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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1998.
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 1-11530
TAUBMAN CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2033632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 East Long Lake Road
Suite 300, P.O. Box 200
Bloomfield Hills, Michigan 48303-0200
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (248) 258-6800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, New York Stock Exchange
$0.01 Par Value
8.3% Series A Cumulative New York Stock Exchange
Redeemable Preferred Stock,
$0.01 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
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 periods that the
registrant was required to file such report(s)) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
As of March 23, 1999, the aggregate market value of the 52,691,181 shares of
Common Stock held by non-affiliates of the registrant was $613 million,
based upon the closing price ($11 5/8) on the New York Stock Exchange composite
tape on such date. (For this computation, the registrant has excluded the market
value of all shares of its Common Stock reported as beneficially owned by
executive officers and directors of the registrant and certain other
shareholders; such exclusion shall not be deemed to constitute an admission that
any such person is an "affiliate" of the registrant.) As of March 23, 1999,
there were outstanding 53,045,285 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held in 1999 are incorporated by reference into Part III.
PART I
Item 1. BUSINESS
The Company
Taubman Centers, Inc. (the "Company" or "TCO") was incorporated in Michigan
in 1973 and had its initial public offering ("IPO") in 1992. Upon completion of
the IPO, the Company became the managing general partner of The Taubman Realty
Group Limited Partnership (the "Operating Partnership" or "TRG"). The Company
has a 62.8% partnership interest in the Operating Partnership, through which the
Company conducts all its operations. The Company owns, develops, acquires, and
operates regional shopping centers ("Centers") and interests therein. The
Company's portfolio, as of December 31, 1998, includes 16 urban and suburban
Centers located in seven states. One additional Center opened in March 1999.
Three additional Centers are presently or will soon be under construction and
are expected to open in 2001. Thirteen of the Centers are "super-regional"
centers because they have more than 800,000 square feet of gross leasable area.
The Operating Partnership also owns certain regional retail shopping center
development projects and more than 99% of The Taubman Company Limited
Partnership (the "Manager"), which manages the shopping centers, and provides
other services to the Operating Partnership and the Company. See the table on
pages 12 and 13 of this report for information regarding the Centers.
The Company is a real estate investment trust, or REIT, under the Internal
Revenue Code of 1986, as amended (the "Code"). In order to satisfy the
provisions of the Code applicable to REITs, the Company must distribute to its
shareholders at least 95% of its REIT taxable income and meet certain other
requirements. The Operating Partnership's agreement provides that the Operating
Partnership will distribute, at a minimum, sufficient amounts to its partners
such that the Company's pro rata share will enable the Company to pay
shareholder dividends (including capital gains dividends that may be required
upon the Operating Partnership's sale of an asset) that will satisfy the REIT
provisions of the Code.
Recent Developments
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine wholly owned (Briarwood, Columbus City Center, The Falls,
Hilltop, Lakeforest, Marley Station, Meadowood Mall, Stoneridge, and The Mall at
Tuttle Crossing) and one joint venture (Woodfield)) and a share of the Operating
Partnership's debt for all of the partnership units owned by two pension trusts
of General Motors Corporation (GMPT) (the GMPT Exchange). Performance statistics
for periods presented below include these ten centers (the GMPT Centers) through
the completion of the GMPT Exchange, except as noted.
For a discussion of the GMPT Exchange and other business developments that
occurred in 1998, see the response to Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (MD&A).
The Shopping Center Business
There are several types of retail shopping centers, varying primarily by size
and marketing strategy. Retail shopping centers range from neighborhood centers
of less than 100,000 square feet of GLA to regional and super-regional shopping
centers. Retail shopping centers in excess of 400,000 square feet of GLA are
generally referred to as "regional" shopping centers, while those centers having
in excess of 800,000 square feet of GLA are generally referred to as
"super-regional" shopping centers. In this annual report on Form 10-K, the term
"regional shopping centers" refers to both regional and super-regional shopping
centers. The term "GLA" refers to gross retail space, including anchors and mall
tenant areas, and the term "Mall GLA" refers to gross retail space, excluding
anchors. The term "anchor" refers to a department store or other large retail
store. The term "mall tenants" refers to stores (other than anchors) that are
typically specialty retailers and lease space in shopping centers.
1
Business of the Company
The Company, as managing general partner of the Operating Partnership, is
engaged in the ownership, management, leasing, acquisition, development and
expansion of regional shopping centers.
The Centers:
o are strategically located in major metropolitan areas, many in communities
that are among the most affluent in the country, including New York City,
Los Angeles, Denver, Detroit, Phoenix, and Washington, D.C.;
o range in size between 437,000 and 1.5 million square feet of GLA and between
132,000 and 598,000 square feet of Mall GLA. The smallest Center has
approximately 50 stores, and the largest has approximately 200 stores. Of
the 16 Centers, 13 are super-regional shopping centers;
o have approximately 2,160 stores operated by its mall tenants under
approximately 790 trade names;
o have 50 anchors, operating under 15 trade names;
o lease approximately 77% of Mall GLA to national chains, including
subsidiaries or divisions of The Limited (The Limited, Limited Express,
Victoria's Secret, and others), The Gap (The Gap, Banana Republic, and
others), and Venator Group, Inc. (Foot Locker, Kinney Shoes, and others);
and
o are among the most productive (measured by mall tenants' average per square
foot sales) in the United States. In 1998, mall tenants had average per
square foot sales of $426, which is substantially greater than the average
for all regional shopping centers owned by public companies.
The most important factor affecting the revenues generated by the Centers
is leasing to mall tenants (primarily specialty retailers), which represents
approximately 90% of revenues. Anchors account for approximately 5% of revenues
because many own their stores and, in general, those that lease their stores do
so at rates substantially lower than those in effect for mall tenants.
The Company's portfolio is concentrated in highly productive super-regional
shopping centers. Of the 16 Centers, 13 had annual rent rolls at December 31,
1998 of over $10 million and had annualized sales per square foot in excess
of $350. The Company believes that this level of productivity is indicative of
the Centers' strong competitive position and is, in significant part,
attributable to the Company's business strategy and philosophy. The Company
believes that large shopping centers (including regional and especially
super-regional shopping centers) are the least susceptible to direct competition
because (among other reasons) anchors and large specialty retail stores do not
find it economically attractive to open additional stores in the immediate
vicinity of an existing location for fear of competing with themselves. In
addition to the advantage of size, the Company believes that the Centers'
success can be attributed in part to their other physical characteristics, such
as design, layout, and amenities.
2
Business Strategy And Philosophy
The Company believes that the regional shopping center business is not simply
a real estate development business, but rather an operating business in which a
retailing approach to the on-going management and leasing of the Centers is
essential. Thus the Company:
o offers a large, diverse selection of retail stores in each Center to give
customers a broad selection of consumer goods and variety of price ranges;
o endeavors to increase overall mall tenants' sales, and thereby increase
achievable rents, by leasing space to a constantly changing mix of tenants;
and
o seeks to anticipate trends in the retailing industry and emphasizes ongoing
introductions of new retail concepts into the Centers. Due in part to this
strategy, a number of successful retail trade names have opened their first
mall stores in the Centers. The Company believes that its execution of this
leasing strategy is unique in the industry and is an important element in
building and maintaining customer loyalty and increasing mall productivity.
The Centers compete for retail consumer spending through diverse, in-depth
presentations of predominantly fashion merchandise in an environment intended to
facilitate customer shopping. While some Centers include stores that target
high-end, upscale customers, each Center is individually merchandised in light
of the demographics of its potential customers within convenient driving
distance.
The Company's leasing strategy involves assembling a diverse mix of mall
tenants in each of the Centers in order to attract customers, thereby generating
higher sales by mall tenants. High sales by mall tenants make the Centers
attractive to prospective tenants, thereby increasing the rental rates that
prospective tenants are willing to pay. The Company implements an active leasing
strategy to increase the Centers' productivity and to set minimum rents at
higher levels. Elements of this strategy include terminating leases of
under-performing tenants, renegotiating existing leases, and not leasing space
to prospective tenants that (though viable or attractive in certain ways) would
not enhance a Center's retail mix.
Potential For Growth
The Company's principal objective is to enhance shareholder value. The
Company seeks to maximize the financial results of its assets, while pursuing a
growth strategy that concentrates primarily on an active new center development
program.
Development of New Centers
- --------------------------
The Company is pursuing an active program of regional shopping center
development. The Company believes that it has the expertise to develop
economically attractive regional shopping centers through intensive analysis of
local retail opportunities. The Company believes that the development of new
centers is the best use of its capital and an area in which the Company excels.
At any time, the Company has numerous potential development projects in various
stages.
During November 1998, the Company opened Great Lakes Crossing, an enclosed
value super-regional mall in Auburn Hills, Michigan. In addition, MacArthur
Center, located in Norfolk, Virginia, opened in March 1999.
3
Additionally, three new centers are currently under construction: Tampa
International, an enclosed 1.3 million square foot super-regional mall in Tampa,
Florida; The Shops at Willow Bend, a 1.5 million square foot regional shopping
center in the metropolitan Dallas area; and The Mall at Wellington Green, a 1.3
million square foot regional shopping center located in West Palm Beach County,
Florida. All three of these Centers are expected to open in 2001.
The Company's policies with respect to development activities are designed
to reduce the risks associated with development. For instance, the Company
entered into an agreement to lease Memorial City Mall, a center adjacent to one
of the most affluent residential areas in Houston, Texas, while the Company
investigates the redevelopment opportunities of the center. Also, the Company
generally does not intend to acquire land early in the development process, but
will instead generally acquire options on land or form partnerships with
landholders holding potentially attractive development sites, typically
exercising options only once it is prepared to begin construction. In addition,
the Company does not intend to begin construction until a sufficient number of
anchor stores have agreed to operate in the shopping center, such that the
Company is confident that the projected sales and rents from Mall GLA are
sufficient to earn a return on invested capital in excess of the Company's cost
of capital. Having historically followed these two principles, the Company's
experience indicates that less than 20% of the costs of the development of a
regional shopping center will be incurred prior to the construction period;
however, no assurance can be given that the Company will continue to be able to
so limit pre-construction costs.
While the Company will continue to evaluate development projects using
criteria, including financial criteria for rates of return, similar to those
employed in the past, no assurances can be given that the adherence to these
policies will produce comparable results in the future. In addition, the costs
of shopping center development opportunities that are explored but ultimately
abandoned will, to some extent, diminish the overall return on development
projects (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Capital Spending"
for further discussion of the Company's development activities).
Strategic Acquisitions
- ----------------------
The Company's objective is to acquire existing centers only when these are
compatible with the quality of the Company's portfolio (or can be redeveloped to
that level) and that satisfy the Company's strategic plans and pricing
requirements.
4
The Company believes it will have additional opportunities to acquire
regional shopping centers, or interests therein, and will have certain
advantages in doing so.
o First, the management expertise of the Manager will enhance the leasing and
operation of newly acquired regional shopping centers. If opportunities
exist to expand, remodel, or re-merchandise the center through new leasing,
the Company's expertise will assist in making an informed and timely
evaluation of the economic consequences of such activities prior to
acquisition, as well as facilitate implementation of such activities.
o Second, a center can be acquired for any combination of cash or equity
interests in the Operating Partnership or (subject to certain limitations)
the Company, possibly creating the opportunity for tax-advantaged
transactions for the seller, thereby reducing the price that might otherwise
have to be paid in an all cash transaction or making an opportunity
available that would not otherwise exist. The Operating Partnership is able
to offer partnership interests in itself in exchange for shopping center
interests, allowing sellers to diversify their interests, attain liquidity
not otherwise available, possibly defer taxes that might otherwise be due if
the interests were instead sold for cash, maintain an investment in the
regional shopping center business, and resolve concerns sellers otherwise
may have regarding future management of their properties.
Expansions of the Centers
- -------------------------
Another potential element of growth is the strategic expansion of existing
properties to update and enhance their market positions, by replacing or adding
new anchor stores or increasing mall tenant space. Most of the Centers have been
designed to accommodate expansions. Expansion projects can be as significant as
new shopping center construction in terms of scope and cost, requiring
governmental and existing anchor store approvals, design and engineering
activities, including rerouting utilities, providing additional parking areas or
decking, acquiring additional land, and relocating anchors and mall tenants (all
of which must take place with a minimum of disruption to existing tenants and
customers). In 1998, for example, the Company opened a 132,000 square foot
expansion of the Mall GLA at Cherry Creek and completed a major renovation at
Woodland. In addition, a new Macy's will begin construction in 1999 at Fair
Oaks and is expected to open in 2000.
5
The following table includes information regarding recent development,
acquisition, and expansion activities.
Developments:
Completion Date Center Location
--------------- ------ --------
July 1997 Tuttle Crossing (1) Columbus, Ohio
November 1997 Arizona Mills Tempe, Arizona
November 1998 Great Lakes Crossing Auburn Hills, Michigan
March 1999 MacArthur Center Norfolk, Virginia
Acquisitions:
Completion Date Center Location
--------------- ------ --------
September 1997 Regency Square Richmond, Virginia
December 1997 Tuttle Leasehold (1) Columbus, Ohio
December 1997 The Falls (1) (2) Miami, Florida
Expansions, Renovations and Anchor Conversions:
Completion Date Center Location
--------------- ------ --------
March 1997 Beverly Center (3) Los Angeles, California
August 1997 Westfarms (4) West Hartford, Connecticut
November 1997-August 1998 Cherry Creek (5) Denver, Colorado
December 1997 Biltmore (6) Phoenix, Arizona
November 1998 Woodland Grand Rapids, Michigan
- ------------------
(1) Centers transferred to GMPT in connection with the GMPT Exchange.
(2) Completely redeveloped and expanded in 1996 before the acquisition of The
Falls.
(3) Broadway converted to Bloomingdale's.
(4) 135,000 square foot expansion followed by the opening of a new Nordstrom in
September.
(5) Lord & Taylor opened a new and expanded store in 1997. Additional 132,000
square foot expansion of mall tenant space opened in August of 1998.
(6) 50,000 square foot expansion of mall tenant space completed.
6
Internal Growth
- ---------------
The Centers are among the most productive in the nation, when measured by mall
tenant's average sales per square foot. Higher sales per square foot enable mall
tenants to remain profitable while paying occupancy costs that are a greater
percentage of total sales. As leases expire at the Centers, the Company has
consistently been able, on a portfolio basis, to lease the available space to an
existing or new tenant at higher rates.
Augmenting this growth, the Company is pursuing a number of new sources of
revenue from the Centers. For example, the Company expects increased revenue
from its specialty leasing efforts. In recent years a new industry -- beyond
traditional carts and kiosks -- has evolved, with more and better quality
specialty tenants. The Company has put in place a company-wide program to
maximize this opportunity.
Rental Rates
As leases have expired in the Centers, the Company has generally been able to
rent the available space, either to the existing tenant or a new tenant, at
rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or will decline for
the opposite reason. However, Center revenues nevertheless increase as older
leases roll over or are terminated early and replaced with new leases negotiated
at current rental rates that are usually higher than the average rates for
existing leases. The following table contains certain information regarding per
square foot base rent at Centers that have been owned and open for five years.
Year Ended December 31
---------------------------------------
1998 (1) 1997 1996 1995 1994
---- ---- ---- ---- ----
Average base rent per square foot:
All mall tenants $41.93 $38.79 $37.90 $36.33 $34.72
Stores closing during year $44.27 $37.62 $33.39 $32.96 $30.46
Stores opening during year $47.92 $41.67 $42.39 $41.27 $41.02
(1) Excludes transferred centers.
7
Lease Expirations
The following table shows lease expirations based on information available
as of December 31, 1998 for the next ten years for the Centers in operation at
that date:
Percent of
Annualized Base Annualized Base Total Leased
Rent Under Rent Under Square Footage
Lease Expiration Number of Leases Leased Area Expiring Leases Expiring Leases Represented by
Year Expiring in Square Footage (in thousands) Per Square Foot Expiring Leases
---- -------- ----------------- --------------- --------------- ---------------
1999 (1) 68 188,527 $7,277 $38.60 2.4%
2000 197 456,882 18,310 40.08 5.8%
2001 200 517,671 21,570 41.67 6.5%
2002 260 742,597 26,010 35.03 9.4%
2003 287 905,024 32,533 35.95 11.4%
2004 231 664,076 29,117 43.85 8.4%
2005 226 652,125 29,202 44.78 8.2%
2006 150 447,482 20,081 44.88 5.6%
2007 159 632,667 23,179 36.64 8.0%
2008 188 929,937 29,925 32.18 11.7%
(1)Excludes leases that expire in 1999 for which renewal leases or leases with
replacement tenants have been executed as of December 31, 1998.
The Company believes that the information in the table is not necessarily
indicative of what will occur in the future because of several factors, but
principally because its leasing policies and practices create a significant
level of early lease terminations at the Centers. For example, the average
remaining term of the leases that were terminated during the period 1993 to 1998
was approximately 1.8 years. The average term of leases signed during 1998 and
1997 was approximately 7.4 years.
In addition, mall tenants at the Centers may seek the protection of the
bankruptcy laws, which could result in the termination of such tenants' leases
and thus cause a reduction in cash flow. Prior to 1992, such bankruptcies had
not affected more than 3% of leases in the shopping centers in any one calendar
year. In 1998, approximately 1.2% of leases were so affected compared to 1.5% in
1997, 2.8% in 1996, 3.2% in 1995, and 3.1% in 1994. Since 1991, the annual
provision for losses on accounts receivable has been less than 2% of annual
revenues.
Occupancy
Mall tenant average occupancy , ending occupancy, and leased space rates of
the Centers are as follows:
Year Ended December 31
---------------------------------------
1998(1) 1997 1996 1995 1994
---- ---- ---- ---- ----
Average Occupancy 89.4% 87.6% 87.4% 88.0% 86.6%
Ending Occupancy 90.2% 90.3% 88.0% 89.4% 89.3%
Leased Space 92.3% 92.3% 89.0% 90.6% 90.9%
(1) Excludes transferred centers.
8
Major Tenants
No single retail company represents 10% or more of the Company's revenues. The
combined operations of The Limited, Inc. accounted for approximately 9.4% of
leased Mall GLA as of December 31, 1998 and for approximately 9.1% of the 1998
base rent. The largest of these, in terms of square footage and rent, is The
Limited, which accounted for approximately 1.8% of leased Mall GLA and 1.7% of
1998 base rent. No other single retail company accounted for more than 4% of
leased Mall GLA or 1998 base rent.
Environmental Matters
All of the Centers presently owned by the Company (not including option
interests in the Development Projects or any of the real estate managed but not
included in the Company's portfolio) have been subject to environmental
assessments. The Company is not aware of any environmental liability relating to
the Centers or any other property in which they have or had an interest (whether
as an owner or operator) that the Company believes would have a material adverse
effect on the Company's business, assets, or results of operations. No
assurances can be given, however, that all environmental liabilities have been
identified or that no prior owner, operator, or current occupant has created an
environmental condition not known to the Company. Moreover, no assurances can be
given that (i) future laws, ordinances, or regulations will not impose any
material environmental liability or that (ii) the current environmental
condition of the Centers will not be affected by tenants and occupants of the
Centers, by the condition of properties in the vicinity of the Centers (such as
the presence of underground storage tanks), or by third parties unrelated to the
Company.
With respect to the matters described below, while there can be no
assurances, the Company believes that such matters will not have a material
adverse effect on the Company's business, assets, or results of operations.
Beverly Center is located over an oil field and several abandoned oil wells,
and is adjacent to an active oil production facility that operates numerous oil
and gas wells. In the Los Angeles basin, where Beverly Center is located,
pockets of methane gas may be found in oil fields; however, elevated levels of
methane have not been detected at Beverly Center.
Cherry Creek is situated on land that was used as a landfill prior to 1950.
Because of the past use of the site as a landfill, the site is listed on the
United States Environmental Protection Agency's Comprehensive Environmental
Response, Compensation and Liability Information System list.
In the summer of 1997, geotechnical drilling activities were undertaken in the
former gasoline station area as part of a parking lot expansion at the
southeastern corner of the Cherry Creek site. The geotechnical soil samples were
observed to have petroleum odors and staining. A subsurface environmental
investigation subsequently revealed a limited zone of hydrocarbon contaminated
soils, with no significant impacts to groundwater. Discussions with the Colorado
Department of Labor and Employment, Oil Inspection Section, held in September
1997, resulted in a "passive retardation" remedial approach that relies on
natural processes to degrade the hydrocarbon contamination. A Corrective Action
Plan was submitted and accepted in 1998 that provided for monitoring the soil
and groundwater. The monitoring procedures required under this plan have been
completed.
Paseo Nuevo is located in an area of known groundwater contamination by
tetrachloroethylene ("PCE"). The groundwater under and around the site was
monitored for six years before, during, and after construction of the center. No
on-site sources of PCE were identified during construction. The Regional Water
Quality Control Board has given approval to discontinue the monitoring program
because the PCE levels remained relatively constant over the six-year period and
do not exceed the state standard for PCE in drinking water.
There are asbestos containing materials ("ACMs") at most of the Centers,
primarily in the form of floor tiles, roof coatings and mastics. The floor
tiles, roof coatings and mastics are generally in good condition. The Manager
has developed and is implementing an operations and maintenance program that
details operating procedures with respect to ACMs prior to any renovation and
that requires periodic inspection for any change in condition of existing ACMs.
9
Personnel
The Company has engaged the Manager to provide real estate management,
acquisition, development, and administrative services required by the Company
and its properties.
As of December 31, 1998, the Manager had 432 full-time employees. The
following table provides a breakdown of employees by operational areas as of
December 31, 1998:
Number Of Employees
-------------------
Property Management............... 194
Leasing........................... 70
Development....................... 53
Financial Services................ 63
Other ............................ 52
-------
Total....................... 432
=======
The Manager considers its relations with its employees to be good.
10
Item 2. PROPERTIES
Ownership
The following table sets forth certain information about each of the Centers.
The table includes only Centers in operation at December 31, 1998. Excluded from
this table are MacArthur Center, which opened in March 1999, and Tampa
International, The Shops at Willow Bend, and the Mall at Wellington Green, all
of which will open in 2001. Also excluded is Memorial City Mall, a development
project. Centers are owned in fee other than Beverly Center, Cherry Creek, La
Cumbre Plaza and Paseo Nuevo, which are held under ground leases expiring
between 2028 and 2083.
Certain of the Centers are partially owned through joint ventures. Generally,
the Operating Partnership's joint venture partners have ongoing rights with
regard to the disposition of the Operating Partnership's interest in the joint
ventures, as well as the approval of certain major matters.
11
Sq. Ft of GLA/ Ownership % Percent of Mall GLA
Mall GLA Year Opened/ Year as of Occupied 1998 Rent (1)
Owned Centers Anchors as of 12/31/98 Expanded Acquired 12/31/98 as of 12/31/98 (in Thousands)
- ------------- ------- --------------- ----------- -------- ------------- ------------------- -------------
Beverly Center Bloomingdale's, Macy's 906,000/ 1982 70%(2) 98% $ 26,001
Los Angeles, CA 598,000
Biltmore Fashion Park Macy's, Saks Fifth 563,000/ 1963/1992/ 1994 100% 97% 11,329
Phoenix, AZ Avenue 324,000 1997
Cherry Creek Foley's, Lord & Taylor, 1,031,000/ 1990/1998 50% 88% 19,456
Denver, CO Neiman Marcus, Saks 558,000 (4)
Fifth Avenue (3)
Fair Oaks Hecht's, JCPenney, Lord 1,406,000/ 1980/1987/ 50% 86% 19,504
Fairfax, VA & Taylor, Sears (5) 590,000 1988
(Washington, D.C.
Metropolitan Area)
Fairlane Town Center Hudson's, JCPenney, 1,405,000/(6) 1976/1978/ 100% 78% 13,751
Dearborn, MI Lord & Taylor, Saks 515,000 1980
(Detroit Metropolitan Fifth Avenue, Sears
Area)
La Cumbre Plaza Robinsons-May, Sears 479,000/ 1967/1989 1996 100% 94% 4,098
Santa Barbara, CA 179,000
Lakeside Crowley's, Hudson's, 1,469,000/ 1976/1980 50% 87% 17,535
Sterling Heights, MI JCPenney, Lord & Taylor, 508,000
(Detroit Metropolitan Sears
Area)
Paseo Nuevo Macy's, Nordstrom 437,000/ 1990 1996 100% 89% 4,356
Santa Barbara, CA 132,000
Regency Square Hecht's (two locations), 826,000/ 1975/1987 1997 100% 96% 8,954
Richmond, VA JCPenney, Sears 239,000
The Mall at Short Bloomingdale's, Macy's, 1,350,000/ 1980/1994/ 100% 97% 32,179
Hills, Neiman Marcus, Nordstrom,528,000 1995
Short Hills, NJ Saks Fifth Avenue
Stamford Town Center Filene's, Macy's, Saks 873,000/ 1982 50% 90% 16,367
Stamford, CT Fifth Avenue 380,000
Twelve Oaks Mall Hudson's, JCPenney, 1,222,000/ 1977/1980 50% 92% 19,972
Novi, MI Lord & Taylor, Sears 484,000
(Detroit Metropolitan
Area)
12
Percent of Mall
Sq. Ft of GLA/ Ownership % GLA Occupied
Mall GLA Year Opened/ Year as of as of 1998 Rent (1)
Owned Centers Anchors as of 12/31/98 Expanded Acquired 12/31/98 12/31/98 (in Thousands)
------------- -------- -------------- ------------ -------- ----------- --------------- --------------
Westfarms Filene's, Filene's 1,298,000/ 1974/1997 79% 91% $21,920
West Hartford, CT Men's Store/Furniture 528,000
Gallery, JCPenney, Lord
& Taylor, Nordstorm
Woodland Hudson's, JCPenney, 1,093,000/ 1968/1974/ 50% 97% 14,831
Grand Rapids, MI Sears 368,000 1984/1989
Value Centers:
- --------------
Arizona Mills GameWorks, Harkins 1,191,000/ 1997 37% 94% 21,044
Tempe, AZ Cinemas, JCPenney 531,000
(Phoenix Outlet, Neiman Marcus -
Metropolitan Area) Last Call, Off 5th Saks,
Rainforest Cafe
Great Lakes Bass Pro, GameWorks, 1,385,000/(7) 1998 80% 79% 3,544 (1)
Crossing JCPenney Outlet, Neiman 576,000
Auburn Hills, MI Marcus-Last Call, Off ---------
(Detroit 5th Saks, Rainforest
Metropolitan Area) Cafe, Star Theatres
Total GLA/Total Mall GLA: 16,934,000/
7,038,000
Average GLA/Average Mall GLA: 1,058,000/
440,000
- ------------------------
(1) Includes minimum and percentage rent for the year ended December 31,
1998. Excludes rent from certain peripheral properties. For Great Lakes
Crossing, which opened in November, the amounts reflect rents for the
period subsequent to the opening date.
(2) The Company has an option to acquire the remaining 30%. The results of
Beverly Center are consolidated in the Company's financial statements.
(3) Nordstrom will be added as a fifth anchor.
(4) GLA excludes approximately 166,000 square feet for the renovated
buildings on adjacent peripheral land.
(5) A newly constructed Macy's store will open in the fall of 2000.
(6) A 30-screen theater will be added and is anticipated to open in the
spring of 2000.
(7) Includes three additional anchors totaling approximately 296,000 square
feet, which will open in the spring of 1999.
13
Anchors
The following table summarizes certain information regarding the anchors at
the Centers (excluding the value centers)as of December 31, 1998.
Number of 12/31/98 GLA
Name Anchor Stores (in thousands) % of GLA
---- ------------- -------------- --------
May Company
Lord & Taylor 6(1) 760
Hecht's 3 417
Filene's 2 379
Filene's Men's Store/
Furniture Gallery 1 80
Foley's 1 178
Robinsons-May 1 150
--- -----
Total 14 1,964 11.6%
Sears 7 1,582 9.3%
JCPenney 7 1,327 7.8%
Federated
Macy's 5 (1) 881
Bloomingdale's 2 379
-- -----
Total 7 1,260 7.5%
Dayton Hudson
Hudson's 4 853 5.0%
Nordstrom 3 (2) 516 3.0%
Saks 5 450 2.7%
Neiman Marcus 2 216 1.3%
Crowley's 1 115 0.7%
Dillard's 0(2) 0
--- ----- ----
Total 50 8,283 57.7%
=== ===== ====
(1) A new Macy's store will open at Fair Oaks in 2000.
(2) An additional Nordstrom store was added along with Dillard's at MacArthur
Center, which opened in March 1999.
14
Mortgage Debt
The following table sets forth certain information regarding the mortgages
encumbering the Centers as of December 31, 1998. All mortgage debt in the table
below is nonrecourse to the Operating Partnership, except for debt encumbering
Arizona Mills and MacArthur Center. The Operating Partnership has guaranteed the
payment of principal and interest on the mortgage debt of these Centers. The
loan agreements provide for the reduction of the amounts guaranteed as certain
center performance and valuation criteria are met, with the Operating
Partnership's guaranty of the Arizona Mills' principal being $13.1 million at
December 31, 1998. The guarantee on the MacArthur Center mortgage is currently
for 100% of the outstanding balance. Biltmore is also encumbered by assessment
bonds totaling approximately $2.8 million, which are not included in the table.
Principal
Balance Annual Debt Balance Due Earliest
Centers Consolidated in Interest as of 12/31/98 Service Maturity on Maturity Prepayment
TCO's Financial Statements Rate (000's) (000's) Date (000's) Date
- -------------------------- ---- ------- ------- ---- ------- ----
Beverly Center 8.36% $146,000 Interest Only 07/15/04 $146,000 30 Days' Notice (1)
MacArthur Center (70%) Floating 94,589(3) Interest Only 10/27/00 94,589 4 Days' Notice (2)
Centers Owned by Unconsolidated
Joint Ventures/TRG's % Ownership
- --------------------------------
Arizona Mills (37%) Floating(4) 140,984(4) Interest Only 02/01/02 140,984 5 Days' Notice (2)
Cherry Creek (50%) Floating(5) 130,000 Interest Only 08/01/99 130,000 4 Days' Notice (2)
Fair Oaks (50%) 6.60% 140,000 Interest Only 04/01/08 140,000 04/01/00 (1)
Lakeside (50%) 6.47% 88,000 Interest Only 12/15/00 88,000 30 Days'Notice (1)
Stamford Town Center (50%) 11.69% (6) 54,887 7,207 12/01/17 0 01/01/00 (7)
Twelve Oaks Mall (50%) Floating(8) 49,955 Interest Only 10/15/01 50,000 30 Days'Notice (2)
Westfarms (79%) 7.85% 100,000 Interest Only 07/01/02 100,000 60 Days'Notice (1)
Floating(9) 55,000(10) Interest Only 07/01/02 55,000 4 Days' Notice (2)
Woodland (50%) 8.20% 66,000 Interest Only 05/15/04 66,000 30 Days'Notice (1)
- ------------------------
(1) Debt may be prepaid with a yield maintenance prepayment penalty. No
prepayment penalty is due if prepaid within six months of maturity date.
(2) Prepayment can be made without penalty.
(3) The loan is a construction facility with a current maximum availability of
$150 million, which is expected to be lowered to $120 million in 1999. The
Company is in the process of finalizing an amendment to this loan agreement.
(4) The loan is a construction facility with a maximum availability of $142
million. The rate is capped at 9.5% until maturity, plus credit spread,
based on one month LIBOR.
(5) The rate is capped to maturity at 7%, plus credit spread, based on one
month LIBOR.
(6) The lender is entitled to contingent interest equal to 20% of annual
applicable receipts in excess of approximately $9.0 million.
(7) The mortgage has a prepayment penalty of 6%, declining by one-half of 1%
for each year after the earliest prepayment date, reducing to a minimum
penalty of 1%, plus an amount equal to ten times the greater of (i)
contingent interest payable for the year immediately preceding prepayment
or (ii) the average amount of contingent interest for the three years
immediately prior to prepayment.
(8) The rate is capped at 8.55% until maturity, plus credit spread, based on
one month LIBOR.
(9) The loan is a construction facility with a maximum availability of $55
million. The rate on the construction facility is capped until maturity at
6.5%, plus credit spread.
For additional information regarding the Centers and their operation, see the
responses to Item 1 of this report. For a discussion of the Company's plans in
1999 to refinance certain debt obligations with secured financing, see MD&A.
15
Item 3. LEGAL PROCEEDINGS
Neither the Company, its subsidiaries, nor any of the joint ventures is
presently involved in any material litigation nor, to the Company's knowledge,
is any material litigation threatened against the Company, its subsidiaries or
any of the properties. Except for routine litigation involving present or former
tenants (generally eviction or collection proceedings), substantially all
litigation is covered by liability insurance.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of Taubman Centers, Inc. is listed and traded on the New
York Stock Exchange (Symbol:TCO). As of March 23, 1999, the
53,045,285 outstanding shares of Common Stock were held by 693 holders of
record.
The following table presents the dividends declared and range of share
prices for each quarter of 1998 and 1997.
Market Quotations
-----------------------------
1998 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $13 11/16 $12 1/8 $0.235
June 30 14 3/8 12 3/4 0.235
September 30 14 3/4 12 1/4 0.235
December 31 14 3/16 12 5/16 0.24
Market Quotations
-----------------------------
1997 Quarter Ended High Low Dividends
------------------ ---- --- ---------
March 31 $15 $12 3/8 $ 0.23
June 30 13 5/8 12 5/8 0.23
September 30 13 11/16 12 1/2 0.23
December 31 13 7/16 11 5/8 0.235
16
During the fourth quarter of 1998, the Company offered and sold a total of
31,399,913 shares of Series B Non-Participating Convertible Preferred Stock (the
"Series B Stock") to the partners (other than the Company) in TRG, which is the
Company's subsidiary Operating Partnership, in an offering exempt from
registration under the Securities Act of 1933 (the "Securities Act"). Under the
Company's articles of incorporation, as amended on September 30, 1998, the
Company was required to offer each partner in the Operating Partnership (other
than the Company) the right to subscribe for Series B Stock on the basis of one
share of Series B Stock for each Unit of Partnership Interest in the Operating
Partnership owned by the subscribing partner. The aggregate offering price was
$38,400, which was equal to the Series B Stock's per share liquidation
preference of $0.001 multiplied by the number of shares sold. The Company sold
all of the offered shares. The Company offered and sold all shares directly and
did not pay any commissions or discounts.
Each share of Series B Stock is entitled to one vote. The Series B Stock
and the Company's Common Stock vote as a single class on all matters submitted
to a vote of the Company's shareholders. The Series B Stock is not entitled to
dividends or other distributions, except upon liquidation as indicated above.
The Series B Stock is convertible under certain circumstances into Common
Stock at the ratio of one share of Common Stock for each 14,000 shares of Series
B Stock (with any resulting fractional shares of Common Stock being redeemed for
cash). Generally, a partner desiring to sell (by exchange or otherwise) Units in
the Operating Partnership to the Company must surrender for conversion shares of
Series B Stock equal in number to the Units being sold. In addition, if a
transfer of Series B Stock results in the transferee holding more shares of
Series B Stock than is permitted under the Company's articles of incorporation,
then the shares of Series B Stock in excess of the permitted number will
automatically convert into Common Stock (or will be redeemed for cash, as
indicated above).
The offering of Series B Stock described above was exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act. Under
the Company's articles of incorporation, the Company may issue shares of Series
B Stock only to partners in the Operating Partnership. Offers were limited to
partners in the Operating Partnership, who constitute a limited number of
sophisticated investors (all of whom are "accredited investors," as defined in
Rule 501 under the Securities Act) fully familiar with the business and
operations of the Company, and did not involve any general solicitation or
advertising. Under the Company's articles of incorporation, resales of the
Series B Stock are permitted only if registered (or exempt from registration)
under the Securities Act, and each certificate evidencing Series B Stock carries
a restrictive legend.
17
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in conjunction with the financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this report.
Year Ended December 31
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands of dollars, except as noted)
STATEMENT OF OPERATIONS DATA:
Income before extraordinary items
from investment in TRG (1) 29,349 21,368 19,831 17,654
Rents, recoveries and other shopping
center revenues (1) 333,953
Income before extraordinary items 70,403 28,662 20,730 19,267 17,014
Extraordinary items (2) (50,774) (444) 5,836 (16,087)
Minority Interest (1) (6,009)
Net income 13,620 28,662 20,286 25,103 927
Series A preferred dividends (3) (16,600) (4,058)
Net income (loss) available to common
shareowners (2,980) 24,604 20,286 25,103 927
Income before extraordinary items per
common share - diluted (4) 0.32 0.48 0.47 0.44 0.38
Net income (loss) per common share -
diluted (4) (0.06) 0.48 0.46 0.57 0.02
Dividends per common share declared 0.945 0.925 0.89 0.88 0.88
Weighted average number of common
shares outstanding 52,223,399 50,737,333 44,444,833 44,249,617 44,589,709
Number of common shares outstanding
at end of period 52,995,904 50,759,657 50,720,358 44,134,913 44,570,913
Ownership percentage of TRG at end
of period (1) 62.79% 36.70% 36.68% 35.10% 35.10%
BALANCE SHEET DATA (1):
Investment in TRG 547,859 369,131 307,190 322,316
Real estate before accumulated depreciation 1,473,440
Total assets 1,480,863 556,824 378,527 315,076 333,316
Total debt 775,298
SUPPLEMENTAL INFORMATION (5):
Funds from Operations allocable to TCO (6) 61,131 53,137 44,104 40,798 38,989
Mall tenant sales (7) 2,332,726 3,086,259 2,827,245 2,739,393 2,561,555
Sales per square foot (7) 426 384 377 364 348
Number of shopping centers at end of period 16 25 21 19 20
Ending Mall GLA in thousands of square feet 7,038 10,850 9,250 8,996 9,088
Average occupancy 89.4% 87.6% 87.4% 88.0% 86.6%
Ending occupancy 90.2% 90.3% 88.0% 89.4% 89.3%
Leased space (8) 92.3% 92.3% 89.0% 90.6% 90.9%
Average base rent per square foot (9):
All mall tenants $41.93 $38.79 $ 37.90 $ 36.33 $34.72
Stores closing during year $44.27 $37.62 $ 33.39 $ 32.96 $30.46
Stores opening during year $47.92 $41.67 $ 42.39 $ 41.27 $41.02
- --------------------------
(1) On September 30, 1998 the Company obtained a majority and controlling
interest in The Taubman Realty Group Limited Partnership (TRG or the
Operating Partnership) as a result of the GMPT Exchange (see Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) - GMPT Exchange and Related Transactions). As a result of this
transaction, the Company's ownership of the Operating Partnership increased
to 62.8% and the Company began consolidating the Operating Partnership.
For 1998, the interest of the noncontrolling partners of the Operating
Partnership (the Minority Interest) is deducted to arrive at the results
allocable to the Company's shareowners. For years prior to 1998, amounts
reflect the Company's interest in the Operating Partnership under the
equity method.
(2) 1998 extraordinary charges include $49.8 million related to debt
extinguished in anticipation of the GMPT Exchange, primarily consisting of
prepayment premiums. In 1995, the Company recognized its $6.6 million share
of an extraordinary gain related to the disposition of Bellevue Center and
the related extinguishment of debt. Also, included as extraordinary items
in 1994 through 1998 are charges related to the extinguishment of other
debt, primarily consisting of prepayment premiums.
(3) In October 1997, the Company issued 8.3% Series A Preferred Stock on which
dividends are paid quarterly.
(4) Basic and diluted earnings per share amounts are equal, except for 1998,
for which basic income before extraordinary items per share was $0.33.
(5) Operating statistics for 1998 exclude centers transferred to GMPT as
part of the GMPT Exchange. See MD&A for 1997 operating statistics restated
to exclude the transferred centers.
18
(6) Funds from Operations is defined and discussed in MD&A - Liquidity and
Capital Resources-Funds from Operations. Funds from Operations does not
represent cash flow from operations, as defined by generally accepted
accounting principles, and should not be considered to be an alternative to
net income as a measure of operating performance or to cash flows as a
measure of liquidity.
(7) Based on reports of sales furnished by mall tenants.
(8) Leased space comprises both occupied space and space that is leased but not
yet occupied.
(9) Amounts include centers owned and open for at least five years.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
The following discussion should be read in conjunction with Selected Financial
Data and the Financial Statements of Taubman Centers, Inc. and the Notes
thereto.
General Background and Performance Measurement
The Company owns a managing general partner's interest in The Taubman Realty
Group Limited Partnership (Operating Partnership), through which the Company
conducts all of its operations. The Operating Partnership owns, develops,
acquires, and operates regional shopping centers nationally. The Consolidated
Businesses consist of shopping centers that are controlled by ownership or
contractual agreement, development projects for future regional shopping centers
and The Taubman Company Limited Partnership (the Manager). Shopping centers that
are not controlled and that are owned through joint ventures with third parties
(Unconsolidated Joint Ventures) are accounted for under the equity method.
The operations of the shopping centers are best understood by measuring their
performance as a whole, without regard to the Company's ownership interest.
Consequently, in addition to the discussion of the operations of the
Consolidated Businesses, the operations of the Unconsolidated Joint Ventures are
presented and discussed as a whole.
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine Consolidated Businesses (Briarwood, Columbus City Center,
The Falls, Hilltop, Lakeforest, Marley Station, Meadowood Mall, Stoneridge, and
The Mall at Tuttle Crossing) and one Unconsolidated Joint Venture (Woodfield))
and a share of the Operating Partnership's debt for all of the partnership units
owned by General Motors Pension Trusts (GMPT) (the GMPT Exchange - see Results
of Operations -- GMPT Exchange and Related Transactions). Performance statistics
presented below include these ten centers (transferred centers) through the
completion of the GMPT Exchange, except as noted. Because the Company's
portfolio changed significantly as a result of the GMPT Exchange, the results of
operations of the transferred centers have been separately classified within the
Consolidated Businesses and Unconsolidated Joint Ventures for purposes of
analyzing and understanding the historical results of the current portfolio.
Since the Company's interest in the Operating Partnership has been its sole
material asset throughout all periods presented, references in the following
discussion to "the Company" include the Operating Partnership, except where
intercompany transactions are discussed or as otherwise noted, even though the
Operating Partnership did not become a consolidated subsidiary until September
30, 1998.
Mall Tenant Sales and Center Revenues
Over the long term, the level of mall tenant sales is the single most important
determinant of revenues of the shopping centers because mall tenants provide
approximately 90% of these revenues and because mall tenant sales determine the
amount of rent, percentage rent, and recoverable expenses (together, total
occupancy costs) that mall tenants can afford to pay. However, levels of mall
tenant sales can be considerably more volatile in the short run than total
occupancy costs.
The Company believes that the ability of tenants to pay occupancy costs and
earn profits over long periods of time increases as sales per square foot
increase, whether through inflation or real growth in customer spending. Because
most mall tenants have certain fixed expenses, the occupancy costs that they can
afford to pay and still be profitable are a higher percentage of sales at higher
sales per square foot.
20
The following table summarizes occupancy costs, excluding utilities, for mall
tenants as a percentage of mall tenant sales.
Current Portfolio Historical Portfolio (1)
--------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Mall tenant sales(in thousands) $2,332,726 $1,965,905 $3,198,966 $3,086,259
Sales per square foot 426 410 408 384
Minimum rents 9.7% 10.0% 10.3% 10.1%
Percentage rents 0.3 0.3 0.3 0.3
Expense recoveries 4.1 4.2 4.5 4.4
--------- ---------- ---------- ----------
Mall tenant occupancy costs 14.1% 14.5% 15.1% 14.8%
========= ========== ========== ==========
(1) Includes transferred centers through the date of the GMPT Exchange.
Occupancy
Historically, average annual occupancy has been within a narrow band. In the
last ten years, average annual occupancy has ranged between 86.5% and 89.4%.
Mall tenant average occupancy, ending occupancy and leased space rates are as
follows:
Current Portfolio Historical Portfolio (1)
----------------- ------------------------
Mall Tenant Average Occupancy
1998 89.4% 89.0%
1997 88.0 87.6
Ending Occupancy
1998 90.2%
1997 90.7
Leased Space
1998 92.3%
1997 92.7
(1) Includes transferred centers through the date of the GMPT Exchange.
Rental Rates
As leases have expired in the shopping centers, the Company has generally been
able to rent the available space, either to the existing tenant or a new tenant,
at rental rates that are higher than those of the expired leases. In a period of
increasing sales, rents on new leases will tend to rise as tenants' expectations
of future growth become more optimistic. In periods of slower growth or
declining sales, rents on new leases will grow more slowly or will decline for
the opposite reason. However, Center revenues nevertheless increase as older
leases roll over or are terminated early and replaced with new leases negotiated
at current rental rates that are usually higher than the average rates for
existing leases. The following table contains certain information regarding per
square foot base rent at the shopping centers that have been owned and open for
five years.
Current Portfolio
-----------------
1998 1997
---- ----
Average Base Rent per square foot:
All mall tenants $41.93 $41.37
Stores closing during the year $44.27 $39.07
Stores opening during the year $47.92 $41.08
21
Seasonality
The regional shopping center industry is seasonal in nature, with mall tenant
sales highest in the fourth quarter due to the Christmas season, and with
lesser, though still significant, sales fluctuations associated with the Easter
holiday and back-to-school events. While minimum rents and recoveries are
generally not subject to seasonal factors, most leases are scheduled to expire
in the first quarter, and the majority of new stores open in the second half of
the year in anticipation of the Christmas selling season. Accordingly, revenues
and occupancy levels are generally highest in the fourth quarter. Because the
seasonality of sales contrasts with the generally fixed nature of minimum rents
and recoveries, mall tenant occupancy costs (the sum of minimum rents,
percentage rents and expense recoveries) relative to sales are considerably
higher in the first three quarters than they are in the fourth quarter.
22
Results of Operations
The following represent significant debt and equity transactions, new center
openings, acquisitions and expansions which affect the operating results
described under Comparison of Fiscal Year 1998 to Fiscal Year 1997.
GMPT Exchange and Related Transactions
On September 30, 1998, the Operating Partnership exchanged interests in 10
shopping centers (nine wholly owned and one Unconsolidated Joint Venture),
together with $990 million of debt, for all of GMPT's partnership units
(approximately 50 million units with a fair value of $675 million, based on the
average stock price of the Company's common shares of $13.50 for the two week
period prior to the closing), providing the Company with a majority and
controlling interest in the Operating Partnership. As a result of the GMPT
Exchange, the Company's general partnership interest in the Operating
Partnership increased to 62.8% of the approximately 84.3 million units of
partnership interest outstanding. The Operating Partnership will continue to
manage the centers exchanged under management agreements with GMPT that expire
December 31, 1999. The management agreements are cancelable with 90 days notice.
In anticipation of the GMPT Exchange, the Operating Partnership used the $1.2
billion proceeds from two bridge loans bearing interest at one month LIBOR plus
1.30% to extinguish $1.1 billion of debt, including substantially all of the
Operating Partnership's public unsecured debt, its outstanding commercial paper,
and borrowings on its existing line of credit. The remaining proceeds were used
primarily to pay prepayment premiums and transaction costs. An extraordinary
charge of approximately $49.8 million, consisting primarily of prepayment
premiums, was incurred in connection with the extinguishment of the debt. GMPT's
share of debt received in the exchange included the $902 million balance on the
first bridge loan, $86 million representing 50% of the debt on the Joint Venture
owned shopping center, and $1.6 million of assessment bond obligations. (See
Liquidity and Capital Resources below regarding the Operating Partnership's
beneficial interest in debt and its plans to refinance its bridge loan.)
Concurrently with the GMPT Exchange, the Operating Partnership committed to a
restructuring of its operations. A restructuring charge of approximately $10.7
million was incurred, consisting primarily of costs related to involuntary
termination of personnel. The Company expects to reduce its annual consolidated
general and administrative expense to approximately $19 million in 1999. This is
a forward-looking statement, and certain significant factors could cause the
actual reductions in general and administrative expense to differ materially,
including but not limited to: 1) actual payroll reductions achieved; 2) actual
results of negotiations; 3) use of outside consultants; and 4) changes in the
Company's owned or managed portfolio.
Other Debt and Equity Transactions
In January 1998, the Operating Partnership redeemed a partner's 6.1 million
units of partnership interest for approximately $77.7 million (including costs).
The redemption was funded through the use of an existing revolving credit
facility.
In October 1997, the Company used the $200 million public offering of eight
million shares of 8.3% Series A Cumulative Redeemable Preferred Stock to acquire
a preferred equity interest in the Operating Partnership. The Operating
Partnership used the net proceeds to pay down debt under existing revolving
credit and commercial paper facilities, which were used to fund the acquisition
of Regency Square in September 1997.
23
Openings, Expansions and Acquisitions
In November 1998, Great Lakes Crossing, an 80% owned enclosed value
super-regional mall, opened in Auburn Hills, Michigan. The center opened 95%
leased. In November 1997, Arizona Mills, a 37% owned enclosed value
super-regional shopping center located in Tempe, Arizona, opened 90% leased.
At Cherry Creek, a 132,000 square foot expansion opened in stages throughout
the fall of 1998. A 135,000 square foot expansion opened at Westfarms in August
1997. In addition, approximately 50,000 square feet of new mall stores opened at
Biltmore in 1997.
In September 1997, the Operating Partnership acquired Regency Square (Regency)
shopping center, located in Richmond, Virginia, for $123.9 million in cash. The
operating results of Regency have been reflected in the Company's results from
the acquisition date.
In December 1997, the Operating Partnership acquired The Falls shopping center
and the leasehold interest in The Mall at Tuttle Crossing, which opened in July
1997. These two centers were transferred to GMPT.
Memorial City Mall Lease
In November 1996, the Operating Partnership entered into an agreement to lease
Memorial City Mall (Memorial City), a 1.4 million square foot shopping center
located in Houston, Texas. The lease of this unencumbered property grants the
Operating Partnership the exclusive right to manage, lease and operate the
property. The Operating Partnership has the option to terminate the lease after
the third full lease year by paying $2 million to the lessor. The Operating
Partnership is using this option period to evaluate the redevelopment
opportunities of the center. As a development project, Memorial City has been
excluded from all operating statistics in this report, and Memorial City's
results of operations have been presented as a net line item in the following
tabular comparisons of results of operations. Memorial City is expected to have
an immaterial effect on EBITDA and net income during the option period.
Presentation of Operating Results
In order to facilitate the analysis of the ongoing business for periods prior
to the GMPT Exchange, the following tables contain the combined operating
results of the Company and the Operating Partnership and also present separately
the revenues and expenses, other than interest, depreciation and amortization,
of the transferred centers. The following discussions include analysis of the
Consolidated Businesses and the Unconsolidated Joint Ventures, with the interest
of the noncontrolling partners of the Operating Partnership (the Minority
Interest) deducted to arrive at the results allocable to the Company's
shareowners. Because the Operating Partnership's net equity is less than zero,
for periods subsequent to the GMPT Exchange the income allocated to the Minority
Interest is equal to the Minority Interest's share of distributions. The
Operating Partnership's net equity is less than zero due to accumulated
distributions in excess of net income and not as a result of operating losses.
Distributions to partners are usually greater than net income because net income
includes non-cash charges for depreciation and amortization. The Company's
average ownership percentage of the Operating Partnership was 43.2% for 1998
(including averages of 38.96% for the period through the GMPT Exchange, and
62.77% thereafter) and 36.7% for 1997.
24
Comparison of Fiscal Year 1998 to Fiscal Year 1997
The following table sets forth operating results for 1998 and 1997, showing
the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
1998 1997
--------------------------------- ----------------------------------
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES(1) VENTURES (2) TOTAL BUSINESSES(1) VENTURES (2) TOTAL
--------------------------------- ----------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 99.8 149.3 249.1 86.4 121.1 207.5
Percentage rents 5.2 3.7 8.9 5.0 2.6 7.5
Expense recoveries 57.9 79.2 137.1 51.6 64.4 115.9
Management, leasing and
development 12.3 12.3 8.5 8.5
Other 17.4 6.8 24.2 11.4 8.0 19.4
Revenues - transferred centers 129.7 47.2 177.0 138.9 62.7 201.6
----- ----- ----- ----- ----- -----
Total revenues 322.3 286.3 608.6 301.6 258.8 560.4
OPERATING COSTS:
Recoverable expenses 51.4 66.0 117.4 45.6 53.7 99.2
Other operating 25.7 11.7 37.4 16.8 10.7 27.5
Management, leasing and
development 8.0 8.0 4.4 4.4
Expenses other than interest,
depreciation and amortization
- transferred centers 44.3 17.7 62.0 47.7 23.9 71.5
General and administrative 24.6 24.6 26.7 26.7
Interest expense 75.8 69.7 145.5 73.6 54.5 128.2
Depreciation and amortization 57.0 31.5 88.5 49.2 23.7 72.8
---- ---- ----- ----- ----- -----
Total operating costs 286.8 196.7 483.5 264.0 166.4 430.4
Net results of Memorial City (1) (0.8) (0.8) 0.0 0.0
---- ----- ----- ----- ----- -----
34.7 89.7 124.4 37.6 92.4 130.0
===== ===== ===== =====
Equity in income before extraordinary item
of Unconsolidated Joint Ventures 46.4 48.8
Restructuring loss (10.7)
----- ----
Income before extraordinary items
and minority interest 70.4 86.4
Extraordinary items (50.8)
Minority interest (6.0) (57.8)
---- -----
Net income 13.6 28.7
Series A preferred dividends (16.6) (4.1)
----- ----
Net income (loss) available to common
shareowners (3.0) 24.6
==== ====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 168.3 104.3 272.6 161.4 94.4 255.7
Beneficial Interest Expense (75.8) (37.1) (112.9) (73.6) (29.3) (102.9)
Non-real estate depreciation (2.3) (2.3) (2.1) (2.1)
Preferred dividends (16.6) (16.6) (4.1) (4.1)
----- ------ ------ ----- ----- -----
Funds from Operations contribution 73.7 67.1 140.8 81.6 65.1 146.7
===== ====== ====== ===== ===== =====
(1) The results of operations of Memorial City are presented net in this table.
The Company expects that Memorial City's net operating income will
approximate the ground rent payable under the lease for the immediate future.
(2) With the exception of the Supplemental Information, amounts represent 100% of
the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits.
(3) EBITDA represents earnings before interest and depreciation and amortization.
Funds from Operations is defined and discussed in Liquidity and Capital
Resources.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1997 amounts have been reclassified to conform to 1998 classifications.
25
Consolidated Businesses
- -----------------------
Total revenues for 1998 were $322.3 million, a $20.7 million, or 6.9%,
increase over 1997. Minimum rents increased $13.4 million, of which $8.9 million
was due to the opening of Great Lakes Crossing and the acquisition of Regency.
Minimum rents also increased because of the expansion at Biltmore and tenant
rollovers. Expense recoveries increased primarily due to Great Lakes Crossing
and Regency. Revenues from management, leasing and development services
increased primarily due to the new management agreements with GMPT. Other
revenue increased primarily due to an increase in gains on sales of peripheral
land and lease cancellation revenue.
Total operating costs increased $22.8 million, or 8.6%, to $286.8 million.
Recoverable and other operating expenses increased due to Great Lakes Crossing
and Regency. Other operating expense also increased due to professional fees,
management expense and an increase in the charge to operations for costs of
potentially unsuccessful pre-development activities. General and administrative
expense decreased $2.1 million between periods due to decreases in payroll and
reduced employee relocation and recruiter costs, partially offset by increases
attributable to the phase-in of the long term compensation plan.
Interest expense increased due to an increase in debt used to finance Tuttle
Crossing, the acquisition of The Falls and the redemption of a partner's
interest in the Operating Partnership, partially offset by a decrease in debt
paid down with the proceeds of the October 1997 and April 1998 equity offerings
and the assumption of debt by GMPT as part of the GMPT Exchange. Depreciation
and amortization expense increased due to Great Lakes Crossing, Tuttle Crossing,
Regency and The Falls, partially offset by the decrease in expense due to the
transferred centers only being included in 1998 through the date of the GMPT
Exchange.
Revenues and expenses other than interest and depreciation for the transferred
centers for 1998 represent operations through the date of the GMPT Exchange. The
resulting decreases from 1997 were partially offset by increases in revenues and
expenses due to the acquisition of The Falls and the opening of Tuttle Crossing.
During 1998, a $10.7 million loss on the restructuring was recognized, which
primarily represented the cost of certain involuntary terminations of personnel.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for 1998 were $286.3 million, a $27.5 million, or 10.6%,
increase from 1997. The increase in minimum rents and expense recoveries was
primarily due to Arizona Mills and the expansions at Westfarms and Cherry Creek.
Minimum rents also increased due to tenant rollovers. Other revenue decreased by
$1.2 million primarily due to a decrease in gains on peripheral land sales.
Total operating costs increased by $30.3 million, or 18.2%, to $196.7 million
for 1998. Recoverable and depreciation and amortization expenses increased
primarily due to Arizona Mills and the expansions. Other operating expense
increased primarily due to Arizona Mills. Interest expense increased primarily
due to an increase in debt used to finance Arizona Mills and the Westfarms
expansion, and a decrease in capitalized interest related to these two projects.
Revenues and expenses other than interest and depreciation for the transferred
centers for 1998 represent the operations of Woodfield through the date of the
GMPT Exchange, resulting in decreases from the prior year.
As a result of the foregoing, income before extraordinary item of the
Unconsolidated Joint Ventures decreased by $2.7 million, or 2.9%, to $89.7
million. The Company's equity in income before extraordinary item of the
Unconsolidated Joint Ventures was $46.4 million, a 4.9% decrease from the
comparable period in 1997.
26
Net Income
- ----------
As a result of the foregoing, the Company's income before extraordinary items
and Minority Interest decreased to $70.4 million for 1998. The Minority Interest
in the Company's results decreased to $6.0 million, from $57.8 million,
reflecting the Company's increased ownership in the Operating Partnership due to
the GMPT Exchange and other equity transactions, as well as the Minority
Interest's $30.7 million share of the 1998 extraordinary items.
Also, the Company recognized its $20.1 million share of $50.8 million in
extraordinary charges related to the extinguishment of debt, including debt
extinguished in anticipation of the GMPT Exchange, primarily consisting of
prepayment premiums. After payment of $16.6 million in Series A preferred
dividends, net income (loss) available to common shareowners for 1998 was $(3.0)
million compared to $24.6 million for 1997.
Comparison of Fiscal Year 1997 to Fiscal Year 1996
Discussion of significant debt and equity transactions, acquisitions, and
openings occurring in 1997 is included in the Comparison of Fiscal Year 1998 to
Fiscal Year 1997. Significant 1996 items are described below.
In December 1996, the Company acquired an additional interest in the Operating
Partnership with the proceeds from the Company's December 1996 offering of
common stock. The Operating Partnership used the net proceeds to pay down short
term floating rate debt and to acquire La Cumbre Plaza. Additionally in 1996,
the Operating Partnership issued units of partnership interest in connection
with the acquisition of the 75% remaining interest in Fairlane Town Center.
These units were redeemed by the Operating Partnership in January 1998. Prior to
the acquisition date, the Company's interest in Fairlane (through the Operating
Partnership) was accounted for under the equity method as an Unconsolidated
Joint Venture. Additionally, in June 1996, the Operating Partnership acquired a
100% leasehold interest in Paseo Nuevo, located in Santa Barbara, California,
for $37 million in cash.
The Company's average ownership percentage of the Operating Partnership was
36.7% for 1997 and 34.5% for 1996.
27
Comparison of Fiscal Year 1997 to Fiscal Year 1996
The following table sets forth operating results showing the results of the
Consolidated Businesses and Unconsolidated Joint Ventures:
1997 1996
--------------------------------- -----------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
CONSOLIDATED JOINT CONSOLIDATED JOINT
BUSINESSES (1) VENTURES (2) TOTAL BUSINESSES (1) VENTURES (2) TOTAL
--------------------------------- -----------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 86.4 121.1 207.5 69.4 123.4 192.8
Percentage rents 5.0 2.6 7.5 3.5 3.5 6.9
Expense recoveries 51.6 64.4 115.9 41.4 69.0 110.4
Management, leasing and
development 8.5 8.5 8.5 8.5
Other 11.4 8.0 19.4 9.2 7.6 16.8
Revenues - transferred centers 138.9 62.7 201.6 130.1 61.8 191.9
----- ----- ----- ----- ----- -----
Total revenues 301.6 258.8 560.4 262.2 265.3 527.5
OPERATING COSTS:
Recoverable expenses 45.6 53.7 99.2 36.0 58.3 94.3
Other operating 16.8 10.7 27.5 14.8 11.3 26.1
Management, leasing and
development 4.4 4.4 4.7 4.7
Expenses other than interest,
depreciation and amortization
- transferred centers 47.7 23.9 71.5 46.2 25.1 71.2
General and administrative 26.7 26.7 22.7 22.7
Interest expense 73.6 54.5 128.2 70.5 53.5 124.0
Depreciation and amortization 49.2 23.7 72.8 40.1 22.9 63.0
----- ----- ----- ----- ----- -----
Total operating costs 264.0 166.4 430.4 235.0 171.1 406.0
Net results of Memorial City (1) 0.0 0.0 0.2 0.2
----- ----- ----- ----- ----- -----
37.6 92.4 130.0 27.3 94.3 121.6
===== ===== ===== =====
Equity in income before extraordinary
item of Unconsolidated Joint
Ventures 48.8 48.6
---- ----
Income before extraordinary item and
minority interest 86.4 76.0
Extraordinary item (1.3)
Minority Interest (57.8) (54.3)
----- -----
Net income 28.7 20.3
Series A preferred dividends (4.1)
---- -----
Net income available to common
shareowners 24.6 20.3
===== =====
SUPPLEMENTAL INFORMATION (3):
EBITDA contribution 161.4 94.4 255.7 138.6 91.2 229.8
Beneficial Interest Expense (73.6) (29.3) (102.9) (70.5) (27.7) (98.2)
Non-real estate depreciation (2.1) (2.1) (1.9) (1.9)
Preferred dividends (4.1) (4.1)
----- ----- ----- ----- ----- -----
Funds from Operations contribution 81.6 65.1 146.7 66.2 63.5 129.7
===== ===== ===== ===== ===== =====
(1) The results of operations of Memorial City are presented net in this table.
The Company expects that Memorial City's net operating income will
approximate the ground rent payable under the lease for the immediate future.
(2) With the exception of the Supplemental Information, amounts represent 100%
of the Unconsolidated Joint Ventures. Amounts are net of intercompany
profits.
(3) EBITDA represents earnings before interest and depreciation and amortization.
Funds from Operations is defined and discussed in Liquidity and Capital
Resources.
(4) Amounts in this table may not add due to rounding.
(5) Certain 1997 and 1996 amounts have been reclassified to conform to 1998
classifications.
28
Consolidated Businesses
- -----------------------
Total revenues for 1997 were $301.6 million, a $39.4 million or 15.0% increase
over 1996. Minimum rents increased $17.0 million, of which $15.1 million was
caused by the 1997 and 1996 acquisitions. The results of Fairlane have been
consolidated in the Operating Partnership's results subsequent to the
acquisition date in July 1996 (prior to that date Fairlane was accounted for
under the equity method as an Unconsolidated Joint Venture). Minimum rents also
increased due to the expansion at Biltmore and tenant rollovers. Percentage rent
and expense recoveries increased primarily due to the acquisitions. Other
revenue increased $2.2 million primarily due to an insurance recovery, a
litigation settlement, and an increase in lease cancellation revenue. The
transferred centers' total revenues increased primarily due to the opening of
Tuttle Crossing.
Total operating costs increased $29.0 million, or 12.3%. Recoverable and
depreciation and amortization expenses increased primarily due to the
acquisitions. Other operating expenses increased primarily due to the
acquisitions, offset by a decrease in the charge to operations for costs of
potentially unsuccessful pre-development activities. General and administrative
expense increased by $4.0 million primarily due to increases in compensation
(including the continuing phase-in of the long-term compensation plan),
recruiter fees and relocation charges, travel, and training. Interest expense
increased due to an increase in debt used to finance Tuttle Crossing and capital
expenditures at other Consolidated Businesses, partially offset by an increase
in capitalized interest. The acquisitions were initially funded with debt which
was subsequently paid down with the proceeds from the December 1996 and the
October 1997 equity issuances.
Unconsolidated Joint Ventures
- -----------------------------
Total revenues for 1997 were $258.8 million, a $6.5 million, or 2.5%, decrease
from 1996, representing a $15.0 million decrease caused by the change of
Fairlane from an Unconsolidated Joint Venture to a Consolidated Business, offset
by increases due to the openings of Arizona Mills and the expansion at
Westfarms, in addition to increases at other centers. The decrease in minimum
rents was primarily due to Fairlane, offset by Arizona Mills, Westfarms and
increases due to tenant rollovers at other centers. The decrease in expense
recoveries was primarily due to Fairlane, offset by Arizona Mills. Other revenue
increased by $0.4 million primarily due to gains on peripheral land sales,
offset by a decrease in lease cancellation revenue and interest income.
Total operating costs decreased by $4.7 million, or 2.7%, to $166.4 million
for 1997 including a $10.1 million decrease due to Fairlane. Recoverable
expenses decreased $4.6 million primarily due to Fairlane, offset by increases
due to Arizona Mills. Other operating costs decreased primarily due to Fairlane
and a decrease in bad debt expense. Additionally, included in 1996 other
operating expense was a nonrecurring $0.5 million payment to an anchor at one of
the centers. Interest expense increased $1.0 million primarily due to an
increase in debt used to finance Arizona Mills and the Westfarms expansion,
partially offset by a decrease in debt related to Fairlane. Operating costs as
presented in the preceding table differ from the amounts shown in the combined,
summarized financial statements of the Unconsolidated Joint Ventures by the
amount of intercompany profit.
As a result of the foregoing, net income of the Unconsolidated Joint Ventures
decreased by $1.9 million, or 2.0%, to $92.4 million. The Company's equity in
net income of the Unconsolidated Joint Ventures was $48.8 million, a 0.4%
increase from 1996.
Net Income
- ----------
As a result of the foregoing, the Company's income before extraordinary item
and minority interest increased by $10.4 million, or 13.7%, to $86.4 million for
1997. In 1996, the Company recognized a $1.3 million extraordinary charge
related to the prepayment of Fairlane's debt. After payment of $4.1 million in
Series A preferred dividends, net income available to common shareowners for
1997 was $24.6 million, compared to $20.3 million in 1996.
29
Liquidity and Capital Resources
On September 30, 1998, the Company obtained a majority and controlling
interest in the Operating Partnership as a result of the GMPT Exchange (see
Results of Operations -- GMPT Exchange and Related Transactions above).
Consequently, the Company has consolidated the accounts of the Operating
Partnership in the Company's financial statements for the year ended December
31,1998. For prior periods, the Company accounted for its investment in the
Operating Partnership under the equity method. In the following discussion,
references to beneficial interest represent the Operating Partnership's share of
the results of its consolidated and unconsolidated businesses. The Company does
not have, and has not had, any parent company indebtedness; all debt discussed
represents obligations of the Operating Partnership.
The Company believes that its net cash provided by operating activities,
distributions from the Joint Ventures, the unutilized portion of its credit
facilities, and its ability to access the credit markets, assure adequate
liquidity to conduct its operations in accordance with its dividend and
financing policies.
As of December 31, 1998, the Company had a consolidated cash balance of $19.0
million. Additionally, the Company has a $200 million line of credit. The line
had no borrowings as of December 31, 1998 and expires in September 2001. The
Company also has available an unsecured bank line of credit of up to $40
million. The line had $15.5 million of borrowings as of December 31, 1998 and
expires in August 1999.
Equity Transactions
In April 1998, the Company sold approximately two million shares of its common
stock at $13.1875 per share, before deducting the underwriting commission and
expenses of the offering, under the Company's shelf registration statement. The
Company used the proceeds to acquire an additional equity interest in the
Operating Partnership. The Operating Partnership paid all costs of the offering.
The Operating Partnership used the net proceeds of approximately $25 million for
general partnership purposes.
In October 1997, the Company issued eight million shares of 8.3% Series A
Preferred Stock under its equity shelf registration statement. Dividends are
payable in arrears on or before the last day of each calendar quarter. The
Company used the $200 million proceeds to acquire a Series A Preferred Equity
interest in the Operating Partnership that entitles the Company to distributions
(in the form of guaranteed payments) in amounts equal to the dividends payable
on the Company's Series A Preferred Stock. The Operating Partnership used the
net proceeds to pay down floating rate debt.
Debt
In anticipation of the GMPT Exchange, the Operating Partnership used the $1.2
billion proceeds from two bridge loans bearing interest at one-month LIBOR plus
1.30% to extinguish approximately $1.1 billion of debt, including substantially
all of the Operating Partnership's public unsecured debt, its outstanding
commercial paper, and borrowings on its existing lines of credit. The remaining
proceeds were used primarily to pay prepayment premiums and transaction costs.
The balance of the first bridge loan of $902 million was assumed by GMPT at
the time of the GMPT Exchange. The second loan had a balance of $340 million at
December 31, 1998 and expires in June 1999. The Company expects to refinance the
balance on the bridge loan prior to the expiration date (see below).
Proceeds from other borrowings in 1998 were used for the $77.7 million
redemption of 6.1 million units of partnership interest in January 1998, and to
fund capital expenditures for the Consolidated Businesses and contributions to
Unconsolidated Joint Ventures for construction costs.
30
At December 31, 1998, the Operating Partnership's debt and its beneficial
interest in the debt of its Consolidated and Unconsolidated Joint Ventures
totaled $1,186.2 million. As shown in the following table, $190.8 million of
this debt was floating rate debt that remained unhedged at December 31, 1998.
Interest rates shown do not include amortization of debt issuance costs and
interest rate hedging costs. These items are reported as interest expense in the
results of operations. In the aggregate, these costs added 0.47% to the
effective rate of interest on beneficial interest in debt at December 31, 1998.
Included in beneficial interest in debt is debt used to fund development and
expansion costs. Beneficial interest in assets on which interest is being
capitalized totaled $223.8 million as of December 31, 1998. Beneficial interest
in capitalized interest was $17.6 million for the year ended December 31, 1998.
Beneficial Interest in Debt
-----------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(In millions Rate at Cap of Rate at
of dollars) 12/31/98 Rate Resets 12/31/98
------------ -------- ---- ------ --------
Total beneficial interest in fixed rate debt 408.6 8.01%(1)
Floating rate debt hedged via interest rate caps:
Through May 1999 200.0 6.71 (1) 6.00 Monthly 5.06
Through July 1999 65.0 6.37 7.00 Monthly 5.06
Through December 1999 200.0 6.71 (1) 7.00 Monthly 5.06
Through October 2001 25.0 5.99 8.55 Monthly 5.06
Through January 2002 53.4 6.86 (1) 9.50 Monthly 5.06
Through July 2002 43.4 6.95 6.50 Monthly 5.06
Other floating rate debt 190.8 6.71 (1)
-----
Total beneficial interest in debt 1,186.2 7.14 (1)
=======
(1)Denotes weighted average interest rate.
Certain loan agreements contain various restrictive covenants including
limitations on net worth, minimum debt service and fixed charges coverage
ratios, a maximum payout ratio on distributions, and a minimum debt yield ratio,
the latter being the most restrictive. The Company is in compliance with all of
such covenants.
In February 1999, an application was completed for a secured, ten-year $270
million financing with an all-in rate of approximately 6.9% on The Mall at Short
Hills. The financing is expected to close by the end of the first quarter of
1999 and the proceeds will be used to pay down the bridge loan, which matures on
June 21, 1999. The bridge loan has a balance of $340 million and the Company is
working on refinancing the remaining balance. The Company expects to obtain a
secured financing on an additional center. In addition, there will be
availability under existing lines of credit to repay the remaining balance if
the additional financing is delayed past the end of the second quarter.
Sensitivity Analysis
The Company has exposure to interest rate risk on its debt obligations and
interest rate instruments. Based on the Operating Partnership's beneficial
interest in debt and interest rates in effect at December 31, 1998, a one
percent increase in interest rates would decrease earnings and cash flows by
approximately $5.2 million. A one percent decrease in interest rates would
increase earnings and cash flows by approximately $6.0 million. Based on the
Company's consolidated debt and interest rates in effect at December 31, 1998, a
one percent increase or decrease in interest rates would decrease or increase
the fair value of debt by approximately $7 million.
31
Funds from Operations
A principal factor that the Company considers in determining dividends to
shareowners is Funds from Operations, which is defined as income before
extraordinary and unusual items, real estate depreciation and amortization, and
the allocation to the minority interest in the Operating Partnership, less
preferred dividends.
Funds from Operations does not represent cash flows from operations, as
defined by generally accepted accounting principles, and should not be
considered to be an alternative to net income as an indicator of operating
performance or to cash flows from operations as a measure of liquidity. However,
the National Association of Real Estate Investment Trusts suggests that Funds
from Operations is a useful supplemental measure of operating performance for
REITs.
Reconciliation of Net Income to Funds from Operations
Year Ended
December 31, 1998
------------------------
(in millions of dollars)
Income before extraordinary items and
minority interest (1) 70.4
Restructuring charge 10.7
Depreciation and Amortization (2) 57.4
Share of Unconsolidated Joint Ventures'
depreciation and amortization (3) 20.7
Other income/expenses, net 0.5
Non-real estate depreciation (2.3)
Preferred dividends (16.6)
-----
Funds from Operations 140.8
=====
Funds from Operations allocable to the Company 61.1
=====
(1) Includes gains on peripheral land sales of $6.0 million for the year ended
December 31, 1998.
(2) Includes $2.7 million of mall tenant allowance
amortization.
(3) Includes $1.3 million of mall tenant allowance amortization.
Dividends
The Company pays regular quarterly dividends to its common and Series A
preferred shareowners. Dividends to its common shareowners are at the discretion
of the Board of Directors and depend on the cash available to the Company, its
financial condition, capital and other requirements, and such other factors as
the Board of Directors deems relevant. Preferred dividends on the Series A Stock
accrue regardless of whether earnings, cash availability, or contractual
obligations were to prohibit the current payment of dividends.
On December 10, 1998, the Company declared a quarterly dividend of $0.24 per
common share payable January 20, 1999 to shareowners of record on December 31,
1998. The Board of Directors also declared a quarterly dividend of $0.51875 per
share on the Company's 8.3% Series A Preferred Stock, paid December 31, 1998 to
shareowners of record on December 21, 1998.
32
Common dividends declared totaled $0.945 per common share in 1998, of which
$0.854 represented return of capital and $0.091 represented ordinary income,
compared to dividends declared in 1997 of $0.925 per common share, of which
$0.324 represented return of capital and $0.601 represented ordinary income. The
tax status of total 1999 common dividends declared and to be declared, assuming
continuation of a $0.24 per common share quarterly dividend, is estimated to be
approximately 50% return of capital, and approximately 50% of ordinary income.
Series A preferred dividends declared were $2.075 and $0.50722 per preferred
share in 1998 and 1997, respectively, all of which represented ordinary income.
The tax status of total 1999 dividends to be paid on Series A Preferred Stock is
estimated to be 100% ordinary income. These are forward-looking statements and
certain significant factors could cause the actual results to differ materially,
including: 1) the amount of dividends declared; 2) changes in the Company's
share of anticipated taxable income of the Operating Partnership due to the
actual results of the Operating Partnership; 3) changes in the number of the
Company's outstanding shares; 4) property acquisitions or dispositions; 5)
financing transactions, including refinancing of existing debt; and 6) changes
in the Internal Revenue Code or its application.
The annual determination of the Company's common dividends is based on
anticipated Funds from Operations available after preferred dividends, as well
as financing considerations and other appropriate factors. Further, the Company
has decided that the growth in common dividends will be less than the growth in
Funds from Operations for the immediate future.
Any inability of the Operating Partnership or its Joint Ventures to secure
financing as required to fund maturing debts, capital expenditures and changes
in working capital, including development activities and expansions, may require
the utilization of cash to satisfy such obligations, thereby possibly reducing
distributions to partners of the Operating Partnership and funds available to
the Company for the payment of dividends.
Capital Spending
Capital spending for routine maintenance of the shopping centers is generally
recovered from tenants. Capital spending not recovered from tenants is
summarized in the following tables:
1998
---------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
---------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion:
Existing centers 27.0 34.5 43.9
New centers 279.3 4.5 214.6
Pre-construction development activities,
net of charge to operations 33.1 33.1
Mall tenant allowances 8.2 7.4 12.3
Corporate office improvements and 3.4 3.4
equipment
Other 0.3 2.2 1.3
----- ----- -----
Total 351.3 48.6 308.6
===== ===== =====
(1)Costs are net of intercompany profits.
(2)Includes the Operating Partnership's share of construction costs for Great
Lakes Crossing (an 80% owned consolidated joint venture), MacArthur Center (a
70% owned consolidated joint venture), The Mall at Wellington Green (a 90%
owned consolidated joint venture), and International Plaza (a 50.1% owned
consolidated joint venture).
33
1997
---------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
---------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion:
Existing centers 12.1 52.8 46.5
New centers 110.8 134.3 140.7
Pre-construction development activities,
net of charge to operations 11.5 11.5
Mall tenant allowances 5.3 4.0 7.5
Corporate office improvements and equipment 2.9 2.9
Other 0.8 0.5 1.1
----- ----- -----
Total 143.4 191.6 210.2
===== ===== =====
(1)Costs are net of intercompany profits.
(2)Includes the Operating Partnership's share of construction costs for Great
Lakes Crossing (an 80% owned consolidated joint venture) and MacArthur Center
(a 70% owned consolidated joint venture).
The Operating Partnership's share of mall tenant allowances per square foot
leased during the year, excluding expansion space and new developments, was
$10.86 ($11.80 excluding the transferred centers) in 1998, and $8.34 in 1997. In
addition, the Operating Partnership's share of capitalized leasing costs in
1998, excluding new developments, was $11.4 million, or $8.96 per square foot
leased ($7.0 million, or $7.95 per square foot, excluding the transferred
centers), and $10.9 million or $10.72 per square foot leased during the year in
1997.
MacArthur Center, a new center under construction in Norfolk, Virginia, opened
in March 1999. The 930,000 thousand square foot center is anchored by Nordstrom
and Dillard's. This Center is owned by a joint venture in which the Operating
Partnership has a 70% controlling interest and is projected to cost
approximately $157 million.
International Plaza, a new 1.3 million square foot center under construction
in Tampa, Florida, will be anchored by Nordstrom, Lord & Taylor, Dillard's and
Neiman Marcus. This center will be owned by a joint venture in which the
Operating Partnership will have a controlling 50.1% interest. In 1999, the
Company held ground-breaking ceremonies for The Shops at Willow Bend, a new 1.5
million square foot center in Plano, Texas. Anchors will be Neiman Marcus, Saks
Fifth Avenue, Lord & Taylor, Foley's and Dillard's. The Mall at Wellington
Green, a 1.3 million square foot center under construction in West Palm Beach
County, Florida, will be anchored by Lord & Taylor, Burdine's, Dillard's and
JCPenney. The center will be owned by a joint venture in which the Operating
Partnership has a 90% controlling interest. All three of these centers are
expected to open in 2001 and will have an aggregate cost to the Operating
Partnership of over $500 million.
In 1996, the Operating Partnership entered into an agreement to lease Memorial
City Mall, a 1.4 million square foot shopping center located in Houston, Texas.
Memorial City is anchored by Sears, Foley's, Montgomery Ward and Mervyn's. In
November 1999, the Operating Partnership has the option to terminate the lease
by paying $2 million to the lessor. The Operating Partnership is using this
option period to evaluate the redevelopment opportunities of the center. Under
the terms of the lease, the Operating Partnership has agreed to invest a minimum
of $3 million during the three year option period. If the redevelopment
proceeds, the Operating Partnership is required to invest an additional $22
million in property expenditures not recoverable from tenants during the first
10 years of the lease term.
The Operating Partnership and The Mills Corporation have formed an alliance to
develop value super-regional projects in major metropolitan markets. The
ten-year agreement calls for the two companies to jointly develop and own at
least seven of these centers, each representing approximately $200 million of
capital investment. A number of locations across the nation are targeted for
future initiatives.
34
The following table summarizes planned capital spending, which is not
recovered from tenants and assumes no acquisitions during 1999:
1999
-------------------------------------------------------------
Beneficial Interest in
Unconsolidated Consolidated Businesses
Consolidated Joint and Unconsolidated
Businesses Ventures (1) Joint Ventures (1)(2)
-------------------------------------------------------------
(in millions of dollars)
Development, renovation, and expansion 223.4(3) 25.4 190.0
Mall tenant allowances 6.1 9.8 11.1
Pre-construction development and other 21.5 4.0 23.5
----- ---- -----
Total 251.0 39.2 224.6
===== ==== =====
(1)Costs are net of intercompany profits.
(2)Includes the Operating Partnership's share of construction costs for Great
Lakes Crossing (an 80% owned consolidated joint venture), MacArthur Center (a
70% owned consolidated joint venture), The Mall at Wellington Green (a 90%
owned consolidated joint venture), and International Plaza ( a 50.1% owned
consolidated joint venture).
(3)Includes costs related to MacArthur Center, Great Lakes Crossing, The Shops
at Willow Bend, The Mall at Wellington Green and International Plaza.
The Operating Partnership's share of costs for development projects scheduled
to be completed in 2001 is anticipated to be as much as $185 million and $165
million in 2000 and 2001, respectively. Estimates of future capital spending
include only projects approved by the Company's Board of Directors and,
consequently, estimates will change as new projects are approved. Estimates
regarding capital expenditures presented above are forward-looking statements
and certain significant factors could cause the actual results to differ
materially, including but not limited to: 1) actual results of negotiations with
anchors, tenants and contractors; 2) changes in the scope and number of
projects; 3) cost overruns; 4) timing of expenditures; 5) financing
considerations; and 6) actual time to complete projects.
The Company expects to fund the development of new centers primarily with
proceeds from construction facilities. Other potential sources of capital
include equity offerings, joint venture partner contributions and borrowings
under other credit facilities.
Year 2000 Matters
The approach of the calendar year 2000 (Year 2000) presents issues for many
financial, information, and operational systems that may not properly recognize
the Year 2000. The Company has developed a detailed plan to address the risks
posed by the Year 2000 issue, covering affected application and infrastructure
systems. Affected systems include both informational (such as accounting and
payroll) and operational (such as elevators, security and lighting). The
Company's plan also addresses the effect of third parties with which it conducts
business, including tenants, vendors, contractors, creditors, and others. The
Company has completed the assessment, inventory and planning phases of its plan
and has determined that the majority of the Company's internal systems and all
of its mission critical systems are already Year 2000 compliant. The Company has
requested information and has obtained commitments from its national tenants and
the majority of its critical vendors and suppliers, and is continuing to develop
alternative solutions to minimize the impact on the Company in the event they do
not meet their Year 2000 commitments.
The Company expects to remediate any remaining issues encountered with
application and infrastructure systems through repair and/or replacement, and
plans to perform a full system test by the end of the first quarter. The
estimated costs of addressing the Year 2000 issue were not material to 1998 and
are not expected to be material to 1999 operations. The Company will also
continue monitoring the progress of material third parties' responses to the
Year 2000 issue. The Company believes that its most likely exposure will be the
failure of third parties in comprehensively addressing the issue. For example,
failure of utility companies to meet their commitments might result in temporary
business interruption at centers. The Company is continuing to develop
contingency plans in response to such exposure, as appropriate. Failure of third
parties with which the Company conducts business to respond successfully to the
Year 2000 issue may have a material adverse effect on the Company.
35
Cash Tender Agreement
A. Alfred Taubman has the annual right to tender to the Company units of
partnership interest in the Operating Partnership (provided that the aggregate
value is at least $50 million) and cause the Company to purchase the tendered
interests at a purchase price based on a market valuation of the Company on the
trading date immediately preceding the date of the tender (the Cash Tender
Agreement). At A. Alfred Taubman's election, his family, and Robert C. Larson
and his family may participate in tenders. The Company will have the option to
pay for these interests from available cash, borrowed funds, or from the
proceeds of an offering of the Company's common stock. Generally, the Company
expects to finance these purchases through the sale of new shares of its stock.
The tendering partner will bear all market risk if the market price at closing
is less than the purchase price and will bear the costs of sale. Any proceeds of
the offering in excess of the purchase price will be for the sole benefit of the
Company.
Based on a market value at December 31, 1998 of $13.75 per common share, the
aggregate value of interests in the Operating Partnership that may be tendered
under the Cash Tender Agreement was approximately $332 million. The purchase of
these interests at December 31, 1998 would have resulted in the Company owning
an additional 29% interest in the Operating Partnership.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivatives and whether it qualifies for hedge accounting. This Statement is
not expected to have a material impact on the Company's consolidated financial
statements. This Statement is effective for fiscal years beginning after June
15, 1999.
36
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is included in this report at Item 7
under the caption "Liquidity and Capital Resources".
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of Taubman Centers, Inc. and the Independent
Auditors' Report thereon are filed pursuant to this Item 8 and are included in
this report at Item 14.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III*
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference to
the material appearing in the Company's definitive proxy statement for the
annual meeting of shareholders to be held in 1999 (the "Proxy Statement") under
the captions "Management--Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners and Management -- Section 16(a)
Beneficial Ownership Reporting Compliance."
Item 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to
the material appearing in the Proxy Statement under the captions "Executive
Compensation" and "Management -- Compensation of Directors."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to
the table and related footnotes appearing in the Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
to the material appearing in the Proxy Statement under the caption
"Management--Certain Transactions." and "Executive Compensation--Certain
Employment Arrangements."
____________________________________
* The Compensation Committee Report on Executive Compensation and the
Shareholder Return Performance Graph appearing in the Proxy Statement are not
incorporated by reference in this Annual Report on Form 10-K or in any other
report, registration statement, or prospectus of the Registrant.
37
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1) The following financial statements of Taubman Centers, Inc. and
the Independent Auditors' Report thereon are filed with this
report:
TAUBMAN CENTERS, INC. Page
Independent Auditors' Report...................................F-2
Balance Sheet as of December 31, 1998 and 1997 ................F-3
Statement of Operations for the years ended
December 31, 1998, 1997 and 1996.............................F-4
Statement of Shareowners' Equity for the years ended
December 31, 1998, 1997 and 1996.............................F-5
Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.............................F-6
Notes to Financial Statements..................................F-7
14(a)(2) The following is a list of the financial statement schedules
required by Item 14(d).
TAUBMAN CENTERS, INC.
Schedule II - Valuation and Qualifying Accounts...............F-23
Schedule III - Real Estate and Accumulated Depreciation.......F-24
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED
PARTNERSHIP (a consolidated subsidiary of Taubman Centers, Inc.)
Independent Auditors' Report..................................F-26
Combined Balance Sheet as of December 31, 1998 and 1997.......F-27
Combined Statement of Operations for the years ended
December 31, 1998, 1997 and 1996............................F-28
Combined Statement of Accumulated Deficiency in Assets for the three
years ended December 31, 1998, 1997 and 1996................F-29
Combined Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................F-30
Notes to Combined Financial Statements........................F-31
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED
PARTNERSHIP (a consolidated subsidiary of Taubman Centers, Inc.)
Schedule II - Valuation and Qualifying Accounts...............F-39
Schedule III - Real Estate and Accumulated Depreciation.......F-40
14(a)(3)
2 -- Separation and Relative Value Adjustment Agreement between
The Taubman Realty Group Limited Partnership and GMPTS
Limited Partnership (without exhibits or schedules, which
will be supplementally provided to the Securities and
Exchange Commission upon its request)(incorporated herein by
reference to Exhibit 2 filed with the Registrant's Current
Report on Form 8-K dated September 30, 1998).
3(a)-- Restated By-Laws of Taubman Centers, Inc.,
(incorporated herein by reference to Exhibit 3 (b) filed
with the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 ("1998 Third
Quarter Form 10-Q")).
3(b)-- Restated Articles of Incorporation of Taubman Centers,
Inc.(incorporated by reference to Exhibit 3(a) filed with
the Registrant's 1998 Third Quarter Form 10-Q).
38
4(a)-- Indenture dated as of July 22, 1994 among Beverly
Finance Corp., La Cienega Associates, the Borrower, and
Morgan Guaranty Trust Company of New York, as Trustee
(incorporated herein by reference to Exhibit 4(h) filed
with the 1994 Second Quarter Form 10-Q).
4(b)-- Deed of Trust, with assignment of Rents, Security
Agreement and Fixture Filing, dated as of July 22, 1994,
from La Cienega Associates, Grantor, to Commonwealth Land
Title Company, Trustee, for the benefit of Morgan Guaranty
Trust Company of New York, as Trustee, Beneficiary
(incorporated herein by reference to Exhibit 4(i) filed
with the 1994 Second Quarter Form 10-Q).
4(c)-- Construction Loan Agreement among Taubman MacArthur
Associates Limited Partnership,as Borrower, and Bayerische
Hypotheken-Und Wechsel-Bank, Aktiengesellschaft, New York
Branch and The Other Banks and Financial Institutions from
time to time Parties hereto, as Lenders and Bayerische
Hypotheken-Und Wechsel-Bank Aktiengesellschaft, New York
Branch, as Agent,dated as of October 28, 1997(incorporated
herein by reference to Exhibit 4(i)filed with Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 ("1997 Form 10-K")).
4(d)-- Loan Agreement dated as of November 25, 1997 among The
Taubman Realty Group Limited Partnership, as Borrower,
Fleet National Bank, as a Bank, PNC Bank, National
Association, as a Bank, the other Banks signatory hereto,
each as a Bank, and PNC Bank, National Association, as
Administrative Agent (incorporated herein by reference to
Exhibit 4(j) filed with the 1997 Form 10-K).
4(e)-- Revolving Credit Agreement dated as of September 21,
1998 among The Taubman Realty Group Limited Partnership,
as Borrower, UBS AG, New York Branch, as a Bank and UBS
AG, New York Branch, as Administrative Agent (incorporated
herein by reference to Exhibit (4) filed with the 1998
Third Quarter Form 10-Q).
10(a)-- The Second Amendment and Restatement of Agreement of
Limited Partnership of the Taubman Realty Group Limited
Partnership dated September 30, 1998 (incorporated by
reference to Exhibit 10 filed with the 1998 Third Quarter
Form 10-Q).
*10(b)-- The Taubman Realty Group Limited Partnership 1992
Incentive Option Plan, as Amended and Restated Effective
as of September 30, 1997 (incorporated herein by reference
to Exhibit 10(b) filed with the 1997 Form 10-K).
10(c)-- Registration Rights Agreement among Taubman Centers, Inc.,
General Motors Hourly-Rate Employees Pension Trust,General
Motors Retirement Program for Salaried Employees Trust,and
State Street Bank & Trust Company, as trustee of the AT&T
Master Pension Trust (incorporated herein by reference to
Exhibit 10(e) filed with the 1992 Form 10-K).
10(d)-- Master Services Agreement between The Taubman Realty Group
Limited Partnership and the Manager (incorporated herein
by reference to Exhibit 10(f) filed with the 1992 Form
10-K).
39
10(e)-- Cash Tender Agreement among Taubman Centers, Inc., A.
Alfred Taubman, acting not individually but as Trustee of
The A. Alfred Taubman Restated Revocable Trust, as amended
and restated in its entirety by Instrument dated January
10, 1989(as the same has been and may hereafter be amended
from time to time), TRA Partners, and GMPTS Limited
Partnership (incorporated herein by reference to Exhibit
10(g) filed with the 1992 Form 10-K).
*10(f)-- Supplemental Retirement Savings Plan (incorporated
herein by reference to Exhibit 10(i) filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
*10(g)-- First Amendment to The Taubman Company Long-Term
Compensation Plan (incorporated herein by reference to
Exhibit 10 filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998).
*10(h) -- Employment agreement between The Taubman Company
Limited Partnership and Lisa A. Payne (incorporated herein
by reference to Exhibit 10 filed with the 1997 First
Quarter Form 10-Q).
*10(i)-- Amended and Restated Continuing Offer, dated as of
September 30, 1997 (incorporated herein by reference to
Exhibit 10 filed with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).
12 -- Statement Re:Computation of Taubman Centers, Inc. Ratio of
Earnings to Combined Fixed Charges and Preferred
Dividends.
21 -- Subsidiaries of Taubman Centers, Inc.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule
99(a) -- Purchase and Sale Agreement By and Between One Federal Street
Joint Venture and The Taubman Realty Group Limited
Partnership, dated July 16, 1997 (Purchase and Sale Agreement)
(without exhibits or schedules, which will be supplementally
provided to the Securities and Exchange Commission upon its
request)(incorporated herein by reference to Exhibit 99(a)
filed with the Registrant's Current Report on Form 8-K dated
September 4, 1997).
99(b) -- First Amendment to Purchase and Sale Agreement, dated August
15, 1997 (without exhibits or schedules, which will be supple-
mentally provided to the Securities and Exchange Commission
upon its request) (incorporated herein by reference to Exhibit
99(b) filed with the Registrant's Current Report on Form 8-K
dated September 4, 1997).
________________________________
* A management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
40
14(b) Current Reports on Form 8-K.
On October 15, 1998 the Company filed a Current Report on Form 8-K dated
September 30, 1998 to announce the completion of the redemption of General
Motors Pension Trusts' holdings in TRG. This Current Report contained the
following pro forma financial statements:
Taubman Centers, Inc. Pro Forma Condensed Consolidated Balance Sheet
as of June 30, 1998 (unaudited)
Taubman Centers, Inc. Pro Forma Condensed Consolidated Statement of
Operations, Year Ended December 31, 1997 (unaudited)
Taubman Centers, Inc. Pro Forma Condensed Consolidated Statement of
Operations, Six Months Ended June 30, 1998 (unaudited)
The Taubman Realty Group Limited Partnership Pro Forma Condensed
Consolidated Balance Sheet as of June 30, 1998 (unaudited)
The Taubman Realty Group Limited Partnership Pro Forma Condensed
Consolidated Statement of Operations, Year Ended December 31, 1997
(unaudited)
The Taubman Realty Group Limited Partnership Pro Forma Condensed
Consolidated Statement of Operations, Six Months Ended June 30, 1998
(unaudited)
14(c) The list of exhibits filed with this report is set forth in response to
Item 14(a)(3). The required exhibit index has been filed with the
exhibits.
14(d) The financial statements and the financial statement schedules of the
Unconsolidated Joint Ventures of The Taubman Realty Group Limited
Partnership listed at Item 14(a)(2) are filed pursuant to this Item 14(d).
41
TAUBMAN CENTERS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
AND FOR EACH OF THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Taubman Centers, Inc.
We have audited the accompanying balance sheets of Taubman Centers, Inc. (the
"Company") as of December 31, 1998 and 1997, and the related statements of
operations, shareowners' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedules listed in the Index at Item 14. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Taubman Centers, Inc. as of December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 16, 1999
F-2
TAUBMAN CENTERS, INC.
BALANCE SHEET
(in thousands, except share data)
December 31
--------------------
1998 1997
---- ----
(Consolidated)
Assets:
Investment in TRG (Notes 2 and 3):
Partnership interest $347,859
Series A Preferred Equity interest 200,000
-------
547,859
Properties, net (Note 5) $1,308,642
Investment in Unconsolidated Joint Ventures
(Note 4) 98,350
Cash and cash equivalents 19,045 8,965
Accounts and notes receivable, less allowance
for doubtful accounts of $333 20,595
Accounts receivable from related parties
(Note 9) 7,092
Deferred charges and other assets (Note 6) 27,139
---------- --------
$1,480,863 $556,824
========== ========
Liabilities:
Unsecured notes payable (Note 7) $ 531,946
Mortgage notes payable (Note 7) 243,352
Accounts payable and accrued liabilities 171,669 $ 277
Dividends payable 12,719 11,929
--------- --------
$ 959,686 $ 12,206
Commitments and Contingencies (Note 12)
Minority Interests (Note 1)
Shareowners' Equity (Notes 2 and 11):
Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 50,000,000 shares authorized,
$200 million liquidation preference,
8,000,000 shares issued and outstanding at
December 31, 1998 and 1997 $ 80 $ 80
Series B Non-Participating Convertible
Preferred Stock, $0.001 par and liquidation
value, 40,000,000 shares authorized and
31,399,913 shares issued and outstanding
at December 31, 1998 28
Common Stock, $0.01 par value, 250,000,000 shares
authorized, 52,995,904 and 50,759,657 issued
and outstanding at December 31, 1998
and 1997 530 508
Additional paid-in capital 697,965 668,951
Dividends in excess of net income (177,426) (124,921)
---------- --------
$ 521,177 $544,618
---------- --------
$1,480,863 $556,824
========== ========
See notes to financial statements.
F-3
TAUBMAN CENTERS, INC.
STATEMENT OF OPERATIONS
(in thousands, except share data)
Year Ended December 31
-------------------------
1998 1997 1996
---- ---- ----
(Consolidated)
Income:
Income before extraordinary item from
investment in TRG (Notes 2 and 3) $ 29,349 $21,368
Minimum rents $107,657
Percentage rents 5,881
Expense recoveries 60,650
Revenues from management, leasing and
development services (Note 9) 12,282
Interest and other 17,769 322 284
Revenues - transferred centers (Note 2) 129,714
-------- -------- -------
$333,953 $ 29,671 $21,652
-------- -------- -------
Operating Expenses:
Recoverable expenses $ 55,351
Other operating 33,842
Management, leasing and development services 8,025
General and administrative 24,616 $ 1,009 $ 922
Restructuring (Note 2) 10,698
Expenses other than interest, depreciation and
amortization - transferred centers (Note 2) 44,260
Interest expense 75,809
Depreciation and amortization (including
$22.8 million relating to the transferred
centers) 57,376
-------- ------- ------
$309,977 $ 1,009 $ 922
-------- ------- ------
Income before equity in income before
extraordinary item of Unconsolidated
Joint Ventures, extraordinary items,
and minority interest $ 23,976 $28,662 $20,730
Equity in income before extraordinary item of
Unconsolidated Joint Ventures (Note 4) 46,427
------ ------- -------
Income before extraordinary items and minority
interest $70,403 $28,662 $20,730
Extraordinary items (Notes 2, 3 and 7) (50,774) (444)
Minority Interest:
Minority share of income (4,230)
Distributions in excess of earnings (1,779)
------- ------- --------
Net income $13,620 $28,662 $ 20,286
Series A preferred dividends (Note 11) (16,600) (4,058)
------- ------- --------
Net income (loss) available to common shareowners $(2,980) $24,604 $ 20,286
======= ======= ========
Basic earnings per common share (Note 13):
Income before extraordinary items $ .33 $ .48 $ .47
======== ======== ========
Net income (loss) $ (.06) $ .48 $ .46
======== ======== ========
Diluted earnings per common share (Note 13):
Income before extraordinary items $ .32 $ .48 $ .47
======== ======== ========
Net income (loss) $ (.06) $ .48 $ .46
======== ======== ========
Cash dividends declared per common share $ .945 $ .925 $ .89
======== ======= ========
Weighted average number of common shares
outstanding 52,223,399 50,737,333 44,444,833
========== ========== ==========
See notes to financial statements.
F-4
TAUBMAN CENTERS, INC.
STATEMENT OF SHAREOWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(in thousands, except share data)
Preferred Stock Common Stock Additional Dividends in
--------------- ------------ Paid-in excess of
Shares Amount Shares Amount Capital Net Income Total
------ ------ ------ ------ ------- ---------- -----
Balance, January 1, 1996 44,134,913 $441 $386,680 $(82,103) $305,018
Proceeds from common stock
offering (Note 3) 5,970,000 60 74,938 74,998
Issuance of stock pursuant to
Continuing Offer (Note 12) 652,245 7 7,319 7,326
Purchases of stock (36,800) (1) (347) (348)
Cash dividends declared (40,770) (40,770)
Net income 20,286 20,286
---------- ---- -------- --------- --------
Balance, December 31, 1996 50,720,358 $507 $468,590 $(102,587) $366,510
Proceeds from preferred stock
offering (Note 3) 8,000,000 $ 80 199,920 200,000
Issuance of stock pursuant
to Continuing Offer (Note 12) 39,299 1 441 442
Cash dividends declared (50,996) (50,996)
Net income 28,662 28,662
---------- ---- ---------- ---- -------- --------- --------
Balance, December 31, 1997 8,000,000 $ 80 50,759,657 $508 $668,951 $(124,921) $544,618
Proceeds from common stock
offering (Note 3) 2,021,611 20 26,640 26,660
Proceeds from preferred stock
offering (Note 11) 31,399,913 28 28
Issuance of stock pursuant
to Continuing Offer (Note 12) 214,636 2 2,374 2,376
Cash dividends declared (66,125) (66,125)
Net income 13,620 13,620
----------- ---- ----------- ---- -------- --------- --------
Balance, December 31, 1998 39,399,913 108 52,995,904 $530 $697,965 $(177,426) $521,177
=========== ==== =========== ==== ======== ========= ========
See notes to financial statements.
F-5
TAUBMAN CENTERS, INC.
STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
---------------------------
1998 1997 1996
---- ---- ----
(Consolidated)
Cash Flows From Operating Activities:
Income before extraordinary items and
minority interest $ 70,403 $28,662 20,730
Adjustments to reconcile income before
extraordinary items and minority interest
to net cash provided by operating
activities:
Depreciation and amortization 57,376
Provision for losses on accounts receivable 1,207
Amortization of deferred financing costs 3,318
Other 2,264
Gains on sales of land (5,637)
Increase (decrease) in cash attributable
to changes in assets and liabilities:
Receivables, deferred charges and
other assets (14,632)
Accounts payable and other liabilities 31,121 (66) (5)
-------- ------- -------
Net Cash Provided By Operating Activities $145,420 $28,596 $20,725
-------- ------- -------
Cash Flows From Investing Activities:
Purchase of additional interests in TRG $(200,000)$(74,998)
Additions to properties $(294,336)
Proceeds from sales of land 6,750
Contributions to Unconsolidated Joint
Ventures (33,322)
Distributions from Unconsolidated Joint
Ventures in excess of income before
extraordinary items 50,970 21,714 19,939
--------- --------- --------
Net Cash Used In Investing Activities $(269,938) $(178,286) $(55,059)
--------- --------- --------
Cash Flows From Financing Activities:
Debt proceeds $1,695,235
Debt payments (175,599)
Early extinguishment of debt (1,169,769)
Debt issuance costs (4,458)
Redemption of partnership units (77,698)
GMPT Exchange (32,651)
Distributions to minority interest (65,914)
Issuance of stock pursuant to Continuing
Offer 2,377
Cash dividends to common shareowners (48,735) $(46,675) $(38,814)
Cash dividends to Series A preferred
shareowners (16,600) (4,058)
Proceeds from stock issuances 26,660 200,000 74,998
Other (1,500) (348)
--------- -------- -------
Net Cash Provided By Financing Activities $131,348 $149,267 $35,836
--------- -------- -------
Net Increase (Decrease) In Cash $ 6,830 $ (423) $ 1,502
Cash and Cash Equivalents at Beginning of Year 8,965 9,388 7,886
Effect of consolidating TRG in connection with
the GMPT Exchange (TRG's cash balance at
Beginning of Year)(Note 2) 3,250
-------- ------ -------
Cash and Cash Equivalents at End of Year $ 19,045 $8,965 $ 9,388
======== ====== =======
See notes to financial statements.
F-6
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
Three Years Ended December 31, 1998
Note 1 - Summary of Significant Accounting Policies
Organization and Basis of Presentation
Taubman Centers, Inc. (the Company or TCO), a real estate investment trust, or
REIT, is the managing general partner of The Taubman Realty Group Limited
Partnership (the Operating Partnership or TRG). The Operating Partnership is an
operating subsidiary that engages in the ownership, management, leasing,
acquisition, development, and expansion of regional retail shopping centers and
interests therein. The Operating Partnership's portfolio as of December 31,
1998, includes 16 urban and suburban shopping centers in seven states. One
additional center opened in March 1999. Three additional centers are under
construction in Florida and Texas. The Company's investment in the Operating
Partnership consists of a general partnership interest and a preferred equity
interest (Note 3).
On September 30, 1998, the Company obtained a majority and controlling
interest in the Operating Partnership as a result of a transaction in which the
Operating Partnership exchanged interests in 10 shopping centers, together with
$990 million of its debt, for all of the partnership units owned by the General
Motors Pension Trusts (GMPT), representing approximately 37% of the Operating
Partnership's equity (the GMPT Exchange) (Note 2). As a result of the GMPT
Exchange, the Company's general partnership interest in the Operating
Partnership increased to 62.8%.
The consolidated balance sheet of the Company as of December 31, 1998 includes
all accounts of the Company, the Operating Partnership and its consolidated
subsidiaries; all intercompany balances have been eliminated. Investments in
entities not unilaterally controlled by ownership or contractual obligation
(Unconsolidated Joint Ventures) are accounted for under the equity method. The
statements of operations and cash flows for the year ended December 31, 1998
include the Operating Partnership as a consolidated subsidiary for the entire
year. The balance sheet as of December 31, 1997 and the statements of operations
and cash flows for periods prior to 1998 reflect the financial position and
results of operations of the Operating Partnership under the equity method.
Since the Company's interest in the Operating Partnership has been its sole
material asset throughout all periods presented, references in the following
notes to "the Company" include the Operating Partnership, except where
intercompany transactions are discussed or as otherwise noted, even though the
Operating Partnership did not become a consolidated subsidiary until September
30, 1998.
Because the net equity of the Operating Partnership is less than zero, the
ownership interest of the Operating Partnership's noncontrolling partners (the
Minority Interest) is presented as a zero balance in the consolidated balance
sheet as of December 31, 1998, and subsequent to the GMPT Exchange, the income
allocated to the Minority Interest is equal to the Minority Interest's share of
distributions. The Operating Partnership's net equity is less than zero due to
accumulated distributions in excess of net income and not as a result of
operating losses. Distributions to partners are usually greater than net income
because net income includes non-cash charges for depreciation and amortization.
Dollar amounts presented in tables within the notes to the financial
statements are stated in thousands of dollars, except share data or as otherwise
noted.
Income Taxes
Federal income taxes are not provided because the Company operates in such a
manner as to qualify as a REIT under the provisions of the Internal Revenue
Code; therefore, applicable taxable income is included in the taxable income of
its shareowners, to the extent distributed by the Company. As a REIT, the
Company must distribute at least 95% of its REIT taxable income to its
shareowners and meet certain other requirements. Additionally, no provision for
income taxes for consolidated partnerships has been made, as such taxes are the
responsibility of the individual partners.
F-7
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Dividends per common share declared in 1998 were $0.945, of which $0.854
represented return of capital and $0.091 represented ordinary income. Dividends
per common share declared in 1997 were $0.925, of which $0.324 represented
return of capital and $0.601 represented ordinary income. Dividends per common
share declared in 1996 were $0.89, of which $0.41 represented return of capital
and $0.48 represented ordinary income. The tax status of the Company's common
dividends in 1998, 1997 and 1996 may not be indicative of future periods.
Dividends per preferred share declared in 1998 and 1997 were $2.075 and
$0.50722, respectively, all of which represented ordinary income. The difference
between net income for financial reporting purposes and taxable income results
primarily from differences in depreciation expense.
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under
short and intermediate term leases which are accounted for as operating leases.
Minimum rents are generally recognized on an accrual basis as earned, the result
of which does not differ materially from a straight-line method. Percentage rent
is accrued when lessees' specified sales targets have been met or achievement of
the sales targets is probable. The effect on 1998 income of recognizing
percentage rent only after specified sales targets have been achieved rather
than the Company's method of recognition is immaterial. Expense recoveries,
which include an administrative fee, are recognized as revenue in the period
applicable costs are chargeable to tenants.
Depreciation and Amortization
Buildings, improvements and equipment are depreciated on straight-line or
double-declining balance bases over the estimated useful lives of the assets,
which range from 3 to 50 years. Tenant allowances and deferred leasing costs are
amortized on a straight-line basis over the lives of the related leases.
Capitalization
Costs related to the acquisition, development, construction and improvement of
properties are capitalized. Interest costs are capitalized until construction is
substantially complete. Properties are reviewed for impairment if events or
changes in circumstances indicate that the carrying amounts of the properties
may not be recoverable.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90
days or less at the date of purchase.
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized
over the terms of the related agreements as a component of interest expense.
Direct costs related to leasing activities are capitalized and amortized on a
straight-line basis over the lives of the related leases. All other deferred
charges are amortized on a straight-line basis over the terms of the agreements
to which they relate.
Stock-Based Compensation Plans
Stock-based compensation plans are accounted for under APB Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations, as
permitted under FAS 123, "Accounting for Stock-Based Compensation."
F-8
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over
the terms of the cap agreements. Amounts received under the cap agreements are
accounted for on an accrual basis, and recognized as a reduction of interest
expense. Amounts paid or received under treasury lock agreements are amortized
to interest expense over the term of the related debt agreement.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
financial instruments:
The carrying value of cash and cash equivalents, accounts and notes
receivable, and accounts payable approximates fair value due to the short
maturity of these instruments.
The fair value of debt is estimated based on quoted market prices if
available, or on the current rates available to the Company for debt of
similar terms and maturity and the assumption that debt will be prepaid
at the earliest possible date.
The fair value of interest rate hedging instruments is the amount that the
Company would receive or pay to terminate the agreement at the reporting
date, taking into account current interest rates.
Operating Segment
The Company has one reportable operating segment; it owns, develops and
manages regional shopping centers. The shopping centers are located in major
metropolitan areas, have similar tenants (most of which are national chains),
and share common economic characteristics. No single retail company represents
10% or more of the Company's revenues.
Note 2 - The GMPT Exchange and Related Transactions
On September 30, 1998, the Company obtained a controlling interest in the
Operating Partnership due to the following transaction. The Operating
Partnership transferred interests in 10 shopping centers (nine wholly owned
(Briarwood, Columbus City Center, The Falls, Hilltop, Lakeforest, Marley
Station, Meadowood Mall, Stoneridge, and The Mall at Tuttle Crossing) and one
Unconsolidated Joint Venture (Woodfield)), together with $990 million of debt,
for all of the partnership units of GMPT (approximately 50 million units with a
fair value of $675 million, based on the average stock price of the Company's
common shares of $13.50 for the two week period prior to the closing) (the GMPT
Exchange). The Operating Partnership continues to manage the transferred centers
under agreements with GMPT (Note 10).
As of the date of the GMPT Exchange, the excess of the Company's cost of its
investment in the Operating Partnership over the Company's share of the
Operating Partnership's accumulated deficit was $390.4 million, of which $176.6
million and $213.8 million was allocated to the Company's bases in the Operating
Partnership's properties and investment in Unconsolidated Joint Ventures,
respectively.
In anticipation of the GMPT Exchange, the Operating Partnership used the $1.2
billion proceeds from two bridge loans bearing interest at one-month LIBOR plus
1.30% to extinguish approximately $1.1 billion of debt, including substantially
all of the Operating Partnership's public unsecured debt, its outstanding
commercial paper, and borrowings on its existing lines of credit. The remaining
proceeds were used primarily to pay prepayment premiums and transaction costs.
An extraordinary charge of approximately $49.8 million, consisting primarily of
prepayment premiums, was incurred in connection with the extinguishment of the
debt.
F-9
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
The balance on the first bridge loan of $902 million was assumed by GMPT in
connection with the GMPT Exchange. The second loan had a balance of $340 million
as of December 31, 1998, and expires in June 1999. The Operating Partnership
expects to refinance the balance on the bridge loan during the first half of
1999 (Note 15 - Subsequent Event).
Concurrently with the GMPT Exchange, the Operating Partnership committed to a
restructuring of its operations. A restructuring charge of approximately $10.7
million was incurred, primarily representing the cost of certain involuntary
terminations of personnel. Pursuant to the restructuring plan, approximately 40
employees were terminated across various administrative functions. During 1998,
termination benefits of $6.1 million were paid. Substantially all benefits were
paid by the end of the first quarter of 1999.
Note 3 - Investment in the Operating Partnership
The Company's ownership in the Operating Partnership at December 31, 1998 and
1997 consisted of a 62.8% and 36.70% managing general partnership interest, as
well as a preferred equity interest. Net income and distributions are allocable
first to the preferred equity interest, and the remaining amounts to the general
and limited Operating Partnership partners in accordance with their percentage
ownership. The Company's average ownership percentage in the Operating
Partnership was 43.2% for 1998 (including averages of 38.96% for the period
through the GMPT Exchange (Note 2), and 62.77% thereafter), 36.7% for 1997, and
34.5% for 1996.
During the three years in the period ended December 31, 1998, the Company's
ownership of the Operating Partnership also increased due to the following
transactions.
In April 1998, the Company sold approximately two million shares of its common
stock at $13.1875 per share, before deducting the underwriting commission and
expenses of the offering, under the Company's shelf registration statement. The
Company used the proceeds to acquire an additional equity interest in the
Operating Partnership. The Operating Partnership paid all costs of the offering.
In January 1998, the Operating Partnership redeemed 6.1 million units of
partnership interest from a partner.
In October 1997, the Company used the proceeds from a $200 million public
offering of eight million shares of 8.3% Series A Cumulative Redeemable
Preferred Stock (Series A Preferred Stock) to acquire a Series A Preferred
Equity interest in the Operating Partnership that entitles the Company to income
and distributions (in the form of guaranteed payments) in amounts equal to the
dividends payable on the Company's Series A Preferred Stock. The Operating
Partnership bore all expenses of the offering. The Operating Partnership used
the net proceeds to pay down short term debt.
In December 1996, the Company purchased newly issued Operating Partnership
units with the $75 million proceeds from the Company's December 1996 offering of
5.97 million shares of common stock. The Operating Partnership bore all expenses
of the Company's offering. The Operating Partnership used the net proceeds to
pay down short term floating rate debt and to acquire La Cumbre Plaza.
Additionally in 1996, the Operating Partnership issued units of partnership
interest in connection with its acquisition of the 75% interest in Fairlane Town
Center held by a joint venture partner.
Also in 1998, 1997 and 1996, the Operating Partnership issued units of
partnership interest in connection with the exercise of incentive options. The
Company exchanged shares of common stock for these newly issued units pursuant
to the Company's Continuing Offer (Note 12).
F-10
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
The Company's income from its investment in the Operating Partnership included
$4.1 million for the year ended December 31, 1997 from its Series A Preferred
Equity interest in the Operating Partnership. Additionally, the Company's share
of the Operating Partnership's income before extraordinary items available to
partnership unitholders under the equity method for the years ended December 31,
1997 and 1996, was $33.5 million and $29.0 million, respectively, reduced by
$8.2 million and $7.6 million, respectively, representing adjustments arising
from the Company's additional basis in the Operating Partnership's net assets.
The Company's share of the Operating Partnership's extraordinary charge
recorded under the equity method in 1996 was approximately $0.4 million, which
related to prepayment premiums incurred in connection with the extinguishment of
debt.
The Operating Partnership's summarized balance sheet and results of operations
information are presented below for periods in which the Company accounted for
the Operating Partnership under the equity method.
December 31 Year Ended December 31
----------- ----------------------
1997 1997 1996
---- ---- ----
Assets: Revenues $313,426 $263,696
-------- --------
Properties $ 1,593,350 Operating costs other than
Accumulated depreciation and interest and depreciation
amortization 268,658 and amortization 152,044 125,128
----------- Interest expense 73,639 70,454
$ 1,324,692 Depreciation and amortization 44,719 35,773
Other assets 72,134 -------- --------
----------- $270,402 $231,355
$ 1,396,826 -------- --------
=========== Equity in income before
extraordinary item of
Liabilities: Unconsolidated Joint
Unsecured notes payable $ 1,008,459 Ventures 52,270 51,753
------ ------
Mortgage notes payable 275,868 Income before extraordinary
Accounts payable and other item $95,294 $ 84,094
liabilities 106,404
Distributions in excess of Extraordinary item (1,328)
net income of Unconsolidated ------- --------
Joint Ventures 141,815 Net income $95,294 $ 82,766
----------- Preferred distributions (4,058)
------- --------
$ 1,532,546 Net income available to
unitholders $91,236 $ 82,766
Partnership Equity: ======= ========
Series A Preferred Equity 192,840 Net income allocable to TCO $37,532 $ 28,564
Partners' Accumulated Deficit (328,560) Extraordinary item allocable
----------- to TCO 444
$ 1,396,826
=========== Depreciation of TCO's additional
basis (8,183) (7,640)
------ ------
Partners' Accumulated Deficit Income before extraordinary
allocable to TCO $ (120,589) item from investment in TRG $29,349 $ 21,368
======= ========
TCO's additional basis 468,448
-----------
Investment in TRG - partnership
interest $ 347,859
===========
F-11
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 4 - Investments in Unconsolidated Joint Ventures
Following are the Company's investments in various real estate
Unconsolidated Joint Ventures which own regional retail shopping centers. The
Operating Partnership is generally the managing general partner of these
Unconsolidated Joint Ventures. The Operating Partnership's interest in each
Unconsolidated Joint Venture is as follows:
TRG's %
Ownership
as of
Unconsolidated Joint Venture Shopping Center December 31, 1998
----------------------------- --------------- -----------------
Arizona Mills, L.L.C. Arizona Mills 37%
Fairfax Company of Virginia L.L.C. Fair Oaks 50
Lakeside Mall Limited Partnership Lakeside 50
Rich-Taubman Associates Stamford Town Center 50
Taubman-Cherry Creek
Limited Partnership Cherry Creek 50
Twelve Oaks Mall Limited Partnership Twelve Oaks Mall 50
West Farms Associates Westfarms 79
Woodland Woodland 50
Arizona Mills, L.L.C. has a construction facility with a maximum availability
of $142 million, under which $141 million was outstanding as of December 31,
1998. The rate on the facility is capped at 9.5% until maturity, plus credit
spread. The payment of principal and interest is guaranteed by each of the
owners of Arizona Mills to the extent of its ownership, with reductions in
amounts guaranteed being provided as certain center performance and valuation
criteria are met. The Operating Partnership's guaranty of principal was $13.1
million at December 31, 1998.
The Company's carrying value of its Investment in Unconsolidated Joint
Ventures exceeds its share of the deficiency in assets reported in the combined
balance sheet of the Unconsolidated Joint Ventures due to (i) intercompany
profits on sales of services that are capitalized by the Unconsolidated Joint
Ventures and (ii) the Company's cost of its investment in excess of the
historical net book values of the Unconsolidated Joint Ventures. The Company
reduces its investment in Unconsolidated Joint Ventures to eliminate the
intercompany profits and amortizes such amounts over the useful lives of the
related assets. The Company's additional basis allocated to depreciable assets
is recognized on a straight-line basis over 40 years.
Combined balance sheet and results of operations information are presented
below (in thousands) for all Unconsolidated Joint Ventures, followed by the
Operating Partnership's beneficial interest in the combined information.
Beneficial interest is calculated based on the Operating Partnership's ownership
interest in each of the Unconsolidated Joint Ventures. The accounts of Woodfield
Associates, formerly a 50% Unconsolidated Joint Venture transferred to GMPT
(Note 2), are included in these results through September 30, 1998, the date of
the GMPT Exchange.
F-12
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
December 31
-----------
1998
----
Assets:
Properties, net $ 572,149
Other assets 73,046
---------
$ 645,195
=========
Liabilities and partners' accumulated
deficiency in assets:
Debt $ 825,927
Capital lease obligations 5,187
Other liabilities 47,622
TRG's accumulated deficiency in assets (103,545)
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (129,996)
---------
$ 645,195
=========
TRG's accumulated deficiency in assets (above) $(103,545)
Elimination of intercompany profit (4,846)
TCO's additional basis 206,741
---------
Investment in Unconsolidated Joint Ventures $ 98,350
=========
Year Ended
----------
December 31, 1998
-----------------
Revenues $ 286,287
---------
Recoverable and other operating expenses $ 101,277
Interest expense 69,389
Depreciation and amortization 32,466
---------
Total operating costs $ 203,132
---------
Income before extraordinary item $ 83,155
Extraordinary item (1,913)
---------
Net income $ 81,242
=========
Net income allocable to TRG $ 42,322
Extraordinary item allocable to TRG 957
Realized intercompany profit 7,205
Depreciation of TCO's additional basis (4,057)
---------
Equity in income before extraordinary item
of Unconsolidated Joint Ventures $ 46,427
=========
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other
operating expenses $ 104,257
Interest expense (37,118)
Depreciation and amortization (20,712)
---------
Income before extraordinary item $ 46,427
=========
F-13
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 5 - Properties
Properties at December 31, 1998 are summarized as follows:
Land $ 102,901
Buildings, improvements and equipment 1,142,466
Construction in process 199,561
Development pre-construction costs 28,512
---------
$1,473,440
Accumulated depreciation and amortization (164,798)
----------
$1,308,642
==========
Depreciation expense for 1998 was $50.8 million. Construction in process
includes costs related to the construction of new centers, and expansions and
other improvements at various existing centers. The charge to operations in 1998
for costs of potentially unsuccessful pre-development activities was $7.3
million. During 1998, non-cash additions to properties of $54.9 million were
recorded, representing accrued costs of new centers and development projects.
Note 6 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1998 are summarized as
follows:
Leasing $ 21,164
Accumulated amortization (10,349)
--------
$ 10,815
Deferred financing costs, net 10,248
Other, net 6,076
--------
$ 27,139
========
Note 7 - Debt
Unsecured Notes Payable
Unsecured notes payable at December 31, 1998 consist of the following:
Notes payable to banks:
Bridge loan, interest at LIBOR plus 1.30%,
maturing June 1999 (Note 15) $340,000
Construction facility, maximum borrowing
available of $210 million, interest at
LIBOR plus 0.90%, maturing December 2001
(Note 15) 170,100
Line of credit, maximum borrowing available
of $40 million, interest based on a
variable bank borrowing rate, 6.25% at
December 31, 1998, maturing August 1999 15,450
Other 6,396
--------
Total Unsecured Notes Payable $531,946
========
Proceeds from the $210 million construction facility were used to make
contributions to Taubman Auburn Hills Associates Limited Partnership, a
consolidated 80% owned venture, to finance the construction of Great Lakes
Crossing. The Company is entitled to preferred distributions on these
contributions at a rate of prime plus 1.5%. The preferred distributions will be
paid from available cash as defined in the partnership agreement.
F-14
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
A $200 million unsecured line of credit facility with interest at LIBOR plus
1.15% maturing in September 2001 is available for general purposes. The facility
will convert to secured debt in June 1999 upon repayment of the bridge loan.
There was no balance outstanding on this line at December 31, 1998.
Certain loan and facility agreements contain various restrictive covenants
including limitations on net worth, minimum debt service and fixed charges
coverage ratios, a maximum payout ratio on distributions, and a minimum debt
yield ratio, the latter being the most restrictive. The Company is in compliance
with all covenants.
Mortgage Notes Payable
Mortgage notes payable at December 31, 1998 consist of the following:
Balance Due
Center Balance Interest Rate Maturity Date on Maturity
- ------ ------- ------------- ------------- -----------
Beverly Center $146,000 8.36% 07/15/04 $146,000
MacArthur Center 94,589 Floating 10/27/00 94,589
Assessment bonds
payable 2,763 Various Various 0
--------
$243,352
========
Mortgage debt is collateralized by properties with a net book value of $289.5
million as of December 31, 1998. The assessment bonds payable are due in monthly
installments with maturities at various dates through 2008, and fixed interest
rates between 5.4% and 6.5%.
In October 1997, the Operating Partnership closed on a three-year, $150
million construction facility for MacArthur Center, which is owned by a
consolidated 70% owned venture. The loan bears interest at one month LIBOR plus
1.2%. Under the facility agreement the maturity date may be extended for two
years (Note 15). The payment of principal and interest is guaranteed by the
Operating Partnership. The loan agreement provides for the reduction of the
amount guaranteed as certain center performance and valuation criteria are met.
The following table presents scheduled principal payments on mortgage debt, as
of December 31, 1998.
1999 $ 233
2000 94,834
2001 262
2002 280
2003 296
Thereafter 147,447
F-15
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Interest Expense
Interest paid in 1998, net of amounts capitalized of $18.2 million,
approximated $76.1 million.
Extraordinary Items
During 1998, the Company recognized extraordinary charges of $50.8 million
relating to the extinguishment of debt, including debt extinguished in
connection with the GMPT Exchange (Note 2). The charges consisted primarily of
prepayment premiums. During 1996, the Company recognized an extraordinary charge
of $0.4 million relating to the extinguishment of debt at an Unconsolidated
Joint Venture.
Interest Rate Hedging Instruments
The Company enters into interest rate agreements to reduce its exposure to
changes in the cost of its floating rate debt. The derivative agreements
generally match the notional amounts, reset dates and rate bases of the hedged
debt to assure the effectiveness of the derivatives in reducing interest rate
risk. As of December 31, 1998, the following interest rate cap agreements were
outstanding:
Frequency
Notional LIBOR of Rate
Amount Cap Rate Resets Term
------ -------- ------ -----------------------------------
$200,000 7.0% Monthly December 1997 through December 1999
200,000 6.0% Monthly December 1998 through May 1999
In September 1998, the Company entered into treasury lock agreements with a
notional amount of $200 million at approximately 5%, plus credit spread. In
October 1998, the Company effectively closed out its position in the treasury
locks at a cost of approximately $4 million, which will be amortized over the
term of the anticipated loan (Note 15).
The Company is exposed to credit risk in the event of nonperformance by the
counterparties to its interest rate cap agreements, but has no off-balance sheet
risk of loss. The Company anticipates that its counterparties will fully perform
their obligations under the agreements.
Fair Value of Financial Instruments Related to Debt
The estimated fair values of financial instruments at December 31, 1998 are as
follows:
Carrying Fair
Value Value
-------- --------
Unsecured notes payable $531,946 $532,043
Mortgage notes payable 243,352 254,156
Interest rate instruments -
in a receivable position 319 5
Beneficial Interest in Debt and Interest Expense
The Operating Partnership's beneficial interest in the debt, capital lease
obligations, capitalized interest, and interest expense of its consolidated
subsidiaries and its Unconsolidated Joint Ventures is summarized in the
following table. The Operating Partnership's beneficial interest excludes the
30% minority interest in the debt outstanding on the MacArthur Center
construction facility.
F-16
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Unconsolidated Share
Joint of Unconsolidated Consolidated Beneficial
Ventures Joint Ventures Subsidiaries Interest
-------- -------------- ------------ --------
As of December 31, 1998:
Debt $825,927 $439,271 $775,298 $1,186,192
Capital lease obligations 5,187 2,858 2,858
For Year Ended December 31, 1998:
Capitalized interest $ 2,466 $ 1,062 $ 18,192 $ 17,610
Interest expense 69,389 37,118 75,809 112,927
Note 8 - Leases
Operating Leases
Shopping center space is leased to tenants and certain anchors pursuant to
lease agreements. Tenant leases typically provide for guaranteed minimum rent,
percentage rent and other charges to cover certain operating costs. Future
minimum rent under operating leases in effect at December 31, 1998 for operating
centers, assuming no new or renegotiated leases or option extensions on anchor
agreements, is summarized as follows:
1999 $ 125,488
2000 117,145
2001 110,613
2002 103,009
2003 91,875
Thereafter 321,481
Certain shopping centers, as lessees, have ground leases expiring at various
dates through the year 2065. In addition, the Company leases its office
facilities. Rental payments under ground and office leases were $8.9 million in
1998. Included in this amount is related party office rental payments of $2.8
million.
The following is a schedule of future minimum rental payments required under
operating leases.
1999 $ 6,467
2000 6,270
2001 5,974
2002 5,805
2003 5,698
Thereafter 139,847
The table above includes $2.6 million, $2.6 million, $2.7 million, $2.8
million, $2.8 million and $3.7 million of related party amounts in 1999, 2000,
2001, 2002, 2003, and thereafter.
Memorial City Mall Lease
In November 1996, the Operating Partnership entered into an agreement to lease
Memorial City Mall, located in Houston, Texas. The lease of this unencumbered
property grants the Operating Partnership the exclusive right to manage, lease
and operate the property. The annual rent is initially $7 million. The Operating
Partnership has the option to terminate the lease after the third full lease
year by paying $2 million to the lessor. Accordingly, the lease will be
accounted for as an operating lease during the option period. The Operating
Partnership is using this option period to evaluate the redevelopment
opportunities of the center.
F-17
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
If the Operating Partnership does not exercise its option to terminate the
lease at the end of the third full lease year, the lease continues for another
52 years and provides for increases in rent every ten years based on 75% of the
increase in the Consumer Price Index between 1996 and the then current year.
Under the terms of the lease, the Operating Partnership has agreed to invest a
minimum of $3 million during the three year option period. If the redevelopment
proceeds, the Operating Partnership is required to invest an additional $22
million in property expenditures not recoverable from tenants during the first
10 years of the lease term.
Note 9 - Transactions with Affiliates
The revenue from management, leasing and development services includes $3.2
million from transactions with affiliates. Accounts receivable from related
parties includes amounts related to reimbursement of third-party
(non-affiliated) costs.
During 1997, the Operating Partnership acquired an option from a related
party to purchase certain real estate on which the Operating Partnership may
develop a shopping center. The option agreement requires option payments of
$150,000 during each of the first five years, $400,000 in the sixth year, and
$500,000 in the seventh year. If the Operating Partnership exercises the option,
the purchase price for the property will be between $5 million and $10 million,
depending upon the year of purchase. While the optionor will have no interest in
the shopping center itself, the optionor may, under certain circumstances,
participate in the proceeds from the Operating Partnership's future sales, if
any, of the peripheral land contiguous to the shopping center.
Other related party transactions are described in Notes 8 and 10.
Note 10 - The Manager
The Taubman Company Limited Partnership (the Manager), which is 99%
beneficially owned by the Operating Partnership, provides property management,
leasing, development and other administrative services to the Company, the
shopping centers, and Taubman affiliates. In addition, the Manager provides
services to centers transferred to GMPT under management agreements that expire
December 31, 1999. The management agreements are cancelable with 90 days notice.
The Manager has a voluntary retirement savings plan established in 1983 and
amended and restated effective January 1, 1994 (the Plan). The Plan is qualified
in accordance with Section 401(k) of the Internal Revenue Code (the Code). The
Manager contributes an amount equal to 2% of the qualified wages of all
qualified employees and matches employee contributions in excess of 2% up to 7%
of qualified wages. In addition, the Manager may make discretionary
contributions within the limits prescribed by the Plan and imposed in the Code.
Costs relating to the Plan were $1.7 million in 1998.
The Operating Partnership has an incentive option plan for employees of the
Manager. Currently, options for 8.0 million Operating Partnership units may be
issued under the plan, including options outstanding for 6.8 million units.
Incentive options generally become exercisable to the extent of one-third of the
units on each of the third, fourth, and fifth anniversaries of the date of
grant. Options expire ten years from the date of grant. The Operating
Partnership's units issued in connection with the incentive option plan are
exchangeable for shares of the Company's common stock under the Continuing Offer
(Note 12).
F-18
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
A summary of the status of the plan as of December 31, 1998 and changes during
1998 is presented below:
Weighted-Average
Exercise Price
Options Units Per Unit
------- ----- --------
Outstanding at
beginning of year 7,023,605 $11.22
Exercised (214,636) 11.07
Canceled (3,951) 10.52
---------
Outstanding at
end of year 6,805,018 11.22
=========
Options vested
at year end 6,022,730 11.28
=========
Options outstanding at December 31, 1998 have a remaining weighted-average
contractual life of 4.4 years and range in exercise price from $9.39 to $13.89.
There were no grants in 1998.
The Company applies APB Opinion 25 and related Interpretations in accounting
for the plan. The exercise price of all options outstanding granted under the
plan was equal to market value on the date of grant. Accordingly, no
compensation expense has been recognized for the plan. Had compensation cost for
the plan been determined based on the fair value of the options at the grant
dates consistent with the method of FAS Statement 123, the pro forma effect on
the Company's earnings and earnings per share would not have been material.
Effective January 1, 1996, the Manager adopted The Taubman Company Long-Term
Performance Compensation Plan. Annually, eligible employees will be granted
contingent notional Operating Partnership units, the ultimate number of which
will be based on the employee's performance. These awards, which will vest on
the third anniversary of the date of grant, will also accrue distribution
equivalents in the form of additional notional units each time the Operating
Partnership makes a distribution to its partners. Upon vesting, additional
notional units may be granted based on the performance of the employee and the
Manager and/or the Operating Partnership. The awards will be paid to the
employee in cash upon vesting, based on the value of the Operating Partnership's
units of partnership interest, unless the employee elects to defer payment as
provided in the plan. The cost of this plan was approximately $6.6 million for
1998.
Note 11 - Preferred Stock
The 8.3% Series A Preferred Stock has no stated maturity, sinking fund or
mandatory redemption and is not convertible into any other securities of the
Company. The Series A Preferred Stock has a liquidation preference of $200
million ($25 per share). Dividends are cumulative and accrue at an annual rate
of 8.3% from the date of the original issuance, October 3, 1997, and are payable
in arrears on or before the last day of each calendar quarter. The 1998 accrued
dividends were paid in 1998. The Series A Preferred Stock can be redeemed by the
Company beginning in October 2002 at $25 per share plus any accrued dividends.
The redemption price can be paid solely out of the sale of capital stock of the
Company.
In connection with the GMPT Exchange, the Company became obligated to issue to
the Minority Interest, upon subscription, one share of Series B
Non-Participating Convertible Preferred Stock (Series B Preferred Stock) for
each of the Operating Partnership units held by the Minority Interest. Each
share of Series B Preferred Stock entitles the holder to one vote on all matters
submitted to the Company's shareholders. The holders of Series B Preferred
Stock, voting as a class, have the right to designate up to four nominees for
election as directors of the Company. On all other matters, including the
election of directors, the holders of Series B Preferred Stock will vote with
the holders of common stock. The holders of Series B Preferred Stock are not
entitled to dividends or earnings. Under certain circumstances, the Series B
Preferred Stock is convertible into common stock at a ratio of 14,000 shares of
Series B Preferred Stock for one share of common stock.
F-19
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Note 12 - Commitments and Contingencies
At the time of the Company's initial public offering (IPO) and acquisition of
its partnership interest in the Operating Partnership, the Company entered into
an agreement with A. Alfred Taubman, who owns an interest in the Operating
Partnership, whereby he has the annual right to tender to the Company Operating
Partnership units (provided that the aggregate value is at least $50 million)
and cause the Company to purchase the tendered interests at a purchase price
based on a market valuation of the Company on the trading date immediately
preceding the date of the tender (the Cash Tender Agreement). The Company will
have the option to pay for these interests from available cash, borrowed funds
or from the proceeds of an offering of the Company's common stock. Generally,
the Company expects to finance these purchases through the sale of new shares of
its stock. The tendering partner will bear all market risk if the market price
at closing is less than the purchase price and will bear the costs of sale. Any
proceeds of the offering in excess of the purchase price will be for the sole
benefit of the Company. At A. Alfred Taubman's election, his family and Robert
C. Larson and his family may participate in tenders.
Based on a market value at December 31, 1998 of $13.75 per common share, the
aggregate value of partnership interests in the Operating Partnership which may
be tendered under the Cash Tender Agreement was approximately $332 million at
December 31, 1998. The purchase of these interests at December 31, 1998 would
have resulted in the Company owning an additional 29% interest in the Operating
Partnership.
The Company has made a continuing, irrevocable offer to all present holders
(other than certain excluded holders, including A. Alfred Taubman), assignees of
all present holders, those future holders of partnership interests in the
Operating Partnership as the Company may, in its sole discretion, agree to
include in the continuing offer, and all existing and future optionees under the
Operating Partnership's incentive option plan (Note 10) to exchange shares of
common stock for partnership interests in the Operating Partnership (the
Continuing Offer). Under the Continuing Offer agreement, one unit of the
Operating Partnership interest is exchangeable for one share of the Company's
common stock.
Shares of common stock that were acquired by GMPT and the AT&T Master Pension
Trust in connection with the IPO may be sold through a registered offering.
Pursuant to a registration rights agreement with the Company, the owners of each
of these shares have the annual right to cause the Company to register and
publicly sell their shares of common stock (provided that the shares have an
aggregate value of at least $50 million and subject to certain other
restrictions). All expenses of such a registration are to be borne by the
Company, other than the underwriting discounts or selling commissions, which
will be borne by the exercising party.
The Company is currently involved in certain litigation arising in the
ordinary course of business. Management believes that this litigation will not
have a material adverse effect on the Company's financial statements.
Note 13 - Earnings Per Share
Basic earnings per common share are calculated by dividing earnings available
to common shareowners by the average number of common shares outstanding during
each period. For diluted earnings per common share, the Company's ownership
interest in the Operating Partnership (and therefore earnings) are adjusted
assuming the exercise of all options for units of partnership interest under the
Operating Partnership's incentive option plan having exercise prices less than
the average market value of the units using the treasury stock method. For the
years ended December 31, 1998, 1997 and 1996, options for 0.3 million, 0.4
million and 1.0 million units of partnership interest with average exercise
prices of $13.81, $13.58 and $12.64, respectively, were excluded from the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price for the period calculated.
F-20
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
Year Ended December 31
------------------------------------
1998 1997 1996
------------------------------------
(in thousands, except share data)
Income before extraordinary items
allocable to common shareowners
(Numerator):
Net income (loss) available to
common shareowners $(2,980) $24,604 $20,286
Common shareowners'share of
extraordinary items 20,066 444
------- ------- -------
Basic income before extraordinary
items $17,086 $24,604 $20,730
Effect of dilutive options (256) (241) (37)
------- ------- -------
Diluted income before extraordinary
items $16,830 $24,363 $20,693
======= ======= =======
Shares (Denominator) - basic and
diluted 52,223,399 50,737,333 44,444,833
========== ========== ==========
Income before extraordinary items
per common share:
Basic $ 0.33 $ 0.48 $0.47
====== ====== =====
Diluted $ 0.32 $ 0.48 $0.47
====== ====== =====
Extraordinary items per common share -
basic and diluted $(0.38) $(0.01)
====== ======
Note 14 - Quarterly Financial Data (Unaudited)
The following is a summary of quarterly results of operations for 1998 and
1997.
1998
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------
(in thousands, except share data)
Revenues $87,202 $92,103 $90,968 $63,680
Equity in income of Unconsolidated
Joint Ventures 11,730 10,946 12,836 10,915
Income before extraordinary items and
minority interest 21,087 20,514 11,494 17,308
Net income (loss) 8,900 9,046 (14,126) 9,800
Series A preferred dividends (4,150) (4,150) (4,150) (4,150)
Net income (loss) available to common
shareowners 4,750 4,896 (18,276) 5,650
Basic earnings per common share:
Income before extraordinary items $0.10 $0.09 $0.03 $0.11
Net income (loss) 0.09 0.09 (0.35) 0.11
Diluted earnings per common share:
Income before extraordinary items $0.10 $0.09 $0.03 $0.10
Net income (loss) 0.09 0.09 (0.34) 0.10
F-21
TAUBMAN CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
1997
--------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------
(in thousands, except share data)
Income before extraordinary item from
Investment in TRG $ 6,606 $ 6,088 $ 6,408 $ 10,246
Income before extraordinary item 6,425 5,914 6,214 10,109
Net income 6,425 5,914 6,214 10,109
Series A preferred dividends (4,058)
Net income available to common shareowners 6,425 5,914 6,214 6,051
Basic and diluted earnings per common share:
Income before extraordinary item $ 0.13 $ 0.12 $ 0.12 $ 0.12
Net income 0.13 0.12 0.12 0.12
Note 15 - Subsequent Events
In February 1999, an application was completed for a secured, ten-year
financing of $270 million with an all- in rate of approximately 6.9% on The Mall
at Short Hills. The financing is expected to close by the end of the first
quarter of 1999; the Company intends to use the proceeds to pay down its bridge
loan, which matures on June 21, 1999.
The Company is in the process of finalizing a three-year $170 million facility
secured by Great Lakes Crossing. The loan agreement will provide for an option
to extend the maturity date one year. The loan will bear interest at one month
LIBOR plus 1.50%. Proceeds from the loan will be used to repay the balance of
the existing construction facility. Payment of principal and interest will be
guaranteed by the Operating Partnership. The loan agreement will provide for a
reduction of the interest rate and the amount guaranteed as certain center
performance and valuation criteria are met.
In addition, the Company is finalizing an amendment to the MacArthur
construction facility. The total availability under the facility will be $120
million with interest at one month LIBOR plus 1.35%.
F-22
TAUBMAN CENTERS, INC. Schedule II
Valuation and Qualifying Accounts
For the year ended December 31, 1998
(in thousands)
Additions
--------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
of year expenses accounts Write-offs Transfers, net of year
------- -------- -------- ----------- -------------- --------
Year ended December 31, 1998:
Allowance for doubtful receivables $ 0 1,207 0 (1,221) 347 $ 333 (1)
====== ===== ===== ====== ==== =====
(1) On September 30, 1998, the Company obtained a majority and controlling
interest in TRG as a result of the GMPT Exchange. Upon obtaining this
controlling interest, the Company consolidated the financial position of
TRG. The Company previously accounted for its investment in TRG under the
equity method.
F-23
TAUBMAN CENTERS, INC. Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
Gross Amount at Which
Initial Cost Carried at Close of Period
to Company Cost ----------------------------
--------------------- Capitalized Accumulated Total
Buildings and Subsequent Depreciation Cost Net
Land Improvements to Acquisition Land BI&E Total (A/D) of A/D
---- ------------ -------------- ---- ---- ---- ------------ --------
Shopping Centers:
Beverly Center, Los Angeles, CA $ 0 $210,902 $22,539 $ 0 $233,441 $233,441 $57,049 $176,392
Biltmore, Phoenix, AZ 19,120 103,657 10,642 19,120 114,299 133,419 13,491 119,928
Fairlane Town Center, Dearborn, MI 16,888 105,142 1,436 16,888 106,578 123,466 14,176 109,290
Great Lakes Crossing, Auburn Hills, MI 15,660 196,633 0 15,660 196,633 212,293 1,566 210,727
La Cumbre Plaza, Santa Barbara, CA 0 27,856 304 0 28,160 28,160 1,947 26,213
Paseo Nuevo, Santa Barbara, CA 0 39,163 775 0 39,938 39,938 3,343 36,595
Regency Square, Richmond, VA 18,635 103,062 (21) 18,635 103,041 121,676 5,275 116,401
The Mall at Short Hills, Short Hills, NJ 25,306 172,533 119,773 25,306 292,306 317,612 47,661 269,951
Other:
Manager's Office Facilities 0 0 26,945 0 26,945 26,945 20,059 6,886
Peripheral Land 7,292 0 5 7,292 5 7,297 0 7,297
Construction in Process and
Development Pre-construction Costs 0 218,250 9,823 0 228,073 228,073 0 228,073
Other 0 1,120 0 0 1,120 1,120 231 889
-------- ---------- -------- -------- ---------- ---------- -------- ----------
TOTAL $102,901 $1,178,318 $192,221 $102,901 $1,370,539 $1,473,440 $164,798 $1,308,642
======== ========== ======== ======== ========== ========== ======== ==========
Date of
Completion of
Construction or Depreciable
Encumbrances Acquisition Life
------------ --------------- -----------
Shopping Centers:
Beverly Center, Los Angeles, CA $146,000 1982 40 Years
Biltmore, Phoenix, AZ 2,763 1994 40 Years
Fairlane Town Center, Dearborn, MI 0 1996 40 Years
Great Lakes Crossing, Auburn Hills, MI 0 1998 50 Years
La Cumbre Plaza, Santa Barbara, CA 0 1996 40 Years
Paseo Nuevo, Santa Barbara, CA 0 1996 40 Years
Regency Square, Richmond, VA 0 1997 40 Years
The Mall at Short Hills, Short Hills, NJ 0 1980 40 Years
Other:
Manager's Office Facilities 0
Peripheral Land 0
Construction in Process and
Development Pre-construction Costs 94,589
Other 0
--------
TOTAL $243,352
========
The changes in total real estate assets and accumulated depreciation for the
year ended December 31, 1998 are as follows:
Total
Real Estate Accumulated
Assets Depreciation
------ ------------
Balance, beginning of year $ 0 Balance, beginning of year $ 0
New development and improvements 349,234 Depreciation for year (57,376)
Disposals (3,527) Disposals 1,263
Transfers In, net 1,127,733 Transfers In (108,685)
---------- ----------
Balance, end of year $1,473,440 (1) Balance, end of year $ (164,798)(1)
========== ==========
(1)On September 30, 1998, the Company obtained a majority and controlling
interest in the Operating Partnership as a result of the GMPT Exchange. Upon
obtaining this controlling interest, the Company consolidated the accounts of
the Operating Partnership. The Company previously accounted for its
investment in the Operating Partnership under the equity method.
F-24
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
(a consolidated subsidiary of Taubman Centers, Inc.)
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997 AND
FOR EACH OF THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
F-25
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareowners
Taubman Centers, Inc.
We have audited the accompanying combined balance sheets of Unconsolidated
Joint Ventures of The Taubman Realty Group Limited Partnership (the
"Partnership") (a consolidated subsidiary of Taubman Centers, Inc.) as of
December 31, 1998 and 1997, and the related combined statements of operations,
accumulated deficiency in assets, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedules listed in the Index at Item 14. These financial statements
and financial statement schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Unconsolidated Joint
Ventures of The Taubman Realty Group Limited Partnership as of December 31, 1998
and 1997, and the combined results of their operations and their combined cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
combined financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
February 16, 1999
F-26
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED BALANCE SHEET
(in thousands)
December 31
-----------
1998 1997
---- ----
Assets:
Properties (Notes 2, 4 and 6) $ 769,665 $ 829,640
Accumulated depreciation and amortization 197,516 205,659
--------- ---------
$ 572,149 $ 623,981
Cash and cash equivalents 29,828 36,875
Accounts and notes receivable, less allowance
for doubtful accounts of $255 and $314
in 1998 and 1997 7,521 8,531
Note receivable from Joint Venture Partner
(Note 6) 964 1,294
Deferred charges and other assets (Notes 3
and 6) 34,733 37,697
--------- ---------
$ 645,195 $ 708,378
========= =========
Liabilities:
Mortgage notes payable (Note 4) $ 824,826 $ 874,472
Other notes payable (Note 4) 1,101 884
Capital lease obligations (Note 5) 5,187 6,509
Accounts payable and other liabilities 47,622 94,801
--------- ---------
$ 878,736 $ 976,666
Commitments (Note 5)
Accumulated deficiency in assets:
TRG $(103,545) $(133,680)
Joint Venture Partners (129,996) (134,608)
--------- ---------
$(233,541) $(268,288)
--------- ---------
$ 645,195 $ 708,378
========= =========
See notes to financial statements.
F-27
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED STATEMENT OF OPERATIONS
(in thousands)
Year Ended December 31
-----------------------------
1998 1997 1996
---- ---- ----
Revenues:
Minimum rents $175,674 $155,912 $157,212
Percentage rents 4,171 3,057 3,951
Expense recoveries 97,994 89,653 95,244
Other 8,448 10,013 8,930
-------- -------- --------
$286,287 $258,635 $265,337
-------- -------- --------
Operating costs:
Recoverable expenses (Note 6) $ 82,595 $ 76,493 $ 81,799
Other operating (Note 6) 18,682 17,638 18,365
Interest expense (Note 4) 69,389 54,018 52,994
Depreciation and amortization 32,466 24,180 23,837
-------- -------- --------
$203,132 $172,329 $176,995
-------- -------- --------
Income before extraordinary item $ 83,155 $ 86,306 $ 88,342
Extraordinary item (Note 4) (1,913)
-------- -------- --------
Net income $ 81,242 $ 86,306 $ 88,342
======== ======== ========
Allocation of net income:
Attributable to TRG $ 42,322 $ 46,857 $ 47,413
Attributable to Joint Venture Partners 38,920 39,449 40,929
-------- -------- --------
$ 81,242 $ 86,306 $ 88,342
======== ======== ========
See notes to financial statements.
F-28
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED STATEMENT OF ACCUMULATED DEFICIENCY IN ASSETS
Years ended December 31, 1998, 1997 and 1996
(in thousands)
Joint Venture
TRG Partners Total
--- -------- -----
Balance, January 1, 1996 $(150,117) $(157,760) $(307,877)
Cash contributions 14,457 24,958 39,415
Non-cash contributions (Note 1) 4,797 8,050 12,847
Cash distributions (55,146) (51,154) (106,300)
TRG purchase of Fairlane interest (Note 1) 3,610 10,831 14,441
Net income 47,413 40,929 88,342
--------- --------- ---------
Balance, December 31, 1996 $(134,986) $(124,146) $(259,132)
Cash contributions 18,822 9,800 28,622
Cash distributions (64,373) (59,711) (124,084)
Net income 46,857 39,449 86,306
--------- --------- ---------
Balance, December 31, 1997 $(133,680) $(134,608) $(268,288)
Cash contributions 33,322 4,900 38,222
Cash distributions (90,263) (83,934) (174,197)
Transferred center (Note 1) 44,754 44,726 89,480
Net income 42,322 38,920 81,242
--------- --------- ---------
Balance, December 31, 1998 $(103,545) $(129,996) $(233,541)
========= ========= =========
See notes to financial statements.
F-29
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31
----------------------------
1998 1997 1996
---- ---- ----
Cash Flows From Operating Activities:
Income before extraordinary item $83,155 $ 86,306 $ 88,342
Adjustments to reconcile income before
extraordinary item to net cash provided
by operating activities:
Depreciation and amortization 32,466 24,180 23,837
Provision for losses on accounts receivable 1,119 697 1,303
Gains on sales of land (1,090) (2,748)
Other 3,908 3,806 2,922
Increase(decrease)in cash attributable to
changes in assets and liabilities:
Receivables, deferred charges and other
assets (7,109) (7,760) (1,821)
Accounts payable and other liabilities (22,042) 43,110 4,841
------- -------- --------
Net Cash Provided By Operating Activities $90,407 $147,591 $119,424
------- -------- --------
Cash Flows From Investing Activities:
Additions to properties $(64,455)$(190,188) $(97,137)
Restricted cash for expansion (224) 1,309
Proceeds from sales of land 1,590 3,452
-------- --------- --------
Net Cash Used In Investing Activities $(63,089)$(186,736) $(95,828)
-------- --------- --------
Cash Flows From Financing Activities:
Debt proceeds $164,710 $ 158,255 $ 20,529
Debt payments (4,489) (8,267) (2,670)
Extinguishment of debt (40,741)
Debt issuance costs (7,619) (4,420)
Cash contributions from partners 38,222 28,622 39,415
Cash distributions to partners (174,197) (124,084) (106,300)
-------- -------- --------
Net Cash Provided By (Used In) Financing
Activities $(24,114) $ 50,106 $(49,026)
-------- -------- --------
Net Increase (Decrease) In Cash $ 3,204 $ 10,961 $(25,430)
Cash and Cash Equivalents at Beginning of Year 36,875 25,914 51,344
Effect of transferred center in connection
with the GMPT Exchange (Note 1) (10,251)
--------- -------- --------
Cash and Cash Equivalents at End of Year $ 29,828 $ 36,875 $ 25,914
========= ======== ========
See notes to financial statements.
F-30
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
Three Years Ended December 31, 1998
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The Taubman Realty Group Limited Partnership (TRG), a consolidated subsidiary
of Taubman Centers, Inc., engages in the ownership, management, leasing,
acquisition, development and expansion of regional retail shopping centers and
interests therein. TRG has engaged the Manager (The Taubman Company Limited
Partnership, which is approximately 99% beneficially owned by TRG) to provide
property management and leasing services for the shopping centers and to provide
corporate, development, and acquisition services. For financial statement
reporting purposes, the accounts of shopping centers that are not controlled and
that are owned through joint ventures with third parties (Unconsolidated Joint
Ventures) have been combined in these financial statements. Generally, net
profits and losses of the Unconsolidated Joint Ventures are allocated to TRG and
the outside partners (Joint Venture Partners) in accordance with their ownership
percentages.
Dollar amounts presented in tables within the notes to the combined financial
statements are stated in thousands.
Investments in Unconsolidated Joint Ventures
TRG's interest in each of the Unconsolidated Joint Ventures at December 31,
1998, is as follows:
TRG's %
Unconsolidated Joint Venture Shopping Center Ownership
---------------------------- --------------- ---------
Arizona Mills, L.L.C. Arizona Mills 37%
Fairfax Company of Virginia L.L.C. Fair Oaks 50
Lakeside Mall Limited Partnership Lakeside 50
Rich-Taubman Associates Stamford Town Center 50
Taubman-Cherry Creek
Limited Partnership Cherry Creek 50
Twelve Oaks Mall
Limited Partnership Twelve Oaks Mall 50
West Farms Associates Westfarms 79
Woodland Woodland 50
Arizona Mills, L.L.C. developed Arizona Mills, a value super-regional mall in
Tempe, Arizona, which opened in November 1997. TRG's ownership interest in
Arizona Mills, L.L.C. increased in January 1997 to 37% from 35% as a result of
Arizona Mills, L.L.C.'s redemption of a former owner's 5% interest for $2.8
million. The former owner is an affiliate of a partner in TRG. In 1996, Arizona
Mills, L.L.C. purchased for $24.8 million approximately 116 acres of land on
which the Center was constructed from an affiliate of a partner in TRG and of a
former owner in Arizona Mills. Also in 1996, TRG and the other owners of Arizona
Mills contributed non-cash pre-construction costs related to this center
totaling $12.8 million.
F-31
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
On September 30, 1998, TRG completed a transaction which included the
transfer of interests in nine consolidated shopping centers and one
Unconsolidated Joint Venture (the GMPT Exchange). The accounts of Woodfield
Associates (Woodfield), a 50% owned Unconsolidated Joint Venture that was
transferred, are included in these combined financial statements through
September 30, 1998. On the date of the GMPT Exchange, the book values of
Woodfield's assets and liabilities were approximately $107.4 million and $196.9
million, respectively.
In July 1996, TRG completed transactions that resulted in it acquiring the 75%
interest in Fairlane Town Center (Fairlane) previously held by a Joint Venture
Partner. TRG also assumed mortgage debt of approximately $26 million,
representing the former Joint Venture Partner's beneficial interest in the $34.6
million mortgage encumbering the property. The accounts of Fairlane are included
in these combined financial statements until the acquisition date. On the
acquisition date, the book values of Fairlane's assets and liabilities were
approximately $25 million and $39 million, respectively.
Revenue Recognition
Shopping center space is generally leased to specialty retail tenants under
short and intermediate term leases which are accounted for as operating leases.
Minimum rents are generally recognized on an accrual basis as earned, the result
of which does not differ materially from a straight-line method. Percentage rent
is accrued when lessees' specified sales targets have been met or achievement of
the sales targets is probable. The effect on 1998 income of recognizing
percentage rent only after specified sales targets have been achieved rather
than the Joint Ventures' method of recognition is immaterial. Expense
recoveries, which include an administrative fee, are recognized as revenue in
the period applicable costs are chargeable to tenants.
Depreciation and Amortization
Buildings, improvements and equipment, stated at cost, are depreciated on
straight-line or double-declining balance bases over the estimated useful lives
of the assets which range from 3 to 55 years. Tenant allowances and deferred
leasing costs are amortized on a straight-line basis over the lives of the
related leases.
Capitalization
Costs related to the acquisition, development, construction, and improvement
of properties are capitalized. Interest costs are capitalized until construction
is substantially complete. Properties are reviewed for impairment if events or
changes in circumstances indicate that the carrying amounts of the properties
may not be recoverable.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of 90
days or less at the date of purchase.
Deferred Charges
Direct financing and interest rate hedging costs are deferred and amortized
over the terms of the related agreements as a component of interest expense.
Direct costs related to leasing activities are capitalized and amortized on a
straight-line basis over the lives of the related leases. All other deferred
charges are amortized on a straight-line basis over the terms of the agreements
to which they relate.
F-32
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Interest Rate Hedging Agreements
Premiums paid for interest rate caps are amortized to interest expense over
the terms of the cap agreements. Amounts received under the cap agreements are
accounted for on an accrual basis, and recognized as a reduction of interest
expense. The differential to be paid or received on swap agreements is accounted
for on an accrual basis and recognized as an adjustment to interest expense.
Amounts paid or received under treasury lock agreements are amortized to
interest expense over the term of the related debt agreement.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
financial instruments:
The carrying value of cash and cash equivalents, accounts and notes
receivable, and accounts payable approximates fair value due to the short
maturity of these instruments.
The fair value of mortgage notes and other notes payable is estimated based
on quoted market prices if available, or on the current rates available to
the Unconsolidated Joint Ventures for debt of similar terms and maturity
and the assumption that debt will be prepaid at the earliest possible
date.
The fair value of interest rate hedging instruments is the amount the
Unconsolidated Joint Venture would pay or receive to terminate the
agreement at the reporting date, taking into account current interest
rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-33
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Note 2 - Properties
Properties at December 31, 1998 and 1997, are summarized as follows:
1998 1997
---- ----
Land $ 42,444 $ 48,338
Buildings, improvements and equipment 705,529 753,859
Construction in process 21,692 27,443
--------- ---------
$769,665 $829,640
========= =========
Depreciation expense for 1998, 1997 and 1996 was $26.7 million, $18.7
million and $18.0 million. Construction in process includes costs related to
expansions and other improvements at various centers. Assets under capital lease
of $5.2 million and $6.5 million at December 31, 1998 and 1997, respectively,
are included in the table above in buildings, improvements and equipment.
Note 3 - Deferred Charges and Other Assets
Deferred charges and other assets at December 31, 1998 and 1997 are summarized
as follows:
1998 1997
---- ----
Leasing $ 30,248 $ 41,568
Accumulated amortization (12,814) (20,562)
-------- --------
$ 17,434 $ 21,006
Deferred financing, net 15,734 12,442
Other, net 1,565 4,249
-------- --------
$ 34,733 $ 37,697
======== ========
F-34
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Note 4 - Debt
Mortgage Notes Payable
Mortgage notes payable at December 31, 1998 and 1997 consists of the
following:
Balance Due
Center 1998 1997 Interest Rate Maturity Date on Maturity
- ------ ---- ---- ------------- ------------ -----------
Arizona Mills $140,984 $121,991 Floating 02/01/02 $140,984
Cherry Creek 130,000 130,000 Floating 08/01/99 130,000
Fair Oaks 140,000 0 6.60% 04/01/08 140,000
Fair Oaks 0 39,119 9.00%
Lakeside 88,000 88,000 6.47% 12/15/00 88,000
Stamford Town Center 54,887 55,630 11.69% 12/01/17 0
Twelve Oaks Mall 49,955 49,940 Floating 10/15/01 50,000
Westfarms 100,000 100,000 7.85% 07/01/02 100,000
Westfarms 55,000 51,792 Floating 07/01/02 55,000
Woodfield 0 172,000 Floating
Woodland 66,000 66,000 8.20% 05/15/04 66,000
-------- --------
$824,826 $874,472
======== ========
The Arizona Mills loan is a construction facility with a maximum
availability of $142 million. The rate is capped at 9.5% until maturity, plus
credit spread. The payment of principal and interest is guaranteed by each of
the owners of Arizona Mills to the extent of its ownership percentage. The loan
agreement provides for the reduction of the amount guaranteed as certain center
performance and valuation criteria are met. TRG's guaranty of the principal was
$13.1 million at December 31, 1998.
The other Unconsolidated Joint Ventures with floating rate debt have entered
into interest rate agreements to reduce their exposure to increases in interest
rates. The rate on Cherry Creek's loan is capped to maturity at 7%, plus credit
spread, based on one month LIBOR. The loan can be extended up to an additional
two years. The rate on the Twelve Oaks loan is capped at 8.55% until maturity,
plus credit spread, based on one month LIBOR. The Westfarms balance of $55.0
million represents borrowings under a construction facility which is fully
drawn. The rate on the construction facility is capped until maturity at 6.5%,
plus credit spread.
The Stamford note also requires payment of additional interest ($1.5 million,
$1.3 million, and $1.6 million in 1998, 1997, and 1996) based on operating
results.
F-35
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Scheduled principal payments on mortgage debt are as follows as of December
31, 1998:
1999 $130,834
2000 88,936
2001 51,052
2002 297,166
2003 1,328
Thereafter 255,510
--------
Total $824,826
========
Other Notes Payable
Other notes payable at December 31, 1998 and 1997 consists of the following:
1998 1997
---- ----
Notes payable to banks, line of credit,
interest generally at prime (7.75%
at December 31, 1998), maximum borrowings
available up to $2.5 million to fund tenant
loans, allowances and buyouts and working
capital.
Other $ 1,058 $ 832
43 52
-------- ------
$ 1,101 $ 884
======= ======
Interest Expense
Interest paid on mortgages and other notes payable in 1998, 1997 and 1996, net
of amounts capitalized of $2.5 million, $9.4 million, and $4.8 million,
approximated $64.0 million, $48.7 million, and $49.9 million.
Extraordinary Item
In March 1998, Fairfax Company of Virginia L.L.C. completed a $140 million,
6.60%, secured financing maturing in 2008. The net proceeds were used to
extinguish an existing mortgage on Fair Oaks of approximately $39 million and
pay a prepayment penalty of approximately $1.8 million. In addition, proceeds of
$5.6 million were used to close out a treasury lock agreement entered into in
1997, which resulted in an effective rate on the financing of approximately 7%.
The remaining proceeds were distributed to the owners.
Interest Rate Hedging Instruments
Certain of the Unconsolidated Joint Ventures have entered into interest rate
cap agreements to reduce their exposure to changes in the cost of floating rate
debt. The terms of the derivative agreements are equivalent to the notional
amounts, reset dates and rate bases of the underlying hedged debt to assure the
effectiveness of the derivatives in reducing interest rate risk. These
Unconsolidated Joint Ventures are exposed to credit risk in the event of
nonperformance by their counterparties to the agreements, but have no
off-balance sheet risk of loss. These Unconsolidated Joint Ventures anticipate
that their counterparties will be able to fully perform their obligations under
the agreements.
F-36
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Fair Value of Debt Instruments
The estimated fair values of financial instruments at December 31, 1998 and
1997 are as follows:
December 31
--------------------------------------------------
1998 1997
--------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------- -----------------------
Mortgage notes payable $824,826 $861,141 $874,472 $910,250
Other notes payable 1,101 1,101 884 884
Interest rate instruments:
In a receivable position 3,450 288 4,787 2,164
In a payable position (4,241)
Note 5 - Leases
Shopping center space is leased to tenants and certain anchors pursuant to
lease agreements. Tenant leases typically provide for guaranteed minimum rent,
percentage rent and other charges to cover certain operating costs. Future
minimum rent under operating leases in effect at December 31, 1998 for operating
centers, assuming no new or renegotiated leases or option extensions on anchor
agreements, is summarized as follows:
1999 $ 150,314
2000 145,103
2001 133,172
2002 119,899
2003 99,921
Thereafter 329,850
Revenues derived from the combined operations of The Limited provided
approximately 10.5% of total revenues in 1998. Revenues derived from the
combined operations of The Limited were less than 10% of total revenues in 1997
and 1996. Amounts due from The Limited at December 31, 1998 were $358 thousand.
One Unconsolidated Joint Venture, as lessee, has a ground lease expiring in
2083. Rental payments under the lease were $2.0 million, $1.8 million and $1.7
million in 1998, 1997 and 1996. All of the ground lease rental payments and
scheduled future payments represent minimum rental expense payable to its Joint
Venture Partner.
The following is a schedule of future minimum rental payments required under
the lease:
1999 $ 1,984
2000 1,984
2001 1,984
2002 2,058
2003 2,281
Thereafter 654,136
F-37
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (Continued)
Capital Lease Obligations
Certain Unconsolidated Joint Ventures have entered into lease agreements for
property improvements with three to five year terms. As of December 31, 1998,
future minimum lease payments for these capital leases are as follows:
1999 $2,038
2000 1,980
2001 1,839
2002 65
2003 ------
Total minimum lease payments $5,922
Less amount representing interest (735)
------
Capital lease obligations $5,187
======
Note 6 - Transactions with Affiliates
Charges from the Manager under various written agreements were as follows
for the years ended December 31:
1998 1997 1996
---- ---- ----
Management and leasing services $17,849 $17,352 $ 16,720
Security and maintenance services 9,481 9,468 11,608
Development services 3,941 4,661 5,410
------- ------- --------
$31,271 $31,481 $ 33,738
======= ======= ========
TRG is a one-third owner of an entity providing management, leasing, and
development services to Arizona Mills, L.L.C.. Charges from this entity were
$2.5 million in 1998 and $9.7 million in 1997.
Westfarms previously loaned $2.4 million to one of its Joint Venture
Partners to purchase a portion of a deceased Joint Venture Partner's interest.
The note bears interest at approximately 7.9% and requires monthly principal
payments of $25 thousand, plus accrued interest, with the final payment due in
2001. The balance at December 31, 1998 and 1997 was $1.0 million and $1.3
million, respectively. Interest income related to the loan was approximately
$0.1 million in 1998, 1997, and 1996.
Other related party transactions are described in Notes 1 and 5.
F-38
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP
LIMITED PARTNERSHIP Schedule II
Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1997 and 1996
(in thousands)
Additions
--------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
of year expenses accounts Write-offs Transfers of year
------- -------- -------- ---------- --------- -------
Year ended December 31, 1996:
Allowance for doubtful receivables $ 157 1,303 0 (1,370) 0 $ 90
====== ====== ====== ====== ===== ====
Year ended December 31, 1997:
Allowance for doubtful receivables $ 90 697 0 (473) 0 $314
====== ====== ====== ===== ===== ====
Year ended December 31, 1998:
Allowance for doubtful receivables $ 314 1,119 0 (1,148) (30)(1) $255
====== ====== ====== ====== ==== ====
(1) Subsequent to September 30, 1998, the date of the GMPT Exchange, the
accounts of Woodfield are no longer included in these combined financial
statements.
F-39
UNCONSOLIDATED JOINT VENTURES OF THE TAUBMAN REALTY GROUP LIMITED PARTNERSHIP Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
Gross Amount at Which
Initial Cost Carried at Close of Period
to Company Cost ---------------------------------------------
------------------- Capitalized Accumulated Total
Buildings and Subsequent Depreciation Cost Net
Land Improvements to Acquisition Land BI&E Total (A/D) of A/D
---- ------------- -------------- ---- ---- ----- ------------ -------
Taubman Shopping Centers:
Arizona Mills, Tempe, AZ $22,017 $163,618 $ 3,697 $22,017 $167,315 $189,332 $ 8,218 $181,114
Cherry Creek, Denver, CO 55 103,488 61,606 55 165,094 165,149 38,727 126,422
Fair Oaks, Fairfax, VA 5,167 36,182 11,216 5,167 47,398 52,565 29,071 23,494
Lakeside, Sterling Heights, MI 2,667 21,182 10,919 2,667 32,101 34,768 22,017 12,751
Stamford Town Center,
Stamford, CT 1,977 43,461 11,856 1,977 55,317 57,294 28,033 29,261
Twelve Oaks Mall, Novi, MI 803 28,640 16,655 803 45,295 46,098 24,308 21,790
Westfarms, Farmington, CT 5,287 38,657 109,700 5,287 148,357 153,644 28,231 125,413
Woodland, Grand Rapids, MI 2,367 19,078 25,574 2,367 44,652 47,019 18,911 28,108
Other Properties:
Peripheral land 2,104 0 0 2,104 0 2,104 0 2,104
Construction in Process 0 0 21,692 0 21,692 21,692 0 21,692
------- -------- -------- ------- -------- -------- -------- --------
TOTAL $42,444 $454,306 $272,915 $42,444 $727,221 $769,665 $197,516 $572,149
======= ======== ======== ======= ======== ======== ======== ========
Date of
Completion of Depreciable
Encumbrances Construction Life
------------ ------------- -----------
Taubman Shopping Centers:
Arizona Mills, Tempe, AZ $140,984 1997 50 Years
Cherry Creek, Denver, CO 130,000 1990 40 Years
Fair Oaks, Fairfax, VA 140,000 1980 55 Years
Lakeside, Sterling Heights, MI 88,000 1976 40 Years
Stamford Town Center,
Stamford, CT 54,887 1982 40 Years
Twelve Oaks Mall, Novi, MI 49,955 1977 50 Years
Westfarms, Farmington, CT 155,000 1974 34 Years
Woodland, Grand Rapids, MI 66,000 1968 33 Years
Other Properties:
Peripheral land 0
Construction in Process 0
--------
TOTAL $824,826
========
The changes in total real estate assets for the three years ended December 31,
1998 are as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year $ 829,640 $638,960 $570,066
Improvements 64,455 192,888 110,187(1)
Disposals (2,715) (2,208) (4,775)
Transfers Out (121,715)(2) (36,518)(3)
--------- -------- --------
Balance, end of year $ 769,665 $829,640 $638,960
========= ======== ========
The changes in accumulated depreciation and amortization for the three years
ended December 31, 1998 are as follows:
1998 1997 1996
---- ---- ----
Balance, beginning of year $(205,659) $(188,491) $(196,263)
Depreciation for year (26,707) (18,669) (17,976)
Disposals 1,685 1,501 4,564
Transfers Out 33,165(2) 21,184(3)
--------- --------- ---------
Balance, end of year $(197,516) $(205,659) $(188,491)
========= ========= =========
(1) Includes TRG's transfer to Arizona Mills of TRG's accumulated
pre-construction costs related to this project.
(2) Subsequent to September 30, 1998, the date of the GMPT Exchange, the
accounts of Woodfield are no longer included in these combined financial
statements.
(3) Subsequent to TRG's purchase of the Joint Venture Partner's interest,
the accounts of Fairlane are no longer included in these combined financial
statements.
F-40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: March 26, 1999 By: /S/ ROBERT S. TAUBMAN
---------------------
Robert S. Taubman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board March 26, 1999
- --------------------- --------------
A. Alfred Taubman
* Vice Chairman of the Board March 26, 1999
- --------------------- --------------
Robert C. Larson
/s/ ROBERT S. TAUBMAN President, Chief Executive Officer, March 26, 1999
- --------------------- and Director --------------
Robert S. Taubman
/s/ LISA A. PAYNE Executive Vice President, March 26, 1999
- --------------------- Chief Financial Officer, and Director --------------
Lisa A. Payne
/s/ ESTHER R. BLUM Senior Vice President, Controller and March 26, 1999
- --------------------- Chief Accounting Officer --------------
Esther R. Blum
* Director March 26, 1999
- --------------------- --------------
Graham Allison
* Director March 26, 1999
- --------------------- --------------
Claude M. Ballard
* Director March 26, 1999
- --------------------- --------------
Allan J. Bloostein
* Director March 26, 1999
- --------------------- --------------
Jerome A. Chazen
* Director March 26, 1999
- --------------------- --------------
S. Parker Gilbert
*By: /s/ LISA A. PAYNE
-----------------
Lisa A. Payne, as
Attorney-in-Fact
EXHIBIT INDEX
Exhibit
Number
- ------
2 -- Separation and Relative Value Adjustment Agreement between The
Taubman Realty Group Limited Partnership and GMPTS Limited Partnership
(without exhibits or schedules, which will be supplementally provided
to the Securities and Exchange Commission upon its request)
(incorporated herein by reference to Exhibit 2 filed with the
Registrant's Current Report on Form 8-K dated September 30, 1998).
3(a) -- Restated By-Laws of Taubman Centers, Inc., (incorporated herein by
reference to Exhibit 3 (b) filed with the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998
("1998 Third Quarter Form 10-Q")).
3(b) -- Restated Articles of Incorporation of Taubman Centers, Inc.
(incorporated by reference to Exhibit 3(a)filed with the Registrant's
1998 Third Quarter Form 10-Q).
4(a) -- Indenture dated as of July 22, 1994 among Beverly Finance Corp., La
Cienega Associates, the Borrower, and Morgan Guaranty Trust Company of
New York, as Trustee (incorporated herein by reference to Exhibit 4(h)
filed with the 1994 Second Quarter Form 10-Q).
4(b) -- Deed of Trust, with assignment of Rents, Security Agreement and
Fixture Filing, dated as of July 22, 1994, from La Cienega Associates,
Grantor, to Commonwealth Land Title Company, Trustee, for the benefit
of Morgan Guaranty Trust Company of New York, as Trustee, Beneficiary
(incorporated herein by reference to Exhibit 4(i) filed with the 1994
Second Quarter Form 10-Q).
4(c) -- Construction Loan Agreement among Taubman MacArthur Associates Limited
Partnership, as Borrower, and Bayerische Hypotheken - Und Wechsel -
Bank, Aktiengesellschaft, New York Branch and The Other Banks and
Financial Institutions from time to time Parties hereto, as Lenders
and Bayerische Hypotheken - Und Wechsel - Bank Aktiengesellschaft, New
York Branch, as Agent, dated as of October 28, 1997 (incorporated
herein by reference to Exhibit 4 (i) filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997 ("1997 Form
10-K")).
4(d) -- Loan Agreement dated as of November 25, 1997 among The Taubman Realty
Group Limited Partnership, as Borrower, Fleet National Bank, as a
Bank, PNC Bank, National Association, as a Bank, the other Banks
signatory hereto, each as a Bank, and PNC Bank, National Association,
as Administrative Agent(incorporated herein by reference to Exhibit
4(j) filed with the 1997 Form 10-K).
4(e) -- Revolving Credit Agreement dated as of September 21, 1998 among The
Taubman Realty Group Limited Partnership, as Borrower,UBS AG, New York
Branch, as a Bank and UBS AG, New York Branch, as Administrative Agent
(incorporated herein by reference to Exhibit (4) filed with the 1998
Third Quarter Form 10-Q).
10(a) -- The Second Amendment and Restatement of Agreement of Limited
Partnership of The Taubman Realty Group Limited Partnership dated
September 30, 1998 (incorporated herein by reference to Exhibit 10
filed with the 1998 Third Quarter Form 10-Q).
*10(b)-- The Taubman Realty Group Limited Partnership 1992 Incentive Option
Plan, as Amended and Restated Effective as of September 30, 1997
(incorporated herein by reference to Exhibit 10 (b) filed with the
1997 Form 10-K).
EXHIBIT INDEX
Exhibit
Number
- ------
10(c) -- Registration Rights Agreement among Taubman Centers, Inc., General
Motors Hourly-Rate Employees Pension Trust, General Motors Retirement
Program for Salaried Employees Trust, and State Street Bank & Trust
Company, as trustee of the AT&T Master Pension Trust (incorporated
herein by reference to Exhibit 10(e) filed with the 1992 Form 10-K).
10(d) -- Master Services Agreement between The Taubman Realty Group Limited
Partnership and the Manager (incorporated herein by reference to
Exhibit 10(f) filed with the 1992 Form 10-K).
10(e) -- Cash Tender Agreement among Taubman Centers, Inc., A. Alfred Taubman,
acting not individually but as Trustee of The A. Alfred Taubman
Restated Revocable Trust, as amended and restated in its entirety by
Instrument dated January 10, 1989 (as the same has been and may
hereafter be amended from time to time), TRA Partners, and GMPTS
Limited Partnership (incorporated herein by reference to Exhibit 10(g)
filed with the 1992 Form 10-K).
*10(f)-- Supplemental Retirement Savings Plan (incorporated herein by
reference to Exhibit 10(i) filed with the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1994).
*10(g)-- First Amendment to The Taubman Company Long-Term Compensation Plan
(incorporated herein by reference to Exhibit 10 filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
*10(h)-- Employment agreement between The Taubman Company Limited
Partnership and Lisa A. Payne (incorporated herein by reference to
Exhibit 10 filed with the 1997 First Quarter Form 10-Q).
*10(i)-- Amended and Restated Continuing Offer, dated as of September
30, 1997 (incorporated herein by reference to Exhibit 10 filed with
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividends.
21 -- Subsidiaries of Taubman Centers, Inc.
23 -- Consent of Deloitte & Touche LLP.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a)-- Purchase and Sale Agreement By and Between One Federal Street Joint
Venture and The Taubman Realty Group Limited Partnership, dated July
16, 1997 (Purchase and Sale Agreement) (without exhibits or schedules,
which will be supplementally provided to the Securities and Exchange
Commission upon its request) (incorporated herein by reference to
Exhibit 99(a) filed with the Registrant's Current Report on Form 8-K
dated September 4, 1997).
99(b)-- First Amendment to Purchase and Sale Agreement, dated August 15, 1997
(without exhibits or schedules, which will be supplementally provided
to the Securities and Exchange Commission upon its request)
(incorporated herein by reference to Exhibit 99(b) filed with the
Registrant's Current Report on Form 8-K dated September 4, 1997).
- --------------------------
* A management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.