EX-13.1 6 a2042763zex-13_1.txt EXHIBIT 13.1 EXHIBIT 13.1 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 we believe 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:
AS OF OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 2000 1999(1) 1998(1) 1997(1) 1996(2) ----------- ----------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Total revenue $ 2,020,751 $ 1,892,703 $ 1,405,559 $ 1,054,167 $ 747,704 Income before unusual item, extraordinary items, and cumulative effect of accounting 347,419 316,100 236,230 203,133 134,663 change Net income available to common shareholders $ 186,528 $ 167,314 $ 133,598 $ 107,989 $ 72,561 BASIC EARNINGS PER PAIRED SHARE: Income before extraordinary items and cumulative effect of accounting change $ 1.13 $ 1.00 $ 1.02 $ 1.08 $ 1.02 Extraordinary items -- (0.03) 0.04 -- (0.03) Cumulative effect of accounting change (0.05) -- -- -- -- ----------- ----------- ----------- ----------- ---------- Net income $ 1.08 $ 0.97 $ 1.06 $ 1.08 $ 0.99 =========== =========== =========== =========== ========== Weighted average Paired Shares outstanding 172,895 172,089 126,522 99,920 73,586 DILUTED EARNINGS PER PAIRED SHARE: Income before extraordinary items and cumulative effect of accounting change $ 1.13 $ 1.00 $ 1.02 $ 1.08 $ 1.01 Extraordinary items -- (0.03) 0.04 -- (0.03) Cumulative effect of accounting change (0.05) -- -- -- -- ----------- ----------- ----------- ----------- ---------- Net income $ 1.08 $ 0.97 $ 1.06 $ 1.08 $ 0.98 =========== =========== =========== =========== ========== Diluted weighted average Paired Shares outstanding 172,994 172,226 126,879 100,304 73,721 Distributions per Paired Share (3) $ 2.02 $ 2.02 $ 2.02 $ 2.01 $ 1.63 BALANCE SHEET DATA: Cash and cash equivalents $ 223,111 $ 157,632 $ 129,195 $ 109,699 $ 64,309 Total assets 13,937,945 14,223,243 13,277,000 7,662,667 5,895,910 Mortgages and other notes payable 8,728,582 8,768,951 7,973,372 5,077,990 3,681,984 Shareholders' equity $ 3,064,471 $ 3,253,658 $ 3,409,209 $ 1,556,862 $1,304,891 OTHER DATA: Cash flow provided by (used in): Operating activities $ 701,516 $ 627,056 $ 529,415 $ 370,907 $ 236,464 Investing activities (75,941) (612,876) (2,102,032) (1,243,804) (199,742) Financing activities (560,096) 14,257 1,592,113 918,287 (35,134) Ratio of Earnings to Fixed Charges and Preferred Dividends (4) 1.37x 1.36x 1.44x 1.54x 1.55x =========== =========== =========== =========== ========== Funds from Operations (FFO) of Simon Group (5) $ 793,158 $ 715,223 $ 544,481 $ 415,128 $ 274,259 =========== =========== =========== =========== ========== FFO allocable to the Companies $ 575,655 $ 520,346 $ 361,326 $ 258,049 $ 168,035 =========== =========== =========== =========== ==========
1 SIMON PROPERTY GROUP, INC.:
AS OF OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 2000 1999(1) 1998(1) 1997(1) 1996(2) ----------- ----------- ---------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Total revenue $ 2,012,737 $ 1,894,971 $ 1,405,072 $ 1,054,167 $ 747,704 Income before unusual, extraordinary items, and cumulative effect of accounting change 355,120 315,499 235,790 203,133 134,663 Net income available to common shareholders $ 192,103 $ 165,944 $ 133,286 $ 107,989 $ 72,561 BASIC EARNINGS PER COMMON SHARE: Income before extraordinary items and cumulative effect of accounting change $ 1.16 $ 0.99 $ 1.01 $ 1.08 $ 1.02 Extraordinary items -- (0.03) 0.04 -- (0.03) Cumulative effect of accounting change (0.05) -- -- -- -- ----------- ----------- ----------- ----------- ---------- Net income $ 1.11 $ 0.96 $ 1.05 $ 1.08 $ 0.99 =========== =========== =========== =========== ========== Weighted average shares outstanding 172,895 172,089 126,522 99,920 73,586 DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary items and cumulative effect of accounting change $ 1.16 $ 0.99 $ 1.01 $ 1.08 $ 1.01 Extraordinary items -- (0.03) 0.04 -- (0.03) Cumulative effect of accounting change (0.05) -- -- -- -- ----------- ----------- ----------- ----------- ---------- Net income $ 1.11 $ 0.96 $ 1.05 $ 1.08 $ 0.98 =========== =========== =========== =========== ========== Diluted weighted average shares outstanding 172,994 172,226 126,879 100,304 73,721 Distributions per common share (3) $ 2.02 $ 2.02 $ 2.02 $ 2.01 $ 1.63 BALANCE SHEET DATA: Cash and cash equivalents $ 214,404 $ 154,924 $ 127,626 $ 109,699 $ 64,309 Total assets 13,911,407 14,199,318 13,269,129 7,662,667 5,895,910 Mortgages and other notes payable 8,728,582 8,768,841 7,990,288 5,077,990 3,681,984 Shareholders' equity 3,054,012 3,237,545 3,394,142 1,556,862 1,304,891
------------------------------------------------------------------------------- SPG REALTY CONSULTANTS, INC.:
AS OF OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 2000 1999(1) 1998(1) 1997 1996 ---------- ---------- ---------- ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA: Total revenue $12,479 $ 2,277 $ 4,582 $ 6,214 $ 9,805 Net income (loss) (5,575) 1,370 (4,431) 1,177 (920) BASIC AND DILUTED EARNINGS PER COMMON SHARE: Net income (loss) $ (3.22) $ 0.80 $ (5.17) $ 2.07 $ (1.88) Basic weighted average shares outstanding 1,729 1,721 857 569 490 Diluted weighted average shares outstanding 1,730 1,722 857 569 490 Distributions per common share (3) $ -- $ -- $ 0.39 $ 0.40 $ 0.425 BALANCE SHEET DATA: Cash and cash equivalents $ 8,707 $ 2,708 $ 1,569 $ 4,147 $ 4,797 Total assets 56,864 35,029 46,601 46,063 31,054 Mortgages and other notes payable 29,425 9,958 21,556 36,818 21,988 Shareholders' equity 10,459 16,113 15,067 4,316 5,039
NOTES ------------------------------------------------------------------------------- (1) NOTES 3, 4 AND 5 TO THE ACCOMPANYING FINANCIAL STATEMENTS DESCRIBE THE NED ACQUISITION AND THE CPI MERGER, WHICH OCCURRED AUGUST 27, 1999 AND SEPTEMBER 24, 1998, RESPECTIVELY, AND OTHER 1999 AND 1998 REAL ESTATE ACQUISITIONS AND DEVELOPMENT. NOTE 2 TO THE ACCOMPANYING FINANCIAL STATEMENTS DESCRIBES THE BASIS OF PRESENTATION. (2) BEGINNING AUGUST 9, 1996, RESULTS INCLUDE THE DRC MERGER. (3) 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. SRC'S DISTRIBUTIONS WERE DECLARED PRIOR TO THE CPI MERGER. (4) IN 1999, INCLUDES A $12,000 UNUSUAL LOSS (SEE NOTE 13 TO THE ACCOMPANYING FINANCIAL STATEMENTS) AND A TOTAL OF $12,290 OF ASSET WRITE-DOWNS. EXCLUDING THESE ITEMS, THE RATIO WOULD HAVE BEEN 1.39X IN 1999. (5) PLEASE REFER TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR A DEFINITION OF FUNDS FROM OPERATIONS. THE 1999 AND 1996 AMOUNTS ARE RESTATED TO REFLECT NAREITS CLARIFICATION OF THE DEFINITION OF FFO. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED You should read the following discussion in conjunction with the Selected Financial Data, and all of the financial statements and notes thereto that are included in this report. Certain statements made in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These 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. We undertake no duty or obligation to update or revise these forward-looking statements, whether as a result of new information, future developments, or otherwise. OVERVIEW Who we are - Simon Property Group, Inc. ("SPG"), a Delaware corporation, is a self-administered and self-managed real estate investment trust ("REIT"). Each share of common stock of SPG is paired ("Paired Shares") 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., is the primary subsidiary of SPG. Units of ownership interest ("Units") in the SPG Operating Partnership are paired ("Paired Units") with 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. In this report, the terms "we", "us" and "our" refer to the Companies and the Operating Partnerships, which prior to the CPI Merger (see below) refers to Simon DeBartolo Group, Inc. and the SPG Operating Partnership. We 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, 2000, we owned or held an interest in 252 income-producing properties in the United States, which consisted of 165 regional malls, 73 community shopping centers, five specialty retail centers, four office and mixed-use properties and five value-oriented super-regional malls in 36 states (the "Properties"), five additional retail real estate properties operating in Europe, and two properties currently under construction and 11 parcels of land held for future development (the "Portfolio" or the "Portfolio Properties"). At both December 31, 2000 and 1999, the Companies' direct and indirect ownership interests in the Operating Partnerships were 72.4%. 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. Our operating results for the two years ended December 31, 2000 and 1999, and their comparability to the respective prior periods, were significantly impacted by a number of Property acquisitions and openings beginning in 1998. The greatest impact on results of operations has come from the September 24, 1998 acquisition, through merger, of Corporate Property Investors, Inc. ("CPI") and Corporate Realty Consultants, Inc. (the "CPI Merger") (see Note 4 to the financial statements). In addition, we acquired ownership interests in, or commenced operations of, a number of other Properties throughout the comparative periods and, as a result, increased the number of Properties we account for using the consolidated method of accounting and sold interests in several Properties throughout the comparative periods (together with the CPI merger, the "Property Transactions"). "Liquidity and Capital Resources" contains additional information on the 2000 activity and Note 5 to the financial statements contains information about acquisitions and dispositions prior to 2000. CUMULATIVE EFFECT OF ACCOUNTING CHANGE On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), which addressed certain revenue recognition policies, including the accounting for overage rent by a landlord. SAB 101 requires overage rent to be recognized as revenue only when each tenant's sales exceeds its sales threshold. We previously recognized overage rent based on reported and estimated sales through the end of the period, less the applicable prorated base sales amount. We adopted SAB 101 effective January 1, 2000 and recorded a loss from the cumulative effect of an accounting change of $12.3 million, which includes our $1.8 million share from unconsolidated entities. 3 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999 Operating income increased $46.3 million or 5.4% in 2000 as compared to 1999. This increase includes the net result of the Property Transactions ($9.7 million). Excluding these transactions, operating income increased approximately $36.6 million or 4.3%, primarily resulting from a $54.6 million increase in minimum rents, a $20.1 million increase in consolidated revenues realized from marketing initiatives throughout the Portfolio from our strategic marketing division, Simon Brand Ventures ("SBV"), a $3.9 million increase in miscellaneous income, and an $8.6 million increase in lease settlements, partially offset by a $31.8 million increase in depreciation and amortization, a $7.2 million increase in corporate expenses previously recorded on the Management Company, primarily due to SBV's, previously part of the Management Company, incorporation as a wholly-owned LLC subsidiary of SRC, and a $9.4 million increase in other expenses. The increase in minimum rent primarily results from increased occupancy levels, the replacement of expiring tenant leases with renewal leases at higher minimum base rents, and a $5.1 million increase in rents from tenants operating under license agreements. The increase in miscellaneous income results from gift certificate sales previously recorded on the Management Company and incidental fee revenues. 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 other expenses primarily results from technology initiative start up costs and the write-off of a $3.0 million investment in piiq.com, an online shopping site that has ceased operations. Interest expense increased $56.1 million, or 9.7% in 2000 as compared to 1999. This increase is primarily the result of overall increases in interest rates during the comparative periods ($20.6 million), the Property Transactions ($7.0 million) and incremental interest on borrowings under our Credit Facility to complete the NED Acquisition ($12.4 million) and acquire an ownership interest in Mall of America ($3.8 million), with the remainder being primarily from borrowings for Property redevelopments that opened in the comparative periods. The $3.4 million income tax benefit in 1999 represents SRC's pro rata share of the SRC Operating Partnership's 1999 losses and the realization of tax carryforward benefits for which a valuation allowance was previously provided. The $9.1 million net gain on the sales of assets in 2000 results from the sale of our interests in an office building, two regional malls and four community shopping centers for approximately $142.6 million, partially offset by a $10.6 million asset write-down on two Properties recognized in the second quarter of 2000. In 1999, we recognized a net loss of $7.1 million on the sale of four Properties. Income from unconsolidated entities increased $27.9 million in 2000, resulting from a $26.1 million increase in income from the Management Company and a $1.8 million increase in income from unconsolidated partnerships and joint ventures. The increase in Management Company income is primarily the result of a $6.7 million increase in management fees due to property acquisitions and increased minimum rents, $7.3 million of asset write-downs recognized in 1999, $4.6 million in 2000 residual land sales, as well as a $5.3 million increase in the income tax benefit, which is primarily due to the reversal of valuation allowances due to 2000 income and forecasted future income. During the first quarter of 2000, we recorded a $12.3 million expense resulting from the cumulative effect of an accounting change described above. Income before allocation to limited partners was $334.4 million for the year ended December 31, 2000, which reflects a $37.0 million or 12.5% increase over 1999, primarily for the reasons discussed above. Income before allocation to limited partners was allocated to the Companies based on SPG's direct ownership of Ocean County Mall and certain net lease assets, and the Companies' preferred Unit preferences and weighted average ownership interests in the Operating Partnerships during the period. Preferred distributions of the SPG Operating Partnership represent distributions on preferred Units issued in connection with the NED Acquisition. Preferred dividends of subsidiary represent distributions on preferred stock of SPG Properties, Inc., a 99.999% owned subsidiary of SPG. YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998 Operating income increased $212.0 million or 33.0% in 1999 as compared to 1998. This increase is primarily the result of the CPI Merger ($143.1 million) and the remaining Property Transactions ($23.0 million). Excluding these transactions, operating income increased approximately $45.9 million, primarily resulting from an approximately $15.1 million increase in consolidated revenues realized from marketing initiatives throughout the Portfolio from our strategic marketing division, SBV; a $39.1 million increase in minimum rents; a $6.3 million increase in gains from sales of peripheral properties; a $4.7 million increase in interest income and a $4.3 million increase in lease settlement income, partially offset by a $14.1 million increase in depreciation and amortization and an $8.6 million decrease in fee 4 income. The increase in minimum rent primarily results from increased occupancy levels, the replacement of expiring tenant leases with renewal leases at higher minimum base rents, and a $7.9 million increase in rents from tenants operating under license agreements. The increase in depreciation and amortization is primarily due to an increase in depreciable real estate realized through renovation and expansion activities. Interest expense increased $159.7 million, or 38.0% in 1999 as compared to 1998. This increase is primarily a result of the CPI Merger ($125.0 million) and the remaining Property Transactions ($18.0 million). The remaining increase includes incremental interest resulting from the SPG Operating Partnership's 1998 issuance of $1.1 billion of public notes, the proceeds of which were used primarily to pay down our Credit Facility (see Liquidity and Capital Resources) ($4.5 million), and incremental interest on borrowings under our Credit Facility to complete the NED Acquisition, and acquire ownership interests in the IBM Properties and Mall of America ($6.3 million) (see Liquidity and Capital Resources and Notes 3 & 5 to the financial statements). The $3.4 million income tax benefit in 1999 represents SRC's pro rata share of the SRC Operating Partnership's current year losses and the realization of tax carryforward benefits for which a valuation allowance was previously provided. Income from unconsolidated entities increased $27.3 million in 1999, resulting from an increase in the Operating Partnerships' share of income from partnerships and joint ventures ($28.4 million), partially offset by a decrease in its share of the income from the Management Company ($1.1 million). The increase in the Operating Partnerships' share of income from partnerships and joint ventures is primarily the result of the joint venture interests acquired in the CPI Merger ($17.2 million), the IBM Properties ($3.2 million) and the NED Acquisition ($3.1 million). The decrease in Management Company income is primarily the result of losses associated with interests in two parcels of land held by the Management Company ($7.3 million), partially offset by increases in SBV revenues ($2.9 million), construction services revenues ($1.3 million) and increased earnings from a subsidiary captive insurance company ($1.1 million). As discussed further in Note 13 to the financial statements, the $12.0 million unusual item in 1999 is the result of damages arising from the litigation surrounding the 1996 acquisition through merger of DeBartolo Realty Corporation (the "DRC Merger"). The $6.7 million extraordinary loss and $7.1 million extraordinary gain in 1999 and 1998, respectively, are the net results from refinancings, early extinguishments and/or forgiveness of debt. Income before allocation to limited partners was $297.4 million during 1999, an increase of $54.0 million over 1998, primarily for the reasons discussed above. Income before allocation to limited partners was allocated to the Companies based on SPG's direct ownership of Ocean County Mall and certain net lease assets, and the Companies' preferred Unit preferences and weighted average ownership interests in the Operating Partnerships during the period. In addition, SRC recognizes an income tax provision (benefit) on its pro rata share of the earnings (losses) of the SRC Operating Partnership. Preferred distributions of the SPG Operating Partnership represent distributions on preferred Units issued in connection with the NED Acquisition (See Note 3 to the financial statements). Preferred dividends of subsidiary represent distributions on preferred stock of SPG Properties, Inc., a 99.999% owned subsidiary of SPG. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, our balance of unrestricted cash and cash equivalents was $223.1 million, including $116.5 million related to our gift certificate program, which we do not consider available for general working capital purposes. We have a $1.25 billion unsecured revolving credit facility (the "Credit Facility") which had available credit of $598.5 million at December 31, 2000. The Credit Facility bears interest at LIBOR plus 65 basis points and has an initial maturity of August 2002, with an additional one-year extension available at our option. SPG and the SPG Operating Partnership also have access to public equity and debt markets. Our current corporate bond ratings are Baa1 by Moody's Investors Service and BBB+ by Standard & Poor's. We anticipate that cash generated from operating performance will provide the funds we need on a short- and long-term basis for 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: - excess cash generated from operating performance - working capital reserves - additional debt financing - additional equity raised in the public markets 5 FINANCING AND DEBT At December 31, 2000, we had combined consolidated debt of $8.7 billion, of which $6.1 billion was fixed-rate debt, bearing interest at a weighted average rate of 7.3% and $2.6 billion was variable-rate debt bearing interest at a weighted average rate of 7.5%. As of December 31, 2000, we had interest rate protection agreements related to $404.0 million of combined consolidated variable-rate debt. Our interest rate protection agreements did not materially impact interest expense or weighted average borrowing rates in 2000. Our share of total scheduled principal payments of mortgage and other indebtedness, including unconsolidated joint venture indebtedness over the next five years is $7.1 billion, with $3.6 billion thereafter. Our ratio of consolidated debt-to-market capitalization was 57.0% and 58.1% at December 31, 2000 and 1999, respectively. MARKET RISK - SENSITIVITY ANALYSIS. Our combined future earnings, cash flows and fair values relating to financial instruments are dependent upon prevalent market rates of interest, primarily LIBOR. Based upon consolidated indebtedness and interest rates at December 31, 2000, a 0.25% increase in the market rates of interest would decrease future earnings and cash flows by approximately $5.9 million, and would decrease the fair value of debt by approximately $220.0 million. A 0.25% decrease in the market rates of interest would increase future earnings and cash flows by approximately $5.9 million, and would increase the fair value of debt by approximately $230.0 million. We manage our exposure to interest rate risk by a combination of interest rate protection agreements to effectively fix or cap a portion of our variable rate debt and by refinancing fixed rate debt at times when rates and terms are appropriate. The following summarizes significant financing and refinancing transactions completed in 2000: SECURED INDEBTEDNESS. During 2000, we refinanced approximately $1.1 billion of mortgage indebtedness on twelve of the Properties. Our share of the refinanced debt is approximately $556 million. The weighted average maturity of the indebtedness increased from approximately 0.6 years to 6.7 years, while the weighted average interest rates increased from approximately 7.77% to 7.84%. CREDIT FACILITY. During 2000 the maximum and average amounts outstanding under the Credit Facility were $830 million and $715 million, respectively. The weighted average interest rate was 7.34% for 2000. UNSECURED NOTES. On March 24, 2000, we refinanced $450.0 million of unsecured debt, which became due and bore interest at LIBOR plus 65 basis points. The new facility matures March 24, 2001 and also bears interest at LIBOR plus 65 basis points. In addition, during September 2000, we refinanced $500.0 million of unsecured debt, which became due and bore interest at LIBOR plus 65 basis points, with a new $475.0 million facility and borrowings from the Credit Facility. The new $475.0 million facility matures September 2001 and bears interest at LIBOR plus 65 basis points. On January 11, 2001, we issued $500.0 million of unsecured debt to institutional investors pursuant to Rule 144A in two tranches. The first tranche is $300.0 million bearing an interest rate of 7 3/8% due January 20, 2006 and the second tranche is $200.0 million bearing an interest rate of 7 3/4% due January 20, 2011. The net proceeds of the offering were used to repay the remaining portion of the indebtedness under the Merger Facility due March 24, 2001 and to repay a portion of the Merger Facility due September 24, 2001. ACQUISITIONS AND DISPOSALS We continue to review and evaluate a limited number of individual property and portfolio acquisition opportunities. However, due to the rapid consolidation of the regional mall business and the current status of the capital markets, we believe that acquisition activity in the near term will be a less significant component of our growth strategy. We believe 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. We cannot assure you that we 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. See Note 5 to the financial statements for 1999 and 1998 acquisition activity. DISPOSALS. During 2000, we sold our interests in two regional malls, four community shopping centers and an office building for a total of approximately $142.6 million, including the buyer's assumption of approximately $25.9 million of mortgage debt, which resulted in a net gain of $19.7 million. The net proceeds of $114.6 million were used to reduce the outstanding borrowings on the Credit Facility, to repurchase Paired Shares, and for general corporate purposes. In addition, on July 31, 2000, we sold our 1,408,450 shares of common stock of Chelsea Property Group, Inc. for $50.0 million, which equaled our original investment. No gain or loss was recognized on the transaction. The net proceeds were used for general corporate purposes. 6 In addition to the Property sales described above, as a continuing part of our long-term strategic plan, we continue to pursue the sale of our remaining non-retail holdings and a number of retail assets that are no longer aligned with our strategic criteria. We expect the sale prices of any non-core assets, if sold, will not differ materially from the carrying value of the related assets. DEVELOPMENT ACTIVITY NEW DEVELOPMENTS. Development activities are an ongoing part of our business. During 2000, we opened two new Properties aggregating approximately 1.7 million square feet of GLA. In total, we invested approximately $179.6 million on new developments in 2000. With fewer new developments currently under construction, we expect 2001 development costs to be approximately $76.2 million. STRATEGIC EXPANSIONS AND RENOVATIONS. One of our key objectives is to increase the profitability and market share of the Properties through the completion of strategic renovations and expansions. During 2000, we invested approximately $201.6 million on redevelopment projects and completed five major redevelopment projects, which added approximately 1.2 million square feet of GLA to the Portfolio. We have a number of renovation and/or expansion projects currently under construction, or in preconstruction development and expect to invest approximately $121.0 million on redevelopment in 2001. INTERNATIONAL EXPANSION. The SPG Operating Partnership and the Management Company have a 29% ownership interest in European Retail Enterprises, B.V. ("ERE") and Groupe BEG, S.A. ("BEG"), respectively, which are accounted for using the equity method of accounting. BEG and ERE are fully integrated European retail real estate developers, lessors and managers. Our total cash investment in ERE and BEG at December 31, 2000 was approximately $45.8million, with commitments for an additional $16.6 million, subject to certain performance and other criteria, including our approval of development projects. The agreements with BEG and ERE are structured to allow us to acquire an additional 25% ownership interest over time. As of December 31, 2000, BEG and ERE had three Properties open in Poland and two in France. TECHNOLOGY INITIATIVES. We continue to evolve our technology initiatives through our association with several third party participants. Through our clixnmortar subsidiary, we have formed an alliance with Found Inc. to build an infrastructure for retailers where shoppers can identify merchandise on line that is actually in inventory at a store and initiate a transaction either at the store or online. Through MerchantWired LLC, we are creating, along with all the other leading retail real estate developers, a full service retail infrastructure company that provides retailers across the country access to a high speed, highly reliable and secure broadband network. The SPG Operating Partnership owns an approximately 53% noncontrolling interest in MerchantWired LLC and accounts for it using the equity method of accounting. In addition, in 2000 we joined with other leading real estate companies across a broad range of property sectors to form Constellation Real Technologies, which is designed to form, incubate and sponsor real estate-related Internet, e-commerce and technology enterprises; acquire interests in existing "best of breed" companies; and act as a consolidator of real estate technology across property sectors. In September, Constellation announced its initial investment of $25.0 million in FacilityPro.com, a business-to-business electronic marketplace designed for the efficient procurement of facilities' products and services. Our share of this investment is $2.5 million. These new activities may generate losses in the initial years of operation, while programs are being developed and customer bases are being established. We have investments totaling approximately $53.0 million related to such programs through December 31, 2000. We expect to continue to invest in these programs over the next two years and together with the other members of MerchantWired, LLC have guaranteed our pro rata share of equipment lease payments up to $46.0 million. There is no assurance that our technology programs will succeed. CAPITAL EXPENDITURES ON CONSOLIDATED PROPERTIES
2000 1999 1998 -------- -------- -------- New Developments $ 58 $ 226 $ 22 Renovations and Expansions 194 248 250 Tenant Allowances 65 65 46 Operational Capital Expenditures 49 27 19 Other -- -- 12 -------- -------- -------- Total $ 366 $ 566 $ 349 ======== ======== ========
DISTRIBUTIONS SPG declared distributions on its common stock in 2000 aggregating $2.02 per share. On February 6, 2001, SPG declared a distribution of $0.5050 per Paired Share payable on February 28, 2001, to shareholders of record on February 16, 2001. The current 7 combined annual distribution rate is $2.02 per Paired Share. Future distributions will be determined based on actual results of operations and cash available for distribution. INVESTING AND FINANCING ACTIVITIES Pursuant to a stock repurchase program authorized by the Board of Directors of SPG, on August 8, 2000, we purchased 1,596,100 Paired Shares at an average price of $25.00 per Paired Share. The purchase is part of a plan announced by management earlier in the year to make opportunistic repurchases of Paired Shares during 2000 funded solely by a portion of the net proceeds realized from sales of our non-core assets. During 2000, 478,454 limited partner units were purchased for approximately $11.1 million. Cash used in investing activities during 2000 includes capital expenditures of $419.4 million, investments in unconsolidated joint ventures of $161.6 million consisting primarily of development funding, $1.3 million in acquisition costs, and $20.3 million of investments in and advances to the Management Company. Capital expenditures include development costs of $71.2 million, renovation and expansion costs of approximately $233.3 million and tenant costs, and other operational capital expenditures of approximately $114.9 million. These uses of cash are partially offset by distributions from unconsolidated entities of $362.1 million; net proceeds of $114.6 million from the sales of our interests in two regional malls, four community shopping centers and an office building; and net proceeds of $50.0 million from the sale of stock held as an investment. Distributions from unconsolidated entities includes approximately $277.1 million resulting from financing activities, with the remainder resulting primarily from those entities' operating activities. Cash used in financing activities during 2000 includes net equity distributions of $557.5 million, $51.0 million to purchase treasury stock and limited partner units, and net debt payments of $48.4 million. 8 EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA") We believe that there are several important factors that contribute to our ability to increase rent and improve profitability of our 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. We believe that EBITDA is an effective measure of shopping center operating performance because: - 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 - EBITDA is unaffected by the debt and equity structure of the property owner. However, you should understand that EBITDA: - does not represent cash flow from operations as defined by accounting principles generally accepted in the United States - should not be considered as an alternative to net income as a measure of operating performance - is not indicative of cash flows from operating, investing and financing activities - is not an alternative to cash flows as a measure of liquidity. Total EBITDA for the Properties increased from $1,362 million in 1998 to $2,102 million in 2000, representing a compound annual growth rate of 24.2%. This growth is primarily the result of merger, acquisition and development activity during the comparative periods ($611 million). The remaining growth in total EBITDA ($129 million) reflects increased rental rates, increased tenant sales, improved occupancy levels, effective control of operating costs and the addition of GLA to the Portfolio through expansions. During this period, the operating profit margin decreased from 64.8% to 64.5%. There were no major acquisitions during 2000. 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:
2000 1999 1998 ---- ---- ---- (in thousands) EBITDA of consolidated Properties $1,320,633 $1,236,421 $ 910,654 EBITDA of unconsolidated Properties 781,513 606,710 451,049 ---------- ---------- ---------- Total EBITDA of Portfolio Properties $2,102,146 $1,843,131 $1,361,703 ========== ========== ========== EBITDA after minority interest (1) $1,616,616 $1,455,272 $1,068,233 ========== ========== ========== Increase in total EBITDA from prior period 14.1% 35.4% 44.9% Increase in EBITDA after minority interest from prior period 11.1% 36.2% 43.0% Operating profit margin of the Portfolio Properties 6 4.5% 65.3% 64.8%
(1) EBITDA after minority interest represents our allocable portion of earnings before interest, taxes, depreciation and amortization for all Properties based on its economic ownership in each Property. 9 FUNDS FROM OPERATIONS ("FFO") FFO is an important and widely used measure of the operating performance of REITs, which provides a relevant basis for comparison among REITs. FFO, as defined by NAREIT, means consolidated net income without giving effect to real estate related depreciation and amortization, gains or losses from extraordinary items and gains or losses on sales of real estate, plus the allocable portion, based on economic ownership interest, of funds from operations of unconsolidated joint ventures, all determined on a consistent basis in accordance with accounting principles generally accepted in the United States. Effective January 1, 2000, we adopted NAREIT's clarification in the definition of FFO, which requires the inclusion of the effects of nonrecurring items not classified as extraordinary, cumulative effect of accounting change or resulting from the sales of depreciable real estate. However, FFO: - does not represent cash flow from operations as defined by accounting principles generally accepted in the United States - should not be considered as an alternative to net income as a measure of operating performance - is not an alternative to cash flows as a measure of liquidity. The following summarizes our FFO and that of the Companies and reconciles our combined income before unusual item, extraordinary items and cumulative effect of accounting change to our FFO for the periods presented:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 2000 1999 (1) 1998 ---------- ---------- ---------- (in thousands) Our FFO $ 793,158 $ 715,223 $ 544,481 ========== ========== ========== Increase in FFO from prior period 10.9% 31.4% 31.2% ========== ========== ========== Reconciliation: Income before unusual item, extraordinary items and cumulative effect of accounting change $ 347,419 $ 316,100 $ 236,230 Plus: Depreciation and amortization from combined consolidated properties 418,670 381,265 267,423 Our share of depreciation and amortization and other items from unconsolidated affiliates 119,562 97,247 82,323 Loss (gain) on sale of real estate (9,132) 7,062 7,283 Unusual Items -- (12,000) -- Less: Minority interest portion of depreciation and amortization and extraordinary items (5,951) (5,128) (7,307) Preferred distributions (Including those of subsidiaries) (77,410) (69,323) (41,471) ---------- ---------- ---------- Our FFO $ 793,158 $ 715,223 $ 544,481 ========== ========== ========== FFO allocable to the Companies $ 575,655 $ 520,346 $ 361,326 ========== ========== ==========
(1) RESTATED TO REFLECT NAREIT'S CLARIFICATION OF THE DEFINITION OF FFO. 10 PORTFOLIO DATA Operating statistics give effect to newly acquired properties beginning in the year of acquisition. The value-oriented super-regional mall category consists of Arizona Mills, Arundel Mills, Grapevine Mills, Concord Mills and Ontario Mills. Operating statistics do not include those properties located outside of the United States. AGGREGATE TENANT SALES VOLUME AND SALES PER SQUARE FOOT. Sales Volume includes 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. The $3,486 million increase from 1998 to 2000 includes $1,355 million from the NED Acquisition and other acquisitions. Excluding these Properties, 2000 sales were $16,718 million, which is a compound annual growth rate of 7.1 % since 1998. 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:
ANNUAL TOTAL TENANT PERCENTAGE YEAR ENDED DECEMBER 31, SALES (IN MILLIONS) INCREASE ----------------------- ------------------- ----------- 2000 $18,073 5.3% 1999 17,169 17.7 1998 14,587 52.9
We believe our sales growth in 2000 is the result of our continued aggressive retenanting efforts and the redevelopment of many of the Properties. Sales per square foot and Comparable Sales at the community shopping centers increased in 2000 by $2 or 1.2% and $2 or 1.1%, respectively. TENANT OCCUPANCY COSTS. Tenant occupancy costs as a percentage of sales was 12.1% in 2000 and 12.3% in 1999 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. We believe we are 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. We also believe that our continuing efforts to increase sales while controlling property operating expenses will continue the trend of increasing rents at the Properties. OCCUPANCY LEVELS AND AVERAGE BASE RENTS. Occupancy and average base rent is based on Owned GLA at mall and freestanding stores in the regional malls and all tenants at value-oriented regional malls and community shopping centers. We believe the continued growth in regional mall occupancy is a result of a significant increase in the overall quality of our Portfolio. The result of the increase in occupancy is a direct or indirect increase in nearly every category of revenue.
OCCUPANCY LEVELS VALUE-ORIENTED COMMUNITY REGIONAL REGIONAL SHOPPING DECEMBER 31, MALLS MALLS CENTERS ------------ -------- ---------------- --------- 2000 91.8% 92.9% 91.5% 1999 90.6% 95.1% 88.6% 1998 90.0% 98.2% 91.4%
AVERAGE BASE RENT PER SQUARE FOOT ------------------------------------------------------------------------------ COMMUNITY % VALUE-ORIENTED % SHOPPING % YEAR ENDED DECEMBER 31, REGIONAL MALLS CHANGE REGIONAL MALLS CHANGE CENTERS CHANGE ----------------------- -------------- ------ -------------- ------ --------- ------ 2000 $28.31 3.6% $17.45 6.8% $9.36 12.0% 1999 27.33 6.3 16.34 (0.4) 8.36 8.9 1998 25.70 8.7 16.40 1.2 7.68 3.2
11 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. These provisions include clauses enabling us 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 us 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 our exposure to increases in costs and operating expenses resulting from inflation. However, inflation may have a negative impact on some of our 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. 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, our earnings are generally highest in the fourth quarter of each year. RETAIL CLIMATE AND TENANT BANKRUPTCIES A number of local, regional, and national retailers, including both in-line and anchor tenants, have recently announced store closings or filed for bankruptcy. Some changeover in tenants is normal in our business. We lost 800,000 square feet of tenants in 2000 to bankruptcies or restructurings. Pressures which affect consumer confidence, job growth, energy costs and income gains, however, can affect retail sales growth and a continuing soft economic cycle may impact our ability to retenant property vacancies resulting from these store closings or bankruptcies. The geographical diversity of our portfolio mitigates some of our risk in the event of an economic downturn. In addition, the diversity of our tenant mix also is a factor because no single retailer represents neither more than 2.0% of total GLA nor more than 3.5% of our annualized base minimum rent. Bankruptcies and store closings may, in some circumstances, create opportunities for us to release spaces at higher rents to tenants with enhanced sales performance. Our previously demonstrated ability to successfully retenant anchor and in line store locations reflects our resilience to fluctuations in economic cycles. While these factors reflect some of the inherent strengths of our portfolio in a difficult retail environment, successful execution of a releasing strategy is not assured. ENVIRONMENTAL MATTERS See Note 13 in the Notes to Financial Statements for discussion of environmental matters. NEW ACCOUNTING PRONOUNCEMENTS See Footnote 15 of the Notes to Financial Statements for a discussion of the impact of new accounting pronouncements. 12 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, 2000 and 1999, and the related combined statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. We have audited the accompanying consolidated balance sheets of Simon Property Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. We have also audited the accompanying consolidated balance sheets of SPG Realty Consultants, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, the consolidated financial position of Simon Property Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, and the consolidated financial position of SPG Realty Consultants, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As explained in Note 15 to the financial statements, effective January 1, 2000, the Companies adopted Staff Accounting Bulletin No. 101, which addressed certain revenue recognition policies, including the accounting for overage rent by a landlord. ARTHUR ANDERSEN LLP Indianapolis, Indiana February 7, 2001. 13 BALANCE SHEETS SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED (Dollars in thousands, except per share amounts)
December 31, December 31, 2000 1999 ------------ ------------ ASSETS: Investment properties, at cost $ 13,045,133 $ 12,802,052 Less -- accumulated depreciation 1,480,719 1,098,881 ------------ ------------ 11,564,414 11,703,171 Cash and cash equivalents 223,111 157,632 Tenant receivables and accrued revenue, net 302,198 289,152 Notes and advances receivable from Management Company and affiliates 182,401 162,082 Investment in unconsolidated entities, at equity 1,315,836 1,528,857 Other investments -- 44,902 Goodwill, net 38,384 39,556 Deferred costs and other assets, net 269,867 262,958 Minority interest, net 41,734 34,933 ------------ ------------ $ 13,937,945 $ 14,223,243 ============ ============ LIABILITIES: Mortgages and other indebtedness $ 8,728,582 $ 8,768,951 Accounts payable and accrued expenses 451,207 478,907 Cash distributions and losses in partnerships and joint ventures, at equity 44,634 32,995 Accrued dividends 18,266 876 Other liabilities 227,552 213,909 ------------ ------------ Total liabilities 9,470,241 9,495,638 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 13) LIMITED PARTNERS' INTEREST IN THE OPERATING PARTNERSHIPS 913,482 984,465 LIMITED PARTNERS' PREFERRED INTEREST IN THE SPG OPERATING PARTNERSHIP (Note 11) 149,885 149,885 PREFERRED STOCK OF SUBSIDIARY (Liquidation value $350,000) 339,866 339,597 SHAREHOLDERS' EQUITY: CAPITAL STOCK OF SIMON PROPERTY GROUP, INC. (750,000,000 total shares authorized, $.0001 par value, 237,996,000 shares of excess common stock): All series of preferred stock, 100,000,000 shares authorized, 5,881,116 and 5,897,602 issued and outstanding, respectively. Liquidation values $559,065 and $562,704, respectively (Note 11) 538,684 542,838 Common stock, $.0001 par value, 400,000,000 shares authorized, 170,840,315 and 170,272,210 issued and outstanding, respectively 17 17 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, 1,740,443 and 1,734,762 issued and outstanding, respectively -- -- Capital in excess of par value 3,313,557 3,298,025 Accumulated deficit (715,288) (551,251) Unrealized loss on long-term investment -- (5,852) Unamortized restricted stock award (19,982) (22,139) Common stock held in treasury at cost, 2,098,555 and 310,955 shares, respectively (52,518) (7,981) ------------ ------------ Total shareholders' equity 3,064,471 3,253,658 ------------ ------------ $ 13,937,945 $ 14,223,243 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 1 STATEMENTS OF OPERATIONS SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED (Dollars in thousands, except per share amounts)
For the Year Ended December 31, ---------------------------------------------------- 2000 1999 1998 -------------- -------------- -------------- REVENUE: Minimum rent $ 1,227,782 $ 1,146,659 $ 850,708 Overage rent 56,438 60,976 49,689 Tenant reimbursements 602,829 583,777 429,470 Other income 133,702 101,291 75,692 -------------- -------------- -------------- Total revenue 2,020,751 1,892,703 1,405,559 -------------- -------------- -------------- EXPENSES: Property operating 320,548 294,699 226,426 Depreciation and amortization 420,065 382,176 268,442 Real estate taxes 191,190 187,627 133,698 Repairs and maintenance 73,918 70,760 53,296 Advertising and promotion 65,797 65,843 50,754 Provision for credit losses 9,644 8,541 6,614 Other 39,021 28,812 24,117 -------------- -------------- -------------- Total operating expenses 1,120,183 1,038,458 763,347 -------------- -------------- -------------- OPERATING INCOME 900,568 854,245 642,212 INTEREST EXPENSE 635,678 579,593 419,918 -------------- -------------- -------------- INCOME BEFORE MINORITY INTEREST 264,890 274,652 222,294 MINORITY INTEREST (10,370) (10,719) (7,335) GAIN (LOSS) ON SALES OF ASSETS, NET OF ASSET WRITE DOWNS OF $10,572, $0, AND $0 RESPECTIVELY 9,132 (7,062) (7,283) INCOME TAX BENEFIT OF SRC -- 3,374 -- -------------- -------------- -------------- INCOME BEFORE UNCONSOLIDATED ENTITIES 263,652 260,245 207,676 INCOME FROM UNCONSOLIDATED ENTITIES 83,767 55,855 28,554 -------------- -------------- -------------- INCOME BEFORE UNUSUAL ITEM, EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 347,419 316,100 236,230 UNUSUAL ITEM (Note 13) -- (12,000) -- EXTRAORDINARY ITEMS - DEBT RELATED TRANSACTIONS (649) (6,705) 7,146 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 15) (12,342) -- -- -------------- -------------- -------------- INCOME BEFORE ALLOCATION TO LIMITED PARTNERS 334,428 297,395 243,376 LESS: LIMITED PARTNERS' INTEREST IN THE OPERATING PARTNERSHIPS 70,490 60,758 68,307 PREFERRED DISTRIBUTIONS OF THE SPG OPERATING PARTNERSHIP 11,267 2,917 -- PREFERRED DIVIDENDS OF SUBSIDIARY 29,335 29,335 7,816 -------------- -------------- -------------- NET INCOME 223,336 204,385 167,253 PREFERRED DIVIDENDS (36,808) (37,071) (33,655) -------------- -------------- -------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 186,528 $ 167,314 $ 133,598 ============== ============== ============== BASIC AND DILUTED EARNINGS PER COMMON PAIRED SHARE: Income before extraordinary items and cumulative effect of accounting change $ 1.13 $ 1.00 $ 1.02 Extraordinary items -- (0.03) 0.04 Cumulative effect of accounting change (Note 15) (0.05) -- -- -------------- -------------- -------------- Net income $ 1.08 $ 0.97 $ 1.06 ============== ============== ==============
2 STATEMENTS OF SHAREHOLDERS' EQUITY SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED (Dollars in thousands)
UNREALIZED CAPITAL GAIN (LOSS) IN SPG SPG SRC ON LONG- EXCESS PREFERRED COMMON COMMON TERM OF PAR STOCK STOCK STOCK INVESTMENT VALUE ---------- ------ ------ ----------- ---------- Balance at December 31, 1997 339,061 11 -- 2,420 1,491,908 Common stock issued to the public (2,957,335 shares) 1 91,398 CPI Merger (Notes 4 and 11) SPG Preferred 717,916 SPG Common (53,078,564 shares) 5 1,758,733 SRC Net Assets 14,755 Preferred stock of Subsidiary (339,061) Common stock issued in connection with acquisitions (519,889 shares) 17,176 Stock incentive program (495,131 shares) 15,983 Other common stock issued (81,111 shares) 2,182 Amortization of stock incentive Transfer out of limited partners' interest in the Operating Partnerships (308,922) Distributions ---------- ------ ------ ----------- ---------- Subtotal 717,916 17 -- 2,420 3,083,213 ---------- ------ ------ ----------- ---------- COMPREHENSIVE INCOME: Unrealized loss on long-term investment (2,294) Net income ---------- ------ ------ ----------- ---------- TOTAL COMPREHENSIVE INCOME: -- -- -- (2,294) -- ---------- ------ ------ ----------- ---------- Balance at December 31, 1998 717,916 17 -- 126 3,083,213 Preferred stock conversion (5,926,440 shares) (199,320) 1 199,319 Common stock issued as dividend (153,890 shares) 4,030 Preferred stock issued in acquisition 24,242 Stock incentive program (537,861 shares) 13,635 Amortization of stock incentive Shares purchased by subsidiary (310,955 shares) Stock options exercised (82,988 shares) 2,138 Transfer out of limited partners' interest in the Operating Partnerships (4,310) Distributions ---------- ------ ------ ----------- ---------- Subtotal 542,838 18 -- 126 3,298,025 ---------- ------ ------ ----------- ---------- COMPREHENSIVE INCOME: Unrealized loss on long-term investment (5,978) Net income ---------- ------ ------ ----------- ---------- TOTAL COMPREHENSIVE INCOME: -- -- -- (5,978) -- ---------- ------ ------ ----------- ---------- Balance at December 31, 1999 $ 542,838 $ 18 $ -- $ (5,852) $3,298,025 ========== ====== ===== ========== ========== Series A Preferred stock conversion (84,046 Paired Shares) (2,827) 2,827 Series B Preferred stock conversion (36,913 Paired Shares) (1,327) 1,327 Common stock issued as dividend (1,242 Paired Shares) 31 Stock options exercised (27,910 Paired Shares) 1,036 Other 85 Stock incentive program (417,994 Paired Shares, net) 9,613 Amortization of stock incentive Shares purchased by subsidiary (191,500 Paired Shares) Treasury shares purchased (1,596,100 Paired Shares) Transfer out of limited partners' interest in the Operating Partnerships 613 Distributions ---------- ------ ------ ----------- ---------- Subtotal 538,684 18 -- (5,852) 3,313,557 ---------- ------ ------ ----------- ---------- COMPREHENSIVE INCOME: Unrealized gain on long-term investment 5,852 Net income ---------- ------ ------ ----------- ---------- TOTAL COMPREHENSIVE INCOME: -- -- -- 5,852 -- ---------- ------ ------ ----------- ---------- Balance at December 31, 2000 $ 538,684 $ 18 $ -- $ -- $3,313,557 ========== ====== ====== =========== ========== UNAMORTIZED COMMON RESTRICTED STOCK TOTAL ACCUMULATED STOCK HELD IN SHAREHOLDERS' DEFICIT AWARD TREASURY 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 CPI Merger (Notes 4 and 11) SPG Preferred 717,916 SPG Common (53,078,564 shares) 1,758,738 SRC Net Assets 14,755 Preferred stock of Subsidiary (339,061) Common stock issued in connection with acquisitions (519,889 shares) 17,176 Stock incentive program (495,131 shares) (15,983) -- Other common stock issued (81,111 shares) 2,182 Amortization of stock incentive 9,463 9,463 Transfer out of limited partners' interest in the Operating Partnerships (308,922) Distributions (276,258) (276,258) ----------- ------------ ----------- ------------- Subtotal (539,566) (19,750) -- 3,244,250 ----------- ------------ ----------- ------------- COMPREHENSIVE INCOME: Unrealized loss on long-term investment (2,294) Net income 167,253 167,253 ----------- ------------ ----------- ------------- TOTAL COMPREHENSIVE INCOME: 167,253 -- -- 164,959 ----------- ------------ ----------- ------------- Balance at December 31, 1998 (372,313) (19,750) -- 3,409,209 Preferred stock conversion (5,926,440 shares) -- Common stock issued as dividend (153,890 shares) 4,030 Preferred stock issued in acquisition 24,242 Stock incentive program (537,861 shares) (12,990) 645 Amortization of stock incentive 10,601 10,601 Shares purchased by subsidiary (310,955 shares) (7,981) (7,981) Stock options exercised (82,988 shares) 2,138 Transfer out of limited partners' interest in the Operating Partnerships (4,310) Distributions (383,323) (383,323) ----------- ------------ ----------- ------------- Subtotal (755,636) (22,139) (7,981) 3,055,251 ----------- ------------ ----------- ------------- COMPREHENSIVE INCOME: Unrealized loss on long-term investment (5,978) Net income 204,385 204,385 ----------- ------------ ----------- ------------- TOTAL COMPREHENSIVE INCOME: 204,385 -- -- 198,407 ----------- ------------ ----------- ------------- Balance at December 31, 1999 $ (551,251) $ (22,139) $ (7,981) $ 3,253,658 =========== ============= =========== ============= Series A Preferred stock conversion (84,046 Paired Shares) -- Series B Preferred stock conversion (36,913 Paired Shares) -- Common stock issued as dividend (1,242 Paired Shares) 31 Stock options exercised (27,910 Paired Shares) 1,036 Other 85 Stock incentive program (417,994 Paired Shares, net) (9,613) -- Amortization of stock incentive 11,770 11,770 Shares purchased by subsidiary (191,500 Paired Shares) (4,539) (4,539) Treasury shares purchased (1,596,100 Paired Shares) (39,998) (39,998) Transfer out of limited partners' interest in the Operating Partnerships 613 Distributions (387,373) (387,373) ----------- ------------ ----------- ------------- Subtotal (938,624) (19,982) (52,518) 2,835,283 ----------- ------------ ----------- ------------- COMPREHENSIVE INCOME: Unrealized gain on long-term investment 5,852 Net income 223,336 223,336 ----------- ------------ ----------- ------------- TOTAL COMPREHENSIVE INCOME: 223,336 -- -- 229,188 ----------- ------------ ----------- ------------- Balance at December 31, 2000 $ (715,288) $ (19,982) $ (52,518) $ 3,064,471 =========== ============ =========== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 3 STATEMENTS OF CASH FLOWS SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED (Dollars in thousands)
For the Year Ended December 31, ------------------------------------------- 2000 1999 1998 ---------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 223,336 $ 204,385 $ 167,253 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 430,472 394,004 278,812 Unusual Item -- 12,000 -- Extraordinary items 649 6,705 (7,146) Cumulative effect of accounting change 12,342 -- -- (Gain) loss on sales of assets, net of asset write downs of $10,572, $0 and $0, respectively (9,132) 7,062 7,283 Limited partners' interest in Operating Partnerships 70,490 60,758 68,307 Preferred dividends of Subsidiary 29,335 29,335 7,816 Preferred distributions of the SPG Operating Partnership 11,267 2,917 -- Straight-line rent (15,590) (17,995) (9,345) Minority interest 10,370 10,719 7,335 Equity in income of unconsolidated entities (83,767) (55,855) (28,554) Other 3,000 (3,374) -- Changes in assets and liabilities-- Tenant receivables and accrued revenue (8,482) (36,960) (13,205) Deferred costs and other assets (10,086) (23,090) (7,846) Accounts payable, accrued expenses and other liabilities 37,312 36,445 58,705 ---------- ----------- ----------- Net cash provided by operating activities 701,516 627,056 529,415 ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (1,325) (339,065) (1,942,724) Capital expenditures (419,382) (504,561) (349,708) Cash from mergers, acquisitions and consolidation of joint ventures, net -- 83,169 18,162 Change in restricted cash -- -- 7,686 Net proceeds from sale of assets 114,576 58,703 46,087 Net proceeds from sale of investment 49,998 -- -- Investments in unconsolidated entities (161,580) (83,125) (55,523) Distributions from unconsolidated entities 362,091 221,707 195,557 Investments in and advances to Management Company and affiliate (20,319) (46,704) (21,569) Other investing activities -- (3,000) -- ---------- ----------- ----------- Net cash provided by (used in) investing activities (75,941) (612,876) (2,102,032) ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of common and preferred stock, net 1,208 2,069 114,570 Purchase of treasury stock and limited partner units (50,972) -- -- Minority interest distributions, net (16,224) (13,925) (19,694) Preferred dividends of Subsidiary (29,335) (29,335) (7,816) Preferred distributions of the SPG Operating Partnership (11,267) (2,913) -- Preferred dividends and distributions to shareholders (369,979) (385,878) (272,797) Distributions to limited partners (131,923) (129,941) (136,551) Mortgage and other note proceeds, net of transaction costs 1,474,527 2,168,069 3,782,314 Mortgage and other note principal payments (1,426,131) (1,593,889) (1,867,913) ---------- ----------- ----------- Net cash (used in) provided by financing activities (560,096) 14,257 1,592,113 ---------- ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 65,479 28,437 19,496 CASH AND CASH EQUIVALENTS, beginning of period 157,632 129,195 109,699 ---------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 223,111 $ 157,632 $ 129,195 ========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 BALANCE SHEETS SIMON PROPERTY GROUP, INC. CONSOLIDATED (Dollars in thousands, except per share amounts)
December 31, December 31, 2000 1999 -------------- ------------- ASSETS: Investment properties, at cost $ 13,037,506 $ 12,794,484 Less-- accumulated depreciation 1,479,378 1,097,629 -------------- ------------- 11,558,128 11,696,855 Cash and cash equivalents 214,404 154,924 Tenant receivables and accrued revenue, net 296,785 288,506 Notes and advances receivable from Management Company and affiliates 182,401 162,082 Note receivable from the SRC Operating Partnership (Interest at 8%, due 2009) 29,425 9,848 Investment in unconsolidated entities, at equity 1,308,838 1,519,504 Other investments -- 41,902 Goodwill, net 38,384 39,556 Deferred costs and other assets, net 240,665 250,210 Minority interest, net 42,377 35,931 -------------- ------------- $ 13,911,407 $ 14,199,318 ============== ============= LIABILITIES: Mortgages and other indebtedness $ 8,728,582 $ 8,768,841 Accounts payable and accrued expenses 439,190 477,757 Cash distributions and losses in partnerships and joint ventures, at equity 44,634 32,995 Accrued dividends 18,266 876 Other liabilities 227,481 213,506 -------------- ------------- Total liabilities 9,458,153 9,493,975 -------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 13) LIMITED PARTNERS' INTEREST IN THE SPG OPERATING PARTNERSHIP 909,491 978,316 LIMITED PARTNERS' PREFERRED INTEREST IN THE SPG OPERATING PARTNERSHIP (Note 11) 149,885 149,885 PREFERRED STOCK OF SUBSIDIARY (Liquidation value $350,000) 339,866 339,597 SHAREHOLDERS' EQUITY (750,000,000 total shares authorized, $.0001 par value, 237,996,000 shares of excess common stock): All series of preferred stock, 100,000,000 shares authorized, 5,881,116 and 5,897,602 issued and outstanding, respectively. Liquidation values $559,065 and $562,704, respectively (Note 11) 538,684 542,838 Common stock, $.0001 par value, 400,000,000 shares authorized, 170,840,315 and 170,272,210 issued and outstanding, respectively 17 17 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 3,299,016 3,283,566 Accumulated deficit (711,395) (552,933) Unrealized loss on long-term investment -- (5,852) Unamortized restricted stock award (19,982) (22,139) Common stock held in treasury at cost, 2,098,555 and 310,955 shares, respectively (52,329) (7,953) -------------- ------------- Total shareholders' equity 3,054,012 3,237,545 -------------- ------------- $ 13,911,407 $ 14,199,318 ============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 STATEMENTS OF OPERATIONS SIMON PROPERTY GROUP, INC. CONSOLIDATED (Dollars in thousands, except per share amounts)
For the Year Ended December 31, --------------------------------------------- 2000 1999 1998 -------------- ------------ ------------ REVENUE: Minimum rent $ 1,227,857 $ 1,146,098 $ 850,351 Overage rent 56,438 60,976 49,689 Tenant reimbursements 602,829 583,780 429,350 Other income 125,613 104,117 75,682 ------------- ------------ ------------ Total revenue 2,012,737 1,894,971 1,405,072 ------------- ------------ ------------ EXPENSES: Property operating 310,728 294,347 226,426 Depreciation and amortization 419,922 381,823 267,876 Real estate taxes 191,180 187,506 133,580 Repairs and maintenance 73,916 70,752 53,308 Advertising and promotion 65,470 65,843 50,754 Provision for credit losses 9,644 8,522 6,610 Other 32,313 27,811 23,973 ------------- ------------ ------------ Total operating expenses 1,103,173 1,036,604 762,527 ------------- ------------ ------------ OPERATING INCOME 909,564 858,367 642,545 INTEREST EXPENSE 637,173 579,848 420,282 ------------- ------------ ------------ INCOME BEFORE MINORITY INTEREST 272,391 278,519 222,263 MINORITY INTEREST (10,725) (10,719) (7,335) GAIN (LOSS) ON SALES OF ASSETS, NET OF ASSET WRITE DOWNS OF $10,572, $0 AND $0, RESPECTIVELY 9,132 (1,942) (7,283) ------------- ------------ ------------ INCOME BEFORE UNCONSOLIDATED ENTITIES 270,798 265,858 207,645 INCOME FROM UNCONSOLIDATED ENTITIES 84,322 49,641 28,145 ------------- ------------ ------------ INCOME BEFORE UNUSUAL ITEM, EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 355,120 315,499 235,790 UNUSUAL ITEM (Note 13) -- (12,000) -- EXTRAORDINARY ITEMS - DEBT RELATED TRANSACTIONS (649) (6,705) 7,146 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 15) (12,342) -- -- ------------- ------------ ------------ INCOME BEFORE ALLOCATION TO LIMITED PARTNERS 342,129 296,794 242,936 LESS: LIMITED PARTNERS' INTEREST IN THE SPG OPERATING PARTNERSHIP 72,616 61,527 68,179 PREFERRED DISTRIBUTIONS OF THE SPG OPERATING PARTNERSHIP 11,267 2,917 -- PREFERRED DIVIDENDS OF SUBSIDIARY 29,335 29,335 7,816 ------------- ------------ ------------ NET INCOME 228,911 203,015 166,941 PREFERRED DIVIDENDS (36,808) (37,071) (33,655) ------------- ------------ ------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 192,103 $ 165,944 $ 133,286 ============= ============ ============ BASIC AND DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary items and cumulative effect of accounting change $ 1.16 $ 0.99 $ 1.01 Extraordinary items -- (0.03) 0.04 Cumulative effect of accounting change (Note 15) (0.05) -- -- ------------- ------------ ------------ Net income $ 1.11 $ 0.96 $ 1.05 ============= ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 172,895 172,089 126,522 ============= ============ ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 172,994 172,226 126,879 ============= ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 6 STATEMENTS OF SHAREHOLDERS' EQUITY SIMON PROPERTY GROUP, INC. CONSOLIDATED (Dollars in thousands, except per share amounts)
UNREALIZED GAIN CAPITAL IN UNAMORTIZED PREFERRED ALL CLASSES OF ON LONG-TERM EXCESS OF ACCUMULATED RESTRICTED STOCK COMMON STOCK INVESTMENTS PAR VALUE DEFICIT STOCK AWARD ---------- -------------- --------------- ---------- ----------- ----------- Balance at December 31, 1997 339,061 11 2,420 1,491,908 (263,308) (13,230) Common stock issued to the public (2,957,335 shares) 1 91,398 CPI Merger (Notes 4 and 11) SPG Preferred 717,916 SPG Common (53,078,564 shares) 5 1,758,733 Preferred stock of Subsidiary (339,061) Common Stock issued in connection with acquisitions (519,889 shares) 17,176 Stock incentive program (495,131 shares) 15,983 (15,983) Other common stock issued (81,111 shares) 2,182 Amortization of stock incentive 9,463 Transfer out of limited partners' interest in the SPG Operating Partnership (308,922) Distributions (276,258) ---------- -------------- --------------- ---------- ----------- ----------- Subtotal 717,916 17 2,420 3,068,458 (539,566) (19,750) ---------- -------------- --------------- ---------- ----------- ----------- COMPREHENSIVE INCOME: Unrealized loss on long-term investment (2,294) Net income 166,941 ---------- -------------- --------------- ---------- ----------- ----------- TOTAL COMPREHENSIVE INCOME: -- -- (2,294) -- 166,941 -- ---------- -------------- --------------- ---------- ----------- ----------- Balance at December 31, 1999 717,916 17 126 3,068,458 (372,625) (19,750) Preferred stock conversion (5,920,440 shares) (199,320) 1 198,786 Common stock issued as dividend (153,890 shares) 4,016 Preferred stock issued in acquisition 24,242 Stock incentive program (537,861 shares) 13,587 (12,990) Amortization of stock incentive 10,601 Shares purchased by subsidary (310,995 Paired shares) Stock options exercised (82,988 shares) 2,131 Transfer out of limited partners' interest in the SPG Operating Partnership (3,412) Distributions (383,323) ---------- -------------- --------------- ---------- ----------- ----------- Subtotal 542,838 18 126 3,283,566 (755,948) (22,139) ---------- -------------- --------------- ---------- ----------- ----------- COMPREHENSIVE INCOME: Unrealized loss on long-term incentive (5,978) Net income 203,015 ---------- -------------- --------------- ---------- ----------- ----------- TOTAL COMPREHENSIVE INCOME: -- -- (5,978) -- 203,015 -- ---------- -------------- --------------- ---------- ----------- ----------- Balance at December 31, 1999 $ 542,838 $ 18 $ (5,852) $3,283,566 $ (552,933) $ (22,139) ========== ============== =============== ========== =========== =========== Series A Preferred stock conversion (84,046 Paired Shares) (2,827) 2,819 Series B Preferred stock conversion (36,913 Paired Shares) (1,327) 1,324 Common stock issued as dividend (1,242 Paired Shares) 31 Stock options exercised (27,910 Paired Shares) 1,036 Other 85 Stock incentive program (417,994 Paired Shares, net) 9,573 (9,613) Amortization of stock incentive 11,770 Shares purchased by subsidiary (191,500 Paired Shares) Tresury shares purchased (1,596,1000 Paired Shares) Transfer out or invested partners' interest in the SPG Operating Partnership 582 Distributions (387,373) ---------- -------------- --------------- ---------- ----------- ----------- Subtotal 538,684 18 (5,852) 3,299,016 (940,306) (19,982) ---------- -------------- --------------- ---------- ----------- ----------- COMPREHENSIVE INCOME: Unrealized gain on long-term investment 5,852 Net income 228,911 ---------- -------------- --------------- ---------- ----------- ----------- TOTAL COMPREHENSIVE INCOME: -- -- 5,852 -- 228,911 -- ---------- -------------- --------------- ---------- ----------- ----------- Balance at December 31, 2000 $ 538,684 $ 18 $ -- $3,299,016 $ (711,395) $ (19,982) ========== ============== =============== ========== =========== =========== COMMON TOTAL STOCK HELD IN SHAREHOLDERS' TRESURY EQUITY ------------- ------------- Balance at December 31, 1997 -- 1,556,862 Common stock issued to the public (2,957,335 shares) 91,399 CPI Merger (Notes 4 and 11) SPG Preferred 717,916 SPG Common (53,078,564 shares) 1,758,738 Preferred stock of Subsidiary (339,061) Common Stock issued in connection with acquisitions (519,889 shares) 17,176 Stock incentive program (495,131 shares) -- Other common stock issued (81,111 shares) 2,182 Amortization of stock incentive 9,463 Transfer out of limited partners' interest in the SPG Operating Partnership (308,922) Distributions (276,258) ---------- ----------- Subtotal -- 3,229,495 ---------- ----------- COMPREHENSIVE INCOME: Unrealized loss on long-term investment (2,294) Net income 166,941 ---------- ----------- TOTAL COMPREHENSIVE INCOME: -- 164,647 ---------- ----------- Balance at December 31, 1999 -- 3,394,142 Preferred stock conversion (5,920,440 shares) (533) Common stock issued as dividend (153,890 shares) 4,016 Preferred stock issued in acquisition 24,242 Stock incentive program (537,861 shares) 597 Amortization of stock incentive 10,601 Shares purchased by subsidary (310,995 Paired shares) (7,953) (7,953) Stock options exercised (82,988 shares) 2,131 Transfer out of limited partners' interest in the SPG Operating Partnership (3,412) Distributions (383,323) ---------- ----------- Subtotal (7,953) 3,040,508 ---------- ----------- COMPREHENSIVE INCOME: Unrealized loss on long-term (5,978) incentive Net income 203,015 ---------- ----------- TOTAL COMPREHENSIVE INCOME: -- 197,037 ---------- ----------- Balance at December 31, 1999 $ (7,953) $ 3,237,545 ========== =========== Series A Preferred stock conversion (84,046 Paired Shares) (8) Series B Preferred stock conversion (36,913 Paired Shares) (3) Common stock issued as dividend (1,242 Paired Shares) 31 Stock options exercised (27,910 Paired Shares) 1,036 Other 85 Stock incentive program (417,994 Paired Shares, net) (40) Amortization of stock incentive 11,770 Shares purchased by subsidiary (191,500 Paired Shares) (4,522) (4,522) Tresury shares purchased (1,596,1000 Paired Shares) (39,854) (39,854) Transfer out or invested partners' interest in the SPG Operating Partnership 582 Distributions (387,373) ---------- ----------- Subtotal (52,329) 2,819,249 ---------- ----------- COMPREHENSIVE INCOME: Unrealized gain on long-term investment 5,852 Net income 228,911 ---------- ----------- TOTAL COMPREHENSIVE INCOME: -- 234,763 ---------- ----------- Balance at December 31, 2000 $ (52,329) $ 3,054,012 ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 7 STATEMENTS OF CASH FLOWS SIMON PROPERTY GROUP, INC. CONSOLIDATED (Dollars in thousands)
For the Year Ended December 31, ---------------------------------------- 2000 1999 1998 ------------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 228,911 $ 203,015 $ 166,941 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 430,329 393,650 278,246 Unusual item -- 12,000 -- Extraordinary items 649 6,705 (7,146) Cumulative effect of accounting change 12,342 -- -- (Gain) loss on sales of assets, net of asset write downs of $10,572, $0 and $0, respectively (9,132) 1,942 7,283 Limited partners' interest in Operating Partnership 72,616 61,527 68,179 Preferred dividends of Subsidiary 29,335 29,335 7,816 Preferred distributions of the SPG Operating Partnership 11,267 2,917 -- Straight-line rent (15,590) (17,998) (9,334) Minority interest 10,725 10,719 7,335 Equity in income of unconsolidated entities (84,322) (49,641) (28,145) Changes in assets and liabilities-- Tenant receivables and accrued revenue (3,715) (36,994) (13,438) Deferred costs and other assets (2,782) (23,524) (7,289) Accounts payable, accrued expenses and other liabilities 26,084 36,123 76,915 ------------- ---------- ----------- Net cash provided by operating activities 706,717 629,776 547,363 ------------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (1,325) (339,065) (1,942,724) Capital expenditures (409,428) (491,357) (345,619) Cash from mergers, acquisitions and consolidation of joint ventures, net -- 83,169 16,616 Change in restricted cash -- -- 7,686 Proceeds from sale of assets 114,576 46,750 46,087 Proceeds from sale of investment 49,998 -- -- Investments in unconsolidated entities (161,580) (83,124) (55,523) Distributions from unconsolidated entities 360,292 221,509 195,497 Investments in and advances to Management Company and affiliate (20,319) (46,704) (21,569) Mortgage loan payoff from the SRC Operating Partnership -- 20,565 -- Loan to the SRC Operating Partnership (19,577) (9,848) -- Other investing activities -- -- -- ------------- ---------- ----------- Net cash provided by (used in) investing activities (87,363) (598,105) (2,099,549) ------------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of common and preferred stock, net 1,175 1,463 92,570 Purchase of treasury stock and limited partner units (50,828) -- -- Minority interest distributions, net (16,224) (14,923) (19,694) Preferred dividends of Subsidiary (29,335) (29,335) (7,816) Preferred distributions of the SPG Operating Partnership (11,267) (2,913) -- Preferred dividends and distributions to shareholders (369,979) (385,878) (272,797) Distributions to limited partners (131,923) (129,941) (136,551) Note payoff to the SRC Operating Partnership -- (17,907) -- Mortgage and other note proceeds, net of transaction costs 1,474,527 2,168,069 3,782,314 Mortgage and other note principal payments (1,426,020) (1,593,008) (1,867,913) ------------- ---------- ----------- Net cash (used in) provided by financing activities (559,874) (4,373) 1,570,113 ------------- ---------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS 59,480 27,298 17,927 CASH AND CASH EQUIVALENTS, beginning of period 154,924 127,626 109,699 ------------- ---------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 214,404 $ 154,924 $ 127,626 ============= ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 8 BALANCE SHEETS SPG REALTY CONSULTANTS, INC. CONSOLIDATED (Dollars in thousands, except per share amounts)
December 31, --------------------------- 2000 1999 ------------ ----------- ASSETS: Cash and cash equivalents $ 8,707 $ 2,708 Accounts receivable (including $2,984 and $0 from related parties) 8,394 646 ------------ ----------- Total current assets 17,101 3,354 Investment properties, at cost, less accumulated depreciation of $1,341 and $1,252, respectively 6,286 6,316 Investment in unconsolidated entities, at equity 6,998 9,353 Investment in technology initiatives 23,583 15,708 Other noncurrent assets 2,896 298 ------------ ----------- $ 56,864 $ 35,029 ============ =========== LIABILITIES: Accounts payable and accrued expenses (including $4,855 and $0 from related parties) $ 12,346 $ 1,811 ------------ ----------- Total current liabilities 12,346 1,811 Mortgages and other indebtedness -- 110 Note payable to the SPG Operating Partnership (Interest at 8%, due 2009) 29,425 9,848 Minority interest 643 998 ------------ ----------- Total liabilities 42,414 12,767 ------------ ----------- COMMITMENTS AND CONTINGENCIES (Note 13) LIMITED PARTNERS' INTEREST IN THE SRC OPERATING PARTNERSHIP 3,991 6,149 SHAREHOLDERS' EQUITY: Common stock, $.0001 par value, 7,500,000 shares authorized, 1,740,443 and 1,734,762 issued and outstanding, respectively -- -- Capital in excess of par value 29,647 29,565 Accumulated deficit (18,999) (13,424) Less common stock held in treasury at cost, 20,986 and 3,110 shares respectively (189) (28) ------------ ----------- Total shareholders' equity 10,459 16,113 ------------ ----------- $ 56,864 $ 35,029 ============ ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 9 STATEMENTS OF OPERATIONS SPG REALTY CONSULTANTS, INC. CONSOLIDATED (In thousands, except per share amounts)
For the Year Ended December 31, -------------------------------------------- 2000 1999 1998 ------------ ------------- ------------ REVENUE: Rental income (including $0, $427 and $1,525 from SPG/CPI) $ 312 $ 1,357 $ 3,122 Tenant reimbursements (including $0, $212 and $725 from SPG/CPI) -- 210 916 Marketing and fee income from the SPG Operating Partnership 8,583 -- -- Insurance premiums 2,829 -- -- Other income 755 710 544 ------------ ------------- ------------ Total revenue 12,479 2,277 4,582 ------------ ------------- ------------ EXPENSES: Property operating (including $0, $0 and $113 to SPG/CPI) -- 733 2,317 Depreciation and amortization 143 353 1,305 Technology initiatives startup costs 5,547 -- -- Loss on investment 3,000 -- -- Insurance losses 2,719 -- -- General and administrative expenses (including $2,076, $131 and $450 to SPG/CPI) 8,263 1,271 848 Merger-related costs -- -- 4,093 ------------ ------------- ------------ Total operating expenses 19,672 2,357 8,563 ------------ ------------- ------------ OPERATING LOSS (7,193) (80) (3,981) INTEREST EXPENSE (including $308, $3,720 and $1,234 to SPG/CPI) 308 3,787 1,279 MINORITY INTEREST 355 -- -- LOSS ON SALE OF ASSETS, NET -- 5,120 -- INCOME TAX BENEFIT -- 3,374 190 ------------ ------------- ------------ LOSS BEFORE UNCONSOLIDATED ENTITIES (7,146) (5,613) (5,070) (LOSS) INCOME FROM UNCONSOLIDATED ENTITIES (555) 6,214 767 ------------ ------------- ------------ (LOSS) INCOME BEFORE ALLOCATION TO LIMITED PARTNERS (7,701) 601 (4,303) LESS--LIMITED PARTNERS' INTEREST IN THE SRC OPERATING PARTNERSHIP (2,126) (769) 128 ------------ ------------- ------------ NET (LOSS) INCOME $ (5,575) $ 1,370 $ (4,431) ============ ============= ============ NET (LOSS) INCOME DERIVED FROM: Pre-CPI Merger period (Note 4) $ -- $ -- $ (4,743) Post-CPI Merger period (Note 4) (5,575) 1,370 312 ------------ ------------- ------------ $ (5,575) $ 1,370 $ (4,431) ============ ============= ============ BASIC AND DILUTED EARNINGS PER COMMON SHARE: Net (loss) income $ (3.22) $ 0.80 $ (5.17) ============ ============= ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 1,729 1,721 857 ============ ============= ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 1,730 1,722 857 ============ ============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 10 STATEMENTS OF CASH FLOWS SPG REALTY CONSULTANTS, INC. CONSOLIDATED (Dollars in thousands)
For the Year Ended December 31, -------------------------------------- 2000 1999 1998 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (5,575) $ 1,370 $ (4,431) Adjustments to reconcile net (loss) income to net cash used in operating activities-- Depreciation and amortization 143 353 1,305 Loss on investment 3,000 -- -- Loss on sales of assets, net -- 5,120 -- Limited partners' interest in SRC Operating Partnership (2,126) (769) 128 Minority interest (355) -- -- Straight-line rent -- 2 (12) Equity in income of unconsolidated entities 555 (6,214) (767) Income tax benefit -- (3,374) (190) Changes in assets and liabilities-- Accounts receivable (7,749) 468 (103) Other non-current assets (4,323) -- -- Accounts payable and accrued expenses 11,227 327 (1,526) ----------- ---------- ---------- Net cash used in operating activities (5,203) (2,717) (5,596) ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in technology initiatives and other capital expenditures (9,953) (13,204) (128) Net proceeds from sales of assets -- 11,953 -- Investments in unconsolidated entities -- -- (3,921) Distributions from unconsolidated entities 1,799 198 19,193 Note receivable from the SPG Operating Partnership -- -- (17,907) Payoff of note from the SPG Operating Partnership -- 17,907 -- Other investment -- (3,000) -- ----------- ---------- ---------- Net cash (used in) provided by investing activities (8,154) 13,854 (2,763) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sales of common stock, net 33 602 14,102 Purchase of treasury stock (144) -- -- Contributions from limited partners -- -- 8,000 Minority interst contributions -- 998 -- Distributions to shareholders -- -- (1,059) Loan from the SPG Operating Partnership 19,577 9,848 -- Mortgage and other note proceeds, net of transaction costs -- -- 3,485 Mortgage and other note principal payments (Including $21,446 to the SPG Operating Partnership in 1999) (110) (21,446) (18,747) ----------- ---------- ---------- Net cash provided by (used in) financing activities 19,356 (9,998) 5,781 ----------- ---------- ---------- CHANGE IN CASH AND CASH EQUIVALENTS 5,999 1,139 (2,578) CASH AND CASH EQUIVALENTS, beginning of period 2,708 1,569 4,147 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, end of period $ 8,707 $ 2,708 $ 1,569 =========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 11 STATEMENTS OF SHAREHOLDERS' EQUITY SPG REALTY CONSULTANTS, INC. CONSOLIDATED (Dollars in thousands)
COMMON TOTAL COMMON CAPITAL IN EXCESS ACCUMULATED STOCK HELD IN SHAREHOLDERS' STOCK OF PAR VALUE DEFICIT TREASURY EQUITY --------- ------------------- ----------- ------------- ------------- Balance at December 31, 1997 -- 13,620 (9,304) -- 4,316 Common stock issued (1,109,019 shares) -- 14,102 14,102 Adjustment of limited partners' interest in the SRC Operating Partnership 2,139 2,139 Distributions -- -- (1,059) (1,059) --------- ------------------- ----------- ------------- ------------- Subtotal -- 29,861 (10,363) -- 19,498 --------- ------------------- ----------- ------------- ------------- COMPREHENSIVE INCOME: Net loss (4,431) (4,431) --------- ------------------- ----------- ------------- ------------- TOTAL COMPREHENSIVE INCOME: -- -- (4,431) -- (4,431) --------- ------------------- ----------- ------------- ------------- Balance at December 31, 1998 -- 29,861 (14,794) -- 15,067 Common stock issued (67,013 shares) -- 602 602 Shares purchased by subsidiary (3,110 shares) (28) (28) Adjustment of limited partners' interest in the SRC Operating Partnership (898) (898) --------- ------------------- ----------- ------------- ------------- Subtotal -- 29,565 (14,794) (28) 14,743 --------- ------------------- ----------- ------------- ------------- COMPREHENSIVE INCOME: Net income 1,370 1,370 --------- ------------------- ----------- ------------- ------------- TOTAL COMPREHENSIVE INCOME: -- -- 1,370 -- 1,370 --------- ------------------- ----------- ------------- ------------- Balance at December 31, 1999 $ -- $ 29,565 $ (13,424) $ (28) $ 16,113 ========= =================== =========== ============= ============= Common stock issued (5,681 shares) -- 51 51 Shares purchased by subsidiary (1,915 shares) -- (17) (17) Treasury shares purchased (15,961 shares) -- (144) (144) Adjustment of limited partners' interest in the SRC Operating Partnership 31 31 --------- ------------------- ----------- ------------- ------------- Subtotal -- 29,647 (13,424) (189) 16,034 --------- ------------------- ----------- ------------- ------------- COMPREHENSIVE INCOME: Net loss (5,575) (5,575) --------- ------------------- ----------- ------------- ------------- TOTAL COMPREHENSIVE INCOME: -- -- (5,575) -- (5,575) --------- ------------------- ----------- ------------- ------------- Balance at December 31, 2000 $ -- $ 29,647 $ (18,999) $ (189) $ 10,459 ========= =================== =========== ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. 12 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 ("Paired Shares") 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 Unit in SPG Realty Consultants, L.P. ("Paired Units") (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 (Note 4) refers to Simon DeBartolo Group, Inc. and its subsidiaries ("SDG") and the SPG Operating Partnership. SPG, primarily through the SPG Operating Partnership, is engaged 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, 2000, SPG and the SPG Operating Partnership owned or held an interest in 252 income-producing properties in the United States, which consisted of 165 regional malls, 73 community shopping centers, five specialty retail centers, four office and mixed-use properties and five value-oriented super-regional malls in 36 states (the "Properties") and five additional retail real estate properties operating in Europe. SPG and the SPG Operating Partnership also owned an interest in two properties currently under construction and 11 parcels of land held for future development, which together with the Properties are hereafter referred to as the "Portfolio Properties". At both December 31, 2000 and 1999, the Companies' direct and indirect ownership interests in the Operating Partnerships were 72.4%. 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, primarily through the SRC Operating Partnership, engages primarily in activities that capitalize on the resources, customer base and operating activities of SPG, which could not be engaged in by SPG without potentially impacting its status as a REIT. These activities include a program launched in 1999 designed to take advantage of new retail opportunities of the digital age. The program clixnmortar.com formed an alliance with a third party to build an infrastructure for retailers where shoppers can identify merchandise on line that is actually in inventory at a store and initiate a transaction either at the store or online. The SRC Operating Partnership's investment in this program was $23,583 and $12,708, as of December 31, 2000 and December 31, 1999, respectively, which is included in investments in technology initiatives on SRC's balance sheets. To date, the majority of such investment is comprised of internally developed software costs. Minority interest on the SRC balance sheets represents an 8.3% outside ownership interest in clixnmortar.com. SRC also has noncontrolling interests in two joint ventures which each own land held for sale, which are located adjacent to Properties. Simon Group has recently formed Simon Brand Ventures, LLC ("SBV"), a business to consumer initiative, and Simon Business Network ("SBN"), a business to business initiative, to continue to expand upon certain mall marketing initiatives to take advantage of Simon Group's size and tenant relationships, primarily through strategic corporate alliances. Beginning in 2000, certain SBV income, previously included in Management Company's results of operations, was included in SRC's results of operations. SBV is focused on leveraging Simon Group's 100 million unique shoppers and their 2 billion annual shopping visits to contribute to Simon Group's second-curve revenue strategy. The SBV concept and initiatives were started in 1997 to create a new medium for connecting consumers with retailers and sponsors by developing a combination of shopping, entertainment and community. SBN is focused on leveraging Simon Group's assets to create new businesses which will drive greater value to its Portfolio Properties, retailers and other developers and generate new sources of revenue for Simon Group. SBN's strategy is to provide a competitively valued, broad-based offering of products and services via a unique and dominant business-to-business marketplace and service network focused on the real estate industry and their tenants. SBV has also 26 entered into cost sharing arrangements with the Management Company similar to those of the SPG Operating Partnership (see Note 8). Effective January 1, 2001, ownership of SBV transferred from SRC to of the SPG Operating Partnership. During 2000, SRC's wholly-owned insurance subsidiary, Marigold Indemnity, Ltd ("Marigold"), began providing general liability insurance coverage to a third party that provides outsourcing services at certain properties. Marigold reinsures the majority of the risk through a third party idemnity company. 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 and customers, 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, 2000, 333 of the approximately 975 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 AND CONSOLIDATION The accompanying combined financial statements include SPG, SRC and their subsidiaries. The accompanying consolidated financial statements of SPG and SRC include SPG and its subsidiaries and SRC and its subsidiaries, respectively. All significant intercompany amounts have been eliminated. SPG's financial statements and the combined financial statements reflect the CPI Merger (see Note 4) 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 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 separate statements of SRC include the historical results of Corporate Realty Consultants, Inc. ("CRC"), the predecessor to SRC, for all periods prior to the CPI Merger. The acquisition of SRC, unlike CPI (see Note 4), was not subject to purchase accounting treatment. Properties which are wholly-owned or owned less than 100% and are controlled by Simon Group are accounted for using the consolidation 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 are recorded when a partnership agreement provides 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 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), which is allocated in accordance with the provisions of the applicable partnership or joint venture agreement, and cash contributions and distributions. The allocation provisions in the partnership or joint venture agreements are not always consistent with the ownership interests held by each general or limited partner or joint venturer, primarily due to partner preferences. 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 2000, 1999 and 1998 was 72.4%, 72.3% and 66.2%, respectively. 3. NED ACQUISITION During 1999, Simon Group acquired ownership interests in 14 regional malls from New England Development Company (the "NED Acquisition"). Simon Group acquired one of the Properties directly and formed a joint venture with three partners ("Mayflower"), of which Simon Group owns a noncontrolling 49.1%, to acquire interests in the remaining Properties. The total cost of the NED Acquisition is approximately $1.8 billion, of which Simon Group's share is approximately $894 million. Simon Group assumed management responsibilities for the portfolio, which includes approximately 10.7 million square feet of GLA. Simon Group's share of the cost of the NED Acquisition included the assumption of approximately $530,000 of mortgage indebtedness; $177,050 in cash; the issuance of 1,269,446 Paired Units valued at approximately $36,400; the issuance of 2,584,227 7% Convertible Preferred Units in the SPG Operating Partnership valued at approximately $72,800; and 2,584,227 8% Redeemable Preferred Units in the SPG Operating Partnership valued at approximately $78,000. Simon Group's share of the cash portion of the purchase price was financed primarily using the Credit Facility (see Note 9). 27 4. CPI MERGER 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. ("CRC"). The CPI Merger included the addition of 23 regional malls, one community center, two office buildings and one regional mall and one community center under construction. The aggregate value associated with the completion of the CPI Merger was approximately $5.9 billion, including transaction costs and liabilities assumed, in accordance with the purchase method of accounting and has been allocated to the estimated fair value of the CPI assets acquired and liabilities assumed and resulted in goodwill of $41,021, as adjusted. Goodwill is amortized over the estimated life of the properties of 35 years. 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 (other than one regional mall, Ocean County Mall, and certain net leased properties valued at approximately $153,100) to the SPG Operating Partnership or one or more subsidiaries of the SPG Operating Partnership in exchange for 47,790,550 Units and 5,053,580 preferred Units in the SPG Operating Partnership. 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 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 SPG Operating Partnership would hold the same proportionate interest in the SRC Operating Partnership that they hold in the SPG 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 are reflected at historical cost. 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 had occurred on January 1, 1998, and was 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 had been consummated on January 1, 1998, nor does it purport to represent the results of operations for future periods.
YEAR ENDED DECEMBER 31, 1998 ----------- Revenue $ 1,715,693 ============ Net income before allocation to Limited Partners (1) 272,025 ============ Net income available to holders of common stock 144,598 ============ Basic net income per Paired Share (1) $ 0.87 ============ Diluted net income per Paired Share $ 0.87 ============ Basic weighted average number of equivalent Paired Shares 165,349,561 ============ Diluted weighted average number of equivalent Paired Shares 165,706,710 ============
(1) Includes net gains on the sales of assets of $37,973, or $0.17 on a basic earnings per share basis. 28 5. OTHER REAL ESTATE ACQUISITIONS AND DISPOSALS ACQUISITIONS During 1999, Simon Group acquired the remaining interests in four Properties, and a noncontrolling 27.5% ownership interest in the 2.8 million square-foot Mall of America for a combined price of approximately $317,850, including the assumption of $134,300 of mortgage indebtedness, 1,000,000 shares of 8% Redeemable Preferred Stock in SPG issued at $24,242, and the remainder in cash, financed primarily through the Credit Facility and working capital. Simon Group is entitled to 50% of the economic benefits of Mall of America, due to a preference. On February 27, 1998, Simon Group acquired a noncontrolling 50% joint venture interest in a portfolio of twelve regional malls and two community centers (the "IBM Properties") comprising approximately 10.7 million square feet of GLA. Simon Group's $487,250 share of the purchase price included the assumption of indebtedness of $242,500. Simon Group also 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. During 1998, Simon Group acquired 100% of one Property, a 90% interest in another Property and additional interests in a total of six Properties for approximately $199,200, including the assumption of $62,100 of indebtedness and 2,864,088 Units valued at approximately $93,500, with the remainder in cash financed primarily through the Credit Facility and working capital. These transactions resulted in the addition of approximately 1.1 million square feet of GLA to the portfolio. DISPOSALS During 2000, 1999 and 1998, Simon Group sold ownership interests in seven, four and five properties, respectively, at a combined gross sale price of $142,575, $58,700 and $120,000, respectively. These sales generated net combined consolidated gains (losses) of $19,704, ($7,062) and ($7,283) in 2000, 1999 and 1998, respectively. Simon Group is continuing to pursue the sale of its remaining 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. During 2000, SRC wrote-off its $3.0 million investment in a technology venture. 6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENT PROPERTIES Investment Properties are recorded at cost (predecessor cost for Properties acquired from certain of the SPG Operating Partnership's unitholders). 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 is 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. 29 USE OF ESTIMATES The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States, 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. CAPITALIZED INTEREST Interest is capitalized on projects during periods of construction. Interest capitalized during 2000, 1999 and 1998 was $19,831, $19,641 and $10,567, respectively. SEGMENT DISCLOSURE Simon Group's interests in its regional malls, community centers and other assets represent one segment as they have similar economic and environmental conditions, business processes, types of customers (i.e. tenants) and services provided, and because resource allocation and other operating decisions are based on an evaluation of the entire portfolio. LONG-TERM INVESTMENT Investments in securities classified as available for sale are reflected in other investments in the balance sheets at market value with the changes in market value reflected as comprehensive income in shareholders' equity. These investments were sold in 2000. 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 of $162,453 and $149,863 are net of accumulated amortization of $149,052 and $121,477 as of December 31, 2000 and 1999, respectively. Interest expense in the accompanying Combined Statements of Operations includes amortization of deferred financing costs of $15,798, $17,535, and $11,835, for 2000, 1999 and 1998, respectively, and has been reduced by amortization of debt premiums and discounts of $5,391, $5,707 and $1,465 for 2000, 1999 and 1998, respectively. CAPITALIZED SOFTWARE COSTS Simon Group capitalizes the cost of internally developed software once management has determined that the software will result in probable future economic benefits. Capitalized costs include external direct costs related to software development and implementation and payroll-related costs of certain employees working solely on these aspects of the project. Capitalized software costs will be amortized on a straight line basis over three years beginning when the system is ready and available for its intended use. 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. Beginning January 1, 2000, the Companies recognize overage rents only when each tenant's sales exceeds its sales threshold. Previously, overage rents were 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. See Note 15 for description and impact of the accounting change. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenditures are incurred. 30 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 2000, 1999 and 1998 was as follows:
BALANCE AT PROVISION BEGINNING FOR CREDIT ACCOUNTS BALANCE AT Year Ended OF YEAR LOSSES WRITTEN OFF END OF YEAR ---------- ---------- ----------- ----------- December 31, 2000 $ 14,467 $ 9,644 $ (4,003) $ 20,108 ========== ========== =========== =========== December 31, l999 $ 14,491 $ 8,541 $ (8,565) $ 14,467 ========== ========== =========== =========== December 31, l998 $ 13,804 $ 6,614 $ (5,927) $ 14,491 ========== ========== =========== ===========
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, which requires REITs to distribute at least 90% of their taxable income to shareholders and meet certain other asset and income tests as well as other requirements. Management intends to continue to adhere to these requirements and maintain the REIT status of SPG and its REIT subsidiaries. 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 fails 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, franchise or other taxes were not significant in any of the periods presented. SRC. SRC, a C Corporation, is subject to income taxes on its earnings. The provision (benefit) for income taxes reflected in the separate financial statements of SRC was $0, ($3,374) and ($190) for 2000, 1999 and 1998, respectively. Deferred tax assets and liabilities consist primarily of tax credits, net operating loss carryforwards and asset basis differences. The net deferred tax asset (liability), net of necessary valuation allowances, at both December 31, 2000 and 1999 was $0. A valuation allowance is provided for loss and credit carryforwards that management currently evaluates as not likely to be realized. The valuation allowance related to SRC's tax accounts is adjusted as necessary based on management's expectation of SRC's ability to utilize its tax benefit carryforwards. In 2000 and 1998, SRC generated losses for which a valuation allowance was provided. In 1999, the income tax benefit represents SRC's pro rata share of the SRC Operating Partnership's current year losses and the realization of tax carryforward benefits for which a valuation allowance was previously provided. 31 PER SHARE DATA 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 following table sets forth the computation for the Companies' basic and diluted earnings per share. The extraordinary items and cumulative effect of accounting change amounts presented in the reconciliation below represent the common shareholders' pro rata share of the respective statements of operations line items.
For the Year Ended December 31, ------------------------------------------ 2000 1999 1998 ------------ ----------- ----------- Common Shareholders' share of income before extraordinary items, unusual item and cumulative effect of accounting change $ 195,932 $ 172,159 $ 128,870 Common Shareholders' share of extraordinary items (470) (4,845) 4,728 Common Shareholders' share of cumulative effect of accounting change (8,934) -- -- ------------ ----------- ----------- Net Income available to Common Shareholders $ 186,528 $ 167,314 $ 133,598 ============ =========== =========== Weighted Average Shares Outstanding - Basic 172,894,555 172,088,590 126,522,228 Effect of stock options 99,538 137,002 357,149 ------------ ----------- ----------- Weighted Average Shares Outstanding - Diluted 172,994,093 172,225,592 126,879,377 ============ =========== ===========
Combined basic and diluted earnings per Paired 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. Neither series of convertible preferred stock issued and outstanding during the comparative periods had a dilutive effect on earnings per share, nor did any of the convertible preferred Units of the SPG Operating Partnership outstanding, which are convertible into Paired Shares on or after August 27, 2004 if certain conditions are met. Paired Units held by limited partners in the Operating Partnerships may be exchanged for Paired Shares, on a one-for-one basis in certain circumstances. If exchanged, the paired Units would not have a dilutive effect. Simon Group accrues distributions when they are declared. SPG declared distributions in 2000 and 1999 aggregating $2.02 per share of common stock, of which $0.94 and $1.06 represented a return of capital measured using accounting principles generally accepted in the United States. On a federal income tax basis, 49% of SPG's 2000 distribution represented a capital gain, 11% represented a return of capital, and 4% represented unrecaptured Section 1250 gain. In 1999, 10% of SPG's 1999 distribution represented a capital gain and 38% represented a return of capital. CASH AND CASH EQUIVALENTS 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. NONCASH TRANSACTIONS Accrued and unpaid distributions were $18,266 and $876 at December 31, 2000 and 1999, respectively. Please refer to Notes 3, 4, 5 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. 32 7. INVESTMENT PROPERTIES Investment properties consist of the following:
DECEMBER 31, ----------------------------------- 2000 1999 -------------- -------------- Land $ 2,000,521 $ 1,988,660 Buildings and improvements 10,954,559 10,739,126 -------------- -------------- Total land, buildings and improvements 12,955,080 12,727,786 Furniture, fixtures and equipment 90,053 74,266 -------------- -------------- Investment properties at cost 13,045,133 12,802,052 Less-accumulated depreciation 1,480,719 1,098,881 -------------- -------------- Investment properties at cost, net $ 11,564,414 $ 11,703,171 ============== ==============
Investment properties includes $122,284 and $201,349 of construction in progress at December 31, 2000 and 1999, respectively. 33 8. INVESTMENTS IN UNCONSOLIDATED ENTITIES Summary financial information of the Joint Venture Properties and a summary of Simon Group's investment in and share of income from such Properties follows.
DECEMBER 31, ------------------------------ BALANCE SHEETS 2000 1999 ------------ ----------- ASSETS: Investment properties at cost, net $ 6,573,412 $ 6,487,200 Cash and cash equivalents 192,138 171,372 Tenant receivables 165,918 160,477 Other assets 276,975 161,702 ------------ ----------- Total assets $ 7,208,443 $ 6,980,751 ============ =========== LIABILITIES AND PARTNERS' EQUITY: Mortgages and other notes payable $ 5,135,488 $ 4,484,598 Accounts payable, accrued expenses and other liabilities 347,733 291,457 ------------ ----------- Total liabilities 5,483,221 4,776,055 Partners' equity 1,725,222 2,204,696 ------------ ----------- Total liabilities and partners' equity $ 7,208,443 $ 6,980,751 ============ =========== SIMON GROUP'S SHARE OF: Total assets $ 2,929,647 $ 2,843,025 ============ =========== Partners' equity $ 679,591 $ 896,572 Add: Excess Investment 558,675 592,457 ------------ ----------- Simon Group's net Investment in Joint Ventures $ 1,238,266 $ 1,489,029 ============ =========== FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- STATEMENTS OF OPERATIONS 2000 1999 1998 ---------- --------- -------- REVENUE: Minimum rent $ 766,379 $ 570,902 $442,530 Overage rent 31,174 25,957 18,465 Tenant reimbursements 377,673 276,207 204,936 Other income 61,062 57,695 31,045 ---------- --------- -------- Total revenue 1,236,288 930,761 696,976 OPERATING EXPENSES: Operating expenses and other 454,775 324,051 245,927 Depreciation and amortization 238,932 170,339 129,681 ---------- --------- -------- Total operating expenses 693,707 494,390 375,608 ---------- --------- -------- OPERATING INCOME 542,581 436,371 321,368 INTEREST EXPENSE 357,692 235,826 176,669 LOSS ON SALE OF ASSETS (6,990) -- (6,818) ---------- --------- -------- INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE ("IBEC") 177,899 200,545 137,881 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (3,948) -- -- EXTRAORDINARY ITEMS- DEBT EXTINGUISHMENTS (1,842) (66) (4,240) ---------- --------- -------- NET INCOME $ 172,109 $ 200,479 $133,641 ========== ========= ======== THIRD-PARTY INVESTORS' SHARE OF IBEC 104,006 122,153 92,554 ---------- --------- -------- SIMON GROUP'S SHARE OF IBEC $ 73,893 $ 78,392 $ 45,327 AMORTIZATION OF EXCESS INVESTMENT 20,972 27,252 22,625 ---------- --------- -------- INCOME FROM UNCONSOLIDATED ENTITIES $ 52,921 $ 51,140 $ 22,702 ========== ========= ========
As of December 31, 2000 and 1999, 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 acquired ("Excess Investment") was $558,675 and $592,457, 34 respectively, which is amortized over the life of the related Properties. Amortization included in income from unconsolidated entities for the years ended December 31, 2000, 1999 and 1998 was $20,972, $27,252 and $22,625, respectively. Included in the 1999 amortization is a $5,000 writedown on a joint venture investment. At December 31, 2000, SRC's investment in unconsolidated joint ventures, which is included in the summary financial information above, represents noncontrolling interests in two joint ventures that each own land held for sale, which are adjacent to two of the Properties. Included in 2000 total assets, total revenue and net income above was $10,721, $4,156 and $3,771, respectively, related to these SRC joint venture investments. During 1998, SRC also had a joint venture interest in a partnership which provided management and advisory services to a hotel. This investment was sold in 1999 for $28,500, which resulted in a $35 gain. Included in 1999 total assets, total revenue and net income above was $18,505, $12,539 and $11,902, respectively, related to SRC's joint venture investments. Included in 1998 total revenue and net income above was $481 and $481, respectively, related to SRC's joint venture investments. THE 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 certain Simon family members. Because Simon Group exercises significant influence but not control 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. Simon Group incurred costs of $79,357, $75,697 and $58,748 on consolidated Properties, related to services provided by the Management Company and its affiliates in 2000, 1999 and 1998, respectively. The Management Company also provides certain of such services to Melvin Simon & Associates, Inc. ("MSA"), and certain other nonowned properties for a fee. Fees for services provided by the Management Company to MSA were $4,246, $3,853 and $3,301 for the years ended December 31, 2000, 1999 and 1998, respectively. The SPG Operating Partnership manages substantially all wholly-owned and joint venture Properties except for 44 Properties of which 29 are managed by the Management Company, and, accordingly, it reimburses a subsidiary of the Management Company for costs incurred relating to the management of such Properties. 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 using assumptions that management believes are reasonable. The SPG Operating Partnership's share of allocated common costs was $60,874, $55,051 and $42,546 for 2000, 1999 and 1998, respectively. As of December 31, 2000 and 1999, amounts due from the Management Company for unpaid accrued interest and unpaid accrued preferred dividends were not material to the combined financial statements or to those of SPG. Amounts due to the Management Company under cost-sharing arrangements and management contracts are included in notes and advances receivable from Management Company and affiliates. 35 Simon Group's net investment in the Management Company as of December 31, 2000 and 1999 was $32,936 and $6,833, respectively. 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.
DECEMBER 31, ---------------------- BALANCE SHEET DATA: 2000 1999 ---------- --------- Total assets $ 225,272 $ 184,501 Notes payable to Simon Group at 11%, due 2008, and advances 182,401 162,082 Shareholders' equity 35,630 21,740 SIMON GROUP'S SHARE OF: Total assets $ 212,838 $ 172,935 ========== ========= Shareholders' equity $ 39,078 $ 23,889 ========== =========
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------ OPERATING DATA: 2000 1999 1998 ------------ ------------ ----------- Total revenue $ 93,618 $ 115,761 $ 100,349 Operating Income 37,290 5,573 8,067 Net Income Available for Common Shareholders $ 35,890 $ 4,173 $ 6,667 ============ ============ =========== Simon Group's Share of Net Income after intercompany profit elimination $ 30,846 $ 4,715 $ 5,852 ============ ============ ===========
EUROPEAN INVESTMENT The SPG Operating Partnership and the Management Company have a 29% ownership interest in European Retail Enterprises, B.V. ("ERE") and Groupe BEG, S.A. ("BEG"), respectively, which are accounted for using the equity method of accounting. BEG and ERE are fully integrated European retail real estate developers, lessors and managers. Simon Group's total cash investment in ERE and BEG at December 31, 2000 was approximately $45.8 million, with commitments for an additional $16.6 million, subject to certain performance and other criteria, including Simon Group's approval of development projects. The agreements with BEG and ERE are structured to allow Simon Group to acquire an additional 25% ownership interest over time. As of December 31, 2000, BEG and ERE had three properties open in Poland and two in France. The translation adjustment resulting from the conversion of BEG and ERE's financial statements from Euros to U.S. dollars was not significant for the years ended December 31, 2000 and 1999. 36 9. INDEBTEDNESS Simon Group's mortgages and other notes payable consist of the following:
DECEMBER 31, ------------------------------ FIXED-RATE DEBT 2000 1999 ----------- ---------- Mortgages and other notes, including ($3,045) and $28 net (discounts) premiums, respectively. Weighted average interest and maturity of 7.5% and 5.8 years. $ 2,178,926 $2,304,435 Unsecured notes, including $4,752 and $275 net discounts, respectively. Weighted average interest and maturity of 7.2% and 6.1 years. 3,485,248 3,489,725 63/4% Putable Asset Trust Securities, including $701 and $913 premiums, respectively, due November 2003. 100,701 100,913 7% Mandatory Par Put Remarketed Securities, including $5,150 and $5,214 premiums, respectively, due June 2028 and subject to redemption June 2008. 205,150 205,214 Commercial mortgage pass-through certificates. Five classes bearing interest at weighted average rates and maturities of 7.3% and 4.0 years. 175,000 175,000 ----------- ---------- Total fixed-rate debt 6,145,025 6,275,287 VARIABLE-RATE DEBT Mortgages and other notes, including $375 and $884 premiums, respectively. Weighted average interest and maturity of 7.9% and 2.8 years. $ 757,436 $ 558,664 Credit Facility (see below) 645,000 785,000 Merger Facility (see below) 925,000 950,000 Simon ERE Facility (see below) 33,192 -- Commercial mortgage pass-through certificates, interest at 6.2%, due December 2004. 50,000 50,000 Unsecured term loans, weighted average rates and maturities of 7.47% and 1.2 years. 172,929 150,000 ----------- ---------- Total variable-rate debt 2,583,557 2,493,664 ----------- ---------- Total mortgages and other notes payable, net $ 8,728,582 $8,768,951 =========== ==========
GENERAL. 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 indebtedness is subject to financial performance covenants relating to leverage ratios, annual real property appraisal requirements, debt service coverage ratios, minimum net worth ratios, debt-to-market capitalization, and minimum equity values. Debt premiums and discounts are 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. MORTGAGES AND OTHER NOTES. Certain of the Properties are pledged as collateral to secure the related mortgage notes. The fixed and variable mortgage notes are nonrecourse; however certain notes have partial guarantees by affiliates of approximately $618,667. The fixed-rate mortgages generally require monthly payments of principal and/or interest. Variable-rate mortgages are typically based on LIBOR. UNSECURED NOTES. Certain of Simon Group's unsecured notes totaling $825,000 with weighted average interests and maturities of 8.0% and 7.1 years, respectively, are structurally senior in right of payment to holders of other Simon Group unsecured notes to the extent of the assets and related cash flows of certain Properties. Certain of the unsecured notes are guaranteed by the SPG Operating Partnership. 37 On February 4, 1999, the SPG Operating Partnership completed the sale of $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 (see below) and to pay $142,000 on the outstanding balance of the Credit Facility (see below). CREDIT FACILITY. The Credit Facility is a $1,250,000 unsecured revolving credit facility. During 1999, Simon Group obtained a three-year extension on the Credit Facility to August of 2002, with an additional 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 2000 under the Credit Facility were $830,000 and $714,645, respectively. The Credit Facility is primarily used for funding acquisition, renovation and expansion and predevelopment opportunities. At December 31, 2000, the Credit Facility had an effective interest rate of 7.30%, with $598,519 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 $450,000 of the remaining balance will mature on March 24, 2001, with the remaining $475,000 due on September 24, 2001. The Merger Facility is subject to covenants and conditions substantially identical to those of the Credit Facility. Financing costs of $9,707, which were incurred to obtain the Merger Facility, were amortized over 18 months. SUBSEQUENT EVENT. On January 11, 2001, the Simon Group issued $500,000 of unsecured debt to institutional investors pursuant to Rule 144A in two tranches. The first tranche is $300,000 bearing an interest rate of 7 3/8% due January 20, 2006 and the second tranche is $200,000 bearing an interest rate of 7 3/4% due January 20, 2011. The net proceeds of the offering were used to repay the remaining portion of the indebtedness under the Merger Facility due March 24, 2001 and to repay a portion of the Merger Facility due September 24, 2001. SIMON ERE FACILITY. On July 31, 2000 Simon ERE Loan, LLC, a wholly owned subsidiary of Simon Group, entered into a Euro-denominated unsecured Credit Agreement , to fund Simon Group's European investment, consisting of a 25 million Euros term loan and a 35 million Euros revolving credit facility. The interest rate for each loan is Euribor plus 0.60% with a facility fee of 0.15%. The interest rate on 30 million Euros is swapped at 7.75%. The maturity date is July 31, 2004 including a one year extension. These loans are guaranteed by the SPG Operating Partnership. DEBT MATURITY AND OTHER As of December 31, 2000, scheduled principal repayments on indebtedness were as follows: 2001 $1,164,354 2002 779,381 2003 1,841,814 2004 1,490,759 2005 816,058 Thereafter 2,637,787 ---------- Total principal maturities 8,730,153 Net unamortized debt discounts (1,571) ---------- Total mortgages and other notes payable $8,728,582 ==========
The Joint Venture Properties have $5,135,488 and $4,484,598 of mortgages and other notes payable at December 31, 2000 and 1999, respectively. Simon Group's share of this debt was $2,166,788 and $1,876,158 at December 31, 2000 and 1999, respectively. This debt, including premiums of $17,158 in 2000, becomes due in installments over various terms extending through 2011, with interest rates ranging from 6.00% to 9.75% (weighted average rate of 7.61% at December 31, 2000). The debt, excluding the $17,158 of premiums, matures $290,162 in 2001; $310,214 in 2002; $688,679 in 2003; $448,445 in 2004; $915,286 in 2005 and $2,465,544 thereafter. 38 Cash paid for interest, net of any amounts capitalized, during 2000, 1999 and 1998 was $646,200, $566,191 and $397,560, respectively. INTEREST RATE PROTECTION AGREEMENTS Simon Group has entered into interest rate protection agreements, in the form of "cap" or "swap" arrangements, with respect to certain 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 $213,200 principal amount of consolidated debt. Cap arrangements, which effectively limit the amount by which variable interest rates may rise, have been entered into for $191,000 principal amount of consolidated debt and cap LIBOR at rates ranging from 7.4% to 16.77% through the related debt's maturity. Costs of the caps ($403) are amortized over the life of the agreements. The unamortized balance of the cap arrangements was $248 and $187 as of December 31, 2000 and 1999, respectively. Simon Group's hedging activity as a result of interest swaps and caps resulted in net interest (expense) savings of $316, ($1,880) and $263 for the years ended December 31, 2000, 1999 and 1998, respectively. This did not materially impact Simon Group's weighted average borrowing rate. Please refer to Note 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of variable-rate mortgages and other loans represents their fair values. The fair value of combined fixed-rate mortgages and other notes payable was approximately $6,453,165 and $5,649,467 at December 31, 2000 and 1999, respectively. The fair value of the combined interest rate protection agreements at December 31, 2000 and 1999, was ($296) and $6,600, respectively. At December 31, 2000 and 1999, the estimated discount rates were 7.17% and 8.06%, respectively. The fair values of combined fixed-rate mortgages and other notes payable and combined interest rate protection agreements are estimated using cash flows discounted at current borrowing rates and at current market rates, 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, 2000, are as follows: 2001 $1,010,887 2002 953,057 2003 874,618 2004 779,022 2005 686,174 Thereafter 2,447,753 ---------- $6,751,511 ==========
Approximately 1.5% of future minimum rents to be received are attributable to leases with an affiliate of a limited partner in the SPG Operating Partnership. 11. CAPITAL STOCK SRC's 1998 historical shares and per share amounts have been adjusted to give effect to the change in SRC's par value of common stock from $0.10 per share to $0.0001 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 common 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. 39 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 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 Melvin, Herbert or David Simon. 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. PREFERRED STOCK The following table summarizes each of the series of preferred stock of Simon Property Group, Inc.:
As of December 31, -------------------------- 2000 1999 -------- -------- Series A 6.5% Convertible Preferred Stock, 209,249 shares authorized, 51,059 and 53,271 issued and outstanding, respectively $ 65,246 $ 68,073 Series B 6.5% Convertible Preferred Stock, 5,000,000 shares authorized, 4,830,057 and 4,844,331 issued and outstanding, respectively 449,196 450,523 Series C 7.00% Cumulative Convertible Preferred Stock, 2,700,000 shares authorized, none issued or outstanding -- -- Series D 8.00% Cumulative Redeemable Preferred Stock, 2,700,000 shares authorized, none issued or outstanding -- -- Series E 8.00% Cumulative Redeemable Preferred Stock, 1,000,000 shares 24,242 authorized, 1,000,000 issued and outstanding 24,242 -------- -------- $538,684 $542,838 ======== ========
SERIES A CONVERTIBLE PREFERRED STOCK. During 2000, 2,212 shares of SPG's Series A Convertible Preferred Stock were converted into 84,046 Paired Shares. In addition, another 1,242 Paired Shares were issued to the holders of the converted shares in lieu of the cash dividends allocable to those preferred shares. Each share of Series A Convertible Preferred Stock has a liquidation preference of $1,000 and is convertible into 37.995 Paired Shares, subject to adjustment under certain circumstances. 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. SERIES B CONVERTIBLE PREFERRED STOCK. During 2000, 14,274 shares of SPG's Series B Convertible Preferred Stock were converted into 36,913 Paired Shares. Each share of the Series B Convertible Preferred Stock has a liquidation preference of $100 and is convertible into 2.586 Paired Shares, subject to adjustment under circumstances identical to those of the Series A Preferred Stock. SPG 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. SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK AND SERIES D CUMULATIVE REDEEMABLE PREFERRED STOCK. In connection with the NED Acquisition, on August 27, 1999, SPG authorized these two new series of preferred stock to be available for issuance upon conversion by the holders or redemption by the SPG Operating Partnership of the 7.00% Preferred Units or the 8.00% Preferred Units, described below. Each of these new series of preferred stock has terms which are substantially identical to the respective series of Preferred Units. 40 SERIES E CUMULATIVE REDEEMABLE PREFERRED STOCK. As part of the consideration for the purchase of ownership in Mall of America, SPG issued the Series E Cumulative Redeemable Preferred Stock for $24,242. The Series E Cumulative Redeemable Preferred Stock is redeemable beginning August 27, 2004 at the liquidation value of $25 per share. 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. SPG Properties, Inc. has outstanding 3,000,000 shares of its 7.89% Series C Cumulative Step-Up Premium RateSM Preferred Stock (the "Series C Preferred Shares") with a liquidation value of $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. Beginning September 30, 2007, SPG Properties, Inc. may redeem the Series C Preferred Shares in whole or in part, using only the sale proceeds of other capital stock of SPG Properties, Inc., at a liquidation value of $50.00 per share, plus accrued and unpaid distributions, if any, thereon. 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. The SPG Operating Partnership pays a preferred distribution to SPG Properties, Inc. equal to the dividends paid on the preferred stock. SPG Properties, Inc. also has outstanding 8,000,000 shares of 8.75% Series B Cumulative Redeemable Preferred Stock, which it may redeem any time on or after September 29, 2006, at a liquidation value of $25.00 per share, plus accrued and unpaid dividends. The liquidation value (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. The SPG Operating Partnership pays a preferred distribution to SPG Properties, Inc. equal to the dividends paid on the preferred stock. LIMITED PARTNERS' PREFERRED INTERESTS IN THE SPG OPERATING PARTNERSHIP In connection with the NED Acquisition, the SPG Operating Partnership issued two new series of preferred Units during 1999 as a component of the consideration for the Properties acquired. The SPG Operating Partnership authorized 2,700,000, and issued 2,584,227, 7.00% Cumulative Convertible Preferred Units (the "7.00% Preferred Units") having a liquidation value of $28.00 per Unit. The 7.00% Preferred Units accrue cumulative dividends at a rate of $1.96 annually, which is payable quarterly in arrears. The 7.00% Preferred Units are convertible at the holders' option on or after August 27, 2004, into either a like number of shares of 7.00% Cumulative Convertible Preferred Stock of SPG with terms substantially identical to the 7.00% Preferred Units or Paired Units at a ratio of 0.75676 to one provided that the closing stock price of SPG's Paired Shares exceeds $37.00 for any three consecutive trading days prior to the conversion date. The SPG Operating Partnership may redeem the 7.00% Preferred Units at their liquidation value plus accrued and unpaid distributions on or after August 27, 2009, payable in Paired Units. In the event of the death of a holder of the 7.00% Preferred Units, or the occurrence of certain tax triggering events applicable to a holder, the SPG Operating Partnership may be required to redeem the 7.00% Preferred Units at liquidation value payable at the option of the SPG Operating Partnership in either cash (the payment of which may be made in four equal annual installments) or Paired Shares. The SPG Operating Partnership also authorized 2,700,000, and issued 2,584,227, 8.00% Cumulative Redeemable Preferred Units (the "8.00% Preferred Units") having a liquidation value of $30.00. The 8.00% Preferred Units accrue cumulative dividends at a rate of $2.40 annually, which is payable quarterly in arrears. The 8.00% Preferred Units are each paired with one 7.00% Preferred Unit or with the Units into which the 7.00% Preferred Units may be converted. The SPG Operating Partnership may redeem the 8.00% Preferred Units at their liquidation value plus accrued and unpaid distributions on or after August 27, 2009, payable in either new preferred units of the SPG Operating Partnership having the same terms as the 8.00% Preferred Units, except that the distribution coupon rate would be reset to a then determined market rate, or in Paired Units. The 8.00% Preferred Units are convertible at the holders' option on or after August 27, 2004, into 8.00% Cumulative Redeemable Preferred Stock of SPG with terms substantially identical to the 8.00% Preferred Units. In the event of the death of a holder of the 8.00% Preferred Units, or the occurrence of certain tax triggering events applicable to a holder, the SPG Operating Partnership may be required to redeem the 8.00% Preferred Units owned by such holder at their liquidation value payable at the option of the SPG Operating Partnership in either cash (the payment of which may be made in four equal annual installments) or Paired Shares. 41 NOTES RECEIVABLE FROM FORMER CPI SHAREHOLDERS Notes receivable of $19,667 from former CPI shareholders, which result from securities issued under CPI's executive compensation program and were assumed in 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 $2,018 bear interest at rates ranging from 6.00% to 7.50% and become due during the period 2001 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 Simon Group has a stock incentive plan (the "1998 Plan"), which provides for the grant of equity-based awards during a ten-year period, in the form of options to purchase Paired Shares ("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 Companies have reserved for issuance 6,300,000 Paired Shares under the 1998 Plan. Additionally, the partnership agreements require the Companies to sell Paired Shares to the Operating Partnerships, at fair value, sufficient to satisfy the exercising of stock options, and for the Companies to purchase Paired Units for cash in an amount equal to the fair market value of such Paired Shares. ADMINISTRATION. The 1998 Plan is administered by SPG'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 Paired Shares on the date of grant. Employee Options generally vest over a three-year period and expire ten years from the date of grant. DIRECTOR OPTIONS. The 1998 Plan provides for automatic grants of Options to directors ("Director Options") 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 Paired Shares upon the director's initial election to the Board of Directors, and upon each reelection, an additional 3,000 Director Options multiplied by the number of calendar years that have elapsed since such person's last election to the Board of Directors. The exercise price of the options is equal to the fair market value of the Paired Shares 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 terminate 30 days after the optionee ceases to be a member of the Board of Directors. RESTRICTED STOCK. The 1998 Plan also provides for shares of restricted common stock of the Companies to be granted to certain employees at no cost to those employees, subject to growth targets established by the Compensation Committee (the "Restricted Stock Program"). Restricted stock vests annually in four installments of 25% each beginning on January 1 following the year in which the restricted stock is awarded. During 2000, 1999 and 1998, a total of 417,994; 537,861 and 495,131 Paired Shares, respectively, net of forfeitures, were awarded under the Restricted Stock Program and predecessor programs with a weighted average grant price of $22.94, $25.50, and $32.69, respectively. Through December 31, 2000 a total of 2,243,080 Paired Shares, net of forfeitures, were awarded. Approximately $11,770, $10,601 and $9,463 relating to these awards were amortized in 2000, 1999 and 1998, 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. Simon Group accounts for stock-based compensation programs using the intrinsic value method, which measures compensation expense as 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. During 2000, Simon Group awarded 750,750 additional options to directors and employees. The 24,000 options granted to Directors vest over a twelve-month period, while the remaining 726,750 employee options granted during 2000 vest over three years. The impact on pro forma net income and earnings per share as a result of applying the fair value method, as prescribed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires entities to measure compensation costs measured at the grant date based on the fair value of the award, was not material. 42 The fair value of the options at the date of grant was estimated using the Black-Scholes option pricing model with the following assumptions:
DECEMBER 31, --------------------------------------------------------- 2000 1999 1998 -------------- -------------- -------------- Weighted Average Fair Value per Option $1.57 $3.27 $7.24 Expected Volatility 20.00 - 20.01% 19.78 - 19.89% 30.83 - 41.79% Risk-Free Interest Rate 6.08 - 6.47% 5.25 - 5.78% 4.64 - 5.68% Dividend Yield 8.68 - 7.76% 5.32 - 6.43% 6.24 - 6.52% Expected Life 10 years 10 years 10 years
The weighted average remaining contract life for options outstanding as of December 31, 2000 was 6.18 years. Information relating to Director Options and Employee Options from December 31, 1997 through December 31, 2000 is as follows:
DIRECTOR OPTIONS EMPLOYEE OPTIONS --------------------------- -------------------------- OPTION PRICE OPTION PRICE OPTIONS PER SHARE (1) OPTIONS PER SHARE (1) ----------- ------------- ---------- ------------- SHARES UNDER OPTION AT DECEMBER 31, 1997 86,080 $ 24.12 1,247,597 $ 22.90 ----------- ------------- ---------- ------------- Granted -- N/A 385,000 30.40 CPI Options Assumed -- N/A 304,209 25.48 Exercised (8,000) 26.27 (38,149) 23.71 Forfeited (3,000) 29.31 (4,750) 25.25 ----------- ------------- ---------- ------------- SHARES UNDER OPTION AT DECEMBER 31, 1998 75,080 $ 24.11 1,893,907 $ 24.82 =========== ============= ========== ============= Granted 62,000 26.90 100,000 25.29 Exercised (5,000) 22.25 (77,988) 23.21 Forfeited -- N/A (58,253) 23.48 ----------- ------------- ---------- ------------- SHARES UNDER OPTION AT DECEMBER 31, 1999 132,080 $ 25.49 1,857,666 $ 24.95 =========== ============= ========== ============= Granted 24,000 26.03 726,750 23.41 Exercised (1,360) 24.63 (43,350) 23.44 Forfeited -- N/A (28,000) 23.41 ----------- ------------- ---------- ------------- SHARES UNDER OPTION AT DECEMBER 31, 2000 154,720 $ 25.67 2,513,066 $ 24.55 =========== ============= ========== ============= OPTIONS EXERCISABLE AT DECEMBER 31, 2000 130,720 $ 25.61 1,705,900 $ 24.77 =========== ============= ========== ============= EXERCISE PRICE RANGE $22.25-$29.31 $22.25-$32.38 ============= =============
(1) Represents the weighted average price when multiple prices exist. EXCHANGE RIGHTS Limited partners in the Operating Partnerships have the right to exchange all or any portion of their Paired Units for Paired 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 64,966,226 Paired Shares for possible issuance upon the exchange of Paired Units. 43 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 16% of their compensation, subject to certain limitations. Participants' salary deferrals are matched at specified percentages up to a total of 4%, and the plan provides annual contributions of 1.5% of eligible employees' compensation. Simon Group contributed $3,492, $3,189 and $2,581 to the plan in 2000, 1999 and 1998, respectively. 13. COMMITMENTS AND CONTINGENCIES LITIGATION TRIPLE FIVE OF MINNESOTA, INC., A MINNESOTA CORPORATION, V. MELVIN SIMON, ET. AL. On or about November 9, 1999, Triple Five of Minnesota, Inc. ("Triple Five") commenced an action in the District Court for the State of Minnesota, Fourth Judicial District, against, among others, Mall of America, certain members of the Simon family and entities allegedly controlled by such individuals, and Simon Group. Two transactions form the basis of the complaint: (i) the sale by Teachers Insurance and Annuity Association of America of one-half of its partnership interest in Mall of America Company and Minntertainment Company to the SPG Operating Partnership and related entities (the "Teachers Sale"); and (ii) a financing transaction involving a loan in the amount of $312,000 obtained from The Chase Manhattan Bank ("Chase") that is secured by a mortgage placed on Mall of America's assets (the "Chase Mortgage"). The complaint, which contains twelve counts, seeks remedies of damages, rescission, constructive trust, accounting, and specific performance. Although the complaint names all defendants in several counts, Simon Group is specifically identified as a defendant in connection with the Teachers Sale. The SPG Operating Partnership has agreed to indemnify Chase and other nonparties to the litigation that are related to the offering of certificates secured by the Chase Mortgage against, among other things, (i) any and all litigation expenses arising as a result of litigation or threatened litigation brought by Triple Five, or any of its owners or affiliates, against any person regarding the Chase Mortgage, the Teachers Sale, any securitization of the Chase Mortgage or any transaction related to the foregoing and (ii) any and all damages, awards, penalties or expenses payable to or on behalf of Triple Five (or payable to a third party as a result of such party's obligation to pay Triple Five) arising out of such litigation. These indemnity obligations do not extend to liabilities covered by title insurance. Simon Group believes that the Triple Five litigation is without merit and intends to defend the action vigorously. Simon Group believes that neither the Triple Five litigation nor any potential payments under the indemnity, if any, will have a material adverse effect on Simon Group. Given the early stage of the litigation it is not possible to provide an assurance of the ultimate outcome of the litigation or an estimate of the amount or range of potential loss, if any. 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 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 DeBartolo Realty Corporation ("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 asserted that the defendants' refusal to issue them approximately 542,000 shares of DRC common stock, which is equivalent to approximately 370,000 Paired Shares 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 plaintiffs and the defendants each filed motions for summary judgment. On October 31, 1997, the Court of Common Pleas entered a judgment in favor of the defendants granting their motion for summary judgment. The plaintiffs appealed this judgment to the Seventh District Court of Appeals in Ohio. On August 18, 1999, the District Court of Appeals reversed the summary judgement order in favor of the defendants entered by the Common Pleas Court and granted plaintiffs' cross motion for summary judgement, remanding the matter to the Common Pleas Court for the determination of plaintiffs' damages. The defendants petitioned the Ohio Supreme Court asking that they exercise their discretion to review and reverse the Appellate Court decision, but the Ohio Supreme court did not grant the petition for review. The case was remanded to the Court of Common Pleas of Mahoning 44 County, Ohio, to conduct discovery relevant to each plaintiff's damages and the counterclaims asserted by Simon Group. The Trial Court referred these matters to a Magistrate. Plaintiffs filed a Supplemental Motion for Summary Judgement on the question of damages. The Magistrate ruled on the counterclaims and found in Defendants' favor on one of them. On December 27, 2000, the Trial Court rendered judgment for the plaintiffs in the combined total amount of $12,000, which includes a set-off of approximately $2,000 with impact to two of the plaintiffs. Defendants have appealed this judgment and plaintiffs have cross-appealed. Those appeals are pending before the District Court of Appeals. Simon Group recorded a $12,000 loss in the third quarter of 1999 related to this litigation as an unusual item. ROEL VENTO ET AL V. TOM TAYLOR ET AL. An affiliate of Simon Group 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 was 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. Simon Group appealed the verdict and on May 6, 1999, the Thirteenth Judicial District (Corpus Christi) of the Texas Court of Appeals issued an opinion reducing the trial court verdict to $3,364 plus interest. Simon Group filed a petition for a writ of certiorari to the Texas Supreme Court requesting that they review and reverse the determination of the Appellate Court. The Texas Supreme Court granted certiorari and heard oral arguments on October 4, 2000. A decision is expected to be rendered during the second quarter of 2001. Management, based upon the advice of counsel, believes that the ultimate outcome of this action will not have a material adverse effect on Simon Group. Simon Group currently is not subject to any other material litigation other than routine litigation, claims and administrative proceedings arising in the ordinary course of business. On the basis of consultation with counsel, management believes that such routine litigation, claims and administrative proceedings will not have a material adverse impact on Simon Group's financial position or its results of operations. LEASE COMMITMENTS As of December 31, 2000, a total of 34 of the consolidated Properties are subject to ground leases. The termination dates of these ground leases range from 2002 to 2090. 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, 2000, 1999 and 1998, was $13,654, $13,365 and $13,618, 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: 2001 $ 7,845 2002 7,984 2003 7,906 2004 7,439 2005 7,133 Thereafter 489,178 ---------- $ 527,485 ==========
LONG-TERM CONTRACT On September 30, 1999, Simon Group entered into a five year contract with Enron Energy Services for Enron to supply or manage all of the energy commodity requirements throughout Simon Group's portfolio. The contract includes electricity, natural gas and maintenance of energy conversion assets and electrical systems including lighting. Simon Group has committed to pay Enron a fixed percentage of the Portfolio's historical energy costs for these services over the term of the agreement. 45 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 Until April 15, 1999, when the Three Dag Hammarskjold building was sold, the SRC Operating Partnership received a substantial amount of its rental income from the SPG Operating Partnership for office space under lease. During the period prior to the CPI Merger, such rent was received from CPI. In preparation for the CPI Merger, on July 31, 1998, CPI, with the assistance of the 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-party affiliates each received a $2,500 fee from CPI in connection with the sale. 15. NEW ACCOUNTING PRONOUNCEMENT On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June of 2000 by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities." These statements, which are effective for Simon Group on January 1, 2001, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. These statements require that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or comprehensive income, depending on whether the derivative is designated and effective as part of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in other comprehensive income must be reclassified as earnings in the period in which earnings are affected by the underlying hedged item, and the ineffective portion of all hedges must be recognized in earnings in the current period. These new standards will result in additional volatility in reported assets, liabilities, earnings and other comprehensive income. SFAS No. 133 requires that as of the date of initial adoption, the difference between the fair value of the derivative instruments to be recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB 20 "Accounting Changes." On January 1, 2001, Simon Group recorded the effect of the transition to SFAS No. 133 which resulted in an immaterial impact to the results of operations and the financial position of Simon Group. SFAS No. 133 further requires that the fair value and effectiveness of each hedging instrument must be measured quarterly. The result of each measurement could result in fluctuations in reported assets, liabilities, other comprehensive income and earnings as these changes in fair value and effectiveness are recorded to the financial statements. Simon Group anticipates, on an ongoing basis, the fluctuations to the aforementioned areas will be immaterial to the financial statements taken as a whole. On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), which addressed certain revenue recognition policies, including the accounting for overage rent by a landlord. SAB 101 requires overage rent to be recognized as revenue only when each tenant's sales exceeds its sales threshold. Simon Group previously recognized overage rent based on reported and estimated sales through the end of the period, less the applicable prorated base sales amount. Simon Group adopted SAB 101 effective January 1, 2000 and recorded a loss from the cumulative effect of an accounting change of $12.3 million in the first quarter of 2000, which includes Simon Groups $1.8 million share from unconsolidated entities. 46 16. QUARTERLY FINANCIAL DATA (UNAUDITED) Combined summarized quarterly 2000 and 1999 data is as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 2000 ------------------------------------ Total revenue $ 477,851 $ 487,659 $ 493,926 $561,315 Operating income 207,144 216,302 219,413 257,709 Income before extraordinary items and cumulative effect of accounting 71,136 75,912 77,434 122,937 change Net income available to common shareholders 28,243 41,012 42,025 75,248 Income before extraordinary items and cumulative effect of accounting $ 0.21 $ 0.24 $ 0.24 $0.44 change per Paired Share- Basic and Diluted Net income per Paired Share - Basic $ 0.16 $ 0.24 $ 0.24 $0.44 and Diluted Weighted average Paired Shares outstanding 173,222,954 173,672,074 172,759,374 171,934,468 Diluted weighted average Paired Shares outstanding 173,268,218 173,815,090 172,862,078 172,037,113 1999 ------------------------------------ Total revenue $ 446,093 $ 454,006 $ 471,171 $521,433 Operating income 196,898 206,643 214,782 235,922 Income before unusual and extraordinary items 67,388 67,338 87,125 94,249 Net income available to common shareholders 34,954 38,462 42,435 51,463 Income before extraordinary items per Paired Share - Basic and Diluted $ 0.21 $ 0.22 $ 0.25 $0.32 Net income per Paired Share - Basic $ 0.21 $ 0.22 $ 0.24 $0.30 and Diluted Weighted average Paired Shares outstanding 168,986,602 173,342,399 173,471,352 173,167,054 Diluted weighted average Paired Shares outstanding 169,168,474 173,609,740 173,542,183 173,182,994