SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 2002
Commission File No. 1-11530
Taubman Centers, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2033632
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(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
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(Address of principal executive offices) (Zip Code)
(248) 258-6800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X . No .
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As of May 10, 2002, there were outstanding 51,072,735 shares of the Company's common stock, par value
$0.01 per share.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following consolidated financial statements of Taubman Centers, Inc. (the Company) are provided pursuant to
the requirements of this item.
Consolidated Balance Sheet as of March 31, 2002 and December 31, 2001..................................... 2
Consolidated Statement of Operations and Comprehensive Income for the three months ended
March 31, 2002 and 2001................................................................................ 3
Consolidated Statement of Cash Flows for the three months ended March 31, 2002
and 2001 .............................................................................................. 4
Notes to Consolidated Financial Statements................................................................ 5
1
TAUBMAN CENTERS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
March 31 December 31
-------- -----------
2002 2001
---- ----
Assets:
Properties $ 2,188,035 $ 2,194,717
Accumulated depreciation and amortization (349,543) (337,567)
-------------- -------------
$ 1,838,492 $ 1,857,150
Investment in Unconsolidated Joint Ventures (Note 5) 144,862 148,801
Cash and cash equivalents 20,621 27,789
Accounts and notes receivable, less allowance
for doubtful accounts of $7,323 and $5,345 in
2002 and 2001 33,848 35,734
Accounts and notes receivable from related parties 12,967 20,645
Deferred charges and other assets 49,213 51,320
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$ 2,100,003 $ 2,141,439
============= =============
Liabilities:
Notes payable $ 1,423,197 $ 1,423,241
Accounts payable and accrued liabilities 144,702 181,912
Dividends and distributions payable 19,409 12,937
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$ 1,587,308 $ 1,618,090
Commitments and Contingencies (Note 8)
Preferred Equity of TRG (Note 1) $ 97,275 $ 97,275
Partners' Equity of TRG allocable to minority partners (Note 1)
Shareowners' Equity:
Series A Cumulative Redeemable Preferred Stock,
$0.01 par value, 8,000,000 shares authorized,
$200 million liquidation preference,
8,000,000 shares issued and outstanding at
March 31, 2002 and December 31, 2001 $ 80 $ 80
Series B Non-Participating Convertible Preferred Stock,
$0.001 par and liquidation value, 40,000,000 shares
authorized and 31,767,066 shares issued and
outstanding at March 31, 2002 and December 31, 2001 32 32
Series C Cumulative Redeemable Preferred Stock,
$0.01 par value, 2,000,000 shares authorized, $75 million
liquidation preference, none issued
Series D Cumulative Redeemable Preferred Stock,
$0.01 par value, 250,000 shares authorized, $25 million
liquidation preference, none issued
Common Stock, $0.01 par value, 250,000,000 shares
authorized, 51,017,431 and 50,734,984 issued and
outstanding at March 31, 2002 and December 31, 2001 510 507
Additional paid-in capital 677,363 673,043
Accumulated other comprehensive income (Note 2) (2,770) (3,119)
Dividends in excess of net income (259,795) (244,469)
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$ 415,420 $ 426,074
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$ 2,100,003 $ 2,141,439
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See notes to consolidated financial statements.
2
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except share data)
Three Months Ended March 31
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2002 2001
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Income:
Minimum rents $ 46,750 $ 38,513
Percentage rents 1,065 1,037
Expense recoveries 27,775 23,134
Revenues from management, leasing and
development services 5,128 6,371
Other 5,904 5,936
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$ 86,622 $ 74,991
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Operating Expenses:
Recoverable expenses $ 23,386 $ 19,474
Other operating 9,956 6,995
Management, leasing and development services 4,893 4,341
General and administrative 4,920 4,755
Interest expense 20,629 15,199
Depreciation and amortization 20,703 16,577
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$ 84,487 $ 67,341
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Income before equity in income of Unconsolidated
Joint Ventures, discontinued operations, cumulative effect of
change in accounting principle and minority and preferred interests $ 2,135 $ 7,650
Equity in income before cumulative effect of change in
accounting principle of Unconsolidated Joint Ventures (Note 5) 6,137 4,856
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Income before discontinued operations, cumulative effect of change
in accounting principle, and minority and preferred interests $ 8,272 $ 12,506
Discontinued operations (Note 3):
Income from operations 1,744 1,230
Gain on disposition of interest in center 2,049
Cumulative effect of change in accounting principle (Note 2) (8,404)
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Income before minority and preferred interests $ 12,065 $ 5,332
Minority interest in consolidated joint ventures 211 417
Minority interest in TRG:
TRG income allocable to minority partners (4,540) (483)
Distributions in excess of earnings allocable to minority partners (3,620) (7,515)
TRG Series C and D preferred distributions (Note 1) (2,250) (2,250)
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Net income (loss) $ 1,866 $ (4,499)
Series A preferred dividends (4,150) (4,150)
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Net loss allocable to common shareowners $ (2,284) $ (8,649)
============== =============
Net income (loss) $ 1,866 $ (4,499)
Other comprehensive income (loss) (Note 2):
Cumulative effect of change in accounting principle (779)
Unrealized gain (loss) on interest rate instruments 173 (1,089)
Reclassification adjustment for amounts recognized in net income 176 99
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Comprehensive income (loss) $ 2,215 $ (6,268)
============= ==============
Basic loss per common share (Note 9):
Loss from continuing operations $ (0.06) $ (0.09)
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Net loss $ (0.04) $ (0.17)
============== =============
Diluted loss per common share (Note 9):
Loss from continuing operations $ (0.06) $ (0.09)
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Net loss $ (0.05) $ (0.17)
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Cash dividends declared per common share $ .255 $ .25
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Weighted average number of common shares outstanding 50,883,089 50,402,465
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See notes to consolidated financial statements.
3
TAUBMAN CENTERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended March 31
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2002 2001
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Cash Flows from Operating Activities:
Income before minority and preferred interests $ 12,065 $ 5,332
Adjustments to reconcile income before
minority and preferred interests to net cash
provided by operating activities:
Depreciation and amortization of continuing operations 20,703 16,577
Depreciation and amortization of discontinued operations 467 641
Provision for losses on accounts receivable 1,239 33
Gains on sales of land (1,957) (1,260)
Gain on disposition of interest in center (2,049)
Cumulative effect of change in accounting principle 8,404
Other 1,026 596
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables, deferred charges and other assets 6,029 988
Accounts payable and other liabilities (16,424) (19,235)
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Net Cash Provided By Operating Activities $ 21,099 $ 12,076
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Cash Flows from Investing Activities:
Additions to properties $ (45,496) $ (52,429)
Proceeds from sales of land 2,833 1,743
Investment in equity securities (1,313)
Proceeds from sale of center 28,210
Contributions to Unconsolidated Joint Ventures (10,483)
Distributions from Unconsolidated Joint Ventures
in excess of income before cumulative effect of change
in accounting principle 4,045 5,689
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Net Cash Used in Investing Activities $ (10,408) $ (56,793)
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Cash Flows from Financing Activities:
Debt proceeds $ 18,108 $ 70,059
Debt payments (18,152) (546)
Repurchases of common stock (11,037)
Distributions to minority and preferred interests (8,160) (7,998)
Issuance of stock pursuant to Continuing Offer 3,315 22
Cash dividends to common shareowners (12,970) (12,783)
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Net Cash Provided By (Used In) Financing Activities $ (17,859) $ 37,717
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Net Decrease in Cash and Cash Equivalents $ (7,168) $ (7,000)
Cash and Cash Equivalents at Beginning of Period 27,789 18,842
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Cash and Cash Equivalents at End of Period $ 20,621 $ 11,842
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See notes to consolidated financial statements.
4
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Interim Financial Statements
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 March 31, 2002 included 19 urban and suburban shopping centers in nine states. Two
additional centers are under construction in Florida and Virginia.
The consolidated financial statements of the Company include all accounts of the Company, the Operating
Partnership and its consolidated subsidiaries, including The Taubman Company LLC (the Manager); 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.
At March 31, 2002, the Operating Partnership's equity included three classes of preferred equity (Series A, C,
and D) and the net equity of the partnership unitholders. Net income and distributions of the Operating
Partnership are allocable first to the preferred equity interests, and the remaining amounts to the general and
limited partners in the Operating Partnership in accordance with their percentage ownership. The Series A
Preferred Equity is owned by the Company and is eliminated in consolidation. The Series C and Series D Preferred
Equity are owned by institutional investors and have a fixed 9% coupon rate, no stated maturity, sinking fund, or
mandatory redemption requirements.
Because the net equity of the partnership unitholders is less than zero, the interest of the noncontrolling
unitholders is presented as a zero balance in the balance sheet as of March 31, 2002 and December 31, 2001. The
income allocated to the noncontrolling unitholders is equal to their share of distributions. The net equity of
the Operating Partnership is less than zero because of 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 ownership in the Operating Partnership at March 31, 2002 consisted of a 61.8% managing general
partnership interest, as well as the Series A Preferred Equity interest. The Company's average ownership
percentage in the Operating Partnership for the three months ended March 31, 2002 and 2001 was 61.7% and 61.5%,
respectively. During the three months ended March 31, 2002, the Company's ownership in the Operating Partnership
increased to 61.8% due to additional interests acquired in connection with the Continuing Offer (Note 8). At
March 31, 2002, the Operating Partnership had 82,784,497 units of partnership interest outstanding, of which the
Company owned 51,017,431. Included in the total units outstanding are 174,058 units issued in connection with
the 1999 acquisition of Lord Associates that currently do not receive allocations of income or distributions.
The unaudited interim financial statements should be read in conjunction with the audited financial statements
and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In
the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial statements for the interim periods have been made. The results of interim periods
are not necessarily indicative of the results for a full year.
Certain prior year amounts have been reclassified to conform to 2002 classifications.
Note 2 - Derivatives
Effective January 1, 2001, the Company adopted SFAS 133 and its related amendments and interpretations, which
establish accounting and reporting standards for derivative instruments. The Company uses derivative instruments
primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company
routinely uses cap, swap, and treasury lock agreements to meet these objectives.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to Other Comprehensive
Income (OCI) of $0.8 million. These amounts represented the transition adjustments necessary to mark the
Company's share of interest rate agreements to fair value as of January 1, 2001.
5
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition to the transition adjustment in first quarter 2001, the Company recognized in earnings its share
of unrealized gains (losses) of $1.0 million and $(1.8) million during the three months ended March 31, 2002 and
2001, respectively, due to changes in interest rates and the resulting changes in value of the Company's interest
rate agreements. Of these amounts, approximately $1.0 million and $(1.5) million represent the changes in value
of the Dolphin swap agreement and the remainder represents the changes in time value of cap instruments.
As of March 31, 2002, the Company has $2.8 million of net derivative losses included in Accumulated OCI as
follows:
Hedged Items OCI Amounts
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(in thousands)
2001 Regency Square financing $ 2,688
Dolphin construction facility 255
$275 million line of credit (173)
---------------
$ 2,770
===============
The realized loss on the Regency Square financing will be recognized as additional interest expense over the
ten-year term of the debt. The loss on the hedge of the Dolphin Mall construction facility will be recognized as
a reduction of earnings through its 2002 maturity date. Gains or losses on the hedge of the $275 million line of
credit will be recognized as an adjustment of interest expense over the one-year effective period of the swap
agreement, beginning November 2002. The Company expects that approximately $0.7 million will be reclassified
from Accumulated OCI and recognized as a reduction of earnings during the next twelve months.
Note 3 - Acquisitions and Dispositions
In early 2002, the Operating Partnership entered into a definitive purchase and sale agreement to acquire for
$88 million a 50% general partnership interest in SunValley Associates, a California general partnership that
owns the Sunvalley Shopping Center located in Concord, California. The $88 million purchase price consists of $28
million of cash and $60 million of existing debt that encumbers the property. The Company's interest in the
secured debt consists of a $55 million primary note bearing interest at LIBOR plus 0.92% and a $5 million note
bearing interest at LIBOR plus 3.0%. The notes mature in September 2003 and have two one-year extension options.
The center is also subject to a ground lease that expires in 2061. The Manager has managed the property since its
development and will continue to do so after the acquisition. Although the Operating Partnership is purchasing
its interest in Sunvalley from an unrelated third party, the other 50% partner in the property is an entity owned
and controlled by Mr. A. Alfred Taubman, the Company's largest shareholder.
Also in early 2002, the Company entered into agreements to sell its interests in LaCumbre Plaza and Paseo
Nuevo, subject to satisfying closing conditions, for $77 million. The centers are subject to ground leases and
are unencumbered by debt. The centers were purchased in 1996 for $59 million. In March 2002, the Company
completed the sale of LaCumbre Plaza, resulting in a gain of $2.0 million. The Company's gain on the sale
differed from the $6.1 million gain recognized by the Operating Partnership due to the Company's $4.1 million
additional basis in LaCumbre Plaza. The results of Paseo Nuevo and LaCumbre Plaza have been presented as
discontinued operations in the Company's statement of operations. The net book value of Paseo Nuevo as of March
31, 2002 was $37 million.
In April 2002, the Company entered into an agreement to purchase an additional interest in Arizona Mills for
approximately $14 million in cash plus the $19 million share of the debt that encumbers the property. After
closing, the Company will have a 50% interest in the center.
The acquisition of Sunvalley Shopping Center closed in May 2002. The acquisition of Arizona Mills and the
sale of Paseo Nuevo are expected to close during the second quarter of 2002. The Company expects to use the net
proceeds from the sale of the two centers to fund the acquisitions of Sunvalley and Arizona Mills and pay down
borrowings under the Company's lines of credit.
6
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4 - Tax Elections
The Company's Taxable REIT Subsidiaries are subject to corporate level income taxes, which are provided for in
the Company's financial statements. The Company's deferred tax assets and liabilities reflect the impact of
temporary differences between the amounts of assets and liabilities for financial reporting purposes and the
bases of such assets and liabilities as measured by tax laws. Deferred tax assets are reduced, if necessary, by a
valuation allowance to the amount where realization is more likely than not assured after considering all available
evidence. The Company's temporary differences primarily relate to deferred compensation and depreciation.
During the three months ended March 31, 2002, the Company's federal income tax expense was zero as a result
of a net operating loss incurred by its Taxable REIT Subsidiaries. As of March 31, 2002, the Company had a net
deferred tax asset of $4.4 million, after a valuation allowance of $7.0 million.
Note 5 - Investments in Unconsolidated Joint Ventures
Following are the Company's investments in Unconsolidated Joint Ventures. The Operating Partnership is the
managing general partner or managing member in these Unconsolidated Joint Ventures, except for those denoted with
an (*).
Ownership as of
Unconsolidated Joint Venture Shopping Center March 31, 2002
------------------------------ ---------------- ----------------
Arizona Mills, L.L.C. * Arizona Mills 37% (Note 3)
Dolphin Mall Associates Dolphin Mall 50
Limited Partnership
Fairfax Company of Virginia, L.L.C. Fair Oaks 50
Forbes Taubman Orlando, L.L.C. * The Mall at Millenia 50
(under construction)
Rich-Taubman Associates Stamford Town Center 50
Tampa Westshore Associates International Plaza 26
Limited Partnership
Taubman-Cherry Creek Cherry Creek 50
Limited Partnership
West Farms Associates Westfarms 79
Woodland Woodland 50
In September 2001, International Plaza, a 1.3 million square foot center, opened in Tampa, Florida. As of
March 31, 2002, the Operating Partnership has a preferred investment in International Plaza of $20.0 million, on
which an annual preferential return of 8.25% will accrue.
In March 2001, Dolphin Mall, a 1.3 million square foot value regional center, opened in Miami, Florida. As of
March 31, 2002, the Operating Partnership has a preferred investment in Dolphin Mall of $29.2 million, on which
an annual preferential return of 16.0% will accrue.
In addition to the preferred return on its investments in International Plaza and Dolphin Mall, the Operating
Partnership will receive a return of its preferred investments before any available cash will be utilized for
distributions to non-preferred partners.
The Company is currently developing The Mall at Millenia in Orlando, Florida. This 1.2 million square foot
center is expected to open in October 2002.
The Company's carrying value of its Investment in Unconsolidated Joint Ventures differs from its share of the
deficiency in assets reported in the combined balance sheet of the Unconsolidated Joint Ventures due to (i) the
Company's cost of its investment in excess of the historical net book values of the Unconsolidated Joint Ventures
and (ii) the Operating Partnership's adjustments to the book basis, including intercompany profits on sales of
services that are capitalized by the Unconsolidated Joint Ventures. The Company's additional basis allocated to
depreciable assets is recognized on a straight-line basis over 40 years. The Operating Partnership's differences
in bases are amortized over the useful lives of the related assets.
7
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Combined balance sheet and results of operations information are presented in the following table (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.
March 31 December 31
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2002 2001
---- ----
Assets:
Properties $ 1,442,628 $ 1,367,082
Accumulated depreciation and amortization (230,597) (220,201)
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$ 1,212,031 $ 1,146,881
Other assets 64,830 80,256
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$ 1,276,861 $ 1,227,137
============= =============
Liabilities and partnership equity:
Notes payable $ 1,196,191 $ 1,154,141
Other liabilities 124,406 109,247
TRG's partnership equity (accumulated deficiency in assets) (3,813) 903
Unconsolidated Joint Venture Partners'
accumulated deficiency in assets (39,923) (37,154)
-------------- -------------
$ 1,276,861 $ 1,227,137
============= =============
TRG's partnership equity (accumulated deficiency in
assets) (above) $ (3,813) $ 903
TRG basis adjustments, including elimination of intercompany
profit 24,148 22,612
TCO's additional basis 124,527 125,286
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Investment in Unconsolidated Joint Ventures $ 144,862 $ 148,801
============= =============
Three Months Ended
March 31
-----------------------------------
2002 2001
---- ----
Revenues $ 64,685 $ 54,055
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Recoverable and other operating expenses $ 22,401 $ 18,460
Interest expense 18,182 18,590
Depreciation and amortization 13,951 9,132
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Total operating costs $ 54,534 $ 46,182
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Income before cumulative effect of change in accounting
principle $ 10,151 $ 7,873
Cumulative effect of change in accounting principle (3,304)
------------- -------------
Net income $ 10,151 $ 4,569
============= =============
Net income allocable to TRG $ 5,587 $ 2,394
Cumulative effect of change in accounting principle
allocable to TRG 1,612
Realized intercompany profit 1,309 1,609
Depreciation of TCO's additional basis (759) (759)
-------------- -------------
Equity in income before cumulative effect of change in
accounting principle of Unconsolidated Joint Ventures $ 6,137 $ 4,856
============= =============
Beneficial interest in Unconsolidated
Joint Ventures' operations:
Revenues less recoverable and other operating expenses $ 24,682 $ 20,052
Interest expense (9,023) (9,816)
Depreciation and amortization (9,522) (5,380)
------------- -------------
Income before cumulative effect of change in accounting
principle $ 6,137 $ 4,856
============= =============
8
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6 - Beneficial Interest in Debt and Interest Expense
In March 2002, the Company entered into a swap agreement to fix the LIBOR rate to 4.3% on a notional amount of
$100 million as a hedge of the Company's $275 million line of credit. This one-year swap begins in November
2002. Also in March 2002, the Company exercised its option to extend the maturity of the Great Lakes Crossing
mortgage to April 2003.
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 in consolidated subsidiaries excludes debt and
interest relating to the minority interests in Great Lakes Crossing, MacArthur Center, and The Mall at Wellington
Green.
At 100% At Beneficial Interest
------------------------------- ----------------------------------------------
Unconsolidated Unconsolidated
Consolidated Joint Consolidated Joint
Subsidiaries Ventures Subsidiaries Ventures Total
------------- ----------------- -------------- ----------------- -------------
(in thousands of dollars)
Debt as of:
March 31, 2002 1,423,197 1,196,191 1,344,283 581,602 1,925,885
December 31, 2001 1,423,241 1,154,141 1,345,086 562,811 1,907,897
Capital Lease Obligations:
March 31, 2002 280 -- 238 -- 238
December 31, 2001 304 64 259 40 299
Capitalized Interest:
Three months ended March 31, 2002 1,146 934 1,120 467 1,587
Three months ended March 31, 2001 8,177 5,105 8,177 2,132 10,309
Interest Expense:
Three months ended March 31, 2002 20,629 18,182 19,419 9,023 28,442
Three months ended March 31, 2001 15,199 18,590 13,872 9,816 23,688
9
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Incentive Option Plan
The Operating Partnership has an incentive option plan for employees of the Manager. 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 8). In December 2001, the Company amended the plan to allow vested unit
options to be exercised by tendering mature units with a market value equal to the exercise price of the unit
options.
In December 2001, the Company's chief executive officer executed a unit option deferral election with regard
to options for approximately three million units at an exercise price of $11.14 per unit due to expire in
November 2002. This election will allow him to defer the receipt of the net units he would receive upon exercise.
These deferred option units will remain in a deferred compensation account until Mr. Taubman's retirement or ten
years from the date of exercise. Beginning with the ten year anniversary of the date of exercise, the deferred
partnership units will be released in ten annual installments. In April 2002, Mr. Taubman exercised options for
1.5 million units by tendering 1.1 million mature units and deferring the receipt of 0.4 million units under the
unit option deferral election. As the Company declares distributions, the deferred option units will receive
their proportionate share of the distributions in the form of cash payments.
There were options for 282,447 units exercised during the three months ended March 31, 2002 at an average
exercise price of $11.74 per unit. During the three months ended March 31, 2001, options for 1,975 units were
exercised at a weighted average price of $11.14 per unit. There were no options granted or cancelled during the
three months ended March 31, 2002 and 2001. As of March 31, 2002, there were vested options for 5.7 million units
with a weighted average exercise price of $11.39 per unit and outstanding options (including unvested options)
for a total of 5.8 million units with a weighted average exercise price of $11.37 per unit.
Currently, options for 5.5 million Operating Partnership units may be issued under the plan, 4.3 million of
which have been issued. When the holder of an option elects to pay the exercise price by surrendering
partnership units, only those units issued to the holder in excess of the number of units surrendered are counted
for purposes of determining the remaining number of units available for future grants under the plan.
Note 8 - 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 (the Cash Tender Agreement) with A. Alfred Taubman,
who owns an interest in the Operating Partnership, whereby he 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 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 certain others may participate
in tenders.
10
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Based on a market value at March 31, 2002 of $15.06 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $372 million. The
purchase of these interests at March 31, 2002 would have resulted in the Company owning an additional 30%
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
to exchange shares of common stock for partnership interests in the Operating Partnership (the Continuing Offer).
Under the Continuing Offer agreement, one unit of partnership interest is exchangeable for one share of the
Company's common stock.
Shares of common stock that were acquired by General Motors pension trusts in connection with the IPO may be
sold through a registered offering. Pursuant to a registration rights agreement with the Company, the owners 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.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of March 31, 2002. All of the loan agreements provide for a reduction of the amounts guaranteed
as certain center performance and valuation criteria are met.
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 3/31/02 as of 3/31/02 as of 3/31/02 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 176.3 88.2 88.2 50% 100%
Great Lakes Crossing 150.3 127.8 150.3 100% 100%
International Plaza 182.4 48.3 91.2 50%(1) 50%(1)
The Mall at Millenia 75.5 37.8 37.8 50% 50%
The Mall at Wellington Green 134.0 120.6 134.0 100% 100%
The Shops at Willow Bend 193.6 193.6 193.6 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent
of approximately 25% of the amounts guaranteed.
In addition, the Operating Partnership has guaranteed obligations of approximately $4.1 million relating to
its investment in MerchantWired. In May 2002, the Company paid $3.3 million of these quaranteed obligations. The
Company also has a capital commitment for approximately $0.8 million in funding for Constellation
Real Technologies, LLC, although any additional contributions would be restricted to a maximum of $0.2 million
in 2002 and $0.3 million in 2003.
11
TAUBMAN CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9 - 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. Diluted
earnings per share of future periods will also reflect the net units deferred under the unit option deferral
election (Note 7). For the three months ended March 31, 2001, options for 1.9 million units of partnership
interest with an average exercise price of $12.45 per unit were excluded from the computation of diluted earnings
per unit because the exercise prices were greater than the average market price for the period calculated. There
were no options excluded from the computation of diluted earnings per unit for the three months ended March 31,
2002.
Three Months
Ended March 31
---------------------------------
2002 2001
---- ----
(in thousands, except share data)
Loss from continuing operations allocable to common
shareowners (Numerator):
Net loss allocable to common shareowners $ (2,284) $ (8,649)
Common shareowners' share of discontinued operations (775) (756)
Common shareowners' share of cumulative effect of
change in accounting principle 4,924
------------- ------------
Basic loss from continuing operations $ (3,059) $ (4,481)
Effect of dilutive options (49) (28)
------------- ------------
Diluted loss from continuing operations $ (3,108) $ (4,509)
============= ============
Shares (Denominator) - basic and diluted 50,883,089 50,402,465
============= ============
Loss from continuing operations per common share -
basic and diluted $ (.06) $ (.09)
============= ===========
Per share effects of discontinued operations and cumulative
effect of change in accounting principle:
Discontinued operations per common share - basic $ .02 $ .02
============= ===========
Discontinued operations per common share - diluted $ .01 $ .01
============= ===========
Cumulative effect of change in accounting
principle per common share - basic and diluted $ (.10)
===========
Note 10 - Cash Flow Disclosures and Noncash Investing and Financing Activities
Interest on mortgage notes and other loans paid during the three months ended March 31, 2002 and 2001, net of
amounts capitalized of $1.1 million and $8.2 million, was $18.7 million and $14.1 million, respectively. The
following non-cash investing and financing activities occurred during the three months ended March 31, 2002 and
2001:
Three Months ended March 31
---------------------------
2002 2001
---- ----
(in thousands)
Non-cash additions to properties $ 10,011
Partnership units released $ 1,008 878
Non-cash additions to properties primarily represent accrued construction and tenant allowance costs of new
centers and development projects.
Note 11 - Subsequent Event
In May 2002, the Company entered into a swap agreement to fix the LIBOR rate to 4.125% on a notional amount of
$100 million as a hedge of the Willow Bend construction facility. The term of the agreement is November 2002
through June 2004. Other subsequent events are described in Notes 3, 7, and 8.
12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains
various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent
the Company's expectations or beliefs concerning future events, including the following: statements regarding
future developments and joint ventures, rents and returns, statements regarding the continuation of trends, and
any statements regarding the sufficiency of the Company's cash balances and cash generated from operating and
financing activities for the Company's future liquidity and capital resource needs. The Company cautions that
although forward-looking statements reflect the Company's good faith beliefs and best judgment based upon current
information, these statements are qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, including those risks, uncertainties, and factors
detailed from time to time in reports filed with the SEC, and in particular those set forth under the headings
"General Risks of the Company" and "Environmental Matters" in the Company's Annual Report on Form 10-K. The
following discussion should be read in conjunction with the accompanying Consolidated 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 (the
Operating Partnership or TRG), 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 LLC (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.
During 2001, the Company opened four new shopping centers (Results of Operations - New Center Openings).
Early in 2002, the Company entered into agreements to sell its interests in LaCumbre Plaza and Paseo Nuevo; the
sale of LaCumbre Plaza closed in March 2002 and Paseo Nuevo is expected to close in the second quarter (Results
of Operations - Acquisition and Dispositions). Additional 2002 and 2001 statistics that exclude the new
centers, LaCumbre Plaza, and Paseo Nuevo are provided to present the performance of comparable centers in the
Company's continuing operations.
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. Additionally, most
percentage rents are recorded in the fourth quarter. Accordingly, revenues and occupancy levels are generally
highest in the fourth quarter.
13
The following table summarizes certain quarterly operating data for 2001 and the first quarter of 2002.
1st 2nd 3rd 4th 1st
Quarter Quarter Quarter Quarter Total Quarter
2001 2001 2001 2001 2001 2002
-----------------------------------------------------------------------------------------
(in thousands)
Mall tenant sales $570,223 $605,945 $617,805 $1,003,894 $2,797,867 $645,317
Revenues 132,903 137,964 139,640 169,330 579,837 155,071
Occupancy:
Average 87.0% 85.5% 84.0% 83.7% 84.9% 83.3%
Ending 85.1 85.6 83.0 84.0 84.0 83.3
Average-comparable (1) 88.2 87.7 87.3 88.3 87.9 87.2
Ending-comparable (1) 88.5 87.4 87.4 88.6 88.6 86.8
Leased space:
All centers 90.8 90.0 88.0 87.7 87.7 87.4
Comparable (1) 92.2 91.6 91.4 91.6 91.6 91.5
(1) Excludes centers that opened in 2001, LaCumbre Plaza, and Paseo Nuevo.
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. The following table
summarizes occupancy costs, excluding utilities, for mall tenants as a percentage of sales for 2001 and the first
quarter of 2002:
1st 2nd 3rd 4th 1st
Quarter Quarter Quarter Quarter Total Quarter
2001 2001 2001 2001 2001 2002
--------------------------------------------------------------------------------
Minimum rents 11.2% 10.5% 11.2% 8.3% 10.0% 12.1%
Percentage rents 0.3 0.1 0.1 0.4 0.2 0.3
Expense recoveries 5.0 5.1 4.8 3.6 4.5 5.4
---- ---- ---- ---- ---- ----
Mall tenant occupancy costs 16.5% 15.7% 16.1% 12.3% 14.7% 17.8%
==== ==== ==== ==== ==== ====
Current Operating Trends
In 2001 and into 2002, the regional shopping center industry has been affected by the softening of the national
economic cycle. Economic pressures that affect consumer confidence, job growth, energy costs, and income gains can
affect retail sales growth and impact the Company's ability to lease vacancies and negotiate rents at
advantageous rates. A number of regional and national retailers have announced store closings or filed for
bankruptcy. During the first quarter of 2002, 1.1% of the Company's tenants sought the protection of the
bankruptcy laws, compared to 2.0% in the first quarter of 2001. The impact of a soft economy on the Company's
current results of operations can be moderated by lease cancellation income, which tends to increase in down-cycles
of the economy.
In addition to overall economic pressures, the events of September 11 had a negative impact on tenant sales
subsequent to September. Tenant sales per square foot in the fourth quarter of 2001 decreased by 3.8% compared
to the same period in 2000 and first quarter 2002 tenant sales per square foot similarly declined by 3.9%
compared to first quarter 2001. The negative sales trend directly impacts the amount of percentage rents certain
tenants and anchors pay. The effects of declines in sales experienced during 2001 and 2002 on the Company's
operations are moderated by the relatively minor share of total rents (approximately three percent) percentage
rents represent. However, if lower levels of sales were to continue, the Company's ability to lease vacancies
and negotiate rents at advantageous rates could be adversely affected.
Occupancy trends showed some improvement in first quarter 2002, in which comparable center average occupancy
declined 1% from first quarter 2001, compared to the fourth quarter 2001 occupancy decline of 1.7%. The Company
expects a greater unfavorable variance in comparable year over year average occupancy in the second quarter, but
anticipates modest improvement by the end of the year.
The tragic events of September 11 have also had an impact on the Company's insurance coverage. The Company had
coverage for terrorist acts in its policies that expired in April 2002. However, such coverage was excluded from
its standard property policies at the Company's renewal. The Company has obtained a separate policy although
with lower limits than the prior coverage for terrorist acts, see "Liquidity and Capital Resources-Covenants and
Commitments".
14
The Company's premiums, including the cost of a separate terrorist policy, have increased by over 100% for
property coverage and over 25% for liability coverage. These increases will impact the Company's annual common area
maintenance rates paid by the Company's tenants by about 55 cents per square foot. Total occupancy costs paid by
tenants signing leases in the Company's traditional centers are on average about $70 per square foot.
Rental Rates
Annualized average base rent per square foot for all mall tenants at the Company's 14 comparable centers
was $41.96 for the three months ended March 31, 2002, compared to $41.44 for the three months ended March 31, 2001.
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 periods 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, such as the Company is currently
experiencing, rents on new leases will grow more slowly or may 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.
Results of Operations
New Center Openings
In March 2001, Dolphin Mall, a 1.3 million square foot value regional center, opened in Miami, Florida.
Dolphin Mall is a 50% owned Unconsolidated Joint Venture and is accounted for under the equity method. The
Operating Partnership will be entitled to a preferred return on approximately $29 million of equity contributions
as of March 2002, which were used to fund construction costs.
Dolphin Mall is subject to annual special tax assessments by a local community development district (CDD) for
certain infrastructure improvements on the property. In the first quarter of 2002, the CDD refinanced its
outstanding bonds to extend the term from 20 years to 30 years and to reduce the interest rate. In addition, the
first annual assessment begins in 2002 rather than in 2001, resulting in a reversal of $2.8 million previously
expensed. The annual assessments will be based on allocations of the cost of the infrastructure between the
properties that benefit. Presently, the total allocation of cost to Dolphin Mall is estimated to be approximately
$65.3 million with a first annual assessment of approximately $3.0 million. A portion of these assessments is
expected to be recovered from tenants.
The Shops at Willow Bend, a wholly owned 1.5 million square foot regional center, opened August 3, 2001 in
Plano, Texas.
International Plaza, a 1.25 million square foot regional center, opened September 14, 2001 in Tampa,
Florida. The Company has an approximately 26% ownership interest in the center and accounts for it under the
equity method. The Operating Partnership will be entitled to a preferred return on approximately $20 million of
equity contributions as of March 2002, which were used to fund construction costs.
The Mall at Wellington Green, a 1.3 million square foot regional center, opened October 5, 2001 in Wellington,
Florida. The center is owned by a joint venture in which the Operating Partnership has a 90% controlling
interest.
The three traditional centers showed modest improvement from 2001's fourth quarter annualized return on
investment of 8%. The performance of Dolphin Mall continued to be adversely affected by slower than expected
lease up, rental concessions and lower than expected expense recoveries. The Company expects some improvement
in the performance of all of these centers by the end of the year.
Acquisitions and Dispositions
In early 2002, the Operating Partnership entered into a definitive purchase and sale agreement to acquire for
$88 million a 50% general partnership interest in SunValley Associates, a California general partnership that
owns the Sunvalley Shopping Center located in Concord, California. The $88 million purchase price consists of $28
million of cash and $60 million of existing debt that encumbers the property. The Company's interest in the
secured debt consists of a $55 million primary note bearing interest at LIBOR plus 0.92% and a $5 million note
bearing interest at LIBOR plus 3.0%. The notes mature in September 2003 and have two one-year extension options.
The center is also subject to a ground lease that expires in 2061. The Manager has managed the property since its
development and will continue to do so after the acquisition. Although the Operating Partnership is purchasing
its interest in Sunvalley from an unrelated third party, the other 50% partner in the property is an entity owned
and controlled by Mr. A. Alfred Taubman, the Company's largest shareholder.
15
Also in early 2002, the Company entered into agreements to sell its interests in LaCumbre Plaza and Paseo
Nuevo, subject to satisfying closing conditions, for $77 million. The centers are subject to ground leases and
are unencumbered by debt. The centers were purchased in 1996 for $59 million. In March 2002, the Company
completed the sale of LaCumbre Plaza, resulting in a gain of $2.0 million. The Company's gain on the transaction
differed from the $6.1 million gain recognized by the Operating Partnership due to the Company's $4.1 million
additional basis in LaCumbre Plaza.
In April 2002, the Company entered into an agreement to purchase an additional interest in Arizona Mills for
approximately $14 million in cash plus the $19 million share of the debt that encumbers the property. After
closing, the Company will have a 50% interest in the center.
The acquisition of Sunvalley Shopping Center closed in May 2002. The acquisition of Arizona Mills and the
sale of Paseo Neuvo are expected to close during the second quarter of 2002. The Company expects to use the net
proceeds from the sales of Paseo Nuevo and LaCumbre Plaza to fund the acquisitions of Sunvalley and Arizona Mills,
and pay down borrowings under the Company's lines of credit. The Company expects that the Arizona Mills
transaction will be slightly accretive and that the other transactions will have a neutral effect on Funds
from Operations in 2002. This is a forward-looking statement and certain significant factors could cause the
actual effect to differ materially, including but not limited to 1) the occurrence and timing of the
transactions, 2) actual operations of the centers, 3) actual use of proceeds, 4) actual transaction costs, and
5) resolution of closing conditions.
Other Significant Debt, Equity, and Other Transactions
In April 2001, the Operating Partnership's $10 million investment in Swerdlow was converted into a loan which
bore interest at 12% and matured in December 2001. This loan is currently delinquent. All interest due through the
December maturity date was received. Although the Operating Partnership expects to fully recover the amount due
under this note receivable, the Company is currently in negotiations with Swerdlow regarding the repayment. An
affiliate of Swerdlow is a partner in the Dolphin Mall joint venture.
During October and November 2001, the Operating Partnership completed an $82.5 million financing secured by
Regency Square and closed on a new $275 million line of credit. The net proceeds of these financings were used
to pay off $150 million outstanding under loans previously secured by Twelve Oaks Mall and the balance under the
expiring revolving credit facility. In May 2001, the Company closed on a $168 million construction loan for The
Mall at Wellington Green.
Investments in Technology Businesses
The Company owns an approximately 6.8% interest in MerchantWired, LLC, a service company providing internet
and network infrastructure to shopping centers and retailers. During the three months ended March 31, 2002 and
2001, the Company recognized its $1.7 million and $0.3 million share of MerchantWired's operating losses,
respectively. As of March 31, 2002, the Company had an investment of approximately $1.9 million in this venture
and has guaranteed obligations of approximately $4.1 million. In May 2002, the Company paid $3.3 million of
these guaranteed obligations. The principal shareholder of MerchantWired LLC is in the final stages of negotiating
a sale of MerchantWired LLC to a third party for cash and contingent consideration. Completing the sale is subject
to finalizing the termination or modification of certain third party contracts, the buyer obtaining credit
approval from its lenders, and certain regulatory and other matters. The principal shareholder expects the
transaction to close in the second quarter. If this transaction is not completed, MerchantWired LLC will need to
raise additional capital from its members. No assurances can be made that the Company or the other members will
be willing to make additional contributions in an amount necessary for MerchantWired LLC to continue to fund its
operations.
The Company has a preferred investment in fashionmall.com, Inc., an e-commerce company originally
organized to market, promote, advertise, and sell fashion apparel and related accessories and products over the
internet. In 2001, fashionmall.com significantly scaled back its operations in response to decreasing revenues
and e-commerce development opportunities, leading its management to conclude that it should seek alternative uses
of its significant cash resources. In light of such developments, the Company has been negotiating with
fashionmall.com's management to return the Company's preferred investment. There is no assurance that the
negotiations will achieve a resolution and/or what their ultimate outcome will be. The Company's investment was
$5.5 million at March 31, 2002.
The Company has a $0.5 million investment in Constellation Real Technologies LLC (Constellation), a company
that forms and sponsors real estate related internet, e-commerce, and telecommunications enterprises. The
Company has also made an additional capital commitment of $0.8 million to Constellation, although any additional
contributions would be restricted to a maximum of $0.2 million in 2002 and $0.3 million in 2003.
16
Derivatives
Effective January 1, 2001, the Company adopted SFAS 133 and its related amendments and interpretations, which
establish accounting and reporting standards for derivative instruments. The Company uses derivative instruments
primarily to manage exposure to interest rate risks inherent in variable rate debt and refinancings. The Company
routinely uses cap, swap, and treasury lock agreements to meet these objectives.
The initial adoption of SFAS 133 on January 1, 2001 resulted in a reduction to income of approximately $8.4
million as the cumulative effect of a change in accounting principle and a reduction to OCI of $0.8 million.
These amounts represented the transition adjustments necessary to mark the Company's share of interest rate
agreements to fair value as of January 1, 2001.
In addition to the transition adjustment in first quarter 2001, the Company recognized in earnings its share
of unrealized gains (losses) of $1.0 million and $(1.8) million during the three months ended March 31, 2002 and
2001, respectively, due to changes in interest rates and the resulting changes in value of the Company's interest
rate agreements. Of these amounts, approximately $1.0 million and $(1.5) million represent the changes in value
of the Dolphin swap agreement and the remainder represents the changes in time value of other instruments.
As of March 31, 2002, the Company has $2.8 million of net derivative losses included in Accumulated OCI, as
follows:
Hedged Items OCI Amounts
------------ -----------
(in thousands)
2001 Regency Square financing $ 2,688
Dolphin construction facility 255
$275 million line of credit (173)
---------------
$ 2,770
===============
The realized loss on the Regency Square financing will be recognized as additional interest expense over the
ten-year term of the debt. The loss on the hedge of the Dolphin Mall construction facility will be recognized as
a reduction of earnings through its 2002 maturity date. Gains or losses on the hedge of the $275 million line of
credit will be recognized as an adjustment to interest expense over the one-year effective period of the swap
agreement, beginning November 2002. The Company expects that approximately $0.7 million will be reclassified
from Accumulated OCI and recognized as a reduction of earnings during the next twelve months.
Comparable Center Operations
The performance of the Company's portfolio can be measured through comparisons of comparable centers'
operations. During the three months ended March 31, 2002, revenues (excluding land sales) less operating costs
(operating and recoverable expenses) of those centers owned and open for the entire period increased
approximately one percent in comparison to the same centers' results in the comparable period of 2001. This
growth was primarily due to expense reductions. The Company expects that comparable center operations will
generally increase annually by an average of two to three percent. This is a forward-looking statement and
certain significant factors could cause the actual results to differ materially; refer to the General Risks of
the Company in the Company's annual report on Form 10-K for the year ended December 31, 2001.
Presentation of Operating Results
The following tables contain the combined operating results of the Company's Consolidated Businesses and the
Unconsolidated Joint Ventures. Income allocated to the minority partners in the Operating Partnership and
preferred interests is deducted to arrive at the results allocable to the Company's common shareowners. Because
the net equity of the Operating Partnership is less than zero, the income allocated to the minority partners is
equal to their share of distributions. The net equity of these minority partners 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. Losses allocable to minority partners in certain consolidated joint ventures are added back to
arrive at the net results of the Company. The Company's average ownership percentage of the Operating Partnership
was approximately 61.7% and 61.5% in the 2002 and 2001 periods, respectively. The results of LaCumbre Plaza and
Paseo Nuevo have been separately classified as discontinued operations.
17
Comparison of the Three Months Ended March 31, 2002 to the Three Months Ended March 31, 2001
The following table sets forth operating results for the three months ended March 31, 2002 and March 31, 2001,
showing the results of the Consolidated Businesses and Unconsolidated Joint Ventures:
Three months ended March 31, 2002 Three months ended March 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OF TOTAL OF
UNCONSOLIDATED CONSOLIDATED UNCONSOLIDATED CONSOLIDATED
JOINT BUSINESSES CONSOLIDATED JOINT BUSINESSES AND
CONSOLIDATED VENTURES AT AND BUSINESSES VENTURES AT UNCONSOLIDATED
BUSINESSES 100%(1) UNCONSOLIDATED 100%(1) JOINT VENTURES
JOINT AT
VENTURES AT 100%
100%
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions of dollars)
REVENUES:
Minimum rents 46.8 41.5 88.2 38.5 32.8 71.3
Percentage rents 1.1 0.6 1.7 1.0 0.6 1.6
Expense recoveries 27.8 20.6 48.3 23.1 16.3 39.4
Management, leasing and development 5.1 5.1 6.4 6.4
Other 5.9 2.0 7.9 5.9 4.4 10.3
---- ---- ----- ---- ---- -----
Total revenues 86.6 64.7 151.3 75.0 54.1 129.0
OPERATING COSTS:
Recoverable expenses 23.4 15.5 38.9 19.5 13.8 33.3
Other operating 10.0 5.2 15.2 7.0 3.4 10.4
Management, leasing and development 4.9 4.9 4.3 4.3
General and administrative 4.9 4.9 4.8 4.8
Interest expense 20.6 18.2 38.8 15.2 18.6 33.8
Depreciation and amortization (2) 20.7 14.1 34.8 16.6 8.8 25.4
---- ---- ----- ---- ---- -----
Total operating costs 84.5 53.0 137.5 67.3 44.6 112.0
---- ---- ----- ---- ---- -----
2.1 11.7 13.8 7.7 9.4 17.1
==== ==== === ====
Equity in income of Unconsolidated Joint
Ventures (2) 6.1 4.9
--- ---
Income before discontinued operations,
cumulative effect of change in
accounting principle, and minority
and preferred interests 8.3 12.5
Discontinued operations:
Gain on disposition of interest in center 2.0
EBITDA (3) 2.2 1.9
Depreciation and amortization (0.5) (0.6)
Cumulative effect of change in
accounting principle (8.4)
Minority and preferred interests:
TRG preferred distributions (2.3) (2.3)
Minority share of consolidated joint
ventures 0.2 0.4
Minority share of income of TRG (4.5) (0.5)
Distributions in excess of minority
share of income (3.6) (7.5)
----- ----
Net income (loss) 1.9 (4.5)
Series A preferred dividends (4.2) (4.2)
----- ----
Net loss allocable to common
shareowners (2.3) (8.6)
==== ====
SUPPLEMENTAL INFORMATION (3):
EBITDA - 100% 45.7 43.9 89.6 41.3 36.9 78.1
EBITDA - outside partners' share (2.1) (19.3) (21.4) (1.8) (16.8) (18.6)
---- ---- ---- ---- ---- ----
EBITDA contribution 43.6 24.7 68.2 39.4 20.1 59.5
Beneficial Interest Expense (19.4) (9.0) (28.4) (13.9) (9.8) (23.7)
Non-real estate depreciation (0.7) (0.7) (0.7) (0.7)
Preferred dividends and distributions (6.4) (6.4) (6.4) (6.4)
---- ---- ---- ---- ---- ----
Funds from Operations contribution 17.0 15.7 32.7 18.5 10.2 28.7
==== ==== ==== ==== ==== ====
(1) With the exception of the Supplemental Information, amounts include 100% of the Unconsolidated Joint Ventures and are
net of intercompany profits. The Unconsolidated Joint Ventures are presented at 100% in order to allow for measurement of
their performance as a whole, without regard to the Company's ownership interest. In its consolidated financial statements,
the Company accounts for its investments in the Unconsolidated Joint Ventures under the equity method.
(2) Amortization of the Company's additional basis in the Operating Partnership was $1.9 million in both 2002 and 2001. Of
this amount, $0.8 million was included in equity in income of Unconsolidated Joint Ventures, while $1.1 million was
included in depreciation and amortization.
(3) EBITDA represents earnings before interest and depreciation and amortization, excluding gains on dispositions of
depreciated operating properties. Funds from Operations is defined and discussed in Liquidity and Capital Resources.
(4) Amounts in the table may not add due to rounding. Certain reclassifications have been made to 2001 amounts to conform
to 2002 classifications.
18
Consolidated Businesses
Total revenues for the three months ended March 31, 2002 were $86.6 million, an $11.6 million or 15.5%
increase over the comparable period in 2001. Minimum rents increased $8.3 million, of which $8.0 million was due
to the openings of The Shops at Willow Bend and The Mall at Wellington Green. Minimum rents also increased due
to tenant rollovers, offsetting decreases in rent caused by lower occupancy. Expense recoveries increased
primarily due to Willow Bend and Wellington Green. Management, leasing, and development revenue decreased
primarily due to the timing of leasing transactions and the completion of two short-term contracts. Other revenue
was consistent with 2001, with increases in gains on sales of peripheral land primarily offset by decreases in
lease cancellation revenue and interest income.
Total operating costs were $84.5 million, a $17.2 million or 25.6% increase over the comparable period in
2001. Recoverable expenses increased primarily due to Willow Bend and Wellington Green. Other operating expense
increased primarily due to the new centers, an increase in the charge to operations for costs of pre-development
activities, professional fees, and losses related to MerchantWired. Interest expense increased primarily due to a
decrease in capitalized interest upon opening of Willow Bend and Wellington Green, partially offset by decreases
due to changes in rates on floating rate debt. Depreciation expense increased primarily due to the new centers.
Unconsolidated Joint Ventures
Total revenues for the three months ended March 31, 2002 were $64.7 million, a $10.6 million or 19.6% increase
from the comparable period of 2001. Rents and recoveries increased primarily due to Dolphin Mall and
International Plaza. Other revenue decreased primarily due to a decrease in lease cancellation revenue.
Total operating costs increased by $8.4 million to $53.0 million for the three months ended March 31, 2002.
Recoverable expenses increased primarily due to the new centers. Recoverable expenses in 2002 included the
reversal of a $2.8 million special assessment tax accrued during 2001. Other operating expense increased
primarily due to the new centers, including greater levels of bad debt expense at Dolphin Mall, partially offset
by decreases in bad debt expense at other centers. Interest expense decreased due to a decrease in the liability
for the Dolphin Mall swap agreement and changes in rates on floating rate debt, partially offset by decreases in
capitalized interest upon opening of Dolphin Mall and International Plaza. Depreciation expense increased
primarily due to the opening of the new centers.
As a result of the foregoing, income of the Unconsolidated Joint Ventures increased by $2.3 million to $11.7
million. The Company's equity in income of the Unconsolidated Joint Ventures was $6.1 million, a $1.2 million
increase from the comparable period in 2001.
Net Income
As a result of the foregoing, the Company's income before discontinued operations, cumulative effect of change
in accounting principle, and minority and preferred interests decreased $4.2 million or 33.6% to $8.3 million for
the three months ended March 31, 2002. The discontinued operations of Paseo Nuevo and LaCumbre Plaza include a
$2.0 million gain on the disposition of LaCumbre Plaza in 2002. In 2001, a cumulative effect of a change in
accounting principle of $8.4 million was recognized in connection with the Company's adoption of SFAS 133. After
allocation of income to minority and preferred interests, the net loss allocable to common shareowners for 2002
was $(2.3) million compared to $(8.6) million in 2001.
19
Liquidity and Capital Resources
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 or its
subsidiaries and joint ventures.
The Company believes that its net cash provided by operating activities, distributions from its joint
ventures, the unutilized portion of its credit facilities, and its ability to access the capital markets assure
adequate liquidity to conduct its operations in accordance with its dividend and financing policies.
As of March 31, 2002, the Company had a consolidated cash balance of $20.6 million. Additionally, the Company
has a secured $275 million line of credit. This line had $190.0 million of borrowings as of March 31, 2002 and
expires in November 2004 with a one-year extension option. The Company also has available a second secured bank
line of credit of up to $40 million. The line had $11.5 million of borrowings as of March 31, 2002 and expires
in June 2002.
In March 2002, the Company exercised its option to extend the maturity of the Great Lakes Crossing loan until
April 2003.
Summary of Investing Activities
Net cash used in investing activities was $10.4 million in 2002 compared to $56.8 million in 2001. Cash used
in investing activities was impacted by the timing of capital expenditures, with additions to properties in 2002
and 2001 for the construction of The Mall at Wellington Green and The Shops at Willow Bend as well as other
development activities and other capital items. The Company received net proceeds of $28.2 million from the sale
of LaCumbre Plaza in 2002. Net proceeds from sales of peripheral land were $2.8 million, an increase of $1.1
million from 2001. Contributions to Unconsolidated Joint Ventures of $10.5 million were made in 2001, primarily
representing funding for construction activities at Dolphin Mall and International Plaza. Distributions from
Unconsolidated Joint Ventures in 2002 were primarily consistent with 2001.
Summary of Financing Activities
Net cash used in financing activities was $17.9 million in 2002, compared to $37.7 million of cash provided by
financing activities in 2001. Debt proceeds were primarily offset by debt payments in 2002, while debt
proceeds, net of repayments and issuance costs, provided $69.5 million in 2001. Stock repurchases of $11.0
million were made in connection with the Company's stock repurchase program in 2001. Issuance of stock pursuant
to the Continuing Offer contributed $3.3 million in 2002. Total dividends and distributions paid were $21.1
million and $20.8 million in 2002 and 2001, respectively.
Beneficial Interest in Debt
At March 31, 2002, the Operating Partnership's debt and its beneficial interest in the debt of its
Consolidated and Unconsolidated Joint Ventures totaled $1,925.9 million with an average interest rate of 5.86%,
excluding amortization of debt issuance costs and interest rate hedging costs. Debt issuance costs and interest
rate hedging costs are reported as interest expense in the results of operations. Amortization of debt issuance
costs added 0.37% to TRG's effective interest rate in the first quarter of 2002. 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 $125.1 million as of March 31, 2002. Beneficial interest in capitalized interest was
$1.6 million for the three months ended March 31, 2002. The following table presents information about the
Company's beneficial interest in debt as of March 31, 2002.
20
Beneficial Interest in Debt
-------------------------------------------------------------
Amount Interest LIBOR Frequency LIBOR
(in millions Rate at Cap of Rate at
of dollars) 3/31/02 Rate Resets 3/31/02
----------- ------- ------ ------- -------
Total beneficial interest in fixed rate debt $1,024.4 7.50% (1)
Floating rate debt hedged via interest rate caps:
Through July 2002 43.4 5.16 6.50% Monthly 1.88%
Through August 2002 38.0 2.70 8.20 Monthly 1.88
Through September 2002 100.0(2) 4.39(1) 7.00 Monthly 1.88
Through October 2002 26.5 4.34 7.10 Monthly 1.88
Through November 2002 40.1 3.82(1) 8.75 Monthly 1.88
Through May 2003 147.0 4.13 7.15 Monthly 1.88
Through September 2003 63.0 4.42 7.00 Monthly 1.88
Through September 2003 63.0 4.36(1) 7.25 Monthly 1.88
Other floating rate debt 380.5 3.69(1)
----------
Total beneficial interest in debt $1,925.9 5.86(1)
========
(1) Denotes weighted average interest rate before amortization of financing costs.
(2) This construction debt at a 50% owned unconsolidated joint venture is swapped at a rate of 6.14% when
LIBOR is below 6.7%.
As provided for by certain debt agreements, the Company has currently locked in an average all-in rate of 4.7%
on $125 million of floating rate debt through the first quarter of 2003, and on $494 million of floating rate
debt into the fourth quarter of 2002. In addition, the Company has locked in an average all-in rate of 4.6% on
$140 million of floating rate debt into the second quarter of 2002.
In March 2002, the Company entered into a swap agreement to fix the LIBOR rate at 4.3% on a notional amount of
$100 million as a hedge of the Company's $275 million line of credit. This one-year swap begins in November 2002.
In May 2002, the Company entered into a swap agreement to fix the LIBOR rate to 4.125% on a notional amount of
$100 million as a hedge of the Willow Bend construction facility. The term of the agreement is November 2002
through June 2004.
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 floating rate debt in effect at March 31, 2002, excluding
debt fixed under long-term LIBOR rate contracts, a one percent increase or decrease in interest rates on this
floating rate debt would decrease or increase cash flows by approximately $4.6 million and, due to the effect of
capitalized interest, annual earnings by approximately $4.1 million. Based on the Company's consolidated debt
and interest rates in effect at March 31, 2002, a one percent increase in interest rates would decrease the fair
value of debt by approximately $39.4 million, while a one percent decrease in interest rates would increase the
fair value of debt by approximately $42.1 million.
Covenants and Commitments
Certain loan agreements contain various restrictive covenants, including minimum net worth requirements,
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 Operating Partnership is in compliance with all of
its covenants.
The Company's secured credit facilities contain customary covenants requiring the maintenance of comprehensive
all-risk insurance on property securing each facility. As a result of exclusions in its insurance policies upon
renewal, the Company purchased a supplemental policy for terrorist acts for its portfolio of centers. No
assurances can be given that the coverage under this policy will be adequate or that mortgagees will not require
coverage for individual centers beyond that which is commercially available at reasonable rates. The Company's
inability to obtain such coverage or to do so only at greatly increased costs may also negatively impact the
availability and cost of future financing.
21
Certain debt agreements contain performance and valuation criteria that must be met for the loans to be
extended at the full principal amounts; these agreements provide for partial prepayments of debt to facilitate
compliance with extension provisions.
Payments of principal and interest on the loans in the following table are guaranteed by the Operating
Partnership as of March 31, 2002. All of the loan agreements provide for a reduction of the amounts guaranteed
as certain center performance and valuation criteria are met.
TRG's Amount of
beneficial loan balance % of loan
interest in guaranteed balance % of interest
Loan balance loan balance by TRG guaranteed guaranteed
Center as of 3/31/02 as of 3/31/02 as of 3/31/02 by TRG by TRG
- ------ ------------- ------------- ------------- ------ ------
(in millions of dollars)
Dolphin Mall 176.3 88.2 88.2 50% 100%
Great Lakes Crossing 150.3 127.8 150.3 100% 100%
International Plaza 182.4 48.3 91.2 50%(1) 50%(1)
The Mall at Millenia 75.5 37.8 37.8 50% 50%
The Mall at Wellington Green 134.0 120.6 134.0 100% 100%
The Shops at Willow Bend 193.6 193.6 193.6 100% 100%
(1) An investor in the International Plaza venture has indemnified the Operating Partnership to the extent
of approximately 25% of the amounts guaranteed.
Funds from Operations
A principal factor that the Company considers in determining dividends to shareowners is Funds from Operations
(FFO), which is defined as income before extraordinary items, cumulative effect of change in accounting
principle, real estate depreciation and amortization, and the allocation to the minority interest in the
Operating Partnership, less preferred dividends and distributions. Gains on dispositions of depreciated
operating properties are excluded from FFO.
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. Funds from Operations as presented by the Company may not be comparable to
similarly titled measures of other companies.
22
Reconciliation of Income to Funds from Operations
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
----------------------- -----------------------
(in millions of dollars)
Income before discontinued operations, cumulative
effect of change in accounting principle, and
minority and preferred interests (1) (2) 8.3 12.5
Funds from operations of discontinued operations 2.2 1.9
Depreciation and amortization (3) 20.7 16.6
Share of Unconsolidated Joint Ventures'
depreciation and amortization (4) 9.5 5.4
Non-real estate depreciation (0.7) (0.7)
Minority partners in consolidated joint ventures
share of funds from operations (0.9) (0.5)
Preferred dividends and distributions (6.4) (6.4)
---- ----
Funds from Operations - TRG 32.7 28.7
==== ====
Funds from Operations allocable to TCO 20.2 17.6
==== ====
(1) Includes gains on peripheral land sales of $2.0 million and $1.3 million for the three months ended
March 31, 2002 and March 31, 2001, respectively.
(2) Includes net non-cash straightline adjustments to minimum rent revenue and ground rent expense of $0.6
million and $0.1 million for the three months ended March 31, 2002 and March 31, 2001, respectively.
(3) Includes $0.8 million and $0.6 million of mall tenant allowance amortization for the three months ended
March 31, 2002 and March 31, 2001, respectively.
(4) Includes $0.5 million and $0.4 million of mall tenant allowance amortization for the three months ended
March 31, 2002 and March 31, 2001, respectively.
(5) Amounts in this table may not add due to rounding.
Reconciliation of Funds from Operations to Income
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
----------------------- -----------------------
(in millions of dollars)
Funds from Operations-TRG 32.7 28.7
Depreciation adjustments:
Consolidated Businesses' depreciation and amortization (20.7) (16.6)
Minority partners in consolidated joint ventures
share of depreciation and amortization 1.1 0.5
Depreciation of TCO's additional basis 1.9 1.9
Non-real estate depreciation 0.7 0.7
Share of Unconsolidated Joint Ventures' depreciation and
amortization (9.5) (5.4)
Discontinued operations (2.2) (1.9)
---- ----
Income from continuing operations allocable to TRG unitholders 4.0 8.0
=== ===
TCO's ownership share of income of TRG (1) 2.4 4.9
TCO basis differences-
Depreciation of TCO's additional basis (1.9) (1.9)
---- ----
Income before distributions in excess of earnings
allocable to minority interest - TCO 0.5 3.0
Distributions in excess of earnings allocable to minority
interest (3.6) (7.5)
---- -----
Loss from continuing operations allocable to TCO common
shareowners (3.1) (4.5)
===== =====
(1) TCO's average ownership of TRG was approximately 61.7% and 61.5% during the three months ended March 31,
2002 and 2001.
(2) Amounts in this table may not add due to rounding.
23
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. To qualify as a REIT, the Company must distribute at least 90% of its REIT taxable
income to its shareowners, as well as meet certain other requirements. Preferred dividends accrue regardless of
whether earnings, cash availability, or contractual obligations were to prohibit the current payment of
dividends. The preferred stock is callable in October 2002. The Company has no present intention to redeem the
preferred equity.
On March 5, 2002, the Company declared a quarterly dividend of $0.255 per common share payable April 22, 2002
to shareowners of record on April 1, 2002. The Board of Directors also declared a quarterly dividend of $0.51875
per share on the Company's 8.3% Series A Preferred Stock for the quarterly dividend period ended March 31, 2002,
which was paid on April 1, 2002 to shareowners of record on March 20, 2002.
The tax status of total 2002 common dividends declared and to be declared, assuming continuation of a $0.255
per common share quarterly dividend, is estimated to be approximately 28% return of capital, and approximately
72% of ordinary income. The tax status of total 2002 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, 6) changes in interest rates, 7)
amount and nature of development activities, and 8) changes in the tax laws or their 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. Based on current tax laws and earnings projections, the Company expects that the
growth in common dividends will be less than the growth in Funds from Operations for at least three more years.
Any inability of the Operating Partnership or its Joint Ventures to obtain 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. The
following table summarizes planned capital spending that is not recovered from tenants. The table excludes
planned acquisitions of interests in operating centers (see "Results of Operations - Acquisitions and
Dispositions").
2002
--------------------------------------------------------------------
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 49.6(3) 99.3(4) 99.3
Mall tenant allowances 9.5 4.0 11.0
Pre-construction development and other 8.0 0.3 8.1
---- ---- ----
Total 67.1 103.6 118.4
==== ==== ====
(1) Costs are net of intercompany profits.
(2) Includes the Operating Partnership's share of construction costs for The Mall at Millenia (a 50% owned
unconsolidated joint venture).
(3) Includes costs related to Stony Point Fashion Park.
(4) Includes costs related to The Mall at Millenia.
24
The Operating Partnership has entered into a 50%-owned joint venture to develop The Mall at Millenia currently
under construction in Orlando, Florida. This project is expected to cost approximately $200 million and open in
October 2002. The Mall at Millenia will be anchored by Bloomingdale's, Macy's, and Neiman Marcus. The Company
expects to achieve an 11% return of the project at stabilization, which is anticipated to be in 2004. The return
in 2003 is expected to be near 10%.
Stony Point Fashion Park, a new 690,000 square foot open-air center under construction in Richmond, Virginia,
will be anchored by Dillard's, Saks, and Galyan's. The center, scheduled to open in September 2003, is expected
to cost approximately $115 million.
The Company's approximately $21 million balance of development pre-construction costs as of March 31, 2002
consists primarily of costs relating to a project in Syosset, New York. Both Neiman Marcus and Lord & Taylor
have made announcements committing to the project. The Company is currently involved in a lawsuit to obtain the
necessary zoning approvals to move forward with the project. Although the Company expects to be successful in
this effort, the process may not be resolved in the near future. In addition, if the litigation is
unsuccessful, the Company would expect to recover substantially less than its cost in this project under possible
alternative uses for the site.
The Operating Partnership and The Mills Corporation have formed an alliance to develop value super-regional
projects in major metropolitan markets. The amended agreement, which expires in May 2008, calls for the two
companies to jointly develop and own at least four of these centers, each representing approximately $200 million
of capital investment. A number of locations across the nation are targeted for future initiatives.
The Operating Partnership anticipates that its share of costs for development projects scheduled to be
completed in 2003 will be as much as $80 million in 2003. 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, 6) actual time to complete projects, 7)
changes in economic climate, 8) competition from others attracting tenants and customers, and 9) increases in
operating costs.
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
certain others 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 March 31, 2002 of $15.06 per common share, the aggregate value of interests in the
Operating Partnership that may be tendered under the Cash Tender Agreement was approximately $372 million. The
purchase of these interests at March 31, 2002 would have resulted in the Company owning an additional 30%
interest in the Operating Partnership.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in this report at Item 2 under the caption "Liquidity and
Capital Resources - Sensitivity Analysis".
25
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends and Distributions.
99 -- Debt Maturity Schedules
b) Current Reports on Form 8-K.
None
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
TAUBMAN CENTERS, INC.
Date: May 14, 2002 By: /s/ Lisa A. Payne
-------------------------------------
Lisa A. Payne
Executive Vice President,
Chief Financial and Administrative Officer,
and Director
27
EXHIBIT INDEX
Exhibit
Number
------
12 -- Statement Re: Computation of Taubman Centers, Inc. Ratio of Earnings to Combined
Fixed Charges and Preferred Dividends and Distributions.
99 -- Debt Maturity Schedules
