<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 1-12618
------------------------
SIMON DEBARTOLO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 35-1901999
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
115 WEST WASHINGTON STREET 46204
INDIANAPOLIS, INDIANA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (317) 636-1600
------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF NOVEMBER 10, 1996, 96,628,183 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 WERE
OUTSTANDING.
- --------------------------------------------------------------------------------
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<PAGE> 2
SIMON DEBARTOLO GROUP, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 1996 and December 31,
1995............................................................................ 3
Consolidated Condensed Statements of Operations for the three-month and
nine-month periods ended September 30, 1996 and 1995............................ 4
Consolidated Condensed Statements of Cash Flows for the nine-month periods ended
September 30, 1996 and 1995..................................................... 5
Notes to Consolidated Condensed Financial Statements............................. 6
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 15
PART II -- OTHER INFORMATION
Items 1 through 6................................................................... 22
Signatures.......................................................................... 24
</TABLE>
2
<PAGE> 3
SIMON DEBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS:
Investment properties, at cost....................................... $ 5,226,532 $2,162,161
Less -- accumulated depreciation..................................... (236,583) 152,817
---------- ----------
4,989,949 2,009,344
Cash and cash equivalents............................................ 92,575 62,721
Tenant receivables and accrued revenue, net.......................... 150,954 144,400
Notes receivable and advances due from Management Company............ 54,128 102,522
Investment in partnerships and joint ventures, at equity............. 368,225 113,676
Deferred costs, net.................................................. 77,384 81,398
Other assets......................................................... 64,981 42,375
---------- ----------
Total assets...................................................... $ 5,798,196 $2,556,436
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Mortgages and other notes payable.................................... $ 3,555,123 $1,980,759
Accounts payable and accrued expenses................................ 199,942 113,131
Accrued distributions................................................ 2,223 48,594
Cash distributions and losses in partnerships and joint ventures, at
equity............................................................ 16,796 54,120
Investment in Management Company..................................... 13,415 20,612
Other liabilities.................................................... 47,932 19,582
---------- ----------
Total liabilities................................................. 3,835,431 2,236,798
---------- ----------
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNERS' INTEREST IN THE OPERATING PARTNERSHIP................ 645,472 86,692
SHAREHOLDERS' EQUITY:
Series A convertible Preferred stock, 4,000,000 authorized,
issued and outstanding............................................ 99,923 99,923
Series B Preferred stock, 8,000,000 authorized,
issued and outstanding............................................ 193,471 --
Common stock, $0.0001 par value, 246,000,000 shares authorized,
93,303,387 and 55,160,195 issued and outstanding, at September 30,
1996 and December 31, 1995, respectively.......................... 9 6
Class B common stock, $0.0001 par value, 12,000,000 shares
authorized, 3,200,000 issued and outstanding...................... 1 1
Class C common stock, $0.0001 par value, 4,000 shares authorized,
issued and outstanding............................................ -- --
Capital in excess of par value....................................... 1,185,983 266,718
Accumulated deficit.................................................. (156,219) (131,015)
Unamortized restricted stock award................................... (5,875) (2,687)
---------- ----------
Total shareholders' equity........................................ 1,317,293 232,946
---------- ----------
Total liabilities, limited partners' equity
and shareholders' equity................................... $ 5,798,196 $2,556,436
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
SIMON DEBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Minimum rent......................................... $117,375 $ 75,242 $277,313 $222,701
Overage rent......................................... 6,987 5,982 17,738 15,877
Tenant reimbursements................................ 63,511 50,536 157,738 140,030
Other income......................................... 14,563 6,282 32,851 19,689
--------- --------- --------- ---------
Total revenue..................................... 202,436 138,042 485,640 398,297
--------- --------- --------- ---------
EXPENSES:
Property operating................................... 35,089 26,647 85,608 72,623
Depreciation and amortization........................ 37,606 22,015 88,913 65,212
Real estate taxes.................................... 19,676 13,321 48,040 39,854
Repairs and maintenance.............................. 10,006 5,740 22,546 16,926
Advertising and promotion............................ 5,542 4,093 14,439 12,013
Merger integration costs............................. 7,236 -- 7,236 --
Provision for doubtful accounts...................... 1,116 (200) 2,867 2,203
Other................................................ 3,450 2,235 9,152 8,295
--------- --------- --------- ---------
Total operating expenses.......................... 119,721 73,851 278,801 217,126
--------- --------- --------- ---------
OPERATING INCOME....................................... 82,715 64,191 206,839 181,171
INTEREST EXPENSE....................................... 56,212 36,468 135,346 112,125
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST........................ 26,503 27,723 71,493 69,046
MINORITY INTEREST...................................... (1,219) (605) (2,394) (1,940)
GAIN ON SALE OF ASSET.................................. 88 -- 88 2,350
--------- --------- --------- ---------
INCOME BEFORE UNCONSOLIDATED ENTITIES.................. 25,372 27,118 69,187 69,456
INCOME FROM UNCONSOLIDATED ENTITIES.................... 3,467 (172) 7,452 3,225
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS...................... 28,839 26,946 76,639 72,681
EXTRAORDINARY ITEMS -- Losses on extinguishments of
debt................................................. (2,530) (2,636) (2,795) (2,884)
--------- --------- --------- ---------
INCOME OF THE OPERATING PARTNERSHIP.................... 26,309 24,310 73,844 69,797
LESS -- LIMITED PARTNERS' INTEREST IN THE OPERATING
PARTNERSHIP.......................................... 9,301 9,536 26,208 28,429
--------- --------- --------- ---------
NET INCOME............................................. 17,008 14,774 47,636 41,368
PREFERRED DIVIDENDS.................................... (2,224) -- (6,286) --
--------- --------- --------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDER............. $ 14,784 $ 14,774 $ 41,350 $ 41,368
========= ========= ========= =========
EARNINGS PER COMMON SHARE:
Income before extraordinary items................. $ 0.20 $ 0.28 $ 0.65 $ 0.79
Extraordinary items............................... (0.02) (0.03) (0.02) (0.03)
--------- --------- --------- ---------
Net income........................................ $ 0.18 $ 0.25 $ 0.63 $ 0.76
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SIMON DEBARTOLO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 47,636 $ 41,368
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization.................................... 94,976 71,761
Losses on extinguishments of debt................................ 2,795 2,888
Gain on sale of asset............................................ (88) (2,350)
Limited Partners' interest in Operating Partnership.............. 26,208 28,429
Straight-line rent............................................... 1,754 (1,237)
Minority interest................................................ 2,394 1,940
Equity in income of unconsolidated entities...................... (7,452) (3,225)
Changes in assets and liabilities --
Tenant receivables and accrued revenue........................... 9,034 3,727
Deferred costs and other assets.................................. (4,200) (9,420)
Accounts payable, accrued expenses and other liabilities......... (29,767) (4,337)
--------- ---------
Net cash provided by operating activities..................... 143,290 129,544
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions..................................................... (43,941) (31,155)
Capital expenditures............................................. (112,419) (61,510)
Cash from Merger and consolidation of joint ventures............. 66,736 4,346
Proceeds from sale of asset...................................... 399 2,550
Investments in unconsolidated entities........................... (54,442) (19,696)
Distributions from unconsolidated entities....................... 45,403 4,274
Loan repayment from Management Company........................... 38,553
--------- ---------
Net cash used in investing activities......................... (59,711) (101,191)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common and convertible preferred stock,
net........................................................... 195,205 142,130
Minority interest distributions.................................. (3,810) (2,823)
Distributions to shareholders.................................... (103,395) (76,103)
Distributions to limited partner................................. (67,951) (54,540)
Proceeds from borrowings, net of transaction costs............... 272,945 359,338
Mortgage, bond and other payments................................ (346,719) (428,511)
--------- ---------
Net cash used in financing activities......................... (53,725) (60,509)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 29,854 (32,156)
CASH AND CASH EQUIVALENTS, beginning of period..................... 62,721 105,139
--------- ---------
CASH AND CASH EQUIVALENTS, end of period........................... $ 92,575 $ 72,983
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
SIMON DEBARTOLO GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 -- ORGANIZATION
On August 9, 1996, the merger and other related transactions pursuant to
the agreement and plan of merger among Simon Property Group, Inc. ("SPG"), an
acquisition subsidiary of SPG and DeBartolo Realty Corporation ("DRC") were
consummated (the "Merger"). Pursuant to the Merger, SPG acquired all the
outstanding shares of common stock of DRC (55,712,529 shares) through the
acquisition subsidiary, at an exchange ratio of 0.68 share of SPG common stock
for each share of DRC common stock (the "Exchange Ratio"). A total of 37,884,520
shares of SPG common stock were issued by the SPG, through the acquisition
subsidiary, to the DRC shareholders. DRC and the acquisition subsidiary merged,
with DRC as the surviving entity and becoming a 99.9% subsidiary of SPG. This
portion of the transaction was valued at approximately $923.4 million, based
upon the number of DRC shares of common stock acquired (55,712,529 shares), the
Exchange Ratio and the last reported sales price per share of SPG's common stock
on August 9, 1996 ($24.375). In connection therewith, SPG changed its name to
Simon DeBartolo Group, Inc. (the "Company") and DRC changed its name to SD
Property Group, Inc. (the "Managing General Partner").
In connection with the Merger, the general and limited partners of the
operating partnership of SPG, Simon Property Group, L.P. ("SPG, LP"),
contributed 49.5% (47,442,212 units) of the total outstanding units of
partnership interest in SPG, LP to the operating partnership of DRC, DeBartolo
Realty Partnership, L.P. ("DRP, LP") in exchange for 47,442,212 units of
partnership interest in DRP, LP, whose name has since been changed to Simon
DeBartolo Group, L.P. ("SDG, LP"). The Company retained a 50.5% partnership
interest (48,400,614 units) in SPG, LP but assigned its rights to receive
distributions of profits on 49.5% (47,442,212 units) of the outstanding units of
partnership interest in SPG, LP to SDG, LP. The limited partners of DRP, LP
approved the contribution made by the partners of SPG, LP and simultaneously
exchanged their 38.1% (34,203,623 units) partnership interest in DRP, LP,
adjusted for the Exchange Ratio, for a smaller partnership interest in SDG, LP.
The exchange of the limited partners' 38.1% partnership interest in DRP, LP for
units of SDG, LP has been accounted for as an acquisition of minority interest
by the Company and is valued based on the estimated fair value of the
consideration issued (approximately $566.9 million). The units of SDG, LP may
under certain circumstances be exchangeable for stock of the Company on a
one-for-one basis. Therefore, the value of the acquisition of the DRP, LP
limited partners' interest acquired was based upon the number of DRP, LP units
exchanged (34,203,623 units), the Exchange Ratio and the last reported sales
price per share of SPG's common stock on August 9, 1996 ($24.375). The limited
partners of SPG, LP received a 23.7% partnership interest in SDG, LP (37,282,628
units) for the contribution of their 38.9% partnership interest in SPG, LP
(37,282,628 units) to SDG, LP. The interests transferred by the partners of SPG,
LP to DRP, LP have been appropriately reflected at historical costs.
Upon completion of the Merger, the Company became a general partner of SDG,
LP with 36.9% (57,605,796 units) of the outstanding partnership units in SDG, LP
and the Managing General Partner became the managing general partner of SDG, LP
with 24.3% (37,873,965 units in SPG, LP) of the outstanding partnership units in
SDG, LP. The Company remained the sole general partner of SPG, LP with 1% of the
outstanding partnership units (958,429 units) and 49.5% interest in the capital
of SPG, LP, and SDG, LP became a special limited partner in SPG, LP with 49.5%
(47,442,212 units) of the outstanding partnership units in SPG, LP and an
additional 49.5% interest in the profits of SPG, LP. SPG, LP did not acquire any
interest in SDG, LP. Upon completion of the Merger, the Company directly and
indirectly owned a controlling 61.2% (95,479,761 units) partnership interest in
SDG, LP.
For financial reporting purposes, the completion of the Merger resulted in
a reverse acquisition by the Company, using the purchase method of accounting,
directly or indirectly, of 100% of the net assets of DRP, LP for consideration
valued at $1.523 billion, including related transaction costs. The purchase
price has been allocated to the fair value of the assets and liabilities of DRP,
LP at September 30, 1996. Certain assumptions were made which management of the
General Partners believes are reasonable. Management expects to
6
<PAGE> 7
finalize the purchase price allocation during the fourth quarter of 1996. The
final allocation is not expected to differ materially from the allocation made
at September 30, 1996.
Although the Company was the accounting acquirer, SDG, LP (formerly DRP,
LP) became the primary operating partnership through which the future business
of the Company will be conducted, As a result of the Merger, the Company's
initial operating partnership, SPG, LP, became a subsidiary of SDG, LP, with 99%
of the profits allocable to SDG, LP and 1% of the profits allocable to the
Company. Cash flow allocable to the Company's 1% profit interest in SDG, LP will
be absorbed by public company cost and related expenses incurred by the Company.
However, because the Company was the accounting acquirer and upon completion of
the Merger acquired majority control of SDG, LP, SPG, LP is the predecessor to
SDG, LP for financial reporting purposes. Accordingly the financial statements
and ratios disclosed by SDG, LP for the post-merger periods will reflect the
reverse acquisition of DRP, LP by the Company using the purchase method of
accounting and for all pre-merger comparative periods, the financial statements
and ratios disclosed by SDG, LP will reflect the financial statements and ratios
of SPG, LP as the predecessor to SDG, LP for financial reporting purposes.
It is currently expected that subsequent to the first anniversary of the
date of the Merger, reorganizational transactions will be effected so that SDG,
LP will directly own all of the assets and partnership interests now owned by
SPG, LP. However, there can be no assurance that such reorganizational
transactions will be so effected. See "The Operating Partnership."
In connection with the Merger, M.S. Management Associates, Inc., a SPG
management company, purchased from The Edward J. DeBartolo Corporation all of
the voting stock (665 shares of common stock) of DeBartolo Properties
Management, Inc., a DRC management company, for $2.5 million in cash. SDG, LP
continues to hold substantially all of the economic interest in DeBartolo
Properties Management, Inc. The Company holds substantially all of the economic
interest in M.S. Management Associates, Inc., while the voting stock are held by
the Simons and their affiliates. M.S. Management Associates, Inc. is accounted
for using the equity method of accounting.
The following unaudited pro forma summary financial information for the
nine month period ended September 30, 1996 combines the consolidated results of
operations of the Operating Partnership as if the Merger had occurred on January
1, 1995 and was carried forward through September 30, 1996:
<TABLE>
<CAPTION>
FOR THE NINE MONTH
PERIOD ENDED
SEPTEMBER 30,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenue................................................... $ 694,343 $ 645,398
=========== ===========
Net Income................................................ $ 107,383 $ 128,225
=========== ===========
Net Income Attributable to:
General Partners........................................ $ 65,933 $ 78,730
Limited Partners........................................ 41,450 49,495
----------- -----------
$ 107,383 $ 128,225
=========== ===========
Net Income per Unit....................................... $ 0.68 $ 0.84
=========== ===========
Weighted Average Units Outstanding........................ 156,925,688 152,806,432
=========== ===========
</TABLE>
NOTE 2 -- BASIS OF PRESENTATION
The accompanying consolidated condensed 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 management, all adjustments (consisting solely of normal recurring matters)
necessary for a fair presentation of the consolidated condensed financial
statements for these interim periods
7
<PAGE> 8
have been included. The results for the interim period ended September 30, 1996
are not necessarily indicative of the results to be obtained for the full fiscal
year. These unaudited consolidated condensed financial statements should be read
in conjunction with the December 31, 1995 audited financial statements and notes
thereto included in the Simon Property Group, Inc. Annual Report on Form 10-K.
The accompanying unaudited consolidated condensed financial statements of
Simon DeBartolo Group, Inc. (the "Company") include all the accounts of the
Company and its majority-owned subsidiaries, including Simon DeBartolo Group,
L.P. and Simon Property Group (the "Operating Partnership"). The Company
directly or indirectly owned 61.5% and 61.0% of the Operating Partnership as of
September 30, 1996 and December 31, 1995, respectively. Properties which are
wholly owned or controlled by the Operating Partnership have been consolidated.
All significant intercompany amounts have been eliminated.
The Operating Partnership's equity interests in certain partnerships and
joint ventures which represent noncontrolling 14.7% to 50.0% ownership interests
and the investment in M.S. Management Associates, Inc. (the "Management
Company" -- see Note 7) are accounted for under the equity method of accounting.
These investments are recorded initially at cost and subsequently adjusted for
net equity in income (loss) and cash contributions and distributions. An
additional 2% ownership in one property is accounted for using the cost method.
Net income is allocated to the Company based on the Company's preferred
unit preference and/or ownership interest in the Operating Partnership during
the period. The Company's weighted average ownership interest in the Operating
Partnership for the three months ended September 30, 1996 and 1995 was 61.3% and
60.8%, respectively. The Company's weighted average ownership interest for the
nine-month periods ended September 30, 1996 and 1995 was 61.2% and 59.3%,
respectively.
NOTE 3 -- RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1996 presentation.
NOTE 4 -- CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, during the nine months
ended September 30, 1996 was $127,464, as compared to $106,734 for the same
period in 1995. Accrued and unpaid distributions as of September 30, 1996 and
December 31, 1995 were $2,223, and $48,594, respectively, which includes accrued
and unpaid dividends entitled to preferential distribution of cash ("Preferred
Shares") of $2,223, and $1,490, respectively.
As described in Note 1 the Operating Partnership issued units in connection
with the acquisition of DRC.
NOTE 5 -- PER SHARE DATA
Per share data is based on the weighted average number of shares of common
stock ("Shares") outstanding during the period. As used herein, the term Shares
does not include Preferred Shares. The weighted average number of Shares used in
the computation for the three months ended September 30, 1996 and 1995 was
80,397,469 and 57,833,028, respectively. The weighted average number of Shares
used in the computation for the nine months ended September 30, 1996 and 1995
was 96,507,387 and 54,320,878, respectively. Additionally, the Series A
Preferred Shares may be converted into common stock of the Company beginning in
October of 1997 at an initial conversion ratio equal to 0.9524, while the Series
B Preferred Shares are not convertible. The stock options outstanding under the
Stock Option Plans and the Preferred Shares have not been included in the
computations of per Share data, as they do not have a dilutive effect.
NOTE 6 -- ACQUISITION
Prior to April 11, 1996, the Operating Partnership held a 50% joint venture
interest in Ross Park Mall in Pittsburgh, Pennsylvania. On April 11, 1996, the
Operating Partnership acquired the remaining economic
8
<PAGE> 9
ownership interest. The purchase price included approximately $44,000 cash and
the assumption of the joint venture partner's share of existing debt ($57,000).
The purchase price in excess of the net assets acquired of $49,015 was allocated
to investment properties. Effective April 11, 1996, the property is being
accounted for using the consolidated method of accounting. It was previously
accounted for using the equity method of accounting.
In connection with the settlement of certain outstanding litigation, the
Operating Partnership acquired on October 4, 1996 for cash an additional 20%
limited partnership interest in North East Mall. At the same time, the Operating
Partnership exercised its option to acquire the remaining 30% limited
partnership interest in North East Mall owned by the Simons in exchange for
472,410 units in the Operating Partnership, as well as the Simons' 50% general
partnership interest which the Operating Partnership acquired for nominal
consideration. The Simons had previously contributed to the Operating
Partnership in exchange for units, the right to receive distributions relating
to its 50% general partnership interest. Therefore, the Operating Partnership as
a result of these transactions owns 100% of North East Mall and accounts for it
using the consolidated method of accounting.
NOTE 7 -- INVESTMENT IN UNCONSOLIDATED ENTITIES
Summary financial information of partnerships and joint ventures accounted
for using the equity method of accounting and a summary of the Operating
Partnership's investment in and share of income (loss) from such partnerships
and joint ventures follow:
<TABLE>
<CAPTION>
PARTNERSHIPS AND
JOINT VENTURES
------------------------------
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
BALANCE SHEETS
ASSETS:
Investment properties at cost, net....................... $ 1,763,739 $1,156,066
Cash and cash equivalents................................ 63,298 52,624
Tenant receivables....................................... 50,356 35,306
Other assets............................................. 45,446 32,626
---------- ----------
Total assets..................................... $ 1,922,839 $1,276,622
========== ==========
LIABILITIES AND PARTNERS' EQUITY:
Mortgage and other notes payable......................... $ 1,071,932 $ 410,652
Accounts payable, accrued expenses and other
liabilities........................................... 159,446 127,322
---------- ----------
Total liabilities..................................... 1,231,378 537,974
Partners' equity...................................... 691,461 738,648
---------- ----------
Total liabilities and partners' equity........... $ 1,922,839 $1,276,622
========== ==========
THE OPERATING PARTNERSHIP'S SHARE OF:
Total assets..................................... $ 551,500 $ 290,802
========== ==========
PARTNERS' EQUITY:
Investment in partnerships and joint ventures, at
equity................................................ $ 368,225 $ 113,676
Cash distributions and losses in partnerships and
joint ventures, at equity............................. (16,796) (54,120)
---------- ----------
$ 351,429 $ 59,556
========== ==========
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
PARTNERSHIPS AND JOINT VENTURES
--------------------------------------------
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
REVENUE:
Minimum rent..................................... $37,295 $19,755 $ 91,334 $57,606
Overage rent..................................... 2,057 548 3,746 1,678
Tenant reimbursements............................ 18,487 10,002 46,000 28,651
Other income..................................... 2,903 1,757 9,061 11,064
------- ------- -------- -------
Total revenue............................ 60,742 32,062 150,141 98,999
OPERATING EXPENSES:
Operating expenses and other..................... 22,888 11,019 55,737 32,456
Depreciation and amortization.................... 12,273 5,310 32,859 15,961
------- ------- -------- -------
Total operating expenses...................... 35,161 16,329 88,596 48,417
------- ------- -------- -------
OPERATING INCOME................................... 25,581 15,733 61,545 50,582
INTEREST EXPENSE................................... 14,555 6,648 28,689 21,282
EXTRAORDINARY ITEMS................................ -- (9) -- (9)
------- ------- -------- -------
NET INCOME......................................... 11,026 9,076 32,856 29,291
THIRD PARTY INVESTORS' SHARE OF NET INCOME......... 8,885 8,254 27,581 26,060
------- ------- -------- -------
THE OPERATING PARTNERSHIP'S
SHARE OF NET INCOME.............................. $ 2,141 $ 822 $ 5,275 $ 3,231
======= ======= ======== =======
</TABLE>
The net income or net loss for each partnership and joint venture is
allocated in accordance with the provisions of the applicable partnership or
joint venture agreement. The allocation provisions in these agreements are not
always consistent with the ownership interest held by each general or limited
partner or joint venturer, primarily due to partner preferences.
Summary financial information of the Management Company accounted for using
the equity method of accounting and a summary of the Operating Partnership's
investment in and share of income from the Management Company follow:
<TABLE>
<CAPTION>
MANAGEMENT COMPANY
------------------------------
SEPTEMBER 30, DECEMBER 31,
BALANCE SHEETS 1996 1995
- ------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
ASSETS:
Current assets................................................... $ 62,874 $ 40,964
Undeveloped land and mortgage notes.............................. 18,245 45,769
Other assets..................................................... 24,889 13,813
-------- --------
Total assets.................................................. $ 106,008 $100,546
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities.............................................. $ 52,584 $ 18,435
Notes payable and advances due to the Operating
Partnership at 11%, due 2008.................................. 71,028 102,522
-------- --------
Total liabilities............................................. 123,612 120,957
Shareholders' deficit......................................... (17,604) (20,411)
-------- --------
Total liabilities and shareholders' deficit................... $ 106,008 $100,546
======== ========
THE OPERATING PARTNERSHIP'S SHARE OF:
Total assets.................................................. $ 94,639 $ 80,437
======== ========
Shareholders' deficit......................................... $ (18,415) $(20,612)
======== ========
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
FOR THE
FOR THE NINE MONTHS ENDED
THREE MONTHS ENDED SEPTEMBER 30,
------------------ ------------------
STATEMENTS OF OPERATIONS 1996 1995 1996 1995
- ------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Management fees...................................... $ 4,952 $ 4,158 $15,122 $15,113
Development and leasing fees......................... 6,480 6,747 10,928 13,140
Cost-sharing income and other........................ 1,935 1,706 7,237 5,221
------- ------- ------- -------
Total revenue..................................... 13,367 12,611 33,287 33,474
EXPENSES:
Operating expenses................................... 7,953 10,747 21,744 24,983
Depreciation......................................... 693 579 1,947 1,679
Interest............................................. 1,539 1,999 4,690 5,691
------- ------- ------- -------
Total expenses.................................... 10,185 13,325 28,381 32,353
------- ------- ------- -------
NET INCOME (LOSS)...................................... 3,182 (714) 4,906 1,121
Intercompany profits related to wholly-owned
properties........................................ (1,232) -- (1,232) --
------- ------- ------- -------
NET INCOME (LOSS) AFTER INTERCOMPANY ELIMINATIONS...... 1,950 (714) 3,674 1,121
PREFERRED DIVIDENDS.................................... 350 350 1,050 1,015
------- ------- ------- -------
NET INCOME (LOSS) AVAILABLE FOR COMMON SHAREHOLDERS.... $ 1,600 $(1,064) $ 2,624 $ 106
======= ======= ======= =======
THE OPERATING PARTNERSHIP'S SHARE OF NET INCOME
(LOSS)............................................... $ 1,326 $ (994) $ 2,177 $ (6)
======= ======= ======= =======
</TABLE>
The management, development and leasing activities related to the
non-wholly owned and other third-party properties are conducted by the
Management Company.
The Operating Partnership's share of allocated common costs were $7,524 and
$5,685, respectively, for the three-month periods and $21,949 and $17,704,
respectively, for the nine-month periods ended September 30, 1996 and 1995.
NOTE 8 -- DEBT
On February 23, 1996, the Operating Partnership borrowed the initial
$100,000 tranche of a $184,000 two-tranche loan facility for the Forum Shops at
Caesar's ("Forum") and retired the existing $89,701 mortgage debt for Forum. The
initial funding bears interest at LIBOR plus 100 basis points and matures in
February 2000. The remaining proceeds of the initial $100,000 tranche are being
used to provide funds for the approximately 250,000-square-foot phase II
expansion of this property.
On April 11, 1996, the Operating Partnership borrowed an additional
$115,000 on its then existing revolving credit facility. The funds were used
primarily to acquire the remaining economic ownership interest in Ross Park Mall
($44,000), and to retire a portion ($54,000) of the existing debt on Ross Park
Mall.
On June 28, 1996, the Operating Partnership obtained an additional $200,000
unsecured, revolving credit facility. The facility bore interest at LIBOR plus
132.5 basis points and would mature in August of 1998. Terms for the facility
were identical to those of the Operating Partnership's other $400,000 facility
obtained in August of 1995.
During the first nine months of 1996, the Operating Partnership drew an
additional $33,246 million on its construction loan for Cottonwood Mall in
Albuquerque, New Mexico. As of September 30, 1996, a total of $55,645 million
was outstanding on the loan.
On September 10, 1996, the Operating Partnership retired the DRC secured
line of credit, which bore interest at LIBOR plus 175 basis points, with
proceeds from SPG, LP's two unsecured credit facilities, which bore interest at
LIBOR plus 132.5 basis points.
On September 27, 1996, the Company completed a $200,000 public offering
(the "Preferred Offering") of 8,000,000 shares of 8 3/4% Series B Cumulative
Redeemable Preferred Stock, generating net proceeds of
11
<PAGE> 12
approximately $193,000. The Company contributed the proceeds of such offering to
the Operating Partnership in exchange for preferred units in the Operating
Partnership, which used the net proceeds to repay $142,800 of outstanding
mortgage indebtedness and $50,200 under SPG, LP's two unsecured credit
facilities.
On September 27, 1996, the Operating Partnership obtained a $750,000,
unsecured, three-year credit facility (the "Credit Facility"), which will
initially bear interest at LIBOR plus 90 basis points, and retired the
outstanding borrowing of SPG, LP in the aggregate principal amount of $323,000
under SPG, LP's two unsecured credit facilities, which bore interest at LIBOR
plus 132.5 basis points. The Credit Facility increases the Operating
Partnership's available capital by $150,000.
In September 6, 1996, the Operating Partnership filed a shelf registration
statement with the Securities and Exchange Commission to provide for the
offering, from time to time, of up to $750,000 aggregate principal amount of
unsecured debt securities of the Operating Partnership. The Operating
Partnership is currently preparing to offer an aggregate of $200,000 in
unsecured debt securities for sale to the public. The proceeds of which will be
used primarily to retire mortgage indebtedness and to paydown the unsecured,
revolving credit facility.
At September 30, 1996, the Operating Partnership had consolidated debt of
$3,555,123, of which $2,481,639 was fixed-rate debt and $1,073,484 was
variable-rate debt. As of September 30, 1996 and December 31, 1995, the
Operating Partnership had interest-rate protection agreements related to
$635,807 and $551,196 of variable-rate debt, respectively. The agreements are
generally in effect until the related variable-rate debt matures. As a result of
the various interest rate protection agreements, interest savings were $654 and
$693 for the three months ended September 30, 1996 and 1995, respectively, and
$1,935 and $2,617 for the nine months ended September 30, 1996 and 1995,
respectively. The Operating Partnership's pro rata share of indebtedness of the
unconsolidated joint venture properties as of September 30, 1996 and December
31, 1995 was $431,181 and $167,644, respectively.
12
<PAGE> 13
NOTE 9 -- SHAREHOLDERS' EQUITY
THE FOLLOWING TABLE SUMMARIZES THE CHANGE IN THE COMPANY'S
SHAREHOLDERS' EQUITY SINCE DECEMBER 31, 1995.
<TABLE>
<CAPTION>
CLASS B CLASS C
SERIES A SERIES B COMMON STOCK COMMON STOCK COMMON STOCK
PREFERRED STOCK PREFERRED STOCK ----------------- ---------------- ----------------
------------------ ------------------- PAR PAR PAR
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE
--------- ------- --------- -------- ---------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995..................... 4,000,000 $99,923 -- -- 55,160,195 $ 6 3,200,000 $ 1 -- $--
Preferred Stock Issued, net
of issuance costs........ 8,000,000 $193,471
Common stock issued as part
of severance program.....
Common stock options
exercised................ 21,563
Common stock issued in
connection with the
Merger................... 37,921,599 3 4,000 --
Transfer Out of Limited
Partners' Interest in SPG
Operating Partnership....
Stock Incentive Program.... 200,030
Amortization of stock
incentive................
Net Income.................
Distributions..............
Other......................
--------- ------- --------- ------- ---------- --- --------- -- ----- ---
Balance at September 30,
1996..................... 4,000,000 $99,923 8,000,000 $193,471 93,303,387 $ 9 3,200,000 $ 1 4,000 $--
========= ======= ========= ======= ========== === ========= == ===== ===
<CAPTION>
CAPITAL IN
EXCESS OF PAR
VALUE, NET OF
PREDECESSOR UNAMORITIZED TOTAL
BASIS ACCUMULATED RESTRICTED SHAREHOLDERS'
ADJUSTMENT DEFICIT STOCK AWARD EQUITY
-------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995..................... $ 266,718 $(131,015) $ (2,687) $ 232,946
Preferred Stock Issued, net
of issuance costs........ 193,471
Common stock issued as part
of severance program.....
Common stock options
exercised................ 499 499
Common stock issued in
connection with the
Merger................... 1,488,924 1,488,927
Transfer Out of Limited
Partners' Interest in SPG
Operating Partnership.... (574,847) (574,847)
Stock Incentive Program.... 4,751 (4,751) --
Amortization of stock
incentive................ 1,563 1,563
Net Income................. 47,636 47,636
Distributions.............. (72,840) (72,840)
Other...................... (62) (62)
Balance at September 30,
1996..................... $1,185,983 $(156,219) $ (5,875) $ 1,317,293
========== ========= ======== ===========
</TABLE>
13
<PAGE> 14
STOCK INCENTIVE PROGRAM
Two stock incentive programs are currently in effect.
Under the terms of the Simon Stock Incentive Program, on March 22, 1995, an
aggregate of 1,000,000 shares of restricted stock was awarded to 50 executives,
subject to certain performance standards and other terms of the plan. On March
22, 1995 and 1996, the board of directors of the Company approved the issuances
of 144,196 and 200,030 shares of common stock, respectively to eligible
executives. The value of these shares is being amortized pro-rata over the
respective four year vesting period. Approximately $1,563 and $525 have been
amortized for the nine-month periods ended September 30, 1996 and 1995,
respectively.
Under the terms of the DeBartolo stock incentive plan, 2,108,000 shares of
common stock are available for grant, subject to certain performance standards
and other terms of the plan. A total of 1,865,240 shares of common stock have
been approved by the compensation committee.
It is management's intent to merge the existing plans into a single plan
for key employees.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
On October 16, 1996, a complaint was filed in the Court of Common Pleas of
Mahoning County, Ohio, captioned Carlo Angostinelli et al. v. DeBartolo Realty
Corp. et al. The named defendants are SD Property Group, Inc., a 99%-owned
subsidiary of the Company, and DeBartolo Properties Management, Inc., and the
plaintiffs are 24 former employees of the defendants. In the complaint, the
number of plaintiffs allege that they were recipients of deferred stock grants
under the DRC 1994 Stock Incentive Plan (the "Plan") and that these grants
immediately vested under the Plan's "change in control" provision as a result of
the Merger. Plaintiffs assert that the defendants' refusal to issue them
approximately 579,000 shares of DRC common stock, which is equivalent to
approximately 394,000 shares of common stock of the Company computed at the .68
exchange ratio used in the Merger, constitutes a breach of contract and a breach
of the implied covenant of good faith and fair dealing under Ohio law.
Plaintiffs seek damages equal to such number of shares of DRC common stock, or
cash in lieu thereof, equal to all deferred stock ever granted to them under the
Plan, dividends on such stock from the time of the grants, compensatory damages
for breach of the implied covenant of good faith and fair dealing, and punitive
damages.
The complaint was served on the defendants on October 28, 1996, and
pre-trial proceedings have not yet commenced. The Company is of the opinion that
it has meritorious defenses and accordingly intends to defend this action
vigorously. While it is difficult for the Company to predict the outcome of this
litigation at this stage based on the information known to the Company to date,
the Company does not expect this action will have a material adverse effect on
the Company.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Operating Partnership 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; and environmental/safety requirements.
RESULTS OF OPERATIONS
The financial results reported reflect the Merger completed on August 9,
1996 of Simon Property Group, Inc. and DeBartolo Realty Corporation. This is in
accordance with the purchase method of accounting utilized to record this Merger
transaction. This Merger resulted in an additional 50 regional malls and 11
community shopping centers to the portfolio, of which additions, 41 regional
malls and 10 community shopping centers are being accounted for on the
consolidated method of accounting. The effects of this increase in the portfolio
and the Merger integration costs are highlighted in the following discussion of
the interim period financial comparisons.
In addition to the Merger, three other transactions (the "Property
Transactions"), each resulting in the consolidation of a mall previously
accounted for using the equity method of accounting, occurred and had
significant effects on the comparison of the nine-month and three-month periods.
Effective July 31, 1995, the Operating Partnership acquired the remaining 50%
interest in Crossroads Mall. Effective September 25, 1995, the Operating
Partnership acquired the remaining 55% interest in East Towne Mall. On April 11,
1996, the Operating Partnership acquired the remaining 50% economic ownership
interest in Ross Park Mall.
For The Three Months Ended September 30, 1996
Vs. The Three Months Ended September 30, 1995
Total revenue increased by $64.4 million or 46.6% for the three months
ended September 30, 1996, as compared to the same period in 1995. This increase
is primarily the result of the Merger ($56.0 million) and the Property
Transactions ($9.1 million).
Total operating expenses increased by $45.9 million, or 62.1%, for the
three months ended September 30, 1996, as compared to the same period in 1995.
This increase is primarily the result of the Merger ($36.3 million) and the
Property Transactions ($4.1 million) and an increase in depreciation and
amortization ($5.0 million).
Interest expense increased by $19.7 million, or 54.1% for the three months
ended September 30, 1996, as compared to the same period in 1995. This increase
is primarily as a result of the Merger ($15.0 million) and the Property
Transactions ($3.7 million).
Income from unconsolidated entities increased by $3.6 million for the three
months ended September 30, 1996, as compared to the same period in 1995. This is
primarily due to the Merger ($2.2 million) and an increase in the Operating
Partnership's pro rata share of income from M.S. Management Associates, Inc.
(together with its subsidiaries, the "Management Company") ($2.3 million),
partially offset by a decrease in the Operating Partnership's pro rata share of
income from the pre-Merger unconsolidated joint venture properties ($0.9
million).
Income of the Operating Partnership was $26.3 million for the three months
ended September 30, 1996, as compared to $24.3 million for the same period in
1995, reflecting a net increase of $2.0 million, after Merger integration costs
of $7.2 million for the reasons described above, and was allocated to the
Company,
15
<PAGE> 16
based on the Company's preferred unit preference and ownership interest in the
Operating Partnership during the period.
For The Nine Months Ended September 30, 1996
Vs. Nine Months Ended September 30, 1995
Total revenue increased by $87.3 million or 21.9% for the nine months ended
September 30, 1996, as compared to the same period in 1995. Of this increase,
$56.0 million is a result of the Merger and $25.1 million is a result of the
Property Transactions. The remaining increase is primarily the result of
increases in minimum rent ($5.3 million), lease settlement income ($2.1
million), and a gain on the sale of a peripheral property ($2.6 million),
partially offset by a decrease in tenant reimbursements ($5.9 million).
Total operating expenses increased by $61.7 million, or 28.4%, for the nine
months ended September 30, 1996, as compared to the same period in 1995. This
increase is primarily the result of the Merger ($36.3 million), the Property
Transactions ($12.9 million) and an increase in depreciation and amortization
($10.2 million).
The gain on sale of an asset in the nine months ended September 30, 1995
($2.4 million) relates to the sale of a minority partnership interest in land
previously held for development in Denver, Colorado.
Interest expense increased by $23.2 million for the nine months ended
September 30, 1996, as compared to the same period in 1995. This increase was
primarily the result of the Merger ($15.0 million) and the Property Transactions
($9.5 million).
Income from unconsolidated entities increased by $4.2 million for the nine
months ended September 30, 1996, as compared to the same period in 1995. This is
primarily due to the Merger ($2.2 million) and an increase in the Operating
Partnership's pro rata share of income from the Management Company ($2.2
million).
Income of the Operating Partnership was $47.6 million for the nine months
ended September 30, 1996, as compared to $41.4 million for the same period in
1995, reflecting a net increase of $6.2 million after Merger integration costs
of $7.2 million, for the reasons described above, and was allocated to the
Company, based on the Company's preferred unit preference and ownership interest
in the Operating Partnership during the period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Operating Partnership's balance of cash and cash
equivalents was $92.6 million, not including its proportionate share of cash
held by the joint venture properties and the Management Company. In addition to
its cash reserves, the Operating Partnership had unused capacity under its
unsecured revolving credit facility totaling $427.0 million.
Offering. On September 6, 1996, the Operating Partnership filed a shelf
registration statement with the Securities and Exchange Commission to provide
for the offering, from time to time, of up to $750 million aggregate principal
amount of unsecured debt securities of the Operation Partnership. The Operating
Partnership intends to offer, immediately upon effectiveness, an aggregate of
$200 million in unsecured debt securities. The proceeds of such offering will be
used primarily to retire mortgage indebtedness and to paydown the unsecured
revolving credit facility.
Effective December 15, 1995, SPG, LP completed a shelf registration filing
for $500.0 million of non-convertible investment grade debt securities. As of
September 30, 1996 SPG, LP had not offered any such debt securities.
DeBartolo Merger. As described in the footnotes to the financial
statements, on August 9, 1996 the Company assumed the outstanding indebtedness
of DeBartolo Realty Partnership, L.P.. Such amount aggregated $1,567.8 million
at September 30, 1996.
16
<PAGE> 17
Acquisitions. On April 11, 1996, the Operating Partnership drew an
additional $115.0 million on its then existing revolving credit facility
primarily to finance the acquisition of the remaining economic ownership
interest in Ross Park Mall ($44 million) and to retire a portion of the
property's debt ($54 million).
In connection with the settlement of certain outstanding litigation, the
Operating Partnership acquired on October 4, 1996 for $12.5 million an
additional 20% limited partnership interest in North East Mall. At the same
time, the Operating Partnership exercised its option to acquire the remaining
30% limited partnership interest in North East Mall owned by the Simons in
exchange for 472,410 partnership units in the Operating Partnership, as well as
the Simons' 50% general partnership interest which the Operating Partnership
acquired for nominal consideration. The Simons had previously contributed to the
Operating Partnership in exchange for partnership units, the right to receive
distributions relating to its 50% general partnership interest. Therefore the
Operating Partnership, as a result of the transactions, owns 100% of North East
Mall and accounts for it using the consolidated method of accounting.
Financing and Refinancing. On February 23, 1996, the Operating Partnership
borrowed the initial $100.0 million tranche of a $184.0 million two-tranche loan
facility for The Forum Shops at Caesar's ("Forum") and retired the existing
$89.7 million mortgage debt for Forum. The initial funding bears interest at
LIBOR plus 100 basis points and matures in February 2000. The remaining proceeds
are being used to provide funds for the approximately 250,000-square-foot phase
II expansion of this property.
On June 28, 1996, the Operating Partnership obtained an additional $200
million unsecured, revolving credit facility. The facility bore interest at
LIBOR plus 132.5 basis points and would mature in August of 1998. Terms for the
facility were identical to those of the Operating Partnership's other $400
million credit facility.
On September 10, 1996, the Operating Partnership retired the DRC secured
line of credit, in the amount of $112.0 million, which bore interest at LIBOR
plus 175 basis points, with proceeds from SPG, LP's two unsecured credit
facilities, which bore interest at LIBOR plus 132.5 basis points.
On September 27, 1996, the Company completed a $200 million public offering
(the "Preferred Offering") of 8,000,000 shares of 8 3/4% Series B Cumulative
Redeemable Preferred Stock, generating net proceeds of approximately $193
million. The Company contributed the proceeds of such offering to the Operating
Partnership in exchange for preferred units in the Operating Partnership, which
ultimately used the net proceeds to repay $142.8 million of outstanding mortgage
indebtedness, $34.4 million under SPG, LP's two unsecured credit facilities,
$12.5 million for the acquisition of the remaining ownership of North East Mall
in Hurst, Texas and the remainder for working capital.
On September 27, 1996, the Operating Partnership obtained a $750 million,
unsecured, three-year credit facility (the "Credit Facility"), with a one year
extension at the option of the Operating Partnership which initially bears
interest at LIBOR plus 90 basis points and retired the outstanding borrowings of
SPG, LP in the aggregate principal amount of $323 million under SPG, LP's two
unsecured credit facilities, which bore interest at LIBOR plus 132.5 basis
points. The Credit Facility increases the Operating Partnership's available
capital by $150 million.
Both the Operating Partnership and the Company anticipate in the future
issuing additional debt or equity securities on a public or private basis. The
Operating Partnership is currently contemplating an issuance of unsecured debt
in the near future in an amount currently expected not to exceed $100 million.
During the first nine months of 1996, the Operating Partnership drew an
additional $33.2 million on its construction loan for Cottonwood Mall in
Albuquerque, New Mexico. As of September 30, 1996, a total of $55.6 million was
outstanding on this construction loan.
Development, Expansions and Renovations. The Operating Partnership is
involved in several development, expansion and renovation efforts.
The Operating Partnership is completing demolition of the existing Bakery
Centre in South Miami, Florida, in preparation for the $130 million development
of The Shops at Sunset Place. Pre-development efforts continue for this
75%-owned 500,000-square-foot retail and entertainment center.
17
<PAGE> 18
Cottonwood Mall opened on July 31, 1996, in Albuquerque, New Mexico. This
1.0 million-square-foot regional mall is wholly-owned by the Operating
Partnership. Cottonwood Mall is anchored by Dillard's, Foley's, JCPenney,
Mervyn's, Montgomery Ward, and a 76,000-square-foot United Artists STARPORT
entertainment complex, which is scheduled to open by the end of 1996.
Construction also continues on the following projects:
- A 250,000-square-foot phase II expansion of Forum, in which the Operating
Partnership has a 55% ownership interest, is scheduled to open in the
fall of 1997. The $90 million costs of the Forum project are being funded
with a portion of a $184 million two-tranche financing facility which
closed February 23, 1996.
- Ontario Mills, a 1.4 million-square-foot value-oriented regional mall in
Ontario, California, in which the Operating Partnership has a 25%
ownership interest, opens November 14, 1996. A $110 million construction
loan on this project has been obtained on this approximately $168 million
partnership venture with The Mills Corporation. The Operating Partnership
funded its $15.0 million equity commitment for this project in July 1996.
- The Operating Partnership owns 50% of the Indian River Mall and a related
community center, Indian River Commons. These developments are being
financed with $22.0 million of partner's equity and a $52.0 million
construction loan. At September 30, 1996 $36.1 million of the loan was
outstanding. The mall will open November 15, 1996 and the community
center in the spring of 1997.
- The Source, a 730,000-square-foot retail development project in Westbury
(Long Island), New York, is expected to open in August of 1997. This new
$150 million development will adjoin an existing Fortunoff store. The
Operating Partnership has a total equity requirement of $31.1 million for
this project. Construction Financing of $120 million closed on this
property in July of 1996. The loan carries interest at LIBOR plus 170
basis points and matures on July 16, 1999. The Operating Partnership has
made a $21.7 million equity investment in this 50%-owned joint venture
development through September 30, 1996.
- Arizona Mills, a 1,225,000-square-foot retail development project in
Tempe, Arizona, broke ground on August 1, 1996. This $183 million
development is expected to open in November of 1997. A commitment has
been obtained for a five-year $145 million construction loan with
interest at LIBOR plus 160 basis points. The Operating Partnership has an
$11.2 million equity investment and a 25% ownership interest in this
joint venture development.
- Grapevine Mills, a 1,450,000-square-foot retail development project in
Fort Worth, Texas, broke ground on July 10, 1996, and is expected to open
in October of 1997. A commitment has been obtained for a four-year $140
million construction loan with interest at LIBOR plus 165 basis points.
The Operating Partnership will have a $13.9 million equity commitment on
this $188 million development project. The Operating Partnership owns
37.5% of this joint venture development.
- The Tower Shops in Las Vegas, Nevada, is an approximately $24 million,
60,000-square-foot retail development project in which the Operating
Partnership owns a 50% interest. This retail development is scheduled to
open late in 1996. The Operating Partnership contributed its $3.2 million
equity commitment in April of 1996.
Several renovation and expansion projects are currently under construction
and management continues to review additional projects. It is anticipated that
these projects will be financed principally with external borrowings, existing
corporate credit facilities and cash flows from operations.
Debt. At September 30, 1996, the Operating Partnership had consolidated
debt of $3,555.1 million, of which $2,481.6 million is fixed-rate debt and
$1,073.5 million is variable-rate debt. As of September 30, 1996, the Operating
Partnership had interest-rate protection agreements relating to $626.1 million
of the variable-rate debt, respectively. The agreements are generally in effect
until the related variable-rate debt matures.
18
<PAGE> 19
The Operating Partnership's ratio of consolidated debt-to-market
capitalization was approximately 45.2% at September 30, 1996.
Distributions. The Operating Partnership declared a distribution of
$0.4925 per Unit in each of the first three quarters of 1996. In addition, a
special distribution of $0.1515 per unit was declared on August 9, 1996 to align
the time periods of distributions for the Company and DeBartolo Realty
Corporation under the definitive merger agreement. Future distributions will be
determined based on actual results of operations and cash available for
distribution. Preferred distributions of $0.5078 per Series A Preferred Unit
were also declared per quarter.
Capital Resources. 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 holders of Preferred Units
and Units.
Management continues to actively review and evaluate property acquisition
opportunities. Management believes that funds on hand and amounts available
under the Credit Facility, together with the ability to issue shares of common
stock of the Company and/or Units, provide the means to finance certain
acquisitions. No assurance can be given that the Operating Partnership 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.
Investing and Financing Activities. Cash used in investing activities for
the nine months ended September 30, 1996 was $59.7 million. Cash used in
investing activities included approximately $44 million for the acquisition of
the remaining economic ownership interest in Ross Park Mall, tenant allowances,
capital expenditures and development related costs of $112.4 million including
$31.3 million, $11.7 million, $6.1 million and $4.7 million at Cottonwood Mall,
Forum, Muncie Mall and The Shops at Sunset Place, respectively; and advances to
unconsolidated joint ventures totaling approximately $54.4 million, including
$18.9 million, $15.0 million, $5.7 million and $3.2 million in equity
contributions made to The Source, Ontario Mills, Arizona Mills and The Tower
Shops, respectively, to fund development activity. Cash received in connection
with the Merger and consolidation of joint venture properties was $66.7 million.
Cash received from unconsolidated entities of $45.4 million included a $30.9
million return of equity from Smith Haven Mall. Additionally, a note repayment
was received from M.S. Management Associates ($38.6 million). Cash used in
investing activities for the nine months ended September 30, 1995 included $61.5
million for tenant allowances, capital expenditures and development related
costs, a $14.6 million equity investment in Rolling Oaks Mall, and $3.1 million
for the acquisition of a joint venture interest in a parcel of land to be held
for development in Little Rock, Arkansas and $18.6 million for the acquisition
of East Towne Mall, partially offset by $2.6 million of net proceeds from the
sale of a joint venture interest in land held for development, distributions
from unconsolidated entities ($4.3 million) and cash of $3.4 million included in
the acquisition of interest in White Oaks Mall.
Cash used in financing activities for the nine months ended September 30,
1996 was $6.8 million less than the nine months ended September 30, 1995. The
decrease in cash used in 1996 as compared to 1995 was primarily the result of
$193.5 million in partnership contributions from the sale of preferred stock in
1996 partially offset by an increase of $41.7 million in distributions to
Unitholders and proceeds from sales of common stock in 1995 of $142.1 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 the Operating Partnership 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
19
<PAGE> 20
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 the Operating Partnership's 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 the Operating
Partnership's liquidity.
Total EBITDA for the portfolio properties increased from $315.3 million for
the nine months ended September 30, 1995 to $390.2 million for the same period
in 1996, representing a growth rate of 23.8%. This increase is primarily
attributable to the malls opened or acquired during 1995. During this period,
operating profit margin decreased slightly from 63.1% to 61.4%.
FFO -- FUNDS FROM OPERATIONS
FFO, as defined by the National Association of Real Estate Investment
Trusts ("NAREIT"), means the consolidated net income of the Operating
Partnership and its subsidiaries without giving effect to depreciation and
amortization, gains or losses from extraordinary items, gains or losses on sales
of real estate, gains or losses on investments in marketable securities and any
provision/benefit for income taxes for such period, plus the allocable portion,
based on the Operating Partnership's ownership interest, of funds from
operations of unconsolidated joint ventures, all determined on a consistent
basis in accordance with generally accepted accounting principles. Management
believes that FFO is an important and widely used measure of the operating
performance of REITs which provides a relevant basis for comparison among REITs.
FFO is presented to assist investors in analyzing the performance of the
Operating Partnership. 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 the Operating
Partnership's operating performance or to cash flows from operating, investing
and financing activities; and (iii) is not an alternative to cash flows as a
measure of the Operating Partnership's liquidity. In March, 1995, NAREIT
modified its definition of FFO. The modified definition provides that
amortization of deferred financing costs and depreciation of non-rental real
estate assets are no longer to be added back to net income in arriving at FFO.
The modified definition was adopted by the Operating Partnership beginning in
1996. Additionally, the prior year FFO is being restated to reflect the new
definition in order to make the amounts comparative. Under the previous
definition, FFO for the three months and nine months ended September 30, 1995,
would have been $52.3 million and $145.4 million, respectively.
The following summarizes FFO and reconciles net income to FFO for the
periods presented:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -------------------
1996 1995 1996 1995
------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FFO..................................................... $74,270 $49,492 $173,482 $137,287
======= ======= ======== ========
Reconciliation:
Net Income............................................ $24,085 $24,310 $ 67,558 $ 69,797
Plus:
Extraordinary items -- Losses on extinguishments of
debt............................................... 2,530 2,636 2,689 2,884
Depreciation and amortization from consolidated
properties....................................... 37,469 21,894 88,507 64,855
The Operating Partnership's share of depreciation
and amortization from unconsolidated
affiliates....................................... 3,775 1,329 9,725 4,340
Merger Integration Costs........................... 7,236 N/A 7,236 --
Less:
Gain on sale of asset................................. (88) (677) (88) (2,350)
Minority interest portion of depreciation,
amortization and extraordinary items............... (737) -- (2,145) (2,239)
Preferred distributions.................................
------- ------- -------- --------
FFO..................................................... $74,270 $49,492 $173,482 $137,287
======= ======= ======== ========
</TABLE>
20
<PAGE> 21
PORTFOLIO DATA
Operating statistics give effect to the merger of the Company and DeBartolo
Realty Corporation and are based upon the business and properties of the Company
and DRC on a combined basis.
Aggregate Tenant Sales Volume. For the nine months ended September 30,
1996 compared to the same period in 1995, total reported retail sales for mall
and freestanding stores at the regional malls and all stores at the community
shopping centers for GLA owned by the Operating Partnership ("Owned GLA")
increased 4.4% from $5,105 million to $5,331 million. 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 regional malls were 84.3% at both
September 30, 1995 and September 30, 1996. Occupancy levels for community
shopping centers decreased from 94.0% at September 30, 1995 to 92.1% at
September 30, 1996. Total GLA has increased 3.0 million square feet from
September 30, 1995 to September 30, 1996, primarily as a result of the October
1995 opening of Lakeline Mall, the December 1995 acquisition of Smith Haven Mall
and the July 1996 opening of Cottonwood Mall.
Average Base Rents. Average base rents per square foot of mall and
freestanding stores at regional mall Owned GLA increased 5.8%, from $19.08 to
$20.18 as of September 30, 1996 as compared to September 30, 1995. In community
shopping centers, average base rents per square foot of Owned GLA increased
3.2%, from $7.26 to $7.49 during this same period.
INFLATION
Inflation has remained relatively low during the past three years and has
had a minimal impact on the operating performance of the portfolio properties.
Nonetheless, substantially all of the tenants' leases contain provisions
designed to lessen the impact of inflation. Such provisions include clauses
enabling the Operating Partnership 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 the Operating Partnership 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 the Operating Partnership's exposure to increases in costs and
operating expenses resulting from inflation.
However, inflation may have a negative impact on some of the Operating
Partnership'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.
OTHER
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.
Management recognizes the retail industry is cyclical in nature and some
tenants continue to experience difficulties, which is reflected in sales trends
and in the bankruptcies and continued restructuring of several prominent retail
organizations. Continuation of these trends could impact future earnings
performance.
21
<PAGE> 22
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 16, 1996, a complaint was filed in the Court of Common Pleas of
Mahoning County, Ohio, captioned Carlo Angostinelli et al. v. DeBartolo Realty
Corp. et al. The named defendants are SD Property Group, Inc., a 99%-owned
subsidiary of the Company, and DeBartolo Properties Management, Inc., and the
plaintiffs are 24 former employees of the defendants. In the complaint, the
number of plaintiffs allege that they were recipients of deferred stock grants
under the DRC 1994 Stock Incentive Plan (the "Plan") and that these grants
immediately vested under the Plan's "change in control" provision as a result of
the Merger. Plaintiffs assert that the defendants' refusal to issue them
approximately 579,000 shares of DRC common stock, which is equivalent to
approximately 394,000 shares of common stock of the Company computed at the .68
exchange ratio used in the Merger, constitutes a breach of contract and a breach
of the implied covenant of good faith and fair dealing under Ohio law.
Plaintiffs seek damages equal to such number of shares of DRC common stock, or
cash in lieu thereof, equal to all deferred stock ever granted to them under the
Plan, dividends on such stock from the time of the grants, compensatory damages
for breach of the implied covenant of good faith and fair dealing, and punitive
damages.
The complaint was served on the defendants on October 28, 1996, and
pre-trial proceedings have not yet commenced. The Company is of the opinion that
it has meritorious defenses and accordingly intends to defend thsi action
vigorously. While it is difficult for the Company to predict the outcome of this
litigation at this stage based on the information known to the Company to date,
the Company does not expect this action will have a material adverse effect on
the Company.
Neither the Company nor any of the portfolio properties is currently a
party to any material pending legal proceedings nor, to management's knowledge,
is any material legal proceeding currently contemplated by governmental
authorities against the Company or the portfolio properties. The entities that
own portfolio properties are parties to a variety of routine litigation arising
in the ordinary course of business. Most of such proceedings are covered by
liability insurance. All of such proceedings, taken together, are not expected
to have a material adverse effect on the Company's operating or financial
results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- None.
(b) Reports on Form 8-K
Five Forms 8-K were filed during the current period.
On August 9, 1996 under Item 5 -- Other Events, the Company reported that
on August 6, 1996 it made available certain operational and portfolio
information concerning the Registrant, Simon Property Group, L.P., and the
properties owned or managed by it as of June 30, 1996, in the form of a press
release. A copy of the package was included as an exhibit to the 8-K filing.
On August 14, 1996 under Item 5 -- Other Events, the Company reported that
it made available additional ownership and operational information concerning
the Company, Simon Property Group, L.P., and the properties owned or managed as
of June 30, 1996, in the form of a Supplemental information Package. A copy of
the package was included as an exhibit to the 8-K filing.
On August 26, 1996 under Item 2 -- Acquisition or Disposition of Assets,
the Company reported that one of its subsidiaries was merged with and into
DeBartolo Realty Corporation on August 9, 1996, pursuant to an Agreement and
Plan of Merger. Additionally, under Item 7 -- Financial Statements and Exhibits,
updated pro forma financial information through June 30, 1996 and interim
financial statements of DRC through June 30, 1996 were presented.
On September 18, 1996 under Item 5 -- Other Events, the Company reported
that it completed a merger with DRC and gave the terms of the merger.
Additionally, the Company reported that it made available additional debt and
operational information for the Registrant, Simon DeBartolo Group, L.P., Simon
Property
22
<PAGE> 23
Group, L.P. and properties owned or managed. Also provided was certain
post-merger ownership information. This information was filed in the form of a
Supplemental Information package, a copy of which was included as an exhibit to
the 8-K filing.
On September 18, 1996 under Item 7 -- Financial Statements and Exhibits,
the Company made available, in the form of exhibits, certain documents relating
to the issuance of a series of Class B Preferred Stock. Included were: Form of
Underwriting Agreement, Form of Articles Supplementary with respect to the
Series B Preferred Stock of the Company to the Amended and Restated Articles of
Incorporation, and Form of Preferred Stock Certificate.
23
<PAGE> 24
SIGNATURES
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 DEBARTOLO GROUP, INC.
Date: November 19, 1996
/s/ JAMES M. BARKLEY
--------------------------------------
James M. Barkley,
Secretary/General Counsel
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS AMENDED FINANCIAL DATA SCHEDULE IS PREPARED FOR USE BY THE UNITED STATES
SECURITIES EXCHANGE COMMISSION ONLY, AND IS UNAUDITED.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 92,575
<SECURITIES> 0
<RECEIVABLES> 150,954<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 5,226,532
<DEPRECIATION> 236,583
<TOTAL-ASSETS> 5,798,196
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 3,555,123
0
283,394
<COMMON> 10
<OTHER-SE> 1,023,899
<TOTAL-LIABILITY-AND-EQUITY> 5,798,196<F3>
<SALES> 0
<TOTAL-REVENUES> 485,640
<CGS> 0
<TOTAL-COSTS> 278,801
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,867
<INTEREST-EXPENSE> 135,346
<INCOME-PRETAX> 76,639
<INCOME-TAX> 76,639
<INCOME-CONTINUING> 76,639
<DISCONTINUED> 0
<EXTRAORDINARY> (2,795)
<CHANGES> 0
<NET-INCOME> 73,844
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
<FN>
<F1>RECEIVABLES ARE STATED NET OF ALLOWANCES AND ALSO INCLUDE ACCRUED REVENUES.
<F2>THE COMPANY DOES NOT REPORT USING A CLASSIFIED BALANCE SHEET.
<F3>INCLUDES LIMITED PARTNERS' INTEREST IN THE SPG OPERATING PARTNERSHIP OF
$645,472.
</FN>
</TABLE>
