<PAGE>
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UNITED STATES
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, 2000
SIMON PROPERTY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation or
organization)
001-14469 046268599
(Commission File No.) (I.R.S. Employer Identification No.)
National City Center
115 West Washington Street, Suite 15 East
Indianapolis, Indiana 46204
(Address of principal executive offices)
(317) 636-1600
(Registrant's telephone number, including area code)
SPG REALTY CONSULTANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation or
organization)
001-14469-01 13-2838638
(Commission File No.) (I.R.S. Employer Identification No.)
National City Center
115 West Washington Street, Suite 15 East
Indianapolis, Indiana 46204
(Address of principal executive offices)
(317) 636-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
As of August 7, 2000, 170,531,768 shares of common stock, par value $0.0001
per share, 3,200,000 shares of Class B common stock, par value $0.0001 per
share, and 4,000 shares of Class C common stock, par value $0.0001 per share
of Simon Property Group, Inc. were outstanding, and were paired with 1,737,358
shares of common stock, par value $0.0001 per share, of SPG Realty
Consultants, Inc.
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<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I--Financial Information Page
Item 1: Financial Statements
Simon Property Group, Inc. and SPG Realty Consultants, Inc.:
Combined Condensed Balance Sheets as of June 30, 2000 and December
31, 1999............................................................ 3
Combined Condensed Statements of Operations for the three-month and
six-month
periods ended June 30, 2000 and 1999................................ 4
Combined Condensed Statements of Cash Flows for the six-month periods
ended June 30, 2000 and 1999........................................ 5
Simon Property Group, Inc.:
Consolidated Condensed Balance Sheets as of June 30, 2000 and
December 31, 1999................................................... 6
Consolidated Condensed Statements of Operations for the three-month
and six-month periods ended June 30, 2000 and 1999.................. 7
Consolidated Condensed Statements of Cash Flows for the six-month
periods ended June 30, 2000 and 1999................................ 8
SPG Realty Consultants, Inc.:
Consolidated Condensed Balance Sheets as of June 30, 2000 and
December 31, 1999................................................... 9
Consolidated Condensed Statements of Operations for the three-month
and six-month periods ended June 30, 2000 and 1999.................. 10
Consolidated Condensed Statements of Cash Flows for the six-month
periods ended June 30, 2000 and 1999................................ 11
Notes to Unaudited Condensed Financial Statements........................ 12
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 20
Item 3: Qualitative and Quantitative Disclosure About Market Risk........ 26
Part II--Other Information
Items 1 through 6........................................................ 27
Signature.................................................................. 29
</TABLE>
2
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Assets:
Investment properties, at cost..................... $12,871,533 $12,802,052
Less--accumulated depreciation..................... 1,273,257 1,098,881
----------- -----------
11,598,276 11,703,171
Cash and cash equivalents.......................... 143,478 157,632
Tenant receivables and accrued revenue, net........ 241,927 289,152
Notes and advances receivable from Management
Company and affiliate............................. 163,903 162,082
Investments in unconsolidated entities, at equity.. 1,470,329 1,528,857
Other investments.................................. 51,658 44,902
Goodwill, net...................................... 38,970 39,556
Deferred costs and other assets, net............... 257,191 262,958
Minority interest, net............................. 38,900 34,933
----------- -----------
$14,004,632 $14,223,243
=========== ===========
Liabilities:
Mortgages and other indebtedness................... $ 8,805,667 $ 8,768,951
Accounts payable and accrued expenses.............. 440,252 479,783
Cash distributions and losses in partnerships and
joint ventures, at equity......................... 35,895 32,995
Other liabilities.................................. 128,270 213,909
----------- -----------
Total liabilities.............................. 9,410,084 9,495,638
----------- -----------
Commitments and contingencies (Note 11)..............
Limited partners' interest in the operating
partnerships........................................ 947,974 984,465
Limited partners' preferred interest in the SPG
operating partnership............................... 149,885 149,885
Preferred stock of subsidiary........................ 339,731 339,597
Shareholders' Equity:
Capital stock of Simon Property Group, Inc.:.......
All series of preferred stock.................... 538,684 542,838
Common stock, $.0001 par value, 400,000,000
shares authorized, 170,842,723 and 170,272,210
issued and outstanding, respectively............ 17 17
Class B common stock, $.0001 par value,
12,000,000 shares authorized, 3,200,000 issued
and outstanding................................. 1 1
Class C common stock, $.0001 par value, 4,000
shares authorized, issued and outstanding....... -- --
Capital stock of SPG Realty Consultants, Inc.:.....
Common stock, $.0001 par value, 7,500,000 shares
authorized, 1,740,467 and 1,734,762 issued and
outstanding, respectively....................... -- --
Capital in excess of par value..................... 3,311,005 3,298,025
Accumulated deficit................................ (657,570) (551,251)
Unrealized loss on long-term investment............ (973) (5,852)
Unamortized restricted stock award................. (26,225) (22,139)
Less common stock held in treasury at cost, 310,955
Paired Shares..................................... (7,981) (7,981)
----------- -----------
Total shareholders' equity..................... 3,156,958 3,253,658
----------- -----------
$14,004,632 $14,223,243
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Six
For the Three Months Months Ended June
Ended June 30, 30,
-------------------- ------------------
2000 1999 2000 1999
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Minimum rent...................... $ 294,265 $ 276,394 $590,727 $550,243
Overage rent...................... 6,718 14,586 18,756 28,026
Tenant reimbursements............. 154,303 139,555 299,147 276,838
Other income...................... 32,373 23,471 56,880 44,992
---------- ---------- -------- --------
Total revenue................... 487,659 454,006 965,510 900,099
---------- ---------- -------- --------
Expenses:
Property operating................ 79,459 72,003 156,441 140,507
Depreciation and amortization..... 99,140 89,765 197,628 179,525
Real estate taxes................. 49,729 44,123 98,151 91,043
Repairs and maintenance........... 16,195 16,976 35,760 36,888
Advertising and promotion......... 15,245 14,854 31,255 29,552
Provision for credit losses....... 2,214 2,951 4,345 4,794
Other............................. 9,375 6,691 18,484 14,249
---------- ---------- -------- --------
Total operating expenses........ 271,357 247,363 542,064 496,558
---------- ---------- -------- --------
Operating income................... 216,302 206,643 423,446 403,541
Interest expense................... 155,207 142,734 313,866 283,856
---------- ---------- -------- --------
Income before minority interest.... 61,095 63,909 109,580 119,685
Minority interest.................. (2,283) (3,688) (4,717) (5,503)
Gain (loss) on sales of assets, net
of asset write downs of $10,572,
$0, $10,572 and $0, respectively.. 1,562 (9,308) 8,658 (9,308)
Income tax benefit of SRC.......... -- 3,374 -- 3,374
---------- ---------- -------- --------
Income before unconsolidated
entities.......................... 60,374 54,287 113,521 108,248
Income from unconsolidated
entities.......................... 15,538 13,051 33,527 26,478
---------- ---------- -------- --------
Income before extraordinary items
and cumulative effect of
accounting change................. 75,912 67,338 147,048 134,726
Extraordinary items--debt related
transactions...................... -- (43) (440) (1,817)
Cumulative effect of accounting
change (note 6)................... -- -- (12,342) --
Income before allocation to limited
partners.......................... 75,912 67,295 134,266 132,909
Less:
Limited partners' interest in the
operating partnerships........... 15,532 12,710 26,271 25,665
Preferred distributions of the
SPG operating partnership........ 2,817 -- 5,634 --
Preferred dividends of
subsidiary....................... 7,334 7,334 14,668 14,668
---------- ---------- -------- --------
Net income......................... 50,229 47,251 87,693 92,576
Preferred dividends................ (9,217) (8,789) (18,438) (19,160)
---------- ---------- -------- --------
Net income available to common
shareholders...................... $ 41,012 $ 38,462 $ 69,255 $ 73,416
========== ========== ======== ========
Basic earnings per common paired
share:
Income before extraordinary items
and cumulative effect of
accounting change................ $ 0.24 $ 0.22 $ 0.45 $ 0.44
Extraordinary items............... -- -- -- --
---------- ---------- -------- --------
Cumulative effect of accounting
change........................... -- -- (0.05) --
---------- ---------- -------- --------
Net income........................ $ 0.24 $ 0.22 $ 0.40 $ 0.43
========== ========== ======== ========
Diluted earnings per common paired
share:
Income before extraordinary items
and cumulative effect of
accounting change................ $ 0.24 $ 0.22 $ 0.45 $ 0.44
Extraordinary items............... -- -- -- (0.01)
Cumulative effect of accounting
change........................... -- -- (0.05) --
---------- ---------- -------- --------
Net income........................ $ 0.24 $ 0.22 $ 0.40 $ 0.43
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 87,693 $ 92,576
Adjustments to reconcile net income to net cash
provided
by operating activities--
Depreciation and amortization........................ 202,733 185,013
Extraordinary items--debt related transactions....... 440 1,817
(Gain) loss on sales of assets, net of asset write
downs of $10,572
and $0, respectively................................. (8,658) 9,308
Cumulative effect of accounting change............... 12,342 --
Limited partners' interest in the Operating
Partnerships........................................ 26,271 25,665
Preferred dividends of Subsidiary.................... 14,668 14,668
Preferred distributions of the SPG Operating
Partnership......................................... 5,634 --
Straight-line rent................................... (8,416) (9,063)
Minority interest.................................... 4,717 5,503
Income tax benefit of SRC............................ -- (3,374)
Equity in income of unconsolidated entities.......... (33,527) (26,478)
Changes in assets and liabilities--
Tenant receivables and accrued revenue............... 44,615 (1,475)
Deferred costs and other assets...................... 8,116 (5,292)
Accounts payable, accrued expenses and other
liabilities......................................... (84,202) (3,926)
--------- ---------
Net cash provided by operating activities.......... 272,426 284,942
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions........................................... -- (99,254)
Capital expenditures................................... (226,106) (201,238)
Cash from acquisitions and consolidation of joint
ventures, net......................................... -- 10,812
Net proceeds from sale of assets....................... 108,993 53,953
Investments in unconsolidated entities................. (103,876) (32,173)
Distributions from unconsolidated entities............. 185,650 163,542
Investments in and advances to the Management Company
and affiliates........................................ (1,821) (13,063)
--------- ---------
Net cash used in investing activities.............. (37,160) (117,421)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net............... 341 1,853
Minority interest distributions, net................... (8,234) (8,142)
Preferred dividends of Subsidiary...................... (14,668) (14,668)
Preferred distributions of the SPG Operating
Partnership........................................... (5,634) --
Preferred dividends and distributions to shareholders.. (194,045) (192,734)
Distributions to limited partners...................... (66,070) (64,821)
Mortgage and other note proceeds, net of transaction
costs................................................. 790,007 1,091,808
Mortgage and other note principal payments............. (751,117) (964,992)
--------- ---------
Net cash used in financing activities.............. (249,420) (151,696)
--------- ---------
Increase (decrease) in cash and cash equivalents......... (14,154) 15,825
Cash and cash equivalents, beginning of period........... 157,632 129,195
--------- ---------
Cash and cash equivalents, end of period................. $ 143,478 $ 145,020
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Assets:
Investment properties, at
cost..................... $12,863,961 $12,794,484
Less--accumulated
depreciation............. 1,271,962 1,097,629
----------- -----------
11,591,999 11,696,855
Cash and cash equivalents. 136,821 154,924
Tenant receivables and
accrued revenue, net..... 239,117 288,506
Notes and advances
receivable from
Management Company and
affiliate................ 163,903 162,082
Note receivable from the
SRC Operating Partnership
(Interest at 8%, due 2009). 22,326 9,848
Investments in
unconsolidated entities,
at equity................ 1,462,460 1,519,504
Other investment.......... 48,658 41,902
Goodwill, net............. 38,970 39,556
Deferred costs and other
assets, net.............. 235,142 250,210
Minority interest, net.... 39,828 35,931
----------- -----------
$13,979,224 $14,199,318
=========== ===========
Liabilities:
Mortgages and other
indebtedness............. $ 8,805,667 $ 8,768,841
Accounts payable and
accrued expenses......... 434,373 478,633
Cash distributions and
losses in partnerships
and joint ventures, at
equity................... 35,895 32,995
Other liabilities......... 128,084 213,506
----------- -----------
Total liabilities....... 9,404,019 9,493,975
----------- -----------
Commitments and
contingencies (Note 11)
Limited partners' interest
in the SPG operating
partnership................ 942,645 978,316
Limited partners' preferred
interest in the SPG
operating partnership...... 149,885 149,885
Preferred stock of
subsidiary................. 339,731 339,597
Shareholders' equity:
All series of preferred
stock.................... 538,684 542,838
Common stock, $.0001 par
value, 400,000,000 shares
authorized, 170,842,723
and 170,272,210 issued
and outstanding,
respectively............. 17 17
Class B common stock,
$.0001 par value,
12,000,000 shares
authorized, 3,200,000
issued and outstanding... 1 1
Class C common stock,
$.0001 par value, 4,000
shares authorized, issued
and outstanding.......... -- --
Capital in excess of par
value.................... 3,296,495 3,283,566
Accumulated deficit....... (657,102) (552,933)
Unrealized loss on long-
term investment.......... (973) (5,852)
Unamortized restricted
stock award.............. (26,225) (22,139)
Less common stock held in
treasury at cost, 310,955
shares................... (7,953) (7,953)
----------- -----------
Total shareholders'
equity................. 3,142,944 3,237,545
----------- -----------
$13,979,224 $14,199,318
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended June Months Ended June
30, 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Minimum rent......................... $294,285 $276,260 $590,763 $549,659
Overage rent......................... 6,718 14,586 18,756 28,026
Tenant reimbursements................ 154,303 139,583 299,147 276,840
Other income......................... 32,093 27,038 54,925 48,294
-------- -------- -------- --------
Total revenue...................... 487,399 457,467 963,591 902,819
-------- -------- -------- --------
Expenses:
Property operating................... 78,861 71,846 154,093 140,180
Depreciation and amortization........ 99,114 89,738 197,579 179,217
Real estate taxes.................... 49,736 44,102 98,121 90,887
Repairs and maintenance.............. 16,193 16,953 35,758 36,879
Advertising and promotion............ 15,196 14,854 31,260 29,552
Provision for credit losses.......... 2,214 2,949 4,345 4,779
Other................................ 7,363 6,747 14,988 14,429
-------- -------- -------- --------
Total operating expenses........... 268,677 247,189 536,144 495,923
-------- -------- -------- --------
Operating income....................... 218,722 210,278 427,447 406,896
Interest expense....................... 155,830 145,488 314,514 284,058
-------- -------- -------- --------
Income before minority interest........ 62,892 64,790 112,933 122,838
Minority interest...................... (2,353) (3,688) (4,787) (5,503)
Gain (loss) on sales of assets, net of
asset write downs of $10,572, $0,
$10,572 and $0, respectively.......... 1,562 (4,188) 8,658 (4,188)
-------- -------- -------- --------
Income before unconsolidated entities.. 62,101 56,914 116,804 113,147
Income from unconsolidated entities.... 15,883 12,608 33,213 24,925
-------- -------- -------- --------
Income before extraordinary items and
cumulative effect of accounting
change................................ 77,984 69,522 150,017 138,072
Extraordinary items--debt related
transactions.......................... -- (43) (440) (1,817)
Cumulative effect of accounting change
(Note 6).............................. -- -- (12,342) --
-------- -------- -------- --------
Income before allocation to limited
partners.............................. 77,984 69,479 137,235 136,255
Less:
Limited partners' interest in the SPG
operating partnership............... 16,103 14,258 27,090 27,540
Preferred distributions of the SPG
operating partnership............... 2,817 -- 5,634 --
Preferred dividends of subsidiary.... 7,334 7,334 14,668 14,668
-------- -------- -------- --------
Net income............................. 51,730 47,887 89,843 94,047
Preferred dividends.................... (9,217) (8,789) (18,438) (19,160)
-------- -------- -------- --------
Net income available to common
shareholders.......................... $ 42,513 $ 39,098 $ 71,405 $ 74,887
======== ======== ======== ========
Basic earnings per common share:
Income before extraordinary items and
cumulative effect of accounting
change.............................. $ 0.24 $ 0.23 $ 0.46 $ 0.45
Extraordinary items.................. -- -- (0.01)
Cumulative effect of accounting
change.............................. -- -- (0.05) --
-------- -------- -------- --------
Net income........................... $ 0.24 $ 0.23 $ 0.41 $ 0.44
======== ======== ======== ========
Diluted earnings per common share:
Income before extraordinary items and
cumulative effect of accounting
change.............................. $ 0.24 $ 0.23 $ 0.46 $ 0.44
Extraordinary items.................. -- -- -- --
Cumulative effect of accounting
change.............................. -- -- (0.05) --
-------- -------- -------- --------
Net income........................... $ 0.24 $ 0.23 $ 0.41 $ 0.44
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
SIMON PROPERTY GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------
2000 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 89,843 $ 94,047
Adjustments to reconcile net income to net cash provided
by operating
activities--
Depreciation and amortization......................... 202,684 184,705
Extraordinary items--debt related transactions........ 440 1,817
(Gain) loss on sales of assets, net of asset write
downs of $10,572 and $0, respectively................ (8,658) 4,188
Cumulative effect of accounting change................ 12,342 --
Limited partners' interest in the SPG Operating
Partnership.......................................... 27,090 27,540
Preferred dividends of Subsidiary..................... 14,668 14,668
Preferred distributions of the SPG Operating
Partnership.......................................... 5,634 --
Straight-line rent.................................... (8,416) (9,065)
Minority interest..................................... 4,787 5,503
Equity in income of unconsolidated entities........... (33,213) (24,925)
Changes in assets and liabilities--
Tenant receivables and accrued revenue................ 46,779 (1,435)
Deferred costs and other assets....................... 8,828 (6,439)
Accounts payable, accrued expenses and other
liabilities.......................................... (89,403) (5,231)
-------- ---------
Net cash provided by operating activities........... 273,405 285,373
-------- ---------
Cash flows from investing activities:
Acquisitions............................................ -- (99,254)
Capital expenditures.................................... (216,819) (198,958)
Cash from acquisitions and consolidation of joint
ventures, net.......................................... -- 10,812
Net proceeds from sales of assets....................... 108,993 42,000
Investments in unconsolidated entities.................. (103,876) (32,338)
Distributions from unconsolidated entities.............. 183,852 163,463
Note payment from the SRC Operating Partnership......... -- 20,565
Loan to the SRC Operating Partnership................... (12,478) --
Investments in and advances to the Management Company
and affiliates......................................... (1,821) (13,063)
-------- ---------
Net cash used in investing activities............... (42,149) (106,773)
-------- ---------
Cash flows from financing activities:
Proceeds from sales of common, net...................... 292 1,253
Minority interest distributions, net.................... (8,234) (8,142)
Preferred dividends of Subsidiary....................... (14,668) (14,668)
Preferred distributions of the SPG Operating
Partnership............................................ (5,634) --
Preferred dividends and distributions to shareholders... (194,045) (192,734)
Distributions to limited partners....................... (66,070) (64,821)
Note payment to the SRC Operating Partnership........... -- (11,899)
Mortgage and other note proceeds, net of transaction
costs.................................................. 790,007 1,091,808
Mortgage and other note principal payments.............. (751,007) (964,787)
-------- ---------
Net cash used in financing activities............... (249,359) (163,990)
-------- ---------
Increase (decrease) in cash and cash equivalents.......... (18,103) 14,610
Cash and cash equivalents, beginning of period............ 154,924 127,626
-------- ---------
Cash and cash equivalents, end of period.................. $136,821 $ 142,236
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Assets:
Cash and cash equivalents........................ $ 6,657 $ 2,708
Accounts receivable.............................. 2,810 646
-------- --------
Total current assets........................... 9,467 3,354
Investment properties, at cost, less accumulated
depreciation of $1,295 and $1,252, respectively. 6,277 6,316
Investments in unconsolidated entities, at
equity.......................................... 7,869 9,353
Investments in technology initiatives............ 24,972 15,708
Other noncurrent assets, net..................... 335 298
-------- --------
$ 48,920 $ 35,029
======== ========
Liabilities:
Accounts payable and accrued expenses............ $ 6,323 $ 1,811
-------- --------
Total current liabilities...................... 6,323 1,811
Mortgages and other indebtedness................. -- 110
Note payable to the SPG Operating Partnership
(Interest at 8%, due 2009)........................ 22,326 9,848
Minority interest................................ 928 998
-------- --------
Total liabilities.............................. 29,577 12,767
-------- --------
Commitments and contingencies (Note 11)
Limited partners' interest in the SRC operating
partnership....................................... 5,329 6,149
Shareholders' Equity:
Common stock, $.0001 par value, 7,500,000 shares
authorized, 1,740,467 and 1,734,762 issued and
outstanding, respectively....................... -- --
Capital in excess of par value................... 29,616 29,565
Accumulated deficit.............................. (15,574) (13,424)
Less common stock held in treasury at cost, 3,110
shares.......................................... (28) (28)
-------- --------
Total shareholders' equity..................... 14,014 16,113
-------- --------
$ 48,920 $ 35,029
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rental income................ $ 91 $ 111 $ 197 $ 1,054
Tenant reimbursements........ -- 39 -- 210
Marketing and fee income..... 2,450 -- 4,238 --
Other income................. 50 296 76 596
---------- ---------- ---------- ----------
Total revenue.............. 2,591 446 4,511 1,860
---------- ---------- ---------- ----------
Expenses:
Property operating........... -- 167 -- 606
Technology initiatives
startup costs............... 2,277 -- 3,138 --
Depreciation and
amortization................ 26 27 49 308
General and administrative
expenses.................... 2,075 45 4,397 313
---------- ---------- ---------- ----------
Total operating expenses... 4,378 239 7,584 1,227
---------- ---------- ---------- ----------
Operating income (loss)........ (1,787) 207 (3,073) 633
Interest expense............... (10) (1,089) (280) (3,787)
Minority interest.............. 70 -- 70 --
Loss on sales of assets, net... -- (5,120) -- (5,120)
Income tax benefit............. -- 3,374 -- 3,374
---------- ---------- ---------- ----------
Loss before unconsolidated
entities...................... (1,727) (2,628) (3,283) (4,900)
Income (loss) from
unconsolidated entities....... (345) 443 314 1,553
---------- ---------- ---------- ----------
Loss before allocation to
limited partners.............. (2,072) (2,185) (2,969) (3,347)
Less--limited partners' in-
terest in the SRC operating
partnership................. (571) (1,548) (819) (1,875)
---------- ---------- ---------- ----------
Net loss..................... $ (1,501) $ (637) $ (2,150) $ (1,472)
========== ========== ========== ==========
Basic and diluted net loss per
common share.................. $ (0.86) $ (0.37) $ (1.24) $ (0.86)
========== ========== ========== ==========
Basic and diluted weighted
average shares outstanding.... 1,736,721 1,733,424 1,734,475 1,711,765
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
SPG REALTY CONSULTANTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
For the Six
Months Ended
June 30,
-----------------
2000 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,150) $ (1,472)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization........................... 49 308
Loss on sales of assets, net............................ -- 5,120
Limited partners' interest in the SRC Operating
Partnership............................................ (819) (1,875)
Straight-line rent...................................... -- 2
Minority interest....................................... (70) --
Equity in income of unconsolidated entities............. (314) (1,553)
Income tax benefit...................................... -- (3,374)
Changes in assets and liabilities--
Accounts receivable and other assets.................... (2,876) 631
Accounts payable and accrued expenses................... 5,201 176
------- --------
Net cash used in operating activities................. (979) (2,037)
------- --------
Cash flows from investing activities:
Investment in technology initiatives and other capital
expenditures............................................. (9,287) (509)
Net proceeds from sales of assets......................... -- 11,953
Note payment from the SPG Operating Partnership........... -- 11,899
Distributions from unconsolidated entities................ 1,798 79
------- --------
Net cash provided by (used in) investing activities... (7,489) 23,422
------- --------
Cash flows from financing activities:
Proceeds from sales of common stock....................... 49 600
Loan from the SPG Operating Partnership................... 12,478 --
Mortgage and other note principal payments................ (110) (20,770)
------- --------
Net cash provided by (used in) financing activities... 12,417 (20,170)
------- --------
Increase in cash and cash equivalents....................... 3,949 1,215
Cash and cash equivalents, beginning of period.............. 2,708 1,569
------- --------
Cash and cash equivalents, end of period.................... $ 6,657 $ 2,784
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Note 1--Organization
Simon Property Group, Inc. ("SPG"), a Delaware corporation, is a self-
administered and self-managed real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"). Each share of common
stock of SPG is paired ("Paired Shares") with a beneficial interest in 1/100th
of a share of common stock of SPG Realty Consultants, Inc., also a Delaware
corporation ("SRC" and together with SPG, the "Companies").
Simon Property Group, L.P. (the "SPG Operating Partnership") is the primary
subsidiary of SPG. Units of ownership interest ("Units") in the SPG Operating
Partnership are paired ("Paired Units") with a Unit in SPG Realty Consultants,
L.P. (the "SRC Operating Partnership" and together with the SPG Operating
Partnership, the "Operating Partnerships"). The SRC Operating Partnership is
the primary subsidiary of SRC. At June 30, 2000 and December 31, 1999, the
Companies' direct and indirect ownership interests in the Operating
Partnerships were 72.4%. The Companies together with the Operating
Partnerships are hereafter referred to as "Simon Group".
SPG, primarily through the SPG Operating Partnership, is engaged in the
ownership, operation, management, leasing, acquisition, expansion and
development of real estate properties, primarily regional malls and community
shopping centers. As of June 30, 2000, SPG and the SPG Operating Partnership
owned or held an interest in 253 income-producing properties, which consisted
of 166 regional malls, 74 community shopping centers, five specialty retail
centers, four mixed-use properties and four value-oriented super-regional
malls in 36 states (the "Properties") and five additional retail real estate
properties operating in Europe. The SPG Operating Partnership also owned an
interest in two properties under construction and 10 parcels of land held for
future development, which together with the Properties are hereafter referred
to as the "Portfolio Properties". The SPG Operating Partnership also holds
substantially all of the economic interest in M.S. Management Associates, Inc.
(the "Management Company").
SRC, primarily through the SRC Operating Partnership, engages primarily in
activities that capitalize on the resources, customer base and operating
activities of SPG, which could not be engaged in by SPG without potentially
impacting its status as a REIT. These activities include a program launched in
1999, which is still in the development stage, designed to take advantage of
new retail opportunities of the digital age. Elements of the program include
incubating concepts that leverage the physical and virtual worlds through a
venture creation subsidiary called clixnmortar.com. The SRC Operating
Partnership's investment in this program was approximately $22,000 and
$12,700, as of June 30, 2000 and December 31, 1999, respectively, which is
included in investments in technology initiatives on SRC's balance sheets. To
date, the majority of such investment is made up of internally developed
software costs. Minority interest on the SRC balance sheets represents an 8.5%
outside ownership interest in clixnmortar.com. In addition, on January 1,
2000, SRC formed Simon Brand Ventures, LLC, to continue and expand upon
certain mall marketing initiatives established by Simon Group to take
advantage of Simon Group's size and tenant relationships, primarily through
strategic corporate alliances. SRC also has noncontrolling interests in two
joint ventures which each own land held for sale, which are located adjacent
to Properties.
Note 2--Basis of Presentation
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of
12
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
management, all adjustments necessary for fair presentation, consisting of
only normal recurring adjustments, have been included. The results for the
interim period ended June 30, 2000 are not necessarily indicative of the
results to be obtained for the full fiscal year. These unaudited financial
statements have been prepared in accordance with the accounting policies
described in the Companies' combined annual report on Form 10-K for the year
ended December 31, 1999 and should be read in conjunction therewith.
The accompanying combined financial statements include SPG and SRC and
their subsidiaries. The accompanying consolidated financial statements for SPG
and SRC include SPG and its subsidiaries and SRC and its subsidiaries,
respectively. All significant intercompany amounts have been eliminated.
Net operating results of the Operating Partnerships are allocated to the
Companies based first on the Companies' preferred unit preference, if
applicable, and then on their remaining ownership interests in the Operating
Partnerships during the period. The Companies' remaining weighted average
ownership interests in the Operating Partnerships for the three-month periods
ended June 30, 2000 and June 30, 1999 were 72.4%. The Companies' remaining
weighted average ownership interests in the Operating Partnerships for the
six-month periods ended June 30, 2000 and June 30, 1999 were 72.4% and 72.1%,
respectively.
Note 3--Reclassifications
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 2000 presentation. These
reclassifications have no impact on the net operating results previously
reported.
Note 4--Per Share Data
Basic earnings per share is based on the weighted average number of shares
of common stock outstanding during the period and diluted earnings per share
is based on the weighted average number of shares of common stock outstanding
combined with the incremental weighted average shares that would have been
outstanding if all dilutive potential common shares would have been converted
into shares at the earliest date possible. Neither series of convertible
preferred stock issued and outstanding during the comparative periods had a
dilutive effect on earnings per share. Paired Units held by limited partners
in the Operating Partnerships may be exchanged for Paired Shares, on a one-
for-one basis in certain circumstances. If exchanged, the Paired Units would
not have a dilutive effect. The increase in weighted average shares
outstanding under the diluted method over the basic method in every period
presented for the Companies is due entirely to the effect of outstanding stock
options. Basic earnings and diluted earnings were the same for all periods
presented. The following table presents weighted average and diluted weighted
average shares outstanding:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted Average Shares
Outstanding................... 173,672,074 173,342,399 173,447,511 171,176,534
Diluted Weighted Average Shares
Outstanding................... 173,815,090 173,609,740 173,569,556 171,394,895
</TABLE>
Note 5--Cash Flow Information
Cash paid for interest, net of amounts capitalized, during the six months
ended June 30, 2000 was $319,696 as compared to $270,937 for the same period
in 1999. Accrued and unpaid distributions were $837 and $876 at June 30, 2000
and December 31, 1999, respectively. See Note 10 for information about non-
cash transactions during the six months ended June 30, 2000.
13
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 6--Cumulative Effect of Accounting Change
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), which addressed certain revenue
recognition policies, including the accounting for overage rent by a landlord.
SAB 101 requires overage rent to be recognized as revenue only when each
tenant's sales exceeds its sales threshold. Simon Group previously recognized
overage rent based on reported and estimated sales through the end of the
period, less the applicable prorated base sales amount. Simon Group adopted
SAB 101 effective January 1, 2000 and recorded a loss from the cumulative
effect of an accounting change of $12,342, which includes Simon Group's $1,765
share from unconsolidated entities, during 2000. In addition, SAB 101 will
impact the timing in which overage rent is recognized throughout each year,
but will not have a material impact on the total overage rent recognized in
each full year. Simon Group estimates the pro forma negative impact of
adopting SAB 101 on combined net income for the three-month and six-month
periods ended June 30, 2000 to be approximately $4,700 and $8,400,
respectively. The negative impact on earnings per share for the three-month
and six-month periods ended June 30, 2000 was approximately $0.03 and $0.05,
respectively.
Note 7--Gain on Sales of Assets, net of Asset Write Downs
During the first six months of 2000, Simon Group sold its interests in two
regional malls, three community shopping centers and an office building for a
total of approximately $137,100, including the buyer's assumption of
approximately $25,900 of mortgage debt, which resulted in a net gain of
$19,230. The net proceeds of approximately $109,000, were used to reduce the
outstanding borrowings on its $1,250,000 unsecured revolving credit facility
(the "Credit Facility") and for general corporate purposes. In addition,
during the second quarter of 2000, Simon Group recognized a total asset write
down of $10,572 on two Properties. Both of the Properties are under contract
for sale. The estimated sale price, net of estimated closing costs, for each
of the Properties was the basis for determining the fair values of the
Properties and the related asset write downs.
Note 8--Investments in Unconsolidated Entities
Summary financial information of Simon Group's investment in partnerships
and joint ventures accounted for using the equity method of accounting and a
summary of Simon Group's investment in and share of income from such
partnerships and joint ventures follow:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
BALANCE SHEETS
Assets:
Investment properties at cost, net..................... $6,487,900 $6,487,200
Other assets........................................... 479,355 493,551
---------- ----------
Total assets....................................... $6,967,255 $6,980,751
========== ==========
Liabilities and Partners' Equity:
Mortgages and other notes payable...................... $4,627,333 $4,484,598
Accounts payable, accrued expenses and other
liabilities........................................... 231,951 291,457
---------- ----------
Total liabilities.................................. 4,859,284 4,776,055
Partners' equity....................................... 2,107,971 2,204,696
---------- ----------
Total liabilities and partners' equity............. $6,967,255 $6,980,751
========== ==========
Simon Group's Share of:
Total assets........................................... $2,832,639 $2,843,025
========== ==========
Simon Group's net Investment in Joint Ventures......... $1,414,558 $1,489,029
========== ==========
</TABLE>
14
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- --------------------------
2000 1999 2000 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenue:
Minimum rent.......... $ 183,652 $ 125,359 $ 364,451 $ 252,492
Overage rent.......... 3,184 4,679 9,028 8,521
Tenant reimbursements. 92,576 60,080 184,110 119,686
Other income.......... 12,173 9,036 22,259 17,757
------------- ------------- ------------ ------------
Total revenue....... 291,585 199,154 579,848 398,456
Operating Expenses:
Operating expenses and
other................ 112,347 71,329 221,458 142,613
Depreciation and
amortization......... 56,121 36,335 111,771 71,065
------------- ------------- ------------ ------------
Total operating
expenses........... 168,468 107,664 333,229 213,678
------------- ------------- ------------ ------------
Operating Income........ 123,117 91,490 246,619 184,778
Interest Expense........ 86,660 49,928 171,112 97,216
------------- ------------- ------------ ------------
Net Income.............. 36,457 41,562 75,507 87,562
Third Party Investors'
Share of Net Income.... 21,164 25,813 44,680 53,515
------------- ------------- ------------ ------------
Simon Group's Share of
Net Income............. $ 15,293 $ 15,749 $ 30,827 $ 34,047
Amortization of Excess
Investment (See below). (5,310) (5,606) (10,583) (11,663)
============= ============= ============ ============
Income from
Unconsolidated
Entities............... $ 9,983 $ 10,143 $ 20,244 $ 22,384
============= ============= ============ ============
</TABLE>
As of June 30, 2000 and December 31, 1999, the unamortized excess of Simon
Group's investment over its share of the equity in the underlying net assets
of the partnerships and joint ventures ("Excess Investment") was $568,731 and
$592,457, respectively, which is amortized over the life of the related
Properties.
Simon Group's share of consolidated net income of the Management Company,
after intercompany profit eliminations, was $5,555 and $2,908 for the three-
month periods ended June 30, 2000 and 1999, respectively, and $13,283 and
$4,094 for the six-month periods ended June 30, 2000 and 1999, respectively.
Simon Group's investment in the Management Company was $19,876 and $6,833 as
of June 30, 2000 and December 31, 1999, respectively.
Note 9--Debt
At June 30, 2000, Simon Group had combined consolidated debt of $8,805,667,
of which $6,128,802 was fixed-rate debt and $2,676,865 was variable-rate debt.
Simon Group's pro rata share of indebtedness of the unconsolidated joint
venture Properties as of June 30, 2000 was $1,952,703. As of June 30, 2000,
Simon Group had interest-rate protection agreements related to $376,000 of its
combined consolidated variable-rate debt. The agreements are generally in
effect until the related variable-rate debt matures. Simon Group's hedging
activity did not materially impact interest expense in the comparative
periods.
On March 24, 2000, Simon Group refinanced $450,000 of unsecured debt, which
became due and bore interest at LIBOR plus 65 basis points. The new facility
matures March 2001 and also bears interest at LIBOR plus 65 basis points.
15
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 10--Shareholders' Equity
The following table summarizes the changes in the Companies' shareholders'
equity since December 31, 1999.
<TABLE>
<CAPTION>
Unrealized Common Total
SPG SPG SRC Loss on Capital in Accumu- Unamortized Stock Share-
Preferred Common Common Invest- Excess of lated Restricted Held in holders'
Stock Stock Stock ment (1) Par Value Deficit Stock Award Treasury Equity
--------- ------ ------ ---------- ---------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... $542,838 $18 $-- $(5,852) $3,298,025 $(551,251) $(22,139) $(7,981) $3,253,658
Preferred Stock
conversion
(84,046 Paired Shares)
(2).................... (2,827) -- 2,827 --
Common stock issued as
dividend (1,242 Paired
Shares) (2)............ -- 31 31
Preferred Stock
conversion
(36,913 Paired Shares)
(3).................... (1,327) -- 1,327 --
Stock incentive program
(434,952 Paired Shares,
net of forfeitures).... -- 10,046 (10,046) --
Amortization of stock
incentive.............. 5,960 5,960
Other common stock
issued (13,360 Paired
Shares)................ -- 386 386
Adjustment to the
limited partners'
interests in the
Operating Partnerships. (1,637) (1,637)
Distributions........... (194,012) (194,012)
-------- --- ---- ------- ---------- --------- -------- ------- ----------
Subtotal................ 538,684 18 -- (5,852) 3,311,005 (745,263) (26,225) (7,981) 3,064,386
Comprehensive Income:
Unrealized gain on
investment (1)......... 4,879 4,879
Net income.............. 87,693 87,693
-------- --- ---- ------- ---------- --------- -------- ------- ----------
Total Comprehensive
Income................. -- -- -- 4,879 -- 87,693 -- -- 92,572
-------- --- ---- ------- ---------- --------- -------- ------- ----------
Balance at June 30,
2000................... $538,684 $18 $-- $ (973) $3,311,005 $(657,570) $(26,225) $(7,981) $3,156,958
======== === ==== ======= ========== ========= ======== ======= ==========
</TABLE>
-------
(1) Amounts consist of the Companies' pro rata share of the unrealized
gain/(loss) resulting from the change in market value of 1,408,450 shares
of common stock of Chelsea GCA Realty, Inc. ("Chelsea"), a publicly traded
REIT. The investment in Chelsea is being reflected in the accompanying
combined balance sheets in other investments.
(2) Effective June 16, 2000, 2,212 shares of SPG's Series A Convertible
Preferred Stock were converted into 84,046 Paired Shares. In addition,
Simon Group issued 1,242 Paired Shares to the holders of the converted
shares in lieu of the cash dividends allocable to those preferred shares.
At June 30, 2000, 51,059 shares of Series A Convertible Preferred Stock
remained outstanding.
(3) On March 1, 2000, 14,274 shares of SPG's Series B Convertible Preferred
Stock were converted into 36,913 Paired Shares. At June 30, 2000,
4,830,057 shares of Series B Convertible Preferred Stock remained
outstanding.
The Simon Property Group 1998 Stock Incentive Plan
At the time of the CPI Merger, Simon Group adopted The Simon Property Group
1998 Stock Incentive Plan (the "1998 Plan"). The 1998 Plan provides for the
grant of equity-based awards during the ten-year period following its adoption
in the form of options to purchase Paired Shares ("Options"), stock
appreciation rights ("SARs"), restricted stock grants and performance unit
awards (collectively, "Awards"). Options may be granted which are qualified as
"incentive stock options" within the meaning of Section 422 of the Code and
Options which
16
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
are not so qualified. During 2000, 457,625 Paired Shares of restricted stock
were awarded to executives related to 1999 performance. As of June 30, 2000,
2,260,038 Paired Shares of restricted stock, net of forfeitures, were deemed
earned and awarded under the 1998 Plan. Approximately $2,936 and $2,654
relating to these programs were amortized in the three-month periods ended
June 30, 2000 and 1999, respectively. Approximately $5,960 and $5,367 relating
to these programs were amortized in the six-month periods ended June 30, 2000
and 1999, respectively. The cost of restricted stock grants, which is based
upon the stock's fair market value at the time such stock is earned, awarded
and issued, is charged to shareholders' equity and subsequently amortized
against earnings of Simon Group over the vesting period.
Note 11--Commitments and Contingencies
Litigation
Triple Five of Minnesota, Inc., a Minnesota corporation, v. Melvin Simon,
et. al. On or about November 9, 1999, Triple Five of Minnesota, Inc. ("Triple
Five") commenced an action in the District Court for the State of Minnesota,
Fourth Judicial District, against, among others, Mall of America, certain
members of the Simon family and entities allegedly controlled by such
individuals, and Simon Group. Two transactions form the basis of the
complaint: (i) the sale by Teachers Insurance and Annuity Association of
America of one-half of its partnership interest in Mall of America Company and
Minntertainment Company to the SPG Operating Partnership and related entities
(the "Teachers Sale"); and (ii) a financing transaction involving a loan in
the amount of $312,000 obtained from The Chase Manhattan Bank ("Chase") that
is secured by a mortgage placed on Mall of America's assets (the "Chase
Mortgage").
The complaint, which contains twelve counts, seeks remedies of damages,
rescission, constructive trust, accounting, and specific performance. Although
the complaint names all defendants in several counts, Simon Group is
specifically identified as a defendant in connection with the Teachers Sale.
The SPG Operating Partnership has agreed to indemnify Chase and other
nonparties to the litigation that are related to the offering of certificates
secured by the Chase Mortgage against, among other things, (i) any and all
litigation expenses arising as a result of litigation or threatened litigation
brought by Triple Five, or any of its owners or affiliates, against any person
regarding the Chase Mortgage, the Teachers Sale, any securitization of the
Chase Mortgage or any transaction related to the foregoing and (ii) any and
all damages, awards, penalties or expenses payable to or on behalf of Triple
Five (or payable to a third party as a result of such party's obligation to
pay Triple Five) arising out of such litigation. These indemnity obligations
do not extend to liabilities covered by title insurance.
Simon Group believes that the Triple Five litigation is without merit and
intends to defend the action vigorously. Simon Group believes that neither the
Triple Five litigation nor any potential payments under the indemnity, if any,
will have a material adverse effect on Simon Group. Given the early stage of
the litigation it is not possible to provide an assurance of the ultimate
outcome of the litigation or an estimate of the amount or range of potential
loss, if any.
Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. On October 16,
1996, a complaint was filed in the Court of Common Pleas of Mahoning County,
Ohio, captioned Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al. The
named defendants are SD Property Group, Inc., an indirect 99%-owned subsidiary
of SPG, and DeBartolo Properties Management, Inc., a subsidiary of the
Management Company, and the plaintiffs are 27 former employees of the
defendants. In the complaint, the plaintiffs alleged that they were recipients
of deferred stock grants under the DeBartolo Realty Corporation ("DRC") Stock
Incentive Plan (the "DRC Plan") and that these grants immediately vested under
the DRC Plan's "change in control" provision as a result of the DRC
17
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
Merger. Plaintiffs asserted that the defendants' refusal to issue them
approximately 542,000 shares of DRC common stock, which is equivalent to
approximately 370,000 Paired Shares computed at the 0.68 exchange ratio used
in the DRC Merger, constituted a breach of contract and a breach of the
implied covenant of good faith and fair dealing under Ohio law. Plaintiffs
sought damages equal to such number of shares of DRC common stock, or cash in
lieu thereof, equal to all deferred stock ever granted to them under the DRC
Plan, dividends on such stock from the time of the grants, compensatory
damages for breach of the implied covenant of good faith and fair dealing, and
punitive damages. The plaintiffs and the defendants each filed motions for
summary judgment. On October 31, 1997, the Court of Common Pleas entered a
judgment in favor of the defendants granting their motion for summary
judgment. The plaintiffs appealed this judgment to the Seventh District Court
of Appeals in Ohio. On August 18, 1999, the District Court of Appeals reversed
the summary judgement order in favor of the defendants entered by the Common
Pleas Court and granted plaintiffs' cross motion for summary judgement,
remanding the matter to the Common Pleas Court for the determination of
plaintiffs' damages. The defendants petitioned the Ohio Supreme Court asking
that they exercise their discretion to review and reverse the Appellate Court
decision, but the Ohio Supreme court did not grant the petition for review.
The case has been remanded to the Court of Common Pleas of Mahoning County,
Ohio, to conduct discovery relevant to each plaintiff's damages and the
counterclaims asserted by Simon Group. The Trial Court referred these matters
to a Magistrate. Plaintiffs have filed a Supplemental Motion for Summary
Judgement on the question of damages. That motion has been fully briefed and
is pending before the Magistrate. The Magistrate has ruled on the
counterclaims and found in Defendants' favor on one of them. This ruling would
result in a set-off of approximately $2,000 against any damage award assessed
in favor of two of the plaintiffs. As a result of the appellate court's
decision, Simon Group recorded a $12,000 loss in the third quarter of 1999
related to this litigation as an unusual item.
Roel Vento et al v. Tom Taylor et al. An affiliate of Simon Group is a
defendant in litigation entitled Roel Vento et al v. Tom Taylor et al., in the
District Court of Cameron County, Texas, in which a judgment in the amount of
$7,800 was entered against all defendants. This judgment includes
approximately $6,500 of punitive damages and is based upon a jury's findings
on four separate theories of liability including fraud, intentional infliction
of emotional distress, tortious interference with contract and civil
conspiracy arising out of the sale of a business operating under a temporary
license agreement at Valle Vista Mall in Harlingen, Texas. Simon Group
appealed the verdict and on May 6, 1999, the Thirteenth Judicial District
(Corpus Christi) of the Texas Court of Appeals issued an opinion reducing the
trial court verdict to $3,364 plus interest. Simon Group filed a petition for
a writ of certiorari to the Texas Supreme Court requesting that they review
and reverse the determination of the Appellate Court. The Texas Supreme Court
has not yet determined whether it will take the matter up on appeal.
Management, based upon the advice of counsel, believes that the ultimate
outcome of this action will not have a material adverse effect on Simon Group.
Simon Group currently is not subject to any other material litigation other
than routine litigation and administrative proceedings arising in the ordinary
course of business. On the basis of consultation with counsel, management
believes that such routine litigation and administrative proceedings will not
have a material adverse impact on Simon Group's financial position or its
results of operations.
Note 12--Related Party Transactions
Until April 15, 1999, when the Three Dag Hammarskjold building was sold,
the SRC Operating Partnership received a substantial amount of its rental
income from the SPG Operating Partnership for office space under lease.
18
<PAGE>
SIMON PROPERTY GROUP, INC. AND
SPG REALTY CONSULTANTS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 13--New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
SFAS 133 will be effective for Simon Group beginning with the 2001 fiscal
year and may not be applied retroactively. Management is currently evaluating
the impact of SFAS 133, which it believes could increase volatility in
earnings and other comprehensive income.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SIMON PROPERTY GROUP, INC. AND SPG REALTY CONSULTANTS, INC. COMBINED
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Simon Group to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, which will, among other things,
affect demand for retail space or retail goods, availability and
creditworthiness of prospective tenants, lease rents and the terms and
availability of financing; adverse changes in the real estate markets
including, among other things, competition with other companies and
technology; risks of real estate development and acquisition; governmental
actions and initiatives; substantial indebtedness; conflicts of interests;
maintenance of REIT status; and environmental/safety requirements.
Overview
The following Property acquisitions, openings and dispositions (the
"Property Transactions") impacted Simon Group's consolidated results of
operations in the comparative periods. During 1999, Simon Group acquired the
remaining ownership interests in five Properties for approximately $213.9
million, which resulted in the consolidation of each of those Properties. In
November 1999, Simon Group opened the wholly-owned Properties; The Shops at
North East Mall and Waterford Lakes Town Center. During 2000, Simon Group sold
its interests in six Properties for approximately $137.1 million, including
the buyer's assumption of $25.9 million of mortgage debt.
Cumulative Effect of Accounting Change
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), which addressed certain revenue
recognition policies, including the accounting for overage rent by a landlord.
SAB 101 requires overage rent to be recognized as revenue only when each
tenant's sales exceeds its sales threshold. Simon Group previously recognized
overage rent based on reported and estimated sales through the end of the
period, less the applicable prorated base sales amount. Simon Group adopted
SAB 101 effective January 1, 2000 and recorded a loss from the cumulative
effect of an accounting change of $12.3 million in the first quarter of 2000.
In addition, SAB 101 will impact the timing in which overage rent is
recognized throughout each year, but will not have a material impact on the
total overage rent recognized in each full year.
Results of Operations
Three Months ended June 30, 2000 vs. Three Months Ended June 30, 1999
Operating income increased $9.7 million or 4.7% for the three months ended
June 30, 2000, as compared to the same period in 1999. This increase includes
the net result of the Property Transactions ($3.2 million). Excluding these
transactions, operating income increased approximately $6.5 million, primarily
resulting from a $11.7 million increase in minimum rents, a $3.9 million
increase in consolidated revenues realized from marketing initiatives
throughout the Portfolio, including the revenues of Simon Group's wholly-owned
strategic marketing subsidiary, Simon Brand Ventures, LLC ("SBV") and a $5.1
million increase in miscellaneous income, partially offset by a $7.2 million
increase in depreciation and amortization and a $7.7 million decrease in
overage rents. The increase in minimum rent primarily results from increased
occupancy levels, the replacement of expiring tenant leases with renewal
leases at higher minimum base rents, and a $2.2 million increase in rents from
tenants operating under license agreements. The increase in depreciation and
amortization is primarily due to an increase in depreciable real estate
realized through renovation and expansion activities. The decrease in overage
rent was primarily the result of Simon Group's adoption of SAB 101 effective
January 1, 2000, which changed the timing in which overage rents were
recognized throughout the year. The negative impact to combined consolidated
overage rents in 2000 as compared to 1999 was estimated to be approximately
$5.5 million.
20
<PAGE>
Interest expense increased $12.5 million, or 8.7% for the three months
ended June 30, 2000, as compared to the same period in 1999. This increase is
primarily a result of overall increases in interest rates during the
comparative periods of approximately $4.5 million, the Property Transactions
($2.1 million) and incremental interest on borrowings under the Credit
Facility to complete the 1999 acquisition of ownership interests in 14
regional malls from New England Development Company (the "NED Acquisition")
($3.2 million) and acquire an ownership interest in Mall of America ($1.0
million), with the remainder being primarily from borrowings for Property
redevelopments that opened in the comparative periods.
The $3.4 million income tax benefit in 1999 represents SRC's pro rata share
of the SRC Operating Partnership's current year losses and the realization of
tax carryforward benefits for which a valuation allowance was previously
provided.
The $1.6 million net gain on the sales of assets in 2000 results from the
sale of Simon Group's interests in an office building, a regional mall and
three community shopping centers for approximately $89.8 million, partially
offset by a $10.6 million asset write down on two Properties recognized in the
second quarter of 2000. In 1999 Simon Group recognized a net loss of $9.3
million on the sale of three properties.
Income from unconsolidated entities increased from $13.1 million in 1999 to
$15.5 million in 2000, resulting from a $2.6 million increase in income from
the Management Company, partially offset by a $0.2 million decrease in income
from unconsolidated partnerships and joint ventures. The increase in
Management Company income is primarily the result of a $2.9 million increase
in management fees.
Income before allocation to limited partners was $75.9 million for the
three months ended June 30, 2000, which reflects an increase of $8.6 million
over the same period in 1999, primarily for the reasons discussed above.
Income before allocation to limited partners was allocated to the Companies
based on SPG's direct ownership of Ocean County Mall and certain net lease
assets, and the Companies' preferred Unit preferences and weighted average
ownership interests in the Operating Partnerships during the period.
Preferred distributions of the SPG Operating Partnership represent
distributions on preferred Units issued in connection with the NED
Acquisition. Preferred dividends of subsidiary represent distributions on
preferred stock of SPG Properties, Inc., a 99.999% owned subsidiary of SPG.
Six Months ended June 30, 2000 vs. Six Months Ended June 30, 1999
Operating income increased $19.9 million or 4.9% for the six months ended
June 30, 2000, as compared to the same period in 1999. This increase includes
the net result of the Property Transactions ($7.4 million). Excluding these
transactions, operating income increased approximately $12.5 million,
primarily resulting from a $24.9 million increase in minimum rents and $6.8
million increase in consolidated revenues realized from marketing initiatives
throughout the Portfolio, including the revenues of SBV, partially offset by a
$12.5 million increase in depreciation and amortization and a $9.0 million
decrease in overage rents. The increase in minimum rent primarily results from
increased occupancy levels, the replacement of expiring tenant leases with
renewal leases at higher minimum base rents, and a $4.4 million increase in
rents from tenants operating under license agreements. The increase in
depreciation and amortization is primarily due to an increase in depreciable
real estate realized through renovation and expansion activities. The decrease
in overage rent was primarily the result of Simon Group's adoption SAB 101
effective January 1, 2000, which changed the timing in which overage rents
were recognized throughout the year. The negative impact to combined
consolidated overage rents in 2000 as compared to 1999 was estimated to be
approximately $9.9 million.
Interest expense increased $30.0 million, or 10.6% for the six months ended
June 30, 2000, as compared to the same period in 1999. This increase is
primarily the result of overall increases in interest rates during the
comparative periods (approximately $7.9 million), the Property Transactions
($5.4 million) and incremental interest on borrowings under the Credit
Facility to complete the NED Acquisition ($6.2 million) and acquire an
ownership interest in Mall of America ($1.9 million), with the remainder being
primarily from borrowings for Property redevelopments that opened in the
comparative periods.
21
<PAGE>
The $3.4 million income tax benefit in 1999 represents SRC's pro rata share
of the SRC Operating Partnership's current year losses and the realization of
tax carryforward benefits for which a valuation allowance was previously
provided.
The $8.7 million net gain on the sales of assets in 2000 results from the
sale of Simon Group's interests in an office building, two regional malls and
three community shopping centers for approximately $137.1 million, partially
offset by a $10.6 million asset write down on two Properties recognized in the
second quarter of 2000. In 1999 Simon Group recognized a net loss of $9.3
million on the sale of three properties.
Income from unconsolidated entities increased from $26.5 million in 1999 to
$33.5 million in 2000, resulting from a $9.2 million increase in income from
the Management Company, partially offset by a $2.1 million decrease in income
from unconsolidated partnerships and joint ventures. The increase in
Management Company income is primarily the result of a $5.9 million increase
in management fees and $3.3 million decrease in the income tax provision,
which is primarily due to a $2.0 million tax refund receivable recognized in
2000.
During the first quarter of 2000, Simon Group recorded a $12.3 million
expense resulting from the cumulative effect of an accounting change as
described above.
Income before allocation to limited partners was $134.3 million for the six
months ended June 30, 2000, which reflects an increase of $1.4 million over
the same period in 1999, primarily for the reasons discussed above. Income
before allocation to limited partners was allocated to the Companies based on
SPG's direct ownership of Ocean County Mall and certain net lease assets, and
the Companies' preferred Unit preferences and weighted average ownership
interests in the Operating Partnerships during the period.
Preferred distributions of the SPG Operating Partnership represent
distributions on preferred Units issued in connection with the NED
Acquisition. Preferred dividends of subsidiary represent distributions on
preferred stock of SPG Properties, Inc., a 99.999% owned subsidiary of SPG.
Liquidity and Capital Resources
As of June 30, 2000, Simon Group's balance of unrestricted cash and cash
equivalents was $143.5 million, including $35.8 million related to Simon
Group's gift certificate program, which management does not consider available
for general working capital purposes. Simon Group's Credit Facility had
available credit of $566 million at June 30, 2000. The Credit Facility bears
interest at LIBOR plus 65 basis points and has an initial maturity of August
2002, with an additional one-year extension available at Simon Group's option.
SPG and the SPG Operating Partnership also have access to public equity and
debt markets.
Management anticipates that cash generated from operating performance will
provide the necessary funds on a short- and long-term basis for its operating
expenses, interest expense on outstanding indebtedness, recurring capital
expenditures, and distributions to shareholders in accordance with REIT
requirements. Sources of capital for nonrecurring capital expenditures, such
as major building renovations and expansions, as well as for scheduled
principal payments, including balloon payments, on outstanding indebtedness
are expected to be obtained from: (i) excess cash generated from operating
performance; (ii) working capital reserves; (iii) additional debt financing;
and (iv) additional equity raised in the public markets.
Financing and Debt
At June 30, 2000, Simon Group had combined consolidated debt of $8,806
million, of which $6,129 million is fixed-rate debt bearing interest at a
weighted average rate of 7.27% and $2,677 million is variable-rate debt
bearing interest at a weighted average rate of 7.43%. As of June 30, 2000,
Simon Group had interest rate protection agreements related to $376 million of
combined consolidated variable-rate debt. Simon Group's interest rate
protection agreements did not materially impact interest expense or weighted
average borrowing rates during the comparative periods.
22
<PAGE>
Simon Group's share of total scheduled principal payments of mortgage and
other indebtedness, including unconsolidated joint venture indebtedness, over
the next five years is $5,965 million, with $4,624 million thereafter. Simon
Group's combined ratio of consolidated debt-to-market capitalization was 58.7%
and 58.1% at June 30, 2000 and December 31, 1999, respectively.
On March 24, 2000, Simon Group refinanced $450 million of unsecured debt,
which became due and bore interest at LIBOR plus 65 basis points. The new
facility matures March 2001 and also bears interest at LIBOR plus 65 basis
points.
Acquisitions
Management continues to review and evaluate a limited number of individual
property and portfolio acquisition opportunities. Management believes,
however, that due to the rapid consolidation of the regional mall business,
coupled with the current status of the capital markets, that acquisition
activity in the near term will be a less significant component of Simon
Group's growth strategy. Management believes that funds on hand and amounts
available under the Credit Facility provide the means to finance certain
acquisitions. No assurance can be given that Simon Group will not be required
to, or will not elect to, even if not required to, obtain funds from outside
sources, including through the sale of debt or equity securities, to finance
significant acquisitions, if any.
Dispositions
During the first six months of 2000, Simon Group sold its interests in two
regional malls, three community shopping centers and an office building for a
total of approximately $137.1 million, including the buyer's assumption of
$25.9 million of mortgage debt, which resulted in a net gain of $19.2 million.
The net proceeds of approximately $109.0 million were used to reduce the
outstanding borrowings on the Credit Facility and for general working capital
purposes.
In addition to the Property sales described above, as a continuing part of
Simon Group's long-term strategy, management continues to pursue the sale of
its remaining non-retail holdings and a number of retail assets that are no
longer aligned with Simon Group's strategic criteria, including eight
Properties currently under contract for sale. Management expects the sale
prices of its non-core assets, if sold, will not differ materially from the
carrying value of the related assets.
Development Activity
New Developments. Development activities are an ongoing part of Simon
Group's business. Simon Group opened Orlando Premium Outlets in Orlando,
Florida in May 2000. In addition, Arundel Mills is scheduled to open this year
in Anne Arundel, Maryland and Bowie Town Center is scheduled to open in the
fall of 2001 in Bowie, Maryland. Simon Group invested approximately $79
million on new developments during the first six months of 2000 and expects to
invest a total of approximately $130 million on new developments in 2000.
Strategic Expansions and Renovations. A key objective of Simon Group is to
increase the profitability and market share of the Properties through the
completion of strategic renovations and expansions. Simon Group has a number
of renovation and/or expansion projects currently under construction, or in
preconstruction development. Simon Group invested approximately $105 million
on renovations and expansions during the first six months of 2000 and expects
to invest a total of approximately $270 million on renovations and expansions
in 2000.
Technology Initiatives. Simon Group is involved in a number of activities
designed to take advantage of new retail opportunities of the digital age.
Elements of the strategy include digitizing the existing assets of the
Properties by implementing internet web sites for each of the Properties,
incubating concepts that leverage the physical and virtual worlds through a
subsidiary venture called clixnmortar.com and creating products that leverage
the digitalization of consumers and mall merchants through an enhanced
broadband network called
23
<PAGE>
MerchantWired. In June of 2000 the SPG Operating Partnership, along with
several other retail REIT industry leaders formed an LLC to continue the
operations of MerchantWired. The SPG Operating Partnership owns an approximate
52% interest in the LLC and accounts for it using the equity method of
accounting. In addition, Simon Group recently announced it is joining with
leading real estate companies across a broad range of property sectors to form
Constellation Real Technologies, which is designed to form, incubate and
sponsor real estate-related Internet, e-commerce and technology enterprises;
acquire interests in existing "best of breed" companies; and act as a
consolidator of real estate technology across property sectors.
These new activities may generate losses in the initial years of operation,
while programs are being developed and customer bases are being established.
Simon Group has investments totaling approximately $42 million related to such
programs through June 30, 2000. Simon Group has made additional funding
commitments of approximately $41 million related to these programs over the
next two years, and has guaranteed MerchantWired equipment lease payments up
to $46 million. As part of the LLC Agreement, the other MerchantWired members
have committed a pro rata share of the lease guarantee equal to their
respective ownership percentages in the LLC, which aggregates approximately
$22 million.
Distributions. The Companies declared a distribution of $0.505 per Paired
Share in the second quarter of 2000. The current annual distribution rate is
$2.02 per Paired Share. Future distributions will be determined based on
actual results of operations and cash available for distribution. In addition,
preferred distributions of $32.765 per share of SPG's Series A preferred stock
and $3.25 per share of SPG's Series B preferred stock were paid during 2000.
Investing and Financing Activities
On July 31, 2000, Simon Group sold its 1,408,450 shares of common stock of
Chelsea for $50 million, which equaled Simon Group's original investment. No
gain or loss was recognized on the transaction. The net proceeds will be used
for general corporate purposes.
Pursuant to a stock repurchase program previously authorized by the Board
of Directors of SPG, on August 8, 2000, the SPG Operating Partnership
purchased 1,596,100 Paired Shares at an average price of $25.00 per Paired
Share. The purchase is part of a plan announced by management earlier in the
year to make opportunistic repurchases of Paired Shares during 2000 funded
solely by a portion of the net proceeds realized from the sales of its non-
core assets.
Cash used in investing activities of $37 million for the six months ended
June 30, 2000 includes capital expenditures of $226 million; investments in
unconsolidated joint ventures of $104 million, which includes $45 million
related to a financing transaction with the remainder consisting primarily of
development funding; and a $2 million advance to the Management Company. These
cash uses are partially offset by net proceeds of $109 million from the sale
of Simon Group's interest in six Properties and distributions from
unconsolidated entities of $186 million. Distributions from unconsolidated
entities includes approximately $61 million related to financing transactions,
with the remainder resulting primarily from operating activities.
Cash used in financing activities for the six months ended June 30, 2000
was $249 million and includes net distributions of $288 million, partially
offset by net borrowings of $39 million.
EBITDA--Earnings from Operating Results before Interest, Taxes, Depreciation
and Amortization
Management believes that there are several important factors that
contribute to the ability of Simon Group to increase rent and improve
profitability of its shopping centers, including aggregate tenant sales
volume, sales per square foot, occupancy levels and tenant costs. Each of
these factors has a significant effect on EBITDA. Management believes that
EBITDA is an effective measure of shopping center operating performance
because: (i) it is industry practice to evaluate real estate properties based
on operating income before interest, taxes, depreciation and amortization,
which is generally equivalent to EBITDA; and (ii) EBITDA is unaffected by the
debt and equity structure of the property owner. EBITDA: (i) does not
represent cash flow from operations as
24
<PAGE>
defined by generally accepted accounting principles; (ii) should not be
considered as an alternative to net income as a measure of operating
performance; (iii) is not indicative of cash flows from operating, investing
and financing activities; and (iv) is not an alternative to cash flows as a
measure of liquidity.
Total EBITDA for the Properties increased from $838.9 million for the six
months ended June 30, 1999 to $979.5 million for the same period in 2000,
representing a 16.8% increase. This increase is primarily attributable to the
NED Acquisition ($78.1 million) and the other Properties opened or acquired
during 1999 ($44.4 million), partially offset by the impact of adopting SAB
101 in accounting for overage rents ($13.8 million), a decrease from
Properties sold in the comparative periods ($5.6 million) and technology
initiatives startup costs ($4.1 million). Excluding these items, EBITDA
increased $38.4 million, or 4.6%. During this period operating profit margin
decreased from 64.6% to 63.4%, which is partially due to the adoption of SAB
101.
FFO--Funds from Operations
FFO is an important and widely used measure of the operating performance of
REITs, which provides a relevant basis for comparison among REITs. FFO, as
defined by NAREIT, means consolidated net income without giving effect to real
estate related depreciation and amortization, gains or losses from
extraordinary items, gains or losses on sales of real estate, or the
cumulative effects of changes in accounting principles, plus the allocable
portion, based on economic ownership interest, of funds from operations of
unconsolidated joint ventures, all determined on a consistent basis in
accordance with generally accepted accounting principles. Effective January 1,
2000, Simon Group adopted NAREIT's clarification in the definition of FFO,
which required the inclusion of the effects of nonrecurring items not
classified as extraordinary or resulting from the sales of depreciable real
estate or the cumulative effects of accounting changes. Simon Group's method
of calculating FFO may be different from the methods used by other REITs. FFO:
(i) does not represent cash flow from operations as defined by generally
accepted accounting principles; (ii) should not be considered as an
alternative to net income as a measure of operating performance; and (iii) is
not an alternative to cash flows as a measure of liquidity.
The following summarizes FFO of Simon Group and reconciles combined income
before extraordinary items and cumulative effect of accounting change to FFO
for the periods presented:
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended June Months Ended June
30, 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(In thousands)
FFO of Simon Group..................... $180,468 $170,573 $350,693 $328,528
======== ======== ======== ========
Reconciliation:
Income Before Extraordinary Items and
Cumulative Effect of Accounting
Change................................ $ 75,912 $ 67,338 $147,048 $134,726
Plus:
Depreciation and amortization from
combined consolidated Properties.... 98,906 89,544 197,142 179,081
Simon Group's share of depreciation
and amortization from unconsolidated
affiliates.......................... 28,055 20,761 56,856 41,291
Less:
Loss (gain) on sales of assets, net
of asset write downs of $10,572, $0,
$10,572, and $0, respectively....... (1,562) 9,308 (8,658) 9,308
Minority interest portion of
depreciation and amortization....... (1,475) (255) (2,955) (2,050)
Preferred distributions (including
preferred distributions of a
subsidiary and to preferred
unitholders)........................ (19,368) (16,123) (38,740) (33,828)
-------- -------- -------- --------
FFO of Simon Group..................... $180,468 $170,573 $350,693 $328,528
======== ======== ======== ========
FFO Allocable to the Companies......... $131,039 $125,099 $254,542 $239,359
======== ======== ======== ========
</TABLE>
25
<PAGE>
Portfolio Data
Operating statistics do not include those Properties located outside of the
United States.
Aggregate Tenant Sales Volume. For the six months ended June 30, 2000
compared to the same period in 1999, total reported retail sales at mall and
freestanding GLA owned by Simon Group ("Owned GLA") in the regional malls
increased $1,122 million or 18.8% from $5,953 million to $7,075 million,
primarily as a result of the NED Acquisition ($560 million), increased
productivity of our existing tenant base and an overall increase in occupancy.
Retail sales at Owned GLA affect revenue and profitability levels because they
determine the amount of minimum rent that can be charged, the percentage rent
realized, and the recoverable expenses (common area maintenance, real estate
taxes, etc.) the tenants can afford to pay.
Occupancy Levels. Occupancy levels for Owned GLA at mall and freestanding
stores in the regional malls increased from 88.4% at June 30, 1999, to 90.0%
at June 30, 2000. Owned GLA has increased 11.4 million square feet from June
30, 1999, to June 30, 2000, primarily as a result of the NED Acquisition.
Average Base Rents. Average base rents per square foot of mall and
freestanding Owned GLA at regional malls increased 5.7%, from $26.15 at June
30, 1999 to $27.63 at June 30, 2000.
Inflation
Inflation has remained relatively low and has had a minimal impact on the
operating performance of the Properties. Nonetheless, substantially all of the
tenants' leases contain provisions designed to lessen the impact of inflation.
Such provisions include clauses enabling Simon Group to receive percentage
rentals based on tenants' gross sales, which generally increase as prices
rise, and/or escalation clauses, which generally increase rental rates during
the terms of the leases. In addition, many of the leases are for terms of less
than ten years, which may enable Simon Group to replace existing leases with
new leases at higher base and/or percentage rentals if rents of the existing
leases are below the then-existing market rate. Substantially all of the
leases, other than those for anchors, require the tenants to pay a
proportionate share of operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing Simon Group's exposure to
increases in costs and operating expenses resulting from inflation.
However, inflation may have a negative impact on some of Simon Group's
other operating items. Interest and general and administrative expenses may be
adversely affected by inflation as these specified costs could increase at a
rate higher than rents. Also, for tenant leases with stated rent increases,
inflation may have a negative effect as the stated rent increases in these
leases could be lower than the increase in inflation at any given time.
Seasonality
The shopping center industry is seasonal in nature, particularly in the
fourth quarter during the holiday season, when tenant occupancy and retail
sales are typically at their highest levels. In addition, shopping malls
achieve most of their temporary tenant rents during the holiday season. As a
result of the above, earnings are generally highest in the fourth quarter of
each year.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
Sensitivity Analysis. Simon Group's combined future earnings, cash flows
and fair values relating to financial instruments are primarily dependent upon
prevalent market rates of interest, primarily LIBOR. Based upon combined
consolidated indebtedness and interest rates at June 30, 2000, a 0.25%
increase in the market rates of interest would decrease future earnings and
cash flows by approximately $6.2 million, and would decrease the fair value of
debt by approximately $166 million. A 0.25% decrease in the market rates of
interest would increase future earnings and cash flows by approximately $6.2
million, and would increase the fair value of debt by approximately $177
million.
26
<PAGE>
PART II--OTHER INFORMATION
Item 1: Legal Proceedings
Please refer to Note 11 of the combined financial statements for a summary
of material pending litigation and routine litigation and administrative
proceedings arising in the ordinary course of business.
Item 4: Submission of Matters to a Vote of Security Holders
The annual meetings of the stockholders of SPG and SRC were held on May 10,
2000. The matters submitted to the stockholders for a vote included (a) the
election of 7 directors to SPG's Board of Directors and the election of 13
directors to the SRC's Board of Directors; and (b) the ratification of the
appointment of Arthur Andersen LLP as independent accountants for the fiscal
year ending December 31, 2000.
The following tables set forth the results of voting on these matters.
SPG:
<TABLE>
<CAPTION>
Number of
Number of Number of Abstentions/
Votes Votes Broker Non-
Matter FOR WITHHELD Votes
------ ----------- ---------- ------------
<S> <C> <C> <C>
Election of Directors:
Robert E. Angelica......................... 133,012,717 8,350,646 --
Birch Bayh................................. 129,982,300 11,381,063 --
Hans C. Mautner............................ 132,906,043 8,457,320 --
G. William Miller.......................... 132,968,301 8,395,062 --
J. Albert Smith, Jr........................ 132,810,975 8,552,388 --
Pieter S. van den Berg..................... 130,058,932 11,304,431 --
Phillip J. Ward............................ 132,917,334 8,446,029 --
Ratification of Appointment of Arthur
Andersen LLP.............................. 141,171,837 105,688 85,838
</TABLE>
SRC:
<TABLE>
<CAPTION>
Number of
Number of Number of Abstentions/
Votes Votes Broker Non-
Matter FOR WITHHELD Votes
------ ----------- ---------- ------------
<S> <C> <C> <C>
Election of Directors:
Robert E. Angelica......................... 133,024,609 8,338,754 --
Birch Bayh................................. 132,989,684 8,373,679 --
Hans C. Mautner............................ 132,923,587 8,439,776 --
G. William Miller.......................... 133,004,422 8,358,941 --
Frederick W. Petri......................... 133,035,076 8,338,287 --
Melvin Simon............................... 132,891,640 8,471,723 --
Herbert Simon.............................. 132,913,600 8,449,763 --
David Simon................................ 119,937,336 21,426,027 --
J. Albert Smith............................ 133,032,233 8,331,130 --
Richard S. Sokolov......................... 132,911,070 8,452,293 --
Peter S. Van Den Berg...................... 133,029,833 8,333,530 --
Phillip J. Ward............................ 132,929,933 8,433,430 --
M. Denise DeBartolo York................... 132,904,772 8,458,591 --
Ratification of Appointment of Arthur
Andersen LLP.............................. 141,171,837 105,688 85,838
</TABLE>
27
<PAGE>
Members of the SPG's Board of Directors whose term of office as a director
continued after the Annual Meeting other than those elected are Melvin Simon,
Herbert Simon, David Simon, Richard S. Sokolov, Frederick W. Petri and M.
Denise DeBartolo York.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
One report on Form 8-K was filed during the current period.
On May 11, 2000 under Item 5--Other Events, SPG reported that it made
available additional ownership and operational information concerning the
Companies, the Operating Partnerships, and the properties owned or managed
as of March 31, 2000, in the form of a Supplemental Information Package. A
copy of the package was included as an exhibit to the 8-K filing. In
addition, SPG reported that, on May 9, 2000, it issued a press release
containing information on earnings as of March 31, 2000 and other matters.
A copy of the press release was included as an exhibit to the filing.
28
<PAGE>
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.
Simon Property Group, Inc. and SPG
Realty Consultants, Inc.
/s/ John Dahl
_____________________________________
John Dahl,
Senior Vice President and Chief
Accounting Officer (Principal
Accounting Officer)
Date: August 10, 2000
29
