<PAGE>
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, 1999
SPG PROPERTIES, INC.
--------------------
(Exact name of registrant as specified in its charter)
Maryland
--------
(State of incorporation or organization)
1-12618
-------
(Commission File No.)
35-1901999
----------
(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) 636-160)
--------------
(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 [_]
<PAGE>
SPG PROPERTIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
Item 1: Financial Statements
<S> <C>
SPG Properties, Inc.:
Consolidated Condensed Balance Sheets as of June 30, 1999 and
December 31, 1998 3
Consolidated Condensed Statements of Operations for the three-month
and six-month periods ended June 30, 1999 and 1998 4
Consolidated Condensed Statements of Cash Flows for the six-month
periods ended June 30, 1999 and 1998 5
Simon Property Group, L.P.:
Consolidated Condensed Balance Sheets as of June 30, 1999 and
December 31, 1998 6
Consolidated Condensed Statements of Operations for the three-month
and six-month periods ended June 30, 1999 and 1998 7
Consolidated Condensed Statements of Cash Flows for the six-month
periods ended June 30, 1999 and 1998 8
Notes to Unaudited Consolidated Condensed Financial Statements 9
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 3: Qualitative and Quantitative Disclosure About Market Risk 25
Part II - Other Information
Items 1 through 6 26
Signature 27
</TABLE>
2
<PAGE>
SPG PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ---------------
<S> <C> <C>
ASSETS:
Investment in the SPG Operating Partnership $2,104,188 $2,108,291
========== ==========
COMMITMENTS AND CONTINGENCIES (See Note 11 to the financial statements of the
SPG Operating Partnership)
SHAREHOLDERS' EQUITY:
Series B and C cumulative redeemable preferred stock, 12,200,000 shares authorized,
11,000,000 issued and outstanding 339,463 339,329
Common stock, $.0001 par value, 400,000,000 shares authorized,
and 110,482,229 and 110,492,467 issued and outstanding, respectively 11 11
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 2,232,829 2,176,267
Accumulated deficit (453,692) (387,656)
Unrealized gain on long-term investment 1,124 89
Unamortized restricted stock award (15,548) (19,750)
---------- ----------
Total shareholders' equity $2,104,188 $2,108,291
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
SPG PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUE:
Minimum rent $ -- $186,474 $ -- $370,934
Overage rent -- 10,701 -- 20,483
Tenant reimbursements -- 91,811 -- 181,971
Other income -- 21,389 -- 37,244
------- -------- -------- --------
Total revenue -- 310,375 -- 610,632
------- -------- -------- --------
EXPENSES:
Property operating -- 50,479 -- 100,258
Depreciation and amortization -- 58,313 -- 116,618
Real estate taxes -- 28,764 -- 58,959
Repairs and maintenance -- 11,655 -- 23,550
Advertising and promotion -- 8,621 -- 16,722
Provision for credit losses -- 733 -- 3,455
Other -- 6,584 -- 12,177
------- -------- -------- --------
Total operating expenses -- 165,149 -- 331,739
------- -------- -------- --------
OPERATING INCOME -- 145,226 -- 278,893
INTEREST EXPENSE -- 92,510 -- 184,420
------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST -- 52,716 -- 94,473
MINORITY INTEREST -- (2,154) -- (3,596)
LOSS ON SALE OF ASSETS -- (7,219) -- (7,219)
------- -------- -------- --------
INCOME BEFORE UNCONSOLIDATED ENTITIES -- 43,343 -- 83,658
EQUITY IN INCOME OF THE SPG OPERATING PARTNERSHIP 32,594 -- 63,456 --
INCOME FROM UNCONSOLIDATED ENTITIES -- 171 -- 4,980
------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS 32,594 43,514 63,456 88,638
EXTRAORDINARY ITEMS -- 7,024 -- 7,024
------- -------- -------- --------
INCOME BEFORE ALLOCATION TO LIMITED PARTNERS 32,594 50,538 63,456 95,662
LESS: LIMITED PARTNERS' INTEREST IN
THE SPG OPERATING PARTNERSHIP -- 15,737 -- 29,579
------- -------- -------- --------
NET INCOME 32,594 34,801 63,456 66,083
PREFERRED DIVIDENDS (7,334) (7,334) (14,668) (14,668)
------- -------- -------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $25,260 $ 27,467 $ 48,788 $ 51,415
======= ======== ======== ========
</TABLE>
The accompaning notes are an integral part of these statements.
4
<PAGE>
SPG PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
----------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,456 $ 66,083
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization -- 120,915
Extraordinary items -- (7,024)
Loss on sale of assets -- 7,219
Limited partners' interest in SPG Operating Partnership -- 29,579
Straight-line rent -- (4,091)
Minority interest -- 3,596
Equity in income of the SPG Operating Partnership (63,456) --
Equity in income of unconsolidated entities -- (4,980)
Changes in assets and liabilities--
Tenant receivables and accrued revenue -- 4,507
Deferred costs and other assets -- (1,866)
Accounts payable, accrued expenses and other liabilities -- (817)
--------- -----------
Net cash provided by operating activities -- 213,121
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions -- (243,355)
Capital expenditures -- (126,776)
Cash from acquisitions and consolidation of joint ventures, net -- 4,387
Change in restricted cash -- 2,591
Net proceeds from sale of assets -- 46,087
Investments in unconsolidated entities -- (6,554)
Distributions from unconsolidated entities -- 113,426
Distributions from the SPG Operating Partnership 129,492 --
Investments in and advances to Management Company and affiliate -- (17,045)
--------- -----------
Net cash provided by (used in) investing activities 129,492 (227,239)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common, net -- 92,350
Minority interest distributions, net -- (6,326)
Preferred dividends and distributions to shareholders (129,492) (126,698)
Distributions to limited partners -- (63,727)
Mortgage and other note proceeds, net of transaction costs -- 1,485,545
Mortgage and other note principal payments -- (1,373,360)
--------- -----------
Net cash provided by (used in) financing activities (129,492) 7,784
--------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS -- (6,334)
CASH AND CASH EQUIVALENTS, beginning of period -- 109,699
--------- -----------
CASH AND CASH EQUIVALENTS, end of period $ -- $ 103,365
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS:
Investment properties, at cost $12,237,005 $11,662,860
Less -- accumulated depreciation 905,040 709,114
----------- -----------
11,331,965 10,953,746
Goodwill, net 41,356 58,134
Cash and cash equivalents 139,591 124,466
Tenant receivables and accrued revenue, net 234,173 217,341
Notes and advances receivable from Management Company and affiliate 128,441 115,378
Note receivable from SRC Operating Partnership -- 20,565
Investment in partnerships and joint ventures, at equity 1,073,057 1,303,251
Investment in Management Company and affiliates 14,452 10,037
Other investment 52,289 50,176
Deferred costs and other assets 236,017 227,684
Minority interest 34,365 32,138
----------- -----------
Total assets $13,285,706 $13,112,916
=========== ===========
LIABILITIES:
Mortgages and other indebtedness $ 8,273,822 $ 7,972,381
Notes payable to SRC Operating Partnership (Interest at 8%, due 2008) 6,008 17,907
Accounts payable and accrued expenses 420,437 410,445
Cash distributions and losses in partnerships and joint ventures, at equity 30,901 29,139
Other liabilities 85,713 95,243
----------- -----------
Total liabilities 8,816,881 8,525,115
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
PARTNERS' EQUITY:
Preferred units, 15,897,602 and 16,053,580 units outstanding, respectively 858,059 1,057,245
General Partners, 168,168,385 and 161,487,017 units outstanding, respectively 2,633,447 2,540,660
Limited Partners, 64,176,334 and 64,182,157 units outstanding, respectively 1,004,975 1,009,646
Unamortized restricted stock award (27,656) (19,750)
----------- -----------
Total partners' equity 4,468,825 4,587,801
----------- -----------
Total liabilities and partners' equity $13,285,706 $13,112,916
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited and dollars in thousands, except per unit amounts)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Minimum rent $273,384 $186,474 $543,991 $370,934
Overage rent 14,556 10,701 27,923 20,483
Tenant reimbursements 138,469 91,811 274,481 181,971
Other income 27,010 21,389 48,218 37,244
-------- -------- -------- --------
Total revenue 453,419 310,375 894,613 610,632
-------- -------- -------- --------
EXPENSES:
Property operating 71,295 50,479 139,145 100,258
Depreciation and amortization 88,836 58,313 177,414 116,618
Real estate taxes 43,573 28,764 89,841 58,959
Repairs and maintenance 16,850 11,655 36,652 23,550
Advertising and promotion 14,717 8,621 29,233 16,722
Provision for credit losses 2,914 733 4,708 3,455
Other 6,743 6,584 14,423 12,177
-------- -------- -------- --------
Total operating expenses 244,928 165,149 491,416 331,739
-------- -------- -------- --------
OPERATING INCOME 208,491 145,226 403,197 278,893
INTEREST EXPENSE 145,488 92,510 284,058 184,420
-------- -------- -------- --------
INCOME BEFORE MINORITY INTEREST 63,003 52,716 119,139 94,473
MINORITY INTEREST (3,688) (2,154) (5,503) (3,596)
LOSSES ON SALES OF ASSETS (4,188) (7,219) (4,188) (7,219)
-------- -------- -------- --------
INCOME BEFORE UNCONSOLIDATED ENTITIES 55,127 43,343 109,448 83,658
INCOME FROM UNCONSOLIDATED ENTITIES 12,608 171 24,925 4,980
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS 67,735 43,514 134,373 88,638
EXTRAORDINARY ITEMS (43) 7,024 (1,817) 7,024
-------- -------- -------- --------
NET INCOME 67,692 50,538 132,556 95,662
PREFERRED UNIT REQUIREMENT (16,123) (7,334) (33,828) (14,668)
-------- -------- -------- --------
NET INCOME AVAILABLE TO UNITHOLDERS $ 51,569 $ 43,204 $ 98,728 $ 80,994
======== ======== ======== ========
NET INCOME AVAILABLE TO UNITHOLDERS
ATTRIBUTABLE TO:
Managing General Partner (SPG) $ 12,051 $ -- $ 22,400 $ --
General Partners (SPG Properties, Inc.
and SD Property Group, Inc.) 25,260 27,467 48,788 51,415
Limited Partners 14,258 15,737 27,540 29,579
-------- -------- -------- --------
Net income $ 51,569 $ 43,204 $ 98,728 $ 80,994
======== ======== ======== ========
BASIC EARNINGS PER UNIT:
Income before extraordinary items $ 0.22 $ 0.21 $ 0.44 $ 0.42
Extraordinary items (0.00) 0.04 (0.01) 0.04
-------- -------- -------- --------
Net income $ 0.22 $ 0.25 $ 0.43 $ 0.46
======== ======== ======== ========
DILUTED EARNINGS PER UNIT:
Income before extraordinary items $ 0.22 $ 0.20 $ 0.44 $ 0.42
Extraordinary items (0.00) 0.04 (0.01) 0.04
-------- -------- -------- --------
Net income $ 0.22 $ 0.24 $ 0.43 $ 0.46
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
SIMON PROPERTY GROUP, L.P.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------
1999 1998
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 132,556 $ 95,662
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization 182,901 120,915
Extraordinary items 1,817 (7,024)
Losses on sales of assets 4,188 7,219
Straight-line rent (8,875) (4,091)
Minority interest 5,503 3,596
Equity in income of unconsolidated entities (24,925) (4,980)
Changes in assets and liabilities--
Tenant receivables and accrued revenue (1,544) 4,507
Deferred costs and other assets (6,427) (1,866)
Accounts payable, accrued expenses and other liabilities (4,961) (817)
---------- -----------
Net cash provided by operating activities 280,233 213,121
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (99,254) (243,355)
Capital expenditures (198,643) (126,776)
Change in restricted cash -- 2,591
Cash from acquisitions and consolidation of joint ventures, net 10,812 4,387
Net proceeds from sales of assets 42,000 46,087
Investments in unconsolidated entities (32,338) (6,554)
Note payment from the SRC Operating Partnership 20,565 --
Distributions from unconsolidated entities 163,463 113,426
Investments in and advances to Management Company and affiliate (13,063) (17,045)
---------- -----------
Net cash used in investing activities (106,458) (227,239)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partnership contributions, net 1,253 92,350
Partnership distributions (266,883) (190,425)
Minority interest distributions, net (8,142) (6,326)
Note payable to the SRC Operating Partnership (11,899) --
Mortgage and other note proceeds, net of transaction costs 1,091,808 1,485,545
Mortgage and other note principal payments (964,787) (1,373,360)
---------- -----------
Net cash provided by (used in) financing activities (158,650) 7,784
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,125 (6,334)
CASH AND CASH EQUIVALENTS, beginning of period 124,466 109,699
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 139,591 $ 103,365
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
SPG PROPERTIES, INC.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands, except per share amounts and where indicated as in
billions)
1. Organization
SPG Properties, Inc. ("SPG Properties"), formerly Simon DeBartolo Group,
Inc. ("SDG"), is a substantially wholly-owned subsidiary of Simon Property
Group, Inc. ("SPG"). SPG Properties and SPG are both self-administered and self-
managed real estate investment trusts ("REITs") under the Internal Revenue Code
of 1986, as amended. SPG Properties and its substantially wholly-owned
subsidiary, SD Property Group, Inc., are general partners of, and hold a
noncontrolling partnership interest in, Simon Property Group, L.P. (the "SPG
Operating Partnership"), formerly Simon DeBartolo Group, L.P. ("SDG, LP"), as of
June 30, 1999 and December 31, 1998. 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. SPG is the managing general partner of the SPG Operating
Partnership. Each share of common stock of SPG is paired with a beneficial
interest in 1/100th of a share of common stock of SPG Realty Consultants, Inc.
("SRC" and together with SPG, the "Companies").
As of June 30, 1999, the SPG Operating Partnership owned or held an
interest in 240 income-producing properties, which consisted of 152 regional
malls, 76 community shopping centers, four specialty retail centers, five office
and mixed-use properties and three value-oriented super-regional malls in 35
states (the "Properties") and one asset in Europe. The SPG Operating Partnership
also owned interests in one regional mall, one value-oriented super-regional
mall, three community centers and one outlet center currently under construction
and twelve parcels of land held for future development. In addition, the SPG
Operating Partnership holds substantially all of the economic interest in M.S.
Management Associates, Inc. (the "Management Company" See Note 8 to the
financial statements of the SPG Operating Partnership). The SPG Operating
Partnership holds substantially all of the economic interest in, and the
Management Company holds substantially all of the voting stock of, DeBartolo
Properties Management, Inc. ("DPMI"), which provides architectural, design,
construction and other services to substantially all of the Properties, as well
as certain other regional malls and community shopping centers owned by third
parties. SPG Properties owned 48.9% and 50.4% of the SPG Operating Partnership
at June 30, 1999 and December 31, 1998, respectively.
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 have been included. The results for the
interim period ended June 30, 1999 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 SPG Properties' December
31, 1998 audited financial statements and notes thereto included in its Annual
Report on Form 10-K.
The accompanying consolidated condensed financial statements of SPG
Properties include accounts of all entities owned or controlled by SPG
Properties. All significant intercompany amounts have been eliminated. In
connection with the CPI Merger, which was consummated as of the close of
business on September 24, 1998 (see the accompanying financial statements of the
SPG Operating Partnership), SPG became the managing general partner of the SPG
Operating Partnership. As a result, SPG Properties no longer controls the SPG
Operating Partnership, and therefore the accompanying balance sheets as of June
30, 1999 and December 31, 1998 reflect SPG Properties' interest in the SPG
Operating Partnership utilizing the equity method of accounting. Prior to the
CPI Merger, SPG Properties and subsidiary accounted for their interests in the
SPG Operating Partnership using the consolidated method of accounting. The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles, which requires management to make
estimates and assumptions that affect the reported amounts of SPG Properties
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
reported periods. Actual results could differ from these estimates.
Net operating results of the SPG Operating Partnership are allocated to its
partners based first on their preferred unit preference and then on their
remaining weighted average ownership interest in the SPG Operating Partnership
during the period. SPG Properties' remaining weighted average ownership interest
in the SPG Operating Partnership for the three-month periods ended June 30, 1999
and 1998 was 49.0% and 63.6%, respectively. SPG Properties' remaining weighted
average ownership interest in the SPG Operating Partnership for the six-month
periods ended June 30, 1999 and 1998 was 49.4% and 63.5%, respectively.
9
<PAGE>
Note 3 - Per Share Data
Because substantially all of the common stock of SPG Properties is owned by
SPG, SPG Properties does not report earnings per share.
Note 4 - Shareholders' Equity
The following table summarizes the changes in shareholders' equity since
December 31, 1998.
<TABLE>
<CAPTION>
All Classes Capital in Unrealized Unamortized Total
Preferred of Common Excess of Accumulated Gain on Restricted Sharehold
Stock Stock Par Deficit Investment (1) Stock Award Equity
---------- ---------- ---------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 $339,329 $12 $2,176,267 $(387,656) $ 89 $ (19,750) $2,108,291
Restricted stock
forfeitures (10,238 shares) (336) 336 --
Amortization of stock
incentive 3,866 3,866
Preferred stock accretion 134 134
Adjustment to allocate net
equity of the SPG
Operating Partnership 56,898 56,898
Distributions (129,492) (129,492)
---------- ---------- ---------- ---------- ---------- ----------- -----------
Subtotal 339,463 12 2,232,829 (517,148) 89 (15,548) 2,039,697
Comprehensive Income:
- ---------------------
Unrealized gain on
investment (1) 1,035 1,035
Net income 63,456 63,456
---------- ---------- ---------- --------- ---------- ----------- -----------
Total Comprehensive
Income -- -- -- 63,456 1,035 -- 64,491
---------- ---------- ---------- --------- ---------- ----------- -----------
Balance at June 30, 1999 $339,463 $12 $2,232,829 $(453,692) $1,124 $(15,548) $2,104,188
========== ========== ========== ========= ========== =========== ===========
</TABLE>
(1) Amounts consist of the unrealized gain resulting from the change in market
value of 1,408,450 shares of common stock of Chelsea GCA Realty, Inc.
("Chelsea"), a publicly traded REIT, which the SPG Operating Partnership
purchased on June 16, 1997. The investment in Chelsea is being reflected in
the SPG Operating Partnership's consolidated condensed balance sheets in
other investment.
The footnotes summarizing the significant accounting policies of and other
matters pertinent to the SPG Operating Partnership follow and should be read in
conjunction with the financial statements and footnotes of SPG Properties and
subsidiary.
10
<PAGE>
SIMON PROPERTY GROUP, L.P.
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands, except per Unit amounts and where indicated as in
billions)
1. Organization
Simon Property Group, L.P. (the "SPG Operating Partnership"), a Delaware
limited partnership, formerly known as Simon DeBartolo Group, L.P. ("SDG, LP"),
is a majority owned subsidiary of Simon Property Group Inc. ("SPG"), a Delaware
corporation. SPG 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 with a beneficial interest in
1/100th of a share of common stock of SPG Realty Consultants, Inc. ("SRC"), also
a Delaware corporation. Units of ownership interest ("Units") in the SPG
Operating Partnership are paired with a beneficial interest in 1/100th of a Unit
in SPG Realty Consultants, L.P. (the "SRC Operating Partnership"). The SRC
Operating Partnership is the primary subsidiary of SRC.
The SPG Operating Partnership, is engaged primarily in the ownership,
operation, management, leasing, acquisition, expansion and development of real
estate properties, primarily regional malls and community shopping centers. As
of June 30, 1999, the SPG Operating Partnership owned or held an interest in 240
income-producing properties in the United States, which consisted of 152
regional malls, 76 community shopping centers, four specialty retail centers,
five office and mixed-use properties and three value-oriented super-regional
malls in 35 states (the "Properties"), and one asset in Europe. The SPG
Operating Partnership also owned interests in one regional mall, one value-
oriented super-regional mall, three community centers and one outlet center
currently under construction and twelve parcels of land held for future
development. In addition, the SPG Operating Partnership holds substantially all
of the economic interest in M.S. Management Associates, Inc. (the "Management
Company" See Note 8). The SPG Operating Partnership holds substantially all of
the economic interest in, and the Management Company holds substantially all of
the voting stock of, DeBartolo Properties Management, Inc. ("DPMI"), which
provides architectural, design, construction and other services to substantially
all of the Properties, as well as certain other regional malls and community
shopping centers owned by third parties. SPG owned 72.4% and 71.6% of the SPG
Operating Partnership at June 30, 1999 and December 31, 1998, respectively.
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 have been included. The results for the
interim period ended June 30, 1999 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 SPG Operating
Partnership's December 31, 1998 audited financial statements and notes thereto
included in its Annual Report on Form 10-K.
The accompanying consolidated condensed financial statements of the SPG
Operating Partnership include all accounts of all entities owned or controlled
by the SPG Operating Partnership. All significant intercompany amounts have been
eliminated. The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles, which
requires management to make estimates and assumptions that affect the reported
amounts of the SPG Operating Partnership's assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported periods. Actual results could differ
from these estimates.
Properties which are wholly-owned or owned less than 100% and are
controlled by the SPG Operating Partnership are accounted for using the
consolidated method of accounting. Control is demonstrated by the ability of the
general partner to manage day-to-day operations, refinance debt and sell the
assets of the partnership without the consent of the limited partner and the
inability of the limited partner to replace the general partner. Investments in
partnerships and joint ventures which represent noncontrolling ownership
interests and the investment in the Management Company are accounted for using
the equity method of accounting. These investments are recorded initially at
cost and subsequently adjusted for net equity in income (loss) and cash
contributions and distributions.
Net operating results of the SPG Operating Partnership are allocated after
preferred distributions, based on its partners' weighted average ownership
interests during the period. SPG's weighted average direct and indirect
ownership interest in the SPG Operating Partnership for the three months ended
June 30, 1999 and 1998 was 72.4% and 63.6%, respectively. SPG's weighted
11
<PAGE>
average direct and indirect ownership interest in the SPG Operating Partnership
for the six months ended June 30, 1999 and 1998 was 72.1% and 63.5%,
respectively.
3. CPI Merger
For financial reporting purposes, as of the close of business on September
24, 1998, the CPI Merger was consummated pursuant to the Agreement and Plan of
Merger dated February 18, 1998, among Simon DeBartolo Group, Inc. ("SDG"),
Corporate Property Investors, Inc. ("CPI"), and Corporate Realty Consultants,
Inc. ("CRC").
Pursuant to the terms of the CPI Merger, a subsidiary of CPI merged with
and into SDG with SDG continuing as the surviving company. SDG became a
majority-owned subsidiary of CPI. The outstanding shares of common stock of SDG
were exchanged for a like number of shares of CPI. Beneficial interests in CRC
were acquired for $14,000 in order to pair the common stock of CPI with 1/100th
of a share of common stock of CRC, the paired share affiliate.
Immediately prior to the consummation of the CPI Merger, the holders of CPI
common stock were paid a merger dividend consisting of (i) $90 in cash, (ii)
1.0818 additional shares of CPI common stock and (iii) 0.19 shares of 6.50%
Series B convertible preferred stock of CPI per share of CPI common stock.
Immediately prior to the CPI Merger, there were 25,496,476 shares of CPI common
stock outstanding. The aggregate value associated with the completion of the CPI
Merger was approximately $5.9 billion including transaction costs and
liabilities assumed.
To finance the cash portion of the CPI Merger consideration, $1.4 billion
was borrowed under a new senior unsecured medium term bridge loan, which bears
interest at a base rate of LIBOR plus 65 basis points and matures in three
mandatory amortization payments (on June 22, 1999, March 24, 2000 and September
24, 2000) (see Note 9). An additional $237,000 was also borrowed under the SPG
Operating Partnership's existing $1.25 billion credit facility (the "Credit
Facility"). In connection with the CPI Merger, CPI was renamed "Simon Property
Group, Inc." and CPI's paired share affiliate, Corporate Realty Consultants,
Inc., was renamed "SPG Realty Consultants, Inc." In addition SDG and SDG, LP
were renamed "SPG Properties, Inc.", and "Simon Property Group, L.P.",
respectively.
Upon completion of the CPI Merger, SPG transferred substantially all of the
CPI assets acquired, which consisted primarily of 23 regional malls, one
community center, two office buildings and one regional mall under construction
(other than one regional mall, Ocean County Mall, and certain net leased
properties valued at approximately $153,100) and liabilities assumed (except
that SPG remains a co-obligor with respect to the Merger Facility (see Note 9))
of approximately $2.3 billion to the SPG Operating Partnership or one or more
subsidiaries of the SPG Operating Partnership in exchange for 47,790,550 limited
partnership interests and 5,053,580 preferred partnership interests in the SPG
Operating Partnership. The preferred partnership interests carry the same rights
and equal the number of preferred shares issued and outstanding as a direct
result of the CPI Merger.
SPG accounted for the merger between SDG and the CPI merger subsidiary as a
reverse purchase in accordance with Accounting Principles Board Opinion No. 16.
Although paired shares of the former CPI and CRC were issued to SDG common stock
holders and SDG became a substantially wholly owned subsidiary of CPI following
the CPI Merger, CPI is considered the business acquired for accounting purposes.
SDG is considered the acquiring company because the SDG common stockholders
became majority holders of the common stock of SPG. The value of the
consideration paid by SDG has been allocated to the estimated fair value of the
CPI assets acquired and liabilities assumed which resulted in goodwill of
$42,518, as adjusted. Goodwill is being amortized over the estimated life of the
properties acquired, which is 35 years. Accumulated amortization of goodwill as
of June 30, 1999 and December 31, 1998 was $1,162 and $414, respectively.
Purchase accounting will be finalized when the SPG Operating Partnership
completes and implements its combined operating plan, which is expected to occur
by the third quarter of 1999.
SDG, LP contributed $14,000 cash to CRC and $8,000 cash to the SRC
Operating Partnership on behalf of the SDG common stockholders and the limited
partners of SDG, LP to obtain the beneficial interests in common stock of CRC,
which were paired with the shares of common stock issued by SPG ("Paired
Shares"), and to obtain Units in the SRC Operating Partnership so that the
limited partners of SDG, LP would hold the same proportionate interest in the
SRC Operating Partnership that they hold in SDG, LP. The cash contributed to CRC
and the SRC Operating Partnership on behalf of the partners of SDG, LP was
accounted for as a distribution to the partners.
12
<PAGE>
Pro Forma
The following unaudited pro forma summary financial information excludes
any extraordinary items and reflects the consolidated results of operations of
the SPG Operating Partnership as if the CPI Merger had occurred as of January 1,
1998, and was carried forward through June 30, 1998. Preparation of the pro
forma summary information was based upon assumptions deemed appropriate by
management. The pro forma summary information is not necessarily indicative of
the results which actually would have occurred if the CPI Merger had been
consummated at January 1, 1998, nor does it purport to represent the results of
operations for future periods.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
---------------------
<S> <C>
Revenue $ 811,197
=====================
Net income (1) 121,730
=====================
Net income available to Unitholders 84,462
=====================
Net income per Unit (1) $ 0.38
=====================
Net income per Unit - assuming dilution $ 0.38
=====================
Weighted average number of Units outstanding 223,889,393
=====================
Weighted average number of Units outstanding assuming dilution 224,280,389
=====================
</TABLE>
(1) Includes a net gain on the sales of assets of $38,075, or $0.17 on a
basic earnings per Unit basis.
Note 4 - Reclassifications
Certain reclassifications of prior period amounts have been made in the
financial statements to conform to the 1999 presentation. These
reclassifications have no impact on the net operating results previously
reported.
Note 5 - Per Unit Data
Basic earnings per Unit is based on the weighted average number of Units
outstanding during the period and diluted earnings per Unit is based on the
weighted average number of Units outstanding combined with the incremental
weighted average Units that would have been outstanding if all dilutive
potential Units would have been converted into Units at the earliest date
possible. The weighted average number of Units used in the computation for the
three-month periods ended June 30, 1999 and 1998 was 232,231,002 and
176,098,843, respectively. The weighted average number of Units used in the
computation for the six-month periods ended June 30, 1999 and 1998 was
230,067,437 and 174,599,824, respectively. The diluted weighted average number
of Units used in the computation for the three-month periods ended June 30, 1999
and 1998 was 232,498,343 and 176,489,839, respectively. The diluted weighted
average number of Units used in the computation for the six-month periods ended
June 30, 1999 and 1998 was 230,285,798 and 174,989,025, respectively. Both
series of convertible preferred Units issued and outstanding during the
comparative periods did not have a dilutive effect on earnings per Unit. The
increase in weighted average Units outstanding under the diluted method over the
basic method in every period presented for the SPG Operating Partnership is due
entirely to the effect of outstanding stock options. Basic earnings and diluted
earnings were the same for all periods presented.
Note 6 - Cash Flow Information
Cash paid for interest, net of amounts capitalized, during the six months
ended June 30, 1999 was $270,768 as compared to $186,614 for the same period in
1998. Accrued and unpaid distributions were $873 and $3,428 at June 30, 1999 and
December 31, 1998, respectively, and represented distributions payable on the
Series A Convertible Preferred Units. See Notes 7 and 10 for information about
non-cash transactions during the six months ended June 30, 1999.
Note 7 - Other Acquisitions and Development
During the first six months of 1999 the SPG Operating Partnership acquired
the remaining ownership interests in four Properties for a total of
approximately $147,500, including the assumption of approximately $48,500 of
mortgage indebtedness. These purchases were funded primarily with borrowings
from the Credit Facility. Each of the Properties purchased were previously
accounted for using the equity method of accounting and are now accounted for
using the consolidated method of accounting.
On April 15, 1999, the SPG Operating Partnership sold the land at Three Dag
Hammarskjold in New York, New York for $9,500, which was accounted for as an
adjustment to the purchase price. Also in the second quarter of 1999, one
community shopping center was sold for $4,200, resulting in a loss of $4,188. In
addition, on June 18, 1999, the SPG Operating Partnership
13
<PAGE>
sold a parcel of land, which was accounted for as an adjustment to the purchase
price. The net proceeds of approximately $28,300 were used to reduce the
outstanding borrowings on the Credit Facility.
In January of 1999, The Shops at Sunset Place opened in South Miami,
Florida. The SPG Operating Partnership owns a noncontrolling 37.5% interest in
this 510,000 square-foot destination-oriented retail and entertainment project.
14
<PAGE>
Note 8 - Investment in Unconsolidated Entities
Partnerships and Joint Ventures
Summary financial information of the SPG Operating Partnership's
investment in partnerships and joint ventures accounted for using the equity
method of accounting and a summary of the SPG Operating Partnership's investment
in and share of income from such partnerships and joint ventures follow:
<TABLE>
<CAPTION>
June 30, December 31,
BALANCE SHEETS 1999 1998
---------- ------------
<S> <C> <C>
Assets:
Investment properties at cost, net $4,170,365 $4,265,022
Cash and cash equivalents 149,924 171,553
Tenant receivables 135,109 140,579
Note receivable from affiliate (Interest at 9.0%, due 2005) 20,227 25,174
Other assets 118,503 100,938
---------- ----------
Total assets $4,594,128 $4,703,266
========== ==========
Liabilities and Partners' Equity:
Mortgages and other indebtedness $3,000,058 $2,861,589
Accounts payable, accrued expenses and other liabilities 199,953 223,631
---------- ----------
Total liabilities 3,200,011 3,085,220
Partners' equity 1,394,117 1,618,046
---------- ----------
Total liabilities and partners' equity $4,594,128 $4,703,266
========== ==========
SPG Operating Partnership's Share of:
Total assets $1,747,355 $1,905,459
========== ==========
Partners' equity $ 450,957 $ 565,496
Add: Excess Investment (See below) 591,199 708,616
---------- ----------
SPG Operating Partnership's Net Investment in Joint Ventures $1,042,156 $1,274,112
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, June 30,
-------------------------- ------------------------
STATEMENTS OF OPERATIONS 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Minimum rent $125,359 $106,881 $252,492 $197,562
Overage rent 4,679 4,988 8,521 7,810
Tenant reimbursements 60,080 44,782 119,686 86,658
Other income 7,714 5,534 15,152 11,220
-------- -------- -------- --------
Total revenue 197,832 162,185 395,851 303,250
Operating Expenses:
Operating expenses and other 71,330 56,866 142,637 107,503
Depreciation and amortization 36,335 31,835 71,065 61,625
-------- -------- -------- --------
Total operating expenses 107,665 88,701 213,702 169,128
-------- -------- -------- --------
Operating Income 90,167 73,484 182,149 134,122
Interest Expense 49,928 46,501 97,216 85,178
Extraordinary Losses -- 42 -- 42
-------- -------- -------- --------
Net Income 40,239 26,941 84,933 48,902
Third Party Investors' Share of Net Income 24,933 17,207 52,439 34,030
-------- -------- -------- --------
SPG Operating Partnership's Share of Net Income $ 15,306 $ 9,734 $ 32,494 $ 14,872
Amortization of Excess Investment (See below) (5,606) (3,417) (11,663) (5,402)
======== ======== ======== ========
Income from Unconsolidated Entities $ 9,700 $ 6,317 $ 20,831 $ 9,470
======== ======== ======== ========
</TABLE>
As of June 30, 1999 and December 31, 1998, the unamortized excess of
the SPG Operating Partnership's investment over its share of the equity in the
underlying net assets of the partnerships and joint ventures ("Excess
Investment") was $591,199 and $708,616, respectively. This Excess Investment is
being amortized generally over the life of the related Properties. Amortization
15
<PAGE>
included in income from unconsolidated entities for the three-month periods
ended June 30, 1999 and 1998 was $5,606 and $3,417, respectively. Amortization
included in income from unconsolidated entities for the six-month periods ended
June 30, 1999 and 1998 was $11,663 and $5,402, respectively.
The net income or net loss for each partnership and joint venture is
allocated in accordance with the provisions of the applicable partnership or
joint venture agreement. The allocation provisions in these agreements are not
always consistent with the ownership interest held by each general or limited
partner or joint venturer, primarily due to partner preferences.
The Management Company
The Management Company, including its consolidated subsidiaries,
provides management, leasing, development, accounting, legal, marketing and
management information systems services to five wholly-owned Properties, 25 non
wholly-owned Properties, Melvin Simon & Associates, Inc., and certain other
nonowned properties. Certain subsidiaries of the Management Company provide
architectural, design, construction, insurance and other services primarily to
certain of the Properties. The Management Company also invests in other
businesses to provide other synergistic services to the Properties. The SPG
Operating Partnership's share of consolidated net income of the Management
Company, after intercompany profit eliminations, was $2,908 and ($6,146) for the
three-month periods ended June 30, 1999 and 1998, and was $4,094 and ($4,490)
for the six-month periods ended June 30, 1999 and 1998, respectively.
Note 9 - Debt
At June 30, 1999, the SPG Operating Partnership had consolidated debt
of $8,273,822, of which $6,369,823 was fixed-rate debt and $1,903,999 was
variable-rate debt. The SPG Operating Partnership's pro rata share of
indebtedness of the unconsolidated joint venture Properties as of June 30, 1999
was $1,250,367. As of June 30, 1999, the SPG Operating Partnership had interest-
rate protection agreements related to $687,999 of its consolidated indebtedness.
The agreements are generally in effect until the related variable-rate debt
matures. The SPG Operating Partnership's hedging activity did not materially
impact interest expense during the comparative periods.
In January of 1999, the SPG Operating Partnership retired the $21,910
mortgage on North East Mall, which bore interest at 10% and had a stated
maturity of September, 2000, using cash from working capital. The paydown
included a $1,774 prepayment charge, which was recorded as an extraordinary
loss. In June of 1999, a new $17,709 mortgage was placed on North East Mall
bearing interest at 6.74%, with a stated maturity of May 2002. The net proceeds
were added to working capital.
On February 4, 1999, the SPG Operating Partnership completed the sale
of $600,000 of senior unsecured notes. These notes include two $300,000
tranches. The first tranche bears interest at 6.75% and matures on February 4,
2004 and the second tranche bears interest at 7.125% and matures on February 4,
2009. The SPG Operating Partnership used the net proceeds of approximately
$594,000 primarily to retire the $450,000 initial tranche of the Merger Facility
and to pay $142,000 on the outstanding balance of the Credit Facility.
16
<PAGE>
Note 10 - Partners' Equity
The following table summarizes the changes in Partners' equity since
December 31, 1998.
<TABLE>
<CAPTION>
General Partners
-----------------------------------
Managing Non-managing Unamortized Total
Preferred General General Limited Restricted Partners'
Units Partner Partners Partners Stock Award Equity
--------- -------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $1,057,245 $751,948 $1,788,712 $1,009,646 $(19,750) $4,587,801
Managing General Partner
Contributions (77,988 Units) 1,899 1,899
Conversion of 155,978 Series A
Preferred Units into 5,926,440
Units (2) (199,320) 198,787 (533)
Units issued as dividend
(153,890 Units) (2) 4,016 4,016
Stock incentive program (523,050
Units, net of forfeitures) 13,562 (336) (13,273) (47)
Amortization of stock incentive 5,367 5,367
Units converted to cash (5,823
Units) (154) (154)
Other 134 134
Adjustment to allocate net
equity of the SPG Operating
Partnership (89,080) 56,898 32,182 --
Distributions (33,828) (50,854) (114,824) (64,821) (264,327)
---------- -------- ---------- ---------- -------- ----------
Subtotal 824,231 830,278 1,730,450 976,853 (27,656) 4,334,156
Comprehensive Income:
- ---------------------
Unrealized gain on investment (1) 496 1,035 582 2,113
Net income 33,828 22,400 48,788 27,540 132,556
---------- -------- ---------- ---------- -------- ----------
Total Comprehensive Income 33,828 22,896 49,823 28,122 -- 134,669
---------- -------- ---------- ---------- -------- ----------
Balance at June 30, 1999 $ 858,059 $853,174 $1,780,273 $1,004,975 $(27,656) $4,468,825
========== ======== ========== ========== ======== ==========
</TABLE>
(1) Amounts consist of the unrealized gain resulting from the change in market
value of 1,408,450 shares of common stock of Chelsea GCA Realty, Inc.
("Chelsea"), a publicly traded REIT, which the SPG Operating Partnership
purchased on June 16, 1997. The investment in Chelsea is being reflected in
the accompanying consolidated condensed balance sheets as other investment.
(2) On February 26, 1999, 150,000 Series A Convertible Preferred Units were
converted into 5,699,304 Units. On March 1, 1999, another 152,346 Units
were issued to the holders of the converted Units in lieu of the cash
dividends allocable to these preferred Units. Additionally, on May 10, 1999
another 5,978 Units of Series A Convertible Preferred Units were converted
into 227,136 Units, with another 1,544 Units issued in lieu of the cash
dividends allocable to those preferred Units. At June 30, 1999, 53,271
Series A Convertible Preferred Units remained outstanding.
The Simon Property Group 1998 Stock Incentive Plan
At the time of the CPI Merger, the SPG Operating Partnership 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 are not so qualified. In March of 1999, 533,696
Paired Shares of restricted stock were awarded to executives related to 1998
performance. As of June 30, 1999, 1,810,275 Paired Shares of restricted
17
<PAGE>
stock, net of forfeitures, were deemed earned and awarded under the 1998 Plan.
Approximately $2,654 and $3,100 relating to these programs were amortized in the
three-month periods ended June 30, 1999 and 1998, respectively and approximately
$5,367 and $4,447 relating to these programs were amortized in the six-month
periods ended June 30, 1999 and 1998, respectively. The cost of restricted stock
grants, which is based upon the stock's fair market value at the time such stock
is earned, awarded and issued, is charged to Partners' equity and subsequently
amortized against earnings of the SPG Operating Partnership over the vesting
period.
Note 11 - Commitments and Contingencies
Litigation
Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. On September
3, 1998, a complaint was filed in the Court of Common Pleas in Cuyahoga County,
Ohio, captioned Richard E. Jacobs, et al. v. Simon DeBartolo Group, L.P. The
plaintiffs are all principals or affiliates of The Richard E. Jacobs Group, Inc.
("Jacobs"). The plaintiffs alleged in their complaint that the SPG Operating
Partnership engaged in malicious prosecution, abuse of process, defamation,
libel, injurious falsehood/unlawful disparagement, deceptive trade practices
under Ohio law, tortious interference and unfair competition in connection with
the SPG Operating Partnership's acquisition by tender offer of shares in RPT, a
Massachusetts business trust, and certain litigation instituted in September,
1997, by the SPG Operating Partnership against Jacobs in federal district court
in New York, wherein the SPG Operating Partnership alleged that Jacobs and other
parties had engaged, or were engaging in activity which violated Section 10(b)
of the Securities Exchange Act of 1934, as well as certain rules promulgated
thereunder. Plaintiffs in the Ohio action are seeking compensatory damages in
excess of $200,000, punitive damages and reimbursement for fees and expenses.
The SPG Operating Partnership moved to dismiss certain of plaintiffs' claims. On
March 31, 1999, the Ohio trial court dismissed the claims for malicious
prosecution and abuse of process as to all plaintiffs other than Jacobs Group,
Inc. On May 7, 1999, the trial court dismissed the claim of Jacobs Group, Inc.
for abuse of process. On May 21, 1999, SPG Operating Partnership filed its
answer to the complaint and asserted counterclaims against Jacobs Group, Inc.
for tortious interference with prospective business relations and contracts,
unfair competition, breach of fiduciary duty and breach of contract seeking
damages in excess of $425,000. On July 28, 1999, United States Court of Appeals,
Second Circuit, reversed the trial court's previously-imposed sanction against
the SPG Operating Partnership. It is difficult to predict the ultimate outcome
of this action and there can be no assurance that the SPG Operating Partnership
will receive a favorable verdict. Based upon the information known at this time,
in the opinion of management, it is not expected that this action will have a
material adverse effect on the SPG Operating Partnership.
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 the SPG Operating Partnership, and DPMI, and the plaintiffs are 27 former
employees of the defendants. In the complaint, the plaintiffs alleged that they
were recipients of deferred stock grants under the DRC Plan and that these
grants immediately vested under the DRC Plan's "change in control" provision as
a result of the DRC Merger. Plaintiffs asserted that the defendants' refusal to
issue them approximately 661,000 shares of DRC common stock, which is equivalent
to approximately 450,000 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 complaint was served on the defendants on October 28, 1996. The
plaintiffs and the defendants each filed motions for summary judgment. On
October 31, 1997, the Court entered a judgment in favor of the defendants
granting their motion for summary judgment. The plaintiffs have appealed this
judgment and the matter is pending. While it is difficult to predict the
ultimate outcome of this action, based on the information known to date, it is
not expected that this action will have a material adverse effect on the SPG
Operating Partnership.
Roel Vento et al v. Tom Taylor et al. An affiliate of the SPG
Operating Partnership is a defendant in litigation entitled Roel Vento et al v.
Tom Taylor et al., in the District Court of Cameron County, Texas, in which a
judgment in the amount of $7,800 has been entered against all defendants. This
judgment includes approximately $6,500 of punitive damages and is based upon a
jury's findings on four separate theories of liability including fraud,
intentional infliction of emotional distress, 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. The
SPG Operating Partnership 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 $3,384 plus interest. The
SPG Operating Partnership intends to file a petition for a writ of certiorari to
the Texas Supreme Court requesting that they review and revise the determination
of the Appellate Court. Management, based upon the advice of counsel, believes
that the ultimate outcome of this action will not have a material adverse effect
on the SPG Operating Partnership.
The SPG Operating Partnership 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
18
<PAGE>
believes that these items will not have a material adverse impact on the SPG
Operating Partnership's financial position or results of operations.
Note 12 - New Accounting Pronouncements
On June 15, 1998, the 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 the SPG Operating Partnership beginning
with the 2001 fiscal year and may not be applied retroactively. Management does
not expect the impact of SFAS 133 to be material to the financial statements.
However, SFAS 133 could increase volatility in earnings and other comprehensive
income.
On April 3, 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up
Activities, which is effective for fiscal years beginning after December 15,
1998. The SPG Operating Partnership has assessed the impact of this
pronouncement and determined the impact to be immaterial to the financial
statements.
Note 13 - Pending Acquisition
On February 25, 1999 the SPG Operating Partnership entered into a
definitive agreement with New England Development Company ("NED") to acquire and
assume management responsibilities for NED's portfolio of up to 14 regional
malls aggregating approximately 10.6 million square feet of GLA. The purchase
price for the portfolio is approximately $1.7 billion. On April 15, 1999, the
SPG Operating Partnership executed a letter of intent to form a joint venture to
acquire the portfolio, with the SPG Operating Partnership's initial ownership to
be approximately 50%. The joint venture intends to complete the purchase of ten
of such regional malls in August of 1999 and up to four more by the end of 1999.
19
<PAGE>
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. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the SPG Properties or the SPG 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; substantial indebtedness; conflicts of interests; maintenance of
REIT status; risks related to the "year 2000 issue"; and environmental/safety
requirements.
Overview
As of June 30, 1999, SPG Properties, including its consolidated
subsidiary, held a 48.9% ownership interest in the SPG Operating Partnership.
This investment is their sole asset and represents their only source of income.
For these reasons, management has based the following discussion on the results
of operations and financial position of the SPG Operating Partnership. Prior to
the CPI Merger, which was consummated as of the close of business on September
24, 1998, SPG Properties (formerly Simon DeBartolo Group, Inc.) and subsidiary
accounted for their interests in the SPG Operating Partnership using the
consolidated method of accounting. As a result of the CPI Merger and related
transactions, SPG Properties and subsidiary began accounting for their
noncontrolling interests in the SPG Operating Partnership using the equity
method of accounting.
For financial reporting purposes, as of the close of business on
September 24, 1998, the operating results include the CPI Merger described in
Note 3 to the financial statements of the SPG Operating Partnership. As a
result, the 1999 consolidated results of operations of the SPG Operating
Partnership include an additional 16 regional malls, one office building and one
community center, with an additional six regional malls being accounted for
using the equity method of accounting.
The following Property acquisitions, sales and opening (the "Property
Transactions"), also impacted the SPG Operating Partnership's consolidated
results of operations in the comparative periods. On January 26, 1998, the SPG
Operating Partnership acquired 100% of Cordova Mall in Pensacola, Florida for
approximately $87.3 million. In March of 1998, the SPG Operating Partnership
opened the approximately $13.3 million Muncie Plaza in Muncie, Indiana. On May
5, 1998, the SPG Operating Partnership acquired the remaining 50.1% interest in
Rolling Oaks Mall for 519,889 shares of SPG's common stock, valued at
approximately $17.2 million. Effective June 1, 1998, the SPG Operating
Partnership sold The Promenade for $33.5 million. Effective June 30, 1998, The
SPG Operating Partnership sold Southtown Mall for $3.3 million. On December 7,
1998, the SPG Operating Partnership obtained a controlling 90% interest in The
Arboretum, a community center in Austin, Texas for approximately $40.5 million.
On January 29, 1999, the SPG Operating Partnership acquired the remaining 15%
ownership interests in Lakeline Mall and Lakeline Plaza for approximately $21.8
million. On February 26, 1999, the SPG Operating Partnership acquired the
remaining 50% ownership interests in Century III Mall for approximately $57.0
million. On May 20, 1999, the SPG Operating Partnership sold Cohoes Commons for
$4.2 million. (See Liquidity and Capital Resources for additional information on
1999 acquisitions and dispositions.)
Results of Operations
For the Three Months ended June 30, 1999 vs. the Three Months Ended June 30,
1998
Total revenue of the SPG Operating Partnership increased $143.0
million or 46.1% for the three months ended June 30, 1999, as compared to the
same period in 1998. This increase is primarily the result of the CPI Merger
($120.0 million) and the Property Transactions ($10.2 million). Excluding these
items, total revenues increased $12.9 million or 4.1%, primarily due to a $10.5
million increase in minimum rent and a $6.0 million increase in tenant
reimbursements. The 5.9% comparable increase in minimum rent results from
increased occupancy levels and the replacement of expiring tenant leases with
renewal leases at higher minimum base rents, while the $6.0 million increase in
tenant reimbursements is offset by a similar increase in recoverable expenses.
Total operating expenses of the SPG Operating Partnership increased
$79.8 million or 48.3% for the three months ended June 30, 1999, as compared to
the same period in 1998. This increase is primarily the result of the CPI Merger
($65.9 million) and the Property Transactions ($7.1 million). Excluding these
transactions, total operating expenses increased $6.8 million or 4.1%, primarily
due to a $6.0 million increase in recoverable expenses, which is offset by an
increase in tenant reimbursements, as described above.
20
<PAGE>
Interest expense of the SPG Operating Partnership increased $53.0
million, or 57.3% for the three months ended June 30, 1999, as compared to the
same period in 1998. This increase is primarily a result of the CPI Merger
($45.7 million), the Property Transactions ($4.1 million), and additional
interest ($1.0 million) on indebtedness incurred by the SPG Operating
Partnership, the net proceeds of which were used to retire mortgage indebtedness
on one of the joint venture Properties and to pay down the Credit Facility.
Excluding these transactions, interest expense increased $2.2 million.
Income from unconsolidated entities of the SPG Operating Partnership
increased from $0.2 million in 1998 to $12.6 million in 1999, resulting from a
$3.3 million increase in income from unconsolidated partnerships and joint
ventures and a $9.1 million increase in income from the Management Company. The
increase in income from unconsolidated partnerships and joint ventures is
primarily due to the CPI Merger ($2.6 million).
The SPG Operating Partnership's $7.0 million extraordinary gain in
1998 is the result of a gain on forgiveness of debt ($5.2 million) and the
write-off of the premium on such indebtedness ($1.8 million).
Net income of the SPG Operating Partnership was $67.7 million for the
three months ended June 30, 1999, as compared to $50.5 million for the same
period in 1998, reflecting an increase of $17.2 million, primarily for the
reasons discussed above. Net income was allocated to the partners of the SPG
Operating Partnership based on their preferred Unit preferences and weighted
average ownership interests in the SPG Operating Partnership during the period.
For the Six Months ended June 30, 1999 vs. the Six Months Ended June 30, 1998
Total revenue of the SPG Operating Partnership increased $284.0
million or 46.5% for the six months ended June 30, 1999, as compared to the same
period in 1998. This increase is primarily the result of the CPI Merger ($231.7
million) and the Property Transactions ($17.3 million). Excluding these items,
total revenues increased $35.0 million or 5.7%, primarily due to a $21.6 million
increase in minimum rent and a $13.0 million increase in tenant reimbursements.
The 5.8% comparable increase in minimum rent results from increased occupancy
levels and the replacement of expiring tenant leases with renewal leases at
higher minimum base rents, while the $13.0 million increase in tenant
reimbursements was offset by an increase in recoverable expenses.
Total operating expenses of the SPG Operating Partnership increased
$159.7 million or 48.1% for the six months ended June 30, 1999, as compared to
the same period in 1998. This increase is primarily the result of the CPI Merger
($133.0 million) and the Property Transactions ($11.3 million). Excluding these
transactions, total operating expenses increased $15.4 million or 4.6%,
primarily due to a $14.9 million increase in recoverable expenses, which was
offset by an increase in tenant reimbursements, as described above.
Interest expense of the SPG Operating Partnership increased $99.6
million, or 54.0% for the six months ended June 30, 1999, as compared to the
same period in 1998. This increase is primarily a result of the CPI Merger
($84.6 million), the Property Transactions ($6.6 million), and additional
interest ($2.0 million) on indebtedness incurred by the SPG Operating
Partnership, the net proceeds of which were used to retire mortgage indebtedness
on one of the joint venture Properties and to pay down the Credit Facility and
incremental interest on borrowings under the Credit Facility to acquire a
noncontrolling joint venture interest in twelve regional malls and two community
centers (the "IBM Properties") in February 1998 ($2.2 million). Excluding these
transactions, interest expense increased $4.2 million.
Income from unconsolidated entities of the SPG Operating Partnership
increased from $5.0 million in 1998 to $24.9 million in 1999, resulting from a
$11.3 million increase in income from unconsolidated partnerships and joint
ventures and a $8.6 million increase in income from the Management Company. The
increase in income from unconsolidated partnerships and joint ventures is
primarily due to the CPI Merger ($7.2 million) and the IBM Properties ($3.3
million).
The SPG Operating Partnership's $1.8 million extraordinary loss in
1999 is the result of refinancing mortgage indebtedness. The $7.0 million
extraordinary gain in 1998 is the result of a gain on forgiveness of debt ($5.2
million) and the write-off of the premium on such indebtedness ($1.8 million).
Net income of the SPG Operating Partnership was $132.6 million for the
six months ended June 30, 1999, as compared to $95.7 million for the same period
in 1998, reflecting an increase of $36.9 million, primarily for the reasons
discussed above. Net income was allocated to the partners of the SPG Operating
Partnership based on their preferred Unit preferences and weighted average
ownership interests in the SPG Operating Partnership during the period.
Liquidity and Capital Resources
As of June 30, 1999, the SPG Operating Partnership's balance of cash and
cash equivalents was approximately $139.6 million. In addition to its cash
balance, the SPG Operating Partnership had a borrowing capacity on the Credit
Facility of $926.0
21
<PAGE>
million available after outstanding borrowings at June 30,
1999. The SPG Operating Partnership also has access to public equity and debt
markets. The SPG Operating Partnership has a debt shelf registration statement
under which $250 million in debt securities may be issued.
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.
On February 26, 1999, 150,000 Series A Convertible Preferred Units
were converted into 5,699,304 Units. Additionally, on March 1, 1999, another
152,346 Units were issued in lieu of the cash dividends allocable to those
preferred Units. Additionally, on May 10, 1999 another 5,978 Series A
Convertible Preferred Units were converted into 227,136 Units, with another
1,544 Units issued in lieu of the cash dividends allocable to those preferred
Units. At June 30, 1999, 53,271 Series A Convertible Preferred Units remained
outstanding.
Sensitivity Analysis
The SPG Operating Partnership's future earnings, cash flows and fair
values relating to financial instruments are dependent upon prevalent market
rates of interest, such as LIBOR. Based upon consolidated indebtedness and
interest rates at June 30, 1999, a 1% increase in the market rates of interest
would decrease future earnings and cash flows by approximately $13.4 million per
year, and would decrease the fair value of debt by approximately $670 million. A
1% decrease in the market rates of interest would increase future earnings and
cash flows by approximately $14.0 million per year, and would increase the fair
value of debt by approximately $870 million.
Financing and Debt
At June 30, 1999, the SPG Operating Partnership had consolidated debt
of $8,274 million, of which $6,370 million is fixed-rate debt bearing interest
at a weighted average rate of 7.3% and $1,904 million is variable-rate debt
bearing interest at a weighted average rate of 5.9%. As of June 30, 1999, the
SPG Operating Partnership had interest rate protection agreements related to
$688 million of consolidated variable-rate debt. The SPG Operating Partnership's
interest rate protection agreements did not materially impact interest expense
or weighted average borrowing rates for the six months ended June 30, 1999 or
1998.
Scheduled principal payments of the SPG Operating Partnership's share
of consolidated indebtedness over the next five years is $3,917 million, with
$4,216 million thereafter. The SPG Operating Partnership, together with the SRC
Operating Partnership, had a combined ratio of consolidated debt-to-market
capitalization of 54.8% and 51.7% at June 30, 1999 and December 31, 1998,
respectively.
In January of 1999 the SPG Operating Partnership retired the $22
million mortgage on North East Mall, which bore interest at 10% and had a stated
maturity of September, 2000, using cash from working capital. The paydown
included a $1.8 million prepayment charge, which was recorded as an
extraordinary loss. In June of 1999, a new $17.7 million mortgage was placed on
North East Mall bearing interest at 6.74%, with a stated maturity of May 2002.
The net proceeds were added to working capital.
On February 4, 1999, the SPG Operating Partnership completed the sale
of $600 million of senior unsecured notes. These notes included two $300 million
tranches. The first tranche bears interest at 6.75% and matures on February 4,
2004 and the second tranche bears interest at 7.125% and matures on February 4,
2009. The SPG Operating Partnership used the net proceeds of approximately $594
million primarily to retire the $450 million initial tranche of the Merger
Facility and to pay $142 million on the outstanding balance of the Credit
Facility.
Acquisitions
Management continues to actively review and evaluate a number of
individual property and portfolio acquisition opportunities. Management believes
that funds on hand, and amounts available under the Credit Facility, together
with the net proceeds of public and private offerings of debt and equity
securities are sufficient to finance likely acquisitions. No assurance can be
given that the SPG 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.
22
<PAGE>
During the first six months of 1999 the SPG Operating Partnership
acquired the remaining ownership interests in four Properties for a total of
approximately $147.5 million, including the assumption of approximately $48.5
million of mortgage indebtedness. These purchases were funded primarily with
borrowings from the Credit Facility. Each of the Properties purchased were
previously accounted for using the equity method of accounting and are now
accounted for using the consolidated method of accounting.
Dispositions
On April 15, 1999, the SPG Operating Partnership sold the land at
Three Dag Hammarskjold in New York, New York for $9.5 million, which was
recorded as an adjustment to the purchase price. Also in the second quarter of
1999, one community shopping center was sold for $4.2 million, resulting in a
loss of $4.2 million. In addition, the SPG Operating Partnership sold a parcel
of land, which was accounted for as an adjustment to the purchase price. The net
proceeds of approximately $28.3 million, were used to reduce the outstanding
borrowings on the Credit Facility.
Portfolio Restructuring. In addition to the Property sales described
above, the SPG Operating Partnership is continuing to evaluate the potential
sale of its remaining non-retail holdings, along with a number of retail assets
that are no longer aligned with the SPG Operating Partnership's strategic
criteria. If these assets are sold, management expects the sale prices will not
differ materially from the carrying value of the related assets.
Development, Expansions and Renovations. The SPG Operating Partnership
is involved in several development, expansion and renovation efforts.
In January of 1999, The Shops at Sunset Place, a 510,000 square-foot
destination-oriented retail and entertainment project, opened in South Miami,
Florida. The SPG Operating Partnership owns 37.5% of this approximately $150
million specialty center.
Construction also continues on the following projects, which have an
aggregate construction cost of approximately $720 million, of which the SPG
Operating Partnership's share is approximately $395 million:
. Concord Mills, a 37.5%-owned value-oriented super regional mall
project, containing approximately 1.4 million square feet of GLA,
is scheduled to open in September of 1999 in Concord (Charlotte),
North Carolina.
. The Mall of Georgia, an approximately 1.6 million square foot
regional mall project, is scheduled to open in August of 1999.
Adjacent to the regional mall, The Mall of Georgia Crossing is an
approximately 441,000 square-foot community shopping center
project, which is also scheduled to open in August of 1999. The
SPG Operating Partnership is funding 85% of the capital
requirements of the project. The SPG Operating Partnership has a
noncontrolling 50% ownership interest in each of these
development projects after the return of its equity and a 9%
return thereon.
. In addition to Mall of Georgia Crossing, two other new community
center projects are under construction: The Shops at North East
Mall and Waterford Lakes Town Center at a combined 1,261,000
square feet of GLA, which are each scheduled to open in November
of 1999.
. Orlando Premium Outlets marks the SPG Operating Partnership's
first project to be constructed in the partnership with Chelsea
GCA Realty. This 433,000 square-foot upscale outlet center is
scheduled for completion in the summer of 2000 in Orlando,
Florida.
A key objective of the SPG Operating Partnership is to increase the
profitability and market share of its Properties through strategic renovations
and expansions. The SPG Operating Partnership's share of projected costs to fund
all renovation and expansion projects in 1999 is approximately $400 million,
which includes approximately $150 million incurred in the first six months of
1999. It is anticipated that the cost of these projects will be financed
principally with the Credit Facility, project-specific indebtedness, access to
debt and equity markets, and cash flows from operations. The SPG Operating
Partnership currently has nine major expansion and/or redevelopment projects
under construction and in the preconstruction development stage with targeted
1999 completion dates. Included in combined investment properties at June 30,
1999 is approximately $330 million of construction in progress, with another
$300 million in the unconsolidated joint venture investment properties.
Distributions. The SPG Operating Partnership declared a distribution
of $0.505 per Unit in each of the first two quarters of 1999. The current annual
distribution rate is $2.02 per Unit. Future distributions will be determined
based on actual results of operations and cash available for distribution.
23
<PAGE>
Investing and Financing Activities
Cash used by the SPG Operating Partnership for investing activities
for the six months ended June 30, 1999 of $106.5 million is primarily the result
of $198.6 million of capital expenditures; acquisitions of $99.3 million; $32.4
million of investments in unconsolidated joint ventures; and $13.1 million of
investments in and advances to the Management Company, partially offset by
distributions from unconsolidated entities of $163.5 million; net proceeds from
the sales of assets of $42.0 million; and cash of $10.8 million from the
consolidations of Haywood Mall, Century III Mall, Lakeline Mall and Lakeline
Plaza. Capital expenditures includes development costs of $12.5 million,
renovation and expansion costs of approximately $158.5 million and tenant costs
and other operational capital expenditures of approximately $27.6 million.
Acquisitions includes $69.0 million, $24.0 million and $6.3 million for the
remaining interests in Haywood Mall, Century III Mall and Lakeline Mall and
Plaza, respectively. Investments in unconsolidated joint ventures is primarily
$11.5 million in Florida Mall and $11.2 million in Orlando Premium Outlots.
Distributions from unconsolidated entities includes $44.9 million, $33.1
million, $27.4 million and $14.4 million derived primarily from incremental
borrowings on Gwinnett Place, Town Center at Cobb, Westchester Mall and Concord
Mills, respectively. Net proceeds from the sales of assets is made up of $28.3
million, $9.5 million and $4.2 million from the sales of the Charles Hotel land,
the Three Dag Hammarskjold land and Cohoes Center, respectively. The $13.1
million investment in the Management Company is primarily to fund an additional
investment in Groupe BEG, which represents the SPG Operating Partnership's
interests in retail real estate in Europe.
Cash used by the SPG Operating Partnership for financing activities
for the six months ended June 30, 1999 was $158.7 million and primarily includes
net distributions of $273.8 million, partially offset by net borrowings of
$115.1 million.
Inflation
Inflation has remained relatively low during the past four years and
has had a minimal impact on the operating performance of the Properties.
Nonetheless, substantially all of the tenants' leases contain provisions
designed to lessen the impact of inflation. Such provisions include clauses
enabling the SPG 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 SPG 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 SPG 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 SPG
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.
Year 2000 Costs
The SPG Operating Partnership has undertaken a project to identify and
correct problems arising from the inability of information technology hardware
and software systems to process dates after December 31, 1999. This Year 2000
project consists of two primary components. The first component focuses on the
SPG Operating Partnership's key information technology systems (the "IT
Component") and the second component focuses on the information systems of key
tenants and key third party service providers as well as imbedded systems within
common areas of substantially all of the Properties (the "Non-IT Component").
Key tenants include the 20 largest base rent contributors and anchor tenants
with over 25,000 square feet of GLA. Key third party service providers are those
providers whose Year 2000 problems, if not addressed, would be likely to have a
material adverse effect on the SPG Operating Partnership's operations.
The IT Component of the Year 2000 project is being managed by the
information services department of the SPG Operating Partnership who have
actively involved other disciplines within the SPG Operating Partnership which
are directly impacted by an IT Component of the project. The Non-IT Component is
being managed by a steering committee of 25 employees, including senior
executives of a number of the SPG Operating Partnership's departments. In
addition, outside consultants have been engaged to assist in the Non-IT
Component.
Status of Project Through July 31, 1999
IT Component. The SPG Operating Partnership's primary operating,
financial accounting and billing systems and the SPG Operating
Partnership's standard primary desktop software have been determined to be
Year 2000 ready. The SPG Operating Partnership's information services
department has also completed its
24
<PAGE>
assessment of other "mission critical" applications within the SPG
Operating Partnership and is currently implementing solutions to those
applications in order for them to be Year 2000 ready. It is expected
that the implementation of these mission critical solutions will be
complete by September 30, 1999.
Non-IT Component. The Non-IT Component includes the following phases:
(1) an inventory of Year 2000 items which are determined to be
material to the SPG Operating Partnership's operations; (2) assigning
priority to identified items; (3) assessing Year 2000 compliance
status as to all critical items; (4) developing replacement or
contingency plans based on the information collected in the preceding
phases; (5) implementing replacement and contingency plans; and (6)
testing and monitoring of plans, as applicable.
Phase (1) and Phase (2) are complete and Phase (3) is in process. The
assessment of compliance status of key tenants is approximately 90%
complete, the assessment of compliance status of key third party
service providers is approximately 91% complete, the assessment of
compliance status of critical inventoried components at the Properties
is approximately 90% complete and the assessment of compliance status
of non-critical inventoried components at the Properties is
approximately 90% complete. The SPG Operating Partnership expects to
complete Phase (3) by August 31, 1999. The development of contingency
or replacement plans (Phase (4)) is scheduled to be completed by
August 31, 1999. Development of such plans is ongoing. Implementation
of contingency and replacement plans (Phase (5)) is ongoing and will
continue throughout 1999 to the extent Year 2000 issues are
identified. Testing is in process. Testing of critical inventoried
components is scheduled to be completed by September 30, 1999.
Costs. The SPG Operating Partnership estimates that it will spend
approximately $1.5 million in incremental costs for its Year 2000 project. This
amount is being incurred over a period that commenced in January 1997 and is
expected to end in September 1999. Costs incurred through June 30, 1999 are
estimated at approximately $600 thousand, including approximately $100 thousand
in the six-month period ended June 30, 1999. Such amounts are expensed as
incurred. These estimates do not include the costs expended by the SPG Operating
Partnership following the 1996 merger with DeBartolo Realty Corporation for
software, hardware and related costs necessary to upgrade its primary operating,
financial accounting and billing systems, which allowed those systems to, among
other things, become Year 2000 compliant.
Risks. The most reasonably likely worst case scenario for the SPG
Operating Partnership with respect to the Year 2000 problems would be
disruptions in operations at the Properties. This could lead to reduced sales at
the Properties and claims by tenants which would in turn adversely affect the
SPG Operating Partnership's results of operations.
The SPG Operating Partnership has not yet completed all phases of its
Year 2000 project and the SPG Operating Partnership is dependent upon key
tenants and key third party suppliers to make their information systems Year
2000 compliant. In addition, disruptions in the economy generally resulting from
Year 2000 problems could have an adverse effect on the SPG Operating
Partnership's operations.
Pending Acquisition
As described in Note 13 to the financial statements, on February 25,
1999 the SPG Operating Partnership entered into a definitive agreement with NED
to acquire and assume management responsibilities for NED's portfolio of up to
14 regional malls aggregating approximately 10.6 million square feet of GLA. The
purchase price for the portfolio is approximately $1.7 billion. On April 15,
1999, the SPG Operating Partnership executed a letter of intent to form a joint
venture to acquire the portfolio, with the SPG Operating Partnership's initial
ownership to be approximately 50%. The joint venture intends to complete the
purchase of ten of such regional malls in August of 1999 and up to four more by
the end of 1999.
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, the SPG Operating Partnership's earnings are generally highest in the
fourth quarter of each year.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
Reference is made to Item 2 of this Form 10-Q under the caption
"Liquidity and Capital Resources".
25
<PAGE>
Part II - Other Information
Item 1: Legal Proceedings
None.
Item 6: Exhibits and Reports on Form 8-K
None
26
<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.
SPG PROPERTIES, INC.
/s/ John Dahl
-------------
John Dahl,
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
Date: August 12,1999
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000912564
<NAME> SPG Properties, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,104,188
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
339,463
<COMMON> 12
<OTHER-SE> 1,764,713
<TOTAL-LIABILITY-AND-EQUITY> 2,104,188
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 63,456
<INCOME-TAX> 0
<INCOME-CONTINUING> 63,456
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,456
<EPS-BASIC> 0.00 <F1>
<EPS-DILUTED> 0.00 <F1>
<FN>
<F1> The Registrant is a substantially wholly-owned subsidiary of Simon
Property Group, L.P. and therefore does not report earnings per share.
</FN>
</TABLE>
