-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EPLh3wyMzM86THrrWiFXVfJftTlwRrM1byijBkJXqkF1pEyJcFg3TvuG2xY/hhvA vcDQ6Ru3MBHKgthEP27Xwg== 0000950137-02-004394.txt : 20020813 0000950137-02-004394.hdr.sgml : 20020813 20020813161812 ACCESSION NUMBER: 0000950137-02-004394 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL GROWTH PROPERTIES INC CENTRAL INDEX KEY: 0000895648 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 421283895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11656 FILM NUMBER: 02729951 BUSINESS ADDRESS: STREET 1: 110 N WACKER DRIVE STREET 2: STE 3100 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3129605000 MAIL ADDRESS: STREET 1: 110 N WACKER DRIVE STREET 2: STE 3100 CITY: CHICAGO STATE: IL ZIP: 60606 10-Q 1 c71196e10vq.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission file number 1-11656 GENERAL GROWTH PROPERTIES, INC. ------------------------------- (Exact name of registrant as specified in its charter) Delaware 42-1283895 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 110 N. Wacker Dr., Chicago, IL 60606 ------------------------------------ (Address of principal executive offices, Zip Code) (312) 960-5000 -------------- (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The number of shares of Common Stock, $.10 par value, outstanding on August 13, 2002 was 62,227,225. GENERAL GROWTH PROPERTIES, INC. INDEX
PAGE NUMBER ------ PART I FINANCIAL INFORMATION Item 1: Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001............................................ 3 Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2002 and 2001........................... 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001..................................... 5 Notes to Consolidated Financial Statements........................................... 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 22 Liquidity and Capital Resources of the Company....................................... 25 Item 3: Quantitative and Qualitative Disclosures about Market Risk....................... 29 PART II OTHER INFORMATION. Item 4: Submission of Matters to a Vote of Security Holders.............................. 31 Item 6: Exhibits and Reports on Form 8-K................................................. 31 SIGNATURE................................................................................. 32
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2001 (UNAUDITED) (Dollars in thousands, except for per share and per unit amounts)
ASSETS JUNE 30, 2002 DECEMBER 31, 2001 ------------- ----------------- Investment in real estate: Land $ 810,848 $ 649,312 Buildings and equipment 4,541,096 4,383,358 Less accumulated depreciation (700,526) (625,544) Developments in progress 80,017 57,436 ----------- ----------- Net property and equipment 4,731,435 4,464,562 Investment in and loans from Unconsolidated Real Estate Affiliates 609,438 617,677 ----------- ----------- Net investment in real estate 5,340,873 5,082,239 Cash and cash equivalents 79,166 160,755 Marketable securities -- 155,103 Tenant accounts receivable, net 97,856 93,043 Deferred expenses, net 103,912 96,656 Investment in and note receivable from General Growth Management, Inc. -- -- Prepaid expenses and other assets 35,485 59,011 ----------- ----------- $ 5,657,292 $ 5,646,807 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes and other debt payable $ 3,360,655 $ 3,398,207 Distributions payable 63,683 62,368 Network discontinuance reserve 4,582 5,161 Accounts payable and accrued expenses 100,275 104,826 ----------- ----------- 3,529,195 3,570,562 Minority interests: Preferred Units 240,000 175,000 Common Units 368,215 380,359 ----------- ----------- 608,215 555,359 Commitments and contingencies -- -- Preferred stock: $100 par value; 5,000,000 shares authorized; 345,000 designated as PIERS (Note 1) which are convertible and carry a $1,000 liquidation value, 337,500 of which were issued and outstanding at June 30, 2002 and December 31, 2001 337,500 337,500 Stockholders' Equity: Common stock: $.10 par value; 210,000,000 shares authorized; 62,214,647 and 61,923,932 shares issued and outstanding as of June 30, 2002 and December 31, 2001, respectively 6,221 6,192 Additional paid-in capital 1,538,654 1,523,213 Retained earnings (accumulated deficit) (344,526) (328,349) Notes receivable-common stock purchase (8,971) (19,890) Accumulated other comprehensive income (loss) (8,996) 2,220 ----------- ----------- Total stockholders' equity 1,182,382 1,183,386 ----------- ----------- $ 5,657,292 $ 5,646,807 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 of 34 GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) (Dollars in thousands, except for per share and per unit amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 --------- --------- --------- --------- Revenues: Minimum rents $ 125,087 $ 108,887 $ 244,659 $ 220,947 Tenant recoveries 57,645 54,790 114,780 109,940 Overage rents 1,685 3,531 7,117 7,668 Fees 22,684 19,784 41,731 38,125 Other 3,489 2,550 6,442 4,832 --------- --------- --------- --------- Total revenues 210,590 189,542 414,729 381,512 Expenses: Real estate taxes 13,718 13,340 27,534 27,293 Property operating 64,833 56,301 128,199 112,705 Provision for doubtful accounts 896 809 2,897 1,984 General and administrative 1,791 1,827 3,032 3,344 Depreciation and amortization 40,134 36,768 78,564 69,894 Network discontinuance costs -- 65,000 -- 65,000 --------- --------- --------- --------- Total operating expenses 121,372 174,045 240,226 280,220 --------- --------- --------- --------- Operating income 89,218 15,497 174,503 101,292 Interest income 1,220 1,030 2,316 2,364 Interest expense (48,704) (52,280) (96,859) (107,542) (Income) loss allocated to minority interests (15,983) 5,340 (29,825) (6,285) Equity in income of unconsolidated affiliates 15,062 12,783 28,245 22,612 --------- --------- --------- --------- Income (loss) before extraordinary items and cumulative effect of accounting change 40,813 (17,630) 78,380 12,441 Extraordinary items -- (1,011) (32) (1,011) Cumulative effect of accounting change -- -- -- (3,334) --------- --------- --------- --------- Net income (loss) 40,813 (18,641) 78,348 8,096 Convertible Preferred Stock Dividends (6,117) (6,117) (12,234) (12,234) --------- --------- --------- --------- Net income (loss) available to common stockholders $ 34,696 $ (24,758) $ 66,114 $ (4,138) ========= ========= ========= ========= Earnings (loss) before extraordinary items and cumulative effect of accounting change per share-basic $ 0.56 $ (0.45) $ 1.07 $ -- ========= ========= ========= ========= Earnings (loss) before extraordinary items and cumulative effect of accounting change per share-diluted $ 0.56 $ (0.45) $ 1.06 $ -- ========= ========= ========= ========= Earnings (loss) per share-basic $ 0.56 $ (0.47) $ 1.07 $ (0.08) ========= ========= ========= ========= Earnings (loss) per share-diluted $ 0.56 $ (0.47) $ 1.06 $ (0.08) ========= ========= ========= ========= Distributions declared per share $ 0.65 $ 0.53 $ 1.30 $ 1.06 ========= ========= ========= ========= Net income (loss) $ 40,813 $ (18,641) $ 78,348 $ 8,096 Other comprehensive income (loss): Net unrealized losses on financial instruments, net of minority interest (16,807) -- (11,385) -- Equity in unrealized gains on available-for-sale securities of unconsolidated affiliate, net of minority interest -- 873 169 1,140 --------- --------- --------- --------- Comprehensive income (loss) $ 24,006 $ (17,768) $ 67,132 $ 9,236 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements 4 of 34 GENERAL GROWTH PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 and 2001 (UNAUDITED) (Dollars in thousands, except for per share and per unit amounts)
SIX MONTHS ENDED JUNE 30, 2002 2001 --------- --------- Cash flows from operating activities: Net Income $ 78,348 $ 8,096 Adjustments to reconcile net income to net cash provided by operating activities: Minority interests 29,825 6,285 Extraordinary items 32 1,011 Cumulative effect of accounting change -- 3,334 Equity in income of unconsolidated affiliates (28,245) (22,612) Provision for doubtful accounts 2,897 1,984 Income distributions received from unconsolidated affiliates 27,461 10,998 Depreciation 74,982 62,858 Amortization 5,395 11,627 Net Changes: Tenant accounts receivable (7,126) 22,178 Prepaid expenses and other assets 9,794 319 Increase in deferred expenses (10,593) (15,906) Accounts payable-Network and Broadband System Reserve (579) 9,634 Accounts payable and accrued expenses (7,629) (50,382) --------- --------- Net cash provided by (used in) operating activities 174,562 49,424 --------- --------- Cash flows from investing activities: Acquisition/development of real estate and improvements and additions to properties (290,151) (93,731) Network and Broadband System additions -- (31,320) Increase in investments in unconsolidated affiliates (25,522) (13,285) Distributions received from unconsolidated affiliates in excess of income 12,189 28,998 Promissory note receivable -- (20,000) Proceeds from repayment of notes receivable for common stock purchases 15,162 -- Loans from unconsolidated affiliates 23,484 -- Proceeds from sale of investments in marketable securities 155,103 -- --------- --------- Net cash provided by (used in) investing activities (109,735) (129,338) --------- --------- Cash flows from financing activities: Cash distributions paid to common stockholders (80,612) (55,522) Cash distributions paid to minority interests (25,444) (20,758) Cash distributions paid to holders of RPUs and CPUs (7,831) (7,831) Payment of dividends on PIERS (12,234) (12,234) Proceeds from sale of common stock, net of issuance costs 7,250 1,444 Proceeds from issuance of RPUs and CPUs, net of issuance costs 63,495 -- Proceeds from issuance of mortgage notes and other debt payable -- 298,342 Principal payments on mortgage notes and other debt payable (90,844) (100,123) Increase in deferred expenses (196) (2,872) --------- --------- Net cash provided by (used in) financing activities (146,416) 100,446 --------- --------- Net change in cash and cash equivalents (81,589) 20,532 Cash and cash equivalents at beginning of period 160,755 27,229 --------- --------- Cash and cash equivalents at end of period $ 79,166 $ 47,761 ========= ========= Supplemental disclosure of cash flow information Interest paid $ 98,227 $ 108,605 ========= ========= Interest capitalized $ 3,088 $ 13,143 ========= ========= Non-cash investing and financing activities: Common stock issued in exchange for Operating Partnership Units $ -- $ 575 Acquisition of GGMI -- 66,079 Acquisition of Victoria Ward assets by assumption of long-term debt 52,636 -- Notes receivable issued for exercised stock options 4,243 2,229 Acquisition of property in exchange for tenant note receivable -- 8,207
The accompanying notes are an integral part of these consolidated financial statements. 5 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 1 ORGANIZATION Readers of this quarterly report should refer to the Company's audited financial statements for the year ended December 31, 2001 which are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (Commission File No. 1-11656), as certain footnote disclosures which would substantially duplicate those contained in the 2001 annual audited financial statements have been omitted from this report. Capitalized terms used, but not defined in, this quarterly report have the same meanings as in the Company's 2001 Annual Report on Form 10-K. GENERAL General Growth Properties, Inc., a Delaware corporation ("General Growth"), was formed in 1986 to own and operate regional mall shopping centers. All references to the "Company" in these Notes to Consolidated Financial Statements include General Growth and those entities owned or controlled by General Growth (including the Operating Partnership and the LLC as described below), unless the context indicates otherwise. Proceeds from General Growth's April 15, 1993 initial public offering of common stock (the "Common Stock") were used to acquire a majority interest in GGP Limited Partnership (the "Operating Partnership"), which was formed to succeed to substantially all of the interests in regional mall general partnerships owned and controlled by the Company and its original stockholders. The Company conducts substantially all of its business through the Operating Partnership, which commenced operations on April 15, 1993. During July 1999, General Growth completed a public offering of 10,000,000 shares of Common Stock and received net proceeds of approximately $330,296. During December 2001, General Growth completed a public offering of 9,200,000 shares of Common Stock (the "2001 Offering") and received net proceeds of approximately $345,000. As of June 30, 2002, the Company owned 100% of fifty-four regional shopping centers and 100% of the Victoria Ward Assets (as defined in Note 2) (collectively, the "Wholly-Owned Centers") and 100% of the common stock of General Growth Management, Inc. ("GGMI"). The Company also owned as of such date 50% of the common stock of GGP/Homart, Inc. ("GGP/Homart"), 50% of the membership interests in GGP/Homart II L.L.C. ("GGP/Homart II"), 51% of the common stock of GGP Ivanhoe, Inc. ("GGP Ivanhoe"), 51% of the common stock of GGP Ivanhoe III, Inc. ("GGP Ivanhoe III"), 50% of Quail Springs Mall and Town East Mall and a 50% general partnership interest in Westlake Retail Associates, Ltd. ("Circle T") (collectively, the "Unconsolidated Real Estate Affiliates"). As of such date, GGP/Homart owned interests in twenty-three shopping centers, GGP/Homart II owned interests in eight shopping centers, GGP Ivanhoe owned 100% of two shopping centers, and GGP Ivanhoe III owned 100% of eight shopping centers. These centers, together with Quail Springs Mall and Town East Mall, comprise the "Unconsolidated Centers". Circle T is currently developing a regional mall in Dallas, Texas and as it is not yet operational has been excluded from the definition of the Unconsolidated Centers. Together, the Wholly-Owned Centers and the Unconsolidated Centers comprise the "Company Portfolio" or the "Portfolio Centers". Effective January 1, 2000, General Growth established a Dividend Reinvestment and Stock Purchase Plan ("DRSP"). General Growth has reserved for issuance up to 1,000,000 shares of Common Stock for issuance under the DRSP. The DRSP will, in general, allow participants in the plan to make purchases of Common Stock from dividends received or additional cash investments. Although the purchase price of the Common Stock will be determined by the current market price, the purchases will be made without fees or commissions. General Growth has and will satisfy DRSP Common Stock purchase needs through the issuance of new shares of Common Stock or by repurchases of currently outstanding Common Stock. As of June 30, 2002, an aggregate of 68,492 shares of Common Stock had been issued under the DRSP. 6 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) During May 2000, the Operating Partnership formed GGPLP L.L.C., a Delaware limited liability company ("the LLC"), by contributing its interest in a portfolio of 44 Wholly-Owned Centers to the LLC in exchange for all of the common units of membership interest in the LLC. On May 25, 2000, a total of 700,000 redeemable preferred units of membership interest in the LLC (the "RPUs") were issued to an institutional investor by the LLC (the "2000 RPUs"). During April 2002, an additional 240,000 RPUs were issued by the LLC to an affiliate of the same institutional investor (the "2002 RPUs") yielding net proceeds of approximately $58,365 which are expected to be used for various upcoming development and acquisition needs. Holders of the 2000 RPUs and 2002 RPUs are entitled to receive cumulative preferential cash distributions per RPU at a per annum rate of 8.95% of the $250 liquidation preference thereof (or $5.59375 per quarter) prior to any distributions by the LLC to the Operating Partnership. Subject to certain limitations, the RPUs may be redeemed in cash by the LLC for the liquidation preference amount plus accrued and unpaid distributions and may be exchanged by the holders of the RPUs for an equivalent amount of redeemable preferred stock of General Growth. Such preferred stock provides for an equivalent 8.95% annual preferred distribution and is redeemable at the option of General Growth for cash equal to the liquidation preference amount plus accrued and unpaid distributions. The redemption right may be exercised at any time on or after May 25, 2005 with respect to the 2000 RPUs and April 23, 2007 with respect to the 2002 RPUs and the exchange right generally may be exercised at any time on or after May 25, 2010 with respect to the 2000 RPUs and April 23, 2012 with respect to the 2002 RPUs. The RPUs outstanding at June 30, 2002 and December 31, 2001 have been reflected in the accompanying consolidated financial statements as a component of minority interest at the then current total liquidation preference amount of $235,000 and $175,000, respectively. During May 2002, 20,000 8.25% cumulative preferred units (the "CPUs") were issued by the LLC to an independent third-party investor yielding $5,000. The holders of these CPUs are entitled to receive cumulative preferential cash distributions per CPU at a per annum rate of 8.25% of the $250 liquidation preference thereof (or $5.15625 per quarter), prior to any distributions by the LLC to the Operating Partnership. In addition and subject to certain conditions, the holders of the CPUs may, on or after June 1, 2012, elect to exchange each CPU for shares of Common Stock with a value as of the exchange closing date equal to the $250 per unit liquidation preference of such CPU plus any accrued and unpaid distributions. However, after receipt of such exchange election, General Growth may elect to fulfill such an exchange election in whole or in part in cash. The CPUs outstanding at June 30, 2002 have been included in the accompanying consolidated financial statements as a component of minority interest at the then current total liquidation preference amount of $5,000. As of June 30, 2002, General Growth owned an approximate 76% general partnership interest in the Operating Partnership (excluding its preferred units of partnership interest as discussed below). The remaining approximate 24% minority interest in the Operating Partnership is held by limited partners that include trusts for the benefit of the families of the original stockholders who initially owned and controlled the Company and subsequent contributors of properties to the Company. These minority interests are represented by common units of limited partnership interest in the Operating Partnership (the "Units"). The Units can be redeemed at the option of the holders for cash or, at General Growth's election with certain restrictions, for shares of Common Stock on a one-for-one basis. The holders of the Units also share equally with General Growth's common stockholders on a per share basis in any distributions by the Operating Partnership on the basis that one Unit is equivalent to one share of Common Stock. General Growth has issued 13,500,000 depositary shares, each representing 1/40 of a share of 7.25% Preferred Income Equity Redeemable Stock, Series A ("PIERS"), or a total of 337,500 PIERS. The PIERS are reflected on the accompanying consolidated balance sheets at their $1,000 per share liquidation or redemption value. In order to enable General Growth to comply with its obligations in respect to the PIERS, General Growth owns preferred units of limited partnership interest in the Operating Partnership (the "Preferred Units") which have rights, preferences and other privileges, including distribution, liquidation, conversion and redemption rights, that mirror those of the PIERS. Accordingly, the Operating Partnership is required to make 7 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) all required distributions on the Preferred Units prior to any distribution of cash or assets to the holders of the Units. At June 30, 2002, 100% of the Preferred Units (337,500) were owned by General Growth. On January 1, 2001, the Company acquired for nominal cash consideration 100% of the common stock of GGMI. This transaction was accounted for as a purchase. For 2001 and subsequent years, the Company has elected that GGMI be treated as a taxable REIT subsidiary as permitted under the Tax Relief Extension Act of 1999. In connection with the acquisition, the GGMI preferred stock owned by the Company was cancelled and approximately $40,000 of the outstanding loans owed by GGMI to the Company were contributed to the capital of GGMI. In addition, the Company and GGMI concurrently terminated the management contracts for the Wholly-Owned Centers as the management activities would thereafter be performed directly by the Company. GGMI has continued to manage, lease, and perform various other services for the Unconsolidated Centers and other properties owned by unaffiliated third parties. Fees recognized by the Company in the three and six months ended June 30, 2002 and 2001 from its Unconsolidated Real Estate Affiliates for services performed for the Unconsolidated Centers were $15,116, $29,091, $13,926 and $27,682, respectively. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and the Operating Partnership consisting of the Wholly-Owned Centers (including those owned by the LLC), GGMI and the unconsolidated investments in GGP/Homart, GGP/Homart II, GGP Ivanhoe, GGP Ivanhoe III, Circle T, Quail Springs Mall and Town East Mall. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables and deferred taxes and amortization periods of deferred costs and intangibles. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position of the Company as of June 30, 2002 and the results of operations for the three and six months ended June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and 2001 have been included. The results for the interim periods ended June 30, 2002 and 2001 are not necessarily indicative of the results to be obtained for the full fiscal year. Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation. EARNINGS PER SHARE ("EPS") Basic per share amounts are based on the weighted average of common shares outstanding of 62,058,449 for 2002 and 52,389,099 for 2001. Diluted per share amounts are based on the total number of weighted average common shares and dilutive securities (stock options) outstanding of 62,192,722 for 2002 and 52,471,502 for 2001. However, certain options outstanding were not included in the computation of diluted earnings per share either because the exercise price of the stock options was higher than the average market price of the Common Stock for the applicable periods and therefore, the effect would be anti-dilutive or because the conditions which must be satisfied prior to the issuance of any such shares were not achieved during the applicable periods. The effect of the issuance of the PIERS is anti-dilutive with respect to the Company's calculation of diluted earnings per share for the three and six months ended June 30, 2002 and 2001 and therefore has been excluded. The outstanding Units have also been excluded from the Company's calculation of diluted earnings per share as 8 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) there would be no net effect on the reported EPS amounts since the minority interests' share of income would also be added back to net income. The following are the reconciliations of the numerators and denominators of the basic and diluted EPS.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 ------- ------- -------- ------ Numerators: Income (loss) before extraordinary items and cumulative effect of accounting change $ 40,813 $(17,630) $ 78,380 $ 12,441 Dividends on PIERS (6,117) (6,117) (12,234) (12,234) ------- ------- -------- ------ Income (loss) available to common stockholders before extraordinary items and cumulative effect of accounting change - for basic and diluted EPS 34,696 $(23,747) 66,146 207 Extraordinary items -- (1,011) (32) (1,011) Cumulative effect of accounting change -- -- -- (3,334) ------- ------- -------- ------ Net income (loss) available to common stockholders - for basic and diluted EPS $34,696 $(24,758) $ 66,114 $ (4,138) ======= ======= ======== ====== Denominators: Weighted average common shares outstanding (in thousands) - for basic EPS 62,137 52,413 62,058 52,389 Effect of dilutive securities - options 156 95 135 83 ------- ------- -------- ------ Weighted average common shares outstanding in thousands) - for diluted EPS 62,293 52,508 62,193 52,472 ======= ======= ======== ======
NOTES RECEIVABLE - OFFICERS As of December 31, 2001, the Company made loans aggregating $19,890 in conjunction with the exercise by certain officers of options to purchase Common Stock of the Company. Such advances, represented by full recourse promissory notes issued by such officers to the Company, were collateralized by the Common Stock purchased. During 2002, additional advances of $4,243 were made to officers in connection with the exercise of options to acquire approximately 135,000 shares of Common Stock. As of April 30, 2002, the Board of Directors of the Company decided to terminate the availability of loans to officers to exercise such options. In conjunction with this decision, the Company and the officers restructured the terms of the promissory notes, including the approximately $2,823 previously advanced in the form of income tax withholding payments made by the Company on behalf of such officers. Each of the officers repaid no less than 60% of the principal and 100% of the interest due under such officer's note as of April 30, 2002 and the remaining amounts, approximately $10,141 as of April 30, 2002, are represented by amended and restated promissory notes. These amended and restated, fully recourse notes are payable in monthly installments of principal and interest (at a market rate which varies monthly computed at LIBOR (1.84% at June 30, 2002) plus 125 basis points per annum) until fully repaid in May 2009 (or within 90 days of the officer's separation from the Company, if earlier). As of June 30, 2002, the current outstanding balance under the promissory notes was $10,020, including approximately $1,049 relating to income tax withholding payments which have been reflected in prepaid expenses and other assets. 9 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) REVENUE RECOGNITION Minimum rent revenues are recognized on a straight-line basis over the term of the related leases. As of June 30, 2002, approximately $55,168 has been recognized as straight-line rents receivable (representing the current net cumulative rents recognized prior to when billed and collectible as provided by the terms of the leases), all of which is included in tenant accounts receivable in the accompanying consolidated financial statements. In addition, amounts collected from tenants to allow the termination of their leases have been included in minimum rents. Such termination income was approximately $3,924 and $3,211, respectively, for the six months ended June 30, 2002 and 2001. Overage rents are recognized during the period for which tenant sales revenues exceed contractual tenant lease thresholds. Recoveries from tenants for taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable costs are incurred. The Company provides an allowance for doubtful accounts against the portion of accounts receivable which is estimated to be uncollectible. Such allowances are reviewed periodically based upon the recovery experience of the Company. COMPREHENSIVE INCOME Comprehensive income is a more inclusive financial reporting methodology that encompasses net income and all other changes in equity except those resulting from investments by and distributions to equity holders. Included in comprehensive income, but not net income, are unrealized gains or losses on marketable securities classified as available-for-sale and unrealized gains or losses on financial instruments designated as cash flow hedges (Note 4). In addition, one of the Company's unconsolidated affiliates received common stock of a large, publicly traded real estate company as part of a 1998 transaction. During 2001, portions of the holdings of such stocks were sold and the cumulative previously unrealized losses for the stock sold were realized. Cumulative net unrealized losses on such remaining securities through December 31, 2001 were $169, net of minority interest and were reflected as accumulated equity in other comprehensive loss of unconsolidated affiliate. For the six months ended June 30, 2001 the Company increased its carrying amount for its investment in such unconsolidated affiliate by $1,566 and reflected $873 and $1,140, respectively for the three and six months ended June 30, 2001, as other comprehensive income, net of minority interest of $326 and $426 respectively, as its equity in such unconsolidated affiliate's unrealized gains on such securities. During the three months ended March 31, 2002, all remaining holdings of such stock were sold and the remaining cumulative unrealized losses pertaining to such stock holdings were realized. BUSINESS SEGMENT INFORMATION The primary business of General Growth and its consolidated affiliates is owning and operating shopping centers. General Growth evaluates operating results and allocates resources on a property-by-property basis and does not distinguish or evaluate its consolidated operations on a geographic basis. Accordingly, General Growth has determined it has a single reportable segment. Further, all material operations are within the United States and no customer or tenant comprises more than 10% of consolidated revenues. STOCK INCENTIVE PLANS General Growth has incentive stock plans pursuant to which certain stock incentive awards in the form of threshold-vesting stock options ("TSOs") are granted to employees. The exercise price of the TSOs to be granted to a participant will be the Fair Market Value ("FMV") of a share of Common Stock on the date the TSO is granted. The threshold price (the "Threshold Price") which must be achieved in order for the TSO to vest will be determined by multiplying the FMV on the date of grant by the Estimated Annual Growth Rate (currently set at 7%) and compounding the product over a five-year period. Shares of the Common Stock must achieve and sustain the Threshold Price for at least 20 consecutive trading days at any time over the five years following 10 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) the date of grant in order for the TSO to vest. All TSOs granted will have a term of 10 years but must vest within 5 years of the grant date in order to avoid forfeiture. The following is a summary of the TSOs that have been awarded as of June 30, 2002.
TSO GRANT YEAR 2002 2001 2000 1999 -------- -------- -------- -------- Exercise price $ 40.74 $ 34.73 $ 29.97 $ 31.69 Threshold Vesting Stock Price $ 57.13 $ 48.70 $ 42.03 $ 44.44 Original Grant Shares 259,675 329,996 304,349 313,964 Forfeited at June 30, 2002 (17,252) (43,251) (70,142) (93,995) Vested and exchanged for cash at June 30, 2002 -- -- (169,398) (106,643) Vested and exercised at June 30, 2002 -- -- (29,347) (36,530) -------- -------- -------- -------- TSOs outstanding at June 30, 2002 242,423 286,745 35,462 76,796 ======== ======== ======== ========
On March 22, 2002, the then remaining 234,507 TSOs that were granted in 2000 vested. In addition, on March 25, 2002 the Company extended a limited opportunity to employees with vested TSOs to exchange such options directly for cash (computed as the net proceeds the employee would have received had he or she exercised the options and then immediately sold the resulting stock). Accordingly, additional compensation expense of approximately $3,355 was recognized for the three months ended March 31, 2002. At April 6, 2002, the expiration date of the exchange opportunity, an aggregate of 165,256 TSOs had been exchanged for cash, representing total payments of approximately $2,330 and an aggregate of 5,454 TSOs had been exercised. Additionally, on April 29, 2002, the then remaining 219,969 TSOs granted in 1999 vested and therefore, in May 2002, the Company extended a similar limited exchange opportunity to employees with previously vested TSOs. As of the expiration of this exchange opportunity (May 10, 2002), an aggregate of 110,785 additional TSOs were exchanged for cash, representing payments of approximately $1,632. As of June 30, 2002 an additional 60,423 TSOs had been exercised. As a result of the additional vesting of the 1999 TSOs and the additional exchange opportunities, the Company has recorded an additional compensation expense of approximately $3,745 for the three months ended June 30, 2002. During the second quarter of 2002, the Company elected to adopt the fair value based employee stock-based compensation expense recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") prospectively. The Company previously applied the intrinsic value based expense recognition provisions set forth in APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). SFAS 123 states that the adoption of the fair value based method is a change to a preferable method of accounting. The adoption of the fair value based method decreased net income by $6 for the three-month and $22 for the six-month periods ended June 30, 2002, respectively (less than $0.01 per share for such periods). Had the Company applied SFAS 123 for all periods presented, the net earnings (loss) for the three-month and six-month periods ended June 30, 2001 would have been ($18,724) (($0.45) per share) and $7,927 ($0.08 per share), respectively, rather than the ($18,641) and $8,096 originally reported. Employee stock-based compensation expense for the three and six-month periods ended June 30, 2002 determined using the fair value based method applied prospectively is not necessarily indicative of future expense amounts when the fair value based method will apply to all options outstanding, as nonvested awards issued to employees prior to January 1, 2002 were and will continue to be accounted for using the intrinsic value based provisions of APB 25. 11 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 2 PROPERTY ACQUISITIONS AND DEVELOPMENTS Subsequent to June 30, 2002, the Company has entered into a series of related contracts to purchase three enclosed regional malls. Although the Company is prepared to purchase 100% of the three malls, it is currently discussing the formation of a new 50/50 joint venture (the "Joint Venture") with an institutional investor (the "Institutional Investor"). If completed, the Joint Venture would own the aforementioned three malls as well as another enclosed regional mall that is currently 100% owned by the Institutional Investor. Accordingly, the Company will either acquire 100% of three malls or a 50% joint venture equity interest in the same three malls and a 50% joint venture equity interest in another mall. As of the date of this report, Company management believes that the most likely outcome will be the formation of the Joint Venture. If completed, the Joint Venture would own and operate four malls with an initial value of approximately $635,000. Joint Venture debt would include approximately $75,000 of existing long term debt to be assumed at closing and approximately $337,000 of new acquisition debt. The Company anticipates obtaining additional financing (currently expected to be two new loans comprising approximately $150,000 in the aggregate) related to currently unencumbered real estate assets to fund the Company's portion of the acquisition cost of the new malls that is not covered by assumed debt and new direct property level acquisition loans. If the 50/50 Joint Venture discussions do not lead to a binding agreement, the Company will acquire 100% of the three malls that it is currently committed to purchase. It is now anticipated that either the 50/50 Joint Venture for four malls or the 100% acquisition of three malls will occur near the end of August, 2002 or in early September, 2002. Subsequent to June 30, 2002, the Company also entered into two separate contracts in connection with two addition potential acquisitions with total aggregate consideration in the range of $115,000 to $120,000. Both contracts are subject to the satisfactory completion of due diligence and, as such, the Company is not currently committed to make either acquisition and in fact may not complete either one or may complete only one acquisition. It is currently anticipated that the Company will determine whether or not to complete either acquisition by the end of September, 2002. On August 5, 2002 the Operating Partnership acquired from GGP/Homart, the Prince Kuhio Plaza in Hilo, Hawaii for approximately $39,000. Prince Kuhio Plaza, which contains approximately 504,000 square feet of gross leaseable area, was acquired by the assumption by the Operating Partnership of the allocated share of the GGP MPTC financing (Note 4) pertaining to Prince Kuhio Plaza (approximately $24,000) and the payment to GGP/Homart of $7,500 in cash and $7,500 in the form of a promissory note. Immediately following the acquisition, GGP/Homart paid a dividend of $15,000 to its two co-investors, paid in the form of $7,500 in cash to NYSCRF and the $7,500 promissory note to the Operating Partnership. Upon receipt of the promissory note as a dividend, the Operating Partnership caused the promissory note to GGP/Homart to be cancelled. On July 10, 2002, the Company acquired JP Realty, Inc. ("JP Realty"), a publicly held real estate investment trust, and its operating partnership subsidiary, Price Development Company, Limited Partnership ("PDC"). The total acquisition price was approximately $1,100,000 which included the assumption of approximately $460,000 in existing debt and approximately $116,000 of existing preferred operating units. Pursuant to the terms of the agreement, the outstanding shares of JP Realty common stock were converted into $26.10 per share of cash (approximately $431,470). Holders of common units of limited partnership interest in PDC were entitled to receive $26.10 per unit in cash or, at the election of the holder, .522 8.5% Series B Cumulative Preferred Units of limited partnership interest of the Operating Partnership (the "Series B Units") (convertible into common units of limited partnership interest of the Operating Partnership based on a conversion price of $50 per unit). Based upon the elections of such holders, approximately 1,426,393 Series B Units were issued and the holders of the remaining common units of limited partnership interest of PDC received approximately $23,600 in cash. JP Realty owned or had an interest in 51 properties, including 18 enclosed regional mall centers, 26 anchored community centers, one free-standing retail property and 6 mixed-use commercial/business properties, containing an aggregate of over 15.2 million square feet of GLA in 10 western states. The cash portion of the acquisition price was funded from the net proceeds of certain new mortgage loans, a new $350,000 acquisition loan, and available cash and cash equivalents. The new acquisition loan bears interest at a rate of per annum of LIBOR plus 150 basis points, provides for periodic principal payments (including from certain refinancing proceeds) and matures in July 2003 (Note 4). On May 28, 2002, the Company acquired the stock of Victoria Ward, Limited, a privately held real estate corporation. The total acquisition price was approximately $250,000, including the assumption of approximately $50,000 of existing debt, substantially all of which was repaid immediately following the closing. The $250,000 total cash requirement was funded from the proceeds of the sale of the Company's investment in marketable securities (related to the GGP MPTC financing (Note 5)) and from available cash and cash equivalents. The principal Victoria Ward assets include 65 fee simple acres in Kakaako, central Honolulu, Hawaii, currently improved with, among other uses, an entertainment, shopping and dining district which includes Ward Entertainment Center, Ward Warehouse, Ward Village and Village Shops. In total, Victoria Ward currently has 17 properties subject to ground leases and 29 owned buildings containing in the aggregate 12 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) approximately 878,000 square feet of retail space, as well as approximately 441,000 square feet of office, commercial and industrial leaseable area (the "Victoria Ward Assets"). During April 2001, GGP-Tucson Mall, L.L.C., a wholly-owned subsidiary of the Operating Partnership ("GGP-Tucson"), agreed to advance $20,000 to an unaffiliated developer in the form of a secured promissory note (bearing interest at 8% per annum) collateralized by such developer's ownership interest in Tucson Mall, a 1.3 million square foot enclosed regional mall in Tucson, Arizona. The promissory note was payable interest only and was due on demand. GGP-Tucson had also entered into an option agreement to purchase Tucson Mall from such developer and its co-tenants in title to the property. On August 15, 2001, the promissory note was repaid in conjunction with GGP-Tucson's completion of its acquisition of Tucson Mall pursuant to the option agreement. The aggregate consideration paid by GGP-Tucson for Tucson Mall was approximately $180,000 which was paid in the form of cash borrowed under the Operating Partnership's revolving line of credit and an approximately $150,000 short-term floating rate acquisition loan. Such acquisition loan was refinanced in December 2001 by the GGP MPTC financing as defined and further discussed in Note 4. All acquisitions completed through June 30, 2002 were accounted for utilizing the purchase method and accordingly, the results of operations are included in the Company's results of operations from the respective dates of acquisition. DEVELOPMENTS The Company has an ongoing program of renovations and expansions at its properties including significant projects currently under construction or recently completed at the Park Mall in Tucson, Arizona; Eden Prairie Mall in Eden Prairie (Minneapolis), Minnesota; Southwest Plaza in Littleton, Colorado; Fallbrook Center in West Hills, California; and Knollwood Mall in St. Louis Park (Minneapolis), Minnesota. During 1999, the Company formed the Circle T joint venture to develop a regional mall in Westlake (Dallas), Texas as further described in Note 3 below. As of June 30, 2002, the Company had invested approximately $16,855 in the joint venture. The Company is currently obligated to fund additional pre-development costs of approximately $800. Actual development costs are not finalized or committed but are anticipated to be funded from a construction loan that is expected to be obtained. The retail site, part of a planned community which is expected to contain a resort hotel, a golf course, luxury homes and corporate offices, is currently planned to contain up to 1.3 million square feet of tenant space including up to six anchor stores, an ice rink and a multi-screen theater. The construction project is currently anticipated to be completed in 2005. The Company also owns and/or is investigating certain other potential development sites (representing a net investment of approximately $22,660), including sites in Toledo, Ohio; West Des Moines, Iowa; and South Sacramento, California but there can be no assurance that development of these sites will proceed. 13 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 3 INVESTMENTS IN AND LOANS FROM UNCONSOLIDATED REAL ESTATE AFFILIATES GGP/HOMART The Company holds a 50% interest in GGP/Homart with the remaining ownership interest held by New York State Common Retirement Fund ("NYSCRF"), the Company's co-investor in GGP/Homart II (described below). At June 30, 2002, GGP/Homart owned interests in twenty-three regional shopping malls, four of which were owned jointly with venture partners. During August 2002, as approved by NYSCRF, GGP/Homart sold the Prince Kuhio Plaza to the Company (Note 2). GGP/Homart has elected REIT status for income tax purposes. The Company shares in the profits and losses, cash flows and other matters relating to GGP/Homart in accordance with its 50% ownership percentage. NYSCRF has an exchange right under the GGP/Homart Stockholders Agreement which permits it to convert its ownership interest in GGP/Homart to shares of Common Stock of General Growth. If such exchange right is exercised, the Company may, at its election, alternatively satisfy such exchange in cash. GGP/HOMART II In November 1999, the Company, together with NYSCRF, formed GGP/Homart II, a Delaware limited liability company which is owned equally by the Company and NYSCRF. GGP/Homart II owns 100% interests in eight regional shopping malls. According to the membership agreement between the venture partners, the Company and NYSCRF share in the profits and losses, cash flows and other matters relating to GGP/Homart II in accordance with their respective 50% ownership percentages. On closing of the GGP MPTC financing, (as defined and described in Note 4) approximately $190,000 of the proceeds attributable to GGP/Homart and GGP/Homart II were loaned, rather than distributed, to the Operating Partnership and NYSCRF in the ratio of their respective ownership interests in GGP/Homart and GGP/Homart II. The loans to the Operating Partnership, which were comprised of approximately $16,596 by GGP/Homart and $78,400 by GGP/Homart II, bear interest at a rate of 5.5% per annum on the remaining outstanding balance and mature on March 30, 2003. During May 2002, an additional $84,000 was loaned to the Operating Partnership and NYSCRF. The loans to the Operating Partnership, which were comprised of $24,000 by GGP/Homart and $18,000 by GGP/Homart II, bear interest at a rate of 5.5% per annum on the remaining outstanding balance and mature on December 31, 2003. The Operating Partnership and NYSCRF anticipate repayment of those loans from future operating distributions from GGP/Homart and GGP/Homart II. GGP IVANHOE III GGP Ivanhoe III owns 100% interests in eight regional shopping malls. GGP Ivanhoe III, which has elected to be taxed as a REIT, is owned 51% by the Company and 49% by an affiliate of Ivanhoe Cambridge of Montreal, Quebec, Canada ("Ivanhoe"), which is also the Company's joint venture partner in GGP Ivanhoe (described below). The Company and Ivanhoe share in the profits and losses, cash flows and other matters relating to GGP Ivanhoe III in accordance with their respective ownership percentages except that certain major operating and capital decisions (as defined in the stockholders' agreement) require the approval of both stockholders. Accordingly, the Company is accounting for GGP Ivanhoe III using the equity method. 14 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) GGP IVANHOE GGP Ivanhoe owns The Oaks Mall in Gainesville, Florida and Westroads Mall in Omaha, Nebraska. The Company owns a 51% ownership interest in GGP Ivanhoe and Ivanhoe owns the remaining 49% ownership interest. The terms of the stockholders' agreement are similar to those of GGP Ivanhoe III. TOWN EAST MALL / QUAIL SPRINGS MALL The Company owns a 50% interest in Town East Mall, located in Mesquite, Texas and a 50% interest in Quail Springs Mall in Oklahoma City, Oklahoma. The Company shares in the profits and losses, cash flows and other matters relating to Town East Mall and Quail Springs Mall in accordance with its ownership percentage. CIRCLE T The Company, through a wholly-owned subsidiary, owns a 50% general partnership interest in Westlake Retail Associates, Ltd. ("Circle T"). AIL Investment, LP, an affiliate of Hillwood Development Company, ("Hillwood") is the limited partner of Circle T. Circle T is currently developing the Circle T Ranch Mall, a regional mall in Dallas, Texas, scheduled for completion in 2005. Development costs are expected to be funded by a construction loan to be obtained by the joint venture and capital contributions by the joint venture partners. As of June 30, 2002, the Company has made contributions of approximately $16,855 to the project for pre-development costs and Hillwood has contributed approximately $11,200, mostly in the form of land costs and related predevelopment costs. As certain major decisions concerning Circle T must be made jointly by the Company and Hillwood, the Company is accounting for Circle T using the equity method. SUMMARIZED INCOME STATEMENT INFORMATION OF UNCONSOLIDATED REAL ESTATE AFFILIATES The following is summarized income statement information of Unconsolidated Real Estate Affiliates of the Company for the three and six months ended June 30, 2002 and 2001.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 --------- --------- --------- --------- Total Revenues $ 167,084 $ 162,915 $ 332,629 $ 315,415 Operating expenses 65,738 67,267 133,081 128,646 Depreciation and amortization 32,849 31,067 64,918 62,370 --------- --------- --------- --------- Operating Income 68,497 64,581 134,630 124,399 Interest expense, net (31,837) (38,879) (63,820) (76,280) Equity in income of unconsolidated real estate affiliates 1,021 779 1,874 1,556 Gain (loss) on outparcel sales 10 (346) (259) (335) --------- --------- --------- --------- Net Income $ 37,691 $ 26,135 $ 72,425 $ 49,340 ========= ========= ========= =========
15 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 4 MORTGAGE NOTES AND OTHER DEBT PAYABLE Mortgage notes and other debt payable at June 30, 2002 and December 31, 2001 consisted of the following: JUNE 30, 2000 DECEMBER 31, 2001 ------------- ----------------- Fixed-Rate debt: Mortgage notes and other debt payable $2,229,049 $2,239,511 Variable-Rate debt: Mortgage notes and other debt payable 947,606 951,696 Credit facilities and bank loan 184,000 207,000 ---------- ---------- Total Variable-Rate debt 1,131,606 1,158,696 ---------- ---------- Total $3,360,655 $3,398,207 ========== ========== FIXED RATE DEBT MORTGAGE NOTES AND OTHER DEBT PAYABLE Mortgage notes and other debt payable consist primarily of fixed rate non-recourse notes collateralized by individual or groups of properties or equipment. Certain mortgage notes payable may be prepaid but are generally subject to a prepayment penalty of a yield-maintenance premium or a percentage of the loan balance. Certain loans have cross-default provisions and are cross-collateralized as part of a group of properties. Under certain cross-default provisions, a default under any mortgage notes included in a cross-defaulted package may constitute a default under all such mortgage notes and may lead to acceleration of the indebtedness due on each property within the collateral package. In general, the cross-defaulted properties are under common ownership. However, GGP Ivanhoe debt collateralized by two GGP Ivanhoe centers (totaling $125,000) is cross-defaulted and cross-collateralized with debt (totaling $435,000) collateralized by eleven Wholly-Owned centers. VARIABLE RATE DEBT MORTGAGE NOTES AND OTHER DEBT PAYABLE Variable rate mortgage notes and other debt payable at June 30, 2002 consist primarily of approximately $947,606 of collateralized mortgage-backed securities, approximately $666,379 of which is currently subject to fixed rate interest swap agreements as described below, and $184,000 of which is outstanding under the Company's Term Loan as described below. The loans bear interest at a rate per annum equal to LIBOR plus 60 to 250 basis points. COMMERCIAL MORTGAGE-BACKED SECURITIES In August 1999, the Company issued $500,000 of commercial mortgage-backed securities, collateralized by the Ala Moana Center. The securities (the "Ala Moana CMBS") are comprised of notes which bear interest at rates per annum ranging from LIBOR plus 50 basis points to LIBOR plus 275 basis points (weighted average equal to LIBOR plus 95 basis points), calculated and payable monthly. The notes were repaid in December 2001 with a portion of the proceeds of the GGP MPTC financing described below. In conjunction with the issuance of the Ala Moana CMBS, the Company arranged for an interest rate cap agreement, the effect of 16 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) which limited the maximum interest rate the Company would be required to pay on the securities to 9% per annum. In September 1999, the Company issued $700,229 of commercial mortgage-backed securities (the "GGP-Ivanhoe CMBS") cross-collateralized and cross-defaulted by a portfolio of nine regional malls and an office complex adjacent to one of the regional malls (five Wholly-Owned Centers and four properties owned by GGP Ivanhoe III). The GGP-Ivanhoe CMBS was comprised of notes which bore interest at rates per annum ranging from LIBOR plus 52 basis points to LIBOR plus 325 basis points (weighted average equal to LIBOR plus approximately 109 basis points), calculated and payable monthly. The notes were repaid in December 2001 with a portion of the proceeds of the GGP MPTC financing described below. In conjunction with the issuance of the GGP-Ivanhoe CMBS, the Company arranged for an interest rate cap agreement, the effect of which was to limit the maximum interest rate the Company would be required to pay on the securities to 9.03% per annum. No amounts were received on the cap agreement in 2001. Approximately $340,000 of the proceeds from the sale of the GGP-Ivanhoe CMBS repaid amounts collateralized by the GGP Ivanhoe III properties and the remaining approximately $360,000 repaid amounts collateralized by the Wholly-Owned Centers in the GGP-Ivanhoe CMBS portfolio of properties. In early December 2001, the Operating Partnership and certain Unconsolidated Real Estate Affiliates completed the placement of $2,550,000 of non-recourse commercial mortgage pass-through certificates (the "GGP MPTC"). The GGP MPTC is collateralized by 27 malls and one office building, including 19 malls owned by certain Unconsolidated Real Estate Affiliates. The GGP MPTC is comprised of both variable rate and fixed rate notes which require monthly payments of principal and interest. The certificates represent beneficial interests in three loan groups made by three sets of borrowers (GGP/Homart-GGP/Homart II, Wholly-Owned and GGP Ivanhoe III). The original principal amount of the GGP MPTC was comprised of $1,235,000 attributed to the Operating Partnership, $900,000 to GGP/Homart and GGP/Homart II and $415,000 to GGP Ivanhoe III. The three loan groups are comprised of variable rate notes with a 36 month initial maturity (with two no cost 12-month extension options), variable rate notes with a 51 month initial maturity (with two no cost 18-month extension options) and fixed rate notes with a 5 year maturity. The 36 month variable rate notes bear interest at rates per annum ranging from LIBOR plus 60 to 235 basis points (weighted average equal to 79 basis points), the 51 month variable rate notes bear interest at rates per annum ranging from LIBOR plus 70 to 250 basis points (weighted average equal to 103 basis points) and the 5 year fixed rate notes bear interest at rates per annum ranging from approximately 5.01% to 6.18% (weighted average equal to 5.38%). The extension options with respect to the variable rate notes are subject to obtaining extensions of the interest rate protection agreements which were required to be obtained in conjunction with the GGP MPTC. Concurrent with the issuance of the certificates, the Company purchased interest rate protection agreements (structured to limit the Company's exposure to interest rate fluctuations in a manner similar to the interest rate cap agreements purchased in connection with the Ala Moana and GGP-Ivanhoe CMBS), and simultaneously an equal amount of interest rate protection agreements were sold to fully offset the effect of these agreements and to recoup a substantial portion of the cost of such agreements. Further, to achieve a more desirable balance between fixed and variable rate debt, the Company entered into a notional amount of $666,933 of swap agreements. Approximately $575,000 of such swap agreements are with independent financial services firms and approximately $91,379 is the current amount with GGP Ivanhoe III in order to provide Ivanhoe with only variable rate debt. The notional amounts of such swap agreements decline over time to an aggregate of $25,000 at maturity of the 51 month variable rate loans (assuming both 18 month extension options are exercised). The swap agreements convert the related variable rate debt to fixed rate debt currently bearing interest at a weighted average rate of 4.85% per annum. Such swap agreements have been designated as hedges of related variable rate debt. On June 1, 1998 the FASB issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"). Statement 133, as amended, was effective for fiscal years beginning after June 15, 17 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) 2000. The Company's only hedging activities are the cash flow hedges represented by its interest rate cap and swap agreements relating to its commercial mortgage-backed securities as described above. These agreements either place a limit on the effective rate of interest the Company will bear on such variable rate obligations or fix the effective interest rate on such obligations to a certain rate. The Company has concluded that these agreements are highly effective in achieving its objective of eliminating its exposure to variability in cash flows relating to these variable rate obligations in any interest rate environment for loans subject to swap agreements and for loans with related cap agreements, when LIBOR rates exceed the strike rates of the agreements. However, Statement 133 also requires that the Company fair value the interest rate cap and swap agreements as of the end of each reporting period. Interest rates have declined since these agreements were obtained. The Company adopted Statement 133 January 1, 2001. In accordance with the transition provisions of Statement 133, the Company recorded at January 1, 2001 a loss to earnings of $3,334 as a cumulative-effect type transition adjustment to recognize at fair value the time-value portion of all the interest rate cap agreements that were previously designated as part of a hedging relationship. Included in the $3,334 loss is $704 relating to interest rate cap agreements held by Unconsolidated Real Estate Affiliates. The Company also recorded $112 to other comprehensive income at January 1, 2001 to reflect the then fair value of the intrinsic portion of the interest rate cap agreements. Subsequent changes in the fair value of these agreements will be reflected in current earnings and accumulated other comprehensive income. During 2001, the Company recorded approximately $2,389 of additional other comprehensive income to reflect 2001 changes in the fair value of its interest rate cap and swap agreements. In conjunction with the GGP MPTC financing, all of the debt hedged by the Company's then existing interest rate cap agreements was refinanced. As the related fair values of the previous cap agreements were nominal on the refinancing date, these cap agreements were not terminated and any subsequent changes in the fair value of these cap agreements is reflected in interest expense. Further, certain caps were purchased and sold in conjunction with GGP MPTC financing. These purchased and sold caps do not qualify for hedge accounting and changes in the fair values of these agreements are reflected in interest expense. Finally, certain interest rate swap agreements were entered into to partially fix the interest rates on a portion of the GGP MPTC financing. These swap agreements have been designated as cash flow hedges on $666,379 of the Company's consolidated variable rate debt. CREDIT FACILITIES As of July 31, 2000, the Company obtained a new unsecured revolving credit facility (the "Revolver") in a maximum aggregate principal amount of $135,000 (cumulatively increased to $185,000 through December 2001). The outstanding balance of the Revolver was fully repaid in December 2001 from a portion of the proceeds of the GGP MPTC financing described above and the Revolver was terminated. The Revolver bore interest at a floating rate per annum equal to LIBOR plus 100 to 190 basis points, depending on the Company's average leverage ratio. In January 2001, GGMI borrowed $37,500 under a new revolving line of credit obtained by GGMI and an affiliate, which was guaranteed by General Growth and the Operating Partnership. This revolving line of credit was scheduled to mature in July 2003 but was fully repaid in December 2001 from a portion of the proceeds of the GGP MPTC financing described above and the line of credit was terminated. The interest rate per annum with respect to any borrowings varied from LIBOR plus 100 to 190 basis points depending on the Company's average leverage ratio. 18 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) INTERIM FINANCING As of July 31, 2000, the Company obtained an unsecured bank term loan (the "Term Loan") in a maximum principal amount of $100,000. As of September 30, 2001, the maximum principal amount of the Term Loan had been increased to $255,000 and, as of such date, all amounts available under the Term Loan were fully drawn. During the fourth quarter of 2001, approximately $48,000 of the principal amount of the Term Loan was repaid from a portion of the 2001 Offering. During 2002, an additional $23,000 of scheduled principal payments have been made. Term Loan proceeds were used to fund ongoing redevelopment projects and repay a portion of the remaining balance of the bank loan described in the paragraph immediately above. The Term Loan has a maturity of July 31, 2003 and bears interest at a rate per annum of LIBOR plus 100 to 170 basis points depending on the Company's average leverage ratio. In March 2001, the Company obtained a $65,000 redevelopment loan collateralized by Eden Prairie Mall. The new loan had an initial draw of approximately $19,400, required monthly payments of interest at a rate of LIBOR plus 190 basis points and was scheduled to mature in April 2004. In December 2001, this loan, with a then outstanding balance of approximately $44,079, was repaid with a portion of the proceeds of the 2001 Offering. In July 2002, in conjunction with the JP Realty acquisition, the Company obtained a new $350,000 loan from a group of banks. The loan bears interest at a rate per annum of LIBOR plus 150 basis points and matures on July 9, 2003. The loan provides for periodic repayments of principal including from certain future refinancing proceeds. CONSTRUCTION LOAN During April 1999, the Company received $30,000 representing the initial loan draw on a $110,000 construction loan facility. The facility was collateralized by and provided financing for the RiverTown Crossings Mall development (including outparcel development) in Grandville (Grand Rapids), Michigan. The construction loan provided for periodic funding as construction and leasing continued and bore interest at a rate per annum of LIBOR plus 150 basis points. As of July 17, 2000 additional loan draws of approximately $80,000 had been made and no further amounts were available under the construction loan facility. Interest was due monthly. The loan had been scheduled to mature on June 30, 2001 and was refinanced on June 28, 2001 with a non-recourse, long-term mortgage loan. The new $130,000 non-recourse mortgage loan bears interest at 7.53% per annum and matures on July 1, 2011. LETTERS OF CREDIT As of June 30, 2002 and December 31, 2001, the Operating Partnership had outstanding letters of credit of $11,444 and $13,200, respectively, primarily in connection with special real estate assessments and insurance requirements. 19 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) NOTE 5 DISTRIBUTIONS PAYABLE The following is a chart of the common and preferred distributions for the Company paid in 2002 and 2001. As described in Note 1, General Growth's preferred stock dividends to its preferred stockholders were in the same amount as the Operating Partnership's distributions to General Growth on the same dates with respect to the Preferred Units held by General Growth.
COMMON DISTRIBUTIONS - ------------------------------------------------------------------------------------------------------------- GENERAL OPERATING GROWTH PARTNERSHIP DECLARATION AMOUNT PER RECORD PAYMENT STOCKHOLDERS LIMITED PARTNERS DATE SHARE DATE DATE AMOUNT AMOUNT ----------- ---------- -------- ------- ------------ ---------------- 06/17/02 $ 0.65 07/05/02 07/31/02 $ 40,440 $ 12,722 03/21/02 0.65 04/15/02 04/30/02 40,346 12,722 12/10/01 0.65 01/14/02 01/31/02 40,266 12,722 09/20/01 0.65 10/15/01 10/31/01 34,262 12,722 06/23/01 0.53 07/06/01 07/31/01 27,801 10,373 03/21/01 0.53 04/06/01 04/30/01 27,778 10,373 12/12/00 0.53 01/05/01 01/31/01 27,744 10,385
PREFERRED DISTRIBUTIONS --------------------------------------------- RECORD PAYMENT AMOUNT PER DATE DATE SHARE --------- --------- ---------- 07/05/02 07/15/02 $ 0.4531 04/05/02 04/15/02 0.4531 01/04/02 01/15/02 0.4531 10/05/01 10/15/01 0.4531 07/06/01 07/13/01 0.4531 04/06/01 04/16/01 0.4531 01/05/01 01/15/01 0.4531 NOTE 6 COMMITMENTS AND CONTINGENCIES In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its properties. In management's opinion, the liabilities if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. The Company periodically enters into contingent agreements for the acquisition of properties. Each acquisition is subject to satisfactory completion of due diligence and, in the case of developments, completion of the project. NOTE 7 NETWORK DISCONTINUANCE COSTS AND OTHER INTERNET INITIATIVES The Company discontinued its Network Services development activities on June 29, 2001, as retailer demand for such services had not developed as anticipated. The discontinuance of the Network Services development activities resulted in a non-recurring, pre-tax charge to second quarter 2001 earnings of $65,000. In addition, the Company recognized $1,000 of net incremental discontinuance costs in the third quarter of 2001. This 20 of 34 GENERAL GROWTH PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AND PER UNIT AMOUNTS) (UNAUDITED) third quarter amount was comprised of approximately $1,366 of incremental discontinuance costs (primarily payroll and severance costs) and approximately $366 of reduction in the Network discontinuance reserve. Such reduction in the Network discontinuance reserve was primarily due to the settlement of obligations to Network Services vendors and consultants at amounts lower than originally contracted for. Minor reductions to the Network discontinuance reserve have been made in late 2001 and in the six months ended June 30, 2002 due to settlements or anticipated settlements with additional vendors and the Company will further reduce the Network discontinuance reserve as additional settlements are agreed to. NOTE 8 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("Statement No. 145"). Generally, Statement No. 145 has the effect of suspending the treatment of debt extinguishment costs as extraordinary items. Statement No. 145 is effective for the year ended December 31, 2003. Accordingly, in the comparative statements presented in the year of adoption, the Company will reclass debt extinguishment costs that are classified under current accounting standards as extraordinary items to other interest costs. In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("Statement No. 146"). Statement No. 146 requires that the costs associated with exit or disposal activity be recognized and measured at fair value when the liability is incurred. The provisions of Statement No. 146 are effective for exit or disposal activities initiated after December 31, 2002. As the Company typically does not engage in significant disposal activities, it is not expected that the implementation of Statement No. 146 in 2003 will have a significant impact on the Company's reported financial results. 21 of 34 GENERAL GROWTH PROPERTIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All references to numbered Notes are to specific footnotes to the Consolidated Financial Statements of the Company included in this quarterly report and which descriptions are hereby incorporated herein by reference. The following discussion should be read in conjunction with such Consolidated Financial Statements and related Notes. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operations have the same meanings as in such Notes. FORWARD-LOOKING INFORMATION Certain statements contained in this Quarterly Report on Form 10-Q may include certain forward-looking information statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates" and "should" and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions, interest rate trends, cost of capital and capital requirements, availability of real estate properties, inability to consummate acquisition opportunities, competition from other companies and venues for the sale/distribution of goods and services, changes in retail rental rates in the Company's markets, shifts in customer demands, tenant bankruptcies or store closures, changes in vacancy rates at the Company's properties, changes in operating expenses, including employee wages, benefits and training, governmental and public policy changes, changes in applicable laws, rules and regulations (including changes in tax laws), the ability to obtain suitable equity and/or debt financing, and the continued availability of financing in the amounts and on the terms necessary to support the Company's future business. USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development and leasing costs, recoverable amounts of receivables and deferred taxes and amortization periods of deferred costs and intangibles. Actual results could differ from those estimates. The Company's critical accounting policies have not changed during 2002, except for the election, during the second quarter of 2002, to adopt the fair value based employee stock-based compensation expense recognition provisions of SFAS 123, as discussed in Note 1. 22 of 34 GENERAL GROWTH PROPERTIES, INC. CERTAIN INFORMATION ABOUT THE COMPANY PORTFOLIO As of June 30, 2002, the Company owns 100% of the Wholly-Owned Centers, 50% of the common stock of GGP/Homart, 50% of the membership interests in GGP/Homart II, 51% of the common stock of GGP Ivanhoe, 51% of the common stock of GGP Ivanhoe III and 50% of Quail Springs Mall and Town East Mall. GGP/Homart owns interests in twenty-three shopping centers, GGP/Homart II owns interests in eight shopping centers, GGP Ivanhoe owns interests in two shopping centers, and GGP Ivanhoe III owns interests in eight shopping centers (collectively, with the Wholly-Owned Centers, Quail Springs Mall and Town East Mall, the "Company Portfolio"). The following data on the Company Portfolio is for 100% of the non-anchor GLA of the centers, excluding centers currently being redeveloped and/or remerchandised. On June 30, 2002, the Mall Store and Freestanding Store portions of the centers in the Company Portfolio which were not undergoing redevelopment were approximately 89.2% occupied as of such date, representing a 1% increase in the occupancy percentage which existed on June 30, 2001, but representing a decrease in occupancy percentage of 1.8% as compared to December 31, 2001. Such minor occupancy declines are typical of the usual retail cycle and the decline in 2002 is less than the first and second quarter declines in 2001 as compared to December 31, 2000. Total annualized Mall Store sales averaged $358 per square foot for the Company Portfolio in the six months ended June 30, 2002. In the six months ended June 30, 2002, total Mall Store sales for the Company Portfolio increased by 1.0 % over the same period in 2001. Comparable Mall Store sales are sales of those tenants that were open the previous 12 months. Therefore, comparable Mall Store sales in the six months ended June 30, 2002 are of those tenants that were operating in the six months ended June 30,2001. Comparable mall store sales in the six months ended June 30, 2002 decreased by 2.0% as compared to the same period in 2001. The average Mall Store rent per square foot from leases that expired in the six months ended June 30, 2002 was $29.90. The Company Portfolio benefited from increasing rents inasmuch as the average Mall Store rent per square foot on new and renewal leases executed during this same period was $35.08, or $5.18 per square foot above the average for expiring leases. Company revenues are primarily derived from tenants in the form of fixed minimum rents, overage rents and recoveries of operating expenses. Inasmuch as the Company's consolidated financial statements reflect the use of the equity method to account for its investments in GGP/Homart, GGP/Homart II, GGP Ivanhoe, GGP Ivanhoe III, Quail Springs Mall and Town East Mall, the discussion of results of operations of the Company below relates primarily to the revenues and expenses of the Wholly-Owned Centers and GGMI. RESULTS OF OPERATIONS OF THE COMPANY THREE MONTHS ENDED JUNE 30, 2002 AND 2001 Total revenues for the three months ended June 30, 2002 were $210.6 million, which represents an increase of $21.1 million or approximately 11.1% from $189.5 million in the three months ended June 31, 2001. The acquisition of Tucson Mall in August 2001 (Note 2) was responsible for approximately $5.7 million of the increase in total revenues, while the Victoria Ward acquisition in May 2002 (Note 2) accounted for approximately $3.2 million of the increase in total revenues. Minimum rent for the three months ended June 30, 2002 increased by $16.2 million or 14.9% from $108.9 million in the comparable period in 2001 to $125.1 million. The net effect of the acquisition of Tucson Mall comprised $3.4 million of such increase in minimum rents and the Victoria Ward acquisition comprised of $2.4 million of such increase, while the remainder of such increase was due primarily to base rents on expansion space and specialty leasing increases at the comparable centers (properties owned for the entire time during the three months ended June 30, 2001 and 2002). Fees and Other income increased by a net $3.9 million or 17.5% from $22.3 million to $26.2 million for the three months ended June 30, 2002 primarily due to increases in leasing and development fees. 23 OF 34 GENERAL GROWTH PROPERTIES, INC. Total expenses, including depreciation and amortization, decreased by approximately $52.6 million or 30.2%, from $174.0 million in the three months ended June 30, 2001 to $121.4 million in the three months ended June 30, 2002. A majority of the decrease was due to the $65 million of network discontinuance costs recognized in the second quarter of 2001. For the three months ended June 30, 2002, property operating expenses increased by $8.5 million or 15.1% from $56.3 million in 2001 to $64.8 million in the second quarter of 2002, approximately $1.7 million of which was attributable to the net effect of the acquisition of Tucson Mall, and $1.2 million of which was attributable to the net effect of the acquisition of Victoria Ward. The remainder was primarily due to approximately $6.4 million in increases in net payroll and professional services costs including approximately $3.8 million of compensation expenses recognized due to the vesting of certain of the Company's TSOs as described in Note 1. Depreciation and amortization increased by $3.4 million or approximately 9.2% over the same period in 2002. The majority of the increase in depreciation and amortization was generated by the completion of certain renovation projects and the resulting commencement of depreciation and the net effect of the acquisition of Tucson Mall. Interest expense for the three months ended June 30, 2002 was $48.7 million, a decrease of $3.6 million or 6.9%, from $52.3 million in the three months ended June 30, 2001. This decrease was primarily due to reduced interest rates in 2002 as compared to 2001. This decrease was partially offset by the acquisition of Tucson Mall (which was responsible for an increase of approximately $1.3 million) and increased debt at the comparable centers. Equity in income of unconsolidated affiliates in the three months ended June 30, 2002 increased by approximately $2.3 million to earnings of $15.1 million in 2002, from $12.8 million in the three months ended June 30, 2001, partially due to reduced net interest expense for such affiliates in 2002 due to reduced interest rates on their mortgage loans primarily due to refinancings in 2001. In addition, the Company's equity in the income of GGP Ivanhoe III increased approximately $1.6 million, primarily due to increases in minimum rents, tenant recoveries and specialty leasing revenues at the properties. The Company's equity in the income of GGP/Homart resulted in an increase in earnings of approximately $1.0 million for the three months ended June 30, 2002. RESULTS OF OPERATIONS OF THE COMPANY SIX MONTHS ENDED JUNE 30, 2002 AND 2001 Total revenues for the six months ended June 30, 2002 were $414.7 million, which represents an increase of $33.2 million or approximately 8.7% from $381.5 million in the six months ended June 30, 2001. Much of the increase is from the net effect of the Tucson Mall and Victoria Ward acquisitions. Minimum rent for the six months ended June 30, 2002 increased by $23.8 million or 10.8% from $220.9 million in the comparable period in 2001 to $244.7 million in 2002. The net effect of the acquisition of Tucson Mall was responsible for approximately $7.0 million of the increase in minimum rents and the Victoria Ward acquisition comprised $2.4 million of such increase. The reminder of such increase in minimum rents was due to higher base rental rates on new and renewal leases. Expansion space, specialty leasing and occupancy increases at the comparable centers (properties owned for the entire time during the six months ended June 30, 2001 and 2002) accounted for the remaining increase in minimum rents. Tenant recoveries increased by $4.9 million or 4.5% from $109.9 million for the six months ended June 30, 2001 to $114.8 million for the six months ended June 30, 2002. Substantially all of the increase was due to the Tucson and Victoria Ward acquisitions. For the six months ended June 30, 2002, overage rents decreased to $7.1 million in 2002 from $7.7 million in 2001. Total operating expenses, including depreciation and amortization, decreased by approximately $40.0 million or 14.3% from $280.2 million in the six months ended June 30, 2001 to $240.2 million in the six months ended June 30, 2002. A majority of the decrease was due to the $65 million of network discontinuance costs recognized in the second quarter of 2001, partially offset by an increase of $7.1 million due to the vesting of TSOs. For the six months ended June 30, 2002, property operating expenses increased by $15.5 million or 13.8% from $112.7 million in 2001 to $128.2 million in the six 24 of 34 GENERAL GROWTH PROPERTIES, INC. months ended June 30, 2002, substantially all of which is attributable to the net effect of the new acquisitions. Depreciation and amortization increased by $8.7 million or 12.4% over the same period in 2002. Approximately $5.1 million of the increase in depreciation and amortization was generated at comparable centers and approximately $2.6 million was due to the net effect of the acquisitions of Victoria Ward and Tucson Mall. Interest expense for the six months ended June 30, 2002 was $96.9 million, a decrease of $10.6 million or 9.9% from $107.5 million in the six months ended June 30, 2001. Equity in income of unconsolidated affiliates in the six months ended June 30, 2002 increased by approximately $5.7 million to earnings of $28.3 million in 2002, from $22.6 million in the six months ended June 30, 2001. This overall increase is due to an increase in income of GGP/Homart of approximately $2.1 million due primarily to a decrease in interest rates. In addition, the Company's equity in the income of GGP/Ivanhoe III increased by approximately $3.9 million due to increased average occupancy and a decrease in interest rates in 2001. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY As of June 30, 2002, the Company held approximately $79.2 million of unrestricted cash and cash equivalents. The Company uses operating cash flow as the principal source of internal funding for short-term liquidity and capital needs such as tenant construction allowances and minor improvements made to individual properties that are not recoverable through common area maintenance charges to tenants. External funding alternatives for longer-term liquidity needs such as acquisitions, new development, expansions and major renovation programs at individual centers include construction loans, mini-permanent loans, long-term project financing, joint venture financing with institutional partners, additional Operating Partnership level or Company level equity investments and unsecured Company level debt or secured loans collateralized by individual shopping centers. In addition, the Company considers its Unconsolidated Real Estate Affiliates as potential sources of short and long-term liquidity. In such regard, the Company has net borrowings (in place of distributions) at June 30, 2002 of approximately $31 million and $90 million from GGP/Homart and GGP/Homart II, respectively (bearing interest at 5.5% per annum and approximately $79 million is due March 30, 2003, and approximately $42 million is due December 31, 2003). Such loaned amounts are substantially all of the GGP/Homart and GGP Homart II net proceeds of the GGP MPTC and other recent financings applicable to the Company and are expected to be repaid from future operating distributions from GGP/Homart and GGP/Homart II (Note 3). Also, in order to maintain its access to the public equity and debt markets, the Company has a currently effective shelf registration statement under which up to $2 billion in equity or debt securities could be issued from time to time. The Company also believes it could obtain, if necessary, revolving credit facilities similar to those which were fully repaid in December 2001 with a portion of the proceeds of the GGP MPTC financing. Finally, the Company has a term loan (Note 4) under which approximately $184 million has been borrowed as of June 30, 2002 which matures on July 31, 2003. 25 of 34 GENERAL GROWTH PROPERTIES, INC. At June 30, 2002, the Company had direct or indirect ("pro rata") mortgage and other debt of approximately $4,954.6 million. The following table reflects the maturity dates of the Company's pro rata debt and the related interest rates, after the effect of the current swap agreements of the Company as described in Note 4. COMPANY PORTFOLIO DEBT MATURITY AND CURRENT AVERAGE INTEREST RATE SUMMARY(a) AS OF JUNE 30, 2002 (Dollars in Thousands)
WHOLLY-OWNED UNCONSOLIDATED COMPANY CENTERS CENTERS(b) PORTFOLIO DEBT -------------------- -------------------- -------------- CURRENT CURRENT AVERAGE AVERAGE AVERAGE MATURING INTEREST MATURING INTEREST MATURING INTEREST YEAR AMOUNT(a) RATE(c) AMOUNT(a) RATE(c) AMOUNT(a) RATE(c) ---- --------- -------- --------- -------- --------- -------- 2002 $ - -% $ - -% $ - -% 2003 259,000 3.45% 269,764 4.97% 528,764 4.23% 2004 339,184 5.77% 87,971 4.96% 427,155 5.60% 2005 250,000 4.89% 83,318 4.89% 333,318 4.89% 2006 609,552 5.88% 304,432 5.02% 913,984 5.59% 2007 265,816 6.61% 81,693 7.26% 347,509 6.76% Subsequent 1,637,103 6.43% 766,741 5.58% 2,403,844 6.16% ---------- ---- ----------- ---- ----------- ---- Total $3,360,655 5.94% $ 1,593,919 5.38% $ 4,954,574 5.76% ========== ==== =========== ==== =========== ==== Variable Rate $ 465,227 3.00% $ 596,305 3.53% $ 1,061,532 3.30% Fixed Rate 2,895,428 6.41% 997,614 6.49% 3,893,042 6.43% ---------- ---- ----------- ---- ----------- ---- Total $3,360,655 5.94% $ 1,593,919 5.38% $ 4,954,574 5.76% ========== ==== =========== ==== =========== ====
(a) Excludes principal amortization. (b) Unconsolidated Centers debt reflects the Company's share of debt (based on its respective equity ownership interests in the Unconsolidated Real Estate Affiliates) relating to the properties owned by the Unconsolidated Real Estate Affiliates. (c) For variable rate loans, the interest rate reflected is the actual annualized weighted average rate for the variable rate debt outstanding during the six months ended June 30, 2002. 26 of 34 GENERAL GROWTH PROPERTIES, INC. A portion of the debt bearing interest at variable rates is subject to interest rate cap and swap agreements. Reference is made to Note 4 and Item 3 below for additional information regarding the Company's debt and the potential impact on the Company of interest rate fluctuations. The following summarizes certain significant investment and financing transactions currently planned or completed since December 31, 2001: During April 2002 the Company, through the LLC, issued an additional 240,000 RPUs to an affiliate of the institutional investor to whom the LLC had issued 700,000 RPUs in May 2000 (see Note 1). The issuance of these preferred units yielded approximately $58 million in net proceeds to the Company. During May 2002 the Company, through the LLC, issued 20,000 8.25% Series C Cumulative Preferred Units to an investor yielding $5 million in net proceeds to the Company (see Note 1). On May 28, 2002 the Company acquired the stock of Victoria Ward, Limited, a privately held real estate corporation. The total Victoria Ward acquisition price was approximately $250 million, including the assumption of approximately $50 million of existing short-term debt, substantially all of which was repaid immediately following the closing. The $250 million total cash requirement was obtained primarily from the sale of the Company's investment in marketable securities and available cash and cash equivalents. The principal Victoria Ward assets include 65 fee simple acres in Kakaako, central Honolulu, Hawaii, currently improved with, among other uses, an entertainment, shopping and dining district which includes Ward Entertainment Center, Ward Warehouse, Ward Village and Village Shops. Victoria Ward is located within two blocks of Ala Moana Center, another regional mall owned by the Company, at its closest point. In total, Victoria Ward currently has 17 ground leases and 29 owned buildings containing in the aggregate approximately 878,000 square feet of retail space, as well as approximately 441,000 square feet of office, commercial and industrial leaseable area. Victoria Ward and Ala Moana Center are expected to complement each other. On June 24, 2002 GGP/Homart II refinanced the existing $178 million, 6% mortgage loan (with a scheduled maturity of December 2002) collateralized by Natick Mall. The new $168.4 million mortgage loan, bearing interest per annum equal to LIBOR plus 55 basis points, provides for monthly payments of principal and interest and matures, assuming the exercise of three, twelve-month extension options, in January 2007. On July 3, 2002 the Company obtained a new mortgage loan collateralized by the Crossroads Center in St. Cloud, Minnesota, which was previously unencumbered. The new $62 million mortgage loan bears interest at LIBOR plus 120 basis points and matures, assuming the exercise of one eighteen-month extension option, in July 2005. On July 9, 2002 the Company obtained a new mortgage loan collateralized by the Eden Prairie Mall in Eden Prairie (Minneapolis), Minnesota. The Eden Prairie Mall was previously subject to a construction loan which was paid in December, 2001 with a portion of the proceeds of the GGP MPTC financing (Note 4). The new $55 million mortgage loan bears interest at a rate per annum equal to LIBOR plus 105 basis points, provides for monthly payments of interest only and matures in July 2007 assuming the exercise of all extension options. On July 10, 2002, the Company acquired JP Realty, Inc. ("JP Realty"), a publicly held real estate investment trust and its operating partnership subsidiary, Price Development Company, Limited Partnership ("PDC"). The total acquisition price was approximately $1,100 million which included the assumption of approximately $460 million in existing debt and approximately $116 million of existing preferred operating units. Pursuant to the terms of the merger agreement, each outstanding share of JP Realty common stock was converted into $26.10 in cash. Holders of common units of limited partnership 27 of 34 GENERAL GROWTH PROPERTIES, INC. interest in PDC was received $26.10 per unit in cash or, at the election of the holder, .522 8.5% Series B Cumulative Preferred Units of the Operating Partnership (convertible into common units of limited partnership interest of the Operating Partnership based on a conversion price of $50 per unit). JP Realty owns or has an interest in 51 properties, including 18-enclosed regional mall centers, 26 anchored community centers, one free-standing retail property and 6 mixed-use commercial/business properties, containing an aggregate of over 15.1 million square feet of GLA in 10 western states. The cash acquisition price was funded from a combination of the net proceeds from the new Eden Prairie and Crossroads mortgage loans described above, a $350 million acquisition loan obtained from a group of commercial banks, and available cash and cash equivalents. The acquisition loan bears interest at a rate per annum of LIBOR plus 150 basis points, provides for periodic principal payments (including from certain refinancing proceeds) and matures in July 2003. On August 5, 2002 the Operating Partnership acquired Prince Kuhio Plaza in Hilo, Hawaii from GGP/Homart for approximately $39 million. The purchase price was comprised of the assumption of approximately $24 million of GGP MPTC financing, a note for $7.5 million and $7.5 million in cash. The $7.5 million note, payable to GGP/Homart, was distributed to the Operating Partnership in conjunction with the distribution of the $7.5 million of cash proceeds to NYSCRF. The Operating Partnership then cancelled the $7.5 million note. Subsequent to June 30, 2002, the Company has entered into a series of related contracts to purchase three enclosed regional malls. Although the Company is prepared to purchase 100% of the three malls, it is currently discussing the formation of a new 50/50 joint venture (the "Joint Venture") with an institutional investor (the "Institutional Investor"). If completed, the Joint Venture would own the aforementioned three malls as well as another enclosed regional mall that is currently 100% owned by the Institutional Investor. Accordingly, the Company will either acquire 100% of three malls or a 50% joint venture equity interest in the same three malls and a 50% joint venture equity interest in another mall. As of the date of this report, Company management believes that the most likely outcome will be the formation of the Joint Venture. If completed, the Joint Venture would own and operate four malls with an initial value of approximately $635 million. Joint Venture debt would include approximately $75 million of existing long term debt to be assumed at closing and approximately $337 million of new acquisition debt. The Company anticipates obtaining additional financing (currently expected to be two new loans comprising approximately $150 million in the aggregate) related to currently unencumbered real estate assets to fund the Company's portion of the acquisition cost of the new malls that is not covered by assumed debt and new direct property level acquisition loans. If the 50/50 Joint Venture discussions do not lead to a binding agreement, the Company will acquire 100% of the three malls that it is currently committed to purchase. It is now anticipated that either the 50/50 Joint Venture for four malls or the 100% acquisition of three malls will occur near the end of August, 2002 or in early September, 2002. Subsequent to June 30, 2002, the Company also entered into two separate contracts in connection with two addition potential acquisitions with total aggregate consideration in the range of $115 million to $120 million. Both contracts are subject to the satisfactory completion of due diligence and, as such, the Company is not currently committed to make either acquisition and in fact may not complete either one or may complete only one acquisition. It is currently anticipated that the Company will determine whether or not to complete either acquisition by the end of September, 2002. Net cash provided by operating activities was $174.6 million in the first six months of 2002, an increase of $125.2 million from $49.4 million in the same period in 2001, due to 2001 being impacted by an overall reduction in accounts payable and the network discontinuance costs. Net cash used by investing activities was $109.7 million in the first six months of 2002 compared to $129.3 million of cash used in the first six months of 2001. Cash flows from investing activities were impacted by the higher volume of acquisition and development activity for the consolidated real estate properties in the first six months of 2002 as compared to the first six months in 2001 as further described in Note 2. This activity was partially offset by the sale of the Company's $155 million of marketable securities in May 2002. Financing activities represented a use of cash of $146.4 million in the first six months of 2002, compared to a source of cash of $100.4 million in 2001. A major contributing factor to the variance in the cash provided from financing activity is that financing from mortgages and other debt, net of repayments of principal on mortgage debt, had a negative impact of $90.8 million in the first six months of 2002 versus a positive impact of $198.2 million in the first six months of 2001. In order to remain qualified as a real estate investment trust for federal income tax purposes, General Growth must distribute or pay tax on 100% of capital gains and at least 90% of its ordinary taxable income to stockholders. The following factors, among others, will affect operating cash flow and, accordingly, influence the decisions of the Board of Directors regarding distributions: (i) scheduled increases in base rents of existing leases; (ii) changes in minimum base rents and/or overage rents attributable to replacement of existing leases with new or renewal leases; (iii) changes in occupancy rates at existing centers and 28 of 34 GENERAL GROWTH PROPERTIES, INC. procurement of leases for newly developed centers; and (iv) General Growth's share of distributions of operating cash flow generated by the Unconsolidated Real Estate Affiliates, less oversight costs and debt service on additional loans that have been or will be incurred. General Growth anticipates that its operating cash flow, and potential new debt or equity from future offerings, new financings or refinancings will provide adequate liquidity to conduct its operations, fund general and administrative expenses, fund operating costs and interest payments and allow distributions to General Growth preferred and common stockholders in accordance with the requirements of the Internal Revenue Code of 1986, as amended, for continued qualification as a real estate investment trust and to avoid any federal income or excise tax on General Growth. During 2001, the retail sector was experiencing declining growth due to layoffs, eroding consumer confidence, falling stock prices and the September 11th attacks. Although the 2001 holiday season was generally stronger than economist predictions, the retail sector and the economy as a whole has not recovered significantly in the six months ended June 30, 2002. Declines in the retail market adversely impact the Company as demand for leasable space is reduced and rents computed as a percentage of tenant sales declines. In addition, a number of local, regional and national retailers, including tenants of the Company, have voluntarily closed their stores or filed for bankruptcy protection during the last few years. Most of the bankrupt retailers reorganized their operations and/or sold stores to stronger operators. Although some leases were terminated pursuant to the lease cancellation rights afforded by the bankruptcy laws, the impact on Company earnings was negligible. Over the last three years, the provision for doubtful accounts has averaged $3.3 million per year, which represents less than 1/2 of 1% of average total revenues of $704.9 million. In addition, the Company historically has generally been successful in finding new uses or tenants for retail locations that are vacated either as a result of voluntary store closing or bankruptcy proceedings. Therefore, the Company does not expect these store closings or bankruptcy reorganizations to have a material impact on its consolidated financial results of operations. The events of September 11th will also have an impact on the Company's insurance coverage. The Company has coverage for terrorist acts in its policies that are scheduled to expire in September 2002. However, it is anticipated that such coverage will be excluded from its standard property policies at the time of renewal. Accordingly, the Company expects to obtain a separate policy for terrorist acts. The Company's premiums, including the cost of a separate terrorist policy, are expected to increase significantly for property coverage and liability coverage. These increases will impact the Company's annual common area maintenance rates paid in the future by the Company's tenants. The Company has over the past nine months experienced a significant increase in the market price of its Common Stock. Accordingly, certain options granted under its incentive stock plans that vest based on the market price of the Common Stock have vested and certain additional options may vest in the remainder of 2002. Under current accounting standards, such vesting would cause the recognition of approximately $10.3 million of additional compensation expense in 2002, including approximately $3.4 million recognized in March 2002 and approximately $3.8 million recognized in the second quarter 2002 as described above and in Note 1. In addition, the Company has adopted SFAS 123 for future grants of Stock options as more fully discussed in Note 1. The Internet and electronic retailing are growing at significant rates. Although the amount of retail sales conducted solely via the Internet is expected to rise in the future, the Company believes that traditional retailing and "e-tailing" will converge such that the regional mall will continue to be a vital part of the overall mix of shopping alternatives for the consumer. On July 30, 2002 the Sarbanes-Oxley Act of 2002 (the "Act") was signed into law by the President of the United States. The Act imposes, among other things, new obligations for disclosure and corporate governance on public companies and directs the SEC and other regulatory bodies to issue additional broad regulations to implement its provisions. Certain of such obligations are effective for this quarterly 29 of 34 GENERAL GROWTH PROPERTIES, INC. report and accordingly, the Company has included the required certifications in this report as exhibits 99.1 and 99.2. The Company intends to comply fully with all such current and future regulations as may be issued as a result of the Act. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS As described in Note 8, the FASB, has issued certain statements, which are effective for the current or subsequent year. The Company does not expect a significant impact on its annual reported operations due to the application of such new statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into any transactions using derivative commodity instruments. The Company is subject to market risk associated with changes in interest rates. Interest rate exposure is principally limited to the $1,131.6 million of debt of the Company outstanding at June 30, 2002 that is priced at interest rates that vary with the market. However, approximately $666.4 million of such floating rate consolidated debt is comprised of non-recourse commercial mortgage-backed securities which are subject to interest rate swap agreements, the effect of which is to fix the interest rate the Company is required to pay on such debt to approximately 4.85% per annum. Therefore, a 25 basis point movement in the interest rate on the remaining $465.2 million of variable rate debt would result in an approximately $1.2 million annualized increase or decrease in consolidated interest expense and cash flows. The remaining debt is fixed rate debt. In addition, the Company is subject to interest rate exposure as a result of the variable rate debt collateralized by the Unconsolidated Real Estate Affiliates for which similar interest rate swap agreements have not been obtained. The Company's share (based on the Company's respective equity ownership interests in the Unconsolidated Real Estate Affiliates) of such variable rate debt was approximately $596.3 million at June 30, 2002. A similar 25 basis point annualized movement in the interest rate on the variable rate debt of the Unconsolidated Real Estate Affiliates would result in an approximately $1.5 million annualized increase or decrease in the Company's equity in the income and cash flows from the Unconsolidated Real Estate Affiliates. The Company is further subject to interest rate risk with respect to its fixed rate financing in that changes in interest rates will impact the fair value of the Company's fixed rate financing. The Company has an ongoing program of refinancing its consolidated and unconsolidated variable and fixed rate debt and believes that this program allows it to vary its ratio of fixed to variable rate debt and to stagger its debt maturities to respond to changing market rate conditions. Reference is made to Item 2 above and Note 4 for additional debt information. 30 of 34 GENERAL GROWTH PROPERTIES, INC. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on May 8, 2002, the stockholders voted upon the election of Mathew Bucksbaum and Beth Stewart as Directors of the Company, each for a term of three years, and the approval of an amendment to the 1998 Incentive Stock Plan to increase the number of shares available for issuance thereunder by 1,000,000 shares. A total of 62,017,756 shares were eligible to vote on each matter presented at the Annual Meeting and which were approved by the following votes of stockholders:
NUMBER OF MATTER SHARES FOR WITHHELD --------------------------------------------------------------------------------------------------------- 1. (a) Election of Mathew Bucksbaum 52,191.877 533,579 (b) Election of Beth Stewart 51,757,689 967,767 NUMBER OF NUMBER OF SHARES NUMBER OF SHARES MATTER SHARES FOR AGAINST ABSTAIN --------------------------------------------------------------------------------------------------------- 2. APPROVAL of Amendment of 1998 Incentive Stock Plan 48,620,945 3,970,645 133,145
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Second Amendment to the Second Amended and Restated Operating Agreement of GGPLP L.L.C. dated May 13, 2002. 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002-John Bucksbaum. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002-Bernard Freibaum. (b), (c) Reports on Form 8-K and proforma information The following report on Form 8-K has been filed by the Company during the quarter covered by this report. Current Report on Form 8-K dated May 28, 2002 describing under Item 5 the acquisition of Victoria Ward, Limited. No financial statements were required to be filed with the report. 31 of 34 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENERAL GROWTH PROPERTIES, INC. (Registrant) Date: August 13, 2002 by: /s/ Bernard Freibaum -------------------------------- Bernard Freibaum Executive Vice President and Chief Financial Officer (Principal Accounting Officer) 32 of 34 EX-10.1 3 c71196exv10w1.txt 2ND AMENDED & RESTATED OPERATING AGREEMENT EXHIBIT 10.1 SECOND AMENDMENT TO SECOND AMENDED AND RESTATED OPERATING AGREEMENT OF GGPLP L.L.C. SECOND AMENDMENT TO SECOND AMENDED AND RESTATED OPERATING AGREEMENT OF GGPLP L.L.C. (this "Second Amendment") is made and entered into on the 13th day of May, 2002, by and among the undersigned parties. W I T N E S S E T H: - - - - - - - - - - WHEREAS, a Delaware limited liability company known as GGPLP L.L.C. (the "Company") exists pursuant to the Delaware Limited Liability Company Act and that certain Second Amended and Restated Operating Agreement dated April 17, 2002, as amended by that certain First Amendment thereto dated April 23, 2002 (the "Restated Agreement"), among GGP Limited Partnership, a Delaware limited partnership, GGP American Properties Inc., a Delaware corporation, Caledonian Holding Company, Inc., a Delaware corporation, GSEP 2000 Realty Corp., a Delaware corporation, GS 2002 Realty Corp., a Delaware corporation, and General Growth Properties, Inc., a Delaware corporation ("GGPI"); WHEREAS, concurrently herewith, DA Retail Investments, LLC, a Delaware limited liability company ("DAI"), is contributing $5,000,000 to the capital of the Company and, in exchange therefor, the Company is issuing to DAI Series C Preferred Units (as defined in the Restated Agreement, as amended hereby); and WHEREAS, the parties hereto, constituting a Majority-In-Interest of the Common Units (as defined in the Restated Agreement) and DAI, desire to amend the Restated Agreement to reflect such capital contribution and the establishment and issuance of Series C Preferred Units and to set forth certain other understandings. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. CAPITALIZED TERMS. Capitalized terms used but not defined herein shall have the definitions assigned to such terms in the Restated Agreement, as amended hereby. 2. AMENDMENT TO SECTION 1.1. (a) Section 1.1 of the Restated Agreement is hereby amended by deleting the last sentence of the definition of "Units" and inserting the following in its place and stead: "The number and designation of all Units held by each Member as of May 13, 2002 is set forth opposite such Member's name on Schedule A." (b) Section 1.1 of the Restated Agreement is hereby amended by deleting the definition of "Closing Price" and inserting the following in its place and stead: "`Closing Price' shall mean, with respect to any Common Shares on any date, the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system if the Common Shares are listed or admitted to trading on the New York Stock Exchange or, if the Common Shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if the Common Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System or, if such system is no longer in use, the principal other automated quotations system that may then be in use or, if the Common Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Shares as such person is selected from time to time by the Board of Directors of GGPI." (c) Section 1.1 of the Restated Agreement is hereby amended by deleting the definition of "Gross Asset Value" and inserting the following in its place and stead: "Gross Asset Value" shall mean, with respect to any asset of the Company, such asset's adjusted basis for Federal income tax purposes, except as follows: (a) the initial Gross Asset Value of (i) the assets contributed by each Member to the Company prior to the date hereof is the gross fair market value of such contributed assets as indicated in the books and records of the Company as of the date hereof, and (ii) any asset hereafter contributed by a Member (including the Managing Member), other than money, is the gross fair market value thereof as reasonably determined by the Managing Member using such reasonable method of valuation as the Managing Member may adopt; (b) if the Managing Member reasonably determines that an adjustment is necessary or appropriate to reflect the relative economic interests of the Members, the Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the Managing Member, as of the following times: (i) a Capital Contribution (other than a de minimis Capital Contribution) to the Company by a new or existing Member as consideration for Units; and (ii) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for the redemption of Units; and 2 (c) the Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the Managing Member, upon the liquidation of the Company within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations; (d) the Gross Asset Values of Company assets distributed to any Member shall be the gross fair market values of such assets (taking Section 7701(g) of the Code into account) as reasonably determined by the Managing Member as of the date of distribution; and (e) the Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations (See Exhibit A); provided, however, that Gross Asset Values shall not be adjusted pursuant to this paragraph to the extent that the Managing Member reasonably determines that an adjustment pursuant to paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (e). At all times, Gross Asset Values shall be adjusted by any Depreciation taken into account with respect to the Company's assets for purposes of computing Net Income and Net Loss. Any adjustment to the Gross Asset Values of Company property shall require an adjustment to the Members' Capital Accounts; as for the manner in which such adjustments are allocated to the Capital Accounts, see paragraph (c) of the definition of Net Income and Net Loss in the case of adjustment by Depreciation, and paragraph (e) of said definition in all other cases. (d) Section 1.1 of the Restated Agreement is hereby amended by inserting the following new defined terms in appropriate alphabetical order in such section: "DAI" shall mean DA Retail Investments, LLC, a Delaware limited liability company. "DAI Contribution Obligation" shall mean the obligation of DAI to make a Capital Contribution pursuant to Section 7.8 hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended." "Exculpatory Liabilities" shall mean Company liabilities with respect to which both of the following conditions are met: (i) the creditor's right to repayment is not limited to specified assets of the Company (i.e., the liability constitutes a recourse obligation of the Company), and (ii) no Member or related person bears the economic risk of loss for such liability (as determined pursuant to Section 1.752-2 of the Regulations, except that for this purpose the DAI Contribution Obligation shall be disregarded). 3 "Gross Asset Value Available to Pay Recourse Liabilities and Exculpatory Liabilities" shall be determined upon liquidation of the Company and shall mean the excess of (i) the aggregate Gross Asset Value of all Company assets (not including the DAI Contribution Obligation or any similar capital contribution obligation or capital account restoration obligation of any other Member), except that for this purpose Code Section 7701(g) shall not be applied in determining the fair market value of an asset solely because it is subject to or available to satisfy one or more Exculpatory Liabilities, over (ii) the aggregate amount of all Nonrecourse Liabilities other than Exculpatory Liabilities. "Recourse Liabilities" shall mean Company liabilities with respect to which a Member or related person bears the economic risk of loss (as determined pursuant to Section 1.752-2 of the Regulations, except that for this purpose the DAI Contribution Obligation shall be disregarded). "Securities Act" shall mean the Securities Act of 1933, as amended. 3. NEW SECTION 4.8. Article IV of the Restated Agreement is hereby amended by adding the following new section at the end thereof: "4.8 ESTABLISHMENT OF SERIES C PREFERRED UNITS. A new series of Preferred Units designated as the "8.25% Series C Cumulative Preferred Units" (the "Series C Preferred Units") is hereby established and shall have such rights, preferences, limitations and qualifications as are described on Schedule C, attached hereto and by this reference made a part hereof (in addition to the rights, preferences, limitations and qualifications contained elsewhere in this Agreement, to the extent applicable). The maximum number of Series C Preferred Units which may be issued by the Company from time to time shall be 20,000." 4. ISSUANCE OF SERIES C PREFERRED UNITS. Concurrently herewith, the Company is issuing to DAI 20,000 Series C Preferred Units in exchange for a Capital Contribution by DAI of $5,000,000. DAI is hereby admitted as a Member in respect of the Series C Preferred Units issued to it, and DAI hereby agrees to be bound by the provisions of the Restated Agreement, as the same is amended hereby and as the same may be amended from time to time, with respect to such Series C Preferred Units. Series C Preferred Units shall not have any relative, participating, optional or other special rights and powers other than as set forth in the Restated Agreement, as the same is amended hereby. Series C Preferred Units that are redeemed or purchased by the Company shall be cancelled and may not be reissued. 5. AMENDMENT TO SECTION 7. Section 7 of the Restated Agreement is hereby amended by adding the following new Section 7.8 at the end thereof: "7.8 DAI CONTRIBUTION OBLIGATION. Notwithstanding any other provision of this Agreement (including Schedule C to this Agreement): (a) Upon liquidation of the Company, in the event that the Gross Asset Value Available to Pay Recourse Liabilities and Exculpatory Liabilities is less than One Hundred Million Dollars ($100,000,000), DAI shall make a Capital 4 Contribution to the Company of cash in immediately available funds equal to the least of (i) One Hundred Million Dollars ($100,000,000), (ii) the amount by which One Hundred Million Dollars ($100,000,000) exceeds the Gross Asset Value Available to Pay Recourse Liabilities and Exculpatory Liabilities and (iii) the aggregate amount of Recourse Liabilities and Exculpatory Liabilities outstanding immediately prior to the liquidation of the Company. Such amount shall be used to pay Recourse Liabilities and/or Exculpatory Liabilities or shall be distributed to Members other than DAI in accordance with their positive Capital Account balances. (b) DAI shall make any Capital Contribution required to be made by it pursuant to this Section 7.8 no later than the later to occur of (i) the last day of the taxable year of the Company in which such liquidation occurs or (ii) 90 days after the date of such liquidation. (c) Any Capital Contribution made by DAI pursuant to this Section 7.8 and the associated Capital Account credit shall be taken into account in allocating Net Income and Net Loss and other items of income, gain, loss and deduction for the taxable year of liquidation. (d) DAI shall not be subrogated to the rights of any creditor or other person receiving the proceeds of the Capital Contribution made by DAI pursuant to this Section 7.8 against the Managing Member, the Company, another Member or any person. DAI hereby waives any right to reimbursement, contribution or similar right to which DAI might otherwise be entitled as a result of the performance of its obligations under this Section 7.8. (e) Section 4.4 and Section 4.6 hereof shall not apply with respect to DAI's obligations pursuant to this Section 7.8. (f) The parties intend that DAI shall bear the economic risk of loss within the meaning of Section 1.752-2(a) of the Regulations with respect to an amount of Exculpatory Liabilities and/or Recourse Liabilities equal to the lesser of One Hundred Million Dollars ($100,000,000) and the aggregate amount of Recourse Liabilities and Exculpatory Liabilities, and this Section 7.8 and other relevant provisions of this Agreement shall be interpreted and applied in a manner consistent therewith. (g) Notwithstanding any other provision of this Agreement, at any time on or after June 1, 2005, DAI may terminate the DAI Contribution Obligation by providing twelve (12) months' prior written notice to the Company, provided however that the DAI Contribution Obligation shall not terminate if during the twelve (12) month period following such notice there has been: (i) An entry of a decree or order for relief in respect of the Company by a court having jurisdiction over a substantial part of the Company's assets, or the appointment of a receiver, liquidator, assignee, 5 custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of the Company's affairs, in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law; or (ii) The commencement against the Company of an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law; or (iii) The commencement by the Company of a voluntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or other similar law, or the consent by it to the entry of an order for relief in an involuntary case under any such law or the consent by it to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of a general assignment for the benefit of creditors, or the failure of Company generally to pay its debts as such debts become due or the taking of any action in furtherance of any of the foregoing; provided that, after the passage of such 12 months, DAI shall cease to be liable for the DAI Contribution Obligation, at the first time, if any, that the appointment, case or proceeding referred to in Section 7.8(g)(i) through (iii) above has terminated. (h) As a result of the transfer of all or a portion of the Series C Preferred Units to a Permitted DAI Transferee pursuant to Section 7 of Schedule C, the transferor shall continue to be obligated for the entire amount of the DAI Contribution Obligation except to the extent that such Permitted DAI Transferee agrees to assume all or a portion of such transferor's obligation under the DAI Contribution Obligation. In the event of such a transfer to and assumption by the Permitted DAI Transferee, (1) the transferor and the Permitted DAI Transferee assuming the obligation under the DAI Contribution Obligation shall notify the Company that the Permitted DAI Transferee has assumed all or a portion of the DAI Contribution Obligation in connection with such transfer, and (2) this Agreement shall be amended to reflect such Permitted DAI Transferee's assumption of all or a portion of the DAI Contribution Obligation. Except to the extent that the Permitted DAI Transferee assumes all or a portion of the obligation under the DAI Contribution Obligation in accordance with this Section 7.8(h), the transferor shall not be relieved of such obligation and shall continue to be obligated under the DAI Contribution Obligation notwithstanding the transfer and to the same extent as if the transfer had not occurred. Following the transfer of Series C Preferred Units to GGPI or the Managing Member pursuant to Section 6 of Schedule C, the transferor shall continue to be obligated for the entire amount 6 of the DAI Contribution Obligation in accordance with its terms and neither GGPI nor the Managing Member shall have any liability therefor." 6. NEW SCHEDULE A. Schedule A to the Restated Agreement, identifying the Members and the number and type hereby inserted in its place and stead. 7. NEW SCHEDULE C. Schedule C in the form attached hereto, fixing the powers, preferences, rights, qualifications, limitations and restrictions of the Series C Preferred Units, is hereby added to the Restated Agreement and inserted after Schedule B thereto. 8. OTHER PROVISIONS UNAFFECTED. Except as expressly amended hereby, the Restated Agreement shall remain in full force and effect in accordance with its terms. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, each of the parties hereto has executed this Second Amendment (and GGPI has executed this Second Amendment solely for the purpose of binding itself under Section 6 of Schedule C to the Restated Agreement, as amended hereby) on the day and year first above written. GGP LIMITED PARTNERSHIP, a Delaware limited partnership By: GENERAL GROWTH PROPERTIES, INC., a Delaware corporation, its general partner By: /s/ Bernard Freibaum --------------------------------------- Name: Bernard Freibaum ---------------------------------- Title: Executive Vice President ---------------------------------- 110 North Wacker Drive Chicago, Illinois 60606 Attention: John Bucksbaum Facsimile No.: 312-960-5463 DA RETAIL INVESTMENTS, LLC By: SAMUEL ZELL/ROBERT LURIE GENERAL PARTNERS, INC. a Delaware corporation, its managing member By: /s/ Philip Tinkler --------------------------------------- Name: Philip Tinkler ---------------------------------- Title: Treasurer ---------------------------------- c/o Equity Group Investment, LLC Two North Riverside Plaza, Suite 600 Chicago, Illinois 60606 Attention: Donald J. Liebentritt Facsimile No.: 312-575-7024 GENERAL GROWTH PROPERTIES, INC., a Delaware corporation By: /s/ Bernard Freibaum ------------------------------------------- Name: Bernard Freibaum -------------------------------------- Title: Executive Vice President -------------------------------------- 110 North Wacker Drive Chicago, Illinois 60606 Attention: John Bucksbaum Facsimile No.: 312-960-5463 8 SCHEDULE A MEMBERS
Member Common Units Preferred Units ------ ------------ --------------- GGP Limited Partnership 911,000 0 Caledonian Holding Company, Inc. 29,600 0 GGP American Properties Inc. 58,500 0 GSEP 2000 Realty Corp. 0 700,000 Series A Preferred Units GSEP 2002 Realty Corp. 0 240,000 Series B Preferred Units DA Retail Investments, LLC 0 20,000 Series C Preferred Units
A-1 SCHEDULE C TO THE SECOND AMENDED AND RESTATED OPERATING AGREEMENT OF GGPLP L.L.C. DESIGNATION, PREFERENCES AND RIGHTS OF SERIES C PREFERRED UNITS 1. DESIGNATION AND NUMBER; ETC. The Series C Preferred Units have been established and shall have such rights, preferences, limitations and qualifications as are described herein (in addition to the rights, preferences, limitations and qualifications contained in the Agreement to the extent applicable). The authorized number of Series C Preferred Units shall be 20,000. Notwithstanding anything to the contrary contained herein, in the event of a conflict between the provisions of this Schedule C and any other provision of the Agreement, the provisions of this Schedule C shall control. Series C Preferred Units shall not have any relative, participating, optional or other special rights and powers other than as set forth herein. 2. RANK OF THE SERIES C PREFERRED UNITS. The Series C Preferred Units shall, with respect to distribution rights and rights upon liquidation, dissolution or winding up of the Company, rank as follows: (a) senior to all classes or series of Common Units and all series of Preferred Units that are not referred to in Section 2(b) or (c) of this Schedule C (the Common Units and the Preferred Units ranking junior to the Series C Preferred Units with respect to distribution rights and rights upon liquidation, dissolution and winding up, collectively, "Series C Junior Units"); (b) on parity with the Series A Preferred Units, the Series B Preferred Units and each other series of Preferred Units that is hereafter created and that provides by its express terms that it ranks on parity with the Series C Preferred Units as to distribution rights and rights upon liquidation, dissolution and winding-up of the Company (the "Series C Parity Units"); and (c) junior to any class or series of Preferred Units that is hereafter established, that provides by its express terms that it ranks senior to the Series C Preferred Units and that is approved in accordance with the provisions of Section 3 of this Schedule C. 3. VOTING. The Company shall not, without the affirmative vote or consent of the holders of at least fifty-one percent (51%) of the Series C Preferred Units outstanding at such time, (a) reclassify any Common Units into Preferred Units ranking senior to or on parity with the Series C Preferred Units with respect to the payment of distributions or distribution of assets upon liquidation, dissolution or winding-up of the Company, (b) issue additional Series C Preferred Units or (c) amend, alter or repeal this Section 3 or any other provisions of this Schedule C or the Agreement, whether by merger, consolidation or otherwise (a "Series C Event"), so as to negate the provisions of clause (a) or (b) of this paragraph or materially and adversely affect any special right, preference, privilege or voting power of the holders of the Series C Preferred Units. Notwithstanding anything to the contrary contained herein, each of the following shall be deemed not to materially and adversely affect such rights, preferences, privileges or voting power and shall not require the vote or consent of the holders of the Series C C-1 Preferred Units: (A) the occurrence of any of the Series C Events set forth in clause (c) of this paragraph so long as Series C Preferred Units remain outstanding with the terms thereof materially unchanged (taking into account that, upon the occurrence of such Series C Event, the Company may not be the surviving entity) and the surviving entity is a Qualified Entity, (B) the authorization or creation of, or the increase in the authorized or issued amount of, the Common Units or any other series of Preferred Units, whether ranking senior or junior to or on parity with the Series C Preferred Units (and any amendments to the Agreement to effect such increase, creation or issuance), provided that no such action alters the parity of the Series C Preferred Units with the Series A Preferred Units and the Series B Preferred Units, and (C) the liquidation, dissolution and winding-up of the Company. In addition, the Company shall not, without the affirmative vote or consent of the holders of at least fifty-one percent (51%) of the Series A Preferred Units, Series B Preferred Units and Series C Preferred Units outstanding at such time (voting together as a single class), authorize or create, or increase the authorized or issued amount of, any class or series of Units ranking senior to the Series C Preferred Units with respect to payments of distributions or rights upon liquidation, dissolution or winding up of the Company (but the provisions of this sentence only shall apply with respect to any such authorization, creation or increase if there are Series A Preferred Units and/or Series B Preferred Units outstanding at the time of such authorization, creation or issuance). For purposes of the provisions of this Section 3, each Series C Preferred Unit (and for purposes of the last sentence of the immediately preceding paragraph, the Series A Preferred Units and Series B Preferred Units) shall have one (1) vote. Notwithstanding anything to the contrary contained herein, the foregoing voting provisions shall not apply if, prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series C Preferred Units shall have been exchanged or redeemed. Except as provided herein, the holders of Series C Preferred Units shall have no voting or consent rights or other rights to participate in the management of the Company or to receive notices of meetings. 4. DISTRIBUTIONS. (a) Payment of Distributions. Each holder of Series C Preferred Units will be entitled to receive, when, as and if declared by the Managing Member, out of Net Operating Cash Flow and subject to the right to payment of the holders of Preferred Units ranking senior to or on parity with the Series C Preferred Units, cumulative preferential cash distributions per Series C Preferred Unit at the rate per annum of 8.25% of the $250 base liquidation preference thereof (or $5.15625 per quarter) (the "Series C Preferred Unit Distribution"). Series C Preferred Unit Distributions with respect to any Series C Preferred Units shall be cumulative, shall accrue from the date of the issuance of such Series C Preferred Units and will be payable (i) quarterly when, as and if authorized and declared by the Managing Member, in arrears, on the 15th day of January, April, July and October of each year and (ii) in the event of an exchange or redemption of Series C Preferred Units, on the exchange or redemption date, as applicable (each a "Series C Preferred Unit Distribution Payment Date"), commencing on the first of such payment dates to occur following their original date of issuance. The amount of distribution per Series C C-2 Preferred Unit accruing in each full quarterly distribution period shall be computed by dividing the annual distribution rate by four. The amount of distributions payable for the initial distribution period or any other period shorter or longer than a full quarterly distribution period on the Series C Preferred Units will be computed on the basis of twelve 30-day months and a 360-day year and the actual number of days elapsed in such a thirty (30) day month. If any Series C Preferred Unit Distribution Payment Date is not a Business Day, then payment of the Series C Preferred Unit Distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day (without any deduction), in each case with the same force and effect as if made on such date. Series C Preferred Unit Distributions will be made to the holders of Series C Preferred Units of record on the relevant record dates, which will be fifteen (15) days prior to the relevant Series C Preferred Unit Distribution Payment Date. (b) Distributions Cumulative. Notwithstanding the foregoing, Series C Preferred Unit Distributions will accrue whether or not the terms and provisions of the Agreement or any other agreement of the Company at any time prohibit the current payment of distributions, whether or not the Company has revenues, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accrued but unpaid Series C Preferred Unit Distributions will accumulate as of the Series C Preferred Unit Distribution Payment Date on which they first become payable. Any accrued but unpaid Series C Preferred Unit Distributions that are not paid on or prior to the date that they first become payable are hereinafter referred to as "Series C Accumulated Preferred Unit Distributions." No interest or sum of money in lieu of interest will be payable in respect of any Series C Accumulated Preferred Unit Distributions. Series C Accumulated Preferred Unit Distributions may be declared and paid at any time, without reference to any regular Series C Preferred Unit Distribution Payment Date. (c) Priority as to Distributions. (i) So long as any Series C Preferred Units are outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any Series C Parity Units, nor shall any cash or other property be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series C Parity Units, unless, in each case, all Series C Accumulated Preferred Unit Distributions have been paid in full (or have been declared and a sum sufficient for such payment has been set aside therefor) or when Series C Accumulated Preferred Unit Distributions are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all distributions declared upon Series C Preferred Units and all distributions declared upon any other series or class or classes of Series C Parity Units shall be declared ratably in proportion to the respective amounts of distributions accumulated and unpaid on the Series C Preferred Units and such Series C Parity Units. (ii) So long as any Series C Preferred Units are outstanding, no distribution of cash or other property (other than distributions paid solely in Series C Junior Units or options, warrants or other rights to subscribe for or purchase Series C Junior Units) shall C-3 be authorized, declared, paid or set apart for payment on or with respect to any class or series of Series C Junior Units nor shall any cash or other property be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series C Junior Units (other than consideration paid solely in Series C Junior Units or options, warrants or other rights to subscribe for or purchase Series C Junior Units) unless, in each case, all Series C Accumulated Preferred Unit Distributions have been paid in full or have been declared and a sum sufficient for payment thereof has been set aside therefor. (iii) So long as there are Series C Accumulated Preferred Unit Distributions (and a sum sufficient for full payment of Series C Accumulated Preferred Unit Distributions is not so set apart), all future Series C Preferred Unit Distributions shall be authorized and declared so that the amount of Series C Preferred Unit Distributions per Series C Preferred Unit shall in all cases bear to each other the same ratio that Series C Accumulated Preferred Unit Distributions per Series C Preferred Unit bear to each other. (iv) Notwithstanding anything to the contrary set forth herein, distributions on Units held by the Managing Member ranking junior to or on parity with the Series C Preferred Units may be made, without preserving the priority of distributions described in Sections 4(c)(i) and (ii) of this Schedule C, but only to the extent such distributions are required to preserve the REIT status of GGPI. (d) No Further Rights. Except as provided in Section 5 hereof, holders of Series C Preferred Units shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the Series C Preferred Unit Distributions (and any Series C Accumulated Preferred Unit Distributions) described herein. 5. LIQUIDATION PREFERENCE. (a) Payment to Holders of Series C Preferred Units. In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, and subject to the right to payment of holders of Preferred Units ranking senior to or on parity with the Series C Preferred Units, before any payment or distribution of the assets of the Company shall be made to or set apart for the holders of Series C Junior Units, each holder of the Series C Preferred Units shall be entitled to receive an amount equal to such holder's Capital Account in respect of its Series C Preferred Units, but the holders of Series C Preferred Units shall not be entitled to any further payment in respect of their Series C Preferred Units. If, upon any such liquidation, dissolution or winding up of the Company, the assets of the Company, or proceeds thereof, distributable to the holders of Series C Preferred Units shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other Series C Parity Units, then such assets, or the proceeds thereof, shall be distributed among the holders of the Series C Preferred Units and the holders of any such other Series C Parity Units ratably in accordance with the respective amounts that would be payable on such Series C Preferred Units and any such other Series C Parity Units if all amounts payable thereon were paid in full. For the purposes of this Section 5, none of a consolidation or merger of the Company with or into one or more entities, a merger of an entity with or into the Company, a statutory share exchange by the Company or a sale, lease or conveyance of all or substantially all of the Company's assets shall C-4 be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Company. (b) Payments to Holders of Series C Junior Units. Subject to the rights of the holders of Series C Parity Units, after payment shall have been made in full to the holders of the Series C Preferred Units as provided in this Section 5, any series or class or classes of Series C Junior Units shall, subject to any respective terms and provisions applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series C Preferred Units shall not be entitled to share therein. 6. EXCHANGE RIGHTS. (a) Right to Exchange. (i) Subject to the other terms and conditions of this Section 6, Series C Preferred Units will be exchangeable in whole but not in part with GGPI at any time on or after June 1, 2012, at the option of the holders of at least fifty-one percent (51%) of all outstanding Series C Preferred Units, for authorized but previously unissued Common Shares (and in the event such option is exercised, such exercise and the Series C Exchange Notice (as defined below) given in connection therewith shall be deemed to apply to all issued and outstanding Series C Preferred Units and the holders thereof). Each holder of Series C Preferred Units will be entitled to receive for each Series C Preferred Unit held by it a number of Common Shares equal to the quotient of the Capital Account relating to such Series C Preferred Unit (adjusted and booked up or down to reflect fair market value of Company assets through the exchange closing date) (the amount of such Capital Account, the "Series C Exchange Price") divided by the Current Per Share Market Price as of the Trading Day immediately preceding the exchange closing date. This exchange right is only exercisable if, at the time of exercise, the fair market value of the Company's assets exceeds the Company's liabilities (and any preferred security claims senior to the Series C Preferred Units) by an amount at least equal to twice the sum of (1) the aggregate Capital Accounts of all holders of Series C Preferred Units plus (2) the aggregate Capital Accounts of all holders of Series C Parity Units. (ii) Notwithstanding anything to the contrary set forth in Section 6(a)(i) of this Schedule C, if a Series C Exchange Notice has been delivered to the Managing Member and GGPI, then the Managing Member or GGPI may at its option, within ten (10) Business Days after receipt of the Series C Exchange Notice, elect to purchase or cause the Company to redeem all or a portion of the outstanding Series C Preferred Units for cash at the Series C Exchange Price per Series C Preferred Unit. If such election by GGPI is made with respect to fewer than all of the outstanding Series C Preferred Units, the number of Series C Preferred Units held by each holder of Series C Preferred Units to be redeemed or purchased shall equal such holder's pro rata share (based on the percentage of the aggregate number of outstanding Series C Preferred Units that the total number of Series C Preferred Units held by such holder of Series C Preferred Units represents) of the aggregate number of Series C Preferred Units being redeemed or purchased. An election by the Managing Member or GGPI under this Section shall be C-5 effected by delivering notice thereof to the holders identified in the Series C Exchange Notice. (iii) If an exchange of all Series C Preferred Units pursuant to Section 6(a)(i) of this Schedule C would violate the provisions on ownership limitation of GGPI set forth in its Charter and such ownership limitation is not waived by GGPI, each holder of Series C Preferred Units shall be entitled to exchange the maximum number of Series C Preferred Units which would comply with the provisions on the ownership limitation of GGPI, and any Series C Preferred Units not so exchanged shall be purchased by GGPI or redeemed by the Company for cash in an amount determined in the manner set forth in subsection (ii) of this Section 6(a). (iv) If an exchange of all Series C Preferred Units pursuant to Section 6(a)(i) of this Schedule C is prohibited by virtue of the holder of the Series C Preferred Units being unable to make such customary representations and warranties as may be reasonably necessary for the Managing Member or GGPI to establish that the issuance of Common Shares pursuant to the exchange shall not be required to be registered under the Securities Act or any applicable state securities laws pursuant to Section 6(b)(i) below, any Series C Preferred Units not so exchanged shall be purchased by GGPI or redeemed by the Company for cash in an amount determined in the manner set forth in subsection (ii) of this Section 6(a). (b) Procedure for Exchange and/or Redemption of Series C Preferred Units. (i) The exchange right only may be exercised pursuant to a written notice of exchange (the "Series C Exchange Notice") delivered to the Managing Member and GGPI by holders of Series C Preferred Units owning at least fifty-one percent (51%) of the outstanding Series C Preferred Units by fax and certified mail postage prepaid. The closing of the exchange, purchase and/or redemption pursuant to this Section 6 shall occur within fifteen (15) Business Days following the giving of the Series C Exchange Notice. At the closing, the exchanging holder(s) shall deliver such instruments of transfer and other documents as GGPI or the Managing Member may reasonably request, and GGPI and/or the Company shall deliver to the exchanging holder(s) certificates representing the Common Shares and/or the cash redemption and/or purchase price. Notwithstanding anything to the contrary contained herein, any and all Series C Preferred Units to be exchanged for Common Shares pursuant to this Section shall be so exchanged in a single transaction at one time. As a condition to the exercise of the rights contained in this Section 6, each holder of Series C Preferred Units shall make such customary representations and warranties as may be reasonably necessary for the Managing Member or GGPI to establish that the issuance of Common Shares pursuant to the exchange shall not be required to be registered under the Securities Act or any applicable state securities laws, including without limitation representations and warranties that such holder is an accredited investor as such term is defined in Rule 501 of Regulation D promulgated pursuant to the Securities Act and that such holder is acquiring such Common Shares for investment, solely for its own account and not with a view to or for the resale or distribution thereof (other than pursuant to the Registration Statement, as defined below); provided, however, that in the event a holder is unable to make such representations, the C-6 condition shall be deemed satisfied with respect to such holder by virtue of Section 6(a)(iv). Any Common Shares issued pursuant to this Section to a holder of Series C Preferred Units shall be delivered as shares which are duly authorized, validly issued, fully paid and nonassessable, free of any pledge, lien, encumbrance or restriction other than those provided in the Charter or the by-laws of GGPI, the Securities Act or relevant state securities or blue sky laws or created by, through or under such holder, and any Series C Preferred Units as to which the exchange right has been exercised shall be free of any pledge, lien, encumbrance or restriction other than those provided in the Agreement, the Securities Act and relevant state securities or blue sky laws (and the parties shall make representations and warranties to the other to such effect). Subject to the provisions of Section 6(c) of this Schedule C, the certificates representing the Common Shares issued upon exchange of the Series C Preferred Units shall, in addition to any legend required by the Charter, contain the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR (B) IF THE CORPORATION HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF COUNSEL FOR THE HOLDER OF THE SHARES REPRESENTED HEREBY, OR OTHER EVIDENCE SATISFACTORY TO THE CORPORATION, THAT SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT AND THE RULES AND REGULATIONS THEREUNDER. (ii) In the event of an exchange of Series C Preferred Units, an amount equal to the Series C Accumulated Preferred Unit Distributions to the date of exchange on any Series C Preferred Units tendered for exchange shall continue to accrue on such Series C Preferred Units, which remain outstanding following such exchange, with the Managing Member as the holder of such Series C Preferred Units (GGPI having contributed the Series C Preferred Units to the Managing Member). Fractional Common Shares are not to be issued upon exchange but, in lieu thereof, the Managing Member will pay a cash adjustment based upon the Current Per Share Market Price as of the exchange closing date. (iii) During the thirty day period ending on the closing of any exchange, purchase and/or redemption pursuant to this Section 6, the holders of Series C Preferred Units shall not, directly or indirectly, buy or sell (including without limitation short-sell) any Common Shares, whether in the open market or in a negotiated transaction. (c) Registration of Common Shares. C-7 (i) As soon as practicable following the issuance of Common Shares pursuant to this Section 6 (but, subject to the provisions of the last sentence of Section 6(c)(ii) of this Schedule C, in no event more than 90 days following such issuance), GGPI shall file a Registration Statement on Form S-3 or other appropriate registration form (the "Registration Statement") with the SEC covering the resale by the initial holders of such Common Shares (the "Initial Holders") and shall use its reasonable best efforts to cause the Registration Statement to become effective as soon as practicable thereafter. Following the effective date of the Registration Statement and until the Common Shares covered by the Registration Statement have been sold or are eligible for resale under Rule 144(k) promulgated under the Securities Act, GGPI shall keep the Registration Statement current, effective and available for the resale by the Initial Holders of the Common Shares delivered to them pursuant to this Section 6. GGPI shall bear all expenses relating to filing such Registration Statement and keeping such Registration Statement current, effective and available; provided, however, that GGPI shall not be responsible for any brokerage fees or underwriting commissions due and payable by any holder of such Common Shares. (ii) During the time period when the Registration Statement is required to be current, effective and available under Section 6(c)(i) of this Schedule C, GGPI also shall: (1) prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus constituting a part thereof, as amended or supplemented (the "Prospectus"), as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the sale of the Common Shares covered by such Registration Statement whenever any Initial Holder shall desire to sell or otherwise dispose of the same but in no event beyond the period in which the Registration Statement is required to be kept in effect under Section 6(c)(i) of this Schedule C; (2) furnish to each Initial Holder, without charge, such number of authorized copies of the Prospectus, and any amendments or supplements to the Prospectus, in conformity with the requirements of the Securities Act, and such other documents as any Initial Holder may reasonably request in order to facilitate the public sale or other disposition of the Common Shares owned by the Initial Holders. (3) register or qualify the securities covered by the Registration Statement under state securities or blue sky laws of such jurisdictions as are reasonably required to effect a sale thereof and do any and all other acts and things which may be necessary or appropriate under such state securities or blue sky laws to enable the Initial Holders to consummate the public sale or other disposition in such jurisdictions of such securities; (4) before filing any amendments or supplements to the Registration Statement or the Prospectus, furnish copies of all such documents proposed to be filed to the Initial Holders who shall be afforded a reasonable C-8 opportunity to review and comment thereon; provided, however, that all such documents shall be subject to the approval of the Initial Holders insofar as they relate to information concerning the Initial Holders (including, without limitation, the proposed method of distribution of any Initial Holder's securities); (5) notify the Initial Holders promptly (A) when any such Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (B) of any request by the SEC or any state securities authority for amendments and supplements to such Registration Statement and the Prospectus or for additional information, (C) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of any such Registration Statement or the initiation of any proceedings for the purpose, (D) if, between the effective date of any such Registration Statement and the sale of the Common Shares to which it relates, GGPI receives any notification with respect to the suspension of the qualification of the Common Shares or initiation of any proceeding for such purpose, and (E) of the happening of any event during the period such Registration Statement is effective which in the judgment of GGPI makes any statement made in the Registration Statement or the Prospectus untrue in any material respect or which requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading; (6) use its reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest practicable time; (7) cooperate with each Initial Holder to facilitate the timely preparation and delivery of certificates representing Common Shares being sold, which certificates shall not bear any restrictive legends, provided the Common Shares evidenced thereby have been sold in a manner permitted by the Prospectus; and (8) upon the occurrence of any event contemplated by Section 6(c)(ii)(5)(E) hereof, promptly prepare and file a supplement or post-effective amendment to the Registration Statement or the Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Common Shares, the Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein in light of the circumstances under which they were made, not misleading. Notwithstanding anything to the contrary contained herein, the obligation to prepare and file the Registration Statement or any supplement or post-effective amendment thereto and any other obligations of GGPI hereunder shall be suspended if GGPI, relying upon advice of counsel, determines that disclosure of any information required to be included therein would be adverse to its interests, but such suspension shall not extend beyond 120 days with respect to any such specified event. C-9 (iii) GGPI hereby agrees to indemnify and hold harmless each Initial Holder and each person, if any, who controls such Initial Holder (within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act) from and against any and all losses, claims, damages, costs and expenses (including reasonable attorneys' fees) ("Claims") to which such Initial Holder or such controlling person may become subject, under the Securities Act or otherwise, caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse such Initial Holder and each such controlling person for any legal or other expenses reasonably incurred by such Initial Holder in connection with investigating or defending any such loss as such expenses are incurred; provided, however, that GGPI shall not be liable insofar as any such losses, claims, damages, costs and expenses (including reasonable attorneys' fees) are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to GGPI by any Initial Holder expressly for use therein. Each Initial Holder agrees to indemnify and hold harmless GGPI and each person, if any, who controls GGPI (within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act) from and against any and all Claims to which GGPI or such controlling person may become subject, under the Securities Act or otherwise, caused by any untrue statement or omission or alleged untrue statement or omission based upon such information furnished in writing to GGPI by such Initial Holder. (iv) Each Initial Holder agrees that, upon receipt of any notice from GGPI of the happening of any event of the kind described in Section 6(c)(ii)(5)(E), such Initial Holder will forthwith discontinue disposition of securities pursuant to the Registration Statement until such Initial Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 6(c)(ii)(8). (d) NO OTHER EXCHANGE RIGHTS. The Series C Preferred Units are not convertible into or redeemable or exchangeable for any other property or securities of GGPI, the Managing Member, the Company or any other Person at the option of any holder of Series C Preferred Units except as expressly provided in this Section 6 or in that certain Debt Maintenance Agreement by and between the Company and DAI of even date herewith. 7. TRANSFERS. Notwithstanding anything to the contrary contained in the Agreement, DAI, and any Permitted DAI Transferee (hereinafter defined) pursuant to this Section 7, may sell, assign or otherwise transfer all but not part of its Series C Preferred Units to a single Permitted DAI Transferee, without the consent of the Managing Member; provided, however, that (i) no such sale, conveyance or other transfer may be made unless the requirements of Section 8.3 of the Agreement (other than Section 8.3(b) thereof) and the second and fourth sentences of Section 8.2 of the Agreement are satisfied with respect to such sale, conveyance or other transfer, (ii) such Series C Preferred Units are held by one person for purposes of Treasury Regulation ss. 1.7704-1(h)(1)(ii), taking into account the "look-through" rules of Treas. Reg.ss. 1.7704-1(h)(3), (iii) the transferor and transferee provide the Company with representations and covenants reasonably satisfactory to the Company to assure the Company that the requirements C-10 described in (ii) above will be satisfied immediately after the transfer and at all times thereafter and (iv) the organizational documents of the proposed transferee prohibit the issuance or the transfer of any membership or other equity interests in such transferee if such transferee would thereafter be treated as owned by more than 14 persons under Treas. Reg.ss. 1.7704-1(h)(1), taking into account the look through rules of Treas. Reg.ss. 1.7704-1(h)(3). For this purpose, a "Permitted DAI Transferee" shall mean a transferee pursuant to this Section 7 that is any Person or Entity that is an Affiliate of DAI or a transferee pursuant to this Section 7 that is any Person or Entity that is an Affiliate of a Permitted DAI Transferee who was the transferee of Series C Preferred Units pursuant to this Section 7 by virtue of having itself constituted an Affiliate of DAI. In addition, DAI and each Permitted DAI Transferee respectively covenants on behalf of themselves and their respective direct or indirect equity owners that no issuances of membership or equity interests or transfers of membership or equity interests in DAI or any DAI Permitted Transferee or any Person owning a direct or indirect equity interest in either shall be made or effective if the Series C Preferred Units held by DAI or the DAI Permitted Transferee would thereafter be treated as owned by more than 14 persons under Treas. Reg.ss. 1.7704-1(h)(1), taking into account the look through rules of Treas. Reg.ss.1.7704-1(h)(3). C-11 EX-99.1 4 c71196exv99w1.txt CERTIFICATION OF CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of General Growth Properties, Inc. (the "Company') on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John Bucksbaum, in my capacity as Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John Bucksbaum - ------------------------------------------ John Bucksbaum Chief Executive Officer August 13, 2002 EX-99.2 5 c71196exv99w2.txt CERTIFICATION OF CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of General Growth Properties, Inc. (the "Company') on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bernard Freibaum, in my capacity as Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company /s/ Bernard Freibaum - ---------------------------- Bernard Freibaum Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----