accounting.
The total purchase price associated with the CPI Merger is approximately $5.9 billion including transaction costs and liabilities assumed. This includes a per share dividend paid immediately prior to the CPI Merger to the holders of CPI common stock of (i) $90 in cash, (ii) 1.0818 additional shares of common stock and (iii) 0.19 shares of 6.50% Series B convertible preferred stock. The dividend was paid on a total of 25,496,476 shares of CPI common stock.
See Note 3 to the financial statements for additional information about the CPI Merger.
Acquisitions and Disposals
During 1998, in addition to the CPI Merger, Simon Group acquired 100% of one Property and additional interests in a total of 21 Properties for approximately $657 million, including the assumption of $271 million of indebtedness and 2,864,088 Units valued at approximately $93 million, with the remainder in cash financed primarily through the Credit
Facility and working capital. These transactions resulted in the addition of approximately 11.8 million square feet of GLA to the portfolio.
Simon Group and several joint venture partners have collectively acquired a 44 percent ownership position in Groupe BEG, S.A. ("BEG"). BEG is a fully integrated European retail real estate developer, lessor and manager. Simon Group and its affiliated Management Company, have contributed $27.5 million of equity capital for a 22% ownership interest and are committed to an additional investment of $28.7 million over the next 12 months, subject to certain financial and other conditions, including Simon Group's approval of development projects. The agreement with BEG is structured to allow Simon Group and its partners to collectively acquire a controlling interest in BEG over time.
Effective June 1, 1998, Simon Group sold The Promenade for $33.5 million. No gain or loss was recognized on this transaction. Effective June 30, 1998, Simon Group sold Southtown Mall for $3.3 million and recorded a $7.2 million loss on the transaction.
See Note 4 to the financial statements for 1997 and 1996 acquisition activity.
On February 25, 1999 Simon Group entered into a definitive agreement with New England Development Company ("NED") to acquire and assume management responsibilities for NED's portfolio of up to 14 regional malls aggregating approximately 10.6 million square feet of GLA. The purchase price for the portfolio is approximately $1.725 billion. Simon Group expects to form a joint venture to acquire the portfolio, with Simon Group's ultimate ownership to be between 30% to 50%.
Management continues to actively review and evaluate a number of individual property and portfolio acquisition opportunities. Management believes that funds on hand and amounts available under the Credit Facility, together with the ability to issue shares of common stock and/or Units, provide the means to finance certain acquisitions. No assurance can be given that Simon Group will not be required to, or will not elect to, even if not required to, obtain funds from outside sources, including through the sale of debt or equity securities, to finance significant acquisitions, if any.
Portfolio Restructuring. As a continuing part of Simon Group's long-term strategic plan, management is evaluating the potential sale of non-retail holdings, along with a number of retail assets that are no longer aligned with Simon Group's strategic criteria. If these assets are sold, management expects the sale prices will not differ materially from the carrying value of the related assets.
Development Activity
Development activities are an ongoing part of Simon Group's business. During 1998, Simon Group opened two new community shopping centers at a combined cost of approximately $47.3 million, adding 465,500 square-feet of GLA to the portfolio. Each of these new community centers is adjacent to an existing regional mall in Simon Group's portfolio. In addition, The Shops at Sunset Place, a destination-oriented retail and entertainment project containing approximately 510,000 square feet of GLA, opened in January of 1999 in South Miami, Florida. Simon Group owns a noncontrolling 37.5% of this specialty retail center.
Construction also continues on the following projects, which have an aggregate construction cost of approximately $620 million, Simon Group's share of which is approximately $347 million:
. Concord Mills, a 37.5%-owned value-oriented super regional mall project, containing approximately 1.4 million square feet of GLA, is scheduled to open in September of 1999 in Concord (Charlotte), North Carolina.
. The Mall of Georgia, an approximately 1.5 million square foot regional mall project, is scheduled to open in August of 1999. Adjacent to the regional mall, The Mall of Georgia Crossing is an approximately 444,000 square-foot community shopping center project, which is scheduled to open in October of 1999. Simon Group is funding 85% of the capital requirements of the project. Simon Group has a noncontrolling 50% ownership interest in each of these development projects after the return of its equity and a 9% return thereon.
. In addition to Mall of Georgia Crossing, two other new community center projects are under construction: The Shops at North East Plaza and Waterford Lakes at a combined 1,243,000 square feet of GLA.
Strategic Expansions and Renovations
A key objective of Simon Group is to increase the profitability and market share of the Properties through the completion of strategic renovations and expansions. In 1998, Simon Group completed construction and opened nine new expansion and/or renovation projects: Aventura Mall in Miami, Florida; Castleton Square in Indianapolis, Indiana; Independence Center in Independence, Missouri; Irving Mall in Irving, Texas; Prien Lake Mall in Lake Charles, Louisiana; Richardson Square in Dallas, Texas; Tyrone Square in St. Petersburg, Florida; Walt Whitman Mall in Huntington, New York; and West Town Mall in Knoxville, Tennessee.
Simon Group currently has five major expansion projects under construction at an aggregate cost of approximately $465 million, Simon Group's share of which is approximately $422 million:
. A $146 million renovation and expansion of The Shops at Mission Viejo in Mission Viejo, California, including the additions of Nordstrom and Saks Fifth Avenue with expansions of Macy's and Robinsons-May is scheduled for completion in the winter of 1999. In addition, a new food court is scheduled to open late in 2000. Simon Group owns 100% of this mall.
. North East Mall will have an additional 308,000 square feet of GLA including a 73,000 square foot small shop expansion, a new Nordstrom and Saks Fifth Avenue when its $103 million renovation and expansion project, which is scheduled to open in the fall of 2000, is complete. Simon Group owns 100% of this regional mall.
. An approximately 200,000 square-foot small shop expansion of The Florida Mall in Orlando, Florida, as well as the addition of Burdines, is scheduled for completion in November of 1999. Expansions of Dillard's, Parisian and JCPenney are also included in this $86 million project. Simon Group has a noncontrolling 50% ownership interest in this project.
. The $65 million expansion and renovation of Town Center at Boca Raton in Boca Raton, Florida includes the addition of Nordstrom, a relocation of Saks Fifth Avenue, a mall renovation and the expansions of Lord & Taylor and Bloomingdale's, with more than 100,000 additional square feet of small shops. This wholly-owned development project is scheduled for completion in the summer of 2000.
. Richmond Town Square is in the middle of a $57 million renovation and expansion project which includes a new Kaufmann's and a JCPenney renovation that opened in November 1998, a Sears remodel and a new food court scheduled to open in May of 1999 and a new Sony Cinema scheduled to open early in 2000.
Simon Group has a number of smaller renovation and/or expansion projects currently under construction aggregating approximately $200 million, nearly all of which relates to wholly-owned Properties. In addition, preconstruction development continues on a number of project expansions, renovations and anchor additions at additional properties. Simon Group expects to commence construction on many of these projects in the next 12 to 24 months.
It is anticipated that these projects will be financed principally with access to debt and equity markets, existing corporate credit facilities and cash flow from operations.
Capital Expenditures
Consolidated capital expenditures, excluding acquisitions, were $349 million, $332 million and $211 million for the periods ended December 31, 1998, 1997 and 1996, respectively.
Distributions
SPG declared distributions on its common stock in 1998 aggregating $2.02 per share. On January 20, 1999, SPG declared a distribution of $0.5050 per share of common stock payable on February 19, 1999, to shareholders of record on February 5, 1999. The current combined annual distribution rate is $2.02 per share of common stock. For federal income tax purposes, 1% of the 1998 common stock distributions represented a capital gain and 48% represented a return of capital. None of the 1997 distributions represented a capital gain and 35% represented a return of capital. Future distributions will be determined based on actual results of operations and cash available for distribution. For purposes of the former CPI shareholders, 9.7% of the distributions declared by CPI during 1998, prior to the CPI Merger, represented a capital gain.
Investing and Financing Activities
In March 1998, Simon Group transferred its 50% ownership interest in The Source, an approximately 730,000 square-foot regional mall, to a newly formed limited partnership in which it has a 50% ownership interest, with the result that Simon Group now owns an indirect noncontrolling 25% ownership interest in The Source. In connection with this transaction, Simon Group's partner in the newly formed limited partnership is entitled to a preferred return of 8% on its initial capital contribution, a portion of which was distributed to Simon Group. Simon Group applied the distribution against its investment in The Source.
In August 1998, Simon Group admitted an additional partner into the partnership which owns The Shops at Sunset Place for $35 million, which was distributed to Simon Group. Simon Group now holds a 37.5% noncontrolling interest in this Property, which opened in January 1999. Simon Group applied the distribution against its investment in the Property.
Cash used in investing activities for the year ended December 31, 1998 of $2,102 million is primarily the result of the CPI Merger and other acquisitions of $1,943 million, $350 million of capital expenditures and $22 million of investments in and advances to the Management Company, partially offset by net distributions from unconsolidated entities of $140 million, cash received from acquired Properties of $18 million, net proceeds of $46 million from the sales of Sherwood Gardens, The Promenade and Southtown Mall and an $8 million decrease in restricted cash. In addition to the $1,659 million paid in connection with the CPI Merger, acquisitions includes $240 million for the acquisition of the IBM Properties, $41 million for the acquisition of Arboretum and $3 million for the acquisition of Cordova Mall. Capital expenditures includes development costs of $58 million, renovation and expansion costs of approximately $222 million and tenant costs and other operational capital expenditures of approximately $66 million. Development costs include $39 million for the Shops at Sunset Place and $14 million at Waterford Lakes. Net distributions from unconsolidated entities primarily consists of $55 million from Florida Mall, $33 million from The Source transactions described above, $30 million associated with The Shops at Sunset Place transaction described above and $12 million from the IBM Properties.
Cash provided by financing activities for the year ended December 31, 1998 was $1,592 million and includes net borrowings of $1,914 million primarily used to fund the CPI Merger and other acquisition and development activity and net proceeds from sales of common stock of $115 million, partially offset by total distributions to minority interest partners of consolidated Properties, shareholders of the Companies, SPG Properties, Inc. and limited partners in the Operating Partnerships of $437 million.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
Management believes that there are several important factors that contribute to the ability of Simon Group to increase rent and improve profitability of its shopping centers, including aggregate tenant sales volume, sales per square foot, occupancy levels and tenant costs. Each of these factors has a significant effect on EBITDA. Management believes that EBITDA is an effective measure of shopping center operating performance because: (i) it is industry practice to evaluate real estate properties based on operating income before interest, taxes, depreciation and amortization, which is generally equivalent to EBITDA; and (ii) EBITDA is unaffected by the debt and equity structure of the property owner. EBITDA: (i) does not represent cash flow from operations as defined by generally accepted accounting principles; (ii) should not be considered as an alternative to net income as a measure of operating performance; (iii) is not indicative of cash flows from operating, investing and financing activities; and (iv) is not an alternative to cash flows as a measure of liquidity.
Total EBITDA for the Properties increased from $387 million in 1994 to $1,362 million in 1998, representing a compound annual growth rate of 37.0%. This growth is primarily the result of the CPI Merger ($113 million), the DRC Merger ($418 million), the SCA Acquisition ($123 million), the IBM acquisition ($73 million), and other Properties developed or acquired during the comparative periods ($214 million). The remaining growth in total EBITDA ($33 million) reflects the
addition of GLA to the Portfolio Properties through expansions, increased rental rates, increased tenant sales, improved occupancy levels and effective control of operating costs. During this period, the operating profit margin increased from 61.9% to 64.8%. This improvement is also primarily attributable to aggressive leasing of new and existing space and effective control of operating costs.
The following summarizes total EBITDA for the Portfolio Properties and the operating profit margin of such properties, which is equal to total EBITDA expressed as a percentage of total revenue:
(1) EBITDA after minority interest represents Simon Group's allocable portion of earnings before interest, taxes, depreciation and amortization for all Properties based on its economic ownership in each Property.
(2) The 1996 operating profit margin, excluding the $7.2 million merger integration costs, is 63.2%.
Funds from Operations ("FFO")
FFO, as defined by NAREIT, means the consolidated net income of Simon Group and its subsidiaries without giving effect to real estate related depreciation and amortization, gains or losses from extraordinary items, gains or losses on sales of real estate, gains or losses on investments in marketable securities and any provision/benefit for income taxes for such period, plus the allocable portion, based on Simon Group's economic ownership interest, of funds from operations of unconsolidated joint ventures, all determined on a consistent basis in accordance with generally accepted accounting principles. Management believes that FFO is an important and widely used measure of the operating performance of REITs which provides a relevant basis for comparison among REITs. FFO is presented to assist investors in analyzing the performance of Simon Group. Simon Group's method of calculating FFO may be different from the methods used by other REITs. FFO: (i) does not represent cash flow from operations as defined by generally accepted accounting principles; (ii) should not be considered as an alternative to net income as a measure of operating performance or to cash flows from operating, investing and financing activities; and (iii) is not an alternative to cash flows as a measure of liquidity.
The following summarizes FFO of Simon Group and the Companies and reconciles combined income before extraordinary items to FFO of Simon Group for the periods presented:
Portfolio Data
Operating statistics give effect to the CPI Merger for 1998 only and the DRC Merger for all periods presented. Statistics include all Properties except for the redevelopment area at Irving Mall, Charles Towne Square, Richmond Town Square and The Shops at Mission Viejo, which are all undergoing extensive redevelopment. The value-oriented super-regional mall category consists of Arizona Mills, Grapevine Mills and Ontario Mills.
Aggregate Tenant Sales Volume and Sales per Square Foot. From 1995 to 1998, total reported retail sales at mall and freestanding GLA owned by the Operating Partnerships ("Owned GLA") in the regional malls and all reporting tenants at community shopping centers increased from $7,649 million to $14,587 million. Sales for 1998 includes $3,180 million, $1,060 million, and $1,041 million from the CPI Properties, the SCA Acquisition, and the IBM Properties, respectively. Excluding these Properties, 1998 sales were $9,305 million, which is a compound annual growth rate of 6.8%. Retail sales at Owned GLA affect revenue and profitability levels because they determine the amount of minimum rent that can be charged, the percentage rent realized, and the recoverable expenses (common area maintenance, real estate taxes, etc.) the tenants can afford to pay.
The following illustrates the total reported sales of tenants at Owned GLA:
Regional mall sales per square foot increased 9.0% in 1998 to $343 as compared to $315 in 1997. In addition, sales per square foot of reporting tenants operating for at least two consecutive years ("Comparable Sales") increased from $318 to $346, or 8.8%, from 1997 to 1998. Simon Group believes its strong sales growth in 1998 is the result of its aggressive retenanting efforts and the redevelopment of many of the Properties. Sales per square foot at the community shopping centers
decreased in 1998 to $176 as compared to $179 in 1997. Sales statistics for value-oriented super-regional malls are not provided as this category is comprised of newly constructed malls with insufficient history to provide meaningful comparisons.
Occupancy Levels. Occupancy levels for mall and freestanding Owned GLA at the regional malls increased from 87.3% at December 31, 1997, to 90.0% at December 31, 1998. Occupancy levels for all tenants at the value-oriented super- regional malls increased from 93.8% at December 31, 1997, to 98.2% at December 31, 1998. Occupancy levels for all tenants at the community shopping centers increased slightly, from 91.3% at December 31, 1997, to 91.4% at December 31, 1998. Owned GLA has increased 20.2 million square feet from December 31, 1997, to December 31, 1998, primarily as a result of the IBM acquisition, the CPI Merger, the acquisition of the Arboretum, and the 1998 Property openings.
Tenant Occupancy Costs. Tenant occupancy costs as a percentage of sales increased from 11.5% in 1997 to 12.3% in 1998 in the regional mall portfolio. A tenant's ability to pay rent is affected by the percentage of its sales represented by occupancy costs, which consist of rent and expense recoveries. As sales levels increase, if expenses subject to recovery are controlled, the tenant can pay higher rent. Management believes Simon Group is one of the lowest-cost providers of retail space, which has permitted the rents in both regional malls and community shopping centers to increase without raising a tenant's total occupancy cost beyond its ability to pay. Management believes continuing efforts to increase sales while controlling property operating expenses will continue the trend of increasing rents at the Properties.
Average Base Rents. Average base rents per square foot of mall and freestanding Owned GLA at regional malls increased 34.0%, from $19.18 in 1995 to $25.70 in 1998. For all tenants at the community shopping centers, average base rents of Owned GLA increased 5.3%, from $7.29 in 1995 to $7.68 in 1998.
The following highlights this trend:
Inflation
Inflation has remained relatively low during the past four years and has had a minimal impact on the operating performance of the Properties. Nonetheless, substantially all of the tenants' leases contain provisions designed to lessen the impact of inflation. Such provisions include clauses enabling Simon Group 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 Simon Group to replace existing leases with new leases at higher base and/or percentage rentals if rents of the existing leases are below the then-existing market rate. Substantially all of the leases, other than those for anchors, require the tenants to pay a proportionate
share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing Simon Group's exposure to increases in costs and operating expenses resulting from inflation.
However, inflation may have a negative impact on some of Simon Group's other operating items. Interest and general and administrative expenses may be adversely affected by inflation as these specified costs could increase at a rate higher than rents. Also, for tenant leases with stated rent increases, inflation may have a negative effect as the stated rent increases in these leases could be lower than the increase in inflation at any given time.
Year 2000 Costs
Simon Group has undertaken a project to identify and correct problems arising from the inability of information technology hardware and software systems to process dates after December 31, 1999. This Year 2000 project consists of two primary components. The first component focuses on Simon Group's key information technology systems (the "IT Component") and the second component focuses on the information systems of key tenants and key third party service providers as well as imbedded systems within common areas of substantially all of the Properties (the "Non-IT Component"). Key tenants include the 20 largest base rent contributors and anchor tenants with over 25,000 square feet of GLA. Key third party service providers are those providers whose Year 2000 problems, if not addressed, would be likely to have a material adverse effect on Simon Group's operations.
The IT Component of the Year 2000 project is being managed by the information services department of Simon Group who have actively involved other disciplines within Simon Group who are directly impacted by an IT Component of the project. The Non-IT Component is being managed by a steering committee of 25 employees, including senior executives of a number of Simon Group's departments. In addition, outside consultants have been engaged to assist in the Non-IT Component.
Status of Project
IT Component. Simon Group's primary operating, financial accounting and billing systems and Simon Group's standard primary desktop software have been determined to be Year 2000 ready. Simon Group's information services department has also completed its assessment of other "mission critical" applications within Simon Group and is currently implementing solutions to those applications in order for them to be Year 2000 ready. It is expected that the implementation of these mission critical solutions will be complete by September 30, 1999.
Non-IT Component. The Non-IT Component includes the following phases: (1) an inventory of Year 2000 items which are determined to be material to Simon Group's operations; (2) assigning priority to identified items; (3) assessing Year 2000 compliance status as to all critical items; (4) developing replacement or contingency plans based on the information collected in the preceding phases; (5) implementing replacement and contingency plans; and (6) testing and monitoring of plans, as applicable.
Phase (1) and Phase (2) are complete and Phase (3) is in process. The assessment of compliance status of key tenants is approximately 82% complete, the assessment of compliance status of key third party service providers is approximately 80% complete, the assessment of compliance status of critical inventoried components at the Properties is approximately 79% complete and the assessment of compliance status of non-critical inventoried components at the Properties is approximately 75% complete. Simon Group expects to complete Phase (3) by April 30, 1999. The development of contingency or replacement plans (Phase (4)) is scheduled to be completed by September 30, 1999. Development of such plans is ongoing. Implementation of contingency and replacement plans (Phase (5)) has commenced and will continue through 1999 to the extent Year 2000 issues are identified. Any required testing (Phase (6)) is to be completed throughout the remainder of 1999.
Costs. Simon Group estimates that it will spend approximately $1.5 million in incremental costs for its Year 2000 project. This amount will be incurred over a period that commenced in January 1997 and is expected to end in September 1999. Costs incurred through December 31, 1998 are estimated at approximately $500 thousand. Such amounts are expensed as incurred. These estimates do not include the costs expended by Simon Group following its 1996 merger with DeBartolo Realty Corporation for software, hardware and related costs necessary to upgrade its primary operating, financial accounting and billing systems, which allowed those systems to, among other things, become Year 2000 compliant.
Risks. The most reasonably likely worst case scenario for Simon Group with respect to the Year 2000 problems would be disruptions in operations at the Properties. This could lead to reduced sales at the Properties and claims by tenants which would in turn adversely affect Simon Group's results of operations.
Simon Group has not yet completed all phases of its Year 2000 project and Simon Group is dependent upon key tenants and key third party suppliers to make their information systems Year 2000 compliant. In addition, disruptions in the economy generally resulting from Year 2000 problems could have an adverse effect on Simon Group's operations.
Seasonality
The shopping center industry is seasonal in nature, particularly in the fourth quarter during the holiday season, when tenant occupancy and retail sales are typically at their highest levels. In addition, shopping malls achieve most of their temporary tenant rents during the holiday season. As a result of the above, earnings are generally highest in the fourth quarter of each year.
Item 7A.
Item 7A. Qualitative and Quantitative Disclosure About Market Risk
Reference is made to Item 7 of this Form 10-K under the caption "Liquidity and Capital Resources".
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to the Index to Financial Statements contained in Item 14.
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
The information required by this item is incorporated herein by reference to the Companies' definitive Proxy Statements for their annual meetings of shareholders to be filed with the Commission pursuant to Regulation 14A and is included under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I hereof.
Item 11.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the Companies' definitive Proxy Statements for their annual meetings of shareholders to be filed with the Commission pursuant to Regulation 14A.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to the Companies' definitive Proxy Statements for their annual meetings of shareholders to be filed with the Commission pursuant to Regulation 14A.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to the Companies' definitive Proxy Statements for their annual meetings of shareholders to be filed with the Commission pursuant to Regulation 14A.
Part IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
The following information includes audited financial statements of Simon Property Group, Inc. ("SPG"), SPG Realty Consultants, Inc. ("SRC") and the combined financial statements of SPG and SRC for the period following the CPI Merger and related transactions (see Note 3). Each share of common stock of SPG is paired with 1/100th of a share of common stock of SRC, with the result that each shareholder of SPG holds a proportionate interest in SRC.
(b) Reports on Form 8-K -------------------
Two Forms 8-K were filed during the fourth quarter ended December 31, 1998.
On October 9, 1998 under Item 2 - Acquisition or Disposition of Assets, Simon Property Group, Inc. and SPG Realty Consultants, Inc. (the "Registrants") jointly filed a Form 8-K to announce the consummation of the merger by and among Simon DeBartolo Group, Inc. (the accounting predecessor
to Simon Property Group, Inc.), Corporate Property Investors, Inc. and Corporate Realty Consultants, Inc. (the predecessor to SPG Realty Consultants, Inc.). On December 8, 1998, the Registrants filed an amendment to the October 9, 1998 Form 8-K to include, under Item 7 - Financial Statements and Exhibits, pro forma financial information through September 30, 1998.
On November 25, 1998 under Item 5 - Other Events, Simon Property Group, Inc. reported that it made available additional ownership and operational information concerning Simon Property Group, Inc., Simon Property Group, L.P. and the properties owned or managed as of September 30, 1998, in the form of a Supplemental Information package. A copy of the package was included as an exhibit to the 8-K filing.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Simon Property Group, Inc. and SPG Realty Consultants, Inc.:
We have audited the accompanying combined balance sheets of Simon Property Group, Inc. and subsidiaries and its paired share affiliate, SPG Realty Consultants, Inc. and subsidiaries (see Note 2), as of December 31, 1998 and 1997, and the related combined statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. We have audited the accompanying consolidated balance sheets of Simon Property Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. We have also audited the accompanying consolidated balance sheet of SPG Realty Consultants, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and the related statements of operations, shareholders' equity and cash flows for the year ended December 31, 1998. These financial statements are the responsibility of the Companies' 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 combined financial position of Simon Property Group, Inc. and subsidiaries and its paired share affiliate, SPG Realty Consultants, Inc. and subsidiaries, as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, the consolidated financial position of Simon Property Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, and the consolidated financial position of SPG Realty Consultants, Inc. and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana February 17, 1999.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of SPG Realty Consultants, Inc. (formerly known as Corporate Realty Consultants, Inc.),
We have audited the consolidated balance sheet of SPG Realty Consultants, Inc. (formerly known as Corporate Realty Consultants, Inc.) as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of SPG Realty Consultants, Inc.'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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SPG Realty Consultants, Inc. (formerly known as Corporate Realty Consultants, Inc.) at December 31, 1997, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
June 30, 1998
Balance Sheets Simon Property Group, Inc. and SPG Realty Consultants, Inc. Combined
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these statements.
Statements of Operations Simon Property Group, Inc. and SPG Realty Consultants, Inc. Combined
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these statements.
Statements of Shareholders' Equity Simon Property Group, Inc. and SPG Realty Consultants, Inc. Combined
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
Statements of Cash Flows Simon Property Group, Inc. and SPG Realty Consultants, Inc. Combined
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
Balance Sheets Simon Property Group, Inc. Consolidated
The accompanying notes are an integral part of these statements.
Statements of Operations Simon Property Group, Inc. Consolidated
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these statements.
Statements of Shareholders' Equity Simon Property Group, Inc. Consolidated
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
Statements of Cash Flows Simon Property Group, Inc. Consolidated
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
Balance Sheets SPG Realty Consultants, Inc. Consolidated
The accompanying notes are an integral part of these statements.
Statements of Operations SPG Realty Consultants, Inc. Consolidated
(In thousands, except per share amounts)
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts and where indicated as in billions)
1. Organization
Simon Property Group, Inc. ("SPG"), a Delaware corporation, is a self- administered and self-managed real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Each share of common stock of SPG is paired with a beneficial interest in 1/100th of a share of common stock of SPG Realty Consultants, Inc., also a Delaware corporation ("SRC" and together with SPG, the "Companies").
Simon Property Group, L.P. (the "SPG Operating Partnership"), formerly known as Simon DeBartolo Group, L.P. ("SDG, LP"), is the primary subsidiary of SPG. Units of ownership interest ("Units") in the SPG Operating Partnership are paired with a beneficial interest in 1/100th of a Unit in SPG Realty Consultants, L.P. (the "SRC Operating Partnership" and together with the SPG Operating Partnership, the "Operating Partnerships"). The SRC Operating Partnership is the primary subsidiary of SRC. The Companies together with the Operating Partnerships are hereafter referred to as "Simon Group".
The Companies, primarily through the Operating Partnerships, are engaged primarily in the ownership, operation, management, leasing, acquisition, expansion and development of real estate properties, primarily regional malls and community shopping centers. As of December 31, 1998, Simon Group owned or held an interest in 242 income-producing properties, which consist of 153 regional malls, 77 community shopping centers, three specialty retail centers, six office and mixed-use properties and three value-oriented super-regional malls in 35 states (the "Properties"). Simon Group also owned interests in one regional mall, one value-oriented super-regional mall, one specialty center and three community centers currently under construction and twelve parcels of land held for future development (collectively, the "Development Properties", and together with the Properties, the "Portfolio Properties"). At December 31, 1998 and 1997, the Companies' direct and indirect ownership interests in the Operating Partnerships were 71.6% and 63.9%, respectively. The SPG Operating Partnership also holds substantially all of the economic interest in M.S. Management Associates, Inc. (the "Management Company"). See Note 8 for a description of the activities of the Management Company.
SRC engages primarily in the ownership, operation, acquisition and development of real estate properties either directly or through interests in joint ventures. SPG and SRC are parties to an agreement pursuant to which SRC may not engage in any activity that could be engaged in by SPG without jeopardizing its status as a REIT unless SPG shall have been given a right of first refusal to engage in such activity, and SPG may not refer to any person other than SRC any business opportunity that could not be engaged in by SPG without jeopardizing its status as a REIT unless SRC shall have been given the right of first refusal to take advantage of such opportunity.
Simon Group is subject to risks incidental to the ownership and operation of commercial real estate. These include, among others, the risks normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness of tenants, competition for tenants, changes in tax laws, interest rate levels, the availability of financing, and potential liability under environmental and other laws. Like most retail properties, Simon Group's regional malls and community shopping centers rely heavily upon anchor tenants. As of December 31, 1998, 314 of the approximately 875 anchor stores in the Properties were occupied by three retailers. An affiliate of one of these retailers is a limited partner in the Operating Partnerships.
2. Basis of Presentation
The accompanying combined financial statements include SPG, SRC and their subsidiaries. All significant intercompany amounts have been eliminated. The combined financial statements reflect the CPI Merger (see Note 3) as of the close of business on September 24, 1998. Operating results prior to the completion of the CPI Merger represent the operating results of Simon DeBartolo Group, Inc. and its subsidiaries ("SDG"), the predecessor to SPG for financial reporting purposes. Accordingly, the term Simon Group, prior to the CPI Merger, refers to SDG and the SPG Operating Partnership.
The accompanying consolidated financial statements for SPG include the accounts of SPG and its subsidiaries. All significant intercompany amounts have been eliminated. The financial statements reflect the CPI Merger as of the close of business on September 24, 1998. Operating results prior to the CPI Merger represent the operating results of SDG.
The accompanying consolidated financial statements of SRC include the accounts of its newly formed subsidiary, the SRC Operating Partnership. Because the cash contributed to SRC and the SRC Operating Partnership in exchange for shares of common stock and Units, in connection with the CPI Merger, represented equity transactions, SRC, unlike CPI (see Note 3), is not subject to purchase accounting treatment. The separate statements of SRC include the historical results of Corporate Realty Consultants, Inc. ("CRC"), the predecessor to SRC, for all periods presented.
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles, which 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 revenues and expenses during the reported period. Actual results could differ from these estimates.
Properties which are wholly-owned ("Wholly-Owned Properties") or owned less than 100% and are controlled by Simon Group ("Minority Interest Properties") are accounted for using the consolidated method of accounting. Control is demonstrated by the ability of the general partner to manage day-to-day operations, refinance debt and sell the assets of the partnership without the consent of the limited partner and the inability of the limited partner to replace the general partner. The deficit minority interest balance in the accompanying balance sheets represents outside partners' interests in the net equity of certain Properties. Deficit minority interests were recorded when a partnership agreement provided for the settlement of deficit capital accounts before distributing the proceeds from the sale of partnership assets and/or from the intent (legal or otherwise) and ability of the partner to fund additional capital contributions. Investments in partnerships and joint ventures which represent noncontrolling 14.7% to 85.0% direct and indirect ownership interests ("Joint Venture Properties") and the investment in the Management Company (see Note 8) are accounted for using the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for net equity in income (loss) and cash contributions and distributions.
Net operating results of the Operating Partnerships are allocated after preferred distributions (see Note 11), based on their respective partners' ownership interests. The Companies' weighted average direct and indirect ownership interest in the Operating Partnerships during 1998, 1997 and 1996 were 66.2%, 62.1% and 61.2%, respectively. At December 31, 1998 and 1997, the Companies' direct and indirect ownership interest was 71.6% and 63.9%, respectively.
3. CPI Merger
For financial reporting purposes, as of the close of business on September 24, 1998, the CPI Merger was consummated pursuant to the Agreement and Plan of Merger dated February 18, 1998, among Simon DeBartolo Group, Inc., Corporate Property Investors, Inc. ("CPI"), and Corporate Realty Consultants, Inc.
Pursuant to the terms of the CPI Merger, SPG Merger Sub, Inc., a substantially wholly-owned subsidiary of CPI, merged with and into SDG with SDG continuing as the surviving company. SDG became a majority-owned subsidiary of CPI. The outstanding shares of common stock of SDG were exchanged for a like number of shares of CPI. Beneficial interests in CRC were acquired for $14,000 in order to pair the common stock of CPI with 1/100th of a share of common stock of CRC, the paired share affiliate.
Immediately prior to the consummation of the CPI Merger, the holders of CPI common stock were paid a merger dividend consisting of (i) $90 in cash, (ii) 1.0818 additional shares of CPI common stock and (iii) 0.19 shares of 6.50% Series B convertible preferred stock of CPI per share of CPI common stock. Immediately prior to the CPI Merger, there were 25,496,476 shares of CPI common stock outstanding. The aggregate value associated with the completion of the CPI Merger was approximately $5.9 billion including transaction costs and liabilities assumed.
To finance the cash portion of the CPI Merger consideration, $1.4 billion was borrowed under a new senior unsecured medium term bridge loan, which bears interest at a base rate of LIBOR plus 65 basis points and matures in three mandatory amortization payments (on June 22, 1999, March 24, 2000 and September 24, 2000). An additional $237,000 was also borrowed under the SPG Operating Partnership's existing $1.25 billion credit facility (the "Credit Facility"). In connection with the CPI Merger, CPI was renamed "Simon Property Group, Inc." CPI's paired share affiliate, Corporate Realty Consultants, Inc., was renamed "SPG Realty Consultants, Inc." In addition SDG and SDG, LP were renamed "SPG Properties, Inc.", and "Simon Property Group, L.P.", respectively.
Upon completion of the CPI Merger, SPG transferred substantially all of the CPI assets acquired, which consisted primarily of 23 regional malls, one community center, two office buildings and one regional mall under construction (other than one regional mall, Ocean County Mall, and certain net leased properties valued at approximately $153,100) and liabilities assumed (except that SPG remains a co-obligor with respect to the Merger Facility (see Note 9)) of approximately $2.3 billion
to SPG Operating Partnership or one or more subsidiaries of the SPG Operating Partnership in exchange for 47,790,550 limited partnership interests and 5,053,580 preferred partnership interests in SPG Operating Partnership. The preferred partnership interests carry the same rights and equal the number of preferred shares issued and outstanding as a direct result of the CPI Merger. Likewise, the net assets of SRC, with a carrying value of approximately $14,755, were transferred to the SRC Operating Partnership in exchange for partnership interests.
The Companies accounted for the merger between SDG and the CPI merger subsidiary as a reverse purchase in accordance with Accounting Principles Board Opinion No. 16. Although paired shares of the former CPI and CRC were issued to SDG common stock holders and SDG became a substantially wholly owned subsidiary of CPI following the CPI Merger, CPI is considered the business acquired for accounting purposes. SDG is considered the acquiring company because the SDG common stockholders hold a majority of the common stock of SPG, post-merger. The value of the consideration paid by SDG has been allocated to the estimated fair value of the CPI assets acquired and liabilities assumed which resulted in goodwill of $58,134, as adjusted. Goodwill is being amortized over the estimated life of the properties of 35 years. Purchase accounting will be finalized when SPG completes and implements its combined operating plan, which is expected to occur by the third quarter of 1999.
SDG, LP contributed $14,000 cash to CRC and $8,000 cash to the SRC Operating Partnership on behalf of the SDG common stockholders and the limited partners of SDG, LP to obtain the beneficial interests in common stock of CRC, which were paired with the shares of common stock issued by SPG, and to obtain Units in the SRC Operating Partnership so that the limited partners of the SDG Operating Partnership would hold the same proportionate interest in the SRC Operating Partnership that they hold in the SDG Operating Partnership. The cash contributed to CRC and the SRC Operating Partnership in exchange for an ownership interest therein have been appropriately accounted for as capital infusion or equity transactions. The assets and liabilities of CRC have been reflected at historical cost. Adjusting said assets and liabilities to fair value would only have been appropriate if the SDG stockholders' beneficial interests in CRC exceeded 80%.
4. The DRC Merger and Other Real Estate Acquisitions, Disposals and Developments
The DRC Merger
On August 9, 1996, SPG acquired the national shopping center business of DeBartolo Realty Corporation and subsidiaries ("DRC") for an aggregate value of $3.0 billion (the "DRC Merger"). The acquired portfolio consisted of 49 regional malls, 11 community centers and 1 mixed-use Property. These Properties included 47,052,267 square feet of retail space gross leasable area ("GLA") and 558,636 of office GLA. Pursuant to the DRC Merger, SPG acquired all the outstanding common stock of DRC (55,712,529 shares), at an exchange ratio of 0.68 shares of SPG's common stock for each share of DRC common stock. A total of 37,873,965 shares of SPG's common stock was issued by SPG, to the DRC shareholders. DRC and the acquisition subsidiary merged. DRC became a 99.9% subsidiary of SPG and changed its name to SD Property Group, Inc. The purchase price was allocated to the fair value of the assets and liabilities using the purchase method of accounting.
Acquisitions and Disposals
On January 26, 1998, Simon Group acquired Cordova Mall in Pensacola, Florida for approximately $87,300, including the assumption of a $28,935 mortgage, which was later retired, and the issuance of 1,713,016 Units, valued at approximately $55,500. This 874,000 square-foot regional mall is wholly-owned by Simon Group.
Effective May 5, 1998, in a series of transactions, Simon Group acquired the remaining 50.1% interest in Rolling Oaks Mall for 519,889 shares of SPG's common stock, valued at approximately $17,176.
Effective June 30, 1998, Simon Group sold Southtown Mall for $3,250 and recorded a $7,219 loss on the transaction.
On December 7, 1998, a joint venture partnership, in which Simon Group owns a controlling 90% interest, purchased The Arboretum, a 209,000 square-foot community center in Austin, Texas. Concurrent with the acquisition, the joint venture obtained a $34,000 mortgage on the Property bearing interest at LIBOR plus 1.5%. Simon Group's share of the $45,000 purchase price was $40,500, which was funded primarily with the net proceeds of the mortgage, with the remainder being funded from working capital.
On September 29, 1997, Simon Group completed its cash tender offer for all of the outstanding shares of beneficial interests of The Retail Property Trust ("RPT"), a private REIT. RPT owned 98.8% of Shopping Center Associates ("SCA"), which owned or had interests in twelve regional malls and one community center, comprising approximately twelve million square feet of GLA in eight states (the "SCA Properties"). During 1997, Simon Group exchanged its 50% interests in two SCA Properties to a third party for the remaining 50% interests in two other SCA Properties, acquired the remaining 50% ownership
interest in another of the SCA Properties and acquired the remaining 1.2% interest in SCA. During 1998, Simon Group sold the community center and a regional mall for $9,550 and $33,500, respectively. These Property sales were accounted for as an adjustment to the allocation of the purchase price. At the completion of these transactions (the "SCA Acquisition"), Simon Group owns 100% of eight of the nine SCA Properties, and a noncontrolling 50% ownership interest in the remaining Property. The total cost for the acquisition of SCA and related transactions of approximately $1,300,000 includes shares of common stock of SPG valued at approximately $50,000, Units in the SPG Operating Partnership valued at approximately $25,300, the assumption of $398,500 of consolidated indebtedness and Simon Group's pro rata share of joint venture indebtedness of $76,750, with the remainder comprising primarily of cash financed using Simon Group's Credit Facility. On September 15, 1998, RPT transferred its ownership interest in SCA to the SPG Operating Partnership in exchange for 27,195,109 Units in the SPG Operating Partnership.
Also in 1997, Simon Group acquired a 100% ownership interest in the Fashion Mall at Keystone at the Crossing, along with an adjacent community center; the remaining 30% ownership interest in Virginia Center Commons; a noncontrolling 50% ownership of Dadeland Mall; and an additional noncontrolling 48% ownership interest of West Town Mall, increasing its total ownership interest to 50%. Simon Group paid an aggregate purchase price of approximately $322,000 for these acquisitions, which included Units in the SPG Operating Partnership valued at $1,100, common stock of SPG valued at approximately $20,000 and the assumption of $64,772 of mortgage indebtedness, with the remainder paid in cash primarily using proceeds from the Credit Facility, sales of equity securities and working capital.
In 1996, Simon Group acquired the remaining 50% ownership interest in two regional malls for 472,410 Units in the SPG Operating Partnership, the assumption of $57,000 of mortgage indebtedness and $56,100 in cash, primarily using proceeds from the Credit Facility and working capital.
See also Note 7 for Joint Venture Property acquisition and disposal activity.
Development Activity
Development activities are an ongoing part of Simon Group's strategy to gain a competitive advantage in the retail real estate business. During 1998, 1997 and 1996, Simon Group invested approximately $102,000, $230,000 and $169,000, respectively on new consolidated and unconsolidated joint venture development projects adding approximately 577,000; 3,600,000; and 3,160,000 square feet of GLA to its portfolio. In addition, The Shops at Sunset Place, a destination-oriented retail and entertainment project containing approximately 510,000 square feet of GLA opened in January of 1999 in South Miami, Florida. Construction also continues on several other projects at an aggregate construction cost of approximately $620,000, of which approximately $347,000 is Simon Group's share. These developments are funded primarily with borrowings from the Credit Facility, construction loans and working capital.
In addition, Simon Group strives to increase profitability and market share of the existing Properties through the completion of strategic renovations and expansions. During 1998, 1997 and 1996, Simon Group invested approximately $337,000, $229,000 and $93,000, respectively on renovation and expansion of the Properties. These projects were also funded primarily with borrowings from the Credit Facility, construction loans and working capital.
Pro Forma
The following unaudited pro forma summary financial information excludes any extraordinary items and combines the consolidated results of operations of SPG and SRC as if the CPI Merger and the SCA Acquisition had occurred as of January 1, 1997, and were carried forward through December 31, 1998. Preparation of the pro forma summary information was based upon assumptions deemed appropriate by management. The pro forma summary information is not necessarily indicative of the results which actually would have occurred if the CPI Merger and the SCA Acquisition had been consummated at January 1, 1997, nor does it purport to represent the results of operations for future periods.
(1) Includes net gains on the sales of assets in 1998 and 1997 of $37,973 and $123,689, respectively, or $0.17 and $0.57 on a basic earnings per share basis, respectively.
5. Summary of Significant Accounting Policies
Investment Properties
Investment Properties are recorded at cost (predecessor cost for Properties acquired from Melvin Simon, Herbert Simon and certain of their affiliates (the "Simons")). Investment Properties for financial reporting purposes are reviewed for impairment on a Property-by-Property basis whenever events or changes in circumstances indicate that the carrying value of investment Properties may not be recoverable. Impairment of investment Properties is recognized when estimated undiscounted operating income is less than the carrying value of the Property. To the extent an impairment has occurred, the excess of carrying value of the Property over its estimated fair value will be charged to income.
Investment Properties include costs of acquisitions, development and predevelopment, construction, tenant allowances and improvements, interest and real estate taxes incurred during construction, certain capitalized improvements and replacements, and certain allocated overhead. Depreciation on buildings and improvements is provided utilizing the straight-line method over an estimated original useful life, which is generally 35 years or the term of the applicable tenant's lease in the case of tenant inducements. Depreciation on tenant allowances and improvements is provided utilizing the straight-line method over the term of the related lease.
Certain improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. All other repair and maintenance items are expensed as incurred.
Capitalized Interest
Interest is capitalized on projects during periods of construction. Interest capitalized during 1998, 1997 and 1996 was $10,567, $11,589 and $5,831, respectively.
Segment Disclosure
Simon Group is engaged in the business of owning, operating, managing, leasing, expanding and developing retail real estate properties. Although Simon Group's regional mall portfolio and office and mixed-use Properties are looked at internally on a divisional basis, the chief executive officer makes resource allocation and other operating decisions based on an evaluation of the entire portfolio. Simon Group's interests in its community centers and other assets have been aggregated with the regional malls as they have similar economic and environmental conditions, business processes, types of customers (i.e. tenants) and services provided. Further, the community centers, offices and other assets each represent less than 10% and in total represent less than 15% of Simon Group's total assets, revenues and earnings before interest, taxes, depreciation and amortization.
Other Investment
Investments in securities classified as available for sale are reflected at market value with the changes in market value reflected in shareholders' equity.
Deferred Costs
Deferred costs consist primarily of financing fees incurred to obtain long- term financing, costs of interest rate protection agreements, and internal and external leasing commissions and related costs. Deferred financing costs, including interest rate protection agreements, are amortized on a straight-line basis over the terms of the respective loans or agreements. Deferred leasing costs are amortized on a straight-line basis over the terms of the related leases. Deferred costs consist of the following:
Interest expense in the accompanying Consolidated Statements of Operations includes amortization of deferred financing costs of $11,835, $8,338 and $8,434, for 1998, 1997 and 1996, respectively, and has been reduced by amortization of debt premiums and discounts of $1,465, $699 and $632 for 1998, 1997 and 1996, respectively.
Revenue Recognition
Simon Group, as a lessor, has retained substantially all of the risks and benefits of ownership of the investment Properties and accounts for its leases as operating leases. Minimum rents are accrued on a straight-line basis over the terms of their respective leases. Certain tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. Overage rents are recognized as revenues based on reported and estimated sales for each tenant through December 31, less the applicable base sales amount. Differences between estimated and actual amounts are recognized in the subsequent year.
Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenditures are incurred.
Allowance for Credit Losses
A provision for credit losses is recorded based on management's judgment of tenant creditworthiness. The activity in the allowance for credit losses during 1998, 1997 and 1996 was as follows:
Income Taxes
SPG. SPG and certain of its subsidiaries are taxed as REITs under Sections 856 through 860 of the Code and applicable Treasury regulations relating to REIT qualification. In order to maintain their qualification as REITs, these entities are required to distribute at least 95% of their taxable income to shareholders and meet certain other asset and income tests as well as other requirements. It is the intention of management to continue to adhere to these requirements and maintain the REIT status. As REITs, these entities will generally not be liable for federal corporate income taxes. Thus, no provision for
federal income taxes for the REITs has been included in the accompanying financial statements. If any of these entities fail to qualify as a REIT in any taxable year, it will be subject to federal income taxes on its taxable income at regular corporate tax rates. State income taxes were not significant in any of the periods presented.
SRC. SRC is subject to income taxes. The provision for income taxes reflected in the separate financial statements of SRC was ($190), $670 and ($218) for 1998, 1997 and 1996, respectively. During 1998, SRC generated operating losses for which a valuation allowance was provided. The deferred tax liability of $3,374 and $3,564 as of December 31, 1998 and 1997, respectively, consisted primarily of asset basis differences for book and tax purposes. The deferred tax liability is accounted for using the liability method of accounting and is included in other liabilities in the accompanying Balance Sheets.
Per Share Data
Effective January 1, 1998, Simon Group retroactively adopted SFAS No. 128 (Earnings Per Share). Accordingly, basic earnings per share is based on the weighted average number of shares of common stock outstanding during the period and diluted earnings per share is based on the weighted average number of shares of common stock outstanding combined with the incremental weighted average shares that would have been outstanding if all dilutive potential common shares would have been converted into shares at the earliest date possible. The weighted average number of shares used in the computation for 1998, 1997 and 1996 was 126,522,228; 99,920,280; and 73,585,602, respectively. The diluted weighted average number of equivalent shares used in the computation for 1998, 1997 and 1996 was 126,879,377; 100,304,344 and 73,721,134, respectively.
Combined basic and diluted earnings per share is presented in the financial statements based upon the weighted average number of paired shares outstanding of the Companies, giving effect to the CPI Merger as of the close of business on September 24, 1998. Management believes this presentation provides the shareholders with the most meaningful presentation of earnings for a single interest in the combined entities.
Both series of convertible preferred stock issued and outstanding during the comparative periods did not have a dilutive effect on earnings per share. Paired Units held by limited partners in the Operating Partnerships may be exchanged for paired shares of common stock of the Companies, on a one-for-one basis in certain circumstances. If exchanged, the paired Units would not have a dilutive effect. The increase in weighted average shares outstanding under the diluted method over the basic method in every period presented for the Companies is due entirely to the effect of outstanding stock options, including 304,210 additional options issued in connection with the CPI Merger. Basic earnings and diluted earnings were the same for all periods presented.
It is the Companies' policy to accrue distributions when they are declared. SPG declared distributions in 1998 and 1997 aggregating $2.02 and $2.01 per share, respectively. The current combined annual distribution rate is $2.02 per share. The following is a summary of distributions per paired share declared in 1998 and 1997, which represented a return of capital measured using generally accepted accounting principles:
On a federal income tax basis, 1% of SPG's 1998 distribution represented a capital gain and 48% represented a return of capital. In 1997, none of the distributions represented a capital gain and 35% represented a return of capital.
Statements of Cash Flows
For purposes of the Statements of Cash Flows, all highly liquid investments purchased with an original maturity of 90 days or less are considered cash and cash equivalents. Cash equivalents are carried at cost, which approximates market value. Cash equivalents generally consist of commercial paper, bankers acceptances, Eurodollars, repurchase agreements and Dutch auction securities. Cash and cash equivalents do not include restricted cash of $867 and $8,553 as of December 31, 1998 and 1997, respectively, to fund certain future capital expenditures.
Cash paid for interest, net of any amounts capitalized, during 1998, 1997 and 1996 was $397,560; $270,912; and $191,965, respectively.
Noncash Transactions
Accrued and unpaid distributions were $3,428 at December 31, 1998 and represented distributions payable on SPG's 6.5% Series A Convertible Preferred Stock, which are paid semiannually on March 31 and September 30 of each year. Please refer to Notes 3, 4, 7 and 11 for additional discussion of noncash transactions.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications have no impact on net operating results previously reported.
6. Investment Properties
Investment properties consist of the following:
Investment properties includes $184,875 and $158,609 of construction in progress at December 31, 1998 and 1997, respectively.
7. Investment in Partnerships and Joint Ventures
Joint Venture Property Acquisitions and Dispositions
On February 27, 1998, Simon Group, in a joint venture partnership with The Macerich Company ("Macerich"), acquired a portfolio of twelve regional malls and two community centers (the "IBM Properties") comprising approximately 10.7 million square feet of GLA at a purchase price of $974,500, including the assumption of $485,000 of indebtedness. Simon Group and Macerich, as noncontrolling 50/50 partners in the joint venture, were each responsible for one half of the purchase price, including indebtedness assumed and each assumed leasing and management responsibilities for six of the regional malls and one community center. Simon Group funded its share of the cash portion of the purchase price using borrowings from an interim $300,000 unsecured revolving credit facility, which was subsequently retired using borrowings from the Credit Facility.
In March 1998, Simon Group transferred its 50% ownership interest in The Source, an approximately 730,000 square-foot regional mall, to a newly formed limited partnership in which it has a 50% ownership interest, with the result that Simon Group now owns an indirect noncontrolling 25% ownership interest in The Source. In connection with this transaction, Simon Group's partner in the newly formed limited partnership is entitled to a preferred return of 8% on its initial capital contribution, a portion of which was distributed to Simon Group. Simon Group applied the distribution against its investment in The Source.
In August 1998, Simon Group admitted an additional partner into the partnership which owns The Shops at Sunset Place for $35,200, which was distributed to Simon Group. Simon Group now holds a 37.5% noncontrolling interest in this Property, which opened in January 1999. Simon Group applied the distribution against its investment in the Property.
Joint Venture Property Summary Financial Information
Summary financial information of partnerships and joint ventures accounted for using the equity method and a summary of Simon Group's investment in and share of income from such partnerships and joint ventures follows.
As of December 31, 1998 and 1997, the unamortized excess of Simon Group's investment over its share of the equity in the underlying net assets of the partnerships and joint ventures ("Excess Investment") was $708,616 and $364,119, respectively. This Excess Investment, which resulted primarily from the CPI Merger and the DRC Merger, is being amortized generally over the life of the related Properties. Amortization included in income from unconsolidated entities for the years ended December 31, 1998, 1997 and 1996 was $22,625, $13,878 and $5,127, respectively.
The net income or net loss for each Joint Venture Property is allocated in accordance with the provisions of the applicable partnership or joint venture agreement. The allocation provisions in these agreements are not always consistent with the ownership interests held by each general or limited partner or joint venturer, primarily due to partner preferences.
At December 31, 1998, SRC's investment in unconsolidated joint ventures, which is included in the summary financial information above, consists of (1) a 50% noncontrolling interest in Mill Creek Land, LLC ("Mill Creek"), with an additional 15% preferential return, which was formed to purchase the land which Mall of Georgia is being built upon and (2) a 25% limited partner interest in Cambridge Hotel Associates, a partnership which provides management and advisory services to the Cambridge Hotel in Cambridge, Massachusetts. Included in total assets, total revenue and net income above is $5,367, $481 and $481, respectively, related to these SRC joint ventures investments.
8. Investment in Management Company
Simon Group holds 80% of the outstanding common stock, 5% of the outstanding voting common stock, and all of the 8% cumulative preferred stock of the Management Company. The remaining 20% of the outstanding common stock of the Management Company (representing 95% of the voting common stock) is owned directly by Melvin Simon, Herbert Simon and David Simon. Because Simon Group exercises significant influence over the financial and operating policies of the Management Company, it is reflected in the accompanying statements using the equity method of accounting. The Management Company, including its consolidated subsidiaries, provides management, leasing, development, project management, accounting, legal, marketing and management information systems services and property damage and general liability insurance coverage to certain Portfolio Properties. These services, excluding insurance coverage, are also provided to Melvin Simon & Associates, Inc. ("MSA"), and certain other nonowned properties for a fee. Simon Group incurred costs of $145,655, $85,229 and $30,949 on consolidated Properties, related to services provided by the Management Company and its affiliates in 1998, 1997 and 1996, respectively. Fees for services provided by the Management Company to MSA were $3,301, $3,073 and $4,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The SPG Operating Partnership manages substantially all Wholly-Owned Properties and 26 Properties owned as joint venture interests, and, accordingly, it reimburses a subsidiary of the Management Company for costs incurred relating to such Properties, including management, leasing, development, accounting, legal, marketing, and management information systems. Substantially all employees of Simon Group (other than direct field personnel) are employed by such Management Company subsidiary. The Management Company records costs net of amounts reimbursed by the SPG Operating Partnership. Common costs are allocated based on payroll and related costs using assumptions that management believes are reasonable. The SPG Operating Partnership's share of allocated common costs was $42,546, $35,341 and $29,262 for 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, total notes receivable and advances due from the Management Company and its consolidated affiliates were $115,378 and $93,809, respectively. Unpaid interest income receivable from the Management Company at December 31, 1998 and 1997, was $722 and $485, respectively. Accrued and unpaid preferred dividends due from the Management Company at December 31, 1998 and 1997 were $117 and $0, respectively. Amounts payable by the SPG Operating Partnership under the cost-sharing arrangement and management contracts were $4,968 and $1,725 at December 31, 1998 and 1997, respectively, and are reflected in accounts payable and accrued expenses in SPG's accompanying Consolidated Balance Sheets.
Summarized consolidated financial information of the Management Company and a summary of Simon Group's investment in and share of income from the Management Company follows.
9. Indebtedness
Simon Group's mortgages and other notes payable consist of the following:
Fixed-Rate Debt
Mortgages and Other Notes. The fixed-rate mortgage loans bear interest ranging from 6.57% to 10.00% (weighted average of 7.55% at December 31, 1998), require monthly payments of principal and/or interest and have various due dates through 2027 (average maturity of 5.9 years). Certain of the Properties are pledged as collateral to secure the related mortgage note. The fixed and variable mortgage notes are nonrecourse and certain ones have partial guarantees by affiliates of approximately $706,042. Certain of the Properties are cross- defaulted and cross-collateralized as part of a group of properties. Under certain of the cross-default provisions, a default under any mortgage included in the cross-defaulted package may constitute a default under all such mortgages and may lead to acceleration of the indebtedness due on each Property within the collateral package. Certain of the Properties are subject to financial performance covenants relating to debt-to-market capitalization, minimum earnings before interest, taxes, depreciation and amortization ("EBITDA") ratios and minimum equity values.
Unsecured Notes and Mandatory Par Put Remarketed Securities. In connection with the CPI Merger, RPT, a REIT and the 99.999% owned subsidiary of the SPG Operating Partnership, took title to substantially all of the CPI assets and assumed $825,000 of unsecured notes (the "CPI Notes"), as described in Note 3. The CPI Notes are structurally senior in right of payment to holders of other Simon Group unsecured notes to the extent of the assets and related cash flow of RPT only, with over 99.999% of the excess cash flow plus any capital event transactions available for the other Simon Group unsecured notes. The CPI Notes pay interest semiannually at rates ranging from 7.05% to 9.00% (weighted average of 8.03%), and have various due dates through 2016 (average maturity of 9.1 years). The CPI Notes contain leverage ratios, annual real property appraisal requirements, debt service coverage ratios and minimum net worth ratios.
The CPI Notes together with existing Simon Group nonconvertible investment- grade unsecured debt securities aggregate $2,617,277 (the "Notes"). In addition, Simon Group has outstanding $205,273 of 7.00% Mandatory Par Put Remarketed Securities ("MOPPRS") at December 31, 1998. The Notes pay interest semiannually at rates ranging from 6.63% to 9.0% (weighted average of 7.25%), and have various due dates through 2018 (average maturity of 8.3 years). The MOPPRS are due June 15, 2028, and are subject to redemption on June 16, 2008. The premium received relating to the MOPPRS of approximately $5,302 is being amortized over the life of the debt securities. The MOPPRS and certain of the Notes are guaranteed by the SPG Operating Partnership and contain leverage ratios and minimum EBITDA and unencumbered EBITDA ratios.
Additionally, on February 4, 1999, the SPG Operating Partnership completed the sale of another $600,000 of senior unsecured notes. These notes include two $300,000 tranches. The first tranche bears interest at 6.75% and matures on February 4, 2004 and the second tranche bears interest at 7.125% and matures on February 4, 2009. The SPG Operating Partnership used the net proceeds of approximately $594,000 to retire the $450,000 initial tranche of the Merger Facility and to pay $142,000 on the outstanding balance of the Credit Facility.
Medium-Term Notes. On May 15, 1997, Simon Group established a Medium-Term Note ("MTN") program. On June 24, 1997, Simon Group completed the sale of $100,000 of notes under the MTN program, which bear interest at 7.125% and have a stated maturity of June 24, 2005. On September 10, 1997, Simon Group issued the remaining $180,000 principal amount of notes under its MTN program. These notes mature on September 20, 2007 and bear interest at 7.125% per annum. The net proceeds from each of these sales were used primarily to pay down the Credit Facility.
Commercial Mortgage Pass-Through Certificates. Simon Group has outstanding a series of six classes of commercial mortgage pass-through certificates cross- collateralized by seven Properties, which matures on December 19, 2004. Five of the six classes totaling $175,000 bear fixed interest rates ranging from 6.716% to 8.233%, with the remaining $50,000 class bearing interest at LIBOR plus 0.365%.
6 3/4% Putable Asset Trust Securities (PATS). The PATS, issued December 1996, pay interest semiannually at 6.75% and mature in 2003. These notes contain leverage ratios and minimum EBITDA and unencumbered EBITDA ratios. The net discount relating to the PATS is being amortized over their remaining life.
Variable-Rate Debt
Mortgages and Other Notes. The variable-rate mortgage loans and other notes bear interest ranging from 5.61% to 7.74% (weighted average of 6.39% at December 31, 1998) and are due at various dates through 2004 (average maturity of 3.3 years). Certain of the Properties are subject to collateral, cross-default and cross-collateral agreements, participation agreements or other covenants relating to debt-to-market capitalization, minimum EBITDA ratios and minimum equity values.
Credit Facility. The Credit Facility is a $1,250,000 unsecured revolving credit facility which initially matures in September of 1999, with a one-year extension available at Simon Group's option. The Credit Facility bears interest at LIBOR plus 65 basis points, with an additional 15 basis point facility fee on the entire $1,250,000. The maximum and average amounts outstanding during 1998 under the Credit Facility were $992,000 and $583,668, respectively. The Credit Facility is primarily used for funding acquisition, renovation and expansion and predevelopment opportunities. At December 31, 1998, the Credit Facility had an effective interest rate of 6.2%, with $880,800 available after outstanding borrowings and letters of credit. The Credit Facility contains financial covenants relating to a capitalization value, minimum EBITDA and unencumbered EBITDA ratios and minimum equity values.
The Merger Facility. In conjunction with the CPI Merger, the SPG Operating Partnership and SPG, as co-borrowers, closed a $1,400,000 medium term unsecured bridge loan (the "Merger Facility"). The Merger Facility bears interest at a base rate of LIBOR plus 65 basis points and will mature at the following intervals (i) $450,000 on June 24, 1999 (ii) $450,000 on March 24, 2000 and (iii) $500,000 on September 24, 2000. As described above, in February 1999 the initial $450,000 maturity on the Merger Facility was retired with proceeds from a $600,000 unsecured debt offering. The Merger Facility is subject to covenants and conditions substantially identical to those of the Credit Facility. Simon Group drew the entire $1,400,000 available on the Merger Facility along with $237,000 on the Credit Facility to pay for the cash portion of the dividend declared in conjunction with the CPI Merger, as well as certain other costs associated with the CPI Merger. Financing costs of $9,456, which were incurred to obtain the Merger Facility, are being amortized over 18 months.
Unsecured Term Loans. Simon Group has two unsecured term loans outstanding at December 31, 1998, totaling $133,000, which were obtained to retire mortgage indebtedness. These term loans bear interest at LIBOR plus 0.65% and mature on January 31, 2000. Simon Group has an interest-rate protection agreement covering one of these term loans in the amount of $63,000, which effectively fixes the interest rate at 6.14%.
Debt Maturity and Other
As of December 31, 1998, scheduled principal repayments on indebtedness were as follows:
Debt premiums and discounts are being amortized over the terms of the related debt instruments. Certain mortgages and notes payable may be prepaid but are generally subject to a prepayment of a yield-maintenance premium.
Net extraordinary gains (losses) resulting from the early extinguishment, refinancing or forgiveness of debt of $7,146, $58 and $(3,521) were incurred for the years ended December 31, 1998, 1997 and 1996, respectively.
The Joint Venture Properties have $2,861,589 and $1,888,512 of mortgages and other notes payable at December 31, 1998 and 1997, respectively. Simon Group's share of this debt was $1,227,044 and $770,776 at December 31, 1998 and 1997, respectively. This debt, including a premium of $20,868 in 1998, becomes due in installments over various terms extending through 2009, with interest rates ranging from 5.44% to 9.75% (weighted average rate of 6.99% at December 31, 1998). The debt, excluding the $20,868 premium, matures $17,270 in 1999; $220,961 in 2000; $9,622 in 2001; $265,603 in 2002; $435,298 in 2003 and $1,891,967 thereafter.
Interest Rate Protection Agreements
Simon Group has entered into certain interest rate protection agreements, in the form of "cap" or "swap" arrangements, with respect to the majority of its variable-rate mortgages and other notes payable. Swap arrangements, which effectively fix Simon Group's interest rate on the respective borrowings, have been entered into for $550,000 principal amount of consolidated debt. Cap arrangements, which effectively limit the amount by which variable interest rates may rise, have been entered into for $387,999 principal amount of consolidated debt and cap LIBOR at rates ranging from 5.49% to 16.765% through the related debt's maturity. Costs of the caps ($1,338) are amortized over the life of the agreements. The unamortized
balance of the cap arrangements was $429 and $2,006 as of December 31, 1998 and 1997, respectively. Simon Group's hedging activity as a result of interest swaps and caps resulted in net interest savings of $263, $1,586 and $2,165 for the years ended December 31, 1998, 1997 and 1996, respectively. This did not materially impact Simon Group's weighted average borrowing rate.
Fair Value of Financial Instruments
The carrying value of variable-rate mortgages and other loans represents their fair values. The fair value of fixed-rate mortgages and other notes payable was approximately $6,100,000 and $3,900,000 at December 31, 1998 and 1997, respectively. The fair value of the interest rate protection agreements at December 31, 1998 and 1997, was ($7,213) and ($692), respectively. At December 31, 1998 and 1997, the estimated discount rates were 6.70% and 6.66%, respectively.
10. Rentals under Operating Leases
Simon Group receives rental income from the leasing of retail and mixed-use space under operating leases. Future minimum rentals to be received under noncancelable operating leases for each of the next five years and thereafter, excluding tenant reimbursements of operating expenses and percentage rent based on tenant sales volume, as of December 31, 1998, are as follows:
Approximately 2.9% of future minimum rents to be received are attributable to leases with JCPenney Company, Inc., an affiliate of a limited partner in the SPG Operating Partnership.
11. Capital Stock
In connection with the CPI Merger, SPG restated its certificate of incorporation to, among other things, restate the number of shares and classes of capital stock authorized for issuance. SPG is now authorized to issue up to 750,000,000 shares, par value $0.0001 per share, of capital stock. The authorized shares of capital stock consist of 400,000,000 shares of common stock, 12,000,000 shares of Class B common stock, 4,000 shares of Class C common stock, 100,000,000 shares of preferred stock, including 209,249 shares of Series A Convertible Preferred Stock and 5,000,000 shares of Class B Convertible Preferred Stock, and 237,996,000 shares of excess common stock. Each share of common stock of SPG is paired with 1/100th of a share of common stock of SRC.
The articles of incorporation of SRC were also restated in conjunction with the CPI Merger. SRC is now authorized to issue up to 7,500,000 shares, par value $0.0001 per share, of common stock. SRC's historical shares and per share amounts have been adjusted to give effect to the change in SRC's par value of common stock from $.10 per share to $.0001 per share and to the CPI Merger exchange ratio of 2.0818 and to change the pairing of SRC's stock from 1/10th to 1/100th.
The Board of Directors is authorized to reclassify the excess stock into one or more additional classes and series of capital stock to establish the number of shares in each class or series and to fix the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, and qualifications and terms and conditions of redemption of such class or series, without any further vote or action by the shareholders. The issuance of additional classes or series of capital stock may have the effect of delaying, deferring or preventing a change in control of SPG without further action of the shareholders. The ability of the Board of Directors to issue additional classes or series of capital stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Companies.
The holders of common stock of SPG are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders, other than for the election of directors. The holders of Class B common stock are entitled to elect four of the thirteen members of the board. The holder of the Class C common stock, which was issued in connection with the DRC Merger, as described below, is entitled to elect two of the thirteen members of the board. The Class B and Class C shares can be converted into shares of common stock at the option of the holders. Shares of Class B common stock convert automatically
into an equal number of shares of common stock upon the sale or transfer thereof to a person not affiliated with the Simons. Shares of Class C common stock convert automatically into an equal number of shares of common stock upon the sale or transfer thereof to a person not affiliated with the members of the DeBartolo family or entities controlled by them. The Companies have reserved 3,200,000 and 4,000 shares of common stock for the possible conversion of the outstanding Class B and Class C shares, respectively.
Common Stock Issuances
During 1998, SPG issued 2,957,335 shares of its common stock in offerings generating combined net proceeds of approximately $91,399. The net proceeds were contributed to the SPG Operating Partnership in exchange for a like number of Units. The SPG Operating Partnership used the net proceeds for general working capital purposes.
On November 11, 1997, SPG issued 3,809,523 shares of its common stock upon the conversion of all of the outstanding shares of SPG's 8.125% Series A Preferred Stock, $.0001 par value per share.
On September 19, 1997, SPG issued 4,500,000 shares of its common stock in a public offering. SPG contributed the net proceeds of approximately $146,800 to the SPG Operating Partnership in exchange for an equal number of Units. The SPG Operating Partnership used the net proceeds to retire a portion of the outstanding balance on the Credit Facility.
As described in Note 4, in connection with the DRC Merger on August 9, 1996, SPG issued 37,873,965 shares of common stock and 4,000 shares of Class C common stock.
Preferred Stock
SPG has 209,249 shares of 6.50% Series A Convertible Preferred Stock outstanding. Each share of Series A Convertible Preferred Stock is convertible into 37.995 paired shares of common stock of the Companies, subject to adjustment under certain circumstances including (i) a subdivision or combination of shares of common stock of the Companies, (ii) a declaration of a distribution of additional shares of common stock of the Companies, issuances of rights or warrants by the Companies and (iii) any consolidation or merger, which the Companies are a part of or a sale or conveyance of all or substantially all of the assets of the Companies to another person or any statutory exchange of securities with another person. The Series A Convertible Preferred Stock is not redeemable, except as needed to maintain or bring the direct or indirect ownership of the capital stock of SPG into conformity with REIT requirements.
In addition, SPG has 4,844,331 shares of 6.50% Series B Convertible Preferred Stock outstanding. Each share of Series B Convertible Preferred Stock is convertible into 2.586 paired shares of common stock of the Companies, subject to adjustment under circumstances identical to those of the Series A Preferred Stock described above. The Companies may redeem the Series B Preferred Stock on or after September 24, 2003 at a price beginning at 105% of the liquidation preference plus accrued dividends and declining to 100% of the liquidation preference plus accrued dividends any time on or after September 24, 2008.
Preferred Stock of Subsidiary
In connection with the CPI Merger, SPG Properties, Inc., formerly Simon DeBartolo Group, Inc., became a subsidiary of SPG. Accordingly, the 11,000,000 shares of Series B and Series C cumulative redeemable preferred stock described below have been reflected outside of equity as Preferred Stock of Subsidiary as of the date of the CPI Merger.
On July 9, 1997, SPG Properties, Inc. sold 3,000,000 shares of its 7.89% Series C Cumulative Step-Up Premium RateSM Preferred Stock (the "Series C Preferred Shares") in a public offering at $50.00 per share. Beginning October 1, 2012, the rate increases to 9.89% per annum. Management intends to redeem the Series C Preferred Shares prior to October 1, 2012. The Series C Preferred Shares are not redeemable prior to September 30, 2007. Beginning September 30, 2007, the Series C Preferred Shares may be redeemed at the option of SPG Properties, Inc. in whole or in part, at a redemption price of $50.00 per share, plus accrued and unpaid distributions, if any, thereon. The redemption price of the Series C Preferred Shares may only be paid from the sale proceeds of other capital stock of SPG Properties, Inc., which may include other classes or series of preferred stock. Additionally, the Series C Preferred Shares have no stated maturity and are not subject to any mandatory redemption provisions, nor are they convertible into any other securities of SPG Properties, Inc. SPG Properties, Inc. contributed the net proceeds of this offering of approximately $146,000 to the SPG Operating Partnership in exchange for preferred Units, the economic terms of which are substantially identical to the Series C Preferred Shares.
On September 27, 1996, SPG Properties, Inc. completed a $200,000 public offering of 8,000,000 shares of Series B cumulative redeemable preferred stock, generating net proceeds of approximately $193,000. Dividends on the preferred stock
are paid quarterly in arrears at 8.75% per annum. SPG Properties, Inc. may redeem the preferred stock any time on or after September 29, 2006, at a redemption price of $25.00 per share, plus accrued and unpaid dividends. The redemption price (other than the portion thereof consisting of accrued and unpaid dividends) is payable solely out of the sale proceeds of other capital shares of SPG Properties, Inc., which may include other series of preferred shares. SPG Properties, Inc. contributed the proceeds to the SPG Operating Partnership in exchange for preferred Units. The SPG Operating Partnership pays a preferred distribution to SPG Properties, Inc. equal to the dividends paid on the preferred stock.
Notes Receivable from Former CPI Shareholders
Notes receivable of $27,168 from former CPI shareholders, which result from securities issued under CPI's executive compensation program and were assumed in connection with the CPI Merger, are reflected as a deduction from capital in excess of par value in the statements of shareholders' equity in the accompanying combined financial statements and SPG's financial statements. Certain of such notes totaling $9,519 are interest bearing at rates ranging from 5.31% to 6.00% and become due during the period 2000 to 2002. The remainder of the notes do not bear interest and become due at the time the underlying shares are sold.
The Simon Property Group 1998 Stock Incentive Plan
At the time of the CPI Merger, Simon Group adopted `The Simon Property Group 1998 Stock Incentive Plan' (the "1998 Plan"). The 1998 Plan provides for the grant of equity-based awards during the ten-year period following its adoption, in the form of options to purchase paired shares of the Companies' common stock ("Options"), stock appreciation rights ("SARs"), restricted stock grants and performance unit awards (collectively, "Awards"). Options may be granted which are qualified as "incentive stock options" within the meaning of Section 422 of the Code and Options which are not so qualified.
The primary purpose of the 1998 Plan is to attract and retain the best available eligible officers, directors, key employees, advisors and consultants. The Companies have reserved for issuance 6,300,000 paired shares of common stock under the 1998 Plan, which includes 2,230,875 shares reserved for the exercise of options granted and grants of restricted stock allocated under the previously existing Stock Incentive Program and DRC Plan, which are described below. If stock options granted in connection with the 1998 Plan are exercised at any time or from time to time, the partnership agreement requires the Companies to sell to the Operating Partnerships, at fair market value, paired shares of the Companies' common stock sufficient to satisfy the exercised stock options. The Companies are also obligated to purchase paired Units for cash in an amount equal to the fair market value of such shares.
Administration. The 1998 Plan is administered by Simon Group's Compensation Committee (the "Committee"). The Committee, in its sole discretion, determines which eligible individuals may participate and the type, extent and terms of the Awards to be granted to them. In addition, the Committee interprets the 1998 Plan and makes all other determinations deemed advisable for the administration of the 1998 Plan. Options granted to employees ("Employee Options") become exercisable over the period determined by the Committee. The exercise price of an Employee Option may not be less than the fair market value of the shares of the common stock on the date of grant. Currently, Employee Options outstanding vest 40% on the first anniversary of the date of grant, an additional 30% on the second anniversary of the grant date and become fully vested three years after the grant date. The Employee Options expire ten years from the date of grant.
Director Options. The 1998 Plan provides for automatic grants of Options ("Director Options") to directors of the Companies who are not also employees of the SPG Operating Partnership or its "affiliates" ("Eligible Directors"). Under the 1998 Plan, each Eligible Director is automatically granted Director Options to purchase 5,000 shares of the Companies' common stock upon the director's initial election to the Board of Directors. Eligible Directors will also receive Director Options to purchase 3,000 shares of common stock multiplied by the number of calendar years that have elapsed since such person's last election to the Board of Directors upon each reelection of the Eligible Director to the Board of Directors. The exercise price of the options is equal to 100% of the fair market value of the Companies' common stock on the date of grant. Director Options become vested and exercisable on the first anniversary of the date of grant or at such earlier time as a "change in control" of the Companies (as defined in the 1998 Plan). Director Options will terminate 30 days after the optionee ceases to be a member of the Board of Directors.
Restricted Stock. In October 1994, under a previous stock incentive program, the Compensation Committee approved a five-year stock incentive program (the "Stock Incentive Program"), under which shares of restricted common stock of SPG were granted to certain employees at no cost to those employees if SPG attained certain growth targets established by the Compensation Committee from time to time. In addition, in 1994, DRC established a five-year stock incentive program (the "DRC Plan") under which shares of restricted common stock were granted to certain DRC employees at no cost to those employees also based upon growth targets established by their Compensation Committee. At the time of the DRC Merger, SPG agreed to assume the terms and conditions of the DRC Plan and the economic criteria upon which restricted stock under
both the Stock Incentive Program and the DRC Plan would be deemed earned and awarded were aligned with one another. Further, other terms and conditions of the DRC Plan and Stock Incentive Program were modified so that beginning with calendar year 1996, the terms and conditions of these two programs are substantially the same. Both the Stock Incentive Program and the DRC Plan provided for a percentage of each of these restricted stock grants to be earned and awarded each year. Any restricted stock earned and awarded vests in four installments of 25% each on January 1 of each year following the year in which the restricted stock is deemed earned and awarded.
The terms and conditions concerning vesting of the restricted stock grant to the Companies' President and Chief Operating Officer are different from those established by the DRC Plan and are specifically set forth in the employment contract with such individual.
In March 1995, an aggregate of 1,000,000 shares of restricted stock was granted to 50 executives, subject to the performance standards, vesting requirements and other terms of the Stock Incentive Program. Prior to the DRC Merger, 2,108,000 shares of DRC common stock were deemed available for grant to certain designated employees of DRC, also subject to certain performance standards, vesting requirements and other terms of the DRC Plan. During 1998, 1997 and 1996, a total of 495,131; 448,753 and 200,030 shares of common stock, respectively, net of forfeitures, were deemed earned and awarded under the Stock Incentive Program and the DRC Plan. Through December 31, 1998, a total of 1,287,225 shares of common stock, net of forfeitures, were deemed earned and awarded under these programs. Approximately $9,463, $5,386 and $2,084 relating to these programs were amortized in 1998, 1997 and 1996, respectively. The cost of restricted stock grants, which is based upon the stock's fair market value at the time such stock is earned, awarded and issued, is charged to shareholders' equity and subsequently amortized against earnings of Simon Group over the vesting period.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires entities to measure compensation costs related to awards of stock-based compensation using either the fair value method or the intrinsic value method. Under the fair value method, compensation expense is measured at the grant date based on the fair value of the award. Under the intrinsic value method, compensation expense is equal to the excess, if any, of the quoted market price of the stock at the grant date over the amount the employee must pay to acquire the stock. Entities electing to measure compensation costs using the intrinsic value method must make pro forma disclosures of net income and earnings per share as if the fair value method had been applied. Simon Group has elected to account for stock- based compensation programs using the intrinsic value method consistent with existing accounting policies. Simon Group granted 5,000 and 380,000 options during April 1998 and September 1998, respectively. The options vest over a three-year period. The fair value at date of grant for options granted during 1998 was $6.19 and $7.25 per option for the April and September grants, respectively. The fair value at the date of grant for options granted during the years ended December 31, 1997 and 1996 was $3.18 and $2.13 per option, respectively. The impact on pro forma net income and earnings per share as a result of applying the fair value method was not material.
The fair value of the options at the date of grant was estimated using the Black-Scholes option pricing model with the following assumptions:
The weighted average remaining contract life for options outstanding as of December 31, 1998 was 6.1 years.
Information relating to the Options from January 1, 1996 through December 31, 1998 is as follows:
(1) Represents the weighted average price.
Exchange Rights
Limited partners in the Operating Partnerships have the right to exchange all or any portion of their Units for shares of common stock on a one-for-one basis or cash, as selected by the Board of Directors. The amount of cash to be paid if the exchange right is exercised and the cash option is selected will be based on the trading price of the Companies' common stock at that time. The Companies have reserved 64,182,157 paired shares of common stock for possible issuance upon the exchange of Units.
12. Employee Benefit Plans
Simon Group maintains a tax-qualified retirement 401(k) savings plan. Under the plan, eligible employees can participate in a cash or deferred arrangement permitting them to defer up to a maximum of 12% of their compensation, subject to certain limitations. Participants' salary deferrals are matched at specified percentages, and the plan provides annual contributions of 3% of eligible employees' compensation. Simon Group contributed $2,581, $2,727 and $2,350 to the plans in 1998, 1997 and 1996, respectively.
Except for the 401(k) plan, Simon Group offers no other postretirement or postemployment benefits to its employees.
13. Commitments and Contingencies
Litigation
Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. On September 3, 1998, a complaint was filed in the Court of Common Pleas in Cuyahoga County, Ohio, captioned Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. The plaintiffs are all principals or affiliates of The Richard E. Jacobs Group, Inc. ("Jacobs"). The plaintiffs allege in their complaint that the SPG Operating Partnership engaged in malicious prosecution, abuse of process, defamation, libel, injurious falsehood/unlawful disparagement, deceptive trade practices under Ohio law, tortious interference and unfair competition in
connection with the SPG Operating Partnership's acquisition by tender offer of shares in RPT, a Massachusetts business trust, and certain litigation instituted in September, 1997, by the SPG Operating Partnership against Jacobs in federal district court in New York, wherein the SPG Operating Partnership alleged that Jacobs and other parties had engaged, or were engaging in activity which violated Section 10(b) of the Securities Exchange Act of 1934, as well as certain rules promulgated thereunder. Plaintiffs in the Ohio action are seeking compensatory damages in excess of $200,000, punitive damages and reimbursement for fees and expenses. It is difficult to predict the ultimate outcome of this action and there can be no assurance that the SPG Operating Partnership will receive a favorable verdict. Based upon the information known at this time, in the opinion of management, it is not expected that this action will have a material adverse effect on Simon Group.
Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. On October 16, 1996, a complaint was filed in the Court of Common Pleas of Mahoning County, Ohio, captioned Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. The named defendants are SD Property Group, Inc., a indirect 99%-owned subsidiary of SPG, and DeBartolo Properties Management, Inc., a subsidiary of the Management Company, and the plaintiffs are 27 former employees of the defendants. In the complaint, the plaintiffs alleged that they were recipients of deferred stock grants under the DRC Plan and that these grants immediately vested under the DRC Plan's "change in control" provision as a result of the DRC Merger. Plaintiffs asserted that the defendants' refusal to issue them approximately 661,000 shares of DRC common stock, which is equivalent to approximately 450,000 paired shares of common stock of the Companies computed at the 0.68 exchange ratio used in the DRC Merger, constituted a breach of contract and a breach of the implied covenant of good faith and fair dealing under Ohio law. Plaintiffs sought damages equal to such number of shares of DRC common stock, or cash in lieu thereof, equal to all deferred stock ever granted to them under the DRC Plan, dividends on such stock from the time of the grants, compensatory damages for breach of the implied covenant of good faith and fair dealing, and punitive damages. The complaint was served on the defendants on October 28, 1996. The plaintiffs and the Company each filed motions for summary judgment. On October 31, 1997, the Court entered a judgment in favor of the Company granting the Company's motion for summary judgment. The plaintiffs have appealed this judgment and the matter is pending. While it is difficult to predict the ultimate outcome of this action, based on the information known to date, it is not expected that this action will have a material adverse effect on Simon Group.
Roel Vento et al v. Tom Taylor et al. An affiliate of the Company is a defendant in litigation entitled Roel Vento et al v. Tom Taylor et al., in the District Court of Cameron County, Texas, in which a judgment in the amount of $7,800 has been entered against all defendants. This judgment includes approximately $6,500 of punitive damages and is based upon a jury's findings on four separate theories of liability including fraud, intentional infliction of emotional distress, tortious interference with contract and civil conspiracy arising out of the sale of a business operating under a temporary license agreement at Valle Vista Mall in Harlingen, Texas. The Company is seeking to overturn the award and has appealed the verdict. The Company's appeal is pending. Although management is optimistic that the Company may be able to reverse or reduce the verdict, there can be no assurance thereof. Management, based upon the advice of counsel, believes that the ultimate outcome of this action will not have a material adverse effect on the Simon Group.
Simon Group currently is not subject to any other material litigation other than routine litigation and administrative proceedings arising in the ordinary course of business. On the basis of consultation with counsel, management believes that these items will not have a material adverse impact on Simon Group's financial position or results of operations.
Lease Commitments
As of December 31, 1998, a total of 37 of the Wholly-Owned and Minority Interest Properties are subject to ground leases. The termination dates of these ground leases range from 1999 to 2087. These ground leases generally require payments by Simon Group of a fixed annual rent, or a fixed annual rent plus a participating percentage over a base rate. Ground lease expense incurred by Simon Group for the years ended December 31, 1998, 1997 and 1996, was $13,618, $10,511 and $8,506, respectively.
Future minimum lease payments due under such ground leases for each of the next five years ending December 31 and thereafter are as follows:
Environmental Matters
Nearly all of the Properties have been subjected to Phase I or similar environmental audits. Such audits have not revealed nor is management aware of any environmental liability that management believes would have a material adverse impact on the Company's financial position or results of operations. Management is unaware of any instances in which it would incur significant environmental costs if any or all Properties were sold, disposed of or abandoned.
14. Related Party Transactions
SRC receives a substantial amount of its rental income from SPG, and from CPI for periods prior to the CPI Merger, for office space under lease. During 1997 and 1996 SRC also received management fee income under various management contracts with affiliates of CPI. These contracts had expired as of December 31, 1997.
In preparation for the CPI Merger, on July 31, 1998, CPI, with assistance from SPG Operating Partnership, completed the sale of the General Motors Building in New York, New York for approximately $800,000. The SPG Operating Partnership and certain third parties each received a $2,500 fee from CPI in connection with the sale.
15. New Accounting Pronouncement
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.
Statement 133 will be effective for Simon Group beginning with the 1999 fiscal year and may not be applied retroactively. Management does not expect the impact of Statement 133 to be material to the financial statements. However, the Statement could increase volatility in earnings and other comprehensive income.
On April 3, 1998 the Accounting Standards Executive Committee issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up Activities, which is effective for fiscal years beginning after December 15, 1998. SOP 98-5 states that costs of start-up activities, including organization costs, should be expensed as incurred. Management does not expect the impact of SOP 98-5 to be material to the financial statements.
16. Quarterly Financial Data (Unaudited)
Combined Summarized quarterly 1998 and 1997 data is as follows:
(1) Primarily due to the cyclical nature of earnings available for common stock and the issuance of additional shares of common stock during the periods, the sum of the quarterly earnings per share varies from the annual earnings per share.
17. Subsequent Events (Unaudited)
On February 25, 1999 Simon Group entered into a definitive agreement with New England Development Company ("NED") to acquire and assume management responsibilities for NED's portfolio of up to 14 regional malls aggregating approximately 10.6 million square feet of GLA. The purchase price for the portfolio is approximately $1.725 billion. Simon Group expects to form a joint venture to acquire the portfolio, with Simon Group's ultimate ownership to be between 30% to 50%.
On February 26, 1999, 150,000 shares of SPG's Series A Convertible Preferred stock were converted into 5,699,250 paired shares of common stock of the Companies, with 59,249 shares of Series A Convertible Preferred stock remaining outstanding.
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.
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC.
By /s/ David Simon --------------- David Simon Chief Executive Officer
March 18, 1999
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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors of Simon Property Group, Inc.:
We have audited in accordance with generally accepted auditing standards, the financial statements of SIMON PROPERTY GROUP, INC. and SPG REALTY CONSULTANTS, INC. included in this Form 10-K and have issued our report thereon dated February 17, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule, "Schedule III: Real Estate and Accumulated Depreciation", as of December 31, 1998, of Simon Property Group, Inc. and SPG Realty Consultants, Inc. are the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The 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 Indianapolis, Indiana, February 17, 1999
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
SCHEDULE III (Dollars in thousands)
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
SCHEDULE III (Dollars in thousands)
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
SCHEDULE III (Dollars in thousands)
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
SCHEDULE III (Dollars in thousands)
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998
SCHEDULE III (Dollars in thousands)
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC.
NOTES TO SCHEDULE III AS OF DECEMBER 31, 1998
(Dollars in thousands)
(1) Reconciliation of Real Estate Properties:
The changes in real estate assets for the years ended December 31, 1998, 1997 and 1996 are as follows:
The aggregate net book values for SPG and SRC for federal income tax purposes as of December 31, 1998 were $6,325,319 and $3,500, respectively.
(2) Reconciliation of Accumulated Depreciation:
The changes in accumulated depreciation and amortization for the years ended December 31, 1998, 1997 and 1996 are as follows:
Depreciation of the Companies' investment in buildings and improvements reflected in the statements of operations is calculated over the estimated original lives of the assets as follows:
Buildings and Improvements - typically 35 years Tenant Inducements - shorter of lease term or useful life
(3) Initial cost represents net book value at December 20, 1993.
(4) Not developed/constructed by Simon Group or the Simons. The date of construction represents acquisition date.
INDEX TO EXHIBITS
Exhibits Page ----
2.1 Agreement and Plan of Merger among SPG, Sub and DRC, dated as of March 26, 1996, as amended (included as Annex I to the Prospectus/Joint Proxy Statement filed as part of Form S-4 of Simon Property Group, Inc. (Registration No. 333-06933))
2.2 Amendment and supplement to Offer to Purchase for Cash all Outstanding Beneficial Interests in The Retail Property Trust (incorporated by reference to Exhibit 99.1 of the Form 8-K filed by the SPG Operating Partnership on September 12, 1997)
2.3 Merger Agreement between SDG, LP and SPG, LP (incorporated by reference to Exhibit 2.3 of the 1997 Form 10-K filed by Simon DeBartolo Group, Inc.)
2.4 Agreement and Plan of Merger among Simon DeBartolo Group, Inc. and Corporate Property Investors and Corporate Realty Consultants, Inc. (incorporated by reference to Exhibit 10.1 in the Form 8-K filed by Simon DeBartolo Group, Inc. on February 24, 1998)
3.1 Restated Certificate of Incorporation of SPG (incorporated by reference to Exhibit 3.1 of the Form 8-K filed by the Companies on October 9, 1998).
3.2 Restated By-laws of SPG (incorporated by reference to Exhibit 3.2 of the Form 8-K filed by the Companies on October 9, 1998).
3.3 Restated Certificate of Incorporation of SRC (incorporated by reference to Exhibit 3.3 of the Form 8-K filed by the Companies on October 9, 1998).
3.4 Restated By-laws of SRC (incorporated by reference to Exhibit 3.4 of the Form 8-K filed by the Companies on October 9, 1998).
4.1 Indenture, dated as of November 26, 1996, by and among the SPG Operating Partnership and The Chase Manhattan Bank, as trustee (incorporated by reference to the form of this document filed as Exhibit 4.1 to the Registration Statement on Form S-3 (Reg. No. 333-11491)).
4.2 Supplemental Indenture, dated as of June 22, 1998, by and among the SPG Operating Partnership and The Chase Manhattan Bank, as trustee, relating to the Securities (incorporated by reference as Exhibit 4.2 to the Registration Statement of Simon DeBartolo Group, L.P. on Form S-4 (Reg. No. 333-63645)).
4.3 Issuance Agreement, dated as of September 24, 1998, between SPG and SRC (incorporated by reference to Exhibit 4.5 of the Form 8-K filed by the Companies on October 9, 1998).
4.4 Trust Agreement, dated as of October 30, 1979 among shareholders of CPI, SRC and First Jersey National Bank, as Trustee (incorporated by reference to Exhibit 4.7 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
4.5 Trust Agreement, dated as of August 26, 1994, among the holders of the 6.50% First Series Preference Shares of CPI, SRC and Bank of Montreal Trust Company, as Trustee (incorporated by reference to Exhibit 4.8 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
9.1 Voting Trust Agreement, Voting Agreement and Proxy between MSA, on the one hand, and Melvin Simon, Herbert Simon and David Simon, on the other hand. (Incorporated by reference to exhibit 9.1 of the Form 10-K of Simon Property Group, Inc. for the fiscal year ended December 31, 1993.)
10.1 Credit Agreement dated as of September 24, 1998 among the Simon Operating Partnership, SPG and The Chase Manhattan Bank as Administrative Agent. (incorporated by reference to Exhibit 4.1 of the Form 10-Q filed by the Companies for the period ended September 30, 1998)
10.2 Form of SPG Indemnity Agreement between SPG and its directors and officers. (incorporated by reference to Exhibit 10.7 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
10.3 Registration Rights Agreement (the "Agreement"), dated as of August 9, 1996, by and among the "Simon Family Members" (as defined in the Agreement), SPG, JCP Realty, Inc., Brandywine Realty, Inc., and the Estate of Edward J. DeBartolo Sr., Edward J. DeBartolo, Jr., Marie Denise DeBartolo York, and the Trusts and other entities listed on Schedule 2 of the Agreement, and any of their respective successors-in-interest and permitted assigns. (incorporated by reference to Exhibit 10.60 of the 1996 Form 10-K filed by Simon DeBartolo Group, Inc.)
10.4 SPG Registration Rights Agreement, dated as of September 24, 1998, by and among SPG and the persons named therein (incorporated by reference to Exhibit 4.4 of the Form 8-K filed by SPG on October 9, 1998).
10.5 (a) The SPG Operating Partnership 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
10.6 (a) Form of Employment Agreement between Hans C. Mautner and the Companies (incorporated by reference to Exhibit 10.63 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
10.7 (a) Form of Employment Agreement between Mark S. Ticotin and the Companies (incorporated by reference to Exhibit 10.64 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
10.8 (a) Form of Incentive Stock Option Agreement between the Companies and Hans C. Mautner pursuant to the SPG Operating Partnership 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.59 of the Form S-4 filed by CPI on August 13,1998 (Reg. No. 333-61399)).
10.9 (a) Form of Incentive Stock Option Agreement between the Companies and Mark S. Ticotin pursuant to the SPG Operating Partnership 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.60 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
10.10 (a) Form of Nonqualified Stock Option Agreement between the Companies and Hans C. Mautner pursuant to the SPG Operating Partnership 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.61 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
10.11 (a) Form of Nonqualified Stock Option Agreement between the Companies and Mark S. Ticotin pursuant to the SPG Operating Partnership 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.62 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
10.12 (a) CPI Executive Severance Policy, as amended and restated effective as of August 11, 1998 (incorporated by reference to Exhibit 10.65 of the Form S-4 filed by CPI on August 13, 1998 (Reg. No. 333-61399)).
21.1 List of Subsidiaries of the Company. 102
23.1 Consent of Arthur Andersen LLP. 103
23.2 Consent of Ernst & Young LLP 104
(a) Represents a management contract, or compensatory plan, contract or arrangement required to be filed pursuant to Regulation S-K.