1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
SIMON PROPERTY GROUP, INC. SPG REALTY CONSULTANTS, INC.
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
Delaware Delaware
(State of incorporation or organization) (State of incorporation or organization)
001-14469 001-14469-01
(Commission File No.) (Commission File No.)
046268599 13-2838638
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
National City Center National City Center
115 West Washington Street, Suite 15 East 115 West Washington Street, Suite 15 East
Indianapolis, Indiana 46204 Indianapolis, Indiana 46204
(Address of principal executive offices) (Address of principal executive offices)
(317) 636-1600 (317) 636-1600
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
CORPORATE PROPERTY INVESTORS, INC. CORPORATE REALTY CONSULTANTS, INC.
(Former name of registrant) (Former name of registrant)
Three Dag Hammarskjold Plaza Three Dag Hammarskjold Plaza
307 East 47th Street 307 East 47th Street
New York, New York 10017 New York, New York 10017
(Former address of principal executive offices) (Former address of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
As of November 11, 1998, 163,574,091 shares of common stock, par value $0.0001
per share, 3,200,000 shares of Class B common stock, par value $0.0001 per share
and 4,000 shares of Class C common stock, par value $0.0001 of Simon Property
Group, Inc. were outstanding, and were paired with 1,667,780.91 shares of common
stock, par value $0.0001 per share, of SPG Realty Consultants, Inc. outstanding
on that same date.
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Simon Property Group, Inc. ("SPG") and SPG Realty Consultants, Inc. ("SRC")
hereby amend their Quarterly Report on Form 10-Q for the period ended September
30, 1998 to correct the combined Balance Sheet of SPG and SRC as of September
30, 1998 and the consolidated Balance Sheet of SPG as of September 30, 1998 to
reflect an adjustment required with regard to the allocation of the purchase
price in connection with the CPI Merger (see Note 2). SRC's financial
statements have been corrected to record as expense and payable amounts paid on
its behalf by CPI in 1998, including legal, accounting, investment advisory and
other costs incurred in connection with the CPI Merger in the amount of $4.1
million.
SIGNATURE
Pursuant to the requirements of the Securities and 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.
/s/ James M. Barkley
-----------------------------------
James M. Barkley,
Secretary/General Counsel
Date: March 29, 1999
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - INTRODUCTION
The following unaudited financial statements of Simon Property Group, Inc.
and its paired-share affiliate, SPG Realty Consultants, Inc., are provided
pursuant to the requirements of this Item. In the opinion of management, all
adjustments necessary for fair presentation, consisting of only normal recurring
adjustments, have been included. The financial statements presented herein have
been prepared in accordance with the accounting policies described in Simon
DeBartolo Group, Inc.'s Annual report on Form 10-K for the year ended December
31, 1997 and the accounting policies described in the notes to Corporate
Property Investors, Inc. and Corporate Realty Consultants, Inc.'s historical
financial statements included in their Registration Statement on Form S-4 filed
August 13, 1998, and should be read in conjunction therewith.
As described in Note 2 to the financial statements, Corporate Property
Investors, Inc. was acquired by Simon DeBartolo Group, Inc. as of the close of
business on September 24, 1998 in a reverse purchase. Although Simon DeBartolo
Group, Inc. became a legal subsidiary of Corporate Property Investors, Inc., the
shareholders of Simon DeBartolo Group, Inc. hold the majority of the outstanding
common stock of Corporate Property Investors, Inc. Accordingly, Simon DeBartolo
Group, Inc. is the predecessor to Simon Property Group, Inc. for accounting and
reporting purposes. In connection with the acquisition, Corporate Property
Investors, Inc. and Corporate Realty Consultants, Inc. were renamed 'Simon
Property Group, Inc.' and 'SPG Realty Consultants, Inc.', respectively. See Note
1 to the financial statements for a description of the basis of presentation of
the following unaudited financial statements.
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SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1998 1997
------------ ------------
ASSETS:
Investment properties, at cost $ 11,679,790 $ 6,867,354
Less-- accumulated depreciation 645,277 461,792
------------ ------------
11,034,513 6,405,562
Goodwill 58,134 --
Cash and cash equivalents 102,517 109,699
Restricted cash 1,685 8,553
Tenant receivables and accrued revenue, net 216,202 188,359
Notes and advances receivable from Management Company and affiliate 111,391 93,809
Investment in partnerships and joint ventures, at equity 1,206,272 612,140
Investment in Management Company and affiliates 1,334 3,192
Other investment 48,239 53,785
Deferred costs and other assets 229,451 164,413
Minority interest 29,442 23,155
------------ ------------
Total assets $ 13,039,180 $ 7,662,667
============ ============
LIABILITIES:
Mortgages and other indebtedness $ 7,745,917 $ 5,077,990
Accounts payable and accrued expenses 413,903 245,121
Accrued distributions 84,496 --
Cash distributions and losses in partnerships and joint ventures, at equity 25,836 20,563
Other liabilities 77,523 67,694
------------ ------------
Total liabilities 8,347,675 5,411,368
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 11)
LIMITED PARTNERS' INTEREST IN THE OPERATING PARTNERSHIPS 997,431 694,437
PREFERRED STOCK OF SUBSIDIARY 339,262 --
SHAREHOLDERS' EQUITY:
CAPITAL STOCK OF SIMON PROPERTY GROUP, INC.:
Series B and C cumulative redeemable preferred stock, 0 shares authorized, 0 and
11,000,000 issued and outstanding, respectively -- 339,061
Series A convertible preferred stock, 209,249 shares authorized,
209,249 and 0 issued and outstanding, respectively 267,393 --
Series B convertible preferred stock, 5,000,000 shares authorized,
4,844,331 and 0 issued and outstanding, respectively 450,523 --
Common stock, $.0001 par value, 400,000,000 shares authorized,
and 163,574,091 and 106,439,001 issued and outstanding, respectively 16 10
Class B common stock, $.0001 par value, 12,000,000 shares authorized, 3,200,000
issued and outstanding 1 1
Class C common stock, $.0001 par value, 4,000 shares authorized, issued and
outstanding -- --
CAPITAL STOCK OF SPG REALTY CONSULTANTS, INC.:
Common stock, $.0001 par value, 7,500,000 shares authorized,
1,667,780.91 issued and outstanding -- --
Capital in excess of par value 3,081,357 1,491,908
Accumulated deficit (420,043) (263,308)
Unrealized gain on long-term investment (1,260) 2,420
Unamortized restricted stock award (22,011) (13,230)
------------ ------------
Total shareholders' equity 3,355,976 1,556,862
------------ ------------
Total liabilities, limited partners' interest and shareholders' equity $ 13,039,180 $ 7,662,667
============ ============
The accompanying notes are an integral part of these statements.
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SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
---------------------------------------------------------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUE:
Minimum rent $ 194,623 $ 152,320 $ 565,557 $ 449,693
Overage rent 2,290 8,650 22,773 26,214
Tenant reimbursements 101,927 81,413 283,898 231,444
Other income 23,498 17,400 60,742 39,901
--------- --------- --------- ---------
Total revenue 322,338 259,783 932,970 747,252
--------- --------- --------- ---------
EXPENSES:
Property operating 55,600 46,203 155,858 130,228
Depreciation and amortization 61,107 48,185 177,725 135,668
Real estate taxes 31,428 23,816 90,387 73,166
Repairs and maintenance 12,424 11,107 35,974 28,653
Advertising and promotion 11,283 8,396 28,005 20,296
Provision for (recovery of) credit losses (1,857) (135) 1,598 2,690
Other 4,816 4,639 16,993 12,818
--------- --------- --------- ---------
Total operating expenses 174,801 142,211 506,540 403,519
--------- --------- --------- ---------
OPERATING INCOME 147,537 117,572 426,430 343,733
INTEREST EXPENSE 97,331 68,940 281,751 203,934
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 50,206 48,632 144,679 139,799
MINORITY INTEREST (1,108) (1,423) (4,704) (3,648)
GAIN (LOSS) ON SALES OF ASSETS (64) -- (7,283) 20
--------- --------- --------- ---------
INCOME BEFORE UNCONSOLIDATED ENTITIES 49,034 47,209 132,692 136,171
INCOME FROM UNCONSOLIDATED ENTITIES 3,817 7,077 8,797 9,590
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 52,851 54,286 141,489 145,761
EXTRAORDINARY ITEMS (22) 27,215 7,002 2,501
--------- --------- --------- ---------
INCOME BEFORE LIMITED PARTNERS' INTERESTS 52,829 81,501 148,491 148,262
LESS:
LIMITED PARTNERS' INTEREST IN
THE OPERATING PARTNERSHIPS 15,789 27,758 45,368 48,522
PREFERRED DIVIDENDS OF SUBSIDIARY 482 -- 482 --
--------- --------- --------- ---------
NET INCOME 36,558 53,743 102,641 99,740
PREFERRED DIVIDENDS (7,592) (9,101) (22,260) (21,914)
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 28,966 $ 44,642 $ 80,381 $ 77,826
========= ========= ========= =========
BASIC EARNINGS PER PAIRED SHARE:
Income before extraordinary items $ 0.25 $ 0.28 $ 0.67 $ 0.78
Extraordinary items -- 0.17 0.04 0.02
--------- --------- --------- ---------
Net income $ 0.25 $ 0.45 $ 0.71 $ 0.80
========= ========= ========= =========
DILUTED EARNINGS PER PAIRED SHARE:
Income before extraordinary items $ 0.25 $ 0.28 $ 0.67 $ 0.78
Extraordinary items -- 0.17 0.04 0.02
--------- --------- --------- ---------
Net income $ 0.25 $ 0.45 $ 0.71 $ 0.80
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
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SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
For the Nine Months Ended September 30,
----------------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 102,641 $ 99,740
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization 185,798 140,927
Extraordinary items (7,002) (2,501)
(Gain) loss on sales of assets, net 7,283 (20)
Limited partners' interest in Operating Partnership 45,368 48,522
Straight-line rent (5,892) (6,378)
Minority interest 4,704 3,648
Equity in income of unconsolidated entities (8,797) (9,590)
Changes in assets and liabilities--
Tenant receivables and accrued revenue (3,942) (1,341)
Deferred costs and other assets (10,516) (18,906)
Accounts payable, accrued expenses and other liabilities 41,648 8,151
----------- -----------
Net cash provided by operating activities 351,293 262,252
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (1,881,183) (736,600)
Capital expenditures (233,200) (219,672)
Change in restricted cash 6,868 (8,829)
Cash from acquisitions 17,213 --
Net proceeds from sales of assets 46,087 599
Investments in unconsolidated entities (28,726) (63,656)
Distributions from unconsolidated entities 164,914 22,199
Investments in and advances to Management Company (19,915) --
Other investing activity -- (55,400)
----------- -----------
Net cash used in investing activities (1,927,942) (1,061,359)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common and convertible preferred stock, net 114,629 327,101
Minority interest distributions, net (10,991) (2,825)
Distributions to shareholders (205,697) (168,263)
Distributions to limited partners (104,139) (91,632)
Mortgage and other note proceeds, net of transaction costs 3,305,199 1,595,202
Mortgage and other note principal payments (1,529,534) (852,906)
Other refinancing transaction -- (21,000)
----------- -----------
Net cash provided by financing activities 1,569,467 785,677
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (7,182) (13,430)
CASH AND CASH EQUIVALENTS, beginning of period 109,699 64,309
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 102,517 $ 50,879
=========== ===========
The accompanying notes are an integral part of these statements.
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SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1998 1997
------------ ------------
ASSETS:
Investment properties, at cost $ 11,646,393 $ 6,867,354
Less-- accumulated depreciation 634,277 461,792
------------ ------------
11,012,116 6,405,562
Goodwill 58,134 --
Cash and cash equivalents 78,971 109,699
Restricted cash 1,685 8,553
Tenant receivables and accrued revenue, net 215,703 188,359
Due from SRC (Note 10) 4,093 --
Notes and advances receivable from Management Company and affiliates 131,956 93,809
Investment in partnerships and joint ventures, at equity 1,203,118 612,140
Investment in Management Company and affiliates 1,334 3,192
Other investment 48,239 53,785
Deferred costs and other assets 228,759 164,413
Minority interest 29,442 23,155
------------ ------------
Total assets $ 13,013,550 $ 7,662,667
============ ============
LIABILITIES:
Mortgages and other indebtedness $ 7,744,926 $ 5,077,990
Accounts payable and accrued expenses 413,903 245,121
Accrued distributions 84,496 --
Cash distributions and losses in partnerships and joint ventures, at equity 25,836 20,563
Other liabilities 73,590 67,694
------------ ------------
Total liabilities 8,342,751 5,411,368
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 11)
LIMITED PARTNERS' INTEREST IN THE SPG OPERATING PARTNERSHIP 990,378 694,437
PREFERRED STOCK OF SUBSIDIARY 339,262 --
SHAREHOLDERS' EQUITY:
Series B and C cumulative redeemable preferred stock, 0 shares authorized, 0 and
11,000,000 issued and outstanding, respectively -- 339,061
Series A convertible preferred stock, 209,249 shares authorized,
209,249 and 0 issued and outstanding, respectively 267,393 --
Series B convertible preferred stock, 5,000,000 shares authorized,
4,844,331 and 0 issued and outstanding, respectively 450,523 --
Common stock, $.0001 par value, 400,000,000 shares authorized,
and 163,574,091 and 106,439,001 issued and outstanding, respectively 16 10
Class B common stock, $.0001 par value, 12,000,000 shares authorized, 3,200,000
issued and outstanding 1 1
Class C common stock, $.0001 par value, 4,000 shares authorized, issued and
outstanding -- --
Capital in excess of par value 3,066,526 1,491,908
Accumulated deficit (420,029) (263,308)
Unrealized gain on long-term investment (1,260) 2,420
Unamortized restricted stock award (22,011) (13,230)
------------ ------------
Total shareholders' equity 3,341,159 1,556,862
------------ ------------
Total liabilities, limited partners' interest and shareholders' equity $ 13,013,550 $ 7,662,667
============ ============
The accompanying notes are an integral part of these statements.
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8
SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
---------------------------------------------------------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUE:
Minimum rent $ 194,597 $ 152,320 $ 565,531 $ 449,693
Overage rent 2,290 8,650 22,773 26,214
Tenant reimbursements 101,935 81,413 283,906 231,444
Other income 23,515 17,400 60,759 39,901
--------- --------- --------- ---------
Total revenue 322,337 259,783 932,969 747,252
--------- --------- --------- ---------
EXPENSES:
Property operating 55,592 46,203 155,850 130,228
Depreciation and amortization 61,092 48,185 177,710 135,668
Real estate taxes 31,428 23,816 90,387 73,166
Repairs and maintenance 12,424 11,107 35,974 28,653
Advertising and promotion 11,283 8,396 28,005 20,296
Provision for (recovery of) credit
losses (1,857) (135) 1,598 2,690
Other 4,812 4,639 16,989 12,818
--------- --------- --------- ---------
Total operating expenses 174,774 142,211 506,513 403,519
--------- --------- --------- ---------
OPERATING INCOME 147,563 117,572 426,456 343,733
INTEREST EXPENSE 97,329 68,940 281,749 203,934
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 50,234 48,632 144,707 139,799
MINORITY INTEREST (1,108) (1,423) (4,704) (3,648)
GAIN (LOSS) ON SALES OF ASSETS (64) -- (7,283) 20
--------- --------- --------- ---------
INCOME BEFORE UNCONSOLIDATED ENTITIES 49,062 47,209 132,720 136,171
INCOME FROM UNCONSOLIDATED ENTITIES 3,809 7,077 8,789 9,590
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 52,871 54,286 141,509 145,761
EXTRAORDINARY ITEMS (22) 27,215 7,002 2,501
--------- --------- --------- ---------
INCOME BEFORE LIMITED PARTNERS' INTEREST 52,849 81,501 148,511 148,262
LESS:
LIMITED PARTNERS' INTEREST IN
THE SPG OPERATING PARTNERSHIP 15,795 27,758 45,374 48,522
PREFERRED DIVIDENDS OF SUBSIDIARY 482 -- 482 --
--------- --------- --------- ---------
NET INCOME 36,572 53,743 102,655 99,740
PREFERRED DIVIDENDS (7,592) (9,101) (22,260) (21,914)
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 28,980 $ 44,642 $ 80,395 $ 77,826
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary items $ 0.25 $ 0.28 $ 0.67 $ 0.78
Extraordinary items -- 0.17 0.04 0.02
--------- --------- --------- ---------
Net income $ 0.25 $ 0.45 $ 0.71 $ 0.80
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary items $ 0.25 $ 0.28 $ 0.67 $ 0.78
Extraordinary items -- 0.17 0.04 0.02
--------- --------- --------- ---------
Net income $ 0.25 $ 0.45 $ 0.71 $ 0.80
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
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SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
For the Nine Months Ended September 30,
---------------------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 102,655 $ 99,740
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization 185,798 140,927
Extraordinary items (7,002) (2,501)
(Gain) loss on sales of assets, net 7,283 (20)
Limited partners' interest in Operating Partnership 45,374 48,522
Straight-line rent (5,892) (6,378)
Minority interest 4,704 3,648
Equity in income of unconsolidated entities (8,789) (9,590)
Changes in assets and liabilities--
Tenant receivables and accrued revenue (5,516) (1,341)
Deferred costs and other assets (10,516) (18,906)
Accounts payable, accrued expenses and other liabilities 41,648 8,151
----------- -----------
Net cash provided by operating activities 349,747 262,252
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (1,881,183) (736,600)
Capital expenditures (233,200) (219,672)
Change in restricted cash 6,868 (8,829)
Cash from acquisitions 17,213 --
Net proceeds from sales of assets 46,087 599
Investments in unconsolidated entities (28,726) (63,656)
Distributions from unconsolidated entities 164,914 22,199
Investments in and advances to Management Company (19,915) --
Other investing activity -- (55,400)
----------- -----------
Net cash used in investing activities (1,927,942) (1,061,359)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common and convertible preferred stock, net 92,629 327,101
Minority interest distributions, net (10,991) (2,825)
Distributions to shareholders (205,697) (168,263)
Distributions to limited partners (104,139) (91,632)
Mortgage and other note proceeds, net of transaction costs 3,305,199 1,595,202
Mortgage and other note principal payments (1,529,534) (852,906)
Other refinancing transaction -- (21,000)
----------- -----------
Net cash provided by financing activities 1,547,467 785,677
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (30,728) (13,430)
CASH AND CASH EQUIVALENTS, beginning of period 109,699 64,309
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 78,971 $ 50,879
=========== ===========
The accompanying notes are an integral part of these statements.
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10
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
1998 1997
--------------- ---------------
ASSETS:
Investment properties, at cost $ 33,397 $ 32,146
Less-- accumulated depreciation 11,000 10,613
--------------- ---------------
22,397 21,533
Cash and cash equivalents 23,546 4,147
Tenant Receivables 499 478
Investments in joint ventures, at equity 3,154 18,007
Other 1,158 1,898
--------------- ---------------
Total assets $ 50,754 $ 46,063
=============== ===============
LIABILITIES:
Mortgages and other indebtedness $ 991 $ 1,184
Notes payable to affiliate 20,565 35,634
Deferred taxes 3,374 3,564
Payable to SPG (Note 10) 4,093 --
Other liabilities 1,025 1,365
--------------- ---------------
Total liabilities 30,048 41,747
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 11)
LIMITED PARTNERS' INTEREST IN THE SRC OPERATING PARTNERSHIP 5,889 --
SHAREHOLDERS' EQUITY:
Common stock, $.0001 par value, respectively, 7,500,000 shares authorized,
1,667,780.91 and 558,730.87 issued and outstanding, respectively -- --
Capital in excess of par value 29,822 13,620
Accumulated deficit (15,005) (9,304)
--------------- ---------------
Total shareholders' equity 14,817 4,316
--------------- ---------------
Total liabilities, limited partners' interest and shareholders' equity $ 50,754 $ 46,063
=============== ===============
The accompanying notes are an integral part of these statements.
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11
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Three Months Ended September 30, For the Nine Months Ended September 30,
---------------------------------------- ---------------------------------------
1998 1997 1998 1997
------- ------- ------- -------
REVENUE:
Minimum rent $ 773 $ 597 $ 2,330 $ 2,370
Tenant reimbursements 165 210 635 779
Management fee income 1 439 4 1,304
Other income 73 41 181 232
------- ------- ------- -------
Total revenue 1,012 1,287 3,150 4,685
------- ------- ------- -------
EXPENSES:
Property operating 759 737 2,126 2,262
Depreciation and amortization 237 236 701 660
Management fees 17 396 94 1,183
Merger-related costs 4,093 -- 4,093 --
Administrative and other 97 72 362 227
------- ------- ------- -------
Total operating expenses 5,203 1,441 7,376 4,332
------- ------- ------- -------
OPERATING INCOME (4,191) (154) (4,226) 353
INTEREST EXPENSE 337 340 1,013 1,025
------- ------- ------- -------
INCOME BEFORE GAIN ON SALE OF
PARTNERSHIP INTERESTS (4,528) (494) (5,239) (672)
GAIN ON SALES OF PARTNERSHIP INTERESTS -- -- -- 1,259
------- ------- ------- -------
INCOME (LOSS) BEFORE UNCONSOLIDATED ENTITIES (4,528) (494) (5,239) 587
INCOME FROM UNCONSOLIDATED ENTITIES 124 155 398 462
------- ------- ------- -------
INCOME (LOSS) OF THE SRC OPERATING PARTNERSHIP (4,404) (339) (4,841) 1,049
LIMITED PARTNERS' INTEREST IN
THE SRC OPERATING PARTNERSHIP (6) -- (6) --
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (4,398) (339) (4,835) 1,049
PROVISION (BENEFIT) FOR INCOME TAXES (3) (124) (193) 361
------- ------- ------- -------
NET INCOME $(4,395) $ (215) $(4,642) $ 688
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ (6.56) $ (.38) $ (7.79) $ 1.21
======= ======= ======= =======
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 670 569 596 569
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
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12
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
For the Nine Months Ended September 30,
---------------------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,642) $ 688
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization 701 660
Gain on sale of assets, net -- (1,259)
Limited partners' interest in SRC Operating Partnership 6 --
Equity in income of unconsolidated entities (398) (462)
Changes in assets and liabilities--
Tenant receivables and other assets 719 662
Deferred taxes (190) (299)
Other liabilities 3,762 147
-------- --------
Net cash provided by (used in) operating activities (42) 137
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,565) (65)
Net proceeds from sales of assets -- 4,231
Investments in unconsolidated entities (3,921) (13,923)
Distributions from unconsolidated entities 19,151 591
-------- --------
Net cash provided by (used in) investing activities 13,665 (9,166)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net 14,097 (1,388)
Contributions from limited partners 8,000
Acquisition and retirement of common stock -- (771)
Distributions to shareholders (1,059) (872)
Mortgage and other note proceeds, net of transaction costs 2,408 12,036
Mortgage and other note principal payments (17,670) (117)
-------- --------
Net cash provided (used in) by financing activities 5,776 8,888
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS 19,399 (141)
CASH AND CASH EQUIVALENTS, beginning of period 4,147 4,797
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 23,546 $ 4,656
======== ========
The accompanying notes are an integral part of these statements.
12
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SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying combined consolidated financial statements include Simon
Property Group, Inc. ("SPG") and subsidiaries and its paired-share affiliate SPG
Realty Consultants, Inc. ("SRC" and together with SPG, the "Company") and its
subsidiary. All significant intercompany amounts have been eliminated. The
combined balance sheets and statements of operations and cash flows reflect the
purchase of Corporate Property Investors, Inc. ("CPI") and related transactions
(the "CPI Merger") 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 subsidiaries ("SDG"), the predecessor
to SAG for financial reporting purposes.
The accompanying consolidated financial statements for SPG include the
accounts of SPG and its subsidiaries. All significant intercompany amounts have
been eliminated. SPG's primary subsidiary is Simon Property Group, L.P. (the
"SPG Operating Partnership"), formerly known as Simon DeBartolo Group, L.P.
("SDG, LP"). The balance sheets and statements of operations and cash flows
reflect the purchase of CPI 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 the paired share
affiliate, SRC, include the accounts of its newly formed subsidiary, SPG Realty
Consultants, L.P. (the "SRC Operating Partnership"). Because the cash
contributed to SRC and the SRC Operating Partnership in exchange for shares of
common stock and units of ownership interests ("Units"), in connection with the
CPI Merger represented equity transactions, SRC, unlike CPI, is not subject to
purchase accounting treatment. The separate statements of SRC represent the
historical results of Corporate Realty Consultants, Inc. ("CRC"), the
predecessor to SRC, for all periods presented.
The SRC Operating Partnership together with the SPG Operating Partnership
are hereafter referred to as the "Operating Partnerships" and together with the
Company, "Simon Group".
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles, which require 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 estimations.
Outstanding common shares of SPG are paired with 1/100th of a share of
SRC. The Company is a self-administrated and self-managed, paired-shared real
estate investment trust ("REIT"), and is 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 September 30, 1998, Simon Group owned or held a combined interest in 241
income-producing properties, which consisted of 153 regional malls, 76 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
specialty retail center and one value-oriented super-regional mall under
construction, an additional two community centers in the final stages of
pre-development and eight parcels of land held for future development. In
addition, Simon Group holds substantially all of the economic interest in M.S.
Management Associates, Inc. (The "Management Company" - See Note 7). Simon Group
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 Properties, as well as certain other
regional malls and community shopping centers owned by third parties. The
Company owned 71.6% and 63.9% of the Operating Partnerships at September 30,
1998 and December 31, 1997, respectively.
NOTE 2 - 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.
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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 $22,000
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. 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 is
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 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 Company's
existing $1.25 billion 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 the fair value of
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) 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 assets of SRC were transferred to the
SRC Operating Partnership in exchange for partnership interests.
As a result of the CPI Merger, the Company, owns a 71.6% interest in the
Operating Partnerships as of September 30, 1998.
The Company 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 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 on a preliminary basis to
the estimated fair value of the CPI assets acquired and liabilities assumed
which resulted in goodwill of $58,134. Goodwill will be amortized over the
estimated life of the properties, of 35 years. The allocation of the purchase
will be finalized when SPG completes its evaluation of the assets acquired and
liabilities assumed and finalizes its combined operating plan for the Company.
SDG, LP contributed cash to CRC and the SRC Operating Partnership on
behalf of the SDG common stockholders and the limited partners of SDG, LP to
obtain the beneficial interests in 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%.
NOTE 3 - RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1998 presentation. These
reclassifications have no impact on the net operating results previously
reported.
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NOTE 4 - PER SHARE DATA
In accordance with SFAS No. 128 (Earnings Per Share), 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 of common stock
used in the computation for the three-month periods ended September 30, 1998 and
1997 was 117,149,600 and 98,785,776, respectively. The weighted average number
of shares of common stock used in the computation for the nine-month periods
ended September 30, 1998 and 1997 was 112,956,863 and 97,766,243, respectively.
The diluted weighted average number of shares used in the computation for the
three-month periods ended September 30, 1998 and 1997 was 117,474,932 and
99,170,829, respectively. The diluted weighted average number of shares used in
the computation for the nine-month periods ended September 30, 1998 and 1997 was
113,325,309 and 98,147,087, respectively.
Combined earnings per share is presented in the financial statements based
upon the weighted average number of paired shares outstanding of the Company,
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.
Paired Units held by limited partners in the Operating Partnerships may be
exchanged for paired shares of common stock of the Company, on a one-for-one
basis in certain circumstances. If exchanged, the paired Units would not have a
dilutive effect. All of the series of preferred stock issued and outstanding
during the comparative periods either were not convertible or their conversion
would not have had a dilutive effect on earnings per share. The increase in
weighted average shares outstanding under the diluted method over the basic
method in every period presented for the Company is due entirely to the effect
of outstanding options under the Company's stock incentive plan, including
304,210 additional options issued in connection with the CPI Merger. Basic
earnings and diluted earnings were the same for all periods presented.
NOTE 5 - CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, during the nine months
ended September 30, 1998 was $256,611, as compared to $199,285 for the same
period in 1997. Unpaid distributions as of September 30, 1998 totaled $84,496
and included $83,978 to the Company's common stockholders and limited
partnership units of the SPG Operating Partnership and $518 to the holders of
the Series B Convertible Preferred stock issued in connection with the CPI
Merger. All accrued distributions were paid as of December 31, 1997. See Notes
1,4 and 9 for information about non-cash transactions during the nine months
ended September 30, 1998.
NOTE 6 - OTHER ACQUISITIONS, DISPOSITIONS AND DEVELOPMENTS
On January 26, 1998, Simon Group acquired Cordova Mall in Pensacola,
Florida for approximately $87,300, which included 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.
In March of 1998, Simon Group opened the approximately $13,300 Muncie
Plaza in Muncie, Indiana. Simon Group owns 100% of this 196,000 square-foot
community center. In addition, phase I of the approximately $34,000 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.
On April 15, 1998, Simon Group purchased the remaining 7.5% ownership
interest in Buffalo Grove Towne Center for $255. This 134,000 square-foot
community center is in Buffalo Grove, Illinois.
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 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"). Following the completion of the tender offer, the SCA
portfolio was restructured. Simon Group exchanged its 50% interests in two SCA
Properties to a third party for similar interests in two other SCA Properties,
in which it had 50% interests, with the result that SCA then owned interests in
a total of eleven Properties. Effective November 30, 1997, Simon Group also
acquired the remaining 50% ownership interest in another of the SCA Properties.
In addition, an affiliate
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of Simon Group acquired the remaining 1.2% interest in SCA. During 1998, Simon
Group sold the community center and The Promenade 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, Simon
Group owns 100% of eight of the nine SCA Properties, and a noncontrolling 50%
ownership interest in the remaining Property.
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 RPT acquisition had occurred as of
January 1, 1997, and were carried forward through September 30, 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 RPT acquisition had been consummated at January 1, 1997, nor
does it purport to represent the results of operations for future periods.
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------ ---------------
Revenue $ 1,240,018 $ 1,153,576
============ ===============
Net income before Limited Partners' interest $ 182,494 $ 236,485
============ ===============
Net income available to common shareholders $ 90,753 $ 128,162
============ ===============
Net income per share $ 0 .55 $ 0.84
============ ===============
Net income per share - assuming dilution $ 0 .55 $ 0.84
============ ===============
Weighted average number of shares of common stock
outstanding 164,868,865 152,379,137
============ ===============
Weighted average number of shares of common stock
outstanding - assuming dilution 165,237,311 152,759,981
============ ===============
NOTE 7 - INVESTMENT IN UNCONSOLIDATED ENTITIES
Partnerships and Joint Ventures
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 a new $300,000 unsecured revolving credit
facility. (See Note 8)
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.
On June 4, 1998, Simon Group, Harvard Private Capital Group ("Harvard")
and Argo II, an investment fund established by J.P. Morgan and The O'Connor
Group, announced that they have collectively committed to acquire a 44 percent
ownership position in Groupe BEG, S.A. ("BEG"). BEG is a fully integrated retail
real estate developer, lessor and manager headquartered in Paris, France. Simon
Group and its affiliated Management Company have contributed $15,000 of equity
capital for a noncontrolling 22% ownership interest and are committed to an
additional investment of $37,500 over the next 9 to 15 months, subject to
certain financial and other conditions. The agreement with BEG is structured to
allow Simon Group, Argo II and Harvard to collectively acquire a controlling
interest in BEG over time.
In August 1998, Simon Group sold one-half of its 75% ownership in The
Shops at Sunset Place construction project. Simon Group now holds a 37.5%
noncontrolling interest in this project, which is scheduled to open in December
1998. Simon Group applied the distribution against its investment in the
project.
Through September 30, 1998, in a series of transactions, Simon Group has
acquired additional 30% ownership interests in Lakeline Mall and Lakeline Plaza
for 319,390 Units valued at approximately $10,500 and $2,100 in cash. These
transactions
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increased Simon Group's ownership interest in these Properties to a
noncontrolling 80%. On October 28, 1998, Simon Group acquired an additional 5%
noncontrolling ownership interest in Lakeline Mall and Lakeline Plaza for
$2,100.
Summary financial information of Simon Group's investment in partnerships
and joint ventures accounted for using the equity method of accounting and a
summary of Simon Group's investment in and share of income from such
partnerships and joint ventures follow:
September 30, December 31,
BALANCE SHEETS 1998 1997
------------ -----------
ASSETS:
Investment properties at cost, net $4,131,774 $2,880,094
Cash and cash equivalents 144,919 101,582
Tenant receivables 141,360 87,008
Other assets 129,983 71,548
---------- ----------
Total assets $4,548,036 $3,140,232
========== ==========
LIABILITIES AND PARTNERS' EQUITY:
Mortgages and other indebtedness $2,819,094 $1,888,512
Accounts payable, accrued expenses and other 227,631 212,543
liabilities ---------- ----------
Total liabilities 3,046,725 2,101,055
Partners' equity 1,501,311 1,039,177
---------- ----------
Total liabilities and partners' equity $4,548,036 $3,140,232
========== ==========
SIMON GROUP'S SHARE OF:
Total assets $1,803,056 $1,082,232
========== ==========
Partners' equity $ 526,672 $ 297,866
Add Excess Investment (See below) 653,764 293,711
---------- ----------
Simon Group's Net Investment in Joint Ventures $1,180,436 $ 591,577
========== ==========
For the three months ended For the nine months ended
--------------------------- ---------------------------
September 30, September 30,
--------------------------- ---------------------------
STATEMENTS OF OPERATIONS 1998 1997 1998 1997
--------- --------- --------- ---------
REVENUE:
Minimum rent $ 108,924 $ 62,613 $ 306,486 $ 168,817
Overage rent 426 2,319 8,236 5,633
Tenant reimbursements 51,775 27,913 138,433 77,491
Other income 5,985 5,384 17,205 12,747
--------- --------- --------- ---------
Total revenue 167,110 98,229 470,360 264,688
OPERATING EXPENSES:
Operating expenses and other 59,044 33,660 166,547 94,575
Depreciation and amortization 33,324 18,518 94,949 53,579
--------- --------- --------- ---------
Total operating expenses 92,368 52,178 261,496 148,154
--------- --------- --------- ---------
OPERATING INCOME 74,742 46,051 208,864 116,534
INTEREST EXPENSE 45,569 21,577 130,747 63,155
EXTRAORDINARY LOSSES 2,060 -- 2,102 1,182
--------- --------- --------- ---------
NET INCOME 27,113 24,474 76,015 52,197
THIRD PARTY INVESTORS' SHARE OF NET
INCOME 21,811 17,970 55,841 38,347
--------- --------- --------- ---------
SIMON GROUP'S SHARE OF NET INCOME $ 5,302 $ 6,504 $ 20,174 $ 13,850
AMORTIZATION OF EXCESS INVESTMENT (SEE
BELOW) (3,636) (2,823) (9,038) (8,792)
========= ========= ========= =========
INCOME FROM UNCONSOLIDATED ENTITIES $ 1,666 $ 3,681 $ 11,136 $ 5,058
========= ========= ========= =========
As of September 30, 1998 and December 31, 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 $653,764
and $293,711, respectively. This Excess Investment, which resulted primarily
from the CPI Merger and the August 9, 1996 acquisition, through merger (the "DRC
Merger"), of the national shopping center business of DeBartolo Realty
Corporation ("DRC"), is being amortized generally over the life of the related
Properties. Amortization included in income from unconsolidated entities for the
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three-month periods ended September 30, 1998 and September 30, 1997 was $3,636
and $2,823, respectively. Amortization included in income from unconsolidated
entities for the nine-month periods ended September 30, 1998 and September 30,
1997 was $9,038 and $8,792, respectively.
The net income or net loss for each partnership and joint venture 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 interest held by each general or limited
partner or joint venturer, primarily due to partner preferences.
The Management Company
The Management Company, including its consolidated subsidiaries, provides
management, leasing, development, accounting, legal, marketing and management
information systems services to one wholly-owned Property, 41 non-wholly owned
Properties, Melvin Simon & Associates, Inc., and certain other nonowned
properties. Certain subsidiaries of the Management Company provide
architectural, design, construction, insurance and other services primarily to
certain of the Properties. The Management Company also invests in other
businesses to provide other synergistic services to the Properties. Simon
Group's share of consolidated net income (loss) of the Management Company, after
intercompany profit eliminations, was $2,151 and $3,396 for the three-month
periods ended September 30, 1998 and 1997, respectively, and was ($2,339) and
$4,532 for the nine-month periods ended September 30, 1998 and 1997,
respectively.
NOTE 8 - DEBT
On February 28, 1998, Simon Group obtained an unsecured revolving credit
facility in the amount of $300,000, to finance the acquisition of the IBM
Properties (See Note 7). The new facility bore interest at LIBOR plus 0.65% and
had a maturity of August 27, 1998. Simon Group drew $242,000 on this facility
during 1998 and subsequently retired and canceled the facility using borrowing
from the Credit Facility (See below).
On June 18, 1998, Simon Group refinanced a $33,878 mortgage on a regional
mall Property and recorded a $7,024 extraordinary gain on the transaction,
including debt forgiveness of $5,162 and the write-off of a premium of $1,862.
The new mortgage, which totals $35,000, bears interest of 7.33% and matures on
June 18, 2008. The retired mortgage bore interest at 9.25% with a maturity of
January 1, 2011.
On June 22, 1998, Simon Group completed the sale of $1,075,000 of senior
unsecured debt securities. The issuance included three tranches of senior
unsecured notes as follows (1) $375,000 bearing interest at 6.625% and maturing
on June 15, 2003 (2) $300,000 bearing interest at 6.75% and maturing on June 15,
2005 and (3) $200,000 bearing interest at 7.375% and maturing on June 15, 2018.
This offering also included a fourth tranche of $200,000 of 7.00% Mandatory Par
Put Remarketed Securities ("MOPPRS") due June 15, 2028, which 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 net proceeds of approximately $1,062,000 were combined with approximately
$40,000 of working capital and used to retire and terminate the $300,000
unsecured revolving credit facility (See Above) and to reduce the outstanding
balance of Simon Group's $1,250,000 unsecured revolving credit facility (the
"Credit Facility"). The Credit Facility has an initial maturity of September
1999 with an optional one-year extension. The debt retired had a weighted
average interest rate of 6.29%.
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
the nine-month anniversary of the closing (ii) $450,000 on the eighteen-month
anniversary of the closing and (iii) $500,000 on the two-year anniversary of the
closing. 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 the Merger Facility's average life of
18-months.
In connection with the CPI Merger, RPT, a REIT and 99.999% owned
subsidiary of the SDG Operating Parternship, took title for substantially all of
the CPI assets and assumed $825,000 of resecured notes *the "CPI Notes"), as
described in Note 2. 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 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, and bear interest
rates ranging from 7.05% to 9.00% (weighted average of 8.03%), and have various
due dates through 2016 (average maturity of 9.6 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 $2,093, and a pro-rata share of $194,952 of nonconsolidated
joint venture indebtedness was assumed in the CPI Merger, and as a result of
acquiring the remaining interest in Palm Beach Mall in connection with the CPI
Merger, Simon Group began accounting for that Property using the consolidated
method of accounting, adding
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$50,700 to consolidated indebtedness. A net premium of $19,165 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.
At September 30, 1998, Simon Group had consolidated debt of $7,745,917, of
which $5,362,285 was fixed-rate debt and $2,383,632 was variable-rate debt.
Simon Group's pro rata share of indebtedness of the unconsolidated joint venture
Properties as of September 30, 1998 and December 31, 1997 was $1,307,974 and
$770,776, respectively. As of September 30, 1998 and December 31, 1997, Simon
Group had interest-rate protection agreements related to $1,224,493 and $415,254
of its pro rata share of indebtedness, respectively. The agreements are
generally in effect until the related variable-rate debt matures. As a result of
the various interest rate protection agreements, consolidated interest savings
were $122 and $285 for the three months ended September 30, 1998 and 1997,
respectively, and were $301 and $1,371 for the nine months ended September 30,
1998 and 1997, respectively.
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NOTE 9 - SHAREHOLDERS' EQUITY
The following table summarizes the changes in the combined shareholders'
equity of the Company and SRC since December 31, 1997.
SPG SPG SRC Unrealized Capital in
Preferred Common Common Gain (Loss) on Excess of Par
Stock Stock Stock Investment(1) Value
--------- ------ ------ -------------- -------------
Balance at December 31, 1997 $ 339,061 $ 11 $ 0 $ 2,420 $ 1,491,908
Common stock issued to the
public (2,957,335 shares) 1 91,398
The CPI Merger (2) 717,916 5 -- 1,773,401
Preferred stock of subsidiary (339,061)
Common stock issued in
connection with acquisitions
(519,889 shares) 17,176
Other common stock issued, net
(579,302 shares) 18,332
Amortization of stock incentive
Adjustment to the limited
partners' interest in the
Operating Partnerships (310,858)
Distributions
--------- ------ ------ ----------- -----------
Subtotal 717,916 17 -- 2,420 3,081,357
Comprehensive Income:
Unrealized loss on investment (1) (3,680)
Net income
--------- ------ ------ ----------- -----------
Total Comprehensive Income (3,680)
========= ====== ====== =========== ===========
Balance at September 30, 1998 $ 717,916 $ 17 $ -- $ (1,260) $ 3,081,357
========= ====== ====== =========== ===========
Unamortized Total
Accumulated Restricted Shareholders'
Deficit Stock Award Equity
----------- ----------- -------------
Balance at December 31, 1997 $ (263,308) $ (13,230) $ 1,556,862
Common stock issued to the
public (2,957,335 shares) 91,399
The CPI Merger (2) 2,491,322
Preferred stock of subsidiary (339,061)
Common stock issued in
connection with acquisitions
(519,889 shares) 17,176
Other common stock issued, net
(579,302 shares) (16,080) 2,252
Amortization of stock incentive 7,299 7,299
Adjustment to the limited
partners' interest in the
Operating Partnerships (310,858)
Distributions (259,376) (259,376)
----------- ----------- -----------
Subtotal (522,684) (22,011) 3,257,015
Comprehensive Income:
Unrealized loss on investment (1) (3,680)
Net income 102,641 102,641
----------- ----------- -----------
Total Comprehensive Income 102,641 98,961
=========== =========== ===========
Balance at September 30, 1998 $ (420,043) $ (22,011) $ 3,355,976
=========== =========== ===========
(1) Amounts consist of the Company's pro rata share of the unrealized gain
resulting from the change in market value of 1,408,450 shares of common
stock of Chelsea GCA Realty, Inc. ("Chelsea"), a publicly traded REIT,
which Simon Group purchased on June 16, 1997. The investment in Chelsea is
being reflected in the accompanying consolidated condensed balance sheets
in other investments.
(2) In connection with the CPI Merger, 53,078,564 shares of common stock were
issued. Notes receivable and permanent restrictions relating to common
shares purchased by former employees of CPI of approximately $26,100 have
been deducted from capital in excess of par.
20
21
Stock Incentive Programs
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 DRC's stock incentive program
(the "DRC Plan"). In April 1998, 492,478 shares were awarded to executives
relating to 1997 performance, and another 24,163 awarded in August 1998. Through
September 30, 1998, 1,290,285 shares of common stock of the Company, net of
forfeitures, were deemed earned and awarded under the Stock Incentive Program
and the DRC Plan. Approximately $2,852 and $1,086 relating to these programs
were amortized in the three-month periods ended September 30, 1998 and 1997,
respectively and approximately $7,299 and $4,110 relating to these programs were
amortized in the nine-month periods ended September 30, 1998 and 1997,
respectively. The cost of restricted stock grants, 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.
On September 24, 1998, in conjunction with the CPI Merger, a new stock
incentive plan, 'The Simon Property Group 1998 Stock Incentive Plan ("The 1998
Plan"), was approved by a vote of the Company's shareholders. The 1998 Plan
replaced the existing Stock Incentive Program, the DRC Plan and the existing
employee and director stock option plans. 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 common stock of The Company, stock appreciation
rights, restricted stock awards and performance unit awards. A total of
6,300,000 shares of common stock of the Company have been approved for issuance
under The 1998 Plan, including approximately 2,230,875 shares reserved for the
exercise of options granted and award of restricted stock allocated under the
previously existing Stock Incentive Program and DRC Plan.
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.
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
amount 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.
Common Stock Issuances
During 1998, Simon Group issued 2,957,335 shares of its common stock in
private offerings generating combined net proceeds of approximately $91,398. 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.
Preferred Stock
As a result of the CPI Merger, SPG has issued and outstanding 209,249
shares of 6.50% Series A Convertible Preferred Stock. Each share of Series A
Convertible Preferred Stock is convertible into 37.995 shares of common stock of
the Company, subject to adjustment under certain circumstances including (i) a
subdivision or combination of shares of common stock of the Company, (ii) a
declaration of a distribution of additional shares of common stock of the
Company, issuances of rights or warrants by the Company and (iii) any
consolidation or merger, which the Company is a part of or a sale or conveyance
of all or substantially all of the assets of the Company 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, 4,844,331 shares of 6.50% Series B Convertible Preferred
Stock were issued in connection with the CPI Merger. Each share of Series B
Convertible Preferred Stock is convertible into 2.586 shares of common stock of
the Company, subject to adjustment under circumstances identical to those of the
Series A Preferred Stock described above. The Company 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.
21
22
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 issued by
SPG Properties, Inc. have been reflected outside of equity of SPG and The
Company as Preferred Stock of Subsidiary as of the date of the CPI Merger.
NOTE 10 - RELATED PARTY TRANSACTIONS
SRC receives rental and operating expense recovery income from SPG
Operating Partnership for space leased in the New York City office building, a
portion of which SPG Operating Partnership occupies. Rental and operating
expense recovery income earned from SPG Operating Partnership and CPI, amounted
to approximately $1,660 and $1,531 for the nine months ended September 30, 1998
and 1997, respectively. In addition, SPG Operating Partnership receives ground
rent from SRC on the land, which the New York City office building is built
upon. Ground rent received for the period from the CPI Merger through September
30, 1998 was nominal.
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 brokerage fee from
CPI in connection with the sale.
The amount due from SRC to SPG of $4,093 at September 30, 1998 represents
expenses paid by CPI in 1998, including legal, accounting, investment advisory
and other costs, on behalf of SRC in connection with the CPI Merger.
NOTE 11 - 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 Simon DeBartolo Group,
L.P. (now Simon Property Group, L.P. or 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
the Company, and DPMI, 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 shares of common stock of the Company 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, 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. The Company is seeking to
overturn the award and has appealed the verdict. The Company's appeal is
pending.
22
23
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.
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
During the second quarter of 1998, the Financial Accounting Standards
Board ("FASB") released EITF 98-9, which clarified its position relating to the
timing of recognizing contingent rent. Simon Group adopted this pronouncement
prospectively, beginning May 22, 1998, which has reduced overage rent by
approximately $5,600 through September 30, 1998.
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.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and Related Information. The
Statement establishes standards for the way public companies report information
about operating segments in annual financial statements and also requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. This statement is effective for
financial statements for fiscal years beginning after December 15, 1997.
Management is currently evaluating the impact, if any, the Statement will have
on Simon Group's 1998 annual financial statements.
23
5
0001063761
SIMON PROPERTY GROUP INC
1,000
9-MOS
DEC-31-1998
SEP-30-1998
78,971
0
215,703
0
0
0
11,646,393
634,277
13,013,550
0
7,744,926
0
717,916
17
2,623,226
13,013,550
0
932,969
0
504,915
0
1,598
281,749
141,509
141,509
141,509
0
7,002
0
102,655
0.72
0.72
Receivables are stated net of allowances.
The Registrant does not report using a classified balance sheet.
Includes limited partner's interest in the Operating Partnership of
$990,378, and preferred stock of subsidiary of $339,262.
5
0001067173
SPG REALTY CONSULTANTS INC
1,000
9-MOS
DEC-31-1998
SEP-30-1998
23,546
0
499
0
0
0
33,397
11,000
50,754
0
21,556
0
0
2
14,817
50,754
0
3,150
0
7,376
0
0
1,013
(4,835)
(193)
(4,642)
(4,642)
0
0
(4,642)
(7.79)
(7.79)
Receivables are stated net of allowances.
The Registrant does not report using a classified balance sheet.
Includes limited partner's interest in the SRC Operating Partnership of
$5,889.
