1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1998
REGISTRATION NOS. 333- AND 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
CORPORATE PROPERTY INVESTORS, INC. CORPORATE REALTY CONSULTANTS, INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
THREE DAG HAMMARSKJOLD PLAZA CHARTER)
305 EAST 47TH STREET THREE DAG HAMMARSKJOLD PLAZA
NEW YORK NEW YORK 10017 305 EAST 47TH STREET
(212) 421-8200 NEW YORK NEW YORK 10017
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE (212) 421-8200
OFFICES) (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE
DELAWARE OFFICES)
(STATE OR OTHER JURISDICTION OF INCORPORATION OR DELAWARE
ORGANIZATION) (STATE OR OTHER JURISDICTION OF INCORPORATION OR
6798 ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE 6512
NUMBER) (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE
046268599 NUMBER)
(I.R.S. EMPLOYER IDENTIFICATION NO.) 13-2838638
(I.R.S. EMPLOYER IDENTIFICATION NO.)
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HAROLD E. ROLFE, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
CORPORATE PROPERTY INVESTORS, INC.
THREE DAG HAMMARSKJOLD PLAZA
305 EAST 47TH STREET
NEW YORK, NEW YORK 10017
(212) 421-8200
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
WITH COPIES TO
ROBERT ROSENMAN, ESQ.
CRAVATH, SWAINE & MOORE
WORLDWIDE PLAZA
825 EIGHTH AVENUE
NEW YORK, NEW YORK 10019
(212) 474-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective and upon consummation of the merger described herein.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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Common Stock, par value $.0001 per share of
Corporate Property Investors, Inc.
("CPI") paired with 1/100th of a share of
Common Stock, par value $.0001 per share,
of Corporate Realty Consultants, Inc.
("CRC Common Stock")..................... 111,766,862 $29.25 $3,269,180,713.50
Class B Common Stock, par value $.0001 per
share, of CPI paired with 1/100th of a
share of CRC Common Stock................ 3,200,000 $29.25 $ 93,600,000
Class C Common Stock, par value $.0001 per
share of CPI paired with 1/100th of a
share of CRC Common Stock................ 4,000 $29.25 $ 117,000 $269,097.83(2)
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(1) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended (the
"Securities Act"), and computed pursuant to Rule 457(f)(1) under the
Securities Act based on the average of the high and low sales price per
share of common stock of Simon DeBartolo Group, Inc. on August 6, 1998 on
the New York Stock Exchange.
(2) Representing the Registration Statement fee of $992,054.83, reduced by
$722,957.00 which was previously paid by Simon DeBartolo Group, Inc. with
respect to the transaction described herein pursuant to Section 14(g) of the
Securities Exchange Act of 1934, as amended.
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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2
[SIMON DEBARTOLO GROUP LOGO]
August 13, 1998
To the Stockholders of Simon DeBartolo Group, Inc.:
In February of this year, Simon DeBartolo Group, Inc. ("SDG") announced its
intention to combine with Corporate Property Investors, Inc. ("CPI") and its
"paired share" affiliate, Corporate Realty Consultants, Inc. ("CRC"), in order
to solidify its position as the largest developer, owner and operator of
super-regional and regional shopping centers in the country. This strategic
combination will be accomplished by means of a reverse merger and the
acquisition of beneficial interests in CRC for cash. The combined company will
be renamed Simon Property Group, Inc. ("Simon Group") and substantially all the
members of the current Board of Directors and senior management of SDG will
become members of the new Board of Directors and senior management of Simon
Group. All of SDG's practices and policies, including investment and financing
policies, will continue as Simon Group's practices and policies. Based upon the
current capitalization of SDG and CPI, the stockholders of SDG would own, in the
aggregate, approximately 67% of the outstanding Simon Group common stock
following the merger.
As an important step to consummating this strategic acquisition, you are
cordially invited to attend a special meeting of stockholders of SDG which will
be held at The Indianapolis Hyatt Regency, One South Capitol Avenue,
Indianapolis, Indiana on September 23, 1998, at 10:00 a.m., Indianapolis time
(the "SDG Special Meeting"). At the SDG Special Meeting, we will seek your
approval of two proposals (the "SDG Proposals"): (i) the adoption of an
amendment to the SDG Amended and Restated Articles of Incorporation (the "SDG
Charter") which will provide for the granting of voting rights to the holders of
outstanding preferred stock of SDG and (ii) the adoption of an Agreement and
Plan of Merger, dated as of February 18, 1998 (the "Merger Agreement"), by and
among SDG, CPI and CRC, pursuant to which a substantially wholly owned
subsidiary of CPI will merge with and into SDG and the stockholders of SDG will
become stockholders of CPI (which will be renamed Simon Property Group, Inc.).
The affirmative vote of a majority of all the votes entitled to be cast by the
holders of the outstanding SDG common stock is required to approve the amendment
to the SDG Charter, and the affirmative vote of 66 2/3% of all the votes
entitled to be cast by the holders of the outstanding SDG common stock is
required to approve the Merger Agreement. As indicated in the Proxy
Statement/Prospectus, as of March 31, 1998, the officers and directors of SDG
beneficially own 51,403,696 shares of SDG common stock (including non-voting
units of partnership interests convertible into SDG common stock), or
approximately 32.7% of the total outstanding shares.
THE SDG BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER, THE MERGER
AGREEMENT AND THE SDG CHARTER AMENDMENT, DETERMINED THAT THE MERGER AND THE SDG
CHARTER AMENDMENT ARE IN THE BEST INTERESTS OF SDG AND ITS STOCKHOLDERS, AND
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE SDG
PROPOSALS. The SDG Board of Directors has obtained an opinion from its
independent financial advisor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, to the effect that, at the date of such opinion and based upon and
subject to certain matters stated therein, the consideration to be received by
the SDG stockholders in the merger was fair to SDG stockholders from a financial
point of view.
You are also cordially invited to attend the 1998 annual meeting of
stockholders of SDG (the "SDG Annual Meeting"), which will be held immediately
following the SDG Special Meeting.
THE ACCOMPANYING NOTICE OF SPECIAL AND ANNUAL MEETINGS OF STOCKHOLDERS,
PROXY STATEMENT/PROSPECTUS, AND THE ANNEXES THERETO, PROVIDE DETAILED
INFORMATION CONCERNING MATTERS TO BE CONSIDERED AT THE SPECIAL AND ANNUAL
MEETINGS, THE REASONS FOR YOUR BOARD OF DIRECTORS' RECOMMENDATION OF THE MERGER,
THE MERGER AGREEMENT AND THE SDG CHARTER AMENDMENT AND CERTAIN ADDITIONAL
INFORMATION, INCLUDING, WITHOUT LIMITATION, INFORMATION ON SDG, CPI AND CRC. YOU
ARE URGED TO CAREFULLY CONSIDER ALL OF THE INFORMATION IN THE ACCOMPANYING
MATERIAL.
We realize this transaction appears complex and requires that you review a
substantial amount of proxy material. Even so, we believe our ability to
complete this combination and preserve the existence of CPI's paired share
affiliate, CRC, will ultimately inure to the benefit of SDG's stockholders,
notwithstanding the enactment of recent legislation limiting the future use of
paired share structures. We urge you to carefully consider the attached proxy
materials and hope you will conclude, as we have, that the combination of SDG
and CPI will improve and strengthen what is already the largest retail real
estate company in the country.
It is important that your shares of SDG common stock be represented at the
SDG Special Meeting and at the SDG Annual Meeting, regardless of the number of
shares you hold. Therefore, please sign, date and return your proxy cards as
soon as possible, whether or not you plan to attend the SDG Special Meeting or
the SDG Annual Meeting. This will not prevent you from voting your shares in
person if you subsequently choose to attend the SDG Special Meeting and/or the
SDG Annual Meeting.
Very truly yours,
/s/ David Simon
David Simon
Chief Executive Officer
3
[SIMON DEBARTOLO GROUP LOGO]
NOTICE OF SPECIAL AND ANNUAL MEETINGS OF STOCKHOLDERS
To the Stockholders of Simon DeBartolo Group, Inc.:
PLEASE TAKE NOTICE that a Special Meeting (the "SDG Special Meeting") of
stockholders of Simon DeBartolo Group, Inc. ("SDG") will be held at The
Indianapolis Hyatt Regency, One South Capitol Avenue, Indianapolis, Indiana, on
September 23, 1998, at 10:00 a.m., Indianapolis time.
At the SDG Special Meeting, you will be asked to consider and vote upon the
following proposals (the "SDG Proposals"):
(1) The approval and adoption of an amendment (the "Voting Preferred
Amendment") to SDG's Amended and Restated Articles of Incorporation (the
"SDG Charter") to provide certain voting rights to the holders of SDG
preferred stock. Approval of the Voting Preferred Amendment is a condition
for the consideration of the Merger Proposal discussed below.
(2) The approval and adoption of an Agreement and Plan of Merger, dated
as of February 18, 1998 (the "Merger Agreement"), by and among SDG,
Corporate Property Investors, Inc. ("CPI") and Corporate Realty Consultants,
Inc. ("CRC") (the "Merger Proposal"), pursuant to which, among other things,
a substantially wholly owned subsidiary of CPI will merge with and into SDG
(the "Merger") and the stockholders of SDG will become stockholders of CPI
(which will be renamed Simon Property Group, Inc.).
(3) To transact such other business as may properly come before the SDG
Special Meeting or any adjournment or postponement thereof.
The affirmative vote of a majority of all the votes entitled to be cast by
the holders of the outstanding SDG common stock is required to approve the
Voting Preferred Amendment, and the affirmative vote of 66 2/3% of all the votes
entitled to be cast by the holders of the outstanding SDG common stock is
required to approve the Merger Proposal. As indicated in the Proxy Statement/
Prospectus, as of March 31, 1998, the officers and directors of SDG beneficially
own 51,403,696 shares of SDG common stock (including non-voting units of
partnership interests convertible into SDG common stock), or approximately 32.7%
of the total outstanding shares. Each of the Voting Preferred Amendment and the
Merger Proposal is more completely described in the accompanying Proxy
Statement/Prospectus, and a copy of the Merger Agreement is attached hereto as
Annex A.
The 1998 Annual Meeting (the "SDG Annual Meeting" and, together with the SDG
Special Meeting, the "SDG Meetings") of stockholders of SDG will be held
immediately following the SDG Special Meeting, at the same location as the SDG
Special Meeting, to consider and vote upon the following proposals:
(1) To elect eleven directors (five to be elected by the holders of the
outstanding Common Stock, par value $0.0001 per share, of SDG ("SDG Common
Stock"), Class B Common Stock, par value $0.0001 per share, of SDG ("SDG
Class B Common Stock") and Class C Common Stock, par value $0.0001 per
share, of SDG ("SDG Class C Common Stock" and together with SDG Common Stock
and SDG Class B Common Stock, "SDG Equity Stock"), four to be elected by the
holders of SDG Class B Common Stock and two to be elected by the holders of
SDG Class C Common Stock), each to serve until the next annual meeting of
stockholders or until their successors are elected and qualified.
(2) To approve the Simon Property Group, L.P. 1998 Stock Incentive Plan
(the "1998 Stock Incentive Plan").
(3) To ratify the appointment of Arthur Andersen LLP as independent
accountants for SDG for the fiscal year ending December 31, 1998.
(4) To transact such other business as may properly come before the SDG
Annual Meeting or any adjournment or postponement thereof.
Only holders of SDG Equity Stock of record at the close of business on July
20, 1998 will be entitled to vote at the SDG Meetings or any adjournment or
postponement thereof. In accordance with the Maryland General Corporation Law,
this notice is being sent to all stockholders of SDG.
WE CORDIALLY INVITE YOU TO ATTEND THE SDG MEETINGS, BUT REGARDLESS OF
WHETHER YOU PLAN TO BE PRESENT, PLEASE PROMPTLY DATE, MARK, SIGN AND MAIL THE
ENCLOSED PROXY IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO ADDITIONAL POSTAGE IF
MAILED IN THE UNITED STATES. ANY STOCKHOLDER WHO EXECUTES AND DELIVERS A PROXY
MAY REVOKE THE AUTHORITY GRANTED THEREUNDER AT ANY TIME PRIOR TO ITS USE BY
GIVING WRITTEN NOTICE OF SUCH REVOCATION TO THE UNDERSIGNED AT 115 WEST
WASHINGTON STREET, INDIANAPOLIS, INDIANA 46204, BY EXECUTING AND DELIVERING A
PROXY BEARING A LATER DATE OR BY ATTENDING AND VOTING AT THE SDG MEETINGS. YOUR
VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
Please do not send any stock certificates with your proxy card. If the
Merger is approved and adopted by the stockholders and the Merger is
consummated, you will receive a transmittal form and instructions for the
surrender of the certificates previously representing your shares of SDG Equity
Stock.
Dated: August 13, 1998.
By Order of the Board of Directors
of Simon DeBartolo Group, Inc.
/s/ James M. Barkley
James M. Barkley, Secretary
4
PROXY STATEMENT
for
SPECIAL AND ANNUAL MEETINGS OF STOCKHOLDERS OF
SIMON DEBARTOLO GROUP, INC.
Each To Be Held on September 23, 1998
PROSPECTUS
for
CORPORATE PROPERTY INVESTORS, INC.
(To Be Renamed Simon Property Group, Inc.)
and
CORPORATE REALTY CONSULTANTS, INC.
(To Be Renamed SPG Realty Consultants, Inc.)
This Proxy Statement/Prospectus relates to the proposed merger and related
transactions contemplated by the Agreement and Plan of Merger, dated as of
February 18, 1998 (the "Merger Agreement"), by and among Simon DeBartolo Group,
Inc., a Maryland corporation ("SDG"), Corporate Property Investors, Inc., a
Delaware corporation and successor by merger to Corporate Property Investors, a
Massachusetts business trust (such entities collectively, "CPI"), and Corporate
Realty Consultants, Inc., a Delaware corporation ("CRC"). CPI will be renamed
Simon Property Group, Inc. ("Simon Group") upon consummation of the merger
provided for in the Merger Agreement. As used in this Proxy
Statement/Prospectus, the term "CPI" refers to CPI and, unless the context
otherwise requires, CRC prior to the Merger and "Simon Group" shall refer to CPI
and, unless the context otherwise requires, CRC from and after the effective
time of the merger provided for in the Merger Agreement.
The Merger Agreement provides for (a) the merger of a substantially wholly
owned subsidiary of CPI with and into SDG (the "Merger"), and (b) the conversion
of each outstanding share of (x) Common Stock, par value $0.0001 per share, of
SDG ("SDG Common Stock"), (y) Class B Common Stock, par value $0.0001 per share,
of SDG ("SDG Class B Common Stock") and (z) Class C Common Stock, par value
$0.0001 per share, of SDG ("SDG Class C Common Stock"), other than shares as to
which dissenters' rights have been perfected, into the right to receive one
share of (x) Common Stock, par value $0.0001 per share, of Simon Group ("Simon
Group Common Stock"), (y) Class B Common Stock, par value $0.0001 per share, of
Simon Group ("Simon Group Class B Common Stock") and (z) Class C Common Stock,
par value $0.0001 per share, of Simon Group ("Simon Group Class C Common
Stock"), respectively, all as more fully described in the Proxy
Statement/Prospectus. With respect to CPI's stockholders, the Merger Agreement
provides for, immediately prior to the consummation of the Merger, the
declaration of a dividend for each outstanding share of Common Stock, par value
$0.01 per share, of CPI ("CPI Common Stock," which from and after the effective
time of the Merger shall be referred to as "Simon Group Common Stock"),
consisting of: (a) $90.00 cash (subject to adjustment); (b) 1.0818 shares of CPI
Common Stock; and (c) 0.19 shares of Series B Convertible Preferred Stock, par
value $.01 per share, of CPI ("CPI Series B Preferred Stock," which from and
after the effective time of the Merger shall be referred to as "Simon Group
Series B Preferred Stock"), all as more fully described in this Proxy
Statement/Prospectus. Each share of Simon Group Common Stock, Simon Group Class
B Common Stock, and Simon Group Class C Common Stock (together, the "Simon Group
Equity Stock") outstanding or issued in connection with the Merger will be
paired with a beneficial interest in shares of Common Stock, par value $.0001
per share, of CRC ("CRC Common Stock" and together with each share of Simon
Group Equity Stock, "Paired Shares") held by the CRC Trusts (as defined below).
This Proxy Statement/Prospectus is being furnished to the stockholders of
SDG in connection with the solicitation of proxies by the Board of Directors of
SDG from holders of outstanding shares of SDG Equity Stock for use at the
special meeting ("SDG Special Meeting") and annual meeting of stockholders of
SDG (the "SDG Annual Meeting" and, together with the SDG Special Meeting, the
"SDG Meetings") and at any adjournments or postponements thereof. The SDG
Special Meeting is scheduled to be held on September 23, 1998, at The
Indianapolis Hyatt Regency, One South Capitol Avenue, Indianapolis, Indiana at
10:00 a.m., Indianapolis time, and the SDG Annual Meeting will be held at the
same location immediately following the SDG Special Meeting.
CPI (to be renamed Simon Group) has filed a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering up to 114,970,862 shares of Simon Group Equity Stock to
be issued in connection with the Merger. This represents the estimated maximum
number of shares that could be issued in the Merger. The number will vary
depending upon the number of shares of SDG Class B Common Stock and SDG Class C
Common Stock as to which appraisal rights have been exercised by the holders
thereof. This Proxy Statement/Prospectus constitutes the Prospectus of CPI filed
as part of the Registration Statement with respect to the shares of Simon Group
Equity Stock to be issued in connection with the Merger other than insofar as it
relates to the SDG Annual Meeting. Shares of SDG Common Stock currently trade on
the New York Stock Exchange ("NYSE"). Application will be made to the NYSE to
have shares of Simon Group Common Stock issued in connection with the Merger
trade on the NYSE from and after the effective time of the Merger.
SEE "RISK FACTORS" ON PAGE 24 FOR MATERIAL RISK FACTORS THAT SHOULD BE
CONSIDERED RELATING TO THE MERGER.
This Proxy Statement/Prospectus, the accompanying form of proxy and the
other enclosed documents are first being mailed to stockholders of SDG on or
about August 13, 1998.
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THE SECURITIES ISSUABLE IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Proxy Statement/Prospectus is August 13, 1998.
5
AVAILABLE INFORMATION
CPI (to be renamed Simon Property Group, Inc.) and CRC (to be renamed SPG
Realty Consultants, Inc.) have filed with the Commission a Registration
Statement (which term shall include all amendments, exhibits, annexes and
schedules thereto) pursuant to the Securities Act, and the rules and regulations
promulgated thereunder, covering the Simon Group Equity Stock to be issued by
CPI in connection with the Merger. This Proxy Statement/Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Statements made in this Proxy Statement/Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement or incorporated by
reference herein, reference is made to the exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified in its entirety by such reference. CPI and CRC intend to continue to
furnish their stockholders with annual reports containing financial statements
audited by their independent public accountants. The information in this Proxy
Statement/Prospectus concerning SDG, CPI and CRC has been furnished by SDG, CPI
and CRC, respectively, and all pro forma information has been prepared by SDG.
SDG is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy and information statements and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth St., N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
In addition, the SDG Common Stock is listed on the NYSE and SDG is required to
file reports, proxy and information statements and other information with the
NYSE. These documents can be inspected at the principal office of the NYSE, 11
Wall Street, New York, New York 10005.
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "RISK FACTORS" and "THE PROPOSED
MERGER AND RELATED MATTERS" and elsewhere in this Proxy Statement/Prospectus
constitute "forward-looking statements." Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of SDG, Simon Group, CPI or CRC or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
forward-looking statements include, but are not limited to, the following:
general economic and business conditions, which will, without limitation, affect
demand for retail space or retail goods, availability and creditworthiness of
prospective tenants, lease rents and the availability of financing; adverse
changes in the real estate markets including, without limitation, competition
with other companies; risks of real estate development and acquisition; the
continuing ability of SDG, Simon Group, CPI or CRC to qualify as real estate
investment trusts; adverse changes in federal income tax law (including the
enactment of certain proposals currently pending in Congress); risks relating to
Year 2000 issues; governmental actions and initiatives; environmental/safety
requirements; and other changes and factors referenced in this Proxy
Statement/Prospectus. See "RISK FACTORS."
i
6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN SDG DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS OF SDG
INCORPORATED HEREIN BY REFERENCE ARE AVAILABLE UPON REQUEST FROM JAMES M.
BARKLEY, SECRETARY, SIMON DEBARTOLO GROUP, INC., 115 WEST WASHINGTON STREET,
INDIANAPOLIS, INDIANA 46204, (317) 636-1600. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE NO LATER THAN FIVE BUSINESS DAYS
PRIOR TO THE DATE OF THE SDG MEETINGS.
The following documents of SDG filed with the Commission (File No. 1-12618)
are incorporated herein by reference:
1. SDG's Annual Report on Form 10-K and Forms 10-K/A for the year
ended December 31, 1997;
2. SDG's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998;
3. SDG's Current Reports on Form 8-K dated February 19, 1998, March
27, 1998, May 27, 1998, June 9, 1998 and August 12, 1998; and
4. SDG's Annual Report on Form 11-K for the year ended December 31,
1997.
In addition, all reports and other documents subsequently filed by SDG pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), prior to the date of the SDG Meetings shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained in this Proxy Statement/Prospectus modifies or supersedes
such statement. Any such statement so modified or superseded shall not be deemed
to constitute a part of this Proxy Statement/ Prospectus except as so modified
or superseded.
SDG WILL PROVIDE, WITHOUT CHARGE, TO EACH PERSON WHO RECEIVES THIS PROXY
STATEMENT/PROSPECTUS, UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF
SUCH DOCUMENTS INCORPORATED HEREIN BY REFERENCE (NOT INCLUDING EXHIBITS TO SUCH
INFORMATION UNLESS THE EXHIBITS THEMSELVES ARE SPECIFICALLY INCORPORATED BY
REFERENCE). REQUESTS FOR DOCUMENTS SHOULD BE MADE AS SPECIFIED ABOVE.
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7
TABLE OF CONTENTS
SUMMARY..................................................... 1
Parties to the Merger..................................... 1
Benefits and Detriments of the Merger..................... 3
Structure of Simon Group.................................. 3
Potential Conflicts of Interest Related to the Merger and
Operations.............................................. 7
Risk Factors.............................................. 7
Time, Place and Date of SDG Meetings; Record Date......... 8
Purpose and Required Approval............................. 8
Terms of Merger; Merger Consideration..................... 9
Recommendations of the Boards of Directors................ 11
Opinions of Financial Advisors............................ 12
Certain Transactions and Agreements Relating to the
Merger.................................................. 12
New REIT Legislation...................................... 15
New York Stock Exchange Listing of Simon Group Common
Stock................................................... 15
Regulatory Approval....................................... 15
Federal Income Tax Consequences of the Merger............. 16
Comparative Rights of Stockholders of SDG and Simon
Group................................................... 16
Appraisal Rights.......................................... 17
Recent Developments....................................... 17
Summary Pro Forma Combined and Selected Historical
Financial Data.......................................... 18
RISK FACTORS................................................ 24
Substantial Indebtedness of Simon Group................... 24
Failure to Consummate CPI Notes Solicitation.............. 25
Costs of Failure to Integrate Operations.................. 26
Dilution on Net Income Per Share Caused by the Merger..... 26
Possible Subordination of Rights of Current Holders of
Simon Group Equity Stock and SDG Units.................. 26
Federal Income Tax Consequences........................... 26
Potential Conflicts of Interest Related to Operations..... 27
Certain Tax Risks......................................... 28
Real Estate Investment Risks.............................. 30
Limits on Change of Control............................... 32
Comparison of Stockholders' Rights........................ 33
Dependence on Key Personnel............................... 33
Risks Relating to Year 2000 Issue......................... 33
Impact of Interest Rate Fluctuations and Other Factors on
Stock Price and Borrowing Costs......................... 34
Risks Related to Interest Rate Hedging Arrangements....... 34
Possible Adverse Effects on Stock Prices Arising from
Shares Available for Future Sale........................ 34
HISTORICAL AND PRO FORMA PER SHARE INFORMATION.............. 35
CAPITALIZATION.............................................. 36
DIVIDENDS ON AND MARKET PRICES OF SDG EQUITY STOCK AND CPI
AND CRC COMMON STOCK...................................... 37
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THE PROPOSED MERGER AND RELATED MATTERS...................................................................... 39
Background of the Merger................................................................................... 39
Recommendation of the SDG Board of Directors; Reasons for the Merger....................................... 41
Recommendation of the CPI Board and CRC Board of Directors; CPI's and CRC's Reasons for the Merger......... 43
Opinion of Financial Advisor to SDG........................................................................ 45
Opinions of Financial Advisors to CPI...................................................................... 50
THE MERGER AGREEMENT AND RELATED MATTERS..................................................................... 54
Effects of the Merger...................................................................................... 54
Effective Time............................................................................................. 54
Terms of the Merger........................................................................................ 54
Certain Provisions Relating to Employee Benefits and Incentive Plans....................................... 55
Exchange of Certificates................................................................................... 56
Fractional Shares.......................................................................................... 57
Representations and Warranties............................................................................. 58
Covenants.................................................................................................. 58
Certain Additional Agreements.............................................................................. 61
Best Efforts to Obtain Approvals of Stockholders........................................................... 62
Indemnification and Insurance.............................................................................. 63
Conditions to Consummation of the Merger................................................................... 63
Termination; Termination Fees and Amendment................................................................ 64
Appraisal Rights........................................................................................... 65
New York Stock Exchange Listing of Simon Group Common Stock................................................ 65
Federal Income Tax Consequences to Holders of SDG Equity Stock............................................. 66
Opinions of SDG's and CPI's Counsel........................................................................ 67
Federal Income Tax Considerations Relating to Simon Group.................................................. 68
Income Taxation of the Partnerships, the Property Partnerships and their Partners.......................... 77
Federal Income Taxation Considerations Relating to Paired Shares........................................... 78
State and Local Tax Considerations......................................................................... 79
Possible Federal Tax Developments.......................................................................... 79
Accounting Treatment....................................................................................... 79
Regulatory Approval........................................................................................ 80
Certain Transactions and Agreements Relating to the Merger................................................. 80
Structure of Simon Group................................................................................... 84
AMENDMENT TO THE SDG CHARTER................................................................................. 85
THE MEETINGS OF STOCKHOLDERS OF SDG.......................................................................... 87
Introduction............................................................................................... 87
Date, Time and Place of SDG Meetings....................................................................... 87
Matters to be Considered at the SDG Meetings............................................................... 87
Record Date and Vote Required.............................................................................. 87
Proxy...................................................................................................... 88
Solicitation of Proxies.................................................................................... 89
Other Matters.............................................................................................. 89
POLICIES OF SIMON GROUP FOLLOWING THE MERGER................................................................. 90
MANAGEMENT OF SIMON GROUP AND CRC FOLLOWING THE MERGER....................................................... 94
FEDERAL SECURITIES LAW CONSEQUENCES.......................................................................... 106
PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA.................................................... 107
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 125
CPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 132
CRC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 140
BUSINESS OF SDG, CPI AND CRC................................ 143
CPI AND CRC SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 165
DESCRIPTION OF SIMON GROUP AND CRC CAPITAL STOCK............ 167
CERTAIN PROVISIONS OF THE SDG OPERATING PARTNERSHIP
AGREEMENT, THE SRC OPERATING PARTNERSHIP AGREEMENT, THE
SIMON GROUP CHARTER, THE CRC CHARTER, SIMON GROUP BY-LAWS
AND CRC BY-LAWS AND DELAWARE LAW.......................... 173
RESTRICTIONS ON TRANSFER.................................... 176
COMPARISON OF RIGHTS OF HOLDERS OF SDG COMMON STOCK AND
SIMON GROUP AND CRC COMMON STOCK.......................... 178
SDG ANNUAL MEETING MATTERS.................................. 184
Security Ownership of Certain Beneficial Owners and
Management............................................. 184
Principal Stockholders.................................... 185
ELECTION OF DIRECTORS..................................... 186
Executive Compensation.................................... 189
Report of SDG Compensation Committee on Executive
Compensation........................................... 191
Performance Graph......................................... 192
APPROVAL OF 1998 STOCK INCENTIVE PLAN..................... 193
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS.... 198
Stockholder Proposals at 1999 Annual Meeting.............. 198
EXPERTS..................................................... 199
LEGAL MATTERS............................................... 199
INDEX TO FINANCIAL STATEMENTS............................... F-1
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Annex C Opinion of Lazard Freres & Co. LLC
Annex D Opinion of J.P. Morgan Securities Inc.
Annex E Sections of the MGCL Relating to Appraisal Rights
Annex F Proposed Amendment to the SDG Charter
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SUMMARY
The following is a summary of certain significant matters contained in this
Proxy Statement/Prospectus and the Annexes hereto. This summary is not intended
to be complete and is qualified in its entirety by the more detailed information
contained elsewhere in this Proxy Statement/Prospectus, the Annexes hereto and
the other documents referred to herein. Terms used but not defined in this
Summary have the meanings ascribed to them elsewhere in this Proxy
Statement/Prospectus. Cross references in this Summary are to the captions of
sections of this Proxy Statement/Prospectus. Stockholders of SDG should read
carefully this Proxy Statement/Prospectus and the Annexes hereto in their
entirety.
PARTIES TO THE MERGER
SDG
SDG, a Maryland corporation, is a self-administered and self-managed real
estate investment trust ("REIT") under the Internal Revenue Code of 1986, as
amended (the "Code"). Simon DeBartolo Group, L.P. (the "SDG Operating
Partnership") is a majority owned subsidiary partnership of SDG. SDG, through
the SDG Operating Partnership, is engaged primarily in the ownership, operation,
management, leasing, acquisition, expansion and development of real estate
properties, primarily regional malls and community shopping centers.
As of March 31, 1998, the SDG Operating Partnership owned or held an
interest in 217 income-producing properties, which consisted of 133 regional
malls, 74 community shopping centers, three specialty retail centers, four
mixed-use properties and three value-oriented super-regional malls located in 34
states ("SDG Properties"). As of that same date, the SDG Operating Partnership
also owned direct or indirect interests in one specialty retail center and two
community centers under construction, an additional two community centers in the
final stages of preconstruction development and seven parcels of land either in
preconstruction development or held for future development (collectively, "SDG
Development Properties," and together with the SDG Properties, "SDG Portfolio
Properties"). The SDG Operating Partnership self-manages SDG Properties wholly
owned, directly or indirectly, by the SDG Operating Partnership. The SDG
Operating Partnership holds substantially all of the economic interest in M.S.
Management Associates, Inc. (the "SDG Management Company"), while substantially
all of the voting stock of the SDG Management Company is held by Melvin Simon,
Herbert Simon and David Simon. The SDG Management Company manages SDG Properties
not wholly owned by the SDG Operating Partnership and certain other properties,
and also engages in certain property development activities. The SDG Operating
Partnership also holds substantially all of the economic interest in, and the
SDG Management Company holds substantially all of the voting stock of, DeBartolo
Properties Management, Inc. ("DPMI"), which provides architectural, design,
construction and other services to substantially all of the SDG Portfolio
Properties, as well as certain other regional malls and community shopping
centers owned by third parties. At March 31, 1998 and December 31, 1997, SDG's
ownership interest in the SDG Operating Partnership was 63.1% and 63.9%,
respectively, and the Simons (constituting Melvin Simon, Herbert Simon, David
Simon, certain of their affiliates and includes certain other Simon family
members and estates, trusts and other entities established for their benefit)
and certain third parties (collectively, "SDG Limited Partners") held the
remaining interests in the SDG Operating Partnership not held directly or
indirectly by SDG.
As a result of the Merger, SDG will become a subsidiary of Simon Group.
Based upon the capitalization of SDG and CPI on the date hereof, SDG
stockholders would own in the aggregate approximately 67% of the outstanding
shares of Simon Group Equity Stock following the Merger. Even though SDG
stockholders will receive in the Merger new shares of common stock of a new
entity -- Simon Group -- substantially all the members of the current Board of
Directors and senior management of SDG will become members of the new Board of
Directors and senior management of Simon Group. All of SDG's practices and
policies, including investment and financing policies, will continue as Simon
Group's practices and policies. The SDG Charter will be amended and restated
upon consummation of the Merger to change the name of SDG to "SPG Properties,
Inc." The principal executive offices of SDG are located at National City
Center, 115 West Washington Street, Suite 15 East, Indianapolis, Indiana 46204,
telephone number (317) 636-1600.
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CPI
CPI is a self-administered and self-managed, privately-held REIT that
primarily owns interests in regional malls and also holds a portfolio of other
commercial income-producing properties (collectively, the "CPI Portfolio
Properties"). The 23 regional malls in which CPI owns interests contain an
aggregate gross leasable area ("GLA") of approximately 27 million square feet.
As used in this Proxy Statement/Prospectus and unless the context requires
otherwise, "GLA" for a property includes area owned by third parties other than
SDG or CPI at that property. The largest of such malls is Roosevelt Field in
Hempstead, New York which contains approximately 2.36 million square feet of
GLA. CPI was organized as a Massachusetts business trust in 1971 and was
incorporated as a Delaware corporation on March 10, 1998 (the "CPI
Reorganization"). As used in this Proxy Statement/Prospectus, the term "CPI
Board" refers to the CPI Board of Trustees prior to the CPI Reorganization and
the CPI Board of Directors after the CPI Reorganization. The CPI Certificate of
Incorporation will be amended and restated immediately prior to or upon
consummation of the Merger to, among other things, change the name of CPI to
"Simon Property Group, Inc." and accommodate the capital structure of Simon
Group contemplated by the Merger. As used in this Proxy Statement/Prospectus,
"Simon Group" refers to CPI and unless the context otherwise requires, CRC from
and after the Effective Time (as defined below) of the Merger. "Effective Time"
refers to such date as the articles of merger or other appropriate documents,
duly prepared and executed by SDG and a substantially wholly-owned subsidiary of
CPI in accordance with Section 3-110 of the Maryland General Corporation Law
("MGCL"), are accepted for record by the State Department of Assessments and
Taxation of Maryland ("Maryland State Department") as provided in Section 3-113
of the MGCL or at such other time as may be agreed upon by the parties and
specified in the articles of merger in accordance with applicable law. The
principal executive offices of CPI are currently located at Three Dag
Hammarskjold Plaza, 305 East 47th Street, New York, New York 10017, telephone
number (212) 421-8200. The principal executive offices of Simon Group will be
located at National City Center, 115 West Washington Street, Suite 15 East,
Indianapolis, Indiana 46204, telephone number (317) 636-1600.
CRC
CRC was formed in October 1975 for the purpose of engaging in real estate
activities that might be problematic for CPI because of its qualification as a
REIT for federal income tax purposes. CPI and CRC are parties to an agreement
pursuant to which CRC may not engage in any activity that could be engaged in by
CPI without jeopardizing its status as a REIT unless CPI shall have been given a
right of first refusal to engage in such activity, and CPI may not refer to any
person other than CRC any business opportunity that could not be engaged in by
CPI without jeopardizing its status as a REIT unless CRC shall have been given
the right of first refusal to take advantage of such opportunity. Since the
holders of CPI Common Stock own a proportionate beneficial interest in one or
more trusts which own all the outstanding shares of CRC Common Stock, CPI and
CRC are treated as a "paired share REIT" for federal income tax purposes. Since
the shares were paired prior to the effective date of the relevant Code
provision that generally precludes such pairing, CPI and CRC are currently
grandfathered from such provision with respect to assets acquired by either CPI
or CRC prior to March 26, 1998. See "RISK FACTORS -- Certain Tax Risks -- REIT
Classification; Legislation Limiting Benefits of Paired Share Status." CRC at
the present time owns the office building in New York City where its principal
executive offices are located and is developing approximately 144 acres of land
surrounding CPI's Mall of Georgia project in Buford, Georgia. See "BUSINESS OF
SDG, CPI AND CRC -- DEVELOPMENT -- Mall of Georgia." The CRC Certificate of
Incorporation will be amended and restated immediately prior to, or upon
consummation of, the Merger to, among other things, change the name of CRC to
"SPG Realty Consultants, Inc." As used in this Proxy Statement/Prospectus,
"Simon Group" refers to CPI and unless the context otherwise requires, CRC from
and after the Effective Time of the Merger. The principal executive offices of
CRC are currently located at Three Dag Hammarskjold Plaza, 305 East 47th Street,
New York, New York 10017, telephone number (212) 421-8200. The principal
executive offices of CRC from and after the Effective Time of the Merger will be
located at National City Center, 115 West Washington Street, Suite 15 East,
Indianapolis, Indiana 46204, telephone number (317) 636-1600.
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BENEFITS AND DETRIMENTS OF THE MERGER
The Merger means that SDG stockholders will have a stake in the country's
largest developer, owner and operator of super regional and regional shopping
malls. The Merger will give Simon Group potentially greater access to the
capital markets, expand the geographic diversification of SDG's ownership and
operation of properties into Boston, Massachusetts and Atlanta, Georgia, and
enhance SDG's operations in the New York metropolitan area, California and
Florida. The combination of CPI's properties with SDG's properties could thus
limit the impact that adverse economic or real estate conditions in a particular
region might have on Simon Group as a whole. See "THE PROPOSED MERGER AND
RELATED MATTERS -- Recommendation of the SDG Board of Directors; Reasons for the
Merger."
Substantial management time and effort will be required to effectuate the
Merger and integrate the businesses of SDG and CPI. The Merger will have a
dilutive effect on the net income per share of Simon Group Common Stock on a pro
forma basis of $0.10 for the three months ended March 31, 1998, after reducing
pro forma net income for a gain totaling $44.3 million, or approximately $0.19
per share, related to a sale of real estate and may have a dilutive effect on
net income per share in future periods. The Merger has a dilutive effect of
$0.54 on the net income per share of Simon Group Common Stock on a pro forma
basis for the year ended December 31, 1997 (after giving effect to the
elimination of a $0.56 gain on sale of real estate) and may have a dilutive
effect on net income per share in future periods. The Merger will increase the
ratio of debt to market capitalization, excluding a pro rata share of joint
venture indebtedness, of SDG from 45.8% as of March 31, 1998 to 46.4% for Simon
Group as of March 31, 1998 on a pro forma basis. This increase in the ratio of
debt to total market capitalization could adversely affect the ability of Simon
Group to obtain debt financing for additional development and would subject
Simon Group to the risks of higher leverage. See "RISK FACTORS -- Substantial
Indebtedness of Simon Group."
STRUCTURE OF SIMON GROUP
As of March 31, 1998, SDG owned or held interests in the SDG Portfolio
Properties through its 63.1% general partnership interest in the SDG Operating
Partnership. As of March 31, 1998, the SDG Limited Partners held 64,059,705
units in the SDG Operating Partnership ("SDG Units"), representing the remaining
36.9% interest in the SDG Operating Partnership not held directly or indirectly
by SDG. As of such date, the Simons beneficially owned 34,584,455 SDG Units,
representing 19.9% of the outstanding SDG Units. The operations of SDG are
carried out through the SDG Operating Partnership and the SDG Management
Company. SDG Units held by SDG Limited Partners may be exchanged for shares of
SDG Common Stock on a one-for-one basis or for cash at SDG's option (the "SDG
Exchange Rights"). If all SDG Units held by SDG Limited Partners outstanding on
March 31, 1998, including the Simons and the other SDG Limited Partners, were
exchanged for SDG Common Stock, an aggregate 64,059,705 additional shares of SDG
Common Stock would be issued.
CPI owns or holds interests in the CPI Portfolio Properties directly or
indirectly through subsidiaries. At March 31, 1998, on a pro forma basis
assuming the exercise of all CPI options and after giving effect to the per
share dividends to be declared by CPI on the CPI Common Stock prior to the
Effective Time pursuant to the Merger Agreement ("CPI Merger Dividends"), CPI
would have had outstanding 54,412,100 shares of CPI Common Stock, 209,249 shares
of 6.50% Convertible Preferred Stock of CPI ("CPI Series A Preferred Stock,"
which from and after the Effective Time shall be referred to as "Simon Group
Series A Preferred Stock") and 4,966,038 shares of CPI Series B Preferred Stock.
After giving effect to the Merger, the Simon Group Series A Preferred Stock will
be convertible into approximately 7,950,492 shares of Simon Group Common Stock
and the Simon Group Series B Preferred Stock will be convertible into
approximately 12,842,426 shares of Simon Group Common Stock. See "DESCRIPTION OF
SIMON GROUP AND CRC CAPITAL STOCK -- PREFERRED STOCK -- Simon Group Convertible
Preferred Stock -- Conversion Rights." Each outstanding share of Simon Group
Equity Stock from and after the Effective Time will be paired with beneficial
interests in one or more trusts (the "CRC Trusts") which own all of the
outstanding shares of CRC Common Stock. See "THE MERGER AGREEMENT AND RELATED
MATTERS -- Terms of the Merger" and "DESCRIPTION OF SIMON GROUP AND CRC CAPITAL
STOCK -- COMMON STOCK; BENEFICIAL OWNERSHIP OF CRC COMMON STOCK."
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The Merger will result in the combination of the existing businesses and
properties of SDG, CPI and CRC. The businesses will be conducted and
substantially all of such properties will be held through the SDG Operating
Partnership and one or more subsidiaries of the SDG Operating Partnership. The
SDG Operating Partnership will be renamed Simon Property Group L.P. upon
consummation of the Merger. In the Merger, a substantially wholly owned
subsidiary of CPI will merge with and into SDG, with SDG being the surviving
company and becoming a subsidiary of Simon Group (with Simon Group owning in
excess of 99.9% of its outstanding common stock). In exchange for each of their
shares of SDG Common Stock, SDG Class B Common Stock and SDG Class C Common
Stock, the stockholders of SDG will receive one share of Simon Group Common
Stock, Simon Group Class B Common Stock and Simon Group Class C Common Stock,
respectively. Based upon the capitalization of SDG and CPI on March 31, 1998,
the stockholders of SDG would own in the aggregate approximately 67% of the
outstanding shares of Simon Group Equity Stock following the Merger.
The SDG Operating Partnership will continue in existence after the Merger
under an amended and restated limited partnership agreement (the "Amended SPG
Operating Partnership Agreement"). In accordance with the SDG Operating
Partnership Agreement and the Amended SPG Operating Partnership Agreement, Simon
Group is obligated to contribute substantially all of its assets and liabilities
to the SDG Operating Partnership in exchange for additional partnership units.
The partnership units may be exchanged for shares of Simon Group Common Stock on
a one-for-one basis or for cash at Simon Group's option. At the Effective Time,
Simon Group will transfer, or direct the transfer of, substantially all of its
assets (i.e., all the assets other than assets valued at approximately $153.1
million, including Ocean County Mall valued at approximately $145.8 million) and
liabilities (except that Simon Group will remain a co-obligor with the SDG
Operating Partnership under a $1.4 billion senior unsecured term loan pursuant
to a commitment letter with The Chase Manhattan Bank and Chase Securities, Inc.)
to the SDG Operating Partnership and one or more subsidiaries of the SDG
Operating Partnership in consideration for 49,858,940 limited partnership
interests (which equals the number of shares of CPI Common Stock outstanding
after the CPI Merger Dividends, less the number of shares equal to the value of
the former CPI assets and liabilities retained by Simon Group) and 5,175,287
preferred partnership interests (which equals the number of shares of CPI Series
A Preferred Stock and CPI Series B Preferred Stock outstanding after the CPI
Merger Dividends). The value of the assets and liabilities retained by Simon
Group or transferred to the SDG Operating Partnership is based on the
consideration to be received or retained by the stockholders of CPI in
connection with the Merger and on the reported closing trading price per share
of SDG Common Stock of $33 5/8 on February 18, 1998, the last trading date
preceding public announcement of the Merger. The fair market value of the former
CPI assets less liabilities to be transferred by Simon Group to the SDG
Operating Partnership and one or more of its subsidiaries is estimated at
approximately $2.4 billion. See "PRO FORMA COMBINED AND SELECTED HISTORICAL
FINANCIAL DATA -- Note 3. Analysis of Stockholders' Equity." Such transfer will
result in a reduction of the SDG Limited Partners' interests, in the aggregate,
in the SDG Operating Partnership from 36.9% to 28.6%, assuming the Merger had
occurred on March 31, 1998. On March 31, 1998, Melvin and Herbert Simon, Simon
Group's Co-Chairmen, and David Simon, Simon Group's Chief Executive Officer,
beneficially held 9.9%, 5.8% and 1.3%, respectively, of the SDG Operating
Partnership, and after such transfer beneficially will hold 7.7%, 4.5% and 1.0%,
respectively, assuming such transfer had occurred on March 31, 1998. See "THE
MERGER AGREEMENT AND RELATED MATTERS -- Certain Transactions and Agreements
Relating to the Merger -- The Operating Partnerships After the Merger; Simon
Group Contribution Agreement." See also "RISK FACTORS -- Potential Conflicts of
Interests Related to Operations," "-- Limits on Change of Control" and
"-- Dependence on Key Personnel." Each of SDG and SD Property Group, Inc. (of
which SDG owns in excess of 99.9% of its outstanding common stock) will continue
as a general partner of the SDG Operating Partnership. Simon Group, both
directly and indirectly through its ownership of SDG, will own an approximate
71.4% interest in the SDG Operating Partnership assuming the Merger had occurred
on March 31, 1998, and will be a general partner of the SDG Operating
Partnership.
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The businesses and the assets of CRC will be held by a newly formed
operating partnership (the "SRC Operating Partnership"), of which CRC will be
the sole general partner. In connection with the formation of the SRC Operating
Partnership, SDG, as a general partner of the SDG Operating Partnership, Simon
Group, CRC and the SDG Limited Partners will enter into a partnership agreement
(the "SRC Operating Partnership Agreement"), pursuant to which, assuming the
Merger had occurred on March 31, 1998, (i) CRC will contribute all of its assets
and liabilities to the SRC Operating Partnership for an interest in the SRC
Operating Partnership and (ii) the SDG Operating Partnership will contribute
assets, including, without limitation, land held for future development, to the
SRC Operating Partnership for units ("CRC Units") representing the remaining
limited partnership interest in the SRC Operating Partnership. The SDG Operating
Partnership will then distribute the CRC Units to the holders of SDG Units in
proportion to their ownership interest in the SDG Operating Partnership,
whereupon such holders also will become limited partners of the SRC Operating
Partnership (the "CRC Limited Partners"); such that following such contributions
and distribution, CRC will own a 71.4% interest and the SDG Limited Partners
will own a 28.6% interest in the SRC Operating Partnership. Following the
Merger, the CRC Units (together with the SDG Units, the "Units") will be paired
with the SDG Units and may be exchanged (together with the SDG Units) for shares
of Simon Group Equity Stock (together with beneficial interests in the CRC
Trusts owning the outstanding shares of CRC Common Stock) on a one-for-one basis
or for cash at Simon Group's option. Following the Merger, the SDG Units and CRC
Units may not be exchanged or transferred separately, but only as a single unit.
After giving effect to the Merger and to the foregoing transactions,
holders of SDG Equity Stock will own shares of Simon Group Equity Stock which
are paired with beneficial interests in the CRC Trusts owning the outstanding
shares of CRC Common Stock. Holders of SDG Units will own SDG Units which are
paired with the CRC Units, and such paired Units will be exchangeable for shares
of Simon Group Common Stock which are paired to beneficial interests in the CRC
Trusts owning the outstanding shares of CRC Common Stock.
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[DIAGRAM]
A DIAGRAM OF THE STRUCTURES (INCLUDING COMMON OWNERSHIP INTERESTS AND VOTING
POWER, AS OF MARCH 31, 1998) OF THE PARTIES TO THE TRANSACTION PRIOR TO THE
MERGER APPEARS HERE.
A DIAGRAM OF THE STRUCTURE (INCLUDING COMMON OWNERSHIP INTERESTS AND VOTING
POWER, AS OF MARCH 31, 1998) OF THE PARTIES TO THE TRANSACTION PRIOR TO THE
MERGER APPEARS HERE.
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POTENTIAL CONFLICTS OF INTEREST RELATED TO THE MERGER AND OPERATIONS
The SDG Board of Directors and SDG management will not receive any
consideration for their SDG Equity Stock different from consideration received
by other holders of SDG Equity Stock in connection with the Merger. However, in
considering the recommendation of the SDG Board of Directors with respect to the
Merger, SDG stockholders should be aware that certain members of management and
the SDG Board of Directors have certain interests as holders of SDG Units that
are in addition to the interests of the SDG stockholders generally. At the
Effective Time, Simon Group will transfer, or direct the transfer of,
substantially all of its assets (i.e., all the assets other than assets valued
at approximately $153.1 million, including Ocean County Mall valued at
approximately $145.8 million) and liabilities (except that Simon Group will
remain a co-obligor with the SDG Operating Partnership under a $1.4 billion
senior unsecured term loan pursuant to a commitment letter with The Chase
Manhattan Bank and Chase Securities, Inc.) to the SDG Operating Partnership and
one or more subsidiaries of the SDG Operating Partnership in consideration for
49,858,940 limited partnership interests (which equals the number of shares of
CPI Common Stock outstanding after the CPI Merger Dividends, less the number of
shares equal to the value of the former CPI assets and liabilities retained by
Simon Group) and 5,175,287 preferred partnership interests (which equals the
number of shares of CPI Series A Preferred Stock and CPI Series B Preferred
Stock outstanding after the CPI Merger Dividends). The value of the assets and
liabilities retained by Simon Group or transferred to the SDG Operating
Partnership is based on the consideration to be received or retained by the
stockholders of CPI in connection with the Merger and on the reported closing
trading price per share of SDG Common Stock of $33 5/8 on February 18, 1998, the
last trading date preceding public announcement of the Merger. The fair market
value of the former CPI assets less liabilities to be transferred by Simon Group
to the SDG Operating Partnership and one or more of its subsidiaries is
estimated at approximately $2.4 billion. Such transfer will result in a
reduction of the SDG Limited Partners' interests, in the aggregate, in the SDG
Operating Partnership from 36.9% to 28.6%, assuming the Merger had occurred on
March 31, 1998. In accordance with the terms of the partnership the SDG Units
may be exchanged for shares of Simon Group Common Stock on a one-for-one basis
or for cash at Simon Group's option. Prior to the transfer of assets and
liabilities, Melvin and Herbert Simon, Simon Group's Co-Chairmen, and David
Simon, Simon Group's Chief Executive Officer, beneficially held 9.9%, 5.8% and
1.3%, respectively, of the SDG Operating Partnership and beneficially held
13.8%, 8.5% and 2.0%, respectively, of SDG (including SDG Common Stock issuable
upon the conversion of SDG Units), and after such transfer beneficially will
hold 7.7%, 4.5% and 1.0%, respectively, of the SDG Operating Partnership and
beneficially will hold 9.6%, 5.8% and 1.4%, respectively of Simon Group
(including Simon Group Common Stock issuable upon the conversion of SDG Units).
See "RISK FACTORS -- Potential Conflicts of Interests Related to Operations" and
"THE MERGER AGREEMENT AND RELATED MATTERS -- Certain Transactions and Agreements
Relating to the Merger."
RISK FACTORS
The stockholders of SDG, in reaching a decision regarding the Merger
Proposal, should consider carefully certain factors set forth herein under the
heading "RISK FACTORS." Simon Group will be subject to substantial indebtedness
and the risks associated with debt financing, including the risk that cash flow
from operations will be insufficient to meet required payments of principal and
interest, the risk that existing indebtedness will not be able to be refinanced
or that terms of such refinancing will not be favorable. In connection with the
Merger, Simon Group will incur a substantial amount of additional debt thereby
increasing its exposure to the risks associated with debt financing. Assuming
the Merger occurred on March 31, 1998 and excluding pro rata share of joint
venture indebtedness, Simon Group would have an additional $2.405 billion of
indebtedness, including the assumption of all of CPI and CRC's indebtedness of
$858.8 million. SDG's obligations under the Merger Agreement are not conditioned
on the obtaining of financing. Certain indentures governing notes of CPI require
redemption of $575 million of the outstanding aggregate amount of $825 million
of notes if substantially all of CPI's assets are transferred to a successor
issuer that is not a REIT. As part of the Merger, SDG intends to transfer
substantially all of CPI's assets to the SDG Operating Partnership, which is not
a REIT. SDG intends to commence a consent solicitation to holders of the notes
to, among other things, amend the indentures to permit the transfer to the SDG
Operating Partnership. If the consent solicitation is not successfully completed
prior to the Merger, substantially all of
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the assets will be transferred to The Retail Property Trust ("RPT"), which
transfer certain holders of notes believe may require waivers. SDG believes that
the assignment of CPI's assets to RPT fully complies with the provisions of the
CPI indentures. SDG and CPI are large enterprises with operations nationwide.
There can be no assurance that costs or other factors associated with the
integration of the two companies will not adversely affect the benefits of
estimated cost savings and future combined results of operations. The Merger has
a dilutive effect of $0.10 on the net income per share of Simon Group Common
Stock on a pro forma basis for the three months ended March 31, 1998 (after
giving effect to the elimination of a $0.19 per share gain on a sale of real
estate) and a dilutive effect of $0.54 on the net income per share of Simon
Group Common Stock on a pro forma basis for the year ended December 31, 1997
(after giving effect to the elimination of a $0.56 gain on sale of real estate),
and may have a dilutive effect on net income per share in future periods.
Other factors to be considered include the following: (i) possible
subordination of rights of current holders of Simon Group Equity Stock and SDG
Units; (ii) federal income tax consequences; (iii) potential conflicts of
interest related to operations; (iv) certain tax risks, including proposed tax
legislation; (v) REIT classification; legislation limiting benefits of paired
share status; (vi) real estate investment risks, including factors affecting
revenues and economic value of shopping centers, illiquidity of real estate,
dependence on anchors and tenants, renewal of leases and reletting of space and
failure to manage expansion and development growth strategy; (vii) limited
control with respect to certain properties partially owned or managed by third
parties; (viii) competition; (ix) possible liability relating to environmental
matters; (x) limits on change of control; (xi) comparison of stockholders'
rights; (xii) dependence on key personnel; (xiii) risks relating to year 2000
issue; (xiv) impact of interest rate fluctuations and other factors on stock
price and borrowing costs; (xv) risks related to interest rate hedging
arrangements; and (xvi) possible adverse effects on stock prices arising from
shares available for future sale. See "RISK FACTORS" for a complete discussion
of such factors.
TIME, PLACE AND DATE OF SDG MEETINGS; RECORD DATE
The SDG Special Meeting will be held at The Indianapolis Hyatt Regency, One
South Capitol Avenue, Indianapolis, Indiana, on September 23, 1998 at 10:00
a.m., Indianapolis time. The SDG Annual Meeting will be held immediately
following the SDG Special Meeting at the same location as the SDG Special
Meeting. Stockholders of record at the close of business on July 20, 1998 (the
"Record Date") are entitled to one vote for each share of SDG Equity Stock held
at the SDG Meetings or any adjournments or postponements thereof. As of the
Record Date, 113,686,334 shares of SDG Equity Stock were issued and outstanding.
PURPOSE AND REQUIRED APPROVAL
The purpose of the SDG Special Meeting is to consider and vote on: (i) the
approval and adoption of an amendment (the "Voting Preferred Amendment") to the
SDG Charter to provide certain voting rights to holders of SDG's 8 3/4% Series B
Cumulative Redeemable Preferred Stock ("SDG Series B Preferred Stock") and 7.89%
Series C Cumulative Step-Up Premium Rate Preferred Stock ("SDG Series C
Preferred Stock" and together with the SDG Series B Preferred Stock, the "SDG
Preferred Stock"); (ii) the approval and adoption of the Merger Agreement and
the transactions contemplated thereby (the "Merger Proposal"); and (iii) such
other business as may properly come before the SDG Special Meeting or any
adjournment or postponement thereof.
The affirmative vote of a majority of all the votes entitled to be cast by
the holders of the outstanding SDG Equity Stock is required to approve the
Voting Preferred Amendment. Consideration of the Merger Proposal is contingent
upon approval of the Voting Preferred Amendment and, accordingly, effectiveness
of the Merger Proposal is conditioned upon the approval of the Voting Preferred
Amendment. The affirmative vote of 66 2/3% of all the votes entitled to be cast
by the holders of the outstanding SDG Equity Stock is required to approve the
Merger Proposal.
In the event that there are not a sufficient number of votes to approve the
Voting Preferred Amendment or the Merger Proposal at the time of the SDG Special
Meeting, the persons present or named as proxies by a stockholder may propose
and vote for one or more adjournments of the SDG Special Meeting to permit
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further solicitation of proxies. A proxy that withholds discretionary authority
or that is voted against the Voting Preferred Amendment or the Merger Proposal
will not be voted in favor of any adjournment or postponement of the SDG Special
Meeting. The SDG Special Meeting may be adjourned by the affirmative vote of a
majority of the votes present in person or by proxy.
The purpose of the SDG Annual Meeting is to consider and vote on: (i) the
election of eleven directors (five to be elected by the holders of SDG Equity
Stock, four to be elected by the holders of SDG Class B Common Stock and two to
be elected by the holders of SDG Class C Common Stock); (ii) the approval of the
Simon Property Group, L.P. 1998 Stock Incentive Plan (the "1998 Stock Incentive
Plan"); (iii) the ratification of the appointment of Arthur Andersen LLP as
independent accountants; and (iv) such other business as may properly come
before the SDG Annual Meeting. Directors will be elected by a plurality of the
votes cast for the election of directors. The approval of the 1998 Stock
Incentive Plan and the ratification of the appointment of the independent
accountants each will require the affirmative vote of a majority of the votes
cast on the matter.
TERMS OF MERGER; MERGER CONSIDERATION
The following description of the Merger Agreement summarizes the material
terms of the Merger Agreement and does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached hereto as Annex A and incorporated herein by reference. Stockholders
of SDG are urged to read the Merger Agreement in its entirety.
General. The Merger Agreement provides that upon the terms and subject to
the conditions described below, at the Effective Time, a subsidiary of CPI shall
be merged with and into SDG in accordance with the MGCL with SDG continuing as
the surviving corporation in the Merger. As a result, SDG will become a
subsidiary of Simon Group, with Simon Group owning in excess of 99.9% of its
outstanding common stock. See "THE MERGER AGREEMENT AND RELATED MATTERS." The
Board of Directors of Simon Group and CRC at the Effective Time will consist of
13 directors and will include 10 directors designated by SDG and three directors
designated by CPI, which directors, in each case, will remain directors until
their successors have been duly elected and qualified or until their earlier
death, resignation or removal.
The Merger Consideration. The Merger Agreement provides that each
outstanding share of SDG Common Stock, SDG Class B Common Stock, and SDG Class C
Common Stock (other than shares held by SDG as treasury stock, shares owned by
CPI, CRC, any wholly owned entity of CPI or CRC or shares as to which appraisal
rights have been perfected) shall be converted into the right to receive one
share of Simon Group Common Stock, Simon Group Class B Common Stock and Simon
Group Class C Common Stock, respectively.
Total consideration to be received and retained by a holder of CPI Common
Stock at the time of the execution of the Merger Agreement was equal to
approximately $179 per share, consisting of $90 in cash, subject to the collar
provisions described in "THE MERGER AGREEMENT AND RELATED MATTERS -- Terms of
the Merger -- The Merger Consideration," approximately $70 in Simon Group Common
Stock (based on the reported closing trading price of SDG Common Stock of
$33 5/8 on February 18, 1998, the last trading date preceding the announcement
of the Merger, and a fixed ratio of 1.0818 additional shares of CPI Common Stock
for each share of CPI Common Stock held) and approximately $19 in Simon Group
Series B Preferred Stock. The trading price of the Simon Group Common Stock at
the Effective Time may be higher or lower than $33 5/8, and if so, the value of
the Simon Group Common Stock to be received by CPI stockholders will be more or
less than approximately $70 depending upon the direction of the price movement.
Specifically, the Merger Agreement provides that prior to the Effective Time CPI
shall declare the CPI Merger Dividends on the shares of CPI Common Stock
consisting of (i) the Cash Amount (as defined below); (ii) 1.0818 shares of CPI
Common Stock and (iii) 0.19 shares of CPI Series B Preferred Stock. The holders
of shares of Simon Group Common Stock, Simon Group Class B Common Stock and
Simon Group Class C Common Stock outstanding or issued in connection with the
Merger will receive a beneficial interest in shares of CRC Common Stock held by
the CRC Trusts. The "Cash Amount" shall be $90.00 per share of CPI Common Stock
if the Market Price for SDG Common Stock is greater than or equal to $28.58 and
less
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than or equal to $38.67 and otherwise shall be adjusted as follows: (i) if the
Market Price for the SDG Common Stock at the Effective Time exceeds $38.67, then
the Cash Amount shall be reduced by an amount equal to such excess multiplied by
2.0818 and (ii) if the Market Price for SDG Common Stock at the Effective Time
is less than $28.58, then the Cash Amount shall be increased by an amount equal
to such deficiency multiplied by 2.0818. The "Market Price" shall be the average
of the closing prices per share for the SDG Common Stock on the NYSE for the 20
consecutive trading days ending on the fifth trading day prior to the Effective
Time.
The following table sets forth the differing Cash Amounts using various
sample SDG Market Prices:
SDG MARKET PRICE CASH AMOUNT
---------------- -----------
$27.00 $93.29
$28.58 - $38.67 $90.00
$40.00 $87.23
If the Effective Time were August 12, 1998, the Market Price would be equal to
$32.08 and the Cash Amount would be $90.00 per share of CPI Common Stock. The
Cash Amount is set based upon the Market Price pursuant to the collar provisions
described above, which only can be determined after the SDG Meetings and on the
fifth trading day prior to the Effective Time. The Effective Time is anticipated
to be on September 24, 1998. Interested parties may call MacKenzie Partners,
Inc. at (800) 322-2885 to obtain the current anticipated Effective Time and a
current example of the Cash Amount to be issued on a per share basis. Prior to
the Merger, each of SDG and CPI shall declare a Special Distribution (as defined
below) to their respective stockholders, the record date for which shall be the
close of business on the last business day prior to the Effective Time. "Special
Distribution" means the distribution to be made by each of SDG and CPI to their
respective stockholders in amounts proportional to dividends paid to SDG's or
CPI's (as the case may be) stockholders for the last full quarter preceding the
Effective Time, prorated over the number of days elapsed in the quarter in which
the Effective Time occurs from the beginning of such quarter to the Effective
Time.
The consideration to be received by each of the SDG stockholders and each
of the CPI stockholders was determined based on an arm's length negotiation of
the Merger Agreement and the desired structure for the transaction.
Conditions to Consummation of the Merger. In addition to the adoption of
the Voting Preferred Amendment, the consummation of the Merger is subject to
certain conditions, including, among others: (i) the approval and adoption of
the Merger Agreement by the requisite vote of the SDG stockholders; (ii) the
approval of the issuance of shares and related beneficial interests by the
requisite vote of the CPI and CRC stockholders (which approval will be given
pursuant to the substantially similar stockholder voting agreements already
entered into by certain CPI stockholders representing more than a majority of
CPI Common Stock and more than two-thirds of the CPI Series A Preferred Stock,
with SDG (the "Stockholder Voting Agreements") in which such stockholders agreed
to vote in favor of the Merger and related transactions and which assure that
the transactions contemplated by the Merger Agreement, other than the adoption
of the Simon Group Charter which requires the vote of 80% of the voting power of
the outstanding voting stock and is a condition to the Merger, will be approved
by CPI and CRC stockholders at a vote on the matter); (iii) the Registration
Statement having become effective in accordance with the Securities Act, no stop
order suspending such effectiveness having been issued and remaining in effect
and no proceeding seeking such an order being pending or threatened; (iv) the
receipt of all state securities or "blue sky" permits and other authorizations
necessary to issue securities pursuant to the Merger Agreement, including under
the CPI Option Plan and the SDG Option Plans (collectively, the "Option Plans")
after the Merger, and securities upon conversion of the Simon Group Series A
Preferred Stock and Simon Group Series B Preferred Stock; (v) the Simon Group
Common Stock issued pursuant to the Merger Agreement and the CPI Common Stock
(which from and after the Effective Time shall be referred to as "Simon Group
Common Stock") previously outstanding and issuable under the Option Plans or
upon conversion of the Simon Group Series A Preferred Stock and Simon Group
Series B Preferred Stock after the Merger having been authorized for listing on
the NYSE; (vi) no court of competent jurisdiction or other competent
governmental or regulatory authority
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having enacted, issued, promulgated, enforced or entered any law or order
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of making illegal or otherwise restricting, preventing or prohibiting
consummation of the Merger or the other transactions contemplated by the Merger
Agreement; and (vii) each party shall have received a satisfactory opinion of
its special counsel as to certain tax matters. All of the foregoing conditions
to the consummation of the Merger are subject to the waiver by the parties to
the Merger Agreement. Neither SDG nor CPI intends to waive any material
condition to the consummation of the Merger, including the condition requiring
the delivery of an opinion of their respective special tax counsel. In the event
that a material condition is waived by either SDG or CPI, SDG and CPI intend to
amend and recirculate the Proxy Statement/Prospectus.
Termination. The Merger Agreement may be terminated, and transactions
contemplated thereby may be abandoned, at any time prior to the Effective Time,
whether prior to or after the approvals required by the SDG, CPI and CRC
stockholders: (a) by mutual written agreement of the parties duly authorized by
action taken by or on behalf of their respective boards of directors; or (b) by
either SDG or CPI upon notification to the nonterminating party by the
terminating party: (i) at any time after November 30, 1998, if the Merger shall
not have been consummated on or prior to such date and such failure to
consummate the Merger is not caused by a breach of the Merger Agreement by the
terminating party or any of its affiliates; (ii) if the requisite approval of
the stockholders of SDG, CPI or CRC shall not be obtained by reason of the
failure to obtain the requisite vote upon a vote held at a meeting of such
stockholders, or any adjournment thereof, called therefor; (iii) if there has
been a material breach of any representation, warranty, covenant or agreement on
the part of the nonterminating party set forth in the Merger Agreement, which
breach is not curable or, if curable, has not been cured within 30 days
following receipt by the nonterminating party of notice of such breach from the
terminating party; or (iv) if any court of competent jurisdiction or other
competent governmental or regulatory authority shall have issued an order making
illegal or otherwise restricting, preventing or prohibiting the Merger and such
order shall have become final and nonappealable. Any reference to any event,
change or effect being "material" or "materially adverse" or having a "material
adverse effect" on or with respect to an entity means such event, change or
effect is material or materially adverse, as the case may be, to the business,
properties, assets, liabilities, condition (financial or otherwise) or results
of operations of such entity.
Termination Fees. In the event that the Merger Agreement is terminated by
CPI due to a willful breach by SDG pursuant to clause (b)(iii) of the preceding
paragraph, or as a result of the requisite SDG stockholder approval not being
obtained at any time prior to November 30, 1998 pursuant to clause (b)(ii) of
the preceding paragraph, SDG will be required to pay CPI a termination fee of
$50 million, payable in annual installments over a two year period (subject to a
limitation intended to prevent a violation of certain requirements for
qualifying as a REIT under sections 856 through 860 of the Code and Applicable
Treasury Regulations ("REIT Requirements")). In the event that the Merger
Agreement is terminated by SDG due to a willful breach by CPI pursuant to clause
(b)(iii) of the preceding paragraph, CPI will be required to pay SDG a
termination fee of $50 million, payable in annual installments over a two year
period (subject to a limitation intended to prevent a violation of certain REIT
Requirements). Any portion of either termination fee that is not paid by the end
of the second year due to limitations of the REIT Requirements shall be
forfeited.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
SDG. On February 19, 1998, the SDG Board of Directors unanimously approved
the Merger Agreement and the transactions contemplated thereby and determined
that the Merger and the transactions contemplated thereby are fair to and in the
best interests of SDG and its stockholders. The SDG Board of Directors
recommends that the SDG stockholders VOTE FOR approval and adoption of the
Merger Agreement. See "THE PROPOSED MERGER AND RELATED MATTERS -- Recommendation
of the SDG Board of Directors; Reasons for the Merger."
CPI and CRC. On February 18, 1998, the CPI Board and CRC Board of
Directors unanimously approved the Merger Agreement and the transactions
contemplated thereby and determined that the Merger and the transactions
contemplated thereby are fair to and in the best interests of CPI and CRC and
their
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stockholders. See "THE PROPOSED MERGER AND RELATED MATTERS -- Recommendation of
the CPI Board and the CRC Board of Directors; CPI's and CRC's Reasons for the
Merger."
OPINIONS OF FINANCIAL ADVISORS
Opinion of Merrill Lynch. On February 19, 1998, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") delivered its oral opinion (which
was subsequently confirmed in writing) to the SDG Board of Directors to the
effect that, as of February 19, 1998, the consideration to be received by the
holders of SDG Equity Stock in the Merger was fair to such stockholders from a
financial point of view. A copy of the written opinion of Merrill Lynch dated
February 19, 1998, which sets forth the assumptions made, matters considered and
limits of its review, is attached to this Proxy Statement/Prospectus as Annex B.
SDG has agreed to pay Merrill Lynch a fee equal to approximately $7 million in
connection with the Merger, which fee is payable only upon consummation of the
Merger. See "THE PROPOSED MERGER AND RELATED MATTERS -- Opinion of Financial
Advisor to SDG."
Opinions of Lazard Freres and J.P. Morgan. On February 18, 1998, Lazard
Freres & Co. LLC ("Lazard Freres") and J.P. Morgan Securities Inc. ("J.P.
Morgan") (collectively, the "CPI Financial Advisors") delivered their oral
opinions (which were subsequently confirmed in writing) to the CPI Board to the
effect that, as of February 18, 1998, the consideration to be received or
retained by the holders of CPI Common Stock pursuant to the Merger Agreement was
fair from a financial point of view to such holders. A copy of the written
opinion of Lazard Freres dated February 18, 1998, which sets forth the
assumptions made, matters considered and limits of its review, is attached to
this Proxy Statement/Prospectus as Annex C. A copy of the written opinion of
J.P. Morgan dated February 18, 1998, which sets forth the assumptions made,
matters considered and limits of its review, is attached to this Proxy
Statement/Prospectus as Annex D. CPI has agreed to pay each of the CPI Financial
Advisors approximately $10 million in connection with the Merger, which fees are
payable only upon consummation of the Merger. See "THE PROPOSED MERGER AND
RELATED MATTERS -- Opinions of Financial Advisors to CPI."
CERTAIN TRANSACTIONS AND AGREEMENTS RELATING TO THE MERGER
In connection with the Merger Agreement and the Merger, certain additional
agreements have been or will be entered into on or prior to the Effective Time.
CPI Stockholder Voting Agreements. At the time SDG and CPI entered into
the Merger Agreement, certain stockholders of CPI, representing 15,811,456
shares (approximately 62.4%) of CPI Common Stock and 153,450 shares
(approximately 73.3%) of the CPI Series A Preferred Stock, entered into the
Stockholder Voting Agreements. Stockholder Voting Agreements were entered into
by each of Stichting Pensioenfonds Voor De Gezondheid Geestelijke En
Maatschappelijke Belangen ("PGGM"), the Kuwait Fund for Arab Economic
Development, the Arab Fund for Economic and Social Development, the Kuwait
Investment Authority, as Agent for the Government of Kuwait, and State Street
Bank and Trust Company, not individually but solely in its capacity as Trustee
of the Telephone Real Estate Equity Trust (collectively, the "Stockholders").
The Stockholder Voting Agreements are applicable to all CPI Common Stock, CPI
Series A Preferred Stock and the related beneficial interests in shares of CRC
Common Stock owned by each of the stockholders who have entered into the
Stockholder Voting Agreements (collectively, the "Owned Shares"). Until the
expiration of the "Voting Period" (the earliest of (x) the Effective Time, (y)
the termination of the Merger Agreement in accordance with its terms or (z)
November 30, 1998), each of the stockholders has agreed to vote its Owned Shares
in favor of the Merger and the approval and adoption of the Merger Agreement and
each of the transactions contemplated by the Merger Agreement. The Stockholder
Voting Agreements assure that the transactions contemplated by the Merger
Agreement, other than the adoption of the Simon Group Charter which requires the
vote of 80% of the voting power of the outstanding voting stock and is a
condition to the Merger, will be approved by CPI and CRC stockholders at a vote
on the matter.
The Operating Partnerships After the Merger; Simon Group Contribution
Agreement. Pursuant to an agreement to be entered into between Simon Group and
SDG, as the general partner of the SDG Operating
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Partnership (the "Contribution Agreement"), at the Effective Time Simon Group
will transfer, or direct the transfer of, substantially all of its assets and
liabilities to the SDG Operating Partnership and one or more subsidiaries in
consideration for limited partnership interests in the SDG Operating
Partnership, as more fully described below under "THE MERGER AGREEMENT AND
RELATED MATTERS -- Certain Transactions and Agreements Relating to the
Merger -- The Operating Partnerships After the Merger; Simon Group Contribution
Agreement" and "-- Structure of Simon Group."
Following the Merger and assuming the exercise of all CPI options and the
contribution of assets and liabilities of Simon Group to the SDG Operating
Partnership, Simon Group, directly and through its ownership of SDG, will own an
approximate 71.4% interest in the SDG Operating Partnership and will be a
general partner of the SDG Operating Partnership. The SDG Limited Partners will
own beneficially, in the aggregate, a 28.6% limited partnership interest in the
SDG Operating Partnership.
In connection with the Merger, CRC will contribute all of its assets and
liabilities to the newly-formed SRC Operating Partnership, will own a 71.4%
interest in the SRC Operating Partnership and will be the sole general partner
of the SRC Operating Partnership. The SDG Limited Partners also will become
limited partners of the SRC Operating Partnership and will own beneficially, in
the aggregate, the remaining 28.6% limited partnership interest in the SRC
Operating Partnership. The Amended SDG Operating Partnership Agreement will
provide for the pairing of SDG Units with CRC Units. The limited partnership
agreement of the SDG Operating Partnership (the "SDG Operating Partnership
Agreement") currently provides that the net proceeds of all offerings of shares
of capital stock by SDG will be contributed to the SDG Operating Partnership in
consideration for the issuance to SDG of additional interests in the SDG
Operating Partnership. Following the Merger, the Amended SDG Operating
Partnership Agreement and the SRC Operating Partnership Agreement will each
provide that the net proceeds of all offerings of shares of capital stock by
Simon Group, which shares (to the extent they consist of shares of Simon Group
Equity Stock or convertible Simon Group Preferred Stock) will be paired with
beneficial interests in the CRC Trusts owning the outstanding shares of CRC
Common Stock, will be contributed to the operating partnerships. Upon such
contribution, the SDG Operating Partnership will issue to Simon Group, and the
SRC Operating Partnership will issue to CRC, an additional number of paired
Units in such operating partnerships equal to the number of such shares and
beneficial trust interests issued by Simon Group and CRC, respectively. The
Amended SDG Operating Partnership Agreement and the SRC Operating Partnership
Agreement also will provide that the net proceeds of all incurrences of
indebtedness by Simon Group (or its subsidiaries) or CRC will be loaned to the
SDG Operating Partnership or the SRC Operating Partnership, as the case may be.
The SDG Operating Partnership Agreement currently provides that holders of SDG
Units have the right to exchange all or any portion of their SDG Units for SDG
Common Stock on a one-for-one basis or, at SDG's option, cash equal to the then
market value of such shares, as determined by SDG. Following the Merger, each
SDG Unit together with the paired CRC Unit will be exchangeable for cash or for
a share of Simon Group Common Stock and a beneficial interest in CRC Common
Stock, as determined by Simon Group and CRC.
Under the provisions of SDG's existing registration rights agreements,
holders of SDG Units who receive shares of SDG Common Stock in exchange for such
SDG Units have the right, under certain circumstances and subject to certain
conditions, to require that SDG register such shares for public distribution. As
described below, New Registration Rights Agreements will be executed to provide
that the holders of the SDG Units who receive shares of Simon Group Common Stock
will have the right, under such circumstances and subject to such conditions, to
require that Simon Group register such shares of Simon Group Common Stock for
public distribution.
Simon Group Issuance Agreement. In connection with the Merger, Simon Group
and CRC will enter into an issuance agreement (the "Issuance Agreement"), the
purpose of which is to ensure that a portion of the consideration paid for any
newly issued Simon Group Equity Stock is transferred to CRC as consideration for
the beneficial interests in the CRC Trusts paired with such newly issued stock.
Pursuant to the Issuance Agreement, whenever Simon Group issues shares of Simon
Group Equity Stock or Simon Group Preferred Stock convertible into shares of
Simon Group Common Stock (but only to the extent such preferred stock is
designated as "Special Preferred Stock"), CRC shall issue to the CRC Trusts a
number of shares of CRC Common Stock such that, immediately after such issuance
of CRC Common Stock, the CRC Proportionate
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Interest of each CRC Trust shall equal the Simon Group Proportionate Interest of
the series of capital stock of Simon Group related to such CRC Trust. For
purposes of the foregoing, the "CRC Proportionate Interest" for any CRC Trust at
any date shall mean a fraction, the numerator of which shall be the number of
shares of CRC Common Stock held in such CRC Trust and the denominator of which
shall be the number of shares of CRC Common Stock outstanding, and the "Simon
Group Proportionate Interest" shall mean (i) with respect to the Simon Group
Equity Stock at any date, a fraction, the numerator of which shall be the number
of shares of Simon Group Equity Stock outstanding at such date and the
denominator of which shall be the sum of the number of shares of Simon Group
Equity Stock outstanding and the aggregate number of shares of Simon Group
Equity Stock issuable upon conversion of all outstanding shares of all series of
Simon Group Special Preferred Stock, and (ii) with respect to any series of
Simon Group Special Preferred Stock, a fraction, the numerator of which shall be
the number of shares of Simon Group Equity Stock issuable upon conversion of
such series of Special Preferred Stock and the denominator of which shall be the
sum of the number of shares of Simon Group Equity Stock outstanding and the
aggregate number of shares of Simon Group Equity Stock issuable upon conversion
of all outstanding shares of all series of Simon Group Special Preferred Stock.
Pursuant to the Issuance Agreement, whenever CRC shall issue shares of CRC
Common Stock, Simon Group shall simultaneously pay to CRC an amount equal to the
greater of (i) the aggregate par value of the shares of CRC Common Stock issued
and (ii) the amount determined in good faith by the Board of Directors of CRC to
represent the fair market net asset value of the shares of CRC Common Stock
issued (less the aggregate consideration paid to CRC by parties other than Simon
Group in connection with such issuance of CRC Common Stock). See "DESCRIPTION OF
SIMON GROUP AND CRC CAPITAL STOCK -- COMMON STOCK; BENEFICIAL OWNERSHIP OF CRC
COMMON STOCK."
Issuance of Interests in CRC and SRC Operating Partnership. In accordance
with the Issuance Agreement, the SDG Operating Partnership will arrange for cash
to be contributed at the Effective Time on behalf of SDG's stockholders to CRC
as payment (the "CRC Payment") for the beneficial interests in the CRC Trusts
(which will be paired with the shares of Simon Group Equity Stock to be issued
to SDG stockholders in the Merger). The SDG Operating Partnership will also
simultaneously arrange for cash to be contributed at the Effective Time on
behalf of the limited partners of the SDG Operating Partnership to the SRC
Operating Partnership as payment (the "Operating Partnership Payment") for CRC
Units which will, in turn, be received by the limited partners of the SDG
Operating Partnership. This is intended to ensure that the limited partners of
the SDG Operating Partnership have the same proportionate interest in the SRC
Operating Partnership as they will have in the SDG Operating Partnership. The
CRC Payment reflects the amount of cash required to be paid to CRC such that,
following such contribution, SDG stockholders will hold the same proportionate
interest in CRC as they will hold in Simon Group upon consummation of the
Merger, without diluting the value of beneficial interests in the CRC Trusts
paired with the previously outstanding shares of CPI Common Stock. Based upon a
preliminary estimate of the value of CRC's net assets as determined by SDG's
management, the amount of the CRC Payment is estimated to be approximately $14
million and the Operating Partnership Payment is estimated to be approximately
$8 million. At the Effective Time, the Board of Directors of CRC will make a
determination of the fair market value of CRC's net assets based upon
information then available. SDG's management does not expect that the final
amount will differ materially from the preliminary estimates. The CRC Payment
will be contributed by CRC to the SRC Operating Partnership and all amounts will
be used for working capital and general purposes, subject to restrictions
described in the SRC Operating Partnership Agreement. See "CERTAIN PROVISIONS OF
THE SDG OPERATING PARTNERSHIP AGREEMENT, THE SRC OPERATING PARTNERSHIP
AGREEMENT, THE SIMON GROUP CHARTER, THE CRC CHARTER, SIMON GROUP BY-LAWS AND CRC
BY-LAWS AND DELAWARE LAW."
To implement the CRC Payment, the following actions will be taken by the
SDG Operating Partnership and its general partners. Immediately prior to the
Effective Time, the SDG Operating Partnership will distribute the CRC Payment to
its general partners, SD Property Group, Inc. and SDG. SD Property Group, Inc.
will, in turn, dividend the cash it receives from the SDG Operating Partnership
to SDG and its other stockholders who own, in the aggregate, less than .01% of
SD Property Group, Inc. The CRC Payment will be held by SDG, which will, at the
Effective Time, transfer the cash dividend it holds to CRC as payment on behalf
of its stockholders for the beneficial interests in the CRC Trusts to be paired
with the shares of Simon
14
24
Group Equity Stock to be issued to SDG stockholders in the Merger. Pursuant to
the terms of the CRC Trusts, the beneficial interests of CRC will be
automatically paired with the shares of Simon Group Equity Stock issued to SDG
stockholders in the Merger. To implement the Operating Partnership Payment, the
SDG Operating Partnership will make the Operating Partnership Payment in
consideration for CRC Units, which will, in turn, be received by the limited
partners of the SDG Operating Partnership.
New Registration Rights Agreements. Simon Group will enter into
registration rights agreements or amendments to existing registration rights
agreements, effective at or as promptly as practicable following the Effective
Time ("New Registration Rights Agreements"), granting registration rights with
respect to shares of Simon Group Equity Stock and Simon Group Preferred Stock,
as applicable, held by certain existing stockholders of CPI and issuable upon
exchange of SDG Units held by existing stockholders of SDG, including Melvin
Simon, Herbert Simon and David Simon. The terms and conditions of the New
Registration Rights Agreements are substantially similar to those of SDG's
existing registration rights agreements.
NEW REIT LEGISLATION
Legislation enacted in 1984 requires that paired entities be treated as one
entity for purposes of determining whether either entity meets the REIT
Requirements. This legislation does not apply to a paired REIT if the REIT and
its paired operating company were paired as of June 30, 1983.
On July 22, 1998, President Clinton signed into law legislation that
terminates the "grandfathering" rule described above with respect to assets
("Non-Grandfathered Assets") acquired (or substantially improved) by either
paired entity after March 26, 1998. Assets acquired subject to a binding written
contract in force on March 26, 1998 (such as the Merger Agreement) are deemed to
be acquired on March 26, 1998 and therefore are excluded from Non-Grandfathered
Assets. As a result of this legislation, Simon Group and CRC will be treated as
one entity with respect to Non-Grandfathered Assets for purposes of determining
whether either entity qualifies as a REIT. Consequently, the benefits of the
"grandfathering" rule described above will be eliminated for any
Non-Grandfathered Assets acquired by Simon Group or CRC.
There are no current plans to change the paired-share status of Simon
Group. In addition, the management of Simon Group does not believe that this
legislation will materially affect Simon Group. Because Simon Group is engaged
primarily in owning and operating regional malls and community shopping centers,
i.e., real estate of a type that can be owned and operated directly by a REIT,
Simon Group has no present need, and would derive no material benefit from,
conducting its operations by leasing its real estate to CRC or the SRC Operating
Partnership. Furthermore, Simon Group has no current intention to acquire real
estate of a type that cannot be operated directly by a REIT, and accordingly,
does not believe that this legislation will adversely affect its current
acquisition strategy. The legislation will, however, limit Simon Group's ability
to change its current acquisition strategy to include the acquisition of real
estate other than of a type that can be owned and operated directly by a REIT.
For example, prior to enactment of the legislation, Simon Group could have
acquired a hotel and leased it to the SRC Operating Partnership. After enactment
of the legislation, such a transaction could, depending on its size, result in
the loss of Simon Group's REIT status.
NEW YORK STOCK EXCHANGE LISTING OF SIMON GROUP COMMON STOCK
As a condition to the Merger, the Simon Group Common Stock and Simon Group
Series B Preferred Stock will be listed on the NYSE. If the Merger is completed,
Simon Group stockholders would be able to trade shares of Simon Group Common
Stock and Simon Group Series B Preferred Stock on the NYSE. See "THE MERGER
AGREEMENT AND RELATED MATTERS -- Certain Transactions and Agreements Relating to
the Merger," "-- Conditions to Consummation of the Merger," "-- Termination;
Termination Fees and Amendment," and "FEDERAL SECURITIES LAWS CONSEQUENCES."
REGULATORY APPROVAL
Other than (i) the Commission's declaring effective the Registration
Statement containing this Proxy Statement/Prospectus, (ii) approvals in
connection with compliance with applicable blue sky or state
15
25
securities laws, (iii) the filing of the articles of merger with the State
Department of Assessments and Taxation of Maryland, (iv) the filing of such
reports under Section 13(a) of the Exchange Act as may be required in connection
with the Merger Agreement and related transactions and (v) such filings as may
be required in connection with the payment of any taxes or the transfer of
properties, neither the management of SDG nor the management of CPI believes
that any filing with or approval of any governmental authority is necessary in
connection with the consummation of the Merger.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is expected to qualify for treatment as a tax-free
reorganization under Section 368(a) of the Code, and the SDG stockholders who
exchange their SDG Equity Stock for Simon Group Equity Stock will not recognize
any gain or loss on the exchange except that gain will be recognized where SDG
stockholders receive cash proceeds in lieu of fractional interests in shares of
Simon Group Equity Stock greater than the tax basis allocated to such
stockholders' fractional share interests to the extent of such excess. Although
the matter is not entirely clear, Simon Group intends to treat and report the
receipt of beneficial interest in the CRC Common Stock by SDG stockholders as a
distribution governed by Section 301 of the Code (governing dividends), and not
as a payment of "other property" or "boot" in the tax-free reorganization. See
"THE MERGER AGREEMENT AND RELATED MATTERS -- Federal Income Tax Consequences to
Holders of SDG Equity Stock." In the event that the Merger does not qualify as a
tax-free reorganization, each SDG stockholder will recognize gain or loss equal
to the difference between the stockholder's tax basis in the SDG Common Stock
and the fair market value of the Simon Group Equity Stock received in the
Merger. Upon receipt of cash in exchange for its shares, a dissenting
stockholder will recognize a taxable gain or loss to the extent the cash
received exceeds or is less than the dissenting stockholder's basis in its
shares. See "-- Appraisal Rights" and "THE MERGER AGREEMENT AND RELATED
MATTERS -- Federal Income Tax Consequences to Holders of SDG Equity Stock."
COMPARATIVE RIGHTS OF STOCKHOLDERS OF SDG AND SIMON GROUP
SDG is incorporated under the laws of the State of Maryland and Simon Group
will be incorporated under the laws of the State of Delaware. SDG stockholders
will, upon consummation of the Merger, become stockholders of Simon Group and
their rights as such will be governed by Delaware law, the Restated Certificate
of Incorporation (the "Simon Group Charter") of Simon Group, the Restated
By-laws (the "Simon Group By-laws") of Simon Group, the Restated Certificate of
CRC (the "CRC Charter") and the Restated By-laws of CRC (the "CRC By-laws").
Important differences exist between the laws of Maryland and the rights of
stockholders of SDG and the laws of Delaware and the rights of stockholders of
Simon Group and CRC. For example, the SDG Charter provides that directors only
may be removed for cause by the stockholders while the Simon Group Charter and
the CRC Charter will provide that directors may be removed with or without cause
by the stockholders. The MGCL provides that stockholders may take action by
unanimous written consent while the Simon Group Charter will require that all
actions by Simon Group Common Stock holders be taken at an annual or special
meeting of the stockholders and the CRC Charter will provide that stockholders
may take action by written consent. The SDG By-laws provide that written notice
of every meeting of the stockholders be given not less than 10 nor more than 90
calendar days before the date of the meeting to each stockholder of record
entitled to vote the such meeting, while the Simon Group By-laws and CRC By-laws
limit the notice period to not less than 10 nor more than 60 calendar days
before the date of the meeting. In addition, the SDG Charter imposes a limit of
24% on the ownership of SDG Equity Stock by a member of the Simon Family Group
and a limit of 6% on the ownership of SDG Equity Stock by any other stockholder.
The Simon Group Charter imposes a limit of 18% on the ownership of SDG Equity
Stock by a member of the Simon Family Group and a limit of 8% on the ownership
of SDG Equity Stock by any other stockholder. For a description of these and
other differences between the rights of holders of SDG Equity Stock and Simon
Group Equity Stock, see "RISK FACTORS -- Comparison of Stockholders' Rights" and
"COMPARISON OF RIGHTS OF HOLDERS OF SDG COMMON STOCK AND SIMON GROUP AND CRC
COMMON STOCK."
16
26
APPRAISAL RIGHTS
The MGCL sets forth the rights of stockholders who object to a merger to
demand and receive fair value for their stock ("appraisal rights"). No appraisal
rights are available to holders of SDG Common Stock and SDG Series B Preferred
Stock because the SDG Common Stock and SDG Series B Preferred Stock are listed
on a national securities exchange (i.e., the NYSE). In addition, no appraisal
rights are available to holders of either SDG Series B Preferred Stock or SDG
Series C Preferred Stock because the SDG Series B Preferred Stock and SDG Series
C Preferred Stock are stock of the successor in the Merger (SDG), the Merger
will not alter the contract rights of this stock and this stock will not be
changed in the Merger into something other than stock in the successor or cash.
The holders of SDG Class B Common Stock and SDG Class C Common Stock have
appraisal rights available to them because neither class of stock is listed on a
national securities exchange and because the shares of each class will be
converted in the Merger into Simon Group Class B Common Stock and Simon Group
Class C Common Stock. The MGCL provides that these rights are available only if
the stockholder (a) files with the corporation a written objection to the Merger
at or before the meeting of stockholders at which the transaction will be
considered and (b) does not vote in favor of the transaction. In addition, the
stockholder must make a written demand on the successor corporation for payment
for the stock within 20 days of the acceptance of the articles of merger by the
Maryland State Department. The MGCL requires that the successor corporation,
SDG, promptly notify each objecting stockholder in writing of the date the
articles of merger are accepted for record by the Maryland State Department. See
"THE MERGER AGREEMENT AND RELATED MATTERS -- Appraisal Rights," "COMPARISON OF
RIGHTS OF HOLDERS OF SDG COMMON STOCK AND SIMON GROUP AND CRC COMMON
STOCK -- Appraisal Rights" and Annex E hereto.
RECENT DEVELOPMENTS
On August 11, 1998, SDG announced results for the quarter and six months
ended June 30, 1998. Total revenue for the quarter increased 26.6% to $310.4
million as compared to $245.1 million in 1997. Net income available to holders
of SDG Common Stock for the quarter increased 10.1% to $27.5 million as compared
to $25.0 million in 1997.
Total revenue for the six months increased 25.3% to $610.6 million as
compared to $487.5 million in 1997. Net income available to holders of SDG
Common Stock for the six months increased 54.9% to $51.4 million as compared to
$33.2 million in 1997. Occupancy for mall and freestanding stores in the
regional malls at June 30, 1998 increased 1.8% to 87.0%, as compared to 85.2% at
June 30, 1997. Total retail sales generated in the regional mall portfolio for
the first six months of 1998 increased 44.7% to $4.2 billion as compared to the
prior year. Total retail sales per square foot in the regional mall portfolio
increased 8.5% to $318, over the same period in 1997 while comparable retail
sales per square foot increased 8.6%, to $328. Average base rents for mall and
freestanding stores in the regional mall portfolio were $23.10 per square foot
at June 30, 1998, an increase of $2.16, or 10.3%, from $20.94 at June 30, 1997.
The average initial base rent for new leases signed in 1998 was $24.97, an
increase of $5.45, or 27.9% over the tenants who closed or whose leases expired.
The foregoing description of SDG's recent developments is more fully described
in SDG's Current Report on Form 8-K dated August 12, 1998.
17
27
SUMMARY PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA
Simon Group Pro Forma Combined Condensed Financial Data
The following pro forma combined financial data for Simon Group prepared by
the management of SDG are derived from the historical financial data of SDG, CPI
and CRC.
The pro forma combined Balance Sheet Data as of March 31, 1998 and December
31, 1997, are presented as if the Merger and related transactions and the Other
Property Transactions (as defined below) had occurred on March 31, 1998 and
December 31, 1997, respectively. The pro forma combined Operating Data is
presented as if the Merger and related transactions and the Other Property
Transactions had occurred as of January 1, 1997, and carried forward therefrom.
Preparation of the pro forma financial information was based on assumptions
deemed appropriate by the management of SDG. The assumptions give effect to the
Merger being accounted for as a reverse purchase in accordance with generally
accepted accounting principles and the cash contributed to CRC and the CRC
Operating Partnership as stock and partnership units for cash transactions. CRC
assets and liabilities will continue to be reflected at historical costs as the
SDG stockholders' beneficial interest in CRC will be less than 80% and the
combined entity qualifying as a REIT, distributing all of its taxable income
and, therefore, incurring no federal income tax expense during the periods
presented. The pro forma financial information is not necessarily indicative of
the results which actually would have occurred if the Merger and related
transactions and the Other Property Transactions had been consummated at the
beginning of the periods presented, nor does it purport to represent the future
financial position and results of operations for future periods. The pro forma
information should be read in conjunction with the historical financial
statements of SDG, incorporated by reference into this Proxy
Statement/Prospectus, and CPI and CRC, included elsewhere herein. See "PRO FORMA
COMBINED AND SELECTED HISTORICAL FINANCIAL DATA -- Simon Group Pro Forma
Combined Condensed Financial Data."
PRO FORMA DATA
------------------------------
FOR THE YEAR
FOR THE THREE ENDED
MONTHS ENDED DECEMBER 31,
MARCH 31, 1998 1997
-------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
OPERATING DATA:
Total revenue............................................... $ 406,080 $ 1,612,406
Property and other expenses................................. 149,039 594,691
Depreciation and amortization............................... 89,236 342,603
Income before items below................................... 167,805 675,112
Interest expense............................................ 133,324 528,572
Minority partners' interest................................. (1,442) (5,270)
Gain on sales of assets..................................... 44,311 123,689
Income from unconsolidated entities......................... 12,312 50,485
Income of the Operating Partnerships and other.............. 89,662 315,444
Limited Partners' interest in the Operating Partnerships.... 19,528 68,631
Preferred dividends......................................... 18,832 75,244
------------ ------------
Net income available to common stockholders................. $ 51,302 $ 171,569
============ ============
EARNINGS PER COMMON SHARE:
Net income before extraordinary items per share -- basic and
diluted(1)................................................ $ 0.31 $ 1.10
Basic weighted average shares outstanding................... 164,096,352 155,773,755
Diluted weighted average shares outstanding................. 164,483,499 156,157,819
AS OF
AS OF DECEMBER 31,
MARCH 31, 1998 1997
-------------- ------------
BALANCE SHEET DATA:
Total assets................................................ $13,098,416 $13,176,023
Mortgages and other indebtedness............................ 7,734,500 7,753,939
Limited Partners' interest in the Operating Partnerships.... 1,023,677 1,029,600
Preferred Stock of subsidiary............................... 339,128 339,061
Stockholders' equity........................................ 3,462,770 3,488,907
- ---------------
(1) Includes gain on sales of assets of $0.19 per share and $0.56 per share for
the three months ended March 31, 1998 and the year ended December 31, 1997,
respectively.
18
28
Summary Historical Financial Data of SDG
The following table sets forth selected consolidated financial data for SDG
and combined historical financial data of Simon Property Group (its
"Predecessor")(1). The information under Balance Sheet Data as of March 31, 1998
and 1997 and all other summary financial data for the three months ended March
31, 1998 and 1997 have been derived from the unaudited consolidated financial
statements of SDG incorporated herein by reference. The summary historical
balance sheet data of SDG as of December 31, 1993, 1994, 1995, 1996 and 1997 and
all other summary historical financial data for SDG and the Predecessor, as
applicable, for the years ended December 31, 1994, 1995, 1996 and 1997 and the
periods ended December 19, 1993 and December 31, 1993 are derived from the
audited financial statements of SDG and the Predecessor, as applicable,
incorporated herein by reference. The financial data should be read in
conjunction with the financial statements and notes thereto and other financial
data of SDG and the Predecessor incorporated herein by reference.
Other data management believes is important in understanding trends in the
SDG's business is also included in the table.
FOR THE THREE SDG
MONTHS ENDED -------------------------------------------------
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------------------
1998 1997 1997(2) 1996(2) 1995(2) 1994
---- ---- ------- ------- ------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenue............ $ 300,257 $ 242,414 $1,054,167 $ 747,704 $ 553,657 $ 473,676
Income (loss) of the SDG
Operating Partnership
before extraordinary
items.................. 45,124 43,062 203,133 134,663 101,505 60,308
Net income (loss)
available to common
shareholders........... 23,948 8,233 $ 107,989 $ 72,561 $ 57,781 $ 23,377
BASIC EARNINGS PER COMMON
SHARE(3):
Income before
extraordinary items.... $ 0.22 $ 0.23 $ 1.08 $ 1.02 $ 1.08 $ 0.71
Extraordinary items...... -- (0.15) -- (0.03) (0.04) (0.21)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 0.22 $ 0.08 $ 1.08 $ 0.99 $ 1.04 $ 0.50
========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding............ 109,684 96,973 99,920 73,586 55,312 47,012
DILUTED EARNINGS PER COMMON
SHARE(3):
Income before
extraordinary items.... $ 0.22 $ 0.23 $ 1.08 $ 1.01 $ 1.08 $ 0.71
Extraordinary items...... -- (0.15) -- (0.03) (0.04) (0.21)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 0.22 $ 0.08 $ 1.08 $ 0.98 $ 1.04 $ 0.50
========== ========== ========== ========== ========== ==========
Diluted weighted average
shares outstanding..... 110,071 97,370 100,304 73,721 55,422 47,214
Distributions per common
share(4)............... $ 0.5050 $ 0.4925 $ 2.01 $ 1.63 $ 1.97 $ 1.90
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 101,997 $ 41,946 $ 109,699 $ 64,309 $ 62,721 $ 105,139
Total assets............. 7,956,808 5,908,896 7,662,667 5,895,910 2,556,436 2,316,860
Mortgages and other
indebtedness........... 5,329,707 3,746,992 5,077,990 3,681,984 1,980,759 1,938,091
Shareholders' equity..... $1,557,185 $1,265,466 $1,556,862 $1,304,891 $ 232,946 $ 57,307
OTHER DATA:
Cash flow provided by
(used in):
Operating activities... $ 119,472 $ 89,517 $ 370,907 $ 236,464 $ 194,336 $ 128,023
Investing activities... (251,481) (72,040) (1,243,804) (199,742) (222,679) (266,772)
Financing activities... 124,307 (39,840) 918,287 (35,134) (14,075) 133,263
Funds from Operations
(FFO) of the SDG
Operating
Partnership(5)......... $ 108,907 $ 87,939 $ 415,128 $ 281,495 $ 197,909 $ 167,761
========== ========== ========== ========== ========== ==========
FFO allocable to SDG(5).. $ 69,015 $ 53,992 $ 258,049 $ 172,468 $ 118,376 $ 92,604
========== ========== ========== ========== ========== ==========
SDG PREDECESSOR
-------------- ------------
DECEMBER 20 TO JANUARY 1 TO
DECEMBER 31, DECEMBER 19,
1993 1993
-------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenue............ $ 18,424 $ 405,869
Income (loss) of the SDG
Operating Partnership
before extraordinary
items.................. 8,707 6,912
Net income (loss)
available to common
shareholders........... $ (11,366) $ 33,101
BASIC EARNINGS PER COMMON
SHARE(3):
Income before
extraordinary items.... $ 0.11 N/A
Extraordinary items...... (0.39) N/A
----------
Net income (loss)........ $ (0.28) N/A
==========
Weighted average shares
outstanding............ 40,950 N/A
DILUTED EARNINGS PER COMMON
SHARE(3):
Income before
extraordinary items.... $ 0.11 N/A
Extraordinary items...... (0.39) N/A
----------
Net income (loss)........ $ (0.28) N/A
==========
Diluted weighted average
shares outstanding..... 40,957 N/A
Distributions per common
share(4)............... -- N/A
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 110,625 N/A
Total assets............. 1,793,654 N/A
Mortgages and other
indebtedness........... 1,455,884 N/A
Shareholders' equity..... $ 29,521 N/A
OTHER DATA:
Cash flow provided by
(used in):
Operating activities... N/A N/A
Investing activities... N/A N/A
Financing activities... N/A N/A
Funds from Operations
(FFO) of the SDG
Operating
Partnership(5)......... N/A N/A
FFO allocable to SDG(5).. N/A N/A
19
29
- ---------------
(1) Prior to the acquisition by SDG on August 9, 1996 of the national shopping
center business of DeBartolo Realty Corporation ("DRC") for an aggregate
value of approximately $3.0 billion (the "DeBartolo Merger"), SDG was known
as Simon Property Group, Inc. which completed its initial public offering of
its common stock in December 1993. Simon Property Group was the predecessor
of Simon Property Group, Inc.
(2) Refer to Note 3 to SDG's audited financial statements included in SDG's Form
10-K and Forms 10-K/A for the year ended December 31, 1997 which are
incorporated by reference herein to describe the DeBartolo Merger, which
occurred on August 9, 1996, and the 1997, 1996, and 1995 real estate
acquisitions and development.
(3) Per share data is reflected only for SDG, because the historical combined
financial statements of the Predecessor are a combined presentation of
partnerships and corporations.
(4) Represents distributions declared per period. A distribution of $0.1515 per
share was declared on August 9, 1996, in connection with the DeBartolo
Merger, designated to align the time periods of distributions of the merged
companies. The current annual distribution rate is $2.02 per share.
(5) FFO, as defined by NAREIT, means the consolidated net income of the SDG
Operating Partnership and its subsidiaries without giving effect to real
estate related depreciation and amortization, gains or losses from
extraordinary items, gains or losses on sales of real estate, gains or
losses on investments in marketable securities and any provision/benefit for
income taxes for such period, plus the allocable portion, based on the SDG
Operating Partnership's ownership interest, of funds from operations of
unconsolidated joint ventures, all determined on a consistent basis in
accordance with generally accepted accounting principles. Management
believes that FFO is an important and widely used measure of the operating
performance of REITs, which provides a relevant basis for comparison among
REITs. FFO is presented to assist investors in analyzing the performance of
SDG. SDG's method of calculating FFO may be different from the methods used
by other REITs. FFO: (i) does not represent cash flow from operations as
defined by generally accepted accounting principles; (ii) should not be
considered as an alternative to net income as a measure of SDG's operating
performance or to cash flows from operating, investing and financing
activities; and (iii) is not an alternative to cash flows as a measure of
SDG's liquidity. In March 1995, NAREIT modified its definition of FFO. The
modified definition provides that amortization of deferred financing costs
and depreciation of nonrental real estate assets are no longer to be added
back to net income in arriving at FFO. This modification was adopted by SDG
beginning in 1996. Additionally the FFO for prior periods has been restated
to reflect the modification in order to make the amounts comparative. Under
the previous definition, FFO for the years ended December 31, 1995 and 1994,
was $208.3 million and $176.4 million, respectively.
The following summarizes FFO of the SDG Operating Partnership and reconciles
income of the SDG Operating Partnership before extraordinary items to FFO for
the periods presented:
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
FFO of SDG Operating
Partnership.................. $108,907 $ 87,939 $ 415,128 $ 281,495 $ 197,909 $ 167,761
======== ======== =============== =============== =============== ===============
Increase in FFO from prior
period....................... 23.8% 80.6% 47.5% 42.2% 18.0% N/A
======== ======== =============== =============== =============== ===============
Reconciliation:
Income of SDG Operating
Partnership before
extraordinary items...... $ 45,124 $ 43,062 $ 203,133 $ 134,663 $ 101,505 $ 60,308
Plus:
Depreciation and
amortization from
consolidated
properties............... 58,079 43,312 200,084 135,226 92,274 75,663
SDG Operating Partnership's
share of depreciation and
amortization from
unconsolidated
affiliates............... 14,804 8,858 46,760 20,159 6,466 7,251
Merger integration costs... -- -- -- 7,236 -- --
SDG Operating Partnership's
share of (gains) or
losses on sales of real
estate................... -- (37) (20) (88) 2,054 --
Unusual item............... -- -- -- -- -- 27,184
Less:
Minority interest portion
of depreciation and
amortization............. (1,766) (850) (5,581) (3,007) (2,900) (2,645)
Preferred dividends........ (7,334) (6,406) (29,248) (12,694) (1,490) --
-------- -------- --------------- --------------- --------------- ---------------
FFO of SDG Operating
Partnership.................. $108,907 $ 87,939 $ 415,128 $ 281,495 $ 197,909 $ 167,761
======== ======== =============== =============== =============== ===============
FFO allocable to SDG........... $ 69,015 $ 53,992 $ 258,049 $ 172,468 $ 118,376 $ 92,604
======== ======== =============== =============== =============== ===============
20
30
Summary Historical Financial Data of CPI
The following table sets forth summary historical financial data for CPI
and should be read in conjunction with the audited and unaudited consolidated
financial statements of CPI and the related notes, included elsewhere herein.
The information under Balance Sheet Data as of March 31, 1998 and all other
summary financial information for the three months ended March 31, 1998 and 1997
has been derived from the unaudited consolidated financial statements of CPI
included herein. The information under Balance Sheet Data as of December 31,
1997 and 1996 and all other summary financial information for the years ended
December 31, 1997, 1996 and 1995 has been derived from the annual audited
consolidated financial statements of CPI included herein. Such statements
account for the investments in real estate joint ventures under the equity
method of accounting. The audited financial statements for other years and
years-end were based on pro rata consolidation of CPI's investment in real
estate joint ventures. The financial information presented below for such years
has been derived from the audited financial statements after adjustments to
reflect the investments in real estate joint ventures under the equity method.
The information under Balance Sheet Data as of March 31, 1997 has been derived
from the unaudited consolidated financial statements of CPI.
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Total revenue..................... $128,404 $ 119,090 $ 493,788 $ 349,109 $ 308,232 $ 298,150 $ 284,557
Gain on sales of properties....... $ 44,311 $ 116,522 $ 122,410 $ 74,084 $ 398 $ 85,090 $ 13,316
Income before extraordinary
items........................... $ 81,527 $ 151,958 $ 277,211 $ 184,371 $ 119,355 $ 137,224 $ 99,984
Net income available to common
shareholders.................... $ 78,099 $ 148,530 $ 263,499 $ 170,659 $ 105,713 $ 132,835 $ 92,670
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary
items(1)........................ $ 3.08 $ 5.70 $ 10.20 $ 7.74 $ 5.00 $ 6.28 $ 4.72
Extraordinary items............... -- -- -- -- -- -- (0.35)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $ 3.08 $ 5.70 $ 10.20 $ 7.74 $ 5.00 $ 6.28 $ 4.37
======== ========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding..................... 25,353 26,066 25,835 22,045 21,160 21,157 21,200
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary
items(2)........................ $ 3.01 $ 5.51 $ 10.14 $ 7.74 $ 5.00 $ 6.28 $ 4.72
Extraordinary items............... -- -- -- -- -- -- (0.35)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $ 3.01 $ 5.51 $ 10.14 $ 7.74 $ 5.00 $ 6.28 $ 4.37
======== ========== ========== ========== ========== ========== ==========
Diluted weighted average shares
outstanding..................... 27,095 27,571 27,348 23,550 22,667 21,637 21,200
Distributions per common
share(3)........................ $ 1.94 $ 1.865 $ 7.685 $ 7.3825 $ 7.0625 $ 7.80 $ 6.80
MARCH 31, DECEMBER 31,
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 16,196 $ 95,745 $ 124,808 $ 106,495 $ 82,838 $ 46,640 $ 49,834
Total assets.................... $2,808,756 $2,932,808 $2,810,254 $3,114,910 $1,988,810 $2,010,354 $1,832,988
Mortgages and notes and bonds
payable....................... $ 857,648 $ 863,337 $ 859,060 $ 964,690 $ 695,562 $ 695,966 $ 696,418
Shareholders' equity............ $1,828,152 $1,909,733 $1,802,614 $1,955,778 $1,176,393 $1,198,482 $1,033,572
21
31
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- ---------- ---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS EXCEPT PER SHARE DATA)
OTHER DATA:
Cash flow provided by (used in):
Operating activities............ $ 46,501 $ 26,266 $ 219,492 $ 124,030 $ 128,359 $ 117,017 $ 102,814
Investing activities............ $(97,764) $ 119,649 $ 194,514 $ (161,287) $ 49,196 $ (147,658) $ (46,287)
Financing activities............ $(57,349) $ (156,665) $ (395,693) $ 60,914 $ (141,357) $ 27,447 $ (140,413)
Funds from Operations (FFO)(4):
Net income...................... $ 81,527 $ 151,958 $ 277,211 $ 184,371 $ 119,355 $ 137,224 $ 92,670
Plus:
Depreciation of real estate
and amortization of
department store and tenant
inducements and leasing
costs....................... 24,324 24,701 99,515 82,124 73,395 74,146 68,461
Merger-related costs.......... 7,539 -- -- -- -- -- --
Write-down of real estate and
related assets and provision
for possible real estate
losses...................... -- -- -- 8,200 -- 44,972 10,100
Provision for retirement
benefits.................... -- -- -- -- -- 4,000 --
Prepayment penalties on
refinancing of mortgage
debt........................ -- -- -- -- -- 88 7,432
Less:
Gain on sales of properties... (44,311) (116,522) (122,410) (74,084) (398) (85,090) (13,316)
Preference share dividends
earned...................... (3,428) (3,428) (13,712) (13,712) (13,642) (4,389) --
-------- ---------- ---------- ---------- ---------- ---------- ----------
FFO allocable to holders of CPI
Common Stock.................. $ 65,651 $ 56,709 $ 240,604 $ 186,899 $ 178,710 $ 170,951 $ 165,347
======== ========== ========== ========== ========== ========== ==========
- ---------------
(1) Includes gain on sales of properties of $1.75 and $4.47 for the three months
ended March 31, 1998 and 1997, respectively, and $4.74, $3.36, $.02, $4.02
and $.63 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(2) Includes gain on sales of properties of $1.64 and $4.23 for the three months
ended March 31, 1998 and 1997, respectively, and $4.48, $3.15, $.02, $3.93,
$.63 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(3) During 1994 a $1.00 extraordinary distribution relating to the sale of
properties was paid.
(4) FFO, as used in the above table and as defined by NAREIT, means the
consolidated net income of CPI without giving effect to depreciation and
amortization (excluding amortization of deferred financing costs or assets
other than those uniquely significant to the real estate industry and
depreciation of non-rental real estate assets), gains or losses from
extraordinary items, gains or losses on sales of real estate and gains or
losses on investments in marketable securities, plus the allocable portion,
based on CPI's ownership interest, of FFO of unconsolidated entities, all
determined on a consistent basis in accordance with generally accepted
accounting principles. CPI's management believes that FFO is a widely used
supplemental measure of the operating performance of REITs which provides a
relevant basis for comparison of REITs. FFO is presented to assist investors
with such comparisons and in analyzing the operating performance of CPI.
CPI's method of calculating FFO may be different from the methods used by
other REITs. FFO: (i) does not represent cash flow from operations as
defined by generally accepted accounting principles; (ii) should not be
considered as an alternative to net income as a measure of operating
performance or to cash flows from operating, investing and financing
activities; and (iii) is not an alternative to cash flows as a measure of
liquidity.
22
32
Summary Historical Financial Data of CRC
The following table sets forth summary historical financial data for CRC
and should be read in conjunction with the audited and unaudited consolidated
financial statements of CRC and the related notes, included elsewhere herein.
The information under Balance Sheet Data as of March 31, 1998 and all other
summary financial information for the three months ended March 31, 1998 and 1997
has been derived from the unaudited consolidated financial statements of CRC
included herein. The information under Balance Sheet Data as of December 31,
1997 and 1996 and all other summary financial information for the years ended
December 31, 1997, 1996 and 1995 has been derived from the annual audited
consolidated financial statements of CRC included herein. The information under
Balance Sheet Data as of March 31, 1997 and December 31, 1995, 1994 and 1993 and
all other summary financial information for the years ended December 31, 1994
and 1993 has been derived from the unaudited consolidated financial statements
of CRC.
FOR THE THREE
MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE)
OPERATING DATA:
Total revenue................................... $ 1,065 $ 1,725 $ 6,214 $ 9,805 $10,423 $11,184 $12,216
Net income (loss) available to common
shareholders.................................. $ (45) $ (21) $ 1,177 $ (920) $ (6) $ 387 $(2,029)
EARNINGS PER COMMON SHARE:
Net income (loss) per share -- basic and
diluted....................................... $ (0.02) $ (0.01) $ 0.43 $ (0.39) $ Nil $ 0.18 $ (0.96)
Basic weighted average shares outstanding....... 2,684 2,755 2,732 $ 2,353 $ 2,264 $ 2,163 $ 2,120
Diluted weighted average shares outstanding..... 2,708 2,755 2,733 2,353 2,264 2,163 2,120
Distributions per common share.................. $ 0.10 $ 0.10 $ 0.40 $ 0.425 $ 0.625 $ 1.00 $ 1.00
MARCH 31, DECEMBER 31,
----------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 3,900 $ 4,558 $ 4,147 $ 4,797 $ 2,759 $ 4,588 $ 4,439
Total assets.................................... $47,208 $30,250 $ 46,063 $31,054 $30,929 $32,239 $33,560
Mortgages and notes payable..................... $38,181 $21,931 $ 36,818 $21,988 $22,208 $22,409 $22,595
Shareholders' equity............................ $ 4,002 $ 4,263 $ 4,316 $ 5,039 $ 4,320 $ 5,650 $ 6,726
FOR THE THREE
MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS)
OTHER DATA:
Cash flow provided by (used in):
Operating activities.......................... $ 213 $ 231 $ 493 $ 769 $ 271 $ 1,790 $ 1,044
Investing activities.......................... $(1,090) $ 342 $(12,970) $ (150) $ (575) $ 8 $ (526)
Financing activities.......................... $ 630 $ (812) $ 11,827 $ 1,419 $(1,525) $(1,649) $(2,278)
Funds from Operations(1):
Net income (loss)............................. $ (45) $ (21) $ 1,177 $ (920) $ (6) $ 387 $(2,029)
Plus:
Depreciation and amortization............... 229 213 889 938 920 1,483 1,582
Write-down of investment.................... -- -- -- 1,100 -- -- 1,500
Less:
Gain on sale of partnership interests....... -- -- (1,259) -- -- -- --
------- ------- -------- ------- ------- ------- -------
Funds from Operations......................... $ 184 $ 192 $ 807 $ 1,118 $ 914 $ 1,870 $ 1,053
======= ======= ======== ======= ======= ======= =======
- ---------------
(1) CRC is not a REIT and accordingly it is a taxable entity. CRC computes Funds
from Operations, as used in the above table, as consolidated net income
without giving effect to depreciation and amortization (excluding
amortization of deferred financing costs or assets other than those uniquely
significant to the real estate industry and depreciation of non-rental real
estate assets), gains or losses from extraordinary items, gains or losses on
sales of real estate plus the allocable portion, based on CRC's ownership
interest, of Funds from Operations of unconsolidated entities, all
determined on a consistent basis in accordance with generally accepted
accounting principles. CRC's management believes that Funds from Operations
is a widely used supplemental measure of the operating performance of real
estate companies which provides a relevant basis for comparison among real
estate companies. Funds from Operations is presented to assist investors in
analyzing the performance of CRC. CRC's method of calculating Funds from
Operations may be different from the methods used by other real estate
companies and is different from the method used by CPI and SDG because a
provision for income taxes is deducted from net income. Funds from
Operations: (i) does not represent cash flow from operations as defined by
generally accepted accounting principles; (ii) should not be considered as
an alternative to net income as a measure of operating performance or to
cash flows from operating, investing and financing activities; and (iii) is
not an alternative to cash flows as a measure of liquidity.
23
33
RISK FACTORS
SDG stockholders should carefully consider all of the information contained
in this Proxy Statement/Prospectus, including the following risk factors, before
approving the Merger. Unless the context otherwise requires and except as
otherwise specified, references to "Simon Group" include CRC and entities owned
or controlled by Simon Group and CRC following consummation of the Merger,
including SDG and entities owned or controlled by SDG, including the SDG
Operating Partnership and the SRC Operating Partnership.
SUBSTANTIAL INDEBTEDNESS OF SIMON GROUP
Simon Group will be subject to the risks normally associated with debt
financing, including the risk that Simon Group's cash flow from operations will
be insufficient to meet required payments of principal and interest, the risk
that existing indebtedness will not be able to be refinanced or that the terms
of such refinancing will not be as favorable as the terms of such indebtedness
and the risk that necessary capital expenditures for such purposes as
renovations and other improvements will not be able to be financed on favorable
terms or at all. Certain significant expenditures associated with a property
(such as mortgage payments) generally will not be reduced when circumstances
cause a reduction in income from such property. Should such events occur, Simon
Group's Funds From Operations (as defined below) and its ability to make
expected distributions to its stockholders may be adversely affected. If a
property is mortgaged to secure payment of indebtedness and Simon Group is
unable to make payments on such indebtedness, the property could be transferred
to the mortgagee with a possible consequent loss of income and asset value to
Simon Group. "Funds From Operations" means, except as otherwise specified in
this Proxy Statement/Prospectus, net income before depreciation and amortization
of real estate property assets, gains or losses from extraordinary items, gains
or losses on sales of real estate, gains or losses on investments in marketable
securities and any provision/benefit for income taxes for such period, plus the
allocable portion, based on ownership interest, of funds from operations of
unconsolidated entities all determined on a consistent basis in accordance with
generally accepted accounting principles. Certain of the indebtedness of Simon
Group will contain cross-default and cross-collateralization features among
various properties. Under cross-default provisions, a default under any mortgage
included in the cross-defaulted package constitutes a default under all such
mortgages and can lead to acceleration of the indebtedness due on each property
within the collateral package. Pursuant to the cross-collateralization feature,
the excess of the value of a property over the mortgage indebtedness specific to
that property serves as additional collateral for indebtedness against each
other property within that particular financing package.
Certain loans of Simon Group have and will have floating interest rates. In
certain cases, Simon Group will continue to be a party to existing interest rate
protection agreements with financial institutions whereby these institutions
agree to indemnify Simon Group against the risk of increases in interest rates
above certain levels. On a pro forma basis, assuming the Merger occurred on
March 31, 1998, of the $3.4 billion total amount of the consolidated floating
rate indebtedness of Simon Group on such date, $2.9 billion would not be covered
by such arrangements.
In connection with the Merger, the SDG Operating Partnership will incur a
substantial amount of additional debt, thereby increasing its exposure to the
risks associated with debt financing. On June 22, 1998 the SDG Operating
Partnership consummated a private placement of $1.075 billion aggregate
principal amount of fixed rate notes, the proceeds of which were used primarily
to repay amounts outstanding under the Credit Facilities. Simon Group has
approximately $1.0 billion available under the terms of its unsecured revolving
credit facilities (the "Credit Facilities") as of March 31, 1998 on a pro forma
basis, as adjusted to reflect the consummation of the $1.075 billion private
placement and the cancellation of a $300 million Credit Facility. A commitment
letter with The Chase Manhattan Bank and Chase Securities Inc. (which acted as
one of SDG's financial advisors in connection with the Merger) has been entered
into for a $1.4 billion senior unsecured term loan to partially finance the CPI
Merger Dividends, pursuant to which Simon Group and the SDG Operating
Partnership will be co-obligors following consummation of the Merger. The
remainder of the CPI Merger Dividends is expected to be financed from the
proceeds of the sale of the General Motors Building (which sale has been
consummated) and borrowing under existing credit facilities. SDG is exploring
various means by which to obtain financing prior to the closing of the Merger.
Such financing may consist of
24
34
public or private offerings of equity or debt, or a combination thereof. No
assurance can be given, however, that SDG will successfully obtain the financing
necessary to consummate the Merger, or if obtained, that such financing will be
on terms and conditions favorable to SDG. SDG's obligations under the Merger
Agreement are not conditioned on the obtaining of financing. See "THE MERGER
AGREEMENT AND RELATED MATTERS -- Conditions to Consummation of Merger."
Assuming the Merger occurred on March 31, 1998 and excluding pro rata share
of joint venture indebtedness, Simon Group would have had approximately $7.735
billion of pro forma combined consolidated indebtedness and an additional $2.405
billion of indebtedness including the assumption of all of CPI and CRC's
indebtedness of $858.8 million as of such date, as compared to historical
indebtedness of SDG of $5.330 billion. Such indebtedness will not cause SDG or
Simon Group to fail to comply with any of SDG's current debt agreements. The pro
forma ratio of debt to market capitalization of Simon Group as of March 31,
1998, assuming a consolidated indebtedness of approximately $7.735 billion and
assuming the Merger occurred on March 31, 1998, would have been 46.4% as
compared to 45.8% for SDG on a historical basis as of March 31, 1998. Assuming
the Merger occurred March 31, 1998 and assuming consummation of the SDG
Operating Partnership's $1.075 billion private placement, approximately $3.6
billion of Simon Group's consolidated debt will mature on or before December 31,
2002. Simon Group does not expect to have sufficient cash flow to make all of
the balloon payments of principal when due under indebtedness secured by
mortgages on certain properties. It is intended that Simon Group will refinance
such debt at or before maturity. However, there can be no assurance that Simon
Group will be able to refinance such indebtedness or otherwise to obtain funds
by selling assets or by raising equity. An inability to make any such balloon
payment when due would permit the mortgage lender to foreclose on such
properties, which could have a material adverse effect on Simon Group. Interest
rates on any debt issued to refinance such mortgage debt may be higher than the
rates on such mortgage debt, which could adversely affect cash available for
distribution before debt repayments and capital expenditures. See "SIMON GROUP
PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA."
FAILURE TO CONSUMMATE CPI NOTES SOLICITATION
CPI currently has outstanding an aggregate of $825 million of notes (the
"CPI Notes"). In connection with the Merger, SDG proposes that substantially all
of CPI's assets will be transferred to the SDG Operating Partnership and SDG
Operating Partnership will become the successor obligor to CPI under the
indentures governing the CPI Notes (collectively, the "CPI Indentures"). Certain
of the CPI Indentures contain provisions that would require the redemption of
$575 million of the CPI Notes if substantially all of CPI's assets were to be
transferred to a successor issuer that is not a REIT. The SDG Operating
Partnership is not a REIT. Because the SDG Operating Partnership is not a REIT,
and in order to permit it to become the successor obligor on the CPI Notes, SDG
intends to commence a consent solicitation of the holders of the CPI Notes to
amend the CPI Indentures to, among other things, (i) enable CPI to transfer all
or substantially all of its assets to the SDG Operating Partnership in
connection with the Merger, which will, in turn, assume the obligations of CPI
under the CPI Indentures, and (ii) conform certain financial and other covenants
contained in the CPI Indentures to similar provisions applicable to certain
outstanding unsecured notes of the SDG Operating Partnership. If holders of at
least 66 2/3% in outstanding principal amount of each issue of CPI Notes consent
to the proposed amendments to the CPI Indentures prior to the Merger, the SDG
Operating Partnership will become the successor obligor on the CPI Notes.
If the consent solicitation is not successfully completed prior to the
Merger, substantially all of the assets of CPI will be transferred to RPT and
RPT will assume CPI's obligations under the CPI Notes. RPT is a REIT subsidiary
of the SDG Operating Partnership, more than 99.99% owned by the SDG Operating
Partnership on a fully diluted basis. As a consequence of RPT's REIT status the
redemption provisions described above will not be triggered in connection with
the Merger.
SDG and CPI have received inquiries from the trustee under the CPI
Indentures and certain holders of the CPI Notes as to the means being utilized
to effect compliance with the terms of the CPI Indentures in connection with the
Merger. Certain of such holders have expressed their view that they do not
believe compliance may be effected without receiving waivers from the requisite
percentage of holders of the CPI Notes. SDG believes that the transfer of CPI's
assets to RPT and RPT's assumption of liabilities of CPI
25
35
described above (including CPI's obligations under the CPI Notes) fully complies
with the provisions of the CPI Indentures. In any event, even if the maturity of
the $825 million of CPI Notes were to be accelerated, SDG and the SDG Operating
Partnership believe that they will have adequate resources to refinance such CPI
Notes, together with any "make whole" premium determined to be payable in
connection therewith.
COSTS OF FAILURE TO INTEGRATE OPERATIONS
SDG and CPI are large enterprises with operations nationwide. There can be
no assurance that costs or other factors associated with the integration of the
two companies (including the failure to integrate the businesses and operating
strategies and policies of the two companies on a timely basis and the
substantial management time and effort required during the transition period)
will not adversely affect the benefits of estimated cost savings (which SDG
expects to increase Funds From Operations per share) and future combined results
of operations. While SDG has successfully integrated other portfolios, such as
in connection with the DeBartolo Merger, in the past, there can be no assurances
that costs or timing associated with the integration of the two companies will
not adversely affect the estimated cost savings and revenue synergies (which are
expected to increase SDG's Funds From Operations) and future combined results of
operations.
There can be no assurance that the estimated cost savings resulting from
the Merger will be achieved and outweigh the costs and other factors associated
with the integration of the two companies. Cost savings of approximately $30.4
million, representing approximately $21.0 million of overhead cost savings and
approximately $9.4 million of operating cost savings, are estimated based on the
elimination of corporate operating redundancies and mall operational
inefficiencies, and revenue enhancements of approximately $19.4 million,
representing approximately $6.0 million attributed to increased revenues from
SDG marketing initiatives within the CPI property portfolio, approximately $8.2
million attributed to increased temporary tenant revenues and approximately $5.2
million attributed to other revenue opportunities (including insurance and
rent), are estimated based on synergies resulting from the Merger. To the extent
that these savings and revenue enhancements are not achieved, earnings and Funds
From Operations of Simon Group will be negatively impacted.
DILUTION ON NET INCOME PER SHARE CAUSED BY THE MERGER
The Merger has a dilutive effect of $0.10 on the net income per share of
Simon Group Common Stock on a pro forma basis for the three months ended March
31, 1998 (after giving effect to the elimination of a $0.19 per share gain on a
sale of real estate) and a dilutive effect of $0.54 on the net income per share
of Simon Group Common Stock on a pro forma basis for the year ended December 31,
1997 (after giving effect to the elimination of a $0.56 gain on sale of real
estate) and may have a dilutive effect on net income per share in future
periods. See "SIMON GROUP PRO FORMA FINANCIAL DATA." SDG management believes
that if the expected cost savings and revenue synergies are not realized and if
a dilutive effect on net income per share of SDG Common Stock occurs, Simon
Group's Funds From Operations per share following the Merger will be lower than
might be expected for SDG's Funds From Operations per share without the Merger.
POSSIBLE SUBORDINATION OF RIGHTS OF CURRENT HOLDERS OF SIMON GROUP EQUITY STOCK
AND SDG UNITS
As is currently the case with SDG, following the Merger Simon Group will be
authorized (i) to issue and sell preferred stock, which may have rights and
preferences (including, but not limited to, the payment of dividends) senior to
Simon Group Equity Stock and (ii) to use the proceeds of such issuances and
sales to purchase preferred units in the SDG Operating Partnership which will
have rights and preferences (including, but not limited to, the payment of
distributions) senior to SDG Units, including SDG Units owned by Simon Group.
The issuance of preferred stock in Simon Group and preferred units in the SDG
Operating Partnership will not require further action by the holders of Simon
Group Equity Stock.
FEDERAL INCOME TAX CONSEQUENCES
The Merger is expected to qualify for treatment as a tax-free
reorganization under Section 368(a) of the Code; however, in the event that the
Merger does not qualify as a tax-free reorganization, each SDG
26
36
stockholder will recognize gain or loss equal to the difference between the
stockholder's tax basis in their current securities and the fair market value of
the securities received in the Merger. Even if the Merger does qualify for
treatment as a tax-free reorganization, the receipt of beneficial interests in
CRC Common Stock will be taxable in whole or in part. Management of CRC believes
that the value of the beneficial interests in CRC Common Stock will not exceed
1% of the value of the Paired Shares. See "THE MERGER AGREEMENT AND RELATED
MATTERS -- Federal Income Tax Consequences to Holders of SDG Equity Stock."
POTENTIAL CONFLICTS OF INTEREST RELATED TO OPERATIONS
The potential for conflicts of interest currently exist in the operations
of SDG because the Simons and the DeBartolos historically have been interested
parties on both sides of certain transactions involving the business and
properties of SDG. These historical arrangements and therefore the potential for
such conflicts of interest will survive the Merger. In accordance with the SDG
Operating Partnership and the Amended SPG Operating Partnership Agreement, Simon
Group is obligated to contribute its assets and liabilities to the SDG Operating
Partnership in exchange for additional partnership units. The partnership units
may be exchanged for shares of Simon Group Common Stock on a one-for-one basis
or for cash at Simon Group's option. At the Effective Time, Simon Group will
transfer, or direct the transfer of, substantially all of its assets and
liabilities to the SDG Operating Partnership and one or more subsidiaries of the
SDG Operating Partnership in consideration for 49,858,940 limited partnership
interests (which equals the number of shares of CPI Common Stock outstanding
after the CPI Merger Dividends, less the number of shares equal to the value of
the former CPI assets and liabilities retained by Simon Group) and 5,175,287
preferred partnership interests (which equals the number of shares of CPI Series
A Preferred Stock and CPI Series B Preferred Stock outstanding after the CPI
Merger Dividends). Such transfer will result in a reduction of the SDG Limited
Partners' interests, in the aggregate, in the SDG Operating Partnership from
36.9% to 28.6%, assuming the Merger had occurred on March 31, 1998.
The value of the assets and liabilities retained by Simon Group or
transferred to the SDG Operating Partnership is based on the consideration to be
received or retained by the stockholders of CPI in connection with the Merger
and on a trading price per share of SDG Common Stock of $33 5/8. The fair market
value of the former CPI assets less liabilities to be transferred by Simon Group
to the SDG Operating Partnership and one or more of its subsidiaries is
estimated at approximately $2.4 billion. Prior to the transfer of assets and
liabilities, Melvin and Herbert Simon, Simon Group's Co-Chairmen, and David
Simon, Simon Group's Chief Executive Officer, beneficially held 9.9%, 5.8% and
1.3%, respectively, of the SDG Operating Partnership, and after such transfer
beneficially will hold 7.7%, 4.5% and 1.0%, respectively. See "SDG ANNUAL
MEETING MATTERS -- Security Ownership of Certain Beneficial Owners and
Management." Decisions regarding the enforcement of the terms of certain
agreements of SDG and its affiliates with the Simons (which term means Melvin
Simon, Herbert Simon, David Simon, certain of their affiliates and includes
certain other Simon family members and estates, trusts and other entities
established for their benefit) and/or the DeBartolos (which term means the
Estate of Edward J. DeBartolo, Edward J. DeBartolo, Jr., M. Denise DeBartolo
York, certain of their affiliates and includes certain other DeBartolo family
members and estates and trusts established for their benefit including certain
entities which are directly or indirectly owned by the Edward J. DeBartolo
Corporation ("EJDC")) including, but not limited to, partnership agreements and
noncompetition agreements will be made only by the Independent Directors (as
defined below). These agreements include the Noncompetition Agreement, dated as
of December 1, 1993, between SDG and David Simon, the Option Agreement, dated
December 1, 1993, between the SDG Management Company and Simon Property Group,
L.P. and several corporate services agreements. "Independent Directors" are
directors of Simon Group who are neither employed by Simon Group nor a member
(or an affiliate of a member) of the Simon Family Group or the DeBartolo Family
Group. The "Simon Family Group" constitutes Melvin Simon, Herbert Simon and
David Simon, other members of the immediate family of any of the foregoing, any
estates of any of the foregoing, any trust established for the benefit of any of
the foregoing or any other entity controlled by any of the foregoing. The
"DeBartolo Family Group" constitutes the Estate of Edward J. DeBartolo, Sr.,
Edward J. DeBartolo, Jr. and Marie Denise DeBartolo York, other members of the
immediate family of any of the foregoing, any other lineal descendants of any of
the foregoing, any estates of any of the foregoing, any
27
37
trusts established for the benefit of any of the foregoing, and any other entity
controlled by any of the foregoing. The failure to enforce the material terms of
any such agreement, particularly the indemnification provisions and the remedy
provisions for breaches of representations and warranties, could result in a
substantial monetary loss to Simon Group.
CERTAIN TAX RISKS
LIMITS ON STOCK OWNERSHIP NECESSARY TO MAINTAIN REIT QUALIFICATION
In order to maintain Simon Group's, SDG's, SD Property Group, Inc.'s and
The Retail Property Trust's ("RPT") (collectively, the "REIT Members")
qualification as REITs under sections 856 through 860 of the Code and applicable
Treasury Regulations, which are the requirements for qualifying as a REIT ("REIT
Requirements"), not more than 50% in value of the outstanding capital stock of
Simon Group may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year (other than the first year). The Simon Group Charter will prohibit
ownership of more than 8% of the value of the outstanding shares of capital
stock of Simon Group by any single stockholder (with an exception for the
Simons, who generally may not own more than 18% of the value of the outstanding
shares of capital stock of Simon Group).
REIT CLASSIFICATION; LEGISLATION LIMITING BENEFITS OF PAIRED SHARE STATUS
After consummation of the Merger, the REIT Members intend to continue to
operate so as to qualify as REITs under the REIT Requirements. A REIT generally
is not subject to federal income tax at the corporate level on income it
currently distributes to its stockholders so long as it distributes at least 95%
of its taxable income. Each of the REIT Members expects to continue to qualify
as REITs, but no assurance can be given that they will so qualify or be able to
remain so qualified. A failure on the part of any of the REIT Members to qualify
as a REIT would, in turn, cause all of the other REIT Members to fail to qualify
as REITs. For example, if RPT fails to qualify as a REIT, SD Property Group,
Inc., SDG and Simon Group would fail to qualify as REITs. See "THE MERGER
AGREEMENT AND RELATED MATTERS -- Federal Income Tax Considerations Relating to
Simon Group -- Requirements for Qualification -- Asset Tests." No assurance can
be given that legislation, new regulations, administrative interpretations or
court decisions will not significantly change the tax laws with respect to
qualification as a REIT, the effect of the pairing agreement or the federal
income tax consequences of such qualification.
Legislation enacted in 1984 requires that paired entities be treated as one
entity for purposes of determining whether either entity meets the REIT
Requirements. This legislation does not apply to a paired REIT if the REIT and
its paired operating company were paired as of June 30, 1983. CPI was paired
with CRC prior to and remained paired on June 30, 1983. Although CPI has
obtained a ruling addressing the effect of the CPI Reorganization on CPI's
grandfathered status, such ruling does not address the effect of the Merger, and
there are no judicial or administrative authorities interpreting this
"grandfathering" rule in the context of a merger or otherwise. CPI will obtain
an opinion of counsel at the closing of the Merger and the related transactions
to the effect that the Merger will not adversely affect Simon Group's and CRC's
grandfathered status. If the Internal Revenue Service were to successfully
contend that Simon Group and CRC no longer qualify as grandfathered from the
1984 legislation limiting paired share REITs, certain income of CRC would be
treated as nonqualifying income of Simon Group, potentially jeopardizing Simon
Group's status as a REIT.
On July 22, 1998, President Clinton signed into law legislation that
terminates the "grandfathering" rule described above with respect to
Non-Grandfathered Assets acquired (or substantially improved) by either paired
entity after March 26, 1998. Assets acquired subject to a binding written
contract in force on March 26, 1998 (such as the Merger Agreement) are deemed to
be acquired on March 26, 1998 and therefore are excluded from Non-Grandfathered
Assets. As a result of this legislation, Simon Group and CRC will be treated as
one entity with respect to Non-Grandfathered Assets for purposes of determining
whether either entity qualifies as a REIT. Consequently, the benefits of the
"grandfathering" rule described above will be eliminated for any
Non-Grandfathered Assets acquired by Simon Group or CRC.
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There are no current plans to change the paired-share status of Simon
Group. In addition, the management of Simon Group does not believe that this
legislation will materially affect Simon Group. Because Simon Group is engaged
primarily in owning and operating regional malls and community shopping centers,
i.e., real estate of a type that can be owned and operated directly by a REIT,
Simon Group has no present need, and would derive no material benefit from,
conducting its operations by leasing its real estate to CRC or the SRC Operating
Partnership. Furthermore, Simon Group has no current intention to acquire real
estate of a type that cannot be operated directly by a REIT, and accordingly,
does not believe that this legislation will adversely affect its current
acquisition strategy. The legislation will, however, limit Simon Group's ability
to change its current acquisition strategy to include the acquisition of real
estate other than of a type that can be owned and operated directly by a REIT.
For example, prior to enactment of the legislation, Simon Group could have
acquired a hotel and leased it to the SRC Operating Partnership. After enactment
of the legislation, such a transaction could, depending on its size, result in
the loss of Simon Group's REIT status.
Current law prohibits a REIT from owning more than 10% of the voting stock
of a corporation. On February 2, 1998, the Clinton Administration released the
Administration's fiscal 1999 budget, which contains certain proposals that may
adversely affect REITs (the "Administration Proposals"). The Administration
Proposals, if adopted in their current form, would prohibit REITs from holding
more than 10% of the value of all classes of stock of a corporation other than a
wholly-owned subsidiary that is a REIT. The proposed effective date of this
proposal generally is the date of the first Congressional committee action with
respect to such proposal. However, to the extent that a REIT's stock ownership
is grandfathered by virtue of this effective date, the grandfathered status will
terminate if the subsidiary corporation engages in a trade or business that it
is not engaged in on the date of first committee action or acquires substantial
new assets on or after that date. If the Administration Proposals are enacted in
their current form, Simon Group's ability to expand certain business activities
through its partially owned corporate subsidiaries would be greatly restricted.
These proposals will not become effective unless legislation is duly passed
by Congress and signed by the President. During the legislative process, these
proposals will be reviewed by Congressional committees and staff and be subject
to public scrutiny by affected companies and industry groups. It is uncertain
whether these proposals will become law or, if either does, what the details of
the implementing legislation will be. Consequently, it is impossible to
determine at this time all of the ramifications which would result from the
legislation based on these proposals. Other legislation, as well as
administrative interpretations or court decisions, also could change the tax law
with respect to Simon Group's qualification as a REIT and the federal income tax
consequences of such qualification. The adoption of any such legislation,
regulations or administrative interpretations could have a material adverse
effect on the results of operations, financial condition and prospects of Simon
Group. See "THE MERGER AGREEMENT AND RELATED MATTERS -- Possible Federal Tax
Developments."
If Simon Group or any of the other REIT Members fails to qualify as a REIT,
the nonqualifying entity will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. In addition, as discussed above, if any of the REIT Members fails to
qualify as a REIT, all of the other REIT Members owning an interest in such REIT
Member will also be disqualified and subject to federal income tax. Unless
entitled to relief under certain statutory provisions, the REIT Members will be
disqualified from treatment as REITs for the four taxable years following the
year during which qualification is lost. The additional tax would significantly
reduce the Funds From Operations of Simon Group. See "THE MERGER AGREEMENT AND
RELATED MATTERS -- Federal Income Tax Considerations Relating to Simon Group."
ADVERSE EFFECTS OF NOT MEETING REIT MINIMUM DISTRIBUTION REQUIREMENTS
To obtain and maintain their status as REITs, the REIT Members generally
will be required each year to distribute at least 95% of their taxable income
after certain adjustments. In addition, the REIT Members will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by them during each calendar year are less than the sum of 85% of their
ordinary income for such calendar year, 95% of their capital gain net income for
the calendar year and any amount of such income that was not distributed in
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prior years. For the year ended 1997, CPI and SDG each distributed amounts
substantially in excess of 95% of its taxable income.
REAL ESTATE INVESTMENT RISKS
FACTORS AFFECTING REVENUES AND ECONOMIC VALUE OF SHOPPING CENTERS
The revenues and value of shopping centers may be adversely affected by a
number of factors, including: the national, regional and local economic climate;
local real estate conditions; perceptions by retailers or shoppers of the
safety, convenience and attractiveness of the shopping center; the proximity and
quality of competing centers; trends in the retail industry, including
contraction in the number of retailers and the number of locations operated; the
quality and philosophy of management; changes in market rental rates; the
inability to collect rent due to bankruptcy or insolvency of tenants or
otherwise; the need periodically to renovate, repair and relet space and the
costs thereof; the ability of an owner to provide adequate maintenance and
insurance and increased operating costs. In addition, shopping center values are
affected by such factors as changes in interest rates, the availability of
financing, changes in governmental regulations, changes in tax laws or rates and
potential environmental or other legal liabilities.
Simon Group's concentration in the retail shopping center real estate
market subjects their portfolios to certain risks, including, among others, the
following risks: demand for shopping center space in Simon Group's markets may
decrease; Simon Group may be unable to re-let space upon lease expirations or to
pay renovation and reletting costs in connection therewith; economic and other
conditions may affect shopping center property cash flows and values; tenants
may be unable to make lease payments or may become bankrupt; and a property may
not generate revenue sufficient to meet operating expenses, including future
debt service. The combined portfolio also has substantial concentration of
properties in certain geographic markets, including Florida, Texas and the New
York metropolitan area, increasing the susceptibility of the combined company to
economic downturn in these regions.
LIMITED CONTROL WITH RESPECT TO CERTAIN PROPERTIES PARTIALLY OWNED OR MANAGED
BY THIRD PARTIES
On March 31, 1998, if the transaction contemplated by the Merger Agreement,
including the sale of the General Motors Building, had occurred on such date,
Simon Group would beneficially own interests in 245 properties ("Simon Group
Portfolio Properties") including 67 income-producing properties in which Simon
Group holds, directly or indirectly, an interest not wholly owned directly or
indirectly by the SDG Operating Partnership ("Joint Venture Properties"). With
respect to these Joint Venture Properties, assuming consummation of the Merger,
Simon Group will, directly or indirectly, be the sole general partner of 12
limited partnerships, a general partner of 23 limited partnerships, an indirect
limited partner of one general partnership, a limited partner of two limited
partnerships, a general partner of 23 general partnerships, a member of one
limited liability company, a managing member of two limited liability companies
and will hold two tenancy-in-common interests and one beneficial trust interest.
In addition, Simon Group will have day-to-day operational control over 51 of
such Joint Venture Properties. On a pro forma basis assuming the Merger occurred
on March 31, 1998, in 1998 the Joint Venture Properties would have generated
15.5% of Simon Group's EBITDA. "EBITDA" means earnings before interest, taxes,
depreciation and amortization for all properties. EBITDA after minority interest
represents earnings before interest, taxes, depreciation and amortization for
all properties after distribution to the third-party joint venture partners.
EBITDA: (i) does not represent cash flow from operations as defined by generally
accepted accounting principles; (ii) should not be considered as an alternative
to net income as a measure of operating performance or to cash flows from
operating, investing and financing activities; and (iii) is not an alternative
to cash flows as a measure of liquidity. The third-party partners' ownership
interests in Joint Venture Properties range from 1.7% to 85.3%.
With respect to limited partnerships owning Joint Venture Properties for
which Simon Group will serve as general partner, Simon Group will not have sole
control of certain major decisions relating to such Joint Venture Properties,
although Simon Group generally will have a right of approval with respect to
such matters. With respect to the limited or general partnerships owning Joint
Venture Properties in which Simon Group will not be the managing or co-managing
general partner, Simon Group will not have day-to-day operational control. These
limitations may result in decisions by third parties with respect to such
properties that do not fully reflect the interests of Simon Group at such time,
including decisions relating to the
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requirements with which Simon Group must comply in order to maintain its status
as a REIT for tax purposes. In addition, the sale or transfer of interests in
certain of the partnerships is subject to rights of first refusal and buy-sell
or similar arrangements. Such rights may be triggered at a time when Simon Group
will not desire to sell but may be forced to do so because it does not have the
cash to purchase the other party's interest. Simon Group will be contractually
restricted from selling certain of these properties without the consent of
certain unrelated parties. These limitations on sale may adversely affect Simon
Group's ability to sell these properties at the most advantageous time for Simon
Group.
COMPETITION
Shopping malls compete for tenants on the basis of the rent charged and
location, and encounter competition from other retail properties in their
respective market areas. However, the principal competition for the shopping
malls may come from future shopping malls that will be located in the same
market areas and from mail order and electronic retailers. There is also
considerable competition to acquire equity interests in desirable real estate.
The competition is provided by other real estate investment trusts, insurance
companies, private pension plans and private developers. Additionally, Simon
Group's credit rating and leverage will affect its competitive position in the
public debt and equity markets.
Simon Group will face competition from other shopping mall developers for
the acquisition of prime development sites and for tenants and will be subject
to the risks of real estate development, including the lack of financing,
construction delays, environmental requirements, budget overruns and lease-up.
Numerous other developers, managers and owners of real estate compete with Simon
Group in seeking management and leasing revenues, land for development and
properties for acquisition. In addition, retailers at the Simon Group Portfolio
Properties face increasing competition from discount shopping centers, outlet
malls, catalogues, discount shopping clubs and telemarketing. With respect to
certain of the Simon Group Portfolio Properties, there are other properties of
the same type within the market area. The existence of competitive properties
could have a material effect on the SDG Operating Partnership's ability to lease
space and on the level of rents the SDG Operating Partnership can obtain.
Renovations and expansions at competing malls could negatively affect a
competing Simon Group Portfolio Property. Increased competition could adversely
affect Simon Group's revenues.
ILLIQUIDITY OF REAL ESTATE
Real property investments are relatively illiquid. Simon Group's ability to
vary its portfolio in response to changes in economic and other conditions
therefore will be limited. If Simon Group wants to sell an investment, there is
no assurance that it will be able to dispose of it in the desired time period or
that the sales prices of any investment will recoup or exceed the amount of
Simon Group's investment.
DEPENDENCE ON ANCHORS AND TENANTS
Simon Group's cash available for distribution would be adversely affected
if GLA in the Simon Group Portfolio Properties could not be leased, if tenants
or anchors failed to meet their contractual obligations or seek concessions in
order to continue operations. If the sales of stores operating in the Simon
Group Portfolio Properties were to decline sufficiently due to economic
conditions, closing of anchors or for other reasons, tenants may be unable to
pay their minimum rents or expense recovery charges. In the event of default by
a tenant or anchor, the Simon Group Portfolio Property owner might experience
delays and costs in enforcing its rights as landlord.
RENEWAL OF LEASES AND RELETTING OF SPACE
Simon Group will be subject to the risks that, upon expiration of leases
for GLA located in the Simon Group Portfolio Properties, the premises may not be
relet or the terms of reletting (including the cost of concessions to tenants)
may be less favorable than current lease terms. If SDG Group were unable
promptly to relet all or a substantial portion of this space or if the rental
rates upon such reletting were significantly lower than expected rates, Simon
Group's cash generated before debt repayments and capital expenditures and
ability to make expected distributions to shareholders may be adversely
affected.
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FAILURE TO MANAGE EXPANSION AND DEVELOPMENT GROWTH STRATEGY
Growth of Simon Group's business through the development of additional
shopping centers and other capital projects may be limited by risks associated
with expansion and development activities generally. These risks include
incurring expenses on projects which are not completed or, due to cost overruns,
delays, lower occupancy levels or other factors, are unprofitable.
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real property may be liable for the
costs of removal or remediation of petroleum or hazardous or toxic substances
on, under or in such property. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
presence of such substances. The costs of removal or remediation of such
substances may be substantial, and the presence of such substances, or failure
to promptly remove or remediate such substances, may, among other things,
adversely affect the owner's or operator's ability to borrow using such property
as collateral. Environmental laws, ordinances and regulations also impose
requirements on conditions and activities at the properties that may affect the
environment or the impact of the environment on human health and safety. The
obligation to pay for the costs of complying with existing environmental laws,
ordinances and regulations, as well as the cost of complying with future
requirements, may affect the operating costs of Simon Group. Further, failure to
comply with such requirements could result in the imposition of monetary
penalties (in addition to the costs to achieve compliance) and potential
liability to third parties. In connection with its business, Simon Group may be
potentially liable for such costs or claims. Both SDG and CPI believe that their
properties are in compliance in all material respects with all applicable
environmental laws, ordinances and regulations and that adequate amounts have
been reserved to cover the costs and expenses related to environmental
conditions with respect to their properties. However, it is possible that there
are material environmental conditions, liabilities or violations of which SDG,
CPI and CRC are currently unaware.
GENERAL REAL ESTATE INVESTMENT RISKS
Simon Group also will be subject to other real estate investment risks
including, without limitation, adverse changes in zoning laws, potential
environmental liabilities, the ongoing need for capital improvements
(particularly in older structures), changes in national or local economic
conditions, changes in neighborhood characteristics and civil unrest,
earthquakes and other natural disasters (which could result in uninsured
losses). See "-- Environmental Matters." The ability of Simon Group to maintain
or increase its Funds From Operations is dependent to a significant degree on
the ability of Simon Group to manage the risks associated with the inability to
lease or add GLA.
LIMITS ON CHANGE OF CONTROL
In order to facilitate compliance with REIT Requirements, the Simon Group
Charter places restrictions on the accumulation of shares in excess of 8% of the
capital stock of Simon Group (18% in the case of the Simons) (calculated based
on the lower of outstanding shares, voting power or value), subject to certain
exceptions permitted with the approval of the Simon Group Board of Directors to
allow (i) underwritten offerings or (ii) the sale of equity securities in
circumstances where the Simon Group Board of Directors determines Simon Group's
ability to satisfy the REIT Requirements will not be jeopardized. Stock of Simon
Group that is held by a "qualified trust" within the meaning of Section
856(h)(3) of the Code is treated as held proportionately by the beneficiaries of
such trust. Simon Group has agreed to waive its charter provisions such that the
Telephone Real Estate Equity Trust may acquire up to 11% of the capital stock of
Simon Group, provided that it remains treated as a "qualified trust," but will
become subject to the 8% limitation if it fails to be so treated. This
restriction on ownership and transferability may have the effect of delaying,
deferring or preventing a transaction or change in control of Simon Group that
might involve a premium price for the shares of Simon Group Equity Stock or that
otherwise might be in the best interest of Simon Group's stockholders. Certain
other provisions of the Simon Group Charter and Simon Group By-laws could have
the effect of delaying or preventing a change of control of Simon Group even if
some of Simon Group's stockholders deem such a change to be in Simon Group's and
their best interest. These include Simon Group Charter provisions preventing
holders of Simon Group Common Stock from acting by written consent and
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requiring that up to six directors in the aggregate may be elected by holders of
Simon Group Class B Common Stock and Simon Group Class C Common Stock. The
stockholders of Simon Group will be governed by the General Corporation Law of
the State of Delaware (the "DGCL"). See "-- Comparison of Stockholders' Rights,"
"CERTAIN PROVISIONS OF THE SDG PARTNERSHIP AGREEMENT, THE SRC PARTNERSHIP
AGREEMENT, THE SIMON GROUP CHARTER, THE CRC CHARTER, SIMON GROUP BY-LAWS AND CRC
BY-LAWS AND DELAWARE LAW" and "COMPARISON OF RIGHTS OF HOLDERS OF SDG COMMON
STOCK AND SIMON GROUP AND CRC COMMON STOCK."
COMPARISON OF STOCKHOLDERS' RIGHTS
SDG is currently incorporated under the laws of the State of Maryland and
CPI and CRC are both incorporated under the laws of the State of Delaware. If
the Merger is consummated, the holders of SDG Equity Stock, whose rights as
stockholders are currently governed by the MGCL, the SDG Charter and the SDG
By-laws, will at the Effective Time become holders of Simon Group Equity Stock
and their rights as such will be governed by the DGCL, the Simon Group Charter,
the CRC Charter, the Simon Group By-Laws and the CRC By-laws.
SDG stockholders should be aware of the following differences in their
rights as stockholders compared to the rights of stockholders of Simon Group and
CRC: the Simon Group Charter and the CRC Charter will provide that directors may
be removed with or without cause by the requisite affirmative vote of the
stockholders; the Simon Group Charter will require that all actions by Simon
Group Common Stock holders be taken at an annual or special meeting of the
shareholders; and the Simon Group Charter and the CRC Charter will provide that
written notice of every meeting of the stockholders be given not less than 10
nor more than 60 calendar days before the date of the meeting to each
stockholder of record entitled to vote at such meeting. These provisions, in
addition to other provisions located in both the SDG Charter, the Simon Group
Charter and the CRC Charter, could have a potential anti-takeover effect
following the Merger. In addition, the 8% ownership limit in the Simon Group
Charter could have the effect of making the acquisition of control more
difficult for a third party. See "-- Limits on Change of Control" and
"COMPARISON OF RIGHTS OF HOLDERS OF SDG COMMON STOCK AND SIMON GROUP AND CRC
COMMON STOCK."
DEPENDENCE ON KEY PERSONNEL
Simon Group will depend on the services of certain key personnel, including
Melvin Simon, Herbert Simon and David Simon, following the consummation of the
Merger. Both SDG's management and CPI's management believe that the loss of the
services of any of these key personnel could have an adverse effect on the
results of Simon Group's operations. See "MANAGEMENT OF SIMON GROUP AND CRC
FOLLOWING THE MERGER -- Management of Simon Group."
RISKS RELATING TO YEAR 2000 ISSUE
Many existing computer programs were designed to use only two digits to
identify a year in the date field without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could fail
or create erroneous results by or at the year 2000. Simon Group plans to address
the "Year 2000" issue with respect to its operations. Substantially all of the
computer systems and applications in use in SDG's home office in Indianapolis,
Indiana have been, or are in the process of being, upgraded and modified.
Failure of Simon Group or its tenants or lessees to properly or timely resolve
the Year 2000 issue could have a material adverse effect on Simon Group's
business. Simon Group believes that its software applications and operational
programs will properly recognize calendar dates beginning in the year 2000. In
addition, Simon Group will be initiating communications with its significant
tenants and lessees to determine the extent to which Simon Group is vulnerable
to third parties' failures to remediate their own potential problems related to
the Year 2000. To date, no significant concerns have been identified; however,
there can be no assurance that there will not be any Year 2000 related operating
problems or expenses that will arise in connection with Simon Group's computer
systems and software or with Simon Group's interface with the computer systems
and software of its tenants and lessees.
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IMPACT OF INTEREST RATE FLUCTUATIONS AND OTHER FACTORS ON STOCK PRICE AND
BORROWING COSTS
Any significant increase in market interest rates from their current levels
could lead holders of Simon Group Common Stock to seek higher yields through
other investments, which could adversely affect the market price of the shares
of Simon Group Common Stock. One of the factors that may influence the price of
Simon Group Common Stock in public markets will be the annual distribution rate
on Simon Group Common Stock as compared with the yields on alternative
investments. Numerous other factors, such as governmental regulatory action and
tax laws, could have a significant impact on the future market price of Simon
Group Common Stock. In addition, increases in market interest rates could result
in increased borrowing costs for Simon Group, which may adversely affect Simon
Group's cash flow and the amounts available for distributions to its
stockholders.
RISKS RELATED TO INTEREST RATE HEDGING ARRANGEMENTS
SDG employs, and Simon Group will continue to employ, standard risk
management strategies to hedge exposures, primarily related to interest rate
fluctuations. SDG has commonly entered into interest rate swaps to fix the costs
of funding and eliminate interest rate volatility. Interest rate cap agreements
are used as a protection against interest rate increases on variable rate debt.
SDG also enters into hedging transactions based upon U.S. Treasury Bill rates to
manage exposure of rising interest rates before anticipated bond offerings.
Simon Group intends to continue to enter into such arrangements if management
determines they are in the best interest of the stockholders.
Interest rate hedging arrangements may expose Simon Group to certain risks.
Although Simon Group will try to minimize these risks, interest rate movements
during the terms of interest rate hedging agreements may result in a gain or
loss on Simon Group's investment in the hedging arrangement. Developing an
effective strategy is complex and no strategy can completely insulate Simon
Group from risks associated with interest rate fluctuations. There can be no
assurance that Simon Group's hedging activities will have the desired beneficial
impact on Simon Group's results of operations or financial condition. Such
hedging agreements may involve certain costs, such as transaction fees or
non-material breakage costs if they are terminated by Simon Group. In addition,
nonperformance by the other party to the hedging arrangement may result in
credit risks to Simon Group. In order to minimize counterparty credit risk,
Simon Group's policy is to enter into hedging arrangements only with large
creditworthy financial institutions.
POSSIBLE ADVERSE EFFECTS ON STOCK PRICES ARISING FROM SHARES AVAILABLE FOR
FUTURE SALE
If the Merger would have occurred on March 31, 1998, Simon Group would have
had outstanding at such date 160,902,609 shares of Simon Group Common Stock,
3,200,000 shares of Simon Group Class B Common Stock, 4,000 shares of Simon
Group Class C Common Stock, 209,249 shares of Simon Group Series A Preferred
Stock, 4,966,038 shares of Simon Group Series B Preferred Stock, 64,059,705 SDG
Units and 1,310,190 stock options. In any given 365-day period, EJDC (or its
affiliates or lenders) is permitted to dispose of the SDG Units held by EJDC
(together with its affiliates) in order to satisfy up to $180 million of
outstanding indebtedness of EJDC, until such indebtedness has been repaid.
Affiliates of EJDC pledged certain SDG Units to secure such indebtedness. This
indebtedness will not be an obligation of Simon Group and will not be secured by
any of the assets of Simon Group. A default on such EJDC indebtedness may cause
EJDC's lenders to foreclose on EJDC's SDG Units. In such an event, it is likely
that the lenders or a single transferee from the lenders would attempt to
dispose of these SDG Units. Such lenders or such single transferee from the
lenders may be permitted to exchange these SDG Units for shares of Simon Group
Common Stock or cash, at the option of Simon Group, and (if Simon Group elects
to issue shares) to dispose of such shares. In addition, 22,635,977 shares of
Simon Group Common Stock, 55,799 shares of Simon Group Series A Preferred Stock
and 2,065,921 shares of Simon Group Series B Preferred Stock held by
stockholders of CPI after the Merger will be immediately tradeable after
consummation of the Merger pursuant to Rule 144(k) under the Securities Act. See
"FEDERAL SECURITIES LAW CONSEQUENCES."
Sales of substantial numbers of shares of Simon Group Common Stock or
Units, or the perception that such sales could occur, could adversely affect the
prevailing market price for the Simon Group Common Stock. If such sales reduce
the market price of the Simon Group Common Stock, Simon Group's ability to raise
additional capital in the equity market could be adversely affected. The
existence of registration rights contained in various registration rights
agreements also may adversely affect the terms upon which Simon Group can obtain
additional capital in the equity markets in the future. See "THE MERGER
AGREEMENT AND RELATED MATTERS -- Certain Transactions and Agreements Relating to
the Merger."
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HISTORICAL AND PRO FORMA PER SHARE INFORMATION
The following table sets forth certain historical, Simon Group pro forma
and CPI and beneficial interest in CRC combined pro forma equivalent information
giving effect to the CPI Merger Dividends, the Merger and the Other Property
Transactions (see "PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA").
The data is based on the historical and Simon Group pro forma financial
statements included elsewhere in this Proxy Statement/Prospectus.
FOR THE THREE MONTHS ENDED MARCH 31, 1998 FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------- ----------------------------------------------
CPI AND BENEFICIAL CPI AND BENEFICIAL
INTEREST IN CRC INTEREST IN CRC
SIMON GROUP COMBINED PRO FORMA SIMON GROUP COMBINED PRO FORMA
HISTORICAL PRO FORMA(1) EQUIVALENT(2) HISTORICAL PRO FORMA(1) EQUIVALENT(2)
----------- ------------ ------------------ ---------- ------------ ------------------
(UNAUDITED)
Net Income per Share of
Common Stock Before
Extraordinary Items
SDG/Simon Group pro
forma................. $ .22 $ .31 -- $ 1.08 $ 1.10 --
CPI and beneficial
interest in CRC
combined.............. $ 3.07 -- $ .65 $10.24 -- $ 2.29
Cash Distributions(3)
SDG/Simon Group pro
forma................. $ .505 $ .505 -- $ 2.01 $ 2.02 --
CPI and beneficial
interest in CRC
combined.............. $ 1.95 -- $ 1.05 $ 7.73 -- $ 4.21
AS OF MARCH 31, 1998 AS OF DECEMBER 31, 1997
------------------ ---------------------
Book Value per Share of
Common Stock
SDG/Simon Group pro
forma................. $11.10 $16.43 -- N/A N/A N/A
CPI and beneficial
interest in CRC
combined.............. $64.09 -- $34.20 N/A N/A N/A
- ---------------
(1) Giving effect to the CPI Merger Dividends and the Merger there were
164,096,352 and 155,773,755 pro forma weighted average shares of Simon Group
Common Stock outstanding during the three months ended March 31, 1998 and
the year ended December 31, 1997, respectively, and 164,106,609 pro forma
shares of Simon Group Common Stock outstanding as of March 31, 1998.
(2) A CPI stockholder is entitled to 2.0818 shares of Simon Group Common Stock,
which includes a beneficial interest in CRC, for each outstanding share of
CPI Common Stock. The existing shares of CPI Common Stock also entitle the
holder to a beneficial interest in CRC. See "THE MERGER AGREEMENT AND
RELATED MATTERS -- Terms of the Merger" for a description of the additional
consideration to which the CPI stockholders are entitled.
(3) SDG currently pays a quarterly distribution of $0.5050 per share of SDG
Common Stock. SDG/Simon Group pro forma Cash Distributions per share are
calculated by multiplying this quarterly distribution amount by four. Future
distributions by Simon Group, however, will be at the discretion of the
Simon Group Board of Directors and will depend on certain factors. See
"POLICIES OF SIMON GROUP FOLLOWING THE MERGER -- Dividend and Distribution
Policies."
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CAPITALIZATION
The following table sets forth the historical capitalization of SDG, CPI
and CRC at March 31, 1998 and the pro forma combined capitalization of Simon
Group and CRC as adjusted by SDG to give effect to the CPI Merger Dividends, the
Merger and related transactions and the Other Property Transactions as if the
Merger and related transactions and the Other Property Transactions had occurred
on March 31, 1998. The following table should be read in conjunction with the
historical and pro forma financial statements and related notes included
elsewhere in, or incorporated by reference into, this Proxy
Statement/Prospectus.
MARCH 31, 1998
-------------------------------------------------------
SIMON GROUP
SDG CPI CRC PRO FORMA
HISTORICAL HISTORICAL HISTORICAL(1) COMBINED
----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Mortgages and other indebtedness............ $5,329,707 $ 857,648 $1,121 $ 7,734,500
Limited Partners' interest in the Operating
Partnerships.............................. 718,264 -- -- 1,023,677
Preferred Stock of subsidiary............... -- -- -- 339,128
Stockholders' equity
SDG Series B cumulative redeemable
Preferred Stock........................ 192,989 -- -- --
SDG Series C cumulative redeemable
Preferred Stock........................ 146,139 -- -- --
Simon Group Series B convertible Preferred
Stock.................................. -- -- -- 496,611
CPI Series A Preferred Stock.............. -- 209,249 -- 269,329
Common Stock and beneficial interest in
CRC.................................... 10 26,415 268 30
Class B Common Stock...................... 1 -- -- 2
Class C Common Stock...................... -- -- -- --
Capital in excess of par and other........ 1,524,746 1,602,067 13,351 3,027,115
Accumulated (deficit) surplus............. (294,817) 104,390 (9,617) (318,434)
Unamortized restricted stock award........ (11,883) -- -- (11,883)
Treasury stock............................ -- (113,969) -- --
---------- ---------- ------ -----------
Total stockholders' equity................ 1,557,185 1,828,152 4,002 3,462,770
---------- ---------- ------ -----------
Total capitalization.............. $7,605,156 $2,685,800 $5,123 $12,560,075
========== ========== ====== ===========
- ---------------
(1) Adjusted to reflect the elimination of intercompany mortgages totalling
$37.1 million as of March 31, 1998.
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DIVIDENDS ON AND MARKET PRICES OF SDG EQUITY STOCK AND CPI AND CRC COMMON STOCK
SDG
The shares of SDG Common Stock are designated for trading on the NYSE under
the symbol "SPG". The following table sets forth the high and low prices per
share and the dividends paid or declared per share of SDG Common Stock quoted on
the NYSE for the periods indicated, as reported in published financial sources:
SDG COMMON
STOCK PRICES
------------- DIVIDEND
HIGH LOW DIVIDEND DATE AMOUNT
---- --- ----------------- --------
Year Ended December 31, 1996
First Quarter................................ $24 5/8 $21 1/8 March 27, 1996 $0.4925
Second Quarter............................... $24 3/4 $22 1/8 June 28, 1996 $0.4925
Third Quarter................................ $25 3/4 $22 7/8 August 1, 1996 $0.1515(1)
Fourth Quarter............................... $31 $25 3/8 January 23, 1997 $0.4925
Year Ended December 31, 1997
First Quarter................................ $32 3/4 $28 3/8 May 6, 1997 $0.4925
Second Quarter............................... $32 $27 7/8 July 28, 1997 $0.5050
Third Quarter................................ $34 3/8 $29 October 23, 1997 $0.5050
Fourth Quarter............................... $33 15/16 $28 7/8 January 23, 1998 $0.5050
Year Ending December 31, 1998
First Quarter................................ $34 1/2 $30 3/8 February 20, 1998 $0.5050
Second Quarter............................... $34 7/8 $31 May 22, 1998 $0.5050
Third Quarter (through August 12, 1998)...... $34 $29 1/16 -- --
- ---------------
(1) Represents a dividend declared in the third quarter of 1996 related to the
DeBartolo Merger, designated to align the time periods of dividend payments
of the merged companies in the DeBartolo Merger.
On February 18, 1998, the last full trading day prior to the public
announcement of the Merger Agreement, the reported closing and high trading
price per share of SDG Common Stock was $33 5/8 and the low trading price was
$32 7/8. On August 12, 1998, the most recent date for which prices were
available prior to printing this Proxy Statement/Prospectus, the reported
closing price per share of SDG Common Stock was $31 1/16. There is no
established public trading market for the SDG Class B Common Stock or SDG Class
C Common Stock. Distributions per share of SDG Class B Common Stock and SDG
Class C Common Stock were identical to those for the SDG Common Stock. SDG
stockholders are urged to obtain current market quotations. At the Record Date
there were approximately 2,811 holders of record of SDG Common Stock. The shares
of SDG Class B Common Stock are held entirely by a voting trust to which the
Simons are parties and are exchangeable on a one-for-one basis into SDG Common
Stock. The shares of SDG Class C Common Stock are held entirely by EJDC and are
also exchangeable on a one-to-one basis into SDG Common Stock. See "POLICIES OF
SIMON GROUP FOLLOWING MERGER -- Dividend and Distribution Policies."
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CPI AND CRC
There is no established public trading market for shares of CPI Common
Stock and CRC Common Stock. The following table sets forth the dividends paid or
declared per share of CPI Common Stock for the periods indicated:
CPI COMMON STOCK CRC BENEFICIAL INTEREST
----------------------------- -----------------------------
DIVIDEND DIVIDEND
DIVIDEND DATE AMOUNT DIVIDEND DATE AMOUNT
----------------- -------- ----------------- --------
Year Ended December 31, 1996
First Quarter................. February 15, 1996 $1.7875 February 15, 1996 $.0125
Second Quarter................ May 15, 1996 $1.865 May 15, 1996 $.01
Third Quarter................. August 15, 1996 $1.865 August 15, 1996 $.01
Fourth Quarter................ November 15, 1996 $1.865 November 15, 1996 $.01
Year Ended December 31, 1997
First Quarter................. February 18, 1997 $1.865 February 18, 1997 $.01
Second Quarter................ May 15, 1997 $1.94 May 15, 1997 $.01
Third Quarter................. August 15, 1997 $1.94 August 15, 1997 $.01
Fourth Quarter................ November 17, 1997 $1.94 November 17, 1997 $.01
Year Ending December 31, 1998
First Quarter................. February 17, 1998 $1.94 February 17, 1998 $.01
Second Quarter................ May 15, 1998 $1.94 May 15, 1998 $.01
CPI (and, commencing in May 1989, CRC) has paid regular and uninterrupted
quarterly cash distributions on its shares since it commenced operations in
1971. These distributions have increased from $1.99 per share in 1972 (the first
full year of operations) to $7.73 per share ($7.69 per share of CPI Common Stock
and $0.04 per beneficial interest in CRC Common Stock) in 1997. The present
annual combined rate of distribution is $7.80 per share ($7.76 per share of CPI
Common Stock and $.04 per beneficial interest in CRC Common Stock).
At July 29, 1998 there were approximately 247 holders of record of CPI
Common Stock and one holder of record of CRC Common Stock. See "POLICIES OF
SIMON GROUP FOLLOWING MERGER -- Dividend and Distribution Policies."
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THE PROPOSED MERGER AND RELATED MATTERS
BACKGROUND OF THE MERGER
In May 1997, the CPI Board approved recommendations by the management of
CPI as to the strategic objectives of CPI, including possibly becoming a
publicly traded company, which would preserve CPI's paired-share structure,
continue its strong growth in Funds From Operations, increase and diversify its
asset base without significantly diluting its asset quality and increase its
leverage in a rational fashion. In the summer and fall of 1997, representatives
of CPI held discussions with representatives of several companies in the
regional mall industry regarding engaging in a significant strategic transaction
with CPI. No proposals for specific transactions were elicited or resulted from
any of these discussions.
With the assistance of its advisors, CPI's management analyzed the
potential benefits and disadvantages of a strategic transaction with the parties
with which it had held such preliminary discussions in light of the strategic
objectives approved by the CPI Board. At a CPI Board meeting on November 4,
1997, CPI's management and legal advisors reviewed with the CPI Board certain
financial and other information about the potential parties to any such
transaction and the results of discussions and analyses conducted to that time.
Following the CPI Board's meeting, senior management of CPI continued to have
discussions with the several parties interested in a potential transaction. It
became clear to CPI management that, based on the discussions until then and the
degree of interest expressed by the several parties, a transaction with The
Rouse Company ("Rouse") satisfied the CPI Board's objectives and the additional
objectives of certainty and swiftness of closing. In early December 1997, active
negotiations with Rouse began. In late December 1997, Hans C. Mautner, Chairman
and Chief Executive Officer of CPI, received a letter from David Simon, Chief
Executive Officer of SDG, wherein Mr. Simon expressed interest in a strategic
transaction between CPI and SDG based on CPI's asset appraisal. CPI took no
action based on such letter at that time.
Several meetings between representatives of CPI and its advisors and
representatives of Rouse and its advisors occurred in December 1997 and January
1998 during which the terms and structure of a combination, the governance of
the combined company and other issues were discussed. While negotiations were
progressing, news reports concerning negotiations between CPI and Rouse began
appearing in the media on January 15, 1998. On January 16, 1998, Mr. Mautner
received another letter from Mr. Simon, stating that SDG was interested in a
transaction with CPI and was prepared to offer substantial consideration to CPI
stockholders. During the following several days, CPI received similar
communications from other parties expressing interest in a potential transaction
with CPI. Throughout this period, management kept the CPI Board and CPI's three
principal stockholders apprised of the Rouse negotiations and the expressions of
interest from other parties.
On January 26, 1998, a special meeting of the CPI Board, at which all
trustees, certain members of CPI management and representatives of CPI's
financial and legal advisors were present, was held to discuss the new
expressions of interest. At this meeting CPI's financial advisors made an
extensive presentation concerning the nature of the contacts with each of the
parties expressing an interest in a transaction with CPI and setting forth
certain financial and business information about those parties. CPI's legal
advisors discussed the legal and fiduciary duties applicable to the trustees'
consideration of any transaction involving CPI, including the new expressions of
interest; in addition, they reviewed other legal, tax and logistical issues. The
CPI Board reaffirmed the strategic objectives to be sought in reviewing any
potential transaction, selected five interested parties, including SDG and
Rouse, as presenting the most viable and attractive potential merger partners
and decided that CPI's management and advisors should evaluate potential
transactions with each of such parties. The CPI Board directed that the
potential bidders be asked to submit a proposal for a transaction by Monday,
February 2, 1998. CPI's advisors sent a letter and a draft of a merger agreement
to the five potential bidders, inviting them to present a detailed proposal for
a transaction with CPI by the morning of February 2, 1998. On February 2, 1998
proposals were received from SDG and one other bidder. In addition, Rouse
delivered a letter stating that it was contemplating certain modifications to
the transaction that had been under consideration by CPI and Rouse, including
obtaining financial assistance from a third party which would participate in the
Rouse proposal.
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49
The CPI Board held a special meeting on Tuesday, February 3, 1998, to
discuss the three proposals. Present at this meeting were all trustees of CPI,
members of management of CPI and representatives of CPI's financial and legal
advisors. Also present were representatives of the financial advisor to the
largest CPI stockholder. Representatives of each of the three parties who had
submitted proposals were invited to make presentations at the meeting. Each such
party, together with its financial advisors, and in one case, legal advisors,
separately presented its proposal along with other pertinent information to the
CPI Board and responded to questions from the CPI Board, management and
advisors. After completion of the presentations by the bidders, the three
proposals, as well as financial and other information concerning each interested
party, were discussed in detail by the CPI Board. CPI's financial advisors gave
a presentation to the CPI Board concerning financial, business and other
information regarding each proposal, and CPI's legal advisors discussed the
legal and fiduciary duties of the trustees and certain structural, tax and other
legal matters concerning the proposed transactions, including terms of the
proposed merger agreements, employment agreements and other governance and
compensation arrangements. Following such discussion, the CPI Board determined
to encourage the bidders to submit their best and final offers in one further
round of bidding and directed CPI's management and advisors to ask each
interested party to improve its proposal and to communicate to such parties the
process by which the final offers were to be submitted.
On Wednesday, February 4, 1998, CPI's advisors notified each interested
party of the preliminary concerns of the CPI Board with such party's proposal.
Each interested party was advised that best and final proposals would be sought.
The CPI Board held a regularly scheduled meeting on Thursday, February 5,
1998, where certain corporate business was transacted and the transaction
proposals were again discussed. Present at the meeting were all the trustees of
CPI, members of CPI's management, representatives of CPI's financial and legal
advisors and representatives of the financial advisor to the largest CPI
stockholder. CPI's financial and legal advisors made extensive presentations
concerning the proposals and the interested parties. CPI's trustees, management
and advisors also discussed how best to manage the bidding process and the
substance of a letter to the bidders describing this process. At this meeting,
trustees representing CPI's largest stockholders indicated the willingness of
such stockholders to execute appropriate agreements obligating them to vote
their CPI shares in favor of a transaction if it were unanimously approved by
the CPI Board.
On the following day, a letter was delivered from CPI's financial advisors
to each of the three interested parties stating that the CPI Board desired final
proposals, including a fully negotiated merger agreement, to be submitted by
Tuesday, February 17, 1998 and informed such parties of the willingness of CPI's
largest stockholders to enter into some form of stockholder voting agreement.
From February 6 until the proposals were due on February 17, CPI management and
advisors assisted each interested party with its continuing due diligence
investigation of CPI, and CPI and its advisors conducted due diligence
investigations of each bidder. Management and legal advisors of CPI negotiated
the terms of a merger agreement, forms of stockholder voting agreements and
various employment and compensation arrangements separately with each bidder. No
bidder was privy to the details of any other bidder's proposal.
Proposals were received substantially simultaneously from three bidders,
including SDG and Rouse, before the deadline on February 17, 1998. In subsequent
discussions thereafter, SDG and Rouse each modified its proposal in various
ways, including offering greater consideration to the CPI stockholders. The
proposal submitted by Rouse, as modified in subsequent discussions, consisted of
$91.50 in cash and $91.50 in common stock of the combined company, subject to
collar provisions, for a total face value of $183 per share of CPI Common Stock.
The proposal of Rouse contemplated an agreement between Rouse and a third party
for such third party to purchase $300 million of a new convertible preferred
stock of the combined company, to acquire in the open market $100 million of
combined company common stock and to receive warrants to purchase three million
shares of common stock of the combined company and an option to purchase the
General Motors Building. The proposal submitted by SDG, as modified in
subsequent discussions, consisted of $90 in cash, subject to the collar
provisions described in "THE MERGER AGREEMENT AND RELATED MATTERS -- Terms of
the Merger -- The Merger Consideration," $70 in common stock of the combined
company and $17 in Series A Preferred Stock, for a total face value of $177 per
share of CPI Common Stock.
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50
The aggregate consideration offered in the proposal submitted by the third
bidder was significantly below those amounts.
On Wednesday, February 18, 1998, the CPI Board held a special meeting to
consider the proposals submitted by the three final bidders. Present at this
meeting were all the trustees of CPI, members of CPI management and
representatives of CPI's financial and legal advisors. Present to confer with
their clients (but not present at the meeting) were representatives of the legal
advisors for each of CPI's three largest stockholders and representatives of the
financial advisor for CPI's largest stockholder.
At this meeting, CPI's legal advisors advised the CPI Board of its legal
and fiduciary duties in considering the three proposals. CPI's financial
advisors gave an extensive presentation concerning the financial and other
aspects and certain terms of each proposal as well as information concerning
each bidder. CPI's legal advisors discussed certain structural, tax and other
legal issues and described for the CPI Board the terms of each bidder's form of
merger agreement, stockholder voting agreement, employment agreements, if any,
and other proposed agreements and compensation arrangements. During the course
of this meeting, SDG raised the face value of the preferred stock component of
its offer to $19, resulting in a total face value for its offer of $179 per
share of CPI Common Stock, and Rouse raised the cash component of its offer to
$94.50, resulting in a total face value for its offer of $186 per share of CPI
Common Stock. Following those presentations and discussions by CPI's advisors
with the bidders, the CPI Board discussed at length the three bidders and their
proposals. The CPI Board initially determined that the third bidder's proposal
was substantially less favorable than those received from Rouse and SDG, and
focused the discussion on the proposals of Rouse and SDG.
After such presentations and discussion, the trustees representing CPI's
three largest stockholders conferred with their advisors, first separately and
then together, to consider the proposals and the presentations made at the
meeting. These trustees then returned to the meeting and, after further
discussion, the CPI Board directed CPI's financial advisors to contact
representatives of SDG to request several further modifications to its proposal.
CPI's financial advisors left the meeting to have such discussion and, upon
returning, reported that SDG was unwilling to make further modifications to its
proposal. The CPI Board considered the terms proposed by Rouse and SDG at that
time to be final and proceeded to evaluate such terms. An extensive discussion
ensued involving the trustees, members of CPI management and CPI's advisors
concerning the financial aspects and legal, tax and other terms of the proposals
by Rouse and SDG, as well as the prospects for the combined company resulting
from either transaction. The final proposal of Rouse offered consideration to
CPI stockholders that was somewhat higher than that offered by SDG, but the CPI
Board considered, among other things, that the resulting entity in a combination
with SDG would be substantially stronger, both financially and as a real estate
combination, than the resulting entity in a combination with Rouse and the
possibility that, as a result, the performance of the stock of the combined
company in a combination with SDG over the long term would result in more value.
After much discussion, including deliveries of the oral opinions of Lazard
Freres and J.P. Morgan on February 18, 1998, confirmed in each case by means of
a written opinion dated as of such date (the "Lazard Freres Opinion" and the
"J.P. Morgan Opinion", respectively, and collectively, the "CPI Financial
Advisors' Opinions"), the CPI Board unanimously approved the Merger Agreement
and authorized management and CPI's advisors to finalize and execute the Merger
Agreement and other related agreements, including severance plans and new
employment agreements with certain senior management of CPI, on the terms and
conditions specifically approved by the CPI Board. On February 19, 1998, the
Merger Agreement and the Stockholder Voting Agreements were executed and
delivered by the parties thereto and a press release announcing the Merger was
released.
RECOMMENDATION OF THE SDG BOARD OF DIRECTORS; REASONS FOR THE MERGER
On February 16, 1998, SDG's Board of Directors approved a proposal to enter
into the Merger and authorized certain officers of SDG to negotiate
modifications to the foregoing proposal (including the final price and form of
the consideration) in consultation with members of the Executive Committee of
SDG. On February 19, 1998, SDG's Board of Directors unanimously approved the
Merger Agreement and the transactions contemplated thereby.
In the course of reaching its decision to approve the Merger Agreement,
SDG's Board of Directors consulted with its financial advisors regarding the
financial aspects and fairness of the Merger, and with its
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legal advisors regarding the legal terms of the transaction and the obligations
of SDG's Board in its consideration of the Merger Agreement. The terms of the
Merger Agreement, including the CPI Merger Dividends, were the result of arms'
length negotiations between SDG and CPI. The SDG Board of Directors considered
the Merger and the terms of the Merger Agreement in light of a variety of
economic, financial, legal and market factors, relied upon the conclusions of
the fairness opinion delivered by Merrill Lynch (discussed below) and concluded
that the Merger and the related matters discussed herein, including the CPI
Merger Dividends, are fair and in the best interests of SDG and its
stockholders. Accordingly, the SDG Board of Directors recommends that the
stockholders of SDG vote FOR approval and adoption of the Merger Agreement.
In reaching its determinations and recommendations with respect to the
Merger Agreement and the transactions contemplated thereby, SDG's Board of
Directors took into account numerous factors, including among other things, the
following:
(i) The Merger would create the country's largest developer, owner and
operator of super regional and regional shopping malls, providing Simon
Group, in the SDG Board of Directors' opinion, with potentially greater
access to capital markets and a larger and more diverse portfolio.
(ii) The combination of CPI's properties with SDG's properties would
expand the geographic diversification of SDG's ownership and operation of
properties into Boston, Massachusetts and Atlanta, Georgia, and enhance
SDG's operations in the New York metropolitan area, California and Florida.
In the SDG Board of Directors' view, this could limit the impact that
adverse economic or real estate conditions in a particular region might
have on Simon Group as a whole.
(iii) CPI has a significant tenant base and the Merger would improve
the strength and quality of tenant relationships.
(iv) The opportunities for economies of scale and operating
efficiencies that should result from the Merger would lead, in the
estimation of SDG's management based on assumptions which it believes to be
reasonable, to cost savings and revenue enhancements of approximately $49.8
million, which are expected to increase the SDG's Funds From Operations per
share. See "RISK FACTORS -- Cost of Failure to Integrate Operations."
(v) The Merger would increase the revenue being realized by SDG's
newly created Simon Brand Ventures consumer marketing division.
(vi) For federal income tax purposes, the Merger is expected to
qualify as a tax-free reorganization.
(vii) The total market capitalization of Simon Group if the Merger and
the related transactions occurred on March 31, 1998 would be, including a
pro rata share of joint venture indebtedness, approximately $18 billion,
which would be substantially greater than SDG's current total market
capitalization, including a pro rata share of joint venture indebtedness,
of approximately $12.7 billion as of March 31, 1998. The SDG Board of
Directors believes that it would provide SDG's stockholders with enhanced
liquidity through increased trading volume, which may improve SDG's public
market valuation.
(viii) The oral opinion of Merrill Lynch on February 19, 1998, which
was subsequently confirmed in a written opinion dated as of such date, to
the effect that, as of such date and based upon the assumptions made,
matters considered and limits of review set forth therein, the
consideration to be received by the holders of SDG Equity Stock in the
Merger was fair to such stockholders from a financial point of view. See
"-- Opinion of Financial Advisor to SDG."
SDG's Board of Directors considered each of the factors listed above during
the course of its deliberations and negotiations prior to entering into the
Merger Agreement. Each of the foregoing factors, which constitute all material
factors considered by SDG's Board of Directors, was viewed positively by SDG's
Board of Directors.
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The SDG Board of Directors considered certain potentially negative factors
that could arise from the Merger, including, among other things, the following:
(i) The significant costs involved in connection with consummating the
Merger and the substantial management time and effort required to
effectuate the Merger and integrate the businesses of SDG and CPI.
(ii) The increase of the ratio of debt to market capitalization,
excluding a pro rata share of joint venture indebtedness, from 45.8% for
SDG as of March 31, 1998 to 46.4% for Simon Group as of March 31, 1998 on a
pro forma basis. The Merger has a dilutive effect on the net income per
share of Simon Group Common Stock on a pro forma basis of $0.10 for the
three months ended March 31, 1998, after reducing pro forma net income for
a gain totaling $44.3 million, or approximately $0.19 per share, related to
a sale of real estate and may have a dilutive effect on net income per
share in future periods. The Merger has a dilutive effect of $0.54 on the
net income per share of Simon Group Common Stock on a pro forma basis for
the year ended December 31, 1997 (after giving effect to the elimination of
a $0.56 gain on sale of real estate) and may have a dilutive effect on net
income per share in future periods. See "RISK FACTORS -- Dilution on Net
Income Per Share Caused by the Merger."
(iii) The potential that the foregoing increase could adversely affect
the ability of Simon Group to obtain debt financing for additional
development and would subject Simon Group to the risks of higher leverage.
See "RISK FACTORS -- Substantial Indebtedness of Simon Group." The SDG
Board of Directors concluded that the increase in debt would not be at an
unacceptable level.
(iv) The risk that the anticipated benefits of the Merger might not be
fully realized.
The SDG Board of Directors did not believe that the negative factors were
sufficient, either individually or collectively, to outweigh the advantages of
the Merger.
SDG's Board of Directors evaluated the factors listed above in light of its
knowledge of the business and operations of CPI and its business judgment. In
view of the wide variety of factors considered in connection with its evaluation
of the Merger, the SDG Board of Directors did not find it practicable to and did
not quantify or otherwise attempt to assign relative weight to the specific
factors considered in reaching its determination.
THE SDG BOARD OF DIRECTORS BELIEVES THAT THE MERGER, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY THE SDG STOCKHOLDERS IN THE MERGER, IS FAIR TO
SDG'S STOCKHOLDERS AND IS IN THE BEST INTERESTS OF SDG AND ITS STOCKHOLDERS, HAS
APPROVED THE MERGER AGREEMENT, AND RECOMMENDS THAT THE STOCKHOLDERS OF SDG VOTE
FOR THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
RECOMMENDATION OF THE CPI BOARD AND THE CRC BOARD OF DIRECTORS; CPI'S AND CRC'S
REASONS FOR THE MERGER
THE CPI BOARD AND THE CRC BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE
MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
The CPI Board believes that the Merger and the other transactions
contemplated by the Merger Agreement are fair to and in the best interests of
the stockholders of CPI. Accordingly, the CPI Board unanimously approved the
Merger and the other transactions contemplated by the Merger Agreement and
recommended that the stockholders of CPI vote for approval and adoption of the
Merger Agreement and the transactions contemplated thereby. In reaching this
determination, the CPI Board consulted with CPI management, as well as its
financial and legal advisors, and considered a number of factors. In view of the
variety of the factors considered in connection with its evaluation of the
Merger and the other transactions contemplated by the Merger Agreement, the CPI
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the following factors or determine that any factor was of
particular importance. Rather, the CPI Board views its recommendation as being
based on the totality of the information presented and considered by it. The CPI
Board considered the following factors, among others, in its
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determination to approve the Merger Agreement and the other transactions
contemplated by the Merger Agreement and to recommend that the CPI stockholders
vote for the approval and adoption of the Merger Agreement and the transactions
contemplated by the Merger Agreement:
(i) The Merger would create the country's largest developer, owner and
operator of super regional and regional shopping malls with one of the
strongest management teams in the industry, including members of management
of CPI who will have an ongoing role with Simon Group, and that CPI will
have a continuing presence in Simon Group through this participation in
senior management of Simon Group and the presence of three CPI designees on
the Board of Directors of Simon Group.
(ii) The consideration to be received and retained by the holders of
CPI Common Stock pursuant to the Merger Agreement represents an attractive
opportunity for CPI stockholders to continue their investment in the stock
of a regional mall owner and operator, but with significantly expanded
geographic diversification and a significantly larger portfolio of assets,
as well as receive a substantial amount of cash for each share of CPI
Common Stock.
(iii) The Merger serves the CPI Board's strategic objectives of
allowing CPI to become a publicly traded company preserving its paired
share structure, continuing CPI's strong growth in Funds From Operations
and increasing and diversifying CPI's asset base within the retail real
estate area without significantly diluting its asset quality and increasing
CPI's leverage in a rational fashion.
(iv) The prospective benefits of an enlarged base to pursue marketing,
sponsorship and other related initiatives underway at both CPI and SDG.
(v) The Merger would significantly increase the market capitalization
of SDG or CPI alone, which may enhance the liquidity of the Simon Group
Common Stock after the Merger as compared to the historical liquidity of
the SDG Common Stock by increasing trading volumes.
(vi) The oral opinions of each of Lazard Freres and J.P. Morgan
delivered on February 18, 1998, confirmed, in each case, by means of a
written opinion of such party dated as of such date, that the consideration
to be received or retained by the holders of CPI Common Stock, including
the beneficial interests in CRC, was fair from a financial point of view to
such holders, as described under "-- Opinions of Financial Advisors to
CPI."
(vii) Presentations from, and discussions with, senior executives of
CPI, representatives of its outside legal counsel and representatives of
Lazard Freres and J.P. Morgan regarding the business, financial, accounting
and legal due diligence with respect to SDG and the terms and conditions of
the Merger Agreement, as well as the other bidders for CPI and the terms of
their proposed transactions, and certain financial aspects of the Merger,
including that it is expected to be accretive to Funds From Operations of
CPI on a per share basis and result in an increase in distributions
received by CPI stockholders.
(viii) The terms of the Merger Agreement, including the conditions to
consummation of the Merger and the absence of a financing condition, the
termination fee payable if the Merger is not approved by stockholders of
SDG, the fact that the Merger Agreement contained a fixed exchange ratio
for the stock component of the consideration to be received or retained by
the holders of CPI Common Stock, the collar provisions described in "THE
MERGER AGREEMENT AND RELATED MATTERS -- Terms of the Merger -- The Merger
Consideration," historical trading prices for SDG Common Stock and the
possibility that the cash component of the CPI Merger Dividends could rise
above $90 per share or fall below $90 per share and the other
representations, warranties, covenants and provisions of the Merger
Agreement. See "THE MERGER AGREEMENT AND RELATED MATTERS -- Terms of the
Merger" and "-- Conditions to Consummation of the Merger."
(ix) The Merger could allow opportunities to realize significant
synergies, which are expected to have a positive effect on the financial
results for Simon Group.
(x) General industry, economic and market conditions, both current and
projected, the interests of CPI's stockholders and the potential impact of
the Merger upon the interests of CPI's employees.
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(xi) The fact that the three largest stockholders of CPI, which
together own over 65% of the voting power of all the outstanding CPI
capital stock, after carefully reviewing the terms of the Merger Agreement
and the proposals received from the competing bidders, all agreed to enter
into the Stockholder Voting Agreements obligating them to vote for the
approval of the Merger Agreement as stockholders of CPI.
(xii) The Merger Agreement would preserve CPI's paired share
structure.
(xiii) Alternatives to the Merger, including proposals by other
bidders for CPI and remaining independent, and the CPI Board's conclusions
that the resulting entity in a combination with SDG would be substantially
stronger, both financially and as a real estate combination, than the
resulting entity in a combination with the other bidders or as an
independent entity.
In considering the Merger, the CPI Board considered certain factors that
could have a potentially negative effect, including, among other things, the
following:
(i) The leverage of Simon Group after the Merger will be greater than
the leverage of CPI or SDG before the Merger and could adversely affect the
ability of Simon Group to obtain additional financing and respond to
changing market conditions. Assuming the Merger occurred on March 31, 1998,
Simon Group would have had approximately $7.735 billion of pro forma
combined consolidated indebtedness as of such date, as compared to
historical consolidated indebtedness of SDG of $5.330 billion. Assuming the
Merger occurred on March 31, 1998, Simon Group would have an additional
$2.405 billion of indebtedness including the assumption of all of CPI and
CRC's indebtedness of $858.8 million.
(ii) The costs associated with integrating the businesses of CPI and
SDG could have an adverse effect on the expected benefits to CPI
stockholders from the Merger and the financial condition and performance of
Simon Group. SDG management believes that if the expected cost savings and
revenue synergies are not realized and if a dilutive effect on net income
per share of SDG Common Stock occurs, Simon Group's Funds From Operations
per share following the Merger will be lower than might be expected for
SDG's Funds From Operations per share without the Merger.
(iii) Certain terms of the Merger Agreement, including that CPI would
be obligated to pay to SDG a termination fee in certain circumstances and
that the cash component of the Merger Dividends could fall below $90 in
certain circumstances.
(iv) The variability of the market price of SDG Common Stock and the
fact that there is no market for Simon Group Common Stock.
The CPI Board determined that the positive effects of the factors
considered by it significantly outweighed the negative effects in reaching its
determination to approve the Merger and its conclusion that the Merger and the
other transactions contemplated by the Merger Agreement are fair to and in the
best interests of CPI stockholders.
The CRC Board of Directors, which consists of three directors, all of whom
are also directors of CPI, met at the same time as the CPI Board and reached the
same conclusions described above as were reached by the CPI Board for the same
reasons.
OPINION OF FINANCIAL ADVISOR TO SDG
On February 19, 1998, Merrill Lynch delivered its oral opinion, which was
subsequently confirmed in a written opinion dated as of such date (the "Merrill
Lynch Opinion"), to the SDG Board of Directors to the effect that, as of such
date, and based upon the assumptions made, matters considered and limits of
review set forth in the Merrill Lynch Opinion, the consideration to be received
by the holders of SDG Equity Stock in the Merger was fair to such stockholders
from a financial point of view. Merrill Lynch has not been engaged to, and will
not, update the Merrill Lynch Opinion prior to closing. In the opinion of the
SDG Board of Directors, there have been no material events or developments since
the date of the Merrill Lynch Opinion which might affect Merrill Lynch's
analysis of the fairness, from a financial point of view, of the consideration
to be received by the holders of SDG Equity Stock in the Merger. In the event
that the Merger Agreement is amended subsequent to the date of this Proxy
Statement/Prospectus, the SDG Board of Directors will make a
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determination at the time of such amendment as to the desirability of requesting
an update of the Merrill Lynch Opinion.
THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND CERTAIN LIMITATIONS ON THE SCOPE OF
REVIEW UNDERTAKEN BY MERRILL LYNCH, IS ATTACHED AS ANNEX B TO THIS PROXY
STATEMENT/PROSPECTUS. EACH HOLDER OF SDG EQUITY STOCK IS URGED TO READ SUCH
OPINION IN ITS ENTIRETY. THE MERRILL LYNCH OPINION WAS INTENDED FOR THE USE AND
BENEFIT OF THE SDG BOARD OF DIRECTORS, WAS DIRECTED ONLY TO THE FAIRNESS OF THE
MERGER CONSIDERATION TO THE HOLDERS OF SDG EQUITY STOCK FROM A FINANCIAL POINT
OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW
SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER AGREEMENT PROPOSAL OR
ANY TRANSACTION RELATED THERETO. THE MERGER CONSIDERATION WAS DETERMINED ON THE
BASIS OF NEGOTIATIONS BETWEEN SDG AND CPI AND WAS APPROVED BY THE SDG BOARD OF
DIRECTORS. THE SUMMARY OF THE MERRILL LYNCH OPINION SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In arriving at the Merrill Lynch Opinion, Merrill Lynch among other things:
(i) reviewed certain publicly available business and financial information
relating to SDG which Merrill Lynch deemed to be relevant; (ii) reviewed certain
business and financial information relating to CPI which Merrill Lynch deemed to
be relevant, including, but not limited to, CPI's Annual Report, dated December
31, 1996, CPI's Quarterly Report to Shareholders, dated September 30, 1997, and
CPI's preliminary 1997 financial statements; (iii) reviewed certain information,
including financial forecasts, relating to the business, earnings, funds from
operations, cash flow, assets, liabilities and prospects of SDG, CPI and CRC, as
well as the amount and timing of the cost savings and related expenses,
synergies and revenue enhancements expected to result from the Merger (the
"Expected Synergies"), furnished to Merrill Lynch by SDG, CPI and CRC,
respectively; (iv) conducted discussions with members of senior management and
representatives of SDG, CPI and CRC concerning the matters described in clauses
(i) and (ii) above, as well as their respective businesses and prospects before
and after giving effect to the Merger and the Expected Synergies; (v) reviewed
the appraisal, dated February 5, 1998 (the "Appraisal"), of the assets of CPI
and CRC as of December 31, 1997, as prepared by Landauer Associates, Inc. (the
"Appraiser"); (vi) reviewed the results of operations of SDG, CPI and CRC and
compared them with those of certain publicly traded companies that Merrill Lynch
deemed to be relevant; (vii) compared the proposed financial terms of the Merger
with the financial terms of certain other transactions that Merrill Lynch deemed
to be relevant; (viii) participated in certain discussions and negotiations
among representatives of SDG, CPI and CRC and their financial and legal
advisors; (ix) reviewed the potential pro forma impact of the Merger; (x)
reviewed the Merger Agreement; and (xi) reviewed such other financial studies
and analyses and took into account such other matters as Merrill Lynch deemed
necessary, including its assessment of general economic, market and monetary
conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch,
or publicly available. Merrill Lynch also did not assume any responsibility for
independently verifying such information or undertaking an independent
evaluation or appraisal of any of the assets or liabilities of SDG, CPI or CRC,
and Merrill Lynch has not been furnished with any such evaluation or appraisal
other than the Appraisal. In addition, Merrill Lynch did not assume any
obligation to conduct, nor has it conducted, any physical inspection of the
properties or facilities of SDG, CPI or CRC. With respect to the financial
forecast information and the Expected Synergies furnished to or discussed with
Merrill Lynch by SDG, CPI or CRC, Merrill Lynch assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of SDG's, CPI's or CRC's management as to the expected future financial
performance of SDG, CPI or CRC, as the case may be, and the Expected Synergies.
Additionally, Merrill Lynch assumed that the Appraisal has been reasonably
prepared and reflects the best available estimates and judgments of the
Appraiser as to the fair value of the assets of CPI and CRC as of the
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date thereof. Merrill Lynch has further assumed that the Merger, upon approval
by the stockholders of SDG, will qualify as a tax-free reorganization for U.S.
federal income tax purposes.
Merrill Lynch's opinion was necessarily based upon market, economic and
other conditions as they exist and can be evaluated on, and upon the information
made available to Merrill Lynch as of February 18, 1998. Merrill Lynch has
assumed that in the course of obtaining the necessary regulatory or other
consents or approvals (contractual or otherwise) for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger. Merrill Lynch has also assumed that the
combined entity will continue to qualify after the Merger as a REIT for federal
income tax purposes. In addition, Merrill Lynch has assumed that the
consummation of the Merger will not adversely affect the status of Simon Group
and CRC as a grandfathered paired REIT. If, following consummation of the
Merger, it were determined that Simon Group and CRC failed to qualify for
grandfathered paired REIT status as a result of the Merger, certain income of
CRC would be treated as nonqualifying income of Simon Group, potentially
jeopardizing Simon Group's status as a REIT. The Administration Proposals
included a proposal that, if enacted, would limit the benefits of Simon Group's
grandfathered status with respect to assets acquired after February 2, 1998; as
a result, Merrill Lynch did not ascribe any incremental value to Simon Group's
and CRC's status as a paired REIT with respect to future asset acquisitions.
Merrill Lynch expressed no opinion as to the prices at which the SDG Equity
Stock will trade following the announcement of the Merger or as to the prices at
which the Simon Group Common Stock, the Simon Group Class B Common Stock, the
Simon Group Class C Common Stock or the Simon Group Series B Preferred Stock
will trade following the consummation of the Merger.
In arriving at the Merrill Lynch Opinion, Merrill Lynch performed certain
financial and comparative analyses, the material portions of which are
summarized below.
Valuation of CPI
CPI Capitalization. Merrill Lynch reviewed SDG's offer for CPI and, on the
basis thereof, calculated an aggregate net offer value for the CPI Common Stock
(the "Net Offer Value") of $4,802.6 million, based on the per share price as of
February 18, 1998, of SDG Common Stock of $33.625, and a notional per share
value of the Simon Group Series B Preferred Stock of $19.00. Using an estimation
of CPI's debt balances as of December 31, 1997 provided by CPI's management,
Merrill Lynch also calculated an aggregate transaction value (the "Transaction
Value") of $5,781.0 million, which consisted of the Net Offer Value plus net
debt of $978.4 million. With respect to the Net Offer Value, Merrill Lynch
calculated Funds From Operations multiples for 1998 and 1999 of 17.1x and 15.5x,
respectively.
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call, an industry service provider of earnings estimates based on an
average of earnings estimates published by various investment banks ("First
Call"), and taken from Merrill Lynch Equity Research, Merrill Lynch compared
certain financial and operating information and ratios for CPI with the
corresponding financial and operating information for a group of publicly traded
companies engaged primarily in the ownership, management, operation and
acquisition of retail real estate. For the purpose of its analysis, the
following companies were used as comparable companies to CPI: Rouse, Taubman
Centers, Inc., General Growth Properties, Inc., Westfield America, Inc., The
Macerich Company, The Mills Corporation and Urban Shopping Centers, Inc.
(collectively, the "SDG Comparable Companies").
Merrill Lynch's calculations resulted in the following relevant ranges for
the SDG Comparable Companies and for CPI as of February 18, 1998: a range of
debt to total market capitalization of 37.8% to 51.8%, with a mean of 42.4% (as
compared to the percentage for CPI implied by the Merger of 16.9%); a range of
market value as a multiple of projected 1997 Funds From Operations of 11.7x to
13.3x, with a mean of 12.6x (as compared to the multiple for CPI implied by the
Merger of 19.3x); a range of market value as a multiple of projected 1998 Funds
From Operations of 11.0x to 12.2x, with a mean of 11.7x (as compared to the
multiple for CPI implied by the Merger of 17.1x); a range of market value as a
multiple of projected 1999 Funds From Operations of 10.3x to 10.9x, with a mean
of 10.6x (as compared to the multiple for CPI implied by the Merger of 15.5x);
and a range of market value to estimated net asset value of 104% to 143%, with a
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mean of 121% (as compared to the percentage for CPI implied by the Merger of
123%). Based upon (i) projected 1998 Funds From Operations multiples, the
implied per share valuation of CPI Common Stock was estimated between $115.17
and $127.73, (ii) projected 1998 Funds From Operations multiples including the
Expected Synergies, the implied per share valuation of CPI Common Stock was
estimated between $140.45 and $155.78, and (iii) the estimated net asset value
of CPI set forth in the Appraisal, the implied per share valuation of CPI Common
Stock was estimated between $150.80 and $207.35, in each case compared to the
implied value of the consideration to be received per share of CPI Common Stock
(the "Implied Merger Consideration") of approximately $179 (consisting of $90 in
cash, approximately $70 in Simon Group Common Stock (based on the reported
closing trading price per share of SDG Common Stock of $33 5/8 on February 18,
1998, the last trading date preceding public announcement of the Merger, and a
fixed ratio of 1.0818 additional shares of CPI Common Stock for each share of
CPI Common Stock held) and approximately $19 liquidation preference of Simon
Group Series B Preferred Stock).
Comparable Transaction Analysis. Merrill Lynch also compared certain
financial ratios of the Merger with those of selected other mergers and
strategic transactions involving REITs. These transactions were: Starwood
Lodging Trust's acquisition of ITT Corporation; Equity Office Properties Trust's
acquisition of Beacon Properties Corporation; Simon Property Group, Inc.'s
acquisition of DeBartolo Realty Corporation, SDG Operating Partnership's
acquisition of RPT; Meditrust REIT's acquisition of La Quinta Inns, Inc.;
Patriot American Hospitality, Inc.'s acquisition of Interstate Hotels Company;
Crescent Real Estate Equities Company's acquisition of Station Casinos, Inc.;
Equity Residential Property Trust's acquisition of Evans Withycombe Residential,
Inc.; Equity Residential Property Trust's acquisition of Wellsford Residential
Property Trust; Apartment Investment and Management Company's acquisition of
Ambassador Apartments, Inc.; Post Properties, Inc.'s acquisition of Columbus
Realty Trust; Camden Property Trust's acquisition of Paragon Group, Inc.; and
Chateau Properties, Inc.'s acquisition of ROC Communities, Inc. (collectively,
the "Transaction Comparables").
Using publicly available information and estimates of financial results as
published by First Call, Merrill Lynch calculated the total transaction value,
as of the day of the announcement of the respective transactions, as a multiple
of the projected forward year Funds From Operations for the transaction. This
analysis yielded a range of transaction Funds From Operations multiples of 10.1x
to 15.1x, with a mean of 11.8x (as compared to the multiple for CPI implied by
the Merger of 15.5x). Based on projected 1998 Funds From Operations multiples,
the implied per share valuation of the CPI Common Stock was estimated between
$105.75 and $158.10, compared to the Implied Merger Consideration of
approximately $179 per share.
Discounted Cash Flow Analyses. Merrill Lynch performed discounted cash
flow analyses (i.e., an analysis of the present value of the projected levered
cash flows for the periods using the discount rates indicated) of CPI based upon
projections provided by CPI's management for the years 1998 through 2002,
inclusive, using discount rates reflecting an equity cost of capital ranging
from 13.0% to 15.0% and terminal value multiples of calendar year 2002 Funds
From Operations ranging from 12.5x to 13.5x. Using the discounted Funds From
Operations method, the implied per share valuation of the CPI Common Stock was
estimated between $138.70 to $158.16, compared to the Implied Merger
Consideration of approximately $179 per share.
Merrill Lynch also performed a discounted synergies analysis (i.e., an
analysis of the present value of the Expected Synergies for the periods using
the discount rates indicated) for CPI based upon projections provided by CPI's
management for the years 1998 through 2002, inclusive, using discount rates
reflecting an equity cost of capital ranging from 13.0% to 15.0% and terminal
value multiples of calendar year 2002 synergies ranging from 14.0x to 15.0x.
Using the discounted synergies method, the implied value of the Expected
Synergies per share of CPI Common Stock was estimated between $38.23 to $43.48.
Based upon the foregoing analyses, the implied per share valuation of CPI Common
Stock including the Expected Synergies was estimated between $176.93 to $201.64,
compared to the Implied Merger Consideration of approximately $179 per share.
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Valuation of SDG
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call and taken from Merrill Lynch Equity Research, Merrill Lynch compared
certain financial and operating information and ratios for SDG with the
corresponding financial and operating information for the SDG Comparable
Companies.
Merrill Lynch's calculations resulted in the following relevant ranges for
the SDG Comparable Companies and for SDG as of February 18, 1998: a range of
debt to total market capitalization of 37.8% to 51.8%, with a mean of 42.4% (as
compared to SDG at 46.5%); a range of market value as a multiple of projected
1997 Funds From Operations of 11.7x to 13.3x, with a mean of 12.6x (as compared
to SDG at 13.0x); a range of market value as a multiple of projected 1998 Funds
From Operations of 11.0x to 12.2x, with a mean of 11.7x (as compared to SDG at
11.8x); a range of market value as a multiple of projected 1999 Funds From
Operations of 10.3x to 10.9x, with a mean of 10.6x (as compared to SDG at
10.6x); a range of market value as a multiple of projected 1997 Funds From
Operations less recurring capital expenditures ("AFFO") of 12.6x to 15.3x, with
a mean of 14.1x (as compared with SDG at 14.4x); and a range of market value as
a multiple of projected 1998 AFFO of 11.9x to 14.1x, with a mean of 13.0x (as
compared to SDG at 13.0x). Based upon publicly available projected 1998 Funds
From Operations multiples published by First Call, the implied per share
valuation of the SDG Equity Stock was estimated between $31.46 and $34.89, and
based upon publicly available 1999 multiples published by First Call, the
implied per share valuation of the SDG Equity Stock was estimated between $32.45
and $34.34.
Discounted Cash Flow Analyses. Merrill Lynch performed discounted cash
flow analyses of SDG based upon projections provided by SDG's management for the
years 1998 through 2002, inclusive, using discount rates reflecting an equity
cost of capital ranging from 13.0% to 15.0% and terminal value multiples of
calendar year 2002 Funds From Operations ranging from 12.5x to 13.5x. The
implied value per share of SDG Equity Stock was estimated between $34.31 to
$39.32 using the discounted dividend method and $36.21 to $41.26 using the
discounted Funds From Operations method.
Pro Forma Merger Consequences. Merrill Lynch analyzed the pro forma
effects resulting from the Merger, including the potential impact on SDG's
projected standalone Funds From Operations per share and the anticipated
accretion (i.e., the incremental increase) to SDG's per share Funds From
Operations resulting from the Merger. Merrill Lynch observed that, after giving
effect to the SDG Expected Synergies, the Merger would be dilutive in 1998 but
accretive to SDG's projected Funds From Operations per share in each of the
years 1999 through 2002, inclusive.
The summary set forth above does not purport to be a complete description
of the analysis performed by Merrill Lynch in arriving at the Merrill Lynch
Opinion. The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial or summary description. Merrill Lynch
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create a misleading view of the
process underlying the Merrill Lynch Opinion. In its analyses, Merrill Lynch
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond SDG's, CPI's
and Merrill Lynch's control. Any estimates contained in Merrill Lynch's analyses
are not necessarily indicative of actual values, which may be significantly more
or less favorable than as set forth therein. Estimated values do not purport to
be appraisals and do not necessarily reflect the prices at which businesses or
companies may be sold in the future, and such estimates are inherently subject
to uncertainty.
None of the SDG Comparable Companies are, of course, identical to CPI or
SDG. Accordingly, a complete analysis of the results of the foregoing
calculations cannot be limited to a quantitative review of such results and
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the SDG Comparable Companies and
other factors that could affect the public trading volume of the SDG Comparable
Companies, as well as that of SDG. In addition, the multiples of market value to
estimated 1997 and projected 1998 Funds From Operations and AFFO for the SDG
Comparable Companies are based on projections prepared by research analysts
using only publicly available information. Accordingly, such estimates may or
may not prove to be accurate.
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The SDG Board of Directors selected Merrill Lynch to render a fairness
opinion because Merrill Lynch is an internationally recognized investment
banking firm with substantial experience in transactions similar to the Merger
and because it is familiar with SDG and its business. Merrill Lynch is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities and
private placements.
Pursuant to a letter agreement dated as of February 18, 1998, SDG has
agreed to pay Merrill Lynch a fee equal to approximately $7 million upon
consummation of the Merger. In addition, SDG has agreed to reimburse Merrill
Lynch for its reasonable out-of-pocket expenses, subject to certain limitations,
and to indemnify Merrill Lynch and certain related persons against certain
liabilities, including certain liabilities under the federal securities laws,
arising out of its engagement.
Merrill Lynch has, in the past, provided financial advisory services to SDG
and may continue to do so and has received, and may receive, fees for the
rendering of such services. In addition, on June 22, 1998, the SDG Operating
Partnership consummated a private placement of $1.075 billion aggregate
principal amount of notes, for which Merrill Lynch served as co-lead manager. In
the ordinary course of its business, Merrill Lynch may actively trade in the
securities of SDG or CPI, for its own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities. As of February 18, 1998, affiliates of Merrill Lynch held
approximately 8.4% of the outstanding shares of SDG Common Stock.
OPINIONS OF FINANCIAL ADVISORS TO CPI
Lazard Freres and J.P. Morgan were engaged by CPI to act as its investment
bankers in connection with the transactions contemplated by the Merger Agreement
and related matters. On February 18, 1998, Lazard Freres and J.P. Morgan
delivered their oral opinions, confirmed in each case by means of a written
opinion dated as of such date (the "Lazard Freres Opinion" and the "J.P. Morgan
Opinion", respectively, and collectively, the "CPI Financial Advisors'
Opinions"), to the CPI Board stating that, as of such date, and based upon the
assumptions made, matters considered and limits of review set forth therein, the
consideration to be received or retained by the stockholders of CPI, including
beneficial interests in CRC, in the transactions contemplated by the Merger
Agreement was fair to them from a financial point of view. Lazard Freres and
J.P. Morgan have not been engaged to, and will not, update the CPI Financial
Advisors' Opinions prior to closing. In the opinion of the CPI Board, there have
been no material events or developments since the date of the CPI Financial
Advisors' Opinions which might affect Lazard Freres' or J.P. Morgan's analyses
of the fairness, from a financial point of view, of the consideration to be
received or retained by the stockholders of CPI in the transactions contemplated
by the Merger Agreement. In the event that the Merger Agreement is amended
subsequent to the date of this Proxy Statement/Prospectus, the CPI Board will
make a determination at the time of such amendment as to the desirability of
requesting an update of the CPI Financial Advisors' Opinions.
THE FULL TEXTS OF THE LAZARD FRERES OPINION AND THE J.P. MORGAN OPINION,
EACH OF WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN, ARE ATTACHED AS ANNEXES
C AND D TO THIS PROXY STATEMENT/PROSPECTUS, RESPECTIVELY, AND ARE INCORPORATED
HEREIN BY REFERENCE. THE DESCRIPTION OF THE CPI FINANCIAL ADVISORS' OPINIONS SET
FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINIONS. THE CPI FINANCIAL ADVISORS' OPINIONS ARE ADDRESSED TO THE CPI BOARD
AND ARE DIRECTED ONLY TO THE CONSIDERATION TO BE RECEIVED OR RETAINED IN THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND DO NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF CPI AS TO HOW SUCH STOCKHOLDER SHOULD VOTE
WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT. CPI
STOCKHOLDERS ARE URGED TO READ THE CPI FINANCIAL ADVISORS' OPINIONS IN THEIR
ENTIRETY IN CONNECTION WITH THEIR CONSIDERATION OF THE TRANSACTIONS CONTEMPLATED
BY THE MERGER AGREEMENT.
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In connection with performing their analyses for rendering their respective
opinions, the CPI Financial Advisors among other things (i) reviewed the
financial terms and conditions of the Merger Agreement; (ii) reviewed certain
publicly available financial information concerning CPI, CRC and SDG; (iii)
reviewed various financial forecasts and other data provided to them by CPI, CRC
and SDG relating to their respective businesses; (iv) held discussions with
members of the senior management of CPI, CRC and SDG concerning their respective
businesses and prospects of CPI and CRC together on one hand and SDG on the
other, the strategic objectives of each, and possible benefits which might be
realized following the transactions contemplated by the Merger Agreement; (v)
reviewed public information with respect to certain publicly-traded REITs and
other companies in lines of business they believed to be generally comparable to
the businesses of CPI and CRC together on one hand and SDG on the other; (vi)
reviewed the financial terms of certain recent business combinations involving
REITs or companies in lines of businesses they believed to be generally
comparable to those of CPI and CRC together on one hand and SDG on the other;
(vii) reviewed the historical market prices and trading volume of the shares of
SDG's Common Stock; (viii) analyzed the pro forma financial impact of the
transactions contemplated by the Merger Agreement on CPI and CRC together on one
hand and SDG on the other; (ix) conferred with and relied upon the counsel to
the CPI Board as to all legal matters pertaining to the Merger Agreement and the
transactions contemplated by the Merger Agreement; and (x) conducted such other
financial studies, analyses and investigations as they deemed appropriate.
The CPI Financial Advisors relied upon the accuracy and completeness of the
information provided to them and did not assume any responsibility for any
independent verification of such information or any independent valuation or
appraisal of any of the assets or liabilities of CPI, CRC or SDG. The CPI
Financial Advisors' Opinions do not constitute valuations or appraisals of the
shares of common stock, assets or liabilities of CPI, CRC or SDG. In addition,
the CPI Financial Advisors did not express any opinions as to the price or range
of prices at which the common stock of SDG, CPI or CRC may trade subsequent to
the date of the CPI Financial Advisors' Opinions. With respect to financial
forecasts, the CPI Financial Advisors assumed that they had been reasonably
prepared on bases reflecting the best available estimates and judgements of
management of CPI and CRC together on one hand and SDG on the other. They
assumed no responsibility for and expressed no view as to such forecasts or the
assumptions on which they were based. Further, the CPI Financial Advisors'
Opinions were necessarily based variously on economics, monetary, market and
other conditions as in effect on, and the information made available to them as
of, the date thereof. It should be understood that subsequent developments may
affect the CPI Financial Advisors' Opinions and that they do not have any
obligation to update, revise or reaffirm the CPI Financial Advisors' Opinions.
In rendering the CPI Financial Advisors' Opinions, the CPI Financial
Advisors assumed that the transactions contemplated by the Merger Agreement
would be consummated on the terms described in the Merger Agreement including
with respect to the tax consequences thereof, without any waiver of any material
terms or conditions by CPI or CRC and that obtaining the necessary approvals for
the transactions contemplated by the Merger Agreement would not have an adverse
effect on CPI, CRC or SDG. CPI Financial Advisors noted that the shares of CPI
Series A Preferred Stock were immediately convertible, and they have treated
them, for the purpose of their opinions, as though they had been converted into
shares of CPI Common Stock and a related beneficial interest in CRC. As
described above, CPI received proposals from other parties with respect to
merger transactions involving CPI. See "-- Background of the Merger." In this
regard, they expressed no opinions as to the fairness, from a financial point of
view, to the stockholders of CPI of the consideration proposed by any such other
parties, and no opinions were expressed as to the relative values to be received
by the stockholders of CPI under the transactions contemplated by the Merger
Agreement and under such other proposals.
In arriving at the CPI Financial Advisors' Opinions, the CPI Financial
Advisors performed certain financial and comparative analyses, the material
portions of which are summarized below.
Valuation of SDG's Offer. The CPI Financial Advisors calculated the value
of SDG's offer based on the per share closing price as of February 17, 1998 of
SDG Common Stock of $33.00. The CPI Financial Advisors noted that, based
primarily on its summary terms and conditions, the Simon Group Series B
Preferred Stock would be likely to have a fair market value of approximately
$17.67 per share. On this basis, the CPI Financial
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Advisors calculated the total value of SDG's offer to be approximately $177.67
per share of CPI Common Stock which represented 19.6x 1997 Funds From Operations
for CPI, 17.5x 1998 projected Funds From Operations and 15.9x 1999 projected
Funds From Operations.
Analysis of CPI's Net Asset Value. The CPI Financial Advisors compared the
value of SDG's offer with the net asset value ("NAV") for CPI as of December 31,
1997 of $146.84 per share as per the Appraisal. The NAV represented 15.8x 1997
Funds From Operations (as compared to the multiple implied by the Merger of
19.6x), 14.0x 1998 projected Funds From Operations (as compared to the multiple
implied by the Merger of 17.5x) and 12.7x 1999 projected Funds From Operations
(as compared to the multiple implied by the Merger of 15.9x).
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call, the CPI Financial Advisors compared certain financial and operating
information and ratios for CPI with the corresponding financial and operating
information for a group of publicly traded REITs engaged primarily in the
ownership, management, operation and acquisition of regional malls. For the
purpose of these analyses, the following companies were used as comparable
companies to CPI: SDG, Rouse, and General Growth Properties, Inc. (collectively,
the "CPI Comparable Companies").
The CPI Financial Advisors' calculations resulted in the following relevant
ranges for the CPI Comparable Companies and for CPI as of February 17, 1998: a
range of market value as a multiple of estimated 1997 Funds From Operations of
12.5x to 13.1x (as compared to the multiple for CPI implied by the Merger of
19.6x); a range of market value as a multiple of projected 1998 Funds From
Operations of 11.6x to 12.1x (as compared to the multiple for CPI implied by the
Merger of 17.5x); and a range of market value as a multiple of projected 1999
Funds From Operations of 10.4x to 11.0x (as compared to the multiple for CPI
implied by the Merger of 15.9x).
Comparable Transaction Analysis. The CPI Financial Advisors also compared
certain financial ratios of the Merger with those of the most comparable other
merger involving REITs engaged primarily in the ownership, management, operation
and acquisition of regional malls, SDG's acquisition of RPT (the "Comparable
Transaction"). Using estimates of financial results as available to the CPI
Financial Advisors, the CPI Financial Advisors calculated the total equity value
as a multiple of both the trailing and forward year Funds From Operations for
the transaction. This analysis yielded a transaction Funds From Operations
multiple that was significantly lower than the multiples for CPI implied by the
Merger.
Pro Forma Merger Consequences. The CPI Financial Advisors analyzed the pro
forma effects resulting from the Merger, including the potential impact on Funds
From Operations per share, based on projections for SDG prepared by research
analysts using only publicly available information. The CPI Financial Advisors
observed that, after giving effect to expected synergies, the Merger would be
slightly dilutive to SDG in 1998 and 1999 but accretive to CPI in each of such
years.
The summary set forth above does not purport to be a complete description
of the analyses performed by the CPI Financial Advisors in arriving at the CPI
Financial Advisors' Opinions. The preparation of a fairness opinion is a complex
process and not necessarily susceptible to partial or summary description. The
CPI Financial Advisors believe that their analyses must be considered as a whole
and that selecting portions of their analyses and of the factors considered by
them, without considering all factors and analyses, could create a misleading
view of the process underlying the CPI Financial Advisors' Opinions. In their
analyses, the CPI Financial Advisors made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond SDG's, CPI's and each of the CPI Financial
Advisor's control. Any estimates contained in the CPI Financial Advisors'
analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimated values
do not purport to be appraisals and do not necessarily reflect the prices at
which businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty.
None of the CPI Comparable Companies are identical to CPI. Accordingly, a
complete analysis of the results of the foregoing calculations cannot be limited
to a quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the
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CPI Comparable Companies and other factors that could affect the public trading
value of the CPI Comparable Companies. The projections furnished to the CPI
Financial Advisors with respect to CPI were prepared by the management of CPI.
CPI does not publicly disclose internal management projections of the type
provided to the CPI Financial Advisors in connection with their analysis of the
transactions contemplated by the Merger Agreement, and such projections were not
prepared with a view toward public disclosure. These projections were based on
numerous variables and assumptions that are inherently uncertain and may be
beyond the control of management, including, without limitation, factors related
to general economic and competitive conditions and prevailing interest rates.
Accordingly, actual results could vary significantly from those set forth in
such projections. In addition, the multiples of market value to estimated 1997
and projected 1998 Funds From Operations for SDG and the CPI Comparable
Companies are based on projections prepared by research analysts using only
publicly available information. Accordingly, such estimates may or may not prove
to be accurate.
Lazard Freres is an internationally recognized investment banking firm and
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. CPI retained
Lazard Freres to act as its investment banker in connection with the
transactions contemplated by the Merger Agreement and related matters based upon
its qualifications, expertise and reputation in investment banking in general
and mergers and acquisitions specifically. In the course of its activities,
Lazard Freres has provided and may continue to provide investment banking
services to CPI and SDG for which Lazard Freres has received or will receive
customary compensation. CPI and its affiliates have paid a total of $2,375,000
in fees to Lazard Freres for such services since January 1996, excluding
services provided in connection with the Merger. In the ordinary course of its
business, Lazard Freres may actively trade the debt and equity securities of CPI
or SDG for its own account or for the accounts of customers and, accordingly,
may hold long or short positions in such securities at any time. In addition, a
vice chairman of Lazard Freres is a director of CPI.
As part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to advise CPI with respect to the
transactions contemplated by the Merger Agreement on the basis of such
experience and its familiarity with CPI. In the course of its activities, J.P.
Morgan has provided and may continue to provide financial advisory services to
CPI for which J.P. Morgan has received or will receive customary compensation.
CPI has paid a total of $1,217,713 in fees to J.P. Morgan and $84,412 to J.P.
Morgan's legal advisors in connection with such services, excluding services
provided in connection with the Merger. In addition, in June 1998 Argo II, an
investment fund established in part by J.P. Morgan, together with SDG and
certain other investors committed to invest approximately $80 million in Groupe
BEG, S.A., a retail real estate developer, lessor and manager headquartered in
Paris, France. In the ordinary course of its business, J.P. Morgan may actively
trade the debt and equity securities of CPI or SDG for its own account or for
the accounts of customers and, accordingly, may hold long or short positions in
such securities at any time.
Pursuant to letter agreements, dated October 20, 1997 and December 22,
1997, CPI agreed to pay each of the CPI Financial Advisors (i) $1.75 million,
which has been paid, upon execution of the Merger Agreement and (ii) a fee
contingent upon consummation of the transactions contemplated by the Merger
Agreement equal to 0.17% of the aggregate value of CPI (generally, the
enterprise value of CPI implied by the transactions contemplated by the Merger
Agreement including cash and the market value of any stock retained, and all
indebtedness less cash and cash equivalents immediately prior to consummation of
the transactions contemplated by the Merger Agreement), which is expected to be
approximately $10 million based on the market value of SDG Common Stock as of
April 27, 1998. Any fees previously paid to each of the CPI Financial Advisors
pursuant to the first clause above will be deducted from any fee to which each
of the CPI Financial Advisors is entitled pursuant to the second clause. CPI has
also agreed to reimburse each of the CPI Financial Advisors for all reasonable
out-of-pocket expenses and to indemnify each of the CPI Financial Advisors and
their respective members, employees, agents, affiliates and controlling persons
against certain liabilities, including certain liabilities under the federal
securities laws, relating to or arising out of their engagement.
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THE MERGER AGREEMENT AND RELATED MATTERS
The following describes the material terms of the Merger Agreement and
related matters. The description set forth below does not purport to be complete
and is qualified in its entirety by reference to the Merger Agreement, a copy of
which is attached hereto as Annex A and is incorporated herein by reference.
Stockholders of SDG are urged to read the Merger Agreement in its entirety.
EFFECTS OF THE MERGER
The Merger Agreement provides that upon the terms and subject to the
conditions described below, at the Effective Time, a wholly owned subsidiary of
CPI shall be merged with and into SDG in accordance with the MGCL, with SDG
continuing as the surviving corporation in the Merger. As a result, SDG will
become a subsidiary of Simon Group. The directors and officers of SDG
immediately prior to the Effective Time will remain the initial directors and
officers of SDG, in each case until the earlier of their resignation or removal
or until their respective successors are duly elected and qualified, as the case
may be. The Board of Directors of Simon Group and CRC at the Effective Time will
consist of 13 directors and will include 10 directors designated by SDG and
three directors designated by CPI, who, in each case, will remain directors
until their successors have been duly elected and qualified or until their
earlier death, resignation or removal. Immediately after the Effective Time, the
officers of Simon Group and CRC shall include two current officers of CPI and
CRC and such other officers designated by SDG, who, in each case, will remain
officers until their successors have been duly elected and qualified or until
their earlier death, resignation or removal. See "MANAGEMENT OF SIMON GROUP AND
CRC FOLLOWING THE MERGER."
EFFECTIVE TIME
Following the adoption of the Merger Agreement and subject to satisfaction
or waiver of certain terms and conditions contained in the Merger Agreement, the
Merger will become effective on such date as the articles of merger or other
appropriate documents, duly prepared and executed by SDG and a substantially
wholly owned subsidiary of CPI in accordance with Section 3-110 of the MGCL, are
accepted for record by the Maryland State Department as provided in Section
3-113 of the MGCL or at such other time as may be agreed upon by the parties and
specified in the articles of merger in accordance with applicable law.
TERMS OF THE MERGER
The Merger Consideration. The Merger Agreement provides that each
outstanding share of SDG Common Stock, SDG Class B Common Stock, and SDG Class C
Common Stock (other than shares held by SDG as treasury stock, shares owned by
Simon Group, CRC or any wholly owned entity of CPI or CRC or shares as to which
appraisal rights have been perfected) shall be converted into the right to
receive one share of Simon Group Common Stock, Simon Group Class B Common Stock
and Simon Group Class C Common Stock, respectively. See "-- Certain Provisions
Related to Employee Benefits and Incentive Plans -- Treatment of SDG Stock
Plans." Each of such shares of Simon Group Equity Stock outstanding or issued in
connection with the Merger will be paired with a beneficial interest in shares
of CRC Common Stock held by the CRC Trusts.
Total consideration to be received and retained by a holder of CPI Common
Stock at the time of the execution of the Merger Agreement was equal to
approximately $179 per share, consisting of $90 in cash, subject to the collar
provisions described in "THE MERGER AGREEMENT AND RELATED MATTERS -- Terms of
the Merger -- The Merger Consideration," approximately $70 in Simon Group Common
Stock (based on the reported closing trading price of SDG Common Stock of
$33 5/8 on February 18, 1998, the last trading date preceding public
announcement of the Merger, and a fixed ratio of 1.0818 additional shares of CPI
Common Stock for each share of CPI Common Stock held) and approximately $19 in
Simon Group Series B Preferred Stock. The trading price of the Simon Group
Common Stock at the Effective Time may be higher or lower than $33 5/8, and if
so, the value of the Simon Group Common Stock to be received by CPI stockholders
will be more or less than approximately $70 depending upon the direction of the
price movement. Specifically, the Merger Agreement provides that prior to the
Effective Time CPI shall declare the CPI
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Merger Dividends on the shares of CPI Common Stock consisting of (i) the Cash
Amount; (ii) 1.0818 shares of CPI Common Stock; and (iii) 0.19 shares of CPI
Series B Preferred Stock (which from and after the Effective Time shall be
referred to as Simon Group Series B Preferred Stock). The "Cash Amount" shall be
$90.00 per share of CPI Common Stock, if the Market Price for SDG Common Stock
is greater than or equal to $28.58 and less than or equal to $38.67 and
otherwise shall be adjusted as follows: (i) if the Market Price for the SDG
Common Stock at the Effective Time exceeds $38.67, then the Cash Amount shall be
reduced by an amount equal to such excess multiplied by 2.0818 and (ii) if the
Market Price for SDG Common Stock at the Effective Time is less than $28.58,
then the Cash Amount shall be increased by an amount equal to such deficiency
multiplied by 2.0818. The "Market Price" shall be the average of the closing
prices per share for the SDG Common Stock on the NYSE for the 20 consecutive
trading days ending on the fifth trading day prior to the Effective Time. The
following table sets forth the Cash Amounts using various sample SDG Market
Prices:
SDG MARKET PRICE CASH AMOUNT
---------------- -----------
$27.00 $93.29
$28.58-$38.67 $90.00
$40.00 $87.23
If the Effective Time were August 12, 1998, the Market Price would be equal to
$32.08 and the Cash Amount would be $90.00 per share of CPI Common Stock. The
Cash Amount is set based upon the Market Price pursuant to the collar provisions
described above, which only can be determined after the SDG Meetings and on the
fifth trading day prior to the Effective Time. Interested parties may call
MacKenzie Partners, Inc. at (800) 322-2885 to obtain the current anticipated
Effective Time and a current example of the Cash Amount to be issued on a per
share basis. Prior to the Merger, each of SDG and CPI shall declare a Special
Distribution to their respective stockholders, the record date for which shall
be the close of business on the last business day prior to the Effective Time.
"Special Distribution" means the distribution to be made by each of SDG and CPI
to their respective stockholders in amounts proportional to dividends paid to
SDG's or CPI's (as the case may be) stockholders for the last full quarter
preceding the Effective Time, prorated over the number of days elapsed in the
quarter in which the Effective Time occurs from the beginning of such quarter to
the Effective Time.
The consideration to be received by each of the SDG stockholders and each
of the CPI stockholders was determined based on an arm's length negotiation of
the Merger Agreement and the desired structure for the transaction.
CERTAIN PROVISIONS RELATING TO EMPLOYEE BENEFITS AND INCENTIVE PLANS
Employee Benefit Plans. In general, except with respect to SDG stock plans
(described below), SDG shall retain its rights and obligations under the SDG
Employee Benefit Plans and Simon Group shall retain the rights and obligations
of CPI under the CPI Employee Benefit Plans in accordance with their respective
terms. SDG and Simon Group shall honor without modification all employee
severance plans (or policies) and employment and severance agreements of SDG,
CPI and CRC and any of their respective subsidiaries and consolidated
non-corporate affiliates (such party's "Entities") in existence on the date of
the Merger Agreement as such agreements shall be in effect in accordance with
the terms of the Merger Agreement at the Effective Time.
Treatment of SDG Stock Plans. As of the Effective Time, each outstanding
option to purchase a share of SDG Common Stock and related interests (an "SDG
Stock Option") under any of the stock option plans of SDG (the "SDG Option
Plans"), whether theretofore vested or unvested, shall constitute an option to
acquire a share of Simon Group Common Stock, together with the related
beneficial interest in CRC Common Stock, and shall otherwise have the same terms
and provisions as such SDG Stock Option (subject to the next sentence). The
price per share of Simon Group Common Stock at which each such option is
exercisable shall be the option exercise price per share of SDG Common Stock at
which such option is exercisable immediately prior to the Effective Time;
provided, however, that, in the case of an incentive stock option under Section
422 of the Code, the option terms shall be determined in order to comply with
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Section 424(a) of the Code. In addition, each outstanding right to earn shares
of SDG Common Stock shall constitute a right to earn shares of Simon Group
Common Stock.
Treatment of CPI Stock Plan. Each outstanding option to purchase a share
of CPI Common Stock and related interests in CRC Common Stock (a "CPI Stock
Option") under the 1993 Share Option Plan of CPI (the "CPI Option Plan") is
immediately exercisable. The price per share of CPI Common Stock and the related
beneficial interest in CRC Common Stock at which each such option is exercisable
shall be the exercise price per share at which the CPI Stock Option is
exercisable pursuant to the CPI Option Plan immediately prior to the Effective
Time (adjusted for the CPI Merger Dividends); provided, however, that, in the
case of an incentive stock option under Section 422 of the Code, the terms of
such option shall be determined in order to comply with Section 424(a) of the
Code. Pursuant to the Merger Agreement, CPI will use its reasonable best efforts
(except the expenditure of cash) to amend the CPI Option Plan and all related
option contracts, (a) effective at the consummation of the Merger, (x) to remove
all transfer restrictions on non-qualified stock options and shares issued upon
the exercise of options and (y) to eliminate the "put" feature and (b) effective
as of the date of the Merger Agreement, to provide that CPI will lend money to
exercising optionees at the applicable federal rate, with such loan (A) to be
fully recourse to the borrower and secured by all shares acquired upon exercise,
(B) with respect to exercises occurring before the consummation of the Merger,
to extend for up to 19 months, and with respect to any other exercise, to extend
for up to ten days and (C) to be mandatorily prepayable to the extent of any
extraordinary cash dividends or distributions receivable with respect to the
option shares of such optionee (including in connection with the Merger).
Restricted Stock. Prior to the Effective Time, (i) CPI shall offer to the
other party under each Employee Share Purchase Contract (the "CPI ESP Contract")
under CPI's Employee Share Purchase Plan (the "ESPP"), and shall use its
reasonable best efforts (it being understood that such efforts shall not require
the expenditure of cash) to obtain the agreement of such party, to amend such
CPI ESP Contract (x) to release the transfer restrictions on the securities
issued pursuant thereto and remove any associated legends from the certificates
evidencing such securities, (y) to eliminate the right of such party to cause
CPI to repurchase such securities and (z) to provide that upon any transfer of
such securities, the transferor shall either pay to CPI the applicable portion
of the "Permanent Restriction" thereunder or obtain an undertaking of the
transferee thereof to pay such amount or obtain a comparable undertaking upon
any subsequent transfer by such transferee and (ii) CPI may pay to such party
(through the forgiveness of indebtedness or otherwise) an amount equal to the
principal of the indebtedness initially incurred, and any accrued interest
subsequently added, to purchase the securities purchased thereunder, but only if
the per-unit purchase price thereof exceeded $150 (before deduction for any
Permanent Restriction).
For a description of Simon Group's benefit plans following consummation of
the Merger, see "MANAGEMENT OF SIMON GROUP AND CRC FOLLOWING THE MERGER -- Simon
Group Benefit Plans."
EXCHANGE OF CERTIFICATES
As soon as reasonably practicable after the Effective Time, Simon Group
shall cause an exchange agent (who will be designated before the closing of the
Merger by SDG and will be reasonably acceptable to CPI) (the "Exchange Agent")
to mail to each holder of record of certificates representing shares of SDG
Equity Stock ("Certificates") (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as Simon Group, may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for the shares issuable in connection with the
Merger and any cash payable pursuant to the Merger Agreement. Upon surrender of
a Certificate for cancellation to the Exchange Agent, together with such letter
of transmittal duly executed and completed, the holder of such Certificate shall
be entitled to receive in exchange therefor the aggregate consideration which
such holder has the right to receive pursuant to the Merger Agreement (the
"Applicable Merger Consideration"), and the Certificates so surrendered shall
forthwith be canceled. In no event shall the holder of any Certificate be
entitled to receive interest on any funds to be received in the Merger. In the
event of a transfer of ownership of shares of SDG Equity Stock, which is not
registered in the transfer records, a
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certificate representing that number of whole paired shares (as adjusted by any
cash amount payable) may be issued to a transferee if the Certificate is
presented to the Exchange Agent accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered, each Certificate shall be
deemed after the Effective Time, except as limited by the following paragraph,
to represent ownership of the shares into which the shares would have been
converted as contemplated by the Merger Agreement. Notwithstanding the
foregoing, Certificates surrendered for exchange by any person deemed to be an
"affiliate" of SDG for purposes of Rule 145 of the Securities Act shall not be
exchanged until Simon Group has received an executed agreement from such persons
("Affiliate's Agreement").
No dividends or other distributions declared or made after the Effective
Time with respect to Simon Group Equity Stock with a record date on or after the
Effective Time, and no distributions to be made to the beneficial owners of
interests in CRC Common Stock arising out of a dividend or distribution declared
or made by CRC after the Effective Time with a record date on or after the
Effective Time, shall be paid to the holder of any unsurrendered Certificate
with respect to the shares represented thereby and no cash payment shall be paid
to any such holder until the holder shall surrender such Certificate. Until paid
to the holders of such unsurrendered Certificates, all such dividends and other
distributions, and all cash payments to be paid, shall be delivered to the
Exchange Agent and held by it as part of the Exchange Fund. The "Exchange Fund"
includes such certificates and funds, together with earnings thereon, to be held
by the Exchange Agent. Subject to applicable laws, following surrender of any
such Certificate, the record holder of the Certificates shall be paid, without
interest, (i) at the time of such surrender, the amount of dividends or other
distributions, if any, with a record date on or after the Effective Time which
theretofore became payable, but which were not paid by reason of the immediately
preceding sentence, with respect to such whole number of shares of Simon Group
Equity Stock and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date on or after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole number of shares of Simon Group Equity Stock.
All cash and Simon Group Equity Stock which are paired to beneficial
interests in the CRC Trusts owning the outstanding shares of CRC Common Stock
upon the surrender for exchange of Certificates shall be deemed to have been
issued at the Effective Time in full satisfaction of all rights pertaining to
the shares of capital stock represented thereby, subject, however, to Simon
Group's obligation to pay any dividends which may have been declared in
accordance with the terms of the Merger Agreement and which remained unpaid at
the Effective Time. From and after the Effective Time, the stock transfer books
of SDG shall be closed and there shall be no further transfers on the stock
transfer books of the shares of capital stock of SDG which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to Simon Group for any reason, they shall be canceled
and exchanged as provided above. Any portion of the Exchange Fund and the net
proceeds held in trust by the Exchange Agent for the holders of fractional Simon
Group Equity Stock (any such fractional shares, the "Fractional Shares") (the
"Stock Trust") which remains undistributed for six months after the Effective
Time shall be delivered to Simon Group, upon demand, and any stockholders who
have not theretofore complied with the terms described above shall thereafter
look only to Simon Group for payment of their claims.
FRACTIONAL SHARES
No certificate or scrip representing the Fractional Shares will be issued
in the Merger upon the surrender for exchange of Certificates, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a stockholder of Simon Group.
As promptly as practicable following the Effective Time, the Exchange Agent
shall determine the aggregate number of whole shares represented by Fractional
Shares to which holders of Fractional Shares would be entitled but for the
provisions of this paragraph (such number of shares being herein called the
"Excess Shares"). As soon after the Effective Time as practicable, the Exchange
Agent, as agent for the holders of Fractional Shares, shall sell the Excess
Shares at then prevailing prices on the NYSE, in the manner provided below. The
sale of the Excess Shares by the Exchange Agent shall be executed on the NYSE
and shall be executed in round lots to the extent practicable. Until the net
proceeds of such sales have
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been distributed to the holders of Fractional Shares, the Exchange Agent will
hold such proceeds in the Stock Trust. Simon Group shall pay all commissions,
transfer taxes and other out-of-pocket transaction costs, including the expenses
and compensation of the Exchange Agent, incurred in connection with such sale of
the Excess Shares. The Exchange Agent shall determine the portion of the Stock
Trust to which each holder of Fractional Shares shall be entitled, if any, by
multiplying the amount of the aggregate net proceeds comprising the Stock Trust
by a fraction the numerator of which is the amount of the fractional share
interest to which such holder of Fractional Shares is entitled and the
denominator of which is the aggregate amount of fractional share interests to
which all holders of Fractional Shares of the same class or series are entitled.
As soon as practicable after the determination of the amount of cash, if any, to
be paid to holders of Fractional Shares, the Exchange Agent shall make available
such amounts to such holders of Fractional Shares.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
the parties thereto, including representations and warranties by each of SDG,
CPI and CRC as to its organization and qualification to conduct business;
authorized and outstanding capital stock; authority relative to the Merger
Agreement; the non-contravention of its governing documents, certain agreements
and certain laws; the delivery of financial statements and other reports; the
absence of certain changes or events; legal proceedings; information supplied;
compliance with laws and orders; compliance with certain agreements; certain tax
matters; certain employee benefit plans and ERISA matters; labor matters;
certain environmental matters; intellectual property rights; real property; the
required stockholder votes; and the receipt of a financial advisor opinion;
except that CRC made no representations as to labor matters, real property or a
financial advisor opinion. CPI and CRC also each represents and warrants to SDG
that it does not own any shares of SDG Equity Stock.
COVENANTS
Conduct of Business by CPI and CRC Pending the Closing. Each of CPI and
CRC and its Entities shall use all commercially reasonable efforts to preserve
intact in all material respects its present business organizations and
reputation, to keep available the services of its key officers and employees, to
maintain its assets and properties in good working order and condition, ordinary
wear and tear excepted, to maintain insurance on its tangible assets and
businesses in such amounts and against such risks and losses as are currently in
effect, to preserve its relationships with tenants and other occupiers of
properties, customers, suppliers, lenders, partners and others having
significant business dealings with them and to comply in all material respects
with all laws and orders of all governmental or regulatory authorities
applicable to them, and neither CPI nor CRC shall, except as otherwise expressly
provided for in the Merger Agreement, as contemplated by the operating, capital
expenditure and leasing budgets approved by the CPI Board of Trustees prior to
December 31, 1997 and the plans and projections of CPI and CRC included in the
Merger Agreement and any expenditure required in an emergency situation to
preserve the business or assets or personnel of CPI or CRC or their Entities
from undue harm (the "CPI/CRC Business Plan") or with the prior written consent
of SDG:
(a) incorporate or organize any new Entity of such party, unless such
Entity shall be wholly owned, directly or indirectly, by CPI or CRC, and
SDG shall receive prompt notice of such incorporation or organization,
including the information that would have been disclosed in the Merger
Agreement had such Entity been in existence on the date thereof;
(b) amend or propose to amend its organizational or governance
documents or permit the amendment of the organizational or governance
documents of the Entities of CPI or CRC, except, in the case of Entities of
CPI or CRC, for the amendment of the organizational or governance documents
of such Entities as are wholly owned, directly or indirectly, by CPI or
CRC, so long as such action shall be promptly disclosed to SDG;
(c)(w) declare, set aside or pay any dividends on or make other
distributions in respect of any of the beneficial interests or capital
stock of such party, except that CPI and CRC each may declare and pay
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(1) quarterly cash dividends on CPI Common Stock and CRC Common Stock in an
amount not to exceed $1.95 per share of CPI Common Stock and related
beneficial interest in shares of CRC Common Stock, with usual record and
payment dates for such dividends in accordance with past dividend practice,
(2) cash dividends on CPI Common Stock and CRC Common Stock in amounts
proportional to the dividends paid on CPI Common Stock and CRC Common Stock
for the last full quarter preceding the Effective Time prorated over the
number of days elapsed in the quarter in which the Effective Time occurs
from the beginning of such quarter to the Effective Time and (3) cash
dividends on CPI Preferred Stock in the amounts, and with the record and
payment dates, required in accordance with the terms thereof, (x) split,
combine, reclassify or take similar action with respect to any of its
beneficial interests or capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its beneficial interest or capital stock, or
permit any of its Entities (other than Entities wholly owned, directly or
indirectly, by CPI or CRC) to split, combine, reclassify or take similar
action with respect to such Entities' capital stock or equity interests or
issue or authorize or propose the issuance of any other securities or
equity interests in respect of, in lieu of, or in substitution for such
capital stock or equity interests, (y) adopt a plan of complete or partial
liquidation or resolutions providing for or authorizing such liquidation or
a dissolution, merger, consolidation, restructuring, recapitalization or
other reorganization or permit any of such party's Entities (other than
Entities wholly owned, directly or indirectly, by CPI or CRC) to take any
such action, or (z) directly or indirectly redeem, repurchase or otherwise
acquire, or permit any Entity of CPI or CRC to redeem, repurchase or
otherwise acquire, directly or indirectly, any shares of capital stock of,
or beneficial or other equity interests in, CPI or CRC or any of their
Entities, or any option with respect thereto (other than in transactions
solely involving CPI or CRC and their Entities that are wholly owned,
directly or indirectly, by CPI or CRC) and other than pursuant to CPI
permissible redemption arrangements;
(d) issue, deliver, sell or otherwise transfer, or authorize or
propose the issuance, delivery, sale or other transfer of, or permit any of
its Entities to issue, deliver, sell, or otherwise transfer or authorize or
propose the issuance, delivery or sale of, any shares of capital stock of,
or beneficial or other equity interests in, it or any of its Entities or
any option with respect thereto (other than (x) issuances of CPI Common
Stock or beneficial interests in CRC Common Stock in connection with
issuance arrangements of CPI permitted by the Merger Agreement; provided
that management of CPI shall use its best efforts to suspend sales of CPI
Common Stock under the CPI 1997 Plan for Shareholder Contractual Purchases
from the date hereof until the Effective Time or (y) the issuance, sale or
transfer by an Entity that is wholly owned, directly or indirectly, by CPI
or CRC of such Entity's capital stock or other equity interests, or options
with respect thereto, to CPI or CRC or other Entities wholly owned,
directly or indirectly, by CPI or CRC), or modify or amend any right of any
holder of outstanding options with respect thereto (other than the
modification or amendment of the rights of CPI or CRC or an Entity wholly
owned, directly or indirectly, by CPI or CRC under an option issued by CPI
or CRC or an Entity wholly owned, directly or indirectly, by CPI or CRC);
(e) except, with respect to loans or capital contributions to any of
CPI's or CRC's Entities, to the extent required under the express terms of
any applicable organizational or governance documents, provide funds to, or
make any investment (in the form of a loan, capital contribution or
otherwise) in (or permit any of CPI's or CRC's Entities to take any such
action with respect to), any Entity of CPI or CRC or other person (except
for such Entities as shall be wholly owned, directly or indirectly, by CPI
or CRC), other than minority investments by CPI or CRC permitted by the
Merger Agreement and certain other investments;
(f) in the case of CRC, amend, modify or terminate the CRC Trust
Agreements or propose such amendment, modification or termination;
(g)(x) acquire (by merging or consolidating with, or by purchasing a
substantial equity interest in or a substantial portion of the assets of,
or by any other manner) or permitting any of its Entities to acquire any
business or any corporation, partnership, association or other business
organization or division thereof or any significant assets, (y) mortgage or
otherwise encumber or subject to any lien or sell, lease or otherwise
dispose of, or permit any of its Entities to do any of the foregoing with
respect to, any significant
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portion of its interest in one or more of certain properties or interests
identified in the Merger Agreement or assign or encumber the right to
receive income, dividends or distributions with respect thereto or (z) make
or agree to make any new capital expenditures;
(h)(x) incur (which shall not be deemed to include entering into
credit agreements, lines of credit or similar arrangements until borrowings
are made or committed to be borrowed under such arrangements) any
indebtedness for borrowed money or guarantee any such indebtedness, or
permit any of its Entities to take any such action, other than to meet the
current cash needs of its and its Entities' business in an aggregate amount
not to exceed that which is contemplated by the CPI/CRC Business Plan, to
permit it to perform its obligations hereunder or to effect a redemption of
indebtedness permitted by clause (y), or (y) voluntarily purchase, cancel,
prepay or otherwise provide for a complete or partial discharge in advance
of a scheduled repayment date with respect to, or waive any right under, or
otherwise modify the provisions of, any indebtedness, or guarantee of
indebtedness, for borrowed money, or permit any of its Entities to take any
of such actions;
(i) enter into, adopt, amend in any material respect (except as may be
required by applicable law) or terminate any CPI Employee Benefit Plan or
grant any options, awards or other benefits or increase compensation,
except for increases in benefits and compensation to employees other than
executive officers having a value in the aggregate of not greater than
$250,000 and except for changes therein contemplated by the Merger
Agreement;
(j) enter into any contract, or amend or modify any existing contract,
or engage in any new transaction outside the ordinary course of business
consistent with past practice or not on an arm's-length basis, or permit
any of its Entities to take such actions, with any affiliate of CPI or CRC
other than transactions among CPI or CRC and Entities that are wholly
owned, directly or indirectly, by CPI or CRC;
(k) make any change in the lines of business in which it and its
Entities participate or are engaged; or
(l) enter into any contract, commitment or arrangement to do or engage
in any action the consummation of which would be prohibited by the
foregoing.
Conduct of Business by SDG Pending the Closing. Except as set forth in the
Merger Agreement, during the period from the date of the Merger Agreement to the
Effective Time, SDG shall, and shall cause each of the SDG Entities to, use all
commercially reasonable efforts to preserve intact in all material respects its
present business organizations and reputation, to keep available the services of
its key officers and employees, to maintain its assets and properties in good
working order and condition, ordinary wear and tear excepted, to maintain
insurance on its tangible assets and businesses in such amounts and against such
risks and losses as are currently in effect, to preserve its relationships with
tenants and other occupiers of properties, customers, suppliers, lenders,
partners and others having significant business dealings with them and to comply
in all material respects with all laws and orders of all governmental or
regulatory authorities applicable to them, and SDG shall not, except as
otherwise expressly provided for in the Merger Agreement or with the prior
written consent of CPI: (a) declare, set aside or pay any dividends on or make
other distributions, except that SDG may declare and pay (1) quarterly cash
dividends on SDG Common Stock in an amount not to exceed $0.505 per share of SDG
Common Stock, with usual record and payment dates for such dividends in
accordance with past dividend practice, (2) cash dividends on SDG Common Stock
in amounts proportional to the dividends paid on SDG Common Stock in the last
full quarter preceding the Effective Time prorated over the number of days
elapsed in the quarter in which the Effective Time occurs from the beginning of
such quarter to the Effective Time and (3) cash dividends on SDG Preferred Stock
in the amounts, and with the record and payment dates, required in accordance
with the terms thereof; (b) enter into any contract, or amend or modify any
existing contract, or engage in any new transaction outside the ordinary course
of business consistent with past practice or not on an arm's length basis, or
permit any SDG Entity to take such actions, with any affiliate of such party
other than transactions among SDG and Entities of SDG that are wholly owned,
directly or indirectly, by SDG or any SDG Entity; (c) make any change in the
lines of business in which it and its
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Entities participate or are engaged; or (d) enter into any contract, commitment
or arrangement to do or engage in any action the consummation of which would be
prohibited by the foregoing.
Certain Mutual Covenants. Until the Effective Time, each party to the
Merger Agreement covenants and agrees as follows: (i) no party shall take any
action or omit to take any action reasonably within its power to take that would
cause SDG to be disqualified as a REIT, would cause CPI to be disqualified as a
REIT or would result in a loss of the status of CPI and CRC prior to the Merger
or Simon Group and CRC from and after the Merger as grandfathered from the
application of Section 269B(a)(3) of the Code pursuant to Section 136(c)(3) of
the Deficit Reduction Act of 1984; (ii) each party shall confer on a regular and
frequent basis with the others with respect to its business and operations and
other matters relevant to the Merger, and shall promptly advise the others,
orally and in writing, of any change or event, including, without limitation,
any complaint, investigation or hearing by any governmental or regulatory
authority (or communication indicating the same may be contemplated) or the
institution or threat of litigation, having, or which, insofar as can be
reasonably foreseen, could have, a material adverse effect on the SDG Entities
taken as a whole or on the CPI/CRC Entities taken as a whole, as the case may
be, or on the ability of any party to consummate the transactions contemplated
by the Merger Agreement; provided that no party shall be required to make any
disclosure to the extent such disclosure would constitute a violation of any
applicable law; (iii) each party will notify the others of, and will use all
commercially reasonable efforts to cure before the closing of the Merger, any
event, transaction or circumstance, as soon as practical after it becomes known
to such party, that causes or will cause any covenant or agreement of such party
under the Merger Agreement to be breached or that renders or will render untrue
any representation or warranty of such party contained in the Merger Agreement;
(iv) each party also will notify the others in writing of, and will use all
commercially reasonable efforts to cure, before the closing, any violation or
breach, as soon as practical after it becomes known to such party, of any
representation, warranty, covenant or agreement made by such party (no notice
given pursuant to clauses (iii) or (iv) of this paragraph shall have any effect
on the representations, warranties, covenants or agreements contained in the
Merger Agreement for purposes of determining satisfaction of any condition
contained therein); and (v) subject to the terms and conditions of the Merger
Agreement, each party will take or cause to be taken all commercially reasonable
steps necessary or desirable and proceed diligently and in good faith to satisfy
each condition to the other's obligations contained in the Merger Agreement and
to consummate making effective the transactions contemplated by the Merger
Agreement.
No Solicitation. Prior to the Effective Time, each of CPI and CRC agree
(a) that it shall, and shall direct and use its best efforts to cause its
Entities, controlled affiliates and representatives to, immediately cease any
discussion or negotiations with any parties that may be ongoing with respect to
the purchase, acquisition or issuance of stock of CPI representing at least a
majority of the voting power of all the outstanding stocks of beneficial
interest in CPI (for purposes hereof, any such proposal or offer with respect to
such merger, consolidation, other business combination, acquisition or similar
transaction is hereinafter referred to as an "Alternative Proposal for CPI or
CRC"); (b) that it shall not, and it shall use its best efforts to cause its
Entities, controlled affiliates and representatives not to, initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its stockholders) with respect to a merger, consolidation or other business
combination transaction involving it or any acquisition or similar transaction
(including, without limitation, a tender or exchange offer) involving (i) the
purchase of all or substantially all of the assets of the CPI/CRC Entities taken
as a whole or (ii) an Alternative Proposal, or engage in any negotiations with
or provide any confidential information or data to, any person or group relating
to an Alternative Proposal for CPI or CRC (excluding the transactions
contemplated by the Merger Agreement), or otherwise knowingly facilitate any
effort or attempt to make or implement an Alternative Proposal for CPI or CRC;
and (c) that it will notify SDG promptly if any such inquiries, proposals or
offers are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, it or
any of such persons.
CERTAIN ADDITIONAL AGREEMENTS
The Merger Agreement provides that each party to the Merger Agreement will
(i) provide the other parties access to personnel, properties and information
regarding its business and hold in confidence
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information relating to the other parties (subject to the terms of a
confidentiality agreement among the parties); (ii) cooperate with one another in
preparing, responding to the Commission in respect of, and causing to be
declared effective and mailed to SDG's stockholders, this Proxy
Statement/Prospectus and the Registration Statement in which it is included;
(iii) cooperate to coordinate the timing of its stockholder meetings regarding
the Merger; (iv) use its best efforts to cause the Simon Group Common Stock and
the related beneficial interests in CRC Common Stock to be issued pursuant to
the Merger Agreement or retained by CPI stockholders, and the Simon Group Common
Stock and the paired interests in CRC Common Stock issuable under the Option
Plans or upon conversion of the Simon Group Series A Preferred Stock after the
Merger to be approved for listing on the NYSE; (v) not take or fail to take any
action which would cause any party to the Merger Agreement or the stockholders
of any party to recognize gain for federal income tax purposes as a result of
the consummation of the Merger (subject to limited exceptions); (vi) proceed
diligently and in good faith to obtain all consents and approvals required to
consummate the Merger and to provide such information as may reasonably be
requested in connection with the consents and approvals; (vii) pay its own costs
and expenses, except that expenses incurred in connection with the printing and
mailing of this Proxy Statement/Prospectus or the Registration Statement
(including filing fees) shall be shared equally by SDG and CPI; (viii) pay its
own financial advisory and any other brokers or finders fees; (ix) take such
action as is reasonably necessary so that the transactions contemplated by the
Merger Agreement may be consummated if any antitakeover statute becomes
applicable; (x) cooperate in the preparation and filing of documents related to
conveyance taxes; (xi) pay any real estate or stock transfer taxes payable in
connection with the transactions contemplated by the Merger Agreement on behalf
of the stockholders of SDG, CPI and CRC and cooperate to prepare documentation
for such taxes; (xii) from the Effective Time until December 31, 1998, Simon
Group shall not assign, sell or otherwise transfer to an unaffiliated third
party any asset owned by SDG prior to the Effective Time if Simon Group would
recognize a gain, without the approval of two-thirds of the Simon Group Board of
Directors; and (xiii) negotiate in good faith with the holders of CPI Common
Stock to modify their registration rights to appropriately reflect the nature of
the transactions contemplated in the Merger Agreement. Pursuant to the terms of
the Merger Agreement, SDG shall use its best efforts to deliver Affiliate's
Agreements.
Pursuant to the Merger Agreement, CPI entered into an agreement to sell the
General Motors Building located at 767 Fifth Avenue, New York, New York. The
sale of the General Motors Building was consummated on July 31, 1998.
SDG and CPI also have agreed in the Merger Agreement to use their best
efforts to obtain all necessary consents of third parties (i) to permit the
contribution at or, at SDG's request, promptly following the Effective Time of
substantially all the assets of CPI and its subsidiaries to the SDG Operating
Partnership and/or to limited liability companies and/or limited partnerships,
all the beneficial interests of which will be held by the SDG Operating
Partnership, or (ii) at SDG's request to effectuate the transfer, effective as
of the Effective Time or promptly following the Effective Time, of all or
substantially all the economic benefits of such assets to the SDG Operating
Partnership and/or such limited liability companies and/or such limited
partnerships.
BEST EFFORTS TO OBTAIN APPROVALS OF STOCKHOLDERS
The Merger Agreement provides that, subject to the exercise of fiduciary
obligations under applicable law as advised by outside counsel, (a) SDG shall,
through its Board of Directors (i) duly call, give notice of, convene and hold a
meeting of its stockholders for the purpose of voting on the approval and
adoption of the Merger Agreement, (ii) include in this Proxy
Statement/Prospectus the recommendation of the Board of Directors of SDG that
the stockholders of SDG adopt and approve the Merger Agreement and (iii) use its
best efforts to obtain such adoption and approval; and (b) each of CPI and CRC
shall, through its Board of Directors, (i) duly call, give notice of, convene
and hold a meeting of its stockholders for the purpose of voting on the adoption
of the Merger Agreement and the issuance of Simon Group Common Stock and CRC
Common Stock pursuant to the Merger Agreement and under the CPI Option Plan in
accordance with the Merger Agreement, (ii) include in a proxy statement to its
stockholders the recommendation of its Board of Directors that its stockholders
adopt the Merger Agreement and approve such issuances, as applicable, and
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(iii) use its best efforts to obtain such adoption and approval. Stockholders of
CPI representing in excess of a majority of the total voting power of all the
outstanding CPI Common Stock and CPI Preferred Stock and two thirds of the total
voting power of all the outstanding CPI Preferred Stock have entered into
Stockholder Voting Agreements obligating them to vote in favor of the Merger and
the other transactions contemplated by the Merger Agreement. A vote of 80% of
the voting power of the outstanding voting stock is required to adopt the Simon
Group Charter and is a condition to the Merger. See "THE MERGER AGREEMENT AND
RELATED MATTERS -- Certain Transactions and Agreements Relating to the Merger."
INDEMNIFICATION AND INSURANCE
From and after the Effective Time and until the sixth anniversary of the
Effective Time and for so long thereafter as any claim for indemnification
asserted on or prior to such date has not been fully adjudicated, Simon Group
(an "Indemnifying Party") shall indemnify, defend and hold harmless each person
who is now, or has been at any time prior to the date of the Merger Agreement or
who becomes prior to the Effective Time, a trustee, director or officer of SDG,
CPI or CRC or any of their respective Entities (the "Indemnified Parties")
against (i) all losses, claims, damages, costs and expenses (including
reasonable attorneys' fees), liabilities, judgments and settlement amounts that
are paid or incurred in connection with any claim, action, suit, proceeding or
investigation (whether civil, criminal, administrative or investigative and
whether asserted or claimed prior to, at or after the Effective Time) that is
based on, or arises out of, the fact that such Indemnified Party is or was a
trustee, director or officer of SDG, CPI or CRC or any of their respective
Entities and relates to or arises out of any action or omission occurring at or
prior to the Effective Time ("Indemnified Liabilities"), and (ii) all
Indemnified Liabilities based on, or arising out of, or pertaining to the Merger
Agreement or the transactions contemplated thereby, in each case to the full
extent a corporation is permitted under applicable law to indemnify its own
trustees, directors or officers, as the case may be; provided that no
Indemnifying Party shall be liable for any settlement of any claim effected
without its written consent, which consent shall not be unreasonably withheld;
and provided further that no Indemnifying Party shall be liable to an
Indemnified Party for any Indemnified Liabilities which occur as a result of the
gross negligence or willful misconduct of such Indemnified Party.
Simon Group shall, until the sixth anniversary of the Effective Time and
for so long thereafter as any claim for insurance coverage asserted on or prior
to such date has not been fully adjudicated, cause to be maintained in effect,
to the extent commercially available, the policies of directors' and officers'
liability insurance maintained by SDG, CPI and CRC, respectively (or policies of
at least the same coverage and amounts containing terms that are no less
advantageous to the insured parties), with respect to claims arising from facts
or events that occurred on or prior to the Effective Time; provided that Simon
Group shall not be obligated to expend in order to maintain or procure insurance
coverage any amount per annum in excess of 150 percent of the aggregate of the
last annual premiums paid by SDG, CPI and CRC for such policies prior to the
date of the Merger Agreement, but if the cost of maintaining such insurance (or
providing such new policies) would but for this proviso exceed such aggregate
amount, then Simon Group shall purchase as much coverage as possible for such
amount.
CONDITIONS TO CONSUMMATION OF THE MERGER
In addition to the approval and adoption of the Voting Preferred Amendment,
the consummation of the Merger pursuant to the Merger Agreement is subject to
certain conditions, including: (i) the approval and adoption of the Merger
Agreement and certain related matters by the requisite vote of the SDG
stockholders; (ii) the approval of the issuance of shares and related beneficial
interests by the requisite vote of the CPI and CRC stockholders (which approval
will be given pursuant to the Stockholder Voting Agreements in which such
stockholders agreed to vote in favor of the Merger and related transactions,
except that the adoption of the Simon Group Charter requires the vote of 80% of
the voting power of the outstanding voting stock and is a condition to the
Merger); (iii) the Registration Statement having become effective in accordance
with the Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and remain in effect and no
proceeding seeking such an order shall be pending or threatened; (iv) the
receipt of all state securities or "blue sky" permits and other authorizations
necessary to issue securities
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pursuant to the Merger Agreement, under the Option Plans after the Merger and
upon conversion of the Simon Group Series A Preferred Stock and Simon Group
Series B Preferred Stock; (v) the Simon Group Common Stock (and related
beneficial interests in CRC) issued pursuant to the Merger Agreement, the CPI
Common Stock previously outstanding and issuable under the Option Plans or upon
conversion of the Simon Group Series A Preferred Stock and Simon Group Series B
Preferred Stock after the Merger having been authorized for listing on the NYSE;
(vi) no court of competent jurisdiction or other competent governmental or
regulatory authority having enacted, issued, promulgated, enforced or entered
any law or order (whether temporary, preliminary or permanent) that is then in
effect and has the effect of making illegal or otherwise restricting, preventing
or prohibiting consummation of the Merger or the other transactions contemplated
by the Merger Agreement; and (vii) each party shall have received a satisfactory
opinion of its special counsel, including the opinion that the Merger will
qualify as a tax-free reorganization for U.S. federal income tax purposes.
The obligation of SDG to consummate the Merger is further conditioned upon
the following: (i) the continued accuracy in all material respects of the
representations and warranties made by CPI and CRC in the Merger Agreement; (ii)
the performance in all material respects of all agreements and covenants to be
performed by CPI and CRC under the Merger Agreement; (iii) no change, event or
occurrence which, individually or in the aggregate, has had or could reasonably
be expected to have a material adverse effect on the CPI/CRC Entities taken as a
whole; (iv) the execution of the Stockholder Voting Agreements as required by
the Merger Agreement (which were executed as of February 18, 1998); (v) the
receipt of customary accountants "cold comfort letters"; and (vi) the receipt of
consents and waivers which if not obtained could reasonably be expected to have
a material adverse effect on CPI, CRC or their Entities or on the ability of the
parties to the Merger Agreement to consummate the transactions contemplated
therein. The obligations of CPI and CRC to consummate the Merger are further
conditioned upon the following: (i) the continued accuracy in all material
respects of the representations and warranties made by SDG in the Merger
Agreement; (ii) the performance in all material respects of all agreements and
covenants to be performed by SDG under the Merger Agreement; (iii) no change,
event or occurrence which, individually or in the aggregate, has had or could
reasonably be expected to have a material adverse effect on the SDG Entities
taken as a whole; (iv) the receipt of customary accountants "cold comfort
letters"; and (v) the receipt of consents and waivers which if not obtained
could reasonably be expected to have a material adverse effect on SDG or its
Entities or on the ability of the parties to the Merger Agreement to consummate
the transactions contemplated therein.
All of the foregoing conditions to the consummation of the Merger are
subject to the waiver of the parties to the Merger Agreement. Neither SDG nor
CPI intends to waive any material condition to consummation of the Merger,
including the condition requiring the delivery of an opinion of their respective
special tax counsel. In the event that a material condition is waived by either
SDG or CPI, SDG and CPI intend to amend and recirculate the Proxy
Statement/Prospectus.
TERMINATION; TERMINATION FEES AND AMENDMENT
Termination. The Merger Agreement may be terminated, and transactions
contemplated hereby may be abandoned, at any time prior to the Effective Time,
whether prior to or after the approvals required by the SDG, CPI and CRC
stockholders: (a) by mutual written agreement of the parties duly authorized by
action taken by or on behalf of their respective boards of directors; or (b) by
either SDG or CPI upon notification to the nonterminating party by the
terminating party (i) at any time after November 30, 1998, if the Merger shall
not have been consummated on or prior to such date and such failure to
consummate the Merger is not caused by a breach of the Merger Agreement by the
terminating party or any of its affiliates; (ii) if the requisite approval of
the stockholders of SDG, CPI or CRC shall not be obtained by reason of the
failure to obtain the requisite vote upon a vote held at a meeting of such
stockholders, or any adjournment thereof, called therefor; (iii) if there has
been a material breach of any representation, warranty, covenant or agreement on
the part of the nonterminating party set forth in the Merger Agreement, which
breach is not curable or, if curable, has not been cured within 30 days
following receipt by the nonterminating party of notice of such breach from the
terminating party; or (iv) if any court of competent jurisdiction or other
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competent governmental or regulatory authority shall have issued an order making
illegal or otherwise restricting, preventing or prohibiting either the Merger
and such order shall have become final and nonappealable. Any reference to any
event, change or effect being "material" or "materially adverse" or having a
"material adverse effect" on or with respect to an entity means such event,
change or effect is material or materially adverse, as the case may be, to the
business, properties, assets, liabilities, condition (financial or otherwise) or
results of operations of such entity.
Termination Fees. In the event that the Merger Agreement is terminated by
CPI due to a willful breach by SDG pursuant to clause (b)(iii) of the preceding
paragraph, or as a result of the requisite SDG stockholder approval not being
obtained at any time prior to November 30, 1998 pursuant to clause (b)(ii) of
the preceding paragraph, SDG will be required to pay CPI a termination fee of
$50 million, payable in annual installments over a two year period (in such a
manner as to not violate certain REIT Requirements). In the event that the
Merger Agreement is terminated by SDG due to a willful breach by CPI pursuant to
clause (b)(iii) of the preceding paragraph, CPI will be required to pay SDG a
termination fee of $50 million, payable in annual installments over a two year
period (in such a manner as to not violate certain REIT Requirements). Any
portion of either termination fee that is not paid by the end of the second year
due to limitations of the REIT Requirements shall be forfeited.
Amendment. The Merger Agreement provides that it may be amended,
supplemented or modified by action taken by or on behalf of the respective
boards of directors of the parties thereto at any time prior to the Effective
Time, whether prior to or after the requisite stockholder adoption and approvals
have been obtained, but after such adoption or approval only to the extent
permitted by applicable law. No such amendment, supplement or modification shall
be effective unless set forth in a written instrument duly executed by or on
behalf of each party to the Merger Agreement.
APPRAISAL RIGHTS
The MGCL sets forth the rights of stockholders who object to a merger to
demand and receive fair value for their stock ("appraisal rights"). No appraisal
rights are available to holders of SDG Common Stock and SDG Series B Preferred
Stock because the SDG Common Stock and SDG Series B Preferred Stock are listed
on a national securities exchange (i.e., the NYSE). In addition, no appraisal
rights are available to holders of either SDG Series B Preferred Stock or SDG
Series C Preferred Stock because the SDG Series B Preferred Stock and SDG Series
C Preferred Stock are stock of the successor in the Merger (SDG), the Merger
will not alter the contract rights of this stock and this stock will not be
changed in the Merger into something other than stock in the successor or cash.
The holders of SDG Class B Common Stock and SDG Class C Common Stock have
appraisal rights available to them because neither class of stock is listed on a
national securities exchange and because the shares of each class will be
converted in the Merger into Simon Group Class B Common Stock and Simon Group
Class C Common Stock. The MGCL provides that these rights are available only if
the stockholder (a) files with the corporation a written objection to the Merger
at or before the meeting of stockholders at which the transaction will be
considered and (b) does not vote in favor of the transaction. In addition, the
stockholder must make a written demand on the successor corporation for payment
for the stock within 20 days of the acceptance of the articles of merger by the
Maryland State Department. The MGCL requires that the successor corporation,
SDG, promptly notify each objecting stockholder in writing of the date the
articles of merger are accepted for record by the Maryland State Department. A
copy of Title 3, Subtitle 2 of the MGCL is attached to this Proxy
Statement/Prospectus as Annex E and is incorporated herein by reference thereto.
NEW YORK STOCK EXCHANGE LISTING OF SIMON GROUP COMMON STOCK
As a condition to the Merger, the Simon Group Common Stock and Simon Group
Series B Preferred Stock will be listed on the NYSE. If the Merger is completed,
Simon Group stockholders would be able to trade shares of Simon Group Common
Stock and Simon Group Series B Preferred Stock on the NYSE. See "-- Conditions
to Consummation of the Merger" and "FEDERAL SECURITIES LAW CONSEQUENCES."
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FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF SDG EQUITY STOCK
The following discussion summarizes the material federal income tax
consequences applicable to holders of SDG Equity Stock that are expected to
result from the Merger and certain transactions associated therewith. This
discussion does not address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, financial institutions, broker-dealers, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws, nor does it give detailed
discussions of any state, local or foreign tax considerations. Accordingly, SDG
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO THEM IN VIEW OF THEIR PARTICULAR CIRCUMSTANCES.
The following discussion is based on the Code, applicable Treasury
Regulations, judicial authority and administrative rulings and practice, all as
of the date of this Proxy Statement/Prospectus. There can be no assurance that
future legislative, judicial or administrative changes or interpretations will
not adversely affect the accuracy of the statements and conclusions set forth
herein. Any such changes or interpretations could be applied retroactively and
could affect the tax consequences of the Merger to SDG's stockholders.
The Merger has been structured to qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Code. Willkie Farr & Gallagher,
counsel to SDG, has issued, and is expected to issue at the closing of the
Merger, an opinion to such effect. In addition, Cravath, Swaine & Moore, counsel
to CPI has issued, and is expected to issue at the closing of the Merger, an
opinion addressing CPI's qualification as a REIT and certain other matters
described herein, and Baker & Daniels has issued, and is expected to issue at
the closing of the Merger, an opinion addressing SDG's qualification as a REIT
and Simon Group's qualification as a REIT after the Effective Time. Such
opinions are based, and will be based, upon the understanding that the relevant
facts are as described in this Proxy Statement/Prospectus and the annexes
hereto, and in rendering such opinions such counsel will rely on the accuracy of
the factual statements and representations in the foregoing documents and upon
certain factual representations made in writing to such counsel. The issuance of
such opinions at the closing of the Merger is based on assumptions about, and is
also contingent upon, certain facts not ascertainable until after the SDG
Special Meeting. The obligations of CPI and SDG to consummate the Merger are
conditioned upon the receipt of such opinions. An opinion of counsel is not
binding on the Internal Revenue Service ("IRS") or the courts. Except as to
certain limited matters relating to the effect of the CPI Reorganization,
neither CPI nor SDG have requested or will request an advance ruling from the
IRS.
Assuming the Merger qualifies as a tax-free reorganization, the material
federal income tax consequences of the Merger will be as follows:
(i) Subject to the discussion in (vii) below, and except as described
in (ii) below, the exchange in the Merger of SDG Equity Stock for Simon
Group Equity Stock will not result in the recognition of gain or loss to
SDG stockholders with respect to such exchange.
(ii) Each SDG stockholder who receives cash proceeds in lieu of
Fractional Shares will recognize gain or loss equal to the difference
between such proceeds and the tax basis allocated to such stockholder's
Fractional Share interests. Each dissenting stockholder who receives cash
proceeds for the shares not voted in favor of the Merger will recognize a
taxable gain or loss equal to the difference between such proceeds and the
tax basis allocated to such shares. See "THE MERGER AGREEMENT AND RELATED
MATTERS -- Appraisal Rights." Any such gain or loss recognized as described
in this paragraph will constitute capital gain or loss if such
stockholder's shares of SDG Equity Stock were held as a capital asset at
the Effective Time.
(iii) The tax basis of the shares of Simon Group Equity Stock
(including fractional share interests for which cash is ultimately
received) received by a SDG stockholder will be equal to the tax basis of
the shares of SDG Equity Stock exchanged therefor, decreased by the amount
of cash received by such stockholder, and increased by the amount of gain
(if any) recognized by such stockholder in the Merger.
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(iv) A stockholder's holding period with respect to the Simon Group
Equity Stock received in the Merger will include the holding period of the
SDG Equity Stock exchanged in the Merger if such SDG Equity Stock was held
as a capital asset at the Effective Time.
(v) The aggregate tax basis of the beneficial interests in the CRC
Common Stock received by a SDG stockholder will equal the fair market value
of such beneficial interests as of the Effective Time. The holding period
for such beneficial interests received by a stockholder will begin on the
day it is distributed.
(vi) No gain or loss will be recognized by SDG, the subsidiary of CPI
formed to merge with SDG, or CPI as a result of the Merger. The Merger will
not affect the qualifications of CPI and SDG as REITs, nor will it
adversely affect the status of CPI and CRC as grandfathered from the
application of Section 269B(a)(3) of the Code (the 1984 paired share REIT
legislation) pursuant to Section 136(c)(3) of the Deficit Reduction Act of
1984.
(vii) The treatment of the receipt of beneficial interests in CRC
Common Stock is not completely clear. Willkie Farr & Gallagher is of the
opinion that the receipt of such beneficial interests should be treated as
a distribution from SDG governed by Section 301 of the Code, and not as
"boot" or "other property" received in the reorganization. If the IRS were
to successfully contend that such beneficial interests are properly treated
as "boot" or "other property," SDG stockholders would recognize gain, but
not loss, on the exchange of shares of SDG Equity Stock for Paired Shares
pursuant to the Merger in an amount equal to the lesser of (a) the fair
market value of the beneficial interests in the CRC Common Stock, as of the
Effective Time, that they receive, or (b) the amount by which the fair
market value of the Paired Shares as of the Effective Time, exceeds the
stockholder's adjusted tax basis in the SDG Equity Stock exchanged
therefor. Any such gain would be characterized as capital gain (assuming
the SDG Equity Stock exchanged was a capital asset in the hands of the
stockholder) unless the boot received has the effect of the distribution of
a dividend. Although there can be no assurance that the IRS will agree, and
valuations may change between the date hereof and the Effective Time,
management of CRC believes that such value will not exceed 1% of the value
of the Paired Shares.
Even if the Merger qualifies as a reorganization, a recipient of shares of
Simon Group Equity Stock will recognize gain to the extent that such shares were
considered to be received in exchange for services or property (other than
solely shares of SDG Equity Stock). All or a portion of such gain may be taxable
as ordinary income. Gain will also have to be recognized to the extent that a
SDG stockholder is treated as receiving (directly or indirectly) consideration
other than Paired Shares in exchange for such stockholder's SDG Equity Stock.
If the Merger is not a reorganization, then each SDG stockholder will
recognize gain or loss with respect to each share of SDG Equity Stock equal to
the difference between such stockholder's basis in such stock and the fair
market value, as of the Effective Time, of the Paired Shares received in
exchange therefor. In such event, an SDG stockholder's aggregate basis in any
Paired Shares received will equal its fair market value, and the stockholder's
holding period for such stock will begin the day after the Merger.
OPINIONS OF SDG'S AND CPI'S COUNSEL
In the opinion of Baker & Daniels, at all times from and after December 31,
1993 through December 31, 1997 SDG has qualified as a REIT, and if SDG continues
its operations in the manner described in this Proxy Statement/Prospectus. SDG
will continue to qualify as a REIT under the Code. In the opinion of Baker &
Daniels, Simon Group will continue to qualify as a REIT after the Effective Time
if Simon Group as constituted after the Effective Time conducts its operations
in the manner described in this Proxy Statement/Prospectus. In the opinion of
Cravath, Swaine & Moore, counsel to CPI, as of December 31, 1997, CPI qualified
as a REIT, and, if CPI continues its operations in the same manner as the
operations of CPI since January 1, 1997, CPI will continue to qualify as a REIT.
It must be emphasized that counsels' opinions are based on various assumptions
and are conditioned upon certain representations made by the companies as to
factual matters, including representations of the companies concerning their
businesses and properties, and the businesses and properties of the SDG
Operating Partnership and other affiliates of SDG and CPI. Moreover, such
qualification and taxation as a REIT depends upon the ability of each of the
REIT Members
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to meet, through actual annual operating results, distribution levels, diversity
of stock ownership, and the various other qualification tests imposed under the
Code discussed below, the results of which have not and will not be reviewed by
such counsel. No assurance can be given that the actual results of the REIT
Members' operations for any one taxable year will satisfy such requirements. See
"-- Federal Income Tax Consequences Relating to Simon Group -- Failure to
Qualify."
FEDERAL INCOME TAX CONSIDERATIONS RELATING TO SIMON GROUP
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective stockholder of Simon Group,
is based upon current law, and is not tax advice. This discussion does not
address all aspects of taxation that may be relevant to particular stockholders
in light of their personal investment or tax circumstances, or to certain types
of stockholders (including insurance companies, tax exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States) subject to special treatment
under the federal income tax laws, nor does it give a detailed discussion of any
state, local or foreign tax considerations. See "-- Federal Income Tax
Consequences to Holders of SDG Equity Stock" for a discussion of certain tax
consequences of the Merger to the SDG stockholders.
EACH PROSPECTIVE STOCKHOLDER OF SIMON GROUP IS ENCOURAGED TO CONSULT ITS
OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE,
OWNERSHIP AND SALE OF THE SHARES OF SIMON GROUP COMMON STOCK AND OF SIMON
GROUP'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
General
SDG and CPI have each made elections to be taxed as a REIT for federal
income tax purposes commencing with their taxable years ending December 31, 1994
and December 31, 1973, respectively, and other REIT Members of the Simon Group
have made similar elections. Management of both companies believe that both
companies are organized and operated in such a manner as to qualify for taxation
as a REIT under the Code. Both companies intend to continue to operate in such a
manner, but no assurance can be given that they will operate in a manner so as
to qualify or remain qualified. See "POLICIES OF SIMON GROUP FOLLOWING THE
MERGER -- Dividend and Distribution Policies."
The REIT Requirements relating to the federal income tax treatment of REITs
and their stockholders are highly technical and complex. The following
discussion sets forth only the material aspects of those requirements. This
summary is qualified in its entirety by the applicable Code provisions, rules
and Treasury Regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Taxation of Simon Group and the REIT Members
A REIT generally is not subject to federal corporate income taxes on that
portion of its ordinary income or capital gain that is distributed currently to
stockholders because the REIT provisions of the Code generally allow a REIT to
deduct dividends paid to its stockholders. This deduction for dividends paid to
stockholders substantially eliminates the federal "double taxation" on earnings
(once at the corporate level and once again at the stockholder level) that
generally results from investment in a corporation.
However, REITs may be subject to federal income tax in the following
circumstances. First, a REIT will be taxed at regular corporate rates on any
undistributed REIT taxable income and undistributed net capital gains. Second,
under certain circumstances, a REIT may be subject to the "alternative minimum
tax" on its items of tax preference, if any. Third, if the REIT has (i) net
income from the sale or other disposition of "foreclosure property" (generally,
property acquired by reason of a default on a lease or an indebtedness held by a
REIT) that is held primarily for sale to customers in the ordinary course of
business or (ii) other non-qualifying net income from foreclosure property, it
will be subject to tax at the highest corporate rate on such
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income. Fourth, if the REIT has net income from a "prohibited transaction"
(generally, a sale or other disposition of property held primarily for sale to
customers in the ordinary course of business, other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if the REIT should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), and has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
the net income attributable to the greater of the amount by which the REIT fails
the 75% or 95% test, multiplied by a fraction intended to reflect the REIT's
profitability. Sixth, if the REIT should fail to distribute with respect to each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the REIT will be subject to a
four percent excise tax on the excess of such required distribution over the
amounts actually distributed (treating as distributed for this purpose capital
gains retained by the REIT and subject to tax, as discussed below at "-- Capital
Gain Dividends"). Seventh, if a REIT acquires any asset from a C corporation
(i.e., a corporation generally subject to a full corporate-level tax, but not
including a corporation, such as SDG, that also qualifies for treatment as a
REIT) in a transaction in which the basis of the asset in the REIT's hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation, and the REIT recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on which such asset
was acquired by the REIT (the "Restriction Period"), then pursuant to guidelines
issued by the IRS in IRS Notice 88-19 (the "Built-in Gain Rules"), the excess of
the fair market value of such property at the beginning of the applicable
Restriction Period over the REIT's adjusted basis in such asset as of the
beginning of such Restriction Period (the "Built-in Gain") will be subject to a
tax at the highest regular corporate rate. The Built-in Gain Rules may also
apply with respect to SDG's share of Built-in Gains, if any, arising from assets
disposed of by the SDG Operating Partnership during the Restriction Period and
attributable to appreciation during periods in which SDG held interests in the
SDG Operating Partnership and did not elect to be taxed as a REIT. The results
described above with respect to the recognition of Built-in Gain assume that all
REIT Members have made or will make elections pursuant to the Built-in Gain
Rules or applicable future administrative rules or Treasury Regulations.
Furthermore, the Administration Proposals propose that a REIT be required to pay
tax on the difference between the fair market value and tax basis of assets it
acquires after December 31, 1998 in such a transaction.
Requirements for Qualification
To qualify as a REIT, a corporation must elect to be so treated and must
meet the requirements, discussed below, relating to its organization, sources of
income, nature of assets, and distributions of income to stockholders.
Organizational Requirements. The Code defines a REIT as a corporation,
trust or association: (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (iii) that would be taxable as
a domestic corporation but for its qualification to be taxable as a REIT; (iv)
that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (v) the beneficial ownership of which is held by
100 or more persons; and (vi) during the last half of each taxable year not more
than 50% in value of the outstanding capital stock of which is owned, directly
or indirectly through the application of certain attribution rules, by five or
fewer individuals (as defined in the Code to include certain entities). In
addition, certain other tests, described below, regarding the nature of a REIT's
income and assets must also be satisfied. The Code provides that conditions (i)
through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Each of the REIT Members has satisfied the requirements set forth in (i)
through (iv) above and have adopted charter provisions containing certain
restrictions regarding transfer of their stock that are intended to assist in
satisfying the stock ownership requirements described in (v) and (vi) above. See
"DESCRIPTION OF SIMON GROUP AND CRC CAPITAL STOCK -- Restrictions On Transfer."
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. Each of the REIT Members' taxable year is the
calendar year.
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The Simon Group will have several "qualified REIT subsidiaries." Code
section 856(i) provides that a corporation that is a "qualified REIT subsidiary"
will not be treated as a separate corporation, and all assets, liabilities and
items of income, deduction, and credit of a "qualified REIT subsidiary" will be
treated as assets, liabilities, and such items (as the case may be) of the REIT.
In applying the requirements described herein, Simon Group's "qualified REIT
subsidiaries" will be ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiary will be treated as assets, liabilities
and items of Simon Group.
In the case of a REIT which is a partner in a partnership, the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of the REIT Requirements, including satisfying the income tests and
asset tests. Thus, for example, SDG's proportionate share of the assets,
liabilities and items of income of the SDG Operating Partnership will be treated
as assets, liabilities and items of income of SDG for purposes of applying the
requirements described herein. See "-- Income Taxation of the Partnerships, the
Property Partnerships and their Partners."
Income Tests. For each of the REIT Members to maintain qualification as a
REIT, there are two gross income requirements that each must satisfy annually.
First, at least 75% of the REIT Member's gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property," dividends from other REITs and,
in certain circumstances, interest) or from "qualified temporary investment
income" (described below). Second, at least 95% of the REIT Member's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property investments and from dividends,
interest, and gain from the sale or disposition of stock or securities or from
any combination of the foregoing.
Rents received by each of the REIT Members will qualify as "rents from real
property" only if several conditions are met. First, the amount of rent must not
be based in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" if the REIT, or an
owner of ten percent or more of the REIT, directly or constructively owns ten
percent or more of such tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents received to qualify as "rents
from real property," any services furnished by the REIT to its tenants must be
services customarily provided by owners of real property in the geographic
location where the REIT's property is located and of a type that may be rendered
by tax-exempt entities without jeopardizing the treatment of the income derived
as "rents from real property." Any amounts characterized as "impermissible
tenant service income" will not qualify as "rent from real property."
"Impermissible tenant service income" consists of amounts received or accrued by
a REIT either for services furnished or rendered to the tenant or for managing
or operating the property. The following types of income will not be classified
as "impermissible tenant service income": (a) amounts received or accrued for
services performed by an independent contractor from which the REIT derives no
income, or (b) amounts received or accrued for services which would not be
characterized as unrelated business taxable income if received or accrued by a
tax-exempt organization.
If a REIT Member receives "impermissible service income" from any one
property in an amount which exceeds 1% of the total amount received from such
property during the taxable year, all amounts received or accrued from such
property during such taxable year will be characterized as nonqualifying income
for the 75% and 95% income tests. For purposes of this de minimis test, amounts
equal to at least 150% of the direct cost of providing such service (or
management or operation) will be deemed received for any service (or management
or operation) provided by the REIT Member to its tenants.
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A person qualifies as an independent contractor if such person does not
own, directly or indirectly, more than 35% of the shares of the REIT, and at
least 35% of such person is not owned, directly or indirectly, by one or more
persons which also own at least 35% of the REIT.
It is expected that each of the REIT Member's real estate investments will
give rise to income that will enable them to satisfy all of the income tests
described above.
None of the REIT Members presently charge, nor do any of them anticipate
charging, more than a de minimis amount of rent that is based in whole or in
part on the income or profits of any person (except by reason of being based on
a percentage of receipts or sales, as described above).
The determination of whether a tenant is a Related Party Tenant is made
after the application of complex attribution rules. Accordingly, none of the
REIT Members can be absolutely certain whether all Related Party Tenants have
been or will be identified. However, none of the REIT Members anticipate
receiving rents in excess of a de minimis amount from Related Party Tenants, nor
do they anticipate holding a lease on any property in which rents attributable
to personal property constitute greater than 15% of the total rents received
under the lease.
None of the REIT Members will knowingly directly perform services
considered to be rendered to the occupant of property. Although the REIT
Members, through the SDG Operating Partnership and other Simon Group affiliates,
will perform all development, construction and leasing services for, and will
operate and manage, wholly-owned properties directly without using an
"independent contractor," management believes that, in almost all instances, the
only services to be provided to lessees of these properties will be those
usually or customarily rendered in connection with the rental of space for
occupancy only, and that in any event, the amounts received for noncustomary
services that may constitute "impermissible tenant service income" from any one
property will not exceed 1% of the total amount collected from such property
during the taxable year. If Simon Group discovers that "impermissible tenant
service income" from any one property may exceed the 1% de minimis test, it will
contract with an independent contractor from whom it will derive no income to
perform such services.
The IRS has issued private rulings holding that if a partnership in which a
REIT is a partner provides management services to properties not wholly owned by
such partnership, the income received from such services or properties should
qualify as "rents from real property" to the extent of such REIT's interest in
such property. (For example, if the SDG Operating Partnership provides
management services to a property in which it holds a 75% interest, 75% of the
income received from the provision of such services should qualify as "rents
from real property.") It is not intended that the SDG Operating Partnership will
provide such services as of the Effective Time, but it or other REIT Members may
provide such services in the future.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any Person. An amount received or
accrued generally will not be excluded from the term "interest," however, solely
by reason of being based on a fixed percentage or percentages of receipts or
sales. The SDG Operating Partnership may advance money from time to time to
tenants for the purpose of financing tenant improvements, but does not intend to
charge interest that will depend in whole or in part on the income or profits of
any person.
If any REIT Member fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if (i) the failure to meet
such tests was due to reasonable cause and not due to willful neglect, (ii) a
schedule of the sources of income is attached to that REIT Member's tax return,
and (iii) any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the REIT Members would be entitled to the benefit of these relief
provisions. Even if these relief provisions apply, a tax would be imposed with
respect to the excess net income.
Asset Tests. In order for each of the REIT Members to individually qualify
as a REIT, at the close of each quarter of its taxable year each REIT Member
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the REIT Member's total assets must be represented by
real estate
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assets (which for this purpose includes (i) its allocable share of real estate
assets held by partnerships in which the REIT Member or a "qualified REIT
subsidiary" of the REIT Member owns an interest, and (ii) stock or debt
instruments purchased with the proceeds of a stock offering or a long-term (at
least five years) debt offering of the REIT Member and held for not more than
one year from the date the REIT Member receives such proceeds), cash, cash
items, government securities and shares in qualified REITs. Second, not more
than 25% of the REIT Member's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the REIT
Member may not exceed five percent of the value of the REIT Member's total
assets, and the REIT Member may not own more than ten percent of any one
issuer's outstanding voting securities (excluding securities of a qualified REIT
subsidiary or another REIT). The Administration has proposed legislation that
would prohibit a REIT from owning more than ten percent of the voting securities
or value of any one issuer (excluding a qualified REIT subsidiary or another
REIT). See "RISK FACTORS -- Certain Tax Risks -- REIT Classification;
Legislation Limiting Benefits of Paired Share Status."
All of the REIT Members expect that they will be able to comply with these
asset tests. Each are presently deemed to and will continue to be deemed to hold
directly their proportionate shares of all real estate and other assets of the
SDG Operating Partnership and/or other partnerships of which they are partners,
and they should be considered to hold their proportionate share of all assets
deemed owned by those partnerships through the partnerships' ownership of
partnership interests in other partnerships. As a result, each REIT Member plans
to hold more than 75% of its assets as real estate assets. In addition, no REIT
Member plans to hold any securities representing more than ten percent of any
one issuer's voting securities, other than any qualified REIT subsidiary, or
securities of any one issuer exceeding five percent of the value of any such
REIT Members gross assets (determined in accordance with generally accepted
accounting principles).
The securities of each of the REIT Members will be treated as real estate
assets and will not violate the 10% voting stock requirement so long as each
such REIT Member qualifies as a REIT. If, however, one of the REIT Members fails
to qualify as a REIT for any reason, any other REIT Member holding a direct or
indirect interest in such REIT Member would then fail this asset test because
the voting securities of such disqualified REIT would not be treated as real
estate assets and would no longer be excludable. For example, loss of REIT
status by SDG would cause Simon Group to be disqualified.
Substantially all of the nonvoting stock and 5% of the voting stock of
certain corporate entities ("Management Companies") such as M.S. Management
Associates, Inc. is owned by the SDG Operating Partnership or other members of
the Simon Group. Pursuant to such arrangements, Simon Group will not own 10% of
the voting stock of such entities. In addition, the value of the securities of
each such entity will not exceed five percent of the value of the total assets
of the REIT Member owning such securities. However, no independent appraisals
have been obtained. In addition, proposed legislation would, if enacted, limit
the ability of the Management Companies to expand future operations. See "RISK
FACTORS -- Certain Tax Risks -- REIT Classification; Legislation Limiting
Benefits of Paired Share Status."
After initially meeting the asset tests at the close of any quarter, none
of the REIT Members will lose its status as a REIT for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. It is intended that each of the REIT Members will maintain
adequate records of the value of their assets to ensure compliance with the
asset tests, and to take such other action within 30 days after the close of any
quarter as may be required to cure any noncompliance. However, there can be no
assurance that such other action will always be successful.
Annual Distribution Requirements. In order to be taxed as REITs, each of
the REIT Members will be required to meet certain annual distribution
requirements. Each REIT Member will have to distribute dividends (other than
capital gain dividends) to its stockholders in an amount at least equal to (i)
the sum of (a) 95% of the REIT Member's "REIT taxable income" (computed without
regard to the dividends paid deduction and the REIT Member's net capital gain)
and (b) 95% of the net income, if any, from foreclosure property in excess of
the special tax on income from foreclosure property, minus (ii) the sum of
certain items
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of noncash income. In addition, during the Restriction Period, if Simon Group
disposes of any asset that is subject to the Built-in Gain Rules, Simon Group
will be required, pursuant to guidelines issued by the IRS, to distribute at
least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
REIT Member timely files its tax return for such year and if paid on or before
the first regular dividend payment after such declaration.
To the extent that any REIT Member does not distribute all of its net
capital gain or distributes at least 95% (but less than 100%) of its REIT
taxable income, as adjusted, it will be subject to tax on the undistributed
portion, at regular ordinary and capital gains corporate tax rates. Furthermore,
if any REIT Member fails to distribute during each calendar year at least the
sum of (a) 85% of its REIT ordinary income for such year, (b) 95% of its REIT
capital gain net income for such year, and (c) any undistributed taxable income
from prior periods, the company will be subject to a 4% excise tax on the excess
of such required distribution over the amounts actually distributed. Each of the
REIT Members intend to make timely distributions sufficient to satisfy this
annual distribution requirement and avoid the imposition of any income or excise
tax. It is expected that Simon Group's taxable income will be less than its cash
flow, due to the allowance of depreciation and other noncash charges in
computing Simon Group's taxable income. Accordingly, Simon Group anticipates
that it will generally have sufficient cash or liquid assets to enable it to
satisfy the 95% distribution requirement.
Pursuant to recently enacted legislation and if a REIT Member so elects, it
may retain, rather than distribute, its net long-term capital gains and pay the
tax on such gains. In such a case, the stockholders would include their
proportionate share of the undistributed long-term capital gains in income.
However, the stockholders would then be deemed to have paid their share of the
tax, which would be credited or refunded to them. In addition, the stockholders
would be able to increase their basis of their shares in the REIT Member by the
amount of the undistributed long-term capital gains (less the amount of capital
gains tax paid by the REIT Member) included in the stockholder's long-term
capital gains.
It is possible that, from time to time, one or more of the REIT Members may
not have sufficient cash or other liquid assets to meet the 95% distribution
requirement due to timing differences between the actual receipt of income and
actual payment of deductible expenses and the inclusion of such income and
deduction of such expenses in arriving at taxable income of the REIT Member or
if the amount of nondeductible expenses such as principal amortization or
capital expenditures exceed the amount of noncash deductions. In the event that
such situation occurs, in order to meet the 95% distribution requirement, the
REIT Members may find it necessary to arrange for short-term, or possibly
long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, a REIT Member may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the REIT Member's
deduction for dividends paid for the earlier year. Thus, a REIT Member may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, such REIT Member will be required to pay interest based upon the amount
of any deduction taken for deficiency dividends.
Failure to Qualify
If any REIT Member fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, such REIT Member would be subject
to tax (including any applicable alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to stockholders in any year in which a
REIT Member fails to qualify will not be deductible by the REIT Member nor will
they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the REIT Member
will also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances a REIT Member
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would be entitled to such statutory relief. As discussed above, disqualification
of one REIT Member will cause disqualification of other REIT Members owning an
interest in the disqualified REIT Member.
Taxation of U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of shares of
Simon Group Equity Stock that (for United States federal income tax purposes)
(i) is a citizen or resident of the United States, (ii) is a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, (iii) is an estate the
income of which is subject to United States federal income taxation regardless
of its source or (iv) is a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have the authority to control all substantial
decisions of the trust. For any taxable year for which Simon Group qualifies for
taxation as a REIT, amounts distributed to taxable U.S. Stockholders will be
taxed as follows:
Distributions Generally
Distributions to U.S. Stockholders, other than capital gain dividends
discussed below, will be taxable as ordinary income to such holders up to the
amount of Simon Group's current or accumulated earnings and profits. Such
distributions are not eligible for the dividends-received deduction for
corporations. To the extent that Simon Group makes distributions in excess of
its current or accumulated earnings and profits, such distributions will first
be treated as a tax-free return of capital, reducing the adjusted tax basis in
the U.S. Stockholders' shares of Simon Group Equity Stock, and distributions in
excess of the U.S. Stockholders' tax basis in their respective shares of the
Simon Group Equity Stock will be taxable as gain realized from the sale of such
shares. Dividends declared by Simon Group in October, November, or December of
any year payable to a stockholder of record on a specified date in any such
month will be treated as both paid by Simon Group and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by Simon Group during January of the following calendar year. Stockholders
may not include on their own income tax returns any tax losses of Simon Group.
Capital Gain Dividends
Dividends to U.S. Stockholders that are properly designated by Simon Group
as capital gain dividends will be treated as long-term capital gain (to the
extent they do not exceed Simon Group's actual net capital gain) for the taxable
year without regard to the period for which the stockholder has held his stock.
Corporate stockholders, however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income.
Simon Group may elect to retain and pay income tax on some or all of its
undistributed net capital gains, in which case Simon Group's stockholders will
include such retained amount in their income. In that event the stockholders
would be entitled to a tax credit or refund in the amount of the tax paid by
Simon Group on the undistributed gain allocated to the stockholders and the
stockholders would be entitled to increase their tax basis by the amount of
undistributed capital gains allocated to such stockholders reduced by the amount
of the credit. In addition, Notice 97-64 provides temporary guidance with
respect to the taxation of capital gain dividends. Pursuant to Notice 97-64,
forthcoming Temporary Regulations will provide that capital gains allocated to a
stockholder by Simon Group may be designated as a 20% rate gain distribution, an
unrecaptured Section 1250 gain distribution subject to a 25% rate, or a 28% rate
gain distribution. In determining the amounts which may be designated as each
class of capital gains dividends, a REIT must calculate its net capital gains as
if it were an individual subject to a marginal tax rate of 28%. Unless
specifically designated otherwise by Simon Group, a distribution designated as a
capital gain distribution is presumed to be a 28% rate gain distribution. If
Simon Group elects to allocate any undistributed net long-term capital gain to
its stockholders, as discussed above, the undistributed long-term capital gains
are considered to be designated as capital gain dividends for purposes of Notice
97-64.
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Dispositions of Shares of Common Stock
A U.S. Stockholder will recognize gain or loss on the sale or exchange of
shares of Simon Group Equity Stock to the extent of the difference between the
amount realized on such sale or exchange and the holder's adjusted tax basis in
such shares. Such gain or loss generally will constitute long-term capital gain
or loss if the holder has held such shares for more than one year. Individual
taxpayers are subject to a maximum tax rate of 28% on long-term capital gain
(20% if the shares were held for more than 18 months). Losses incurred on the
sale or exchange of shares of common stock held for six months or less (after
applying certain holding period rules), however, will generally be deemed
long-term capital loss to the extent of any long-term capital gain dividends
received by the U.S. Stockholder and undistributed capital gains allocated to
such U.S. Stockholder with respect to such shares.
Passive Activity and Loss; Investment Interest Limitations
Distributions from Simon Group and gain from the disposition of the shares
of Simon Group Equity Stock will not ordinarily be treated as passive activity
income, and therefore, U.S. Stockholders generally will not be able to apply any
"passive losses" against such income. Dividends from Simon Group (to the extent
they do not constitute a return of capital) generally will be treated as
investment income for purposes of the investment interest limitation. Net
capital gain from the disposition of Simon Group Equity Stock and capital gain
dividends generally will be excluded from investment income unless the taxpayer
elects to have the gain taxed at ordinary rates.
Treatment of Tax Exempt U.S. Stockholders
The IRS has ruled that amounts distributed by a REIT to a tax-exempt
pension trust do not constitute unrelated business taxable income ("UBTI").
Although rulings are merely interpretations of law by the IRS and may not be
relied on by anyone other than the taxpayer to whom it was addressed, based on
this analysis, indebtedness incurred by Simon Group in connection with the
acquisition of an investment will not cause any income derived from the
investment to be treated as UBTI to a tax-exempt entity. A tax-exempt entity
that incurs indebtedness to finance its purchase of shares, however, will be
subject to UBTI by virtue of the acquisition indebtedness rules.
In addition, qualified trusts that hold more than ten percent (by value) of
the interests in a REIT are required to treat a percentage of REIT dividends as
UBTI. The requirement applies only if (i) the qualification of the REIT depends
upon the application of a "look-through" exception to the restriction on REIT
stockholdings by five or fewer individuals, including qualified trusts (see
"DESCRIPTION OF SIMON GROUP AND CRC CAPITAL STOCK") and (ii) the REIT is
"predominantly held" by qualified trusts. It is not anticipated that Simon Group
will be "predominantly held" by qualified trusts.
Special Tax Consideration for Foreign Stockholders
The rules governing United States federal income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates (collectively, "Non-U.S. Stockholders") are complex, and the
following discussion is intended only as a summary of such rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state, and local income tax laws on an investment in
Simon Group, including any reporting requirements, as well as the tax treatment
of such an investment under their home country laws.
In general, Non-U.S. Stockholders will be subject to regular United States
federal income tax with respect to their investment in Simon Group if such
investment is "effectively connected" with the Non-U.S. Stockholder's conduct of
a trade or business in the United States. A corporate Non-U.S. Stockholder that
receives income that is (or is treated as) effectively connected with a United
States trade or business may also be subject to the branch profits tax under
section 884 of the Code, which is payable in addition to regular United States
corporate income tax. The following discussion will apply to Non-U.S.
Stockholders whose investment in Simon Group is not so effectively connected.
Simon Group expects to withhold United States income tax, as described below, on
the gross amount of any distributions paid to a Non-U.S. Stockholder
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unless (i) a lower treaty rate applies and the required form evidencing
eligibility for that reduced rate is filed with Simon Group, or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with Simon Group, claiming that the
distribution is "effectively connected" income.
A distribution by Simon Group that is not attributable to gain from the
sale or exchange by Simon Group of a United States real property interest and
that is not designated by Simon Group as a capital gain dividend will be treated
as an ordinary income dividend to the extent made out of current or accumulated
earnings and profits. Generally, an ordinary income dividend will be subject to
a United States withholding tax equal to 30% of the gross amount of the
distribution unless such tax is reduced or eliminated by an applicable tax
treaty. A distribution of cash in excess of Simon Group's earnings and profits
will be treated first as a return of capital that will reduce a Non-U.S.
Stockholder's basis in its shares of the Simon Group Equity Stock (but not below
zero) and then as gain from the disposition of such shares, the tax treatment of
which is described under the rules discussed below with respect to dispositions
of shares.
Distributions by Simon Group that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Beginning with payments made on or after January 1, 1999, newly
issued Treasury Regulations require a corporation that is a REIT to treat as a
dividend the portion of a distribution that is not designated as a capital gain
dividend or return of basis and apply the 30% withholding tax (subject to any
applicable deduction or exemption) to such portion, and to apply the provisions
of the FIRPTA withholding rules discussed below with respect to the remainder of
the distribution. Under FIRPTA, such distributions are taxed to a Non-U.S.
Stockholder as if such distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a Non-U.S. Stockholder will be
taxed at the normal capital gain rates applicable to a U.S. Stockholder (subject
to any applicable alternative minimum tax and a special alternative minimum tax
in the case of non-resident alien individuals). Distributions subject to FIRPTA
may also be subject to a 30% branch profits tax in the hands of a foreign
corporate stockholder that is not entitled to treaty exemption.
Simon Group will be required to withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, (i) 35% of designated capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (ii) 30% of ordinary dividends paid out of
earnings and profits. In addition, if Simon Group designates prior distributions
as capital gain dividends, subsequent distributions, up to the amount of such
prior distributions not withheld against, will be treated as capital gain
dividends for purposes of withholding. A distribution in excess of Simon Group
earnings and profits may be subject to 30% dividend withholding if at the time
of the distribution it cannot be determined whether the distribution will be in
an amount in excess of Simon Group's current or accumulated earnings and
profits. Tax treaties may reduce Simon Group's withholding obligations. If the
amount withheld by Simon Group with respect to a distribution to a Non-U.S.
Stockholder exceeds the stockholder's United States tax liability with respect
to such distribution (as determined under the rules described in the two
preceding paragraphs), the Non-U.S. Stockholder may file for a refund of such
excess from the IRS. It should be noted that the 35% withholding tax rate on
capital gain dividends currently corresponds to the maximum income tax rate
applicable to corporations, but is higher than the 28% maximum rate on capital
gains of individuals.
Unless the shares of Simon Group constitute a "United States real property
interest" within the meaning of FIRPTA or are effectively connected with a U.S.
trade or business, a sale of such shares by a Non-U.S. Stockholder generally
will not be subject to United States taxation. The shares of Simon Group will
not constitute a United States real property interest if Simon Group is a
"domestically controlled REIT." A domestically controlled REIT is a REIT in
which at all times during a specified testing period less than 50% in value of
its shares is held directly or indirectly by Non-U.S. Stockholders. It is
currently anticipated Simon Group will be a domestically controlled REIT, and
therefore that the sale of shares in Simon Group will not be subject to taxation
under FIRPTA. However, because the shares of Simon Group are publicly traded, no
assurance can be given that Simon Group will continue to be a domestically
controlled REIT. Notwithstanding the foregoing, capital gain not subject to
FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is
a nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and certain other conditions apply, in which
case the nonresident alien individual will
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be subject to a 30% tax on such individual's capital gains. If Simon Group did
not constitute a domestically controlled REIT, whether a Non-U.S. Stockholder's
sale of shares of Simon Group would be subject to tax under FIRPTA as a sale of
a United States real property interest would depend on whether the shares were
"regularly traded" (as defined by applicable Treasury Regulations) on an
established securities market (e.g., the NYSE, on which the shares of Simon
Group Common Stock are listed) and on the size of the selling stockholder's
interest in Simon Group (i.e., 5% or greater ownership). If the gain on the sale
of Simon Group's shares were subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to the same treatment as a U.S. Stockholder with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals).
In any event, a purchaser of shares of the Simon Group Common Stock from a
Non-U.S. Stockholder will not be required under FIRPTA to withhold on the
purchase price if the purchased shares of the Simon Group Common Stock are
"regularly traded" on an established securities market or if Simon Group is a
domestically controlled REIT. Otherwise, under FIRPTA the purchaser of shares of
the Simon Group Common Stock may be required to withhold ten percent of the
purchase price and remit such amount to the IRS.
INCOME TAXATION OF THE PARTNERSHIPS, THE PROPERTY PARTNERSHIPS AND THEIR
PARTNERS
The following discussion summarizes certain federal income tax
considerations applicable to Simon Group's investment in the SDG Operating
Partnership and the Property Partnerships.
Classification of the Partnerships and the Property Partnerships as
Partnerships
The REIT Members will be entitled to include in their income their
distributive share of the income and to deduct their distributive share of the
losses of SDG Operating Partnership and other partnerships in which they own
interests only if such partnerships are classified for federal income tax
purposes as partnerships rather than as associations taxable as corporations.
Under applicable Treasury Regulations, such partnerships will be classified as
partnerships for federal income tax purposes.
Partners, Not Partnerships, Subject to Tax
A partnership is not a taxable entity for federal income tax purposes.
Rather, a partner is required to take into account its allocable share of a
partnership's income, gains, losses, deductions, and credits for any taxable
year of the partnership ending within or with the taxable year of the partner,
without regard to whether the partner has received or will receive any
distributions from the partnership.
Partnership Allocations
Although a partnership agreement will generally determine the allocation of
income and losses among partners, such allocations will be disregarded for tax
purposes under section 704(b) of the Code if they do not comply with the
provisions of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder as to substantial economic effect.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income and
loss of the SDG Operating Partnership and property partnerships are intended to
comply with the requirements of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Sale of Property
Generally, any gain realized on the sale of real property by a REIT Member
will be capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. However, under the REIT Requirements, a
REIT Member's share, as a partner, of any gain realized by SDG Operating
Partnership (or any other partnership) on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of a trade or business will be treated as income from a
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prohibited transaction that is subject to a 100% penalty tax. See "-- Taxation
of Simon Group." Such prohibited transaction income will also have an adverse
effect upon the REIT Member's ability to satisfy the income tests for REIT
status. See "-- Requirements for Qualification -- Income Tests." Whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. A safe
harbor to avoid classification as a prohibited transaction exists as to real
estate assets held for the production of rental income by a REIT for at least
four years where in any taxable year the REIT has made no more than seven sales
of property or, in the alternative, the aggregate of the adjusted bases of all
properties sold does not exceed ten percent of the adjusted bases of all of the
REIT's properties during the year and the expenditures includible in a
property's basis made during the four-year period prior to disposition must not
exceed 30% of the property's net sales price. Simon Group intends to hold the
Portfolio Properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning, operating and leasing
the Portfolio Properties and to make such occasional sales of the Portfolio
Properties, including peripheral land, as are consistent with its investment
objectives. No assurance can be given, however, that every property sale by
Simon Group will constitute a sale of property held for investment.
Information Reporting Requirement and Backup Withholding Tax
Simon Group will report to its U.S. Stockholders and the IRS the amount of
distributions paid during each calendar year and the amount of tax withheld, if
any. Under certain circumstances, U.S. Stockholders may be subject to backup
withholding at a rate of 31% with respect to distributions paid. Backup
withholding will apply only if the holder (i) fails to furnish its taxpayer
identification number ("TIN") (which, for an individual, would be his Social
Security number), (ii) furnishes an incorrect TIN, (iii) is notified by the IRS
that it has failed properly to report payments of interest and dividends, or
(iv) under certain circumstances, fails to certify, under penalty of perjury,
that it has furnished a correct TIN and has not been notified by the IRS that it
is subject to backup withholding for failure to report interest and dividend
payments. Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
U.S. Stockholders should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against such U.S. Stockholder's United
States federal income tax liability and may entitle such U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Stockholders. For example, Simon Group may
be required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their non-foreign status to Simon Group. Non-
U.S. Stockholders should consult their tax advisors with respect to any such
information reporting and backup withholding requirements.
FEDERAL INCOME TAXATION CONSIDERATIONS RELATING TO PAIRED SHARES
Separate Taxation
Notwithstanding that Paired Shares may only be transferred as a unit,
holders of Paired Shares will be treated for U.S. federal income tax purposes as
holding equal numbers of shares of Simon Group Equity Stock and CRC Common
Stock. It should also be noted that, although holders of Paired Shares own
beneficial interests in CRC shares through the CRC Trusts, for federal income
tax purposes such holders will be treated as owning the CRC shares underlying
the CRC Trusts. The tax treatment of distributions to stockholders and of any
gain or loss upon the sale or other disposition of the Paired Shares (as well as
the amount of gain or loss) must therefore be determined separately with respect
to each share of Simon Group Equity Stock and each share of CRC Common Stock
contained within each Paired Share. The tax basis and holding period for each
share of Simon Group Equity Stock and CRC Common Stock also must be determined
separately. See "-- Tax Consequences of the Merger." Upon a taxable sale of a
Paired Share, the amount realized should be allocated between the Simon Group
and CRC stock based on their then-relative values. Since CRC is not a
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REIT but is instead a regular C corporation, it will be subject to corporate
level tax, without the benefit of the dividend paid deduction available to
REITs. In addition, recently enacted legislation will adversely affect the
treatment of CRC. See "RISK FACTORS -- Certain Tax Risks -- REIT Classification;
Legislation Limiting Benefits of Paired Share Status."
Distributions from CRC up to the amount of CRC's current or accumulated
earnings and profits (less any earnings and profits allocable to distributions
on any preferred stock of CRC) will be taken into account by U.S. Stockholders
as ordinary income and generally will be eligible for the dividends-received
deduction for corporations (subject to certain limitations). Distributions in
excess of CRC's current and accumulated earnings and profits will not be taxable
to a holder to the extent that they do not exceed the adjusted tax basis of the
holder's CRC Common Stock, but rather will reduce the adjusted tax basis of such
CRC Common Stock. To the extent such distributions exceed the adjusted tax basis
of a holder's CRC Common Stock, they will be included in income as long-term
capital gain (or, in the case of individuals, trusts and estates, mid-term
capital gain if the CRC Common Stock has been held for more than one year but
not more than 18 months, and in the case of all taxpayers short-term capital
gain if the CRC Common Stock has been held for one year or less), assuming the
shares are a capital asset in the hands of the stockholder. Such capital gain
will be long-term capital gain if the shares have been held for more than one
year. Individual taxpayers are subject to a maximum tax rate of 28% on long-term
capital gain (20% if the shares were held for more than 18 months).
A sale of CRC Common Stock, if considered a sale or exchange of a United
States real property interest, will be taxed to a non-U.S. stockholder under
FIRPTA. It is unclear whether the assets of CRC would cause CRC to constitute a
real property holding company, thereby causing CRC stock to be United States
real property interests. Even if CRC is considered a real property holding
company, whether a Non-U.S. Stockholder's sale of shares of CRC would be subject
to tax under FIRPTA as a sale of a United States real property interest would
depend on whether the shares are "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market (e.g., the NYSE, on
which the shares of Simon Group Common Stock will be listed) and on whether the
selling stockholder owns or owned more than 5% of the CRC Common Stock. See
"-- Special Tax Consideration for Foreign Stockholders."
STATE AND LOCAL TAX CONSIDERATIONS
Simon Group is and its stockholders may be subject to state or local
taxation in various state or local jurisdictions where Simon Group, its
affiliates and its stockholders transact business or reside. The state and local
tax treatment of the Simon Group and its stockholders may not conform to the
federal income tax consequences discussed above. Consequently, prospective
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws on their investment in the Simon Group.
POSSIBLE FEDERAL TAX DEVELOPMENTS
The rules dealing with federal income taxation are constantly under review
by the IRS, the Treasury Department and Congress. New federal tax legislation or
other provisions may be enacted into law or new interpretations, rulings or
Treasury Regulations could be adopted, all of which could affect the taxation of
Simon Group and its stockholders. See, for example, "RISK FACTORS -- Certain Tax
Risks." No prediction can be made as to the likelihood of passage of any new tax
legislation or other provisions either directly or indirectly affecting Simon
Group or their stockholders. Consequently, the tax treatment described herein
may be modified prospectively or retroactively by legislative action.
ACCOUNTING TREATMENT
Simon Group will account for the Merger between SDG and the CPI merger
subsidiary as a reverse acquisition in accordance with Accounting Principles
Board Opinion No. 16. Although Simon Group Equity Stock will be issued to SDG
stockholders and SDG will become a substantially wholly owned subsidiary of
Simon Group following the Merger, CPI is considered the business acquired for
accounting purposes. SDG is the acquiring company because the SDG stockholders
will represent in excess of a majority of the stockholders of Simon Group. The
fair market value of the consideration given by the acquiring company will
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be used as the valuation basis for the combination of SDG and CPI. The assets
and liabilities of CPI will be revalued by SDG to their respective fair market
values at the Effective Time.
The SDG Operating Partnership will contribute cash to CRC and the newly
formed SRC Operating Partnership on behalf of the SDG stockholders and the
limited partners of the SDG Operating Partnership to obtain the beneficial
interests in CRC which will be paired with the shares to be issued by Simon
Group and to obtain units in the SRC Operating Partnership so that the limited
partners of the SDG Operating Partnership will hold the same proportionate
interest in the SRC Operating Partnership as they hold in the SDG Operating
Partnership at the Effective Time of the Merger. The cash contributed to CRC and
the CRC Operating Partnership represent stock and partnership units for cash
transactions. The assets and liabilities of CRC will not be adjusted to fair
market value but will be reflected at historical cost because the SDG
stockholders' beneficial interest in CRC will be less than 80%.
Following the Merger and related transactions, the separate consolidated
financial statements will be filed pursuant to the Exchange Act for each of
Simon Group (formerly CPI) and SPG Realty Consultants, Inc. (formerly CRC) as
required under Rule 3-01 and Rule 3-02 of Regulation S-X of the Securities Act.
Management plans to submit the separate financial statements of Simon Group and
SRC Realty Consultants, Inc. in a joint filing and may also include combined
financial statements of Simon Group and SRC Realty Consultants, Inc. in those
filings. Since SDG is the predecessor to Simon Group, the historical financial
statements of Simon Group will be the historical financial statements of SDG.
REGULATORY APPROVAL
Other than (i) the Commission's declaring effective the Registration
Statement containing this Proxy Statement/Prospectus, (ii) approvals in
connection with compliance with applicable blue sky or state securities laws,
(iii) the filing of the articles of merger with the Maryland State Department,
(iv) the filing of such reports under Section 13(a) of the Exchange Act, as may
be required in connection with the Merger Agreement and related transactions,
and (v) such filings as may be required in connection with the payment of any
taxes or the transfer of properties, neither the management of SDG nor the
management of CPI believes that any filing with or approval of any governmental
authority is necessary in connection with the consummation of the Merger.
CERTAIN TRANSACTIONS AND AGREEMENTS RELATING TO THE MERGER
In connection with the Merger Agreement and the Merger, certain other
transaction agreements have been or will be entered into on or prior to the
Effective Time which provide for the consummation of the other transactions on
or prior to the Effective Time.
CPI Stockholder Voting Agreements. At the time SDG and CPI entered into
the Merger Agreement, certain stockholders of CPI, representing 15,811,456
shares (approximately 62.4%) of the CPI Common Stock and 153,450 shares
(approximately 73.3%) of the CPI Series A Preferred Stock, entered into
substantially similar Stockholder Voting Agreements as a condition to SDG
entering into the Merger Agreement. The voting power of such stockholders
represents more than the requisite number of votes necessary to approve and
adopt the Merger Agreement and the transactions contemplated thereby, except
that the adoption of the Simon Group Charter requires the vote of 80% of the
voting power of the outstanding voting stock and is a condition to the Merger.
The following discusses the material terms of the Stockholder Voting Agreements.
Stockholder Voting Agreements, dated as of February 18, 1998, were entered
into by each of Stichting Pensioenfonds Voor De Gezondheid Geestelijke En
Maatschappelijke Belangen ("PGGM"), the Kuwait Fund for Arab Economic
Development, the Arab Fund for Economic and Social Development, the Kuwait
Investment Authority, as Agent for the Government of Kuwait, and State Street
Bank and Trust Company, not individually but solely in its capacity as Trustee
of the Telephone Real Estate Equity Trust (collectively, the "Stockholders").
The Stockholder Voting Agreements are applicable to all CPI Common Stock, CPI
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Series A Preferred Stock and the related beneficial interests in shares of CRC
Common Stock owned by each of the Stockholders (collectively, the "Owned
Shares").
Until the expiration of the Voting Period (the earliest of (x) the
Effective Time, (y) the termination of the Merger Agreement in accordance with
its terms or (z) November 30, 1998), each of the Stockholders has agreed to vote
its Owned Shares in favor of the Merger and the approval and adoption of the
Merger Agreement and each of the transactions contemplated by the Merger
Agreement. Each of the Stockholders also has agreed to vote its Owned Shares
against any action or agreement that would result in a material breach of any
covenant, representation or warranty or other obligation or agreement of CPI or
CRC under the Merger Agreement or of the Stockholder under the Stockholder
Voting Agreement. Finally, each Stockholder has agreed to vote against any
extraordinary corporate transaction and certain other actions involving CPI or
CRC. Each of the Stockholders has further agreed that until the expiration of
the Voting Period, it will not (i) transfer any Owned Shares, (ii) grant any
proxies or powers of attorney, deposit any Owned Shares into a voting trust or
enter into a voting agreement, understanding or arrangement with respect to
Owned Shares that would conflict with the proxy granted under the Stockholder
Voting Agreement or (iii) take any action that would make any representation or
warranty untrue or incorrect or would result in a breach by the Stockholder of
its obligations under the Stockholder Voting Agreement; provided, however, that
the Stockholder shall not be prevented from transferring its Owned Shares to any
person who executes and delivers to SDG an agreement substantially the same as
the Stockholder Voting Agreement.
Each of the Stockholders also has agreed that until the expiration of the
Voting Period, the Stockholder and its affiliates (other than CPI, CRC and their
respective Entities) shall not, and shall instruct their respective officers,
directors, employees, agents or other representative not to (i) directly or
indirectly solicit, initiate or encourage, or take any other action to
facilitate, any inquiries or proposals from any person that constitute, or may
be reasonably be expected to lead to, an Alternative Proposal for CPI or CRC;
(ii) enter into, maintain, or continue discussions or negotiations with any
party, other than SDG, in furtherance of such inquiries or to obtain an
Alternative Proposal for CPI or CRC; (iii) agree to or endorse any Alternative
Proposal for CPI or CRC; or (iv) authorize or permit the representatives of the
Stockholder or any of its affiliates to take any such action; provided, however,
that neither the Stockholder nor its representatives on the Board of Directors
of CPI or CRC are prevented from taking actions to the same extent and in the
same circumstances permitted for the Boards of Directors of CPI and CRC in the
Merger Agreement. The Stockholder Voting Agreements assure that the transactions
contemplated by the Merger Agreement, other than the adoption of the Simon Group
Charter which requires the vote of 80% of the voting power of the outstanding
voting stock and is a condition to the Merger, will be approved by CPI and CRC
stockholders at a vote on the matter.
The Operating Partnerships After the Merger; Simon Group Contribution
Agreement. Pursuant to the Contribution Agreement, at the Effective Time Simon
Group will transfer, or direct the transfer of, substantially all of its assets
and liabilities to the SDG Operating Partnership and one or more subsidiaries in
consideration for limited partnership interests in the SDG Operating
Partnership, as more fully described under "-- Structure of Simon Group."
Following the Merger and assuming the exercise of all CPI options and the
contribution of assets and liabilities of Simon Group to the SDG Operating
Partnership, Simon Group, directly and through its ownership of SDG, will own an
approximate 71.4% interest in the SDG Operating Partnership and will be a
general partner of the SDG Operating Partnership. The SDG Limited Partners will
own beneficially, in the aggregate, a 28.6% limited partnership interest in the
SDG Operating Partnership.
In connection with the Merger, CRC will contribute all of its assets and
liabilities to the newly-formed SRC Operating Partnership, will own a 71.4%
interest in the SRC Operating Partnership and will be the sole general partner
of the CRC Operating Partnership. The SDG Limited Partners also will become
limited partners of the SRC Operating Partnership and will own beneficially, in
the aggregate, the remaining 28.6% limited partnership interest in the SRC
Operating Partnership. The Amended SDG Operating Partnership Agreement will
provide for the pairing of the SDG Units with the CRC Units. The SDG Operating
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Partnership Agreement currently provides that the net proceeds of all offerings
of shares of capital stock by SDG will be contributed to the SDG Operating
Partnership in consideration for the issuance to SDG of additional interests in
the SDG Operating Partnership. Following the Merger, the Amended SDG Operating
Partnership Agreement and the SRC Operating Partnership Agreement will each
provide that the net proceeds of all offerings of shares of capital stock by
Simon Group, which shares (to the extent they consist of shares of Simon Group
Equity Stock or convertible Simon Group Preferred Stock) will be paired with
beneficial interests in the CRC Trusts owning the outstanding shares of CRC
Common Stock, will be contributed to the operating partnerships. Upon such
contribution, the SDG Operating Partnership will issue to Simon Group, and the
SRC Operating Partnership will issue to CRC, an additional number of paired
Units in such operating partnerships equal to the number of such shares and
beneficial trust interests issued by Simon Group and CRC, respectively. The
Amended SDG Operating Partnership Agreement and the SRC Operating Partnership
Agreement also will provide that the net proceeds of all incurrences of
indebtedness by Simon Group (or its subsidiaries) or CRC will be loaned to the
SDG Operating Partnership or the CRC Operating Partnership, as the case may be.
The SDG Operating Partnership Agreement currently provides that holders of SDG
Units have the right to exchange all or any portion of their SDG Units for SDG
Common Stock on a one-for-one basis or, at SDG's option, cash equal to the then
market value of such shares, as determined by SDG. Following the Merger, each
SDG Unit together with the paired CRC Unit will be exchangeable for cash or for
a share of Simon Group Common Stock and a beneficial interest in CRC Common
Stock, as determined by Simon Group and CRC.
Under the provisions of SDG's existing registration rights agreements,
holders of SDG Units who receive shares of SDG Common Stock in exchange for such
SDG Units have the right, under certain circumstances and subject to certain
conditions, to require that SDG register such shares for public distribution. As
described below, New Registration Rights Agreements will be executed to provide
that the holders of the SDG Units and CRC Units who receive shares of Simon
Group Common Stock and beneficial trust interests in the CRC Common Stock owned
by the CRC Trusts will have the right, under such circumstances and subject to
such conditions, to require that Simon Group register the Simon Group Common
Stock for public distribution.
Simon Group Issuance Agreement. In connection with the Merger, Simon Group
and CRC will enter into the Issuance Agreement, the purpose of which is to
ensure that a portion of the consideration paid for any newly issued Simon Group
Equity Stock is transferred to CRC as consideration for the beneficial interests
in the CRC Trusts paired with such newly issued stock. Pursuant to the Issuance
Agreement, whenever Simon Group issues shares of Simon Group Common Stock or
Simon Group Preferred Stock convertible into shares of Simon Group Equity Stock
(but only to the extent such preferred stock is designated as "Special Preferred
Stock"), CRC shall issue to the CRC Trusts a number of shares of CRC Common
Stock such that, immediately after such issuance of CRC Common Stock, the CRC
Proportionate Interest of each CRC Trust shall equal the Simon Group
Proportionate Interest of the series of capital stock of Simon Group related to
such CRC Trust. For purposes of the foregoing, the "CRC Proportionate Interest"
for any CRC Trust at any date shall mean a fraction, the numerator of which
shall be the number of shares of CRC Common Stock held in such CRC Trust and the
denominator of which shall be the number of shares of CRC Common Stock
outstanding, and the "Simon Group Proportionate Interest" shall mean (i) with
respect to the Simon Group Equity Stock at any date, a fraction, the numerator
of which shall be the number of shares of Simon Group Equity Stock outstanding
at such date and the denominator of which shall be the sum of the number of
shares of Simon Group Equity Stock outstanding and the aggregate number of
shares of Simon Group Equity Stock issuable upon conversion of all outstanding
shares of all series of Simon Group Special Preferred Stock, and (ii) with
respect to any series of Simon Group Special Preferred Stock, a fraction, the
numerator of which shall be the number of shares of Simon Group Equity Stock
issuable upon conversion of such series of Special Preferred Stock and the
denominator of which shall be the sum of the number of shares of Simon Group
Equity Stock outstanding and the aggregate number of shares of Simon Group
Equity Stock issuable upon conversion of all outstanding shares of all series of
Simon Group Special Preferred Stock. Pursuant to the Issuance Agreement,
whenever CRC shall issue shares of CRC Common Stock Simon Group shall
simultaneously pay to CRC an amount equal to the greater of (i) the aggregate
par value of the shares of CRC Common Stock issued and (ii) the amount
determined in good faith by the Board of Directors of CRC
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to represent the fair market net asset value of the shares of CRC Common Stock
issued (less the aggregate consideration paid to CRC by parties other than Simon
Group in connection with such issuance of CRC Common Stock). See "DESCRIPTION OF
SIMON GROUP AND CRC CAPITAL STOCK -- COMMON STOCK; BENEFICIAL OWNERSHIP OF CRC
COMMON STOCK."
Issuance of Interests in CRC and SRC Operating Partnership. In accordance
with the Issuance Agreement, the SDG Operating Partnership will arrange for cash
to be contributed at the Effective Time on behalf of SDG's stockholders to CRC
as payment (the "CRC Payment") for the beneficial interests in the CRC Trusts
(which will be paired with the shares of Simon Group Equity Stock to be issued
to SDG stockholders in the Merger). The SDG Operating Partnership will also
simultaneously arrange for cash to be contributed at the Effective Time on
behalf of the limited partners of the SDG Operating Partnership to the SRC
Operating Partnership as payment (the "Operating Partnership Payment") for units
of the SRC Operating Partnership which will, in turn, be received by the limited
partners of the SDG Operating Partnership. This is intended to ensure that the
limited partners of the SDG Operating Partnership have the same proportionate
interest in the SRC Operating Partnership as they will have in the SDG Operating
Partnership. The CRC Payment reflects the amount of cash required to be paid to
CRC such that, following such contribution, SDG stockholders will hold the same
proportionate interest in CRC as they will hold in Simon Group upon consummation
of the Merger, without diluting the value of beneficial interests in the CRC
Trusts paired with the previously outstanding shares of CPI Common Stock. Based
upon a preliminary estimate of the value of CRC's net assets as determined by
SDG's management, the amount of the CRC Payment is estimated to be approximately
$14 million and the Operating Partnership Payment is estimated to be
approximately $8 million. At the Effective Time, the Board of Directors of CRC
will make a determination of the fair market value of CRC's net assets based
upon information then available. SDG's management does not expect that the final
amount will differ materially from the preliminary estimates. The CRC Payment
will be contributed by CRC to the SRC Operating Partnership and all amounts will
be used for working capital and general purposes, subject to restrictions
described in the SRC Operating Partnership Agreement. See "CERTAIN PROVISIONS OF
THE SDG OPERATING PARTNERSHIP AGREEMENT, THE SRC OPERATING PARTNERSHIP
AGREEMENT, THE SIMON GROUP CHARTER, THE CRC CHARTER, SIMON GROUP BY-LAWS AND CRC
BY-LAWS AND DELAWARE LAW."
To implement the CRC Payment, the following actions will be taken by the
SDG Operating Partnership and its general partners. Immediately prior to the
Effective Time, the SDG Operating Partnership will distribute the CRC Payment to
its general partners, SD Property Group, Inc. and SDG. SD Property Group, Inc.
will, in turn, dividend the cash it receives from the SDG Operating Partnership
to SDG and its other stockholders who own, in the aggregate, less than .01% of
SD Property Group, Inc. The CRC Payment will be held by SDG, which will, at the
Effective Time, transfer the cash dividend it holds to CRC as payment on behalf
of its stockholders for the beneficial interests in the CRC Trusts to be paired
with the shares of Simon Group Equity Stock to be issued to SDG stockholders in
the Merger. Pursuant to the terms of the CRC Trusts, the beneficial interests of
CRC will be automatically paired with the shares of Simon Group Equity Stock
issued to SDG stockholders in the Merger. To implement the Operating Partnership
Payment, the SDG Operating Partnership will make the Operating Partnership
Payment in consideration for units of the SRC Operating Partnership, which will,
in turn, be received by the limited partners of the SDG Operating Partnership.
New Registration Rights Agreements. Simon Group will enter into the New
Registration Rights Agreements or amendments to existing registration rights
agreements, granting registration rights with respect to shares of Simon Group
Equity Stock and Simon Group Preferred Stock, as applicable, held by certain
existing stockholders of CPI and issuable upon exchange of SDG Units held by
existing stockholders of SDG, including Melvin Simon, Herbert Simon and David
Simon. The terms and conditions of the New Registration Rights Agreements are
substantially similar to those of SDG's existing registration rights agreements.
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STRUCTURE OF SIMON GROUP
As of March 31, 1998, SDG owned or held interests in the SDG Portfolio
Properties through its 63.1% general partnership interest in the SDG Operating
Partnership. As of March 31, 1998, the Simons and the SDG Limited Partners held
64,059,705 SDG Units in the SDG Operating Partnership, representing the
remaining 36.9% interest in the SDG Operating Partnership not held directly or
indirectly by SDG. As of such date, the Simons beneficially owned 34,584,455 SDG
Units, representing 19.9% of the outstanding SDG Units. The operations of SDG
are carried on through the SDG Operating Partnership and the SDG Management
Company. SDG Units held by SDG Limited Partners may be exchanged for shares of
SDG Common Stock on a one-for-one basis or for cash at SDG's option (the "SDG
Exchange Rights"). If all SDG Units held by SDG Limited Partners outstanding on
March 31, 1998, including the Simons and the other SDG Limited Partners, were
exchanged for SDG Common Stock, an aggregate 64,059,705 additional shares of SDG
Common Stock would be issued.
CPI owns or holds interests in the CPI Portfolio Properties directly or
indirectly through other subsidiaries. At March 31, 1998, on a pro forma basis
assuming the exercise of all CPI options and after giving effect to the CPI
Merger Dividends, CPI would have had outstanding 54,412,100 shares of CPI Common
Stock, 209,249 shares of CPI Series A Preferred Stock and 4,966,038 shares of
CPI Series B Preferred Stock. After giving effect to the Merger, the Simon Group
Series A Preferred Stock will be convertible into approximately 7,950,492 shares
of Simon Group Common Stock and the Simon Group Series B Preferred Stock will be
convertible into approximately 12,842,426 shares of Simon Group Common Stock.
See "DESCRIPTION OF SIMON GROUP AND CRC CAPITAL STOCK -- PREFERRED STOCK --
Simon Group Convertible Preferred Stock -- Conversion Rights." Each outstanding
share of Simon Group Common Stock from and after the Effective Time will be
paired with beneficial interests in the CRC Trusts which own all of the
outstanding shares of CRC Common Stock. See "THE MERGER AGREEMENT AND RELATED
MATTERS -- Terms of the Merger" and "DESCRIPTION OF SIMON GROUP AND CRC CAPITAL
STOCK -- COMMON STOCK; BENEFICIAL OWNERSHIP OF CRC COMMON STOCK."
The Merger will result in the combination of the existing businesses and
properties of SDG, CPI and CRC. The businesses will be conducted and
substantially all of such properties will be held through the SDG Operating
Partnership and one or more subsidiaries of the SDG Operating Partnership. In
the Merger, a substantially wholly owned subsidiary of CPI will merge with and
into SDG, with SDG being the surviving company and becoming a subsidiary of
Simon Group (with Simon Group owning in excess of 99.9% of its outstanding
common shares). In exchange for each of their shares of SDG Common Stock, SDG
Class B Common Stock and SDG Class C Common Stock, the stockholders of SDG will
receive one share of Simon Group Common Stock, Simon Group Class B Common Stock
and Simon Group Class C Common Stock, respectively. Based upon the
capitalization of SDG and CPI on March 31, 1998, the stockholders of SDG would
own in the aggregate approximately 67% of the outstanding shares of Simon Group
Equity Stock following the Merger.
The SDG Operating Partnership will continue in existence after the Merger
under the Amended SDG Operating Partnership Agreement. In accordance with the
SDG Operating Partnership Agreement and the Amended SPG Operating Partnership
Agreement, Simon Group is obligated to contribute substantially all of its
assets and liabilities to the SDG Operating Partnership in exchange for
additional Partnership units. The partnership units may be exchanged for shares
of Simon Group Common Stock on a one-for-one basis or for cash at Simon Group's
option. At the Effective Time, Simon Group will transfer, or direct the transfer
of, substantially all of its assets (i.e., all the assets other than assets
valued at approximately $153.1 million, including Ocean County Mall valued at
approximately $145.8 million) and liabilities (except that Simon Group will
remain a co-obligor with the SDG Operating Partnership under a $1.4 billion
senior unsecured term loan pursuant to a commitment letter with The Chase
Manhattan Bank and Chase Securities, Inc.) to the SDG Operating Partnership and
one or more subsidiaries of the SDG Operating Partnership in consideration for
49,858,940 limited partnership interests (which equals the number of shares of
CPI Common Stock outstanding after the Merger Dividends, less the number of
shares equal to the value of the
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former CPI assets and liabilities retained by Simon Group) and 5,175,287
preferred partnership interests (which equals the number of shares of CPI Series
A Preferred Stock and CPI Series B Preferred Stock outstanding after the CPI
Merger Dividends). The value of the assets and liabilities retained by Simon
Group or transferred to the SDG Operating Partnership is based on the
consideration to be received or retained by the stockholders of CPI in
connection with the Merger and on a reported closing trading price per share of
SDG Common Stock of 33 5/8 on February 18, 1998, the last trading date preceding
public announcement of the Merger. The fair market value of the former CPI
assets less liabilities to be transferred by Simon Group to the SDG Operating
Partnership and one or more of its subsidiaries is estimated at approximately
$2.4 billion. See "PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL
DATA -- Note 3. Analysis of Stockholders' Equity." Such transfer will result in
a reduction of the SDG Limited Partners' interests from 36.9% to 28.6%, assuming
the Merger had occurred on March 31, 1998. On March 31, 1998, Melvin and Herbert
Simon, Simon Group's Co-Chairmen, and David Simon, Simon Group's Chief Executive
Officer, beneficially held 9.9%, 5.8% and 1.3%, respectively, of the SDG
Operating Partnership, and after such transfer beneficially will hold 7.7%, 4.5%
and 1.0%, respectively, assuming such transfer had occurred on March 31, 1998.
See "THE MERGER AGREEMENT AND RELATED MATTERS -- Certain Transactions and
Agreements Relating to the Merger -- The Operating Partnerships After the
Merger; Simon Group Contribution Agreement." See also "RISK FACTORS -- Potential
Conflicts of Interests Related to Operations," "-- Limits on Change of Control"
and "-- Dependence on Key Personnel." Each of SDG and SD Property Group, Inc.
(of which SDG owns in excess of 99.9% of its outstanding common stock) will
continue as a general partner of the SDG Operating Partnership. Simon Group,
both directly through its ownership of SDG will own an approximate 71.4%
interest in the SDG Operating Partnership and will be a general partner of the
SDG Operating Partnership assuming the Merger had occurred on March 31, 1998.
The businesses and the assets of CRC will be held by the SRC Operating
Partnership, of which CRC will be the sole general partner. In connection with
the formation of the SRC Operating Partnership, SDG, as a general partner of the
SDG Operating Partnership, Simon Group, SRC and the SDG Limited Partners will
enter into the SRC Operating Partnership Agreement, pursuant to which assuming
the Merger had occurred on March 31, 1998 (i) CRC will contribute all of its
assets and liabilities to the SRC Operating Partnership for a 71.4% interest in
the SRC Operating Partnership and (ii) SDG Operating Partnership will contribute
assets including, without limitation, land held for future development, to the
SRC Operating Partnership for CRC Units representing the remaining 28.6% limited
partnership interest in the SRC Operating Partnership. The SDG Operating
Partnership will then distribute the CRC Units to the holders of SDG Units in
proportion to their ownership interest in the SDG Operating Partnership,
whereupon such holders also will become limited partners of the SRC Operating
Partnership. Following the Merger, the CRC Units will be paired with the SDG
Units and may be exchanged (together with the SDG Units) for shares of Simon
Group Equity Stock (together with beneficial interests in the CRC Trusts owning
the outstanding shares of CRC Common Stock) on a one-for-one basis or for cash
at Simon Group's option. Following the Merger, the SDG Units and CRC Units may
not be exchanged or transferred separately, but only as a single unit.
After giving effect to the Merger and to the foregoing transactions,
holders of SDG Equity Stock will own shares of Simon Group Equity Stock which
are paired with beneficial interests in the CRC Trusts owning the outstanding
shares of CRC Common Stock, and holders of SDG Units will own SDG Units which
are paired with the CRC Units, and such paired Units will be exchangeable for
shares of Simon Group Common Stock which are paired to beneficial interests in
the CRC Trusts owning the outstanding shares of CRC Common Stock.
AMENDMENT TO THE SDG CHARTER
At the SDG Special Meeting, stockholders of SDG will be asked to vote upon
and approve an amendment to the SDG Charter as follows:
To provide certain voting rights (the "Voting Preferred Amendment") to
holders of SDG's 8 3/4% Series B Cumulative Redeemable Preferred Stock
("SDG Series B Preferred Stock") and 7.89%
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Series C Cumulative Step-Up Premium Rate Preferred Stock ("SDG Series C
Preferred Stock" and together with the SDG Series B Preferred Stock, the
"SDG Preferred Stock").
The following summary of the Voting Preferred Amendment does not purport to
be complete and is qualified by reference to the proposed Voting Preferred
Amendment to the SDG Charter, a copy of which is attached to this Proxy
Statement/Prospectus as Annex F.
The Voting Preferred Amendment provides that holders of SDG Series B
Preferred Stock and SDG Series C Preferred Stock will be granted the right to
vote with the SDG Equity Stock (of which Simon Group will own in excess of 99.9%
following the Merger) solely for the election of directors to the Board of
Directors of SDG. For the purposes of such a vote, the holders of SDG Equity
Stock, SDG Series B Preferred Stock and SDG Series C Preferred Stock shall vote
together as one class. Accordingly, following the Merger, the holders of SDG
Preferred Stock will be entitled to one vote per share, representing
approximately 9.0% of the aggregate voting power when voting together as a class
with the shares of SDG Equity Stock. The voting rights for the holders of SDG
Series B Preferred Stock and SDG Series C Preferred Stock shall become effective
immediately upon the filing of the Voting Preferred Amendment with the Maryland
State Department (which is expected to be filed as soon as practicable after the
SDG Meetings but prior to the consummation of the Merger) and accordingly the
voting rights will not be exercisable in connection with any of the proposals at
the SDG Meetings. Approval of the Voting Preferred Amendment is necessary for
approval of the Merger Proposal. In structuring the Merger, a goal of the SDG
Board of Directors was to have the Merger qualify as a tax-free reorganization
for U.S. federal income tax purposes. The Voting Preferred Amendment, by
converting the SDG Preferred Stock to "voting stock" for purposes of U.S.
federal income tax analysis, will facilitate tax-free reorganization treatment.
See "THE MERGER AGREEMENT AND RELATED MATTERS -- Conditions to Consummation of
the Merger." The affirmative vote of a majority of all the votes entitled to be
cast by holders of the outstanding SDG Equity Stock is required to approve this
amendment.
THE SDG BOARD OF DIRECTORS CONSIDERS THE VOTING PREFERRED AMENDMENT TO BE
IN THE BEST INTEREST OF SDG AND ITS STOCKHOLDERS AND RECOMMENDS THAT
STOCKHOLDERS VOTE FOR ITS APPROVAL AND ADOPTION.
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THE MEETINGS OF STOCKHOLDERS OF SDG
INTRODUCTION
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the SDG Board of Directors for use in connection with
the SDG Special Meeting and the SDG Annual Meeting and any adjournments or
postponements of such meetings. It is anticipated that the mailing of the Proxy
Statement/Prospectus to SDG stockholders will commence on August 13, 1998.
DATE, TIME AND PLACE OF SDG MEETINGS
The SDG Special Meeting will be held at The Indianapolis Hyatt Regency, One
South Capitol Avenue, Indianapolis, Indiana, on September 23, 1998, at 10:00
a.m., Indianapolis time. The SDG Annual Meeting will be held immediately
following the SDG Special Meeting at the same location as the SDG Special
Meeting.
MATTERS TO BE CONSIDERED AT THE SDG MEETINGS
SDG Special Meeting
At the SDG Special Meeting, the holders of SDG Equity Stock, voting
together as a single class, will be asked to consider and vote upon each of the
SDG Proposals:
(1) The approval and adoption of an amendment to the SDG Charter to
provide certain voting rights to the holders of SDG Preferred Stock
effective immediately upon the filing of the Voting Preferred Amendment
with the Maryland State Department (as more fully described under
"AMENDMENT TO THE SDG CHARTER"). Approval of the Voting Preferred Amendment
is a condition to the consideration of the Merger Proposal.
(2) The approval and adoption of the Merger Proposal, as more fully
described under "THE MERGER AGREEMENT AND RELATED MATTERS."
(3) To transact such other business as may properly come before the
SDG Special Meeting or any adjournment or postponement thereof.
SDG Annual Meeting
At the SDG Annual Meeting, the holders of SDG Equity Stock voting together
as a single class, will be asked to consider the following proposals:
(1) The election of eleven directors (five to be elected by the
holders of SDG Equity Stock, four to be elected by the holders of SDG Class
B Common Stock and two to be elected by the holders of SDG Class C Common
Stock) each to serve until their successors are elected and have qualified.
(2) To approve the 1998 Stock Incentive Plan.
(3) The ratification of the appointment of Arthur Andersen LLP as
independent accountants for SDG for the fiscal year ended December 31,
1998.
(4) Such other business as may properly come before the SDG Annual
Meeting or any adjournment or postponement thereof.
RECORD DATE AND VOTE REQUIRED
The SDG Board of Directors has fixed the close of business on July 20, 1998
as the Record Date for the SDG Annual Meeting and the SDG Special Meeting. At
July 20, 1998, there were 110,482,334 shares of SDG Common Stock, 3,200,000
shares of SDG Class B Common Stock and 4,000 shares of SDG Class C Common Stock
outstanding.
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The Voting Preferred Amendment proposal requires approval by at least a
majority of the aggregate votes entitled to be cast by holders of the
outstanding SDG Equity Stock, voting together as a single class. The Merger
Proposal requires approval by at least 66 2/3% of the aggregate votes entitled
to be cast by holders of the outstanding SDG Equity Stock, voting together as a
single class. The approval of the Merger Proposal is contingent upon approval of
the Voting Preferred Amendment. Therefore, a vote against the Voting Preferred
Amendment is effectively a vote against the Merger Proposal. At the SDG Annual
Meeting, directors will be elected by a plurality of the votes cast for the
election of directors. The approval of the 1998 Stock Incentive Plan and the
ratification of the appointment of independent accountants each will require the
affirmative vote of a majority of the votes cast on the matter at the SDG Annual
Meeting.
In the event that there are not a sufficient number of votes to approve the
Voting Preferred Amendment or the Merger Proposal at the time of the SDG Special
Meeting, the persons present or named as proxies by a stockholder may propose
and vote for one or more adjournments of the SDG Special Meeting to permit
further solicitation of proxies. A proxy that withholds discretionary authority
or that is voted against the Voting Preferred Amendment or the Merger Proposal
will not be voted in favor of any adjournment or postponement of the SDG Special
Meeting. The SDG Special Meeting may be adjourned by the affirmative vote of a
majority of the votes present in person or by proxy.
The presence, in person or by proxy, of SDG stockholders owning shares of
SDG Equity Stock representing a majority of all the votes entitled to be cast by
holders of SDG Equity Stock at the SDG Special Meeting and the SDG Annual
Meeting, respectively, is necessary to constitute a quorum at each such meeting.
As of July 31, 1998, directors and executive officers of SDG as a group
beneficially held shares of SDG Equity Stock representing 32.7% of all the votes
entitled to be cast by holders of SDG Equity Stock at the SDG Meetings and each
such person has advised SDG that he or she intends to vote to approve and adopt
the SDG Proposals.
A proxy may indicate that all or a portion of the shares represented by
such proxy are not being voted with respect to a specific proposal. This could
occur, for example, when a broker is not permitted to vote shares held in street
name on certain proposals in the absence of instructions from the beneficial
owner. Broker non-votes and abstentions will be considered present for purposes
of determining a quorum. BECAUSE APPROVAL OF THE PROPOSALS AT THE SDG SPECIAL
MEETING REQUIRES THE AFFIRMATIVE VOTE OF A PROPORTION OF THE OUTSTANDING SHARES
OF SDG EQUITY STOCK AS DESCRIBED ABOVE, ANY BROKER NON-VOTES OR ABSTENTIONS ON
THE PROPOSAL WILL HAVE THE SAME EFFECT AS VOTES "AGAINST" THE PROPOSAL. NONE OF
THE MATTERS TO BE CONSIDERED AT THE SDG ANNUAL MEETING -- THE ELECTION OF
DIRECTORS, THE APPROVAL OF THE 1998 STOCK INCENTIVE PLAN AND THE RATIFICATION OF
THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS -- REQUIRES THE AFFIRMATIVE VOTE OF A
SPECIFIED PROPORTION OF THE OUTSTANDING SHARES OF SDG EQUITY STOCK. ACCORDINGLY,
BROKER NON-VOTES AND ABSTENTIONS WILL HAVE NO EFFECT ON THE RESULT OF THE VOTE
ON SUCH MATTERS.
PROXY
Enclosed is a form of proxy which should be completed, dated, signed and
returned by each SDG stockholder before the SDG Meetings to ensure that such
stockholder's shares will be voted at the meetings. Any SDG stockholder signing
and delivering a proxy has the power to revoke the proxy at any time prior to
its use by filing with the Corporate Secretary of SDG a written revocation of
the proxy or a duly executed proxy bearing a later date or by attending and
voting in person at the meetings.
Shares represented by a properly executed proxy will be voted in accordance
with the instructions indicated on such proxy with respect to the proposals at
the SDG Special Meeting and the election of directors and the ratification of
the appointment of independent accountants at the SDG Annual Meeting, and, at
the discretion of the proxy holders, on all other matters to come properly
before either meeting. If a stockholder executes a proxy with no instructions
indicated thereon, shares represented by such proxy will be voted in favor of
the proposals at the SDG Special Meeting and, at the SDG Annual Meeting, for the
election as directors of all nominees listed on the form of proxy and for the
ratification of the appointment of Arthur Andersen LLP as independent
accountants for SDG for 1998.
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SOLICITATION OF PROXIES
SDG will bear the expense of the proxy solicitation. Such solicitation will
be by mail but also may be by telephone or in person by the directors, officers
or employees of SDG who will not receive any additional compensation. In
addition, SDG retained MacKenzie Partners, Inc., a proxy soliciting firm, to
assist in the solicitation of proxies. SDG anticipates that the cost of such
proxy soliciting firm to SDG will not exceed $12,500, plus expenses. The
telephone number of MacKenzie Partners, Inc. is (212) 929-5500.
OTHER MATTERS
The SDG Board of Directors knows of no matters, other than those described
in this Proxy Statement/Prospectus, which are to be brought before the SDG
Special Meeting or the SDG Annual Meeting. However, if any other matters
properly come before either meeting, it is the intention of the persons named in
the enclosed form of proxy to vote such proxy in accordance with their
discretion on such matters.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARD. IF THE
MERGER IS APPROVED AND ADOPTED BY THE STOCKHOLDERS AND THE MERGER IS
CONSUMMATED, YOU WILL RECEIVE A TRANSMITTAL FORM AND INSTRUCTIONS FOR THE
SURRENDER OF THE CERTIFICATES PREVIOUSLY REPRESENTING YOUR SHARES OF SDG EQUITY
STOCK.
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POLICIES OF SIMON GROUP FOLLOWING THE MERGER
The following is a discussion of dividend and distribution policies,
investment policies, financing policies, conflicts of interest policies and
policies with respect to certain other activities of SDG which Simon Group
expects to continue following the Merger. The policies may be amended or
rescinded from time to time following the Merger at the discretion of the Board
of Directors of Simon Group without a vote of the stockholders of Simon Group.
DIVIDEND AND DISTRIBUTION POLICIES
It is intended that following the Merger Simon Group will operate so as to
qualify as a REIT under sections 856 through 860 of the Code and applicable
Treasury Regulations. To obtain and maintain its status as a REIT, Simon Group
generally will be required each year to distribute to its stockholders at least
95% of its taxable income after certain adjustments. In the event that Funds
From Operations are insufficient to meet these distribution requirements, Simon
Group could be required to borrow the amount of the deficiency or sell assets to
obtain the cash necessary to make distributions required to retain REIT status.
While Simon Group does not intend to reduce quarterly distributions as a
result of the Merger, future distributions paid by Simon Group will be at the
discretion of its Board of Directors and will depend on its actual cash flow,
financial condition, capital requirements, annual distribution requirements
under the REIT provisions of the Code and such other factors as the Simon Group
Board of Directors deems relevant. The next full quarterly dividend paid by
Simon Group will be adjusted to take into account the Special Distribution to be
declared by each of SDG and CPI prior to the Merger, the record date for which
shall be the close of business on the last business day prior to the Effective
Time. "Special Distribution" means the distribution to be made by each of SDG
and CPI to their respective stockholders in amounts proportional to dividends
paid to SDG's or CPI's (as the case may be) stockholders for the last full
quarter preceding the Effective Time prorated over the number of days elapsed in
the quarter in which the Effective Time occurs from the beginning of such
quarter to the Effective Time. Assuming Simon Group continues to make regular
quarterly distributions at the rate currently paid by SDG ($0.5050 per share),
following the Merger each former stockholder of SDG, as a stockholder of Simon
Group, would be entitled to receive a quarterly distribution from Simon Group
equivalent to $0.5050 per share of SDG Equity Stock held prior to the Merger.
It is anticipated that Funds From Operations of Simon Group will exceed
earnings and profits due to non-cash expenses, primarily depreciation and
amortization, to be incurred by Simon Group. Distributions by Simon Group to the
extent of current or accumulated earnings and profits for federal income tax
purposes, other than capital gains dividends, will be taxable to stockholders as
ordinary dividend income. Any dividend designated by Simon Group as a capital
gain dividend generally will give rise to capital gain for stockholders.
Distributions in excess of Simon Group's current or accumulated earnings and
profits will be treated as a non-taxable reduction of a stockholder's adjusted
tax basis in its share of Simon Group Equity Stock to the extent thereof, and
thereafter as capital gain. Distributions treated as non-taxable reductions in
adjusted tax basis will have the effect of deferring taxation until the sale of
a stockholder's shares of Simon Group Equity Stock or future distributions in
excess of the stockholder's basis in such share of Simon Group Equity Stock.
Simon Group will maintain a distribution reinvestment plan under which
stockholders may elect to reinvest their distributions automatically in
additional shares of Simon Group Equity Stock. To fulfill its obligations under
the distribution reinvestment plan, Simon Group may, from time to time, elect to
purchase shares of Simon Group Equity Stock in the open market on behalf of
participating stockholders or issue new shares of Simon Group Equity Stock to
such stockholders. Simon Group may suspend or amend such plan at any time. This
Proxy Statement/Prospectus does not constitute an offer of any shares of Simon
Group Equity Stock that may be issued by Simon Group in connection with a
distribution reinvestment program, and such shares may be purchased only
pursuant to a separate prospectus contained in an effective registration
statement.
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INVESTMENT POLICIES
Simon Group will conduct all its investment activities through the SDG
Operating Partnership for as long as such partnership exists. Simon Group's
primary business objective will be to increase Funds From Operations per share
and the value of its properties and operations. It is intended that Simon Group
will achieve these objectives by pursuing an aggressive leasing strategy;
continuing to improve the performance of the Portfolio Properties through both
traditional and innovative management techniques; where appropriate, renovating
and/or expanding Portfolio Properties; developing new shopping centers whenever
such development meets the economic criteria of Simon Group; and acquiring
additional shopping centers and the portfolios of other retail real estate
companies that meet its investment criteria, although no assurance can be given
that Simon Group will achieve such objectives. Simon Group's policy will be to
develop and acquire properties primarily for generation of current income and
long-term value appreciation. Simon Group will not have a policy limiting the
amount or percentage of assets that may be invested in any particular property
or type of property or in any geographic area.
Simon Group may purchase or lease properties for long-term investment,
develop or redevelop its properties or sell such properties, in whole or in
part, when circumstances warrant. Simon Group currently participates and Simon
Group may continue to participate with other entities in property ownership,
through joint ventures or other types of co-ownership. Equity investments may be
subject to existing mortgage financing and other indebtedness that have priority
over the equity interest of Simon Group.
While Simon Group emphasizes equity real estate investments, Simon Group
may, in its discretion, invest in mortgages (which may or may not be insured by
a governmental agency) and other real estate interests consistent with its
qualification as a REIT. It is not intended that Simon Group invest to a
significant extent in mortgages or deeds of trust, but it may invest in
participating or convertible mortgages if Simon Group concludes that it may
benefit from the cash flow or any appreciation in the value of the property.
Subject to the percentage ownership limitations and gross income tests
necessary for REIT qualification, Simon Group may also invest in securities of
other entities engaged in real estate activities or securities of other issuers.
See "THE MERGER AGREEMENT AND RELATED MATTERS -- Federal Income Tax
Considerations Relating to Simon Group -- Requirements for Qualification." Simon
Group may invest in the securities of other issuers in connection with
acquisitions of indirect interests in real estate (normally general or limited
partnership interests in special purpose partnerships owning one or more
properties). Simon Group may in the future acquire all or substantially all of
the securities or assets of other REITs, management companies or similar
entities where such investments would be consistent with its investment
policies. It is not intended that Simon Group invest in securities of other
issuers (other than the SDG Operating Partnership and certain wholly-owned
subsidiaries and to acquire interests in real estate) for the purpose of
exercising control. It is not intended that Simon Group's investments in
securities will require it to register as an "investment company" under the
Investment Company Act of 1940, as amended, and it is intended that Simon Group
divest securities before any such registration would be required.
FINANCING POLICIES
Similar to SDG, Simon Group will not maintain a policy of limiting its
ratio of debt to Total Market Capitalization. Certain agreements relating to
indebtedness of Simon Group and SDG do, however, set forth restrictions on the
amount of indebtedness that each will be permitted to incur. If SDG's pro rata
share of indebtedness of all unconsolidated Joint Venture Properties were
included, Simon Group's ratio of debt to total market capitalization, including
a pro rata share of joint venture indebtedness, would have been 49.8% on a pro
forma basis as compared to 50.1% for SDG on an historical basis as of March 31,
1998. See "RISK FACTORS -- Indebtedness of Simon Group."
To the extent that its Board of Directors determines to seek additional
capital, Simon Group may raise such capital through additional equity offerings,
debt financing or retention of cash flow (subject to provisions in the Code
requiring the distribution by a REIT of a certain percentage of taxable income
and taking into account taxes that would be imposed on undistributed taxable
income), or a combination of these methods. If Simon Group's Board of Directors
determines to raise additional equity capital, it may, without stockholder
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approval, issue additional shares of Simon Group Common Stock or other capital
stock of Simon Group up to the amount of its authorized capital in any manner
(and on such terms and for such consideration) as it deems appropriate,
including in exchange for property. Such securities may be senior to the
outstanding classes of Simon Group common stock and may include additional
classes of preferred stock (which may be convertible into SDG Common Stock).
Existing stockholders will have no preemptive right to purchase shares in any
subsequent offering of securities by Simon Group, and any such offering could
cause a dilution of a stockholder's investment in Simon Group.
Following the Merger, as long as the SDG Operating Partnership is in
existence, the proceeds of the sale of any common or preferred securities by
Simon Group (after transferring a portion of such consideration to CRC in
accordance with the Issuance Agreement) will be contributed to the SDG Operating
Partnership in exchange for Units, which will dilute the ownership interest, if
any, of the SDG Limited Partners. Any amounts received upon such issuance by CRC
will, so long as the SRC Operating Partnership Agreement is in existence, be
contributed to the SRC Operating Partnership in exchange for Units, which will
dilute the ownership interest, if any, of the CRC Limited Partners. It is
anticipated that, following the Merger, any additional borrowings would be made
through the SDG Operating Partnership, although Simon Group might incur
borrowings that would be reloaned to the SDG Operating Partnership. Borrowings
may be in the form of bank borrowings, publicly and privately placed debt
instruments, or purchase money obligations to the sellers of properties, any of
which indebtedness may be unsecured or may be secured by any or all of the
assets of Simon Group, CRC, the SDG Operating Partnership, the SRC Operating
Partnership, or any existing or new property-owning partnership and may have
full or limited recourse to all or any portion of the assets of any of the
foregoing. Although Simon Group may borrow to fund the payment of dividends, it
currently has no intention or expectation that it will do so.
Simon Group may seek to obtain unsecured or secured lines of credit or may
determine to issue debt securities (which may be convertible into capital stock
or be accompanied by warrants to purchase capital stock) or to sell or
securitize its lease receivables. The proceeds from any borrowings may be used
to finance acquisitions, to develop or redevelop properties, to refinance
existing indebtedness, for working capital or capital improvements, or for
meeting the income distribution requirements applicable to REITs if Simon Group
has income without the receipt of cash sufficient to enable it to meet such
distribution requirements. Simon Group also may determine to finance
acquisitions through the exchange of properties or issuance of additional SDG
Units in the SDG Operating Partnership, shares of Simon Group Common Stock,
shares of preferred stock or other securities. The ability to offer SDG Units to
transferors may result in a beneficial structure for the transferors because the
exchange of SDG Units for properties may defer the recognition of gain for tax
purposes by the transferor and may be an advantage for Simon Group since certain
investors may be limited in the number of shares of Simon Group common stock
that they may purchase. To the extent that Simon Group's Board of Directors
determines to obtain additional debt financing, it is intended that Simon Group
(or an entity owned or controlled by Simon Group) do so generally through
mortgages on properties and drawings against revolving lines of credit in a
manner consistent with its debt capitalization policy. These mortgages may be
recourse, non-recourse or cross-collateralized. Simon Group will not have a
policy limiting the number or amount of mortgages that may be placed on any
particular property, but mortgage financing instruments usually limit additional
indebtedness on such properties.
CONFLICTS OF INTEREST POLICIES
Simon Group will maintain certain policies of SDG and enter into certain
agreements designed to reduce or eliminate potential conflicts of interest. Any
transaction between Simon Group and the Simons or the DeBartolos (including
property acquisitions, service and property management agreements and retail
space leases) must be approved by a majority of Simon Group's Independent
Directors. The SDG Management Company has agreed with SDG that if in the future
Simon Group is permitted by applicable tax law and regulations to conduct any or
all of the activities that are now being conducted by the SDG Management
Company, the SDG Management Company will not compete with SDG or Simon Group
with respect to new or renewal business of this nature.
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A majority of the members of Simon Group's Board of Directors (of which six
must be Independent Directors) have the power to authorize and require the sale
of any Portfolio Property because the sale of Portfolio Properties may have an
adverse tax impact on the Simons or the DeBartolos and the other SDG Limited
Partners and therefore may involve conflicts of interest that could have an
adverse impact on the stockholders of Simon Group. The exercise of such powers
is subject to applicable agreements with third parties. In addition, decisions
with respect to the exercise of the options to acquire from the Simons or the
DeBartolos and the enforcement of contracts between Simon Group and the Simons
or the DeBartolos, will be made by the Independent Directors. The noncompetition
agreements between SDG and each of Melvin Simon, Herbert Simon and David Simon
contain covenants limiting the ability of the Simons to participate in certain
shopping center activities in North America.
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
It is not intended that Simon Group make investments other than as
previously described. It is intended that Simon Group make investments in such a
manner as to be consistent with the REIT Requirements, unless, because of
changing circumstances or changes in the REIT Requirements, Simon Group's Board
of Directors determines that it is no longer in the best interests of Simon
Group to qualify as a REIT. Simon Group has authority to offer shares of its
capital stock or other securities in exchange for property and to repurchase or
otherwise reacquire its shares or any other securities and may engage in such
activities in the future. Simon Group may in the future issue shares of Simon
Group Common Stock to holders of SDG Units in the SDG Operating Partnership and
CRC Units in the SRC Operating Partnership upon exercise of their rights under
the SDG Operating Partnership. Simon Group has not made loans to other entities
or persons, including its officers and directors, other than the SDG Management
Company. Simon Group may in the future make loans to joint ventures in which it
participates. It is not intended that Simon Group engage in (i) trading,
underwriting or agency distribution or sale of securities of other issuers and
(ii) the active trade of loans and investments.
CERTAIN ACTIVITIES OF CPI PRIOR TO THE MERGER
The following were certain of CPI's activities prior to the Merger: During
the past three years, CPI issued (i) 91,701 shares of CPI Common Stock pursuant
to a plan under which distributions are used to purchase shares, (ii) 75,131
shares of CPI Common Stock in an original issuance for cash, (iii) 7,487,183
shares of CPI Common Stock in exchange for various partnership interests, (iv)
7,000 shares upon exercise of an employee's stock options and (v) $250 million
of 7 7/8% Notes due 2016 in accordance with Rule 144A of the Securities Act. CPI
also sold 3,550 shares of CPI Common Stock held in its treasury and issued 2,041
shares of CPI Common Stock from its treasury in connection with distributions
under its Trustees' and Executives' Deferred Remuneration Plan during that same
period. During the past three years, the maximum amount that CPI borrowed under
the Revolving Credit Agreement, dated as of June 26, 1996 among CPI, the Chase
Manhattan Bank and Morgan Guaranty Trust Company of New York and the lenders
party thereto (the "CPI Revolving Credit Agreement") was $40,000,000. During
that period, joint ventures in which CPI is a participant have also borrowed
money in mortgage refinancing transactions aggregating approximately
$92,100,000. In the ordinary course of business during the past three years, CPI
has extended loans to various tenants in the aggregate amount of approximately
$800,000. CPI also refinanced approximately $15.7 million of loans under CPI's
Employee Share Purchase Plan, as amended, during that same time. CPI has not
invested in the securities of other issuers for the purpose of exercising
control. CPI has not underwritten securities of other issuers. During the past
three years, CPI has not engaged in the purchase and sale (or turnover) of
investments. During the past three years, CPI has acquired various partnership
interests in exchange for 7,487,183 shares of CPI Common Stock. During the past
three years, CPI has repurchased (i) 81,677 shares of CPI Common Stock from
participants in CPI's Employee Share Purchase Plan, (ii) 2,603,158 shares of CPI
Common Stock in exchange for property and (iii) 628,524 shares of CPI Common
Stock for cash. CPI also reacquired 59,684 shares of CPI Common Stock in
adjustment of an earlier issuance of CPI Common Stock in exchange for property.
During the past three years, CPI has provided annual reports containing
financial statements certified by independent public accountants and quarterly
reports containing unaudited financial statements to its security holders.
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MANAGEMENT OF SIMON GROUP AND CRC FOLLOWING THE MERGER
BOARD OF DIRECTORS OF SIMON GROUP AND CRC
The following table sets forth the proposed composition of the Board of
Directors of Simon Group and CRC at the Effective Time of the Merger if the
Merger Proposal is approved and adopted.
CLASS OF
SIMON GROUP STOCK
ELECTING
DIRECTORSHIP
NAME AGE OF SUCCESSOR(1)
---- --- --------------------
Robert E. Angelica.......................................... 51 Equity Stock
Birch Bayh.................................................. 70 Equity Stock
Hans C. Mautner............................................. 60 Equity Stock
G. William Miller........................................... 73 Equity Stock
J. Albert Smith, Jr......................................... 58 Equity Stock
Pieter S. van den Berg...................................... 52 Equity Stock
Philip J. Ward.............................................. 49 Equity Stock
David Simon................................................. 36 Class B Common Stock
Herbert Simon............................................... 63 Class B Common Stock
Melvin Simon................................................ 71 Class B Common Stock
Richard S. Sokolov.......................................... 48 Class B Common Stock
Frederick W. Petri.......................................... 51 Class C Common Stock
M. Denise DeBartolo York.................................... 47 Class C Common Stock
- ---------------
(1) The directors of CRC are elected by all holders of CRC Common Stock.
Ms. M. Denise DeBartolo York and Messrs. William T. Dillard II, G. William
Miller, Frederick W. Petri, David Simon, Herbert Simon, Melvin Simon, J. Albert
Smith, Jr., Richard S. Sokolov and Philip J. Ward are currently directors of
SDG, Mr. Hans C. Mautner is currently a director of CPI and CRC, Mr. Robert E.
Angelica is currently a director of CPI and Mr. Pieter S. van den Berg is a CPI
designee.
Set forth below is a summary of the business experience of the nominees for
directorships.
Robert E. Angelica, 51, has been a director of CPI since 1997. He is
President and Chief Investment Officer of the AT&T Investment Management
Corporation, a position he has held since 1992. Mr. Angelica is also a board
member of The Emerging Markets Growth Fund, Inc. and The India Magnum Fund, Ltd.
Birch Bayh, 70, has been a director of SDG since 1993. He has been a
partner in the Washington, D.C. law firm of Oppenheimer, Wolff, Donnelly & Bayh
LLP (formerly Bayh, Connaughton & Stewart P.C.) for more than five years. He
served as a United States Senator from Indiana from 1963 to 1981. Mr. Bayh also
serves as a director of ICN Pharmaceuticals, Inc. and Acordia, Inc.
Hans C. Mautner, 60, is Chairman of the Board of Directors and Chief
Executive Officer of CPI and CRC. He has been a director of CPI since 1973 and
of CRC since 1975. He served as Vice President of CPI from 1972 until 1973, when
he was appointed Executive Vice President. Mr. Mautner was elected President of
CPI and CRC in 1976, was elected Chairman and President in 1988, and was elected
Chairman, President and Chief Executive Officer of CPI and CRC in 1989. Prior to
joining CPI, he was a General Partner of Lazard Freres. Mr. Mautner is currently
a director of Cornerstone Properties Inc. and a board member for seven funds in
The Dreyfus Family of Funds.
G. William Miller, 73, has been a director of SDG since the DeBartolo
Merger. He has been Chairman of the Board and Chief Executive Officer of G.
William Miller & Co. Inc., a merchant banking firm, since 1983. He is a former
Secretary of the U.S. Treasury and a former Chairman of the Federal Reserve
Board. From January 1990 until February 1992, he was Chairman and Chief
Executive Officer of Federated Stores,
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Inc., the parent company of predecessors to Federated Department Stores, Inc.
Mr. Miller is Chairman of the Board and a director of Waccamaw Corporation. He
is also a director of GS Industries, Inc., Kleinwort Benson Australian Income
Fund, Inc. and Repligen Corporation.
Fredrick W. Petri, 51, has been a director of SDG since the DeBartolo
Merger. He is a partner of Petrone, Petri & Company, a real estate investment
firm he founded in 1993, and an officer of Housing Capital Company since its
formation in 1994. Prior thereto, he was an Executive Vice President of Wells
Fargo Bank, where for over 18 years he held various real estate positions. Mr.
Petri is currently a trustee of the Urban Land Institute and a director of
Storage Trust Realty. He previously was a member of the Board of Governors and a
Vice President of the National Association of Real Estate Investment Trusts and
a director of the National Association of Industrial and Office Park
Development. He is a director of the University of Wisconsin's Real Estate
Center.
David Simon, 36, is the Chief Executive Officer of SDG and has been a
director since SDG's incorporation. Mr. Simon served as President of SDG from
SDG's incorporation until 1996 and was appointed Chief Executive Officer on
January 3, 1995. In addition, he has been Executive Vice President, Chief
Operating Officer and Chief Financial Officer of Melvin Simon & Associates, Inc.
("MSA") since 1990. From 1988-1990, Mr. Simon was Vice President of Wasserstein
Perella & Company, a firm specializing in mergers and acquisitions. In addition,
Mr. Simon serves as a member of the Board of Governors of NAREIT and the Urban
Land Institute, and is a trustee and member of the International Council of
Shopping Centers. He is the son of Melvin Simon, the nephew of Herbert Simon and
a director of Healthcare Compare Corp.
Herbert Simon, 63, is the Co-Chairman of the Board of SDG and has been a
director since SDG's incorporation. Mr. Simon served as Chief Executive Officer
from SDG's incorporation through January 2, 1995, when he was appointed
Co-Chairman of the Board. In addition, Mr. Simon is the Co-Chairman of the Board
of MSA. Mr. Simon is also a director of Kohl's Corporation, a specialty
retailer.
Melvin Simon, 71, is the Co-Chairman of the Board of SDG and has been a
director since SDG'S incorporation. In addition, he is the Co-Chairman of the
Board of MSA, a company he founded in 1960 with his brother, Herbert Simon.
J. Albert Smith, Jr., 58, has been a director of SDG since 1993. He is the
President of Bank One, Indianapolis, NA, a commercial bank, a position he has
held since September 30, 1994. Prior to his current position, he was the
President of Banc One Mortgage Corporation, a mortgage banking firm, a position
he held since 1975.
Richard S. Sokolov, 48, has been a director of SDG since the DeBartolo
Merger. He served as the President and Chief Executive Officer and a director of
DeBartolo Realty Corporation ("DRC") from its incorporation until the DeBartolo
Merger. Prior to that he had served as Senior Vice President, Development of
EJDC since 1986 and as Vice President and General Counsel since 1982. In
addition, Mr. Sokolov is a trustee, the incoming chairman (commencing May 1998)
and a member of the Executive Committee of the International Council of Shopping
Centers.
Pieter S. van den Berg, 52, has been Director Controller of PGGM, a Dutch
pension fund, since 1991.
Philip J. Ward, 49, has been a director of SDG since the DeBartolo Merger.
He has been Senior Managing Director, Head of Real Estate Investments, for CIGNA
Investments, Inc., a wholly owned subsidiary of CIGNA Corporation since 1985. He
is a member of the International Council of Shopping Centers, the Urban Land
Institute, the National Association of Industrial and Office Parks and the
Society of Industrial and Office Realtors. He is a director of the Connecticut
Investment Fund and Wyndham Hotel Corporation.
M. Denise DeBartolo York, 47, has been a director of SDG since the
DeBartolo Merger. She served as a director of DRC from February 1995 until the
DeBartolo Merger. She serves as Chairman of the Board of EJDC and DeBartolo,
Inc. Ms. DeBartolo York previously served EJDC as Executive Vice President of
Personnel/Communications and has been associated with EJDC in an executive
capacity since 1975. She is the daughter of the late Edward J. DeBartolo.
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EXECUTIVE COMMITTEE APPOINTED BY THE BOARD OF DIRECTORS OF SIMON GROUP
The powers and duties of the Executive Committee are as follows: (1)
developing a strategy for acquisitions and dispositions and overseeing the
implementation of that strategy; (2) approving the acquisition and disposition
of real property; (3) reviewing and approving all development, expansion and
renovation projects; (4) developing financing and dividend strategies and
policies; (5) approving material capital expenditures and the execution of
certain contracts and agreements, including those related to the borrowing of
money; (6) developing and reviewing new strategic initiatives, e.g.,
international investments, sponsorships and Simon Brand Venture projects; (7)
developing all major human resource decisions/policies, i.e., pension plans,
stock plans, bonus pools, executive compensation and employment policies; (8)
developing strategies for, and approving, anchor store transactions and other
material tenant matters; and (9) exercising all other powers of the Simon Group
Board of Directors between meetings, except where action of the entire Board of
Directors is required by the Simon Group Charter, Simon Group By-laws,
applicable law or Simon Group's conflict of interest policies.
The Executive Committee will be comprised of Messrs. Hans Mautner, Melvin
Simon, Herbert Simon, David Simon, Richard S. Sokolov and Mark S. Ticotin.
MANAGEMENT OF SIMON GROUP AND CRC
The following table sets forth certain information with respect to the
proposed executive officers of Simon Group and CRC at the Effective Time of the
Merger if the Merger Proposal is approved and adopted.
NAME AGE POSITION
---- --- --------
Melvin Simon(1)........................... 71 Co-Chairman
Herbert Simon(1).......................... 63 Co-Chairman
Hans C. Mautner........................... 60 Vice Chairman
David Simon(1)............................ 36 Chief Executive Officer
Richard S. Sokolov........................ 48 President and Chief Operating Officer
Mark S. Ticotin........................... 49 Senior Executive Vice President
Randolph L. Foxworthy..................... 53 Executive Vice President -- Corporate Development
William J. Garvey......................... 59 Executive Vice President -- Property Development
James A. Napoli........................... 51 Executive Vice President -- Leasing
John R. Neutzling......................... 45 Executive Vice President -- Property Management
James M. Barkley.......................... 46 General Counsel; Secretary
Stephen E. Sterrett....................... 43 Treasurer
John Rulli................................ 41 Senior Vice President -- Human Resources &
Corporate Operations
James R. Giuliano, III.................... 40 Senior Vice President
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(1) Melvin Simon is the brother of Herbert Simon and the father of David Simon.
Set forth below is a summary of the business experience of the proposed
executive officers of Simon Group. The executive officers will serve at the
pleasure of the Simon Group Board of Directors. For biographical information of
Melvin Simon, Herbert Simon, Hans C. Mautner, David Simon and Richard S.
Sokolov, see "-- Board of Directors of Simon Group and CRC."
Mark S. Ticotin is President and Chief Operating Officer of CPI and CRC.
Mr. Ticotin served as Senior Vice President of CPI from 1988 to 1997 and was
responsible for the Leasing and Marketing Departments. He joined CPI in 1983 as
Vice President of Asset Management. Prior to joining CPI, Mr. Ticotin was an
attorney with the law firm of Cravath, Swaine & Moore.
Mr. Foxworthy is the Executive Vice President -- Corporate Development of
SDG. He served as a Director of SDG from the initial public offering of common
stock of Simon Property Group, Inc. in December 1993 until the DeBartolo Merger.
Mr. Foxworthy joined MSA in 1980 and has been an Executive Vice
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President in charge of Corporate Development of MSA since 1986 and has held the
same position with SDG since the initial public offering of common stock of
Simon Property Group, Inc. in December 1993.
Mr. Garvey is the Executive Vice President -- Property Development of SDG.
Mr. Garvey, who was Executive Vice President and Director of Development at MSA,
joined MSA in 1979 and held various positions with MSA.
Mr. Napoli is the Executive Vice President -- Leasing of SDG. Mr. Napoli
also served as Executive Vice President and Director of Leasing since he joined
MSA in 1989.
Mr. Neutzling holds the position of Executive Vice President -- Property
Management of SDG. Mr. Neutzling has also been an Executive Vice President of
MSA since 1992 overseeing all property and asset management functions. He joined
MSA in 1974 and has held various positions with MSA.
Mr. Barkley serves as SDG's General Counsel and Secretary. Mr. Barkley
holds the same position for MSA. He joined MSA in 1978 as Assistant General
Counsel for Development Activity.
Mr. Sterrett serves as SDG's Treasurer. He joined MSA in 1989 and has held
various positions with MSA.
Mr. Rulli is the Senior Vice President -- Human Resources and Corporate
Operations of SDG. He joined MSA in 1988 and has held various positions with
MSA.
Mr. Giuliano has served as Senior Vice President of SDG since the DeBartolo
Merger. He joined DRC in 1993, where he served as Senior Vice President and
Chief Financial Officer up to the DeBartolo Merger.
PRIOR COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS OF CPI AND CRC
CPI and CRC Executive Compensation
The following table sets forth information concerning compensation for
services in all capacities to CPI for the Chief Executive Officer and the four
other most highly compensated executive officers of CPI (the "CPI Named
Executives") for the year ended December 31, 1997. For compensation arrangements
of executive officers of SDG who will become executive officers of Simon Group
at the Effective Time of the Merger, if the Merger Proposal is approved and
adopted, see "SDG ANNUAL MEETING MATTERS -- Executive Compensation."
SUMMARY COMPENSATION TABLE
SECURITIES
NAME AND OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
------------------ ---- -------- -------- ------------ ------------ ------------ ------- ------------
Hans C. Mautner...... 1997 $550,000 $325,000 -- N/A 60,000 N/A $119,585(2)
Chief Executive
Officer
Mark S. Ticotin...... 1997 $367,311 $273,000 -- N/A 50,000 N/A 71,993(3)
G. Martin Fell....... 1997 $330,000 $215,000 -- N/A 40,000 N/A 59,816(4)
J. Michael Maloney... 1997 $330,000 $215,000 -- N/A 40,000 N/A 61,260(5)
Michael L. Johnson... 1997 $315,000 $225,000 -- N/A 40,000 N/A 103,057(6)
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(1) Bonus awards were earned in 1997 but were not paid until 1998.
(2) Represents (i) $96,293 payable under the CPI Simplified Employee Pension
Plan, as amended and restated effective January 1, 1993 (the "SEPP") and the
Amended and Restated Supplemental Executive Retirement Plan of CPI, as
amended and restated, effective as of August 1, 1997 (the "SERP"), (ii)
$2,092 in insurance premiums paid with respect to term life insurance and
(iii) $21,200 in reimbursement for officer's tax preparation and financial
planning advice.
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(3) Represents (i) $68,393 payable under the SEPP and the SERP, (ii) $1,350 in
insurance premiums paid with respect to term life insurance and (iii) $2,250
in reimbursement for officer's tax preparation and financial planning
advice.
(4) Represents (i) $57,661 payable under the SEPP and the SERP and (ii) $2,155
in insurance premiums paid with respect to term life insurance.
(5) Represents (i) $57,859 payable under the SEPP and the SERP, (ii) $1,601 in
insurance premiums paid with respect to term life insurance and (iii) $1,800
in reimbursement for officer's tax preparation and financial planning
advice.
(6) Represents (i) $57,156 payable under the SEPP and the SERP, (ii) $901 in
insurance premiums paid with respect to term life insurance and (iii)
$45,000 in reimbursement for officer's tax preparation and financial
planning advice.
CPI's Board of Directors (with the approval of more than 75% of CPI's
stockholders) has authorized the payment prior to the Effective Time of cash
bonuses to Hans C. Mautner and Mark S. Ticotin in the respective amounts of
$9,375,000 and $5,625,000.
The following table sets forth information with respect to the unexercised
stock options granted to the CPI Named Executives for the year ended December
31, 1997.
1997 OPTION GRANTS
NUMBER OF POTENTIAL REALIZED
SHARES OF VALUE AT ASSUMED
CPI ANNUAL RATES OF
COMMON % OF TOTAL STOCK PRICE
STOCK OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE EXPIRATION -----------------------
NAME GRANTED IN 1997 PRICE DATE 5% 10%
---- ---------- ---------- -------- ------------- ---------- -----------
Hans C. Mautner................ 60,000 12.8% $120.50 March 5, 2007 $4,546,908 $11,522,758
Mark S. Ticotin................ 50,000 10.6% $120.50 March 5, 2007 $3,789,090 $9,602,298
G. Martin Fell................. 40,000 8.5% $120.50 March 5, 2007 $3,031,272 $7,681,839
J. Michael Maloney............. 40,000 8.5% $120.50 March 5, 2007 $3,031,272 $7,681,839
Michael L. Johnson............. 40,000 8.5% $120.50 March 5, 2007 $3,031,272 $7,681,839
CRC has no employees and paid no consideration to its executive officers
for the year ended December 31, 1997.
CPI and CRC Director Compensation and Compensation Committee Members
Each CPI director currently receives compensation of $1,500 per month and
$2,000 per CPI Board meeting. In addition, each non-employee director of CPI who
is a member of the Audit Committee, Compensation Committee, Executive Committee,
Investment Committee or Nominating Committee of the CPI Board currently receives
compensation of $1,500 per committee meeting attended by such director.
David P. Feldman and Andrea Geisser, CRC's non-employee directors, receive
annual compensation of $2,500 per year for being directors of CRC. Messrs.
Feldman and Geisser also receive additional compensation of $300 per CRC Board
of Directors meeting. Hans C. Mautner receives no compensation for serving on
CRC's Board of Directors.
CPI and CRC Compensation Committee Interlocks and Insider Participation
The members of the compensation committee of the CPI Board during the year
ended December 31, 1997 were David P. Feldman, Damon Mezzacappa and Daniel Rose.
CRC did not have a compensation committee for the year ended December 31,
1997.
For compensation arrangements of executive officers of SDG who will become
executive officers of Simon Group at the Effective Time of the Merger if the
Merger Proposal is approved and adopted, see "SDG ANNUAL MEETING
MATTERS -- Executive Compensation."
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EMPLOYMENT AGREEMENTS
Employment Agreement between CPI and Hans C. Mautner
CPI and Hans C. Mautner will enter into an employment agreement prior to
the Effective Time, which shall become effective as of the Effective Time and
shall be assumed by Simon Group (the "Mautner Agreement"). The Mautner Agreement
will have a term of five years following the Effective Time.
Under the Mautner Agreement, Mautner will receive an annual base salary of
$762,000 and will be eligible to receive an annual bonus in an amount up to 135%
of his annual base salary. The severance provisions in the Mautner Agreement
provide that, in the event Mautner is terminated by Simon Group other than for
"Cause", death or disability, or by Mautner for "Good Reason" (as such terms are
defined therein), Simon Group will pay Mautner an amount equal to the product of
three times the sum of (i) Mautner's then annual base salary and (ii) his then
annual bonus and will contribute an amount to the CPI Supplemental Executive
Retirement Plan, as amended and restated effective as of August 1, 1997 (the
"SERP") equal to 33% of the sum of his annual base salary and bonus, as well as
continue to provide certain employee benefits. In addition, all then outstanding
unvested options granted to Mautner under the CPI Option Plan, or any other
option plan, shall become immediately vested and exercisable and remain
exercisable for their original term.
Simon Group will grant Mautner an option to acquire 237,500 shares of Simon
Group Common Stock as of the Effective Time with an option price equal to the
fair market value of SDG Common Stock on the date of grant. The stock option
agreements provide that the stock options vest in equal installments on each of
the first, second and third anniversaries of the date of grant. All outstanding
options become immediately vested and exercisable in the event of Mautner's
death, disability, discharge without "Cause," voluntary termination for "Good
Reason" (as such terms are defined therein) or retirement from Simon Group after
attaining age 62.
In addition, at or within one year of the Effective Time, Simon Group will
grant Mautner an option to acquire 62,500 shares of Simon Group Common Stock
with an option price equal to the fair market value of such stock on the date of
grant. Such option shall vest in installments within three years of the date of
grant.
The Mautner Agreement contains a golden parachute excise tax gross-up
provision, under which Mautner will be entitled to be made whole on excise taxes
imposed under Section 4999 of the Code.
As of the Effective Time, the Mautner Agreement will supersede the
Executive Agreement between Mautner and CPI. See "-- Other Employment
Agreements."
Employment Agreement between CPI and Mark Ticotin
CPI and Mark S. Ticotin will enter into an employment agreement prior to
the Effective Time, which shall become effective as of the Effective Time and
shall be assumed by Simon Group (the "Ticotin Agreement"). The Ticotin Agreement
will have a term of five years following the Effective Time and provides for
automatic one-year extensions of the term each December 31 unless either party
gives the other party notice that the term will not be extended.
Under the Ticotin Agreement, Ticotin will receive an annual base salary of
$500,000 and will be eligible to receive an annual bonus in an amount not less
than 100% of his base salary.
The severance provisions in the Ticotin Agreement provide that, in the
event Ticotin is terminated by Simon Group other than for "Cause", death or
disability, or by the Executive for "Good Reason" (as such terms are defined
therein), Simon Group will pay Ticotin an amount equal to the product of three
times the sum of (i) Ticotin's then annual base salary and (ii) his then annual
bonus, and will contribute an amount to the SERP equal to 33% of the sum of his
annual base salary and bonus as well as continue to provide certain employee
benefits. In addition, all then outstanding unvested options granted to Ticotin
shall become immediately vested and exercisable and remain exercisable for their
original term.
Simon Group will grant Ticotin an option to acquire 142,500 shares of Simon
Group Common Stock as of the Effective Time with an option price equal to the
fair market value of SDG Common Stock on the date
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of grant. The stock option agreements provide that the stock options vest in
equal installments on each of the first, second and third anniversaries of the
date of grant. All outstanding options will become immediately vested and
exercisable in the event of Ticotin's death, disability, discharge without
"Cause," voluntary termination for "Good Reason" (as such terms are defined
therein) or retirement from Simon Group after attaining age 62.
In addition, at or within one year of the Effective Time, Simon Group will
grant Ticotin an option to acquire 37,500 shares of Simon Group Common Stock
with an option price equal to the fair market value of such stock on the date of
grant. Such option shall vest in installments within three years of the date of
grant.
The Ticotin Agreement contains a golden parachute excise tax gross-up
provision, under which Ticotin will be entitled to be made whole on excise taxes
imposed under Section 4999 of the Code.
As of the Effective Time, the Ticotin Agreement will supersede the
Executive Agreement between Ticotin and CPI. See "-- Other Employment
Agreements."
Other Employment Agreements
CPI entered into an identical executive agreement (the "Executive
Agreement") effective August 7, 1997 with each of the following individuals: G.
Martin Fell, Michael L. Johnson, J. Michael Maloney, Hans C. Mautner, Harold E.
Rolfe and Mark S. Ticotin (each, an "Executive"). The Executive Agreement
provides for the terms and conditions of the Executive's employment following a
"Change in Control" (as defined therein). The Merger will constitute a Change in
Control.
In the event the Executive is terminated by CPI other than for "Cause",
death or "Incapacity", or by the Executive for "Good Reason" (as such terms are
defined in the Executive Agreement) following a Change in Control, CPI will pay
the Executive, in a lump sum, the aggregate of (i) any accrued but unpaid annual
base salary, a pro-rata portion of the Executive's annual bonus (the "Pro-Rata
Bonus"), accrued vacation pay to the extent not paid, and (ii) an amount equal
to the product of three times the sum of (A) Executive's current annual base
salary and (B) Executive's then annual bonus (not less than the highest annual
bonus paid with respect to the three years prior to a Change in Control). In
addition, CPI will continue to provide certain employee benefits for three years
post-termination of employment (including an immediate lump sum contribution to
the SERP equal to 11% of the amount determined in the preceding sentence (other
than accrued vacation pay)), and all outstanding unvested options granted to the
Executive under the CPI Option Plan, or any other option plan, shall become
immediately vested and exercisable and remain exercisable for their original
term.
The Executive Agreements contain a golden parachute excise tax gross-up
provision, under which the Executives will be entitled to be made whole on
excise taxes imposed under Section 4999 of the Code.
It is anticipated that each Executive, other than Messrs. Mautner and
Ticotin, will terminate employment at or prior to the Effective Time under
circumstances that will entitle them to the amounts payable upon termination
under their respective Executive Agreements.
CPI SEVERANCE PLANS
CPI Executive Severance Policy
The CPI Executive Severance Policy (the "Executive Policy") applies to two
tiers of employees: (a) officers with the title of Chairman, President, Senior
Vice President, Vice President or Treasurer (each, a "Class 1 Employee") and (b)
employees who are not Class 1 Employees and who hold the title of Assistant
Controller, Assistant Secretary, Assistant Treasurer, Chief Information Officer,
Director of Development, Executive Director of Leasing, Regional Marketing
Manager or Regional Property Manager (each, a "Class 2 Employee").
A Class 1 Employee who has had a "Termination" (as defined in the Executive
Policy) will receive a cash severance payment as soon as practicable following
such Termination equal to three times such Employee's "Annual Compensation"
(defined in the Executive Policy as current salary plus largest bonus in
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last three years). A Class 2 Employee who has had a Termination will receive a
cash severance payment as soon as practicable following such Termination equal
to two times such employee's Annual Compensation; provided, however, that if
such employee has less than three years of "Service" (as defined in the
Executive Policy), such employee shall instead receive a cash payment equal to
such employee's Annual Compensation.
Employees eligible for severance benefits under the Executive Policy and an
individual written contract with CPI will not be entitled to benefits under the
Executive Policy unless the individual contract expressly states otherwise.
CPI may amend or terminate the Executive Policy with respect to any person
who was not an employee prior to the date of such amendment or termination. As
to any other employee, no amendment or termination that is adverse to the
interests of the employee will be effective until February 18, 2001.
CPI Staff Severance Policy
The CPI Staff Severance Policy (the "Staff Policy") was established in
order to provide severance benefits to certain employees not covered under the
Executive Policy in the event of their "Termination" (as defined in the Staff
Policy). The Staff Policy applies to any employee who is not entitled to
benefits under the Executive Policy and (a) whose principal workplace is the New
York City headquarters, a regional leasing office or construction office of CPI,
or (b) whose title is Building Manager, Mall Manager, General Manager or
Marketing Director or Secretary ("Eligible Employees").
An Eligible Employee with respect to whom a "Termination" has occurred
shall receive a cash severance payment equal to the product of (a) such Eligible
Employee's "Annual Compensation" (defined in the Staff Policy as current salary
and largest bonus in last three years) times (b) a fraction, the numerator of
which is the lesser of such Eligible Employee's "Service" (as defined in the
Staff Policy) and 24, and the denominator of which is 12.
Employees eligible for severance benefits under the Staff Policy and an
individual written contract with CPI will not be entitled to benefits under the
Staff Policy unless the individual contract expressly states otherwise.
CPI may amend or terminate the Staff Policy with respect to any person who
was not an employee prior to the date of such amendment or termination. As to
any other employee, no amendment or termination that is adverse to the interests
of the employee will be effective until February 18, 2001.
CPI AND SIMON GROUP BENEFIT PLANS
After the Effective Time, Simon Group expects to freeze certain of the CPI
benefit plans described below and pay all benefits then accrued thereunder in
accordance with the terms thereof. All further benefits to be provided to CPI's
employees will be provided under comparable SDG benefit plans, descriptions of
which also are set forth below.
SDG Employee Plan
General. Under the SDG Operating Partnership's Employee Stock Plan (the
"Employee Plan") a maximum of 4,595,000 shares of SDG Common Stock (subject to
adjustment) are available for issuance to eligible officers and key employees.
The Employee Plan is administered by the Compensation Committee of the Board of
Directors (the "SDG Compensation Committee") which consists of persons not
eligible to participate in the Employee Plan. During the ten-year period
following the adoption of the Employee Plan, the SDG Compensation Committee may,
subject to the terms of the Employee Plan, grant to key employees (including
officers and directors who are employees) of the SDG Operating Partnership or
its "affiliates" (as defined in the Employee Plan) the following types of
awards: incentive stock options ("ISOs") within the meaning of section 422 of
the Code, "nonqualified stock options" ("NQSOs"), stock appreciation rights
("SARs"), performance units and shares of restricted or unrestricted SDG Common
Stock.
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Any stock option granted under the Employee Plan may be exercised over a
period determined by the SDG Compensation Committee in its discretion. The
exercise price of an option (the "Option Price") may not be less than the fair
market value of the shares of the SDG Common Stock on the date of grant. The SDG
Compensation Committee may, in its discretion, with the grantee's consent,
amend, cancel, substitute, accelerate the exercisability of or extend the
scheduled expiration date of any award, provided however, that no award may be
exercisable more than ten years after the date of grant. The Board of Directors
of SDG in its capacity as a general partner of the SDG Operating Partnership may
amend, suspend or discontinue the Employee Plan at any time. Certain specified
amendments must be approved by stockholders.
Option Grants. No options were granted under the Employee Plan during
1997. All options granted to date under the Employee Plan are exercisable at the
fair market value of the SDG Common Stock on the date of grant, have a ten-year
term, generally vest 40% on the first anniversary of the grant date and an
additional 30% on the second anniversary of the grant date, and generally become
100% vested three years after the grant date.
Stock Incentive Program. Under SDG's five-year stock-based incentive
program (the "Stock Incentive Program"), an aggregate of 1,000,000 restricted
shares of SDG Common Stock were allocated in March 1995 under the Employee Plan
to a total of 50 executive officers and key employees. A percentage of the total
number of shares allocated, ranging from 15% to 25%, may be earned in each of
the five years of the program only if SDG attains annual and cumulative targets
for growth in Funds From Operations. The determination of whether SDG has
achieved its targets for a particular year is made in March of the following
year (the "Determination Date") and, to the extent the targets have been
achieved, a portion of the allocation of shares of restricted stock is deemed to
be earned and is awarded as of the Determination Date. Although the participant
is entitled to vote all earned shares and receive distributions paid thereon as
of the Determination Date, earned shares vest in four installments of 25% each
on January 1, of each year following the year in which the Determination Date
occurs. The participant must be employed by SDG on the day prior to the vesting
date to receive such shares, otherwise the earned shares are forfeited.
1998 Stock Incentive Plan. At the SDG Annual Meeting, SDG stockholders are
being asked to approve the 1998 Stock Incentive Plan. If the 1998 Stock
Incentive Plan is approved, after the Effective Time, no further awards will be
made under the SDG Employee Plan; however, key employees of the SDG Operating
Partnership and its affiliates will be eligible to receive similar awards under
the 1998 Stock Incentive Plan. See "APPROVAL OF 1998 STOCK INCENTIVE PLAN."
SDG Incentive Bonus Plan
The Incentive Bonus Plan (the "Bonus Plan") is intended to provide senior
executives and key employees with opportunities to earn incentives based upon
the performance of SDG, the participant's business unit and the individual
participant. At the beginning of a year, the Committee specifies the maximum
incentive pool available for distributions and approves performance measures for
each participant and three levels of performance that must be attained in order
to trigger the award of the bonuses. Each participant's bonus award for the year
is expressed as a percentage of base salary, a fixed dollar amount, or a
percentage of the available incentive pool. Bonus amounts for each year are
determined in the following February with disbursement in March.
SDG Deferred Compensation Plan
The SDG Operating Partnership has a non-qualified deferred compensation
plan (the "Deferred Compensation Plan") that provides deferred compensation to
certain executives and key employees. Under the Deferred Compensation Plan, a
participant may defer all or a part of his compensation. SDG, at its discretion,
may contribute a matching amount equal to a rate selected by SDG, and an
additional incentive contribution amount on such terms as SDG may specify. All
participant deferrals and SDG matching and incentive contributions are credited
to a participant's account and remain general assets of SDG. A participant's
elective deferrals are fully vested. Except in the case of death or disability
of the participant or insolvency or a change in control of SDG, a participant
becomes vested in SDG matching and incentive
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contributions 20% after one year of service and an additional 20% for each year
thereafter. Upon death or disability of the participant or insolvency or a
change in control of SDG, a participant becomes 100% vested in his account.
All contributions under the Deferred Compensation Plan are deposited in
what is commonly referred to as a "rabbi trust" arrangement pursuant to which
the assets of the trust are subject to the claims of SDG's general creditors in
the event of SDG's insolvency. The trust assets are invested by the trustee in
its sole discretion. Payments of a participant's elective deferrals and vested
matching contributions are made as elected by the participant. These amounts
would be paid earlier in the event of termination of employment or death of the
participant, an unforeseen emergency affecting the participant or a change in
control of SDG.
SDG Retirement Plans
The SDG Operating Partnership and certain related entities maintain a
tax-qualified retirement savings plan for eligible employees which contains a
cash or deferred arrangement described in section 401(k) of the Code. Under the
plan eligible employees may defer up to a maximum of 12% of their compensation
(as defined in the plan), subject to certain limits imposed by the Code.
Participants' salary deferrals are matched by participating employers in an
amount equal to 100% of the first 2% of such deferrals and 50% of the next 4% of
such deferrals. In addition, participating employers contribute annually 3% of
eligible employees' compensation (as defined in the plan). Amounts deferred by
employees are immediately vested; amounts contributed by participating employers
become vested 30% after the completion of three years of service, 40% after the
completion of four years of service and an additional 20% after the completion
of each additional year of service until 100% vested after the completion of
seven years of service.
CPI 1993 Share Option Plan
CPI maintains the 1993 Share Option Plan of CPI (the "CPI Option Plan") to
provide for the grant of share options to directors, officers and salaried
employees of CPI. The general purpose of the CPI Option Plan is to promote the
interests of CPI by providing to directors and employees additional incentives
to continue and increase their efforts with respect to, and in the case of
employees, to remain in the employ of, CPI.
Under the CPI Option Plan 1,000,000 Series A Common Shares of beneficial
interest in CPI (and related interests in CRC) are reserved for issuance to
employees and directors upon exercise of options. The option prices are to be
equal to the "Fair Market Value" (as defined in the CPI Option Plan) of the
optioned shares at the date of grant. The term of each option is to be for such
period as the Compensation Committee of the CPI Board (the "CPI Compensation
Committee") will determine, but not more than ten years. The CPI Option Plan
will terminate on, and no option will be granted after, December 1, 1998.
The CPI Option Plan is administered by the CPI Compensation Committee.
Unless the CPI Compensation Committee otherwise determines, any option granted
under the CPI Option Plan will become exercisable in equal installments on each
of the first three or four anniversaries of the date of grant, such annual
installments to be cumulative. All options granted pursuant to the CPI Option
Plan are fully vested.
The CPI Option Plan provides that options may be exercised through use of a
full recourse note.
CPI Employee Share Purchase Plan
The Employee Share Purchase Plan (the "ESPP") provides for the issuance of
rights to purchase Series A Common Shares of Beneficial Interest of CPI (and
related interests in CRC) at "Fair Market Value" (as defined in the ESPP). The
consideration for each unit purchased is a combination of all or some of cash,
or a recourse note receivable from the employee and a "Permanent Restriction"
(as defined in the ESPP) payable to CPI upon transfer of the unit. All rights to
purchase CPI Common Stock under the ESPP are now fully vested. Upon a transfer
of CPI Common Stock, the transferor shall either pay CPI the amount of the
permanent restriction or cause the transferee to pay such amount or obtain a
comparable undertaking by the transferee upon any subsequent transfer.
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CPI Employee 401(k) Savings Plan
The primary purpose of the CPI Employee 401(k) Savings Plan (the "401(k)
Plan"), as amended and restated effective January 1, 1998, is to provide
full-time employees with retirement benefits in recognition of the contribution
of the employees to the successful operation of CPI. The 401(k) Plan is intended
to be a profit-sharing plan, qualified under Section 401(a) of the Code which
permits salary deferral contributions as provided by Section 401(k) of the Code
and may provide discretionary matching contributions. Its affiliated trust (the
"Trust") is intended to be exempt from tax under Section 501(a) of the Code. The
401(k) Plan is a prototype plan sponsored by Merrill Lynch.
CPI has overall responsibility for the termination, administration, and
operation of the 401(k) Plan. CPI may at any time terminate the 401(k) Plan and
Trust in accordance with the express provisions of the 401(k) Plan. CPI may at
any time amend any options in the adoption agreement under the 401(k) Plan and
may amend the prototype plan although, except for limited amendments, such an
amendment would convert the plan to an individually designed plan.
CPI Amended and Restated Supplemental Executive Retirement Plan
The SERP is intended to provide selected executives with benefits that are
supplemental to those provided under CPI's Simplified Employee Pension Plan (the
"SEPP"). The SERP is intended to be a "top-hat" plan as described in ERISA.
CPI determines whether or not a contribution will be made under the SERP
for each calendar year. If a contribution is to be made, CPI will contribute, on
behalf of each participant, an amount equal to:
(x) 7 1/2% of the participant's "Compensation" (as defined in the
SERP) for such calendar year, up to the taxable wage base determined under
Section 230 of the Social Security Act with respect to determining taxes
under Section 3101(a) of the Code for such year (the "Taxable Wage Base"),
plus 11% of Compensation for such year in excess of such Taxable Wage Base;
reduced by
(y) the amount contributed on behalf of the participant under the SEPP
for such year, and in the case of a participant who deferred compensation
under the Trustees' and Executives' Deferred Remuneration Plan of CPI (the
"DRP") for such year, any contribution to the DRP by CPI equivalent to
amounts that would have been contributed under the SEPP on behalf of the
participant for such year if such compensation had not been so deferred.
A participant entitled to a contribution under the SERP may elect that such
contribution will be paid to him or her in cash on the contribution date so long
as the participant furnishes proof satisfactory to the CPI Compensation
Committee that such amounts (after being reduced by taxes) will be used to
purchase an annuity, life insurance policy or similar investment vehicle
approved by the CPI Compensation Committee. A participant's benefit under the
SERP is fully vested and nonforfeitable at all times. All amounts owed under the
SERP are or will be funded through a rabbi trust. The SERP is administered by
the CPI Compensation Committee, and may not be amended without the consent of an
affected participant, including with respect to the right to investment options.
CPI Trustees' and Executives' Deferred Remuneration Plan
The Trustees' and Executives' Deferred Remuneration Plan of CPI, as amended
and restated effective August 1, 1997 (the "DRP"), allows a Trustee and each
employee of CPI whose annual remuneration rate is $100,000 (or such other amount
determined by the CPI Compensation Committee to comply with regulations issued
by the Department of Labor for "top-hat" plans) or more to elect to have a
percentage of remuneration to be earned by him during each Fiscal Year or
portion thereof deferred in accordance with the terms and conditions of the DRP.
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114
In addition to elected deferrals, on December 31 of each calendar year (or
such later date as is elected by the CPI Compensation Committee), the following
amount will be credited to each participant's account(s) under the DRP:
(a) the amount that would have been contributed for such calendar year
on such participant's behalf under the SEPP had such participant's
compensation, as determined for purposes of the SEPP, included amounts
deferred pursuant to the DRP; reduced by
(b) the amount actually contributed for such calendar year on such
participant's behalf under the SEPP.
The DRP is unfunded (although CPI has periodically delineated specific
assets to finance liabilities under the DRP) and is intended to be a "top-hat"
plan as described in ERISA. The DRP is administered by the Committee, and may
not be amended without the consent of an affected participant, including with
respect to investment options.
CPI Simplified Employee Pension Plan
CPI's Simplified Employee Pension Plan, as amended and restated effective
January 1, 1993 (the "SEPP"), is intended to provide simplified employee
pensions to eligible employees in accordance with Section 408(k) of the Code.
For each plan year, CPI determines whether a contribution will be made under the
SEPP for that year. If a contribution is to be made, then the following will be
contributed on behalf of each participant: (a) 7-1/2% of a participant's
"Compensation" (as defined in the SEPP) for such plan year up to the Taxable
Wage Base, plus (b) 11% of his Compensation for such plan year in excess of such
Taxable Wage Base but subject to limitations on Compensation under the Code
(currently $160,000 per annum). The contribution will be either paid directly to
a participant's individual retirement account that meets the requirements of
Section 408(a) of the Code ("IRA") or delivered to the participant by check made
payable to the trustee of the participant's IRA. All contributions made on
behalf of a participant are fully vested and nonforfeitable at all times.
CPI has reserved the right to terminate the SEPP at any time. In the event
of a dissolution, merger, consolidation or reorganization of CPI, the SEPP will
terminate unless it is continued by a successor to CPI in accordance with the
terms of the SEPP.
CRC has no employees, and accordingly, no employee benefit plans.
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115
FEDERAL SECURITIES LAW CONSEQUENCES
All Simon Group Equity Stock newly-issued in connection with the Merger
will be freely transferable, except that any Simon Group Equity Stock received
by persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of SDG prior to the Merger may be sold by them only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act ("Rule 145") with respect to affiliates of SDG, or Rule 144 under the
Securities Act ("Rule 144") with respect to persons who become affiliates of
Simon Group, or as otherwise permitted under the Securities Act. Persons who may
be deemed to be affiliates of SDG or Simon Group generally include individuals
or entities that control, are controlled by or are under common control with,
such person and generally include the executive officers and directors of such
person as well as principal stockholders of such person.
In general, Rule 145 provides that for one year following the Effective
Time an affiliate (together with certain related persons) of the acquired entity
would be entitled to sell Simon Group Equity Stock acquired in connection with
the Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144.
Additionally, the number of shares to be sold by an affiliate (together with
certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 may not exceed the greater of 1% of
the outstanding class of Simon Group Equity Stock or the average weekly trading
volume of such shares during the four calendar weeks preceding such sale. Rule
145 will remain available to affiliates if Simon Group remains current with its
informational filings with the Commission under the Exchange Act. One year after
the Effective Time, an affiliate will be able to sell such Simon Group Equity
Stock without being subject to such manner of sale or volume limitations
provided that Simon Group is current with its Exchange Act informational filings
and such person is not then an affiliate of Simon Group. 3,781,493 shares of
Simon Group Equity Stock will be subject to Rule 145 immediately following the
Merger. Two years after the Effective Time, an affiliate will be able to sell
such Simon Group Equity Stock without any restrictions so long as such person
had not been an affiliate of Simon Group for at least three months prior to the
date of such sale. See "THE MERGER AGREEMENT AND RELATED MATTERS -- Accounting
Treatment."
The 52,732,845 shares of Simon Group Common Stock, 209,249 shares of Simon
Group Series A Preferred Stock which will be retained by the stockholders of CPI
and 4,812,777 shares of Simon Group Series B Preferred Stock which will be held
by the stockholders of CPI immediately after the Merger (assuming no options are
exercised prior to the Merger) will be "restricted securities" within the
meaning of Rule 144. As discussed below, 22,635,977 shares of Simon Group Common
Stock, 55,799 shares of Simon Group Series A Preferred Stock and 2,065,921
shares of Simon Group Series B Preferred Stock will be immediately tradeable
after the consummation of the Merger pursuant to Rule 144(k). The remaining
30,096,868 shares of Simon Group Common Stock, 153,450 shares of Simon Group
Series A Preferred Stock and 2,746,856 shares of Simon Group Series B Preferred
Stock retained by stockholders of CPI after the Merger, which includes shares
held by persons who will be affiliates of Simon Group at the Effective Time,
will be subject to Rule 144 immediately following the Merger. Similar to the
resale restrictions discussed above under Rule 145, under Rule 144 as currently
in effect, a person (or persons whose shares are aggregated), including an
affiliate of Simon Group, who has beneficially owned shares for at least one
year generally is entitled to sell, within any three-month period a number of
shares that may not exceed the greater of 1% of the outstanding shares of such
class or the average weekly trading volume of such shares during the four
calendar weeks preceding such sale, subject to the filing of a Form 144 with
respect to such sale and certain other limitations and restrictions. A person
who is not deemed to have been an affiliate of Simon Group at any time during
the three month period preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years will be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
Pursuant to certain agreements, certain of such holders have certain rights to
cause Simon Group to register such shares of Simon Group Common Stock under the
Securities Act. See "THE MERGER AGREEMENT AND RELATED MATTERS -- Certain
Transactions and Agreements Relating to the Merger -- The Operating Partnerships
After the Merger; Simon Group Contribution Agreement" and "-- New Registration
Rights Agreements." All share numbers provided in this section entitled "FEDERAL
SECURITIES LAWS CONSEQUENCES" assume no options to purchase shares of CPI Common
Stock are exercised prior to the Merger.
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116
PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA
SIMON GROUP PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The accompanying financial statements prepared by SDG present the pro forma
combined condensed Balance Sheets of SDG, CPI and CRC, hereafter referred to as
Simon Group, as of March 31, 1998 and the pro forma combined condensed
Statements of Operations of Simon Group for the three months ended March 31,
1998 and for the year ended December 31, 1997. SDG's management has also
included a pro forma combined condensed Balance Sheet of Simon Group as of
December 31, 1997 which is in addition to the requirements of Rule 11 of
Regulation S-X promulgated under the Securities Act of 1933, as amended. The pro
forma combined condensed Balance Sheet as of December 31, 1997 and the related
pro forma Statement of Operations have been examined by Arthur Andersen LLP, for
which their report can be found elsewhere in this Proxy Statement/Prospectus. An
examination may only be performed when the historical financial information from
which the pro forma financial information is derived has been audited. The most
recent audited period is the period ended December 31, 1997. In light of the
fact that in connection with the Merger and related transactions, CPI and CRC,
previously private companies not subject to public disclosure requirements or
reporting obligations, become the new public registrants, and the fact that the
Merger of CPI and SDG is accounted for as a reverse merger and the assets and
liabilities of CRC are reflected at historical cost, management believes that
examined pro forma financial information enhances the reliability of pro forma
data made available to assist stockholders in understanding and evaluating the
effects of the Merger.
The pro forma combined condensed Balance Sheet as of March 31, 1998 is
presented as if (i) the CPI Merger Dividends and the Merger of SDG, CPI and CRC
and cash contributed by the SDG Operating Partnership to CRC and CRC's newly
formed operating partnership on behalf of the SDG stockholders and limited
partners of the SDG Operating Partnership, (ii) the sale by CPI of the General
Motors Building had occurred as of March 31, 1998. The pro forma combined
condensed Balance Sheet as of December 31, 1997 is presented by SDG as if (i)
the CPI Merger Dividends, the Merger of SDG, CPI and CRC and cash contributed by
the SDG Operating Partnership to CRC and CRC's newly formed operating
partnership on behalf of the SDG stockholders and limited partners of the SDG
Operating Partnership, (ii) the January 1998 acquisition by CPI of Phipps Plaza,
(iii) the January 1998 sale by CPI of Burnsville Mall, (iv) the January 1998
acquisition by SDG of Cordova Mall, (v) the February 1998 acquisition by SDG of
a 50% interest in a portfolio of twelve regional malls and (vi) the sale by CPI
of the General Motors Building had occurred on December 31, 1997. The pro forma
combined condensed Statement of Operations for the year ended December 31, 1997
is presented by SDG as if (i) the Merger of SDG, CPI and CRC and cash
contributed by the SDG Operating Partnership to CRC and CRC's newly formed
operating partnership on behalf of the SDG stockholders and limited partners of
the SDG Operating Partnership, (ii) the September and November 1997 transactions
by SDG to acquire ten portfolio properties and a 50% ownership interest in an
eleventh property of RPT, (iii) the December 1997 acquisition by SDG of the
Fashion Mall at Keystone at the Crossing, (iv) the January 1998 acquisition by
CPI of Phipps Plaza, (v) the January 1998 sale by CPI of Burnsville Mall, (vi)
the January 1998 acquisition by SDG of Cordova Mall, (vii) the February 1998
acquisition by SDG of a 50% interest in a portfolio of twelve regional malls and
(viii) the sale by CPI of the General Motors Building had occurred as of January
1, 1997 (collectively, the "Other Property Transactions").
Preparation by SDG of the pro forma financial information was based on
assumptions deemed appropriate by the management of SDG. These assumptions give
effect to the Merger being accounted for as a reverse purchase in accordance
with generally accepted accounting principles and the cash contributed to CRC
and the CRC Operating Partnership as stock and partnership units for cash
transactions. CRC assets and liabilities will continue to be reflected at
historical costs as the SDG stockholders' beneficial interest in CRC will be
less than 80% and the combined entity qualifying as a REIT, distributing all of
its taxable income and, therefore, incurring no Federal income tax expense
during the periods presented. The pro forma financial information is not
necessarily indicative of the results which actually would have occurred if the
transactions had been consummated at the beginning of the period presented, nor
does it purport to represent the future financial position and results of
operations for future periods. The pro forma information should be read in
conjunction with the historical financial statements of SDG incorporated by
reference into this Proxy Statement/Prospectus and of CPI and CRC included
elsewhere in this Proxy Statement/Prospectus.
107
117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management of
Simon DeBartolo Group, Inc.:
We have examined the pro forma adjustments reflecting the Merger and Other
Property Transactions described in Note 1 and the application of those
adjustments to the historical amounts in the accompanying pro forma combined
condensed balance sheet of Simon Property Group, Inc. as of December 31, 1997,
and the pro forma combined condensed statement of operations for the year then
ended. The historical condensed financial statements are derived from the
historical financial statements of Simon DeBartolo Group, Inc., which were
audited by us and are incorporated by reference herein, and of Corporate
Property Investors, Inc. and Corporate Realty Consultants, Inc., which were
audited by Ernst & Young LLP, and appear elsewhere herein. Such pro forma
adjustments are based upon Simon DeBartolo Group, Inc. management's assumptions
described in the notes to the pro forma financial statements. Our examination
was made in accordance with standards established by the American Institute of
Certified Public Accountants and, accordingly, included such procedures as we
considered necessary in the circumstances.
The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
transactions occurred at an earlier date. However, the pro forma combined
condensed financial statements are not necessarily indicative of the results of
operations or related effects on financial position that would have been
attained had the Merger and Other Property Transactions actually occurred
earlier.
In our opinion, Simon DeBartolo Group, Inc. management's assumptions
provide a reasonable basis for presenting the significant effects directly
attributable to the Merger and Other Property Transactions described in Note 1,
the related pro forma adjustments give appropriate effect to those assumptions,
and the pro forma columns reflect the proper application of those adjustments to
the historical financial statement amounts in the pro forma combined condensed
balance sheet as of December 31, 1997, and the pro forma combined condensed
statement of operations for the year then ended.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
August 12, 1998
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118
SIMON GROUP
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED, IN THOUSANDS)
PRO FORMA
-------------------------------------------
MERGER AND
SALE RELATED
SDG CPI CRC OF GM TRANSACTIONS
(HISTORICAL)(A) (HISTORICAL)(A) (HISTORICAL)(A) BUILDING(B) ADJUSTMENTS TOTAL
--------------- --------------- --------------- ------------ ------------ -----------
ASSETS:
Investment in properties,
partnerships and joint
ventures, net............. $7,303,529 $2,651,323 $41,012 $(585,000) $2,869,735(D) $12,280,599
Goodwill.................... -- -- -- -- 99,898(D) 99,898
Cash and cash equivalents
and short-term
investments............... 101,997 16,196 3,900 782,024 (789,101)(D) 115,016
Receivables, net............ 179,371 61,311 1,044 -- (34,308)(D) 207,418
Investment, notes receivable
and advances from
management company and
affiliate................. 102,746 -- -- -- -- 102,746
Other assets................ 246,773 42,866 1,252 -- 1,848(D) 292,739
---------- ---------- ------- --------- ---------- -----------
Total assets.......... $7,934,416 $2,771,696 $47,208 $ 197,024 $2,148,072 $13,098,416
========== ========== ======= ========= ========== ===========
LIABILITIES:
Mortgages and other
indebtedness.............. $5,329,707 $ 857,648 $ 1,121 $ (11,976) $1,558,000(D) $ 7,734,500
Accounts payable, accrued
expenses and other
liabilities............... 329,260 85,896 42,085 (4,000) 85,100(D) 538,341
---------- ---------- ------- --------- ---------- -----------
Total liabilities..... 5,658,967 943,544 43,206 (15,976) 1,643,100(D) 8,272,841
---------- ---------- ------- --------- ---------- -----------
LIMITED PARTNERS' INTEREST IN
THE OPERATING
PARTNERSHIPS................ 718,264 -- -- -- 305,413(G) 1,023,677
PREFERRED STOCK OF
SUBSIDIARY.................. -- -- -- -- 339,128(E) 339,128
STOCKHOLDERS' EQUITY (NOTES 3
AND 4):
SDG Preferred Stock......... 339,128 -- -- -- (339,128)(E) --
Series A Convertible
Preferred Stock........... -- 209,249 -- -- 60,080(D) 269,329
Series B Convertible
Preferred Stock........... -- -- -- -- 496,611(D) 496,611
Common stock and beneficial
interests................. 11 26,415 268 -- (26,410)(D) 32
11(F)
(263)(I) 2,148,072
Capital in excess of par and
other..................... 1,524,746 1,602,067 13,351 -- 178,112(D) 3,027,115
(305,413)(G)
13,989(F)
263(I)
Accumulated (deficit)
surplus................... (294,817) 104,390 (9,617) 213,000 (317,390)(D) (318,434)
(14,000)(F)
Unamortized restricted stock
award..................... (11,883) -- -- -- -- (11,883)
Treasury stock.............. -- (113,969) -- -- 113,969(D) --
---------- ---------- ------- --------- ---------- -----------
Total stockholders'
equity.............. 1,557,185 1,828,152 4,002 213,000 (139,569) 3,462,770
---------- ---------- ------- --------- ---------- -----------
Total liabilities and
stockholders'
equity.............. $7,934,416 $2,771,696 $47,208 $ 197,024 $2,148,072 $13,098,416
========== ========== ======= ========= ========== ===========
The accompanying notes and SDG management's assumptions are an integral part of
this statement.
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SIMON GROUP
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
PRO FORMA
-----------
SALE
SDG CPI CRC OF GM
(HISTORICAL)(A) (HISTORICAL)(A) (HISTORICAL)(A) BUILDING(B)
--------------- --------------- --------------- -----------
ASSETS:
Investment in properties, partnerships
and joint ventures, net............... $6,997,139 $2,490,862 $39,540 $(580,000)
Goodwill................................ -- -- -- --
Cash and cash equivalents and short-term
investments........................... 109,699 164,808 4,147 780,770
Receivables, net........................ 188,359 71,363 983 --
Investment, notes receivable and
advances from management company and
affiliate............................. 97,001 -- -- --
Other assets............................ 249,906 47,587 1,393 --
---------- ---------- ------- ---------
Total assets...................... $7,642,104 $2,774,620 $46,063 $ 200,770
========== ========== ======= =========
LIABILITIES:
Mortgages and other indebtedness........ $5,077,990 $ 859,060 $ 1,184 $ (13,230)
Accounts payable, accrued expenses and
other liabilities..................... 312,815 112,946 40,563 (4,000)
---------- ---------- ------- ---------
Total liabilities................. 5,390,805 972,006 41,747 (17,230)
---------- ---------- ------- ---------
LIMITED PARTNERS' INTEREST IN THE
OPERATING PARTNERSHIPS.................. 694,437 -- -- --
PREFERRED STOCK OF SUBSIDIARY............. -- -- -- --
STOCKHOLDERS' EQUITY (NOTES 3 AND 4):
SDG Preferred Stock..................... 339,061 -- -- --
Series A Convertible Preferred Stock.... -- 209,249 -- --
Series B Convertible Preferred Stock.... -- -- -- --
Common stock and beneficial interest.... 11 26,419 268 --
Capital in excess of par and other...... 1,494,328 1,602,111 13,352 --
Accumulated (deficit) surplus........... (263,308) 78,851 (9,304) 218,000
Unamortized restricted stock award...... (13,230) -- -- --
Treasury stock.......................... -- (114,016) -- --
---------- ---------- ------- ---------
Total stockholders' equity........ 1,556,862 1,802,614 4,316 218,000
---------- ---------- ------- ---------
Total liabilities and
stockholders' equity............ $7,642,104 $2,774,620 $46,063 $ 200,770
========== ========== ======= =========
PRO FORMA
--------------------------------------
MERGER AND OTHER
RELATED TRANSACTIONS PROPERTY
ADJUSTMENTS TRANSACTIONS(H) TOTAL
-------------------- --------------- -----------
ASSETS:
Investment in properties, partnerships
and joint ventures, net............... $2,909,359(D) $ 456,926 $12,313,826
Goodwill................................ 94,025(D) -- 94,025
Cash and cash equivalents and short-term
investments........................... (789,411)(D) (120,876) 149,137
Receivables, net........................ (39,209)(D) -- 221,496
Investment, notes receivable and
advances from management company and
affiliate............................. -- -- 97,001
Other assets............................ 1,652(D) -- 300,538
---------- --------- -----------
Total assets...................... $2,176,416 $ 336,050 $13,176,023
========== ========= ===========
LIABILITIES:
Mortgages and other indebtedness........ $1,558,000(D) $ 270,935 $ 7,753,939
Accounts payable, accrued expenses and
other liabilities..................... 92,600(D) 9,592 564,516
---------- --------- -----------
Total liabilities................. 1,650,600 280,527 8,318,455
---------- --------- -----------
LIMITED PARTNERS' INTEREST IN THE
OPERATING PARTNERSHIPS.................. 279,640(G) 55,523 1,029,600
PREFERRED STOCK OF SUBSIDIARY............. 339,061(E) -- 339,061
STOCKHOLDERS' EQUITY (NOTES 3 AND 4):
SDG Preferred Stock..................... (339,061)(E) -- --
Series A Convertible Preferred Stock.... 60,080(D) 269,329
Series B Convertible Preferred Stock.... 496,676(D) 496,676
Common stock and beneficial interest.... (26,414)(D) -- 32
11(F)
(263)(I)
Capital in excess of par and other...... 178,309(D) -- 3,022,712
(279,640)(G)
13,989(F)
263(I)
Accumulated (deficit) surplus........... (296,851)(D) -- (286,612)
(14,000)(F)
Unamortized restricted stock award...... -- -- (13,230)
Treasury stock.......................... 114,016(D) -- --
---------- --------- -----------
Total stockholders' equity........ (92,885) -- 3,488,907
---------- --------- -----------
Total liabilities and
stockholders' equity............ $2,176,416 $ 336,050 $13,176,023
========== ========= ===========
The accompanying notes and SDG management's assumptions are an integral part of
this statement.
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SIMON GROUP -- NOTES AND SDG MANAGEMENT'S ASSUMPTIONS TO PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS, MARCH 31, 1998 INFORMATION UNAUDITED)
1. Basis of Presentation
SDG is a self-administered and self-managed REIT which through its
subsidiaries is engaged primarily in the ownership, development, management,
leasing, acquisition and expansion of income-producing properties, primarily
regional malls and community shopping centers. At March 31, 1998 and December
31, 1997, it owned or had an interest in 217 and 202 properties, respectively.
SDG, CPI and CRC entered into the Merger Agreement, which provides for the
Merger of a substantially wholly owned subsidiary of CPI with and into SDG.
Legally, SDG will become a majority-owned subsidiary of CPI. Pursuant to the
Merger Agreement, the outstanding shares of SDG Common Stock will be exchanged
for like shares of CPI. Beneficial interests in CRC will be acquired for cash.
CPI's name will be changed to Simon Group. Immediately prior to the consummation
of the Merger, the holders of CPI Common Stock will receive a dividend per share
consisting of $90 in cash, 1.0818 shares of CPI Common Stock and 0.19 shares of
Series B Convertible Preferred Stock of CPI. The aggregate purchase price is
estimated by SDG to be approximately $5.9 billion. See "THE PROPOSED MERGER AND
RELATED MATTERS."
CPI is a self-administered and self-managed privately held REIT which
invests in income-producing properties. At March 31, 1998 and December 31, 1997,
CPI owned or held interests in 30 properties, 23 shopping centers and seven
commercial properties. CRC is engaged in the ownership, operation, acquisition
and development of income producing properties directly or through interests in
joint ventures and other non-REIT qualifying activities.
Simon Group will account for the Merger between SDG and the CPI merger
subsidiary as a reverse acquisition in accordance with Accounting Principles
Board Opinion No. 16. Although Simon Group Equity Stock will be issued to SDG
stockholders and SDG will become a substantially wholly owned subsidiary of
Simon Group following the Merger, CPI is considered the business acquired for
accounting purposes. SDG is the acquiring company because the SDG stockholders
will represent in excess of a majority of the stockholders of Simon Group. The
fair market value of the consideration given by the acquiring company will be
used as the valuation basis for the combination of SDG and CPI. The assets and
liabilities of CPI will be revalued by SDG to their respective fair market
values at the Effective Time.
The SDG Operating Partnership will contribute cash to CRC and the newly
formed SRC Operating Partnership on behalf of the SDG stockholders and the
limited partners of the SDG Operating Partnership to obtain the beneficial
interests in CRC which will be paired with the shares to be issued by Simon
Group and to obtain units in the SRC Operating Partnership so that the limited
partners of the SDG Operating Partnership will hold the same proportionate
interest in the SRC Operating Partnership as they hold in the SDG Operating
Partnership at the Effective Time of the Merger. The cash contributed to CRC and
the CRC Operating Partnership represent stock and partnership units for cash
transactions. The assets and liabilities of CRC will not be adjusted to fair
market value but will be reflected at historical cost because the SDG
stockholders' beneficial interest in CRC will be less than 80%.
Following the Merger and related transactions, the separate consolidated
financial statements will be filed pursuant to the Exchange Act for each of
Simon Group (formerly CPI) and SPG Realty Consultants, Inc. (formerly CRC) as
required under Rule 3-01 and Rule 3-02 of Regulation S-X of the Securities Act.
Management plans to submit the separate financial statements of Simon Group and
SRC Realty Consultants, Inc. in a joint filing and may also include combined
financial statements of Simon Group and SRC Realty Consultants, Inc. in those
filings. Since SDG is the predecessor to Simon Group, the historical financial
statements of Simon Group will be the historical financial statements of SDG.
Upon completion of the Merger and related transactions, the common
stockholders of Simon Group will own a share of common stock of Simon Group and
a beneficial interest in CRC. The shareholders' beneficial interests in CRC are
in direct proportion to their ownership of Simon Group. The beneficial interest
in CRC will be stapled to a share of Simon Group. Accordingly, a share of Simon
Group cannot be transferred without a corresponding transfer of the beneficial
interest in CRC. Simon Group and CRC will operate as a paired-share REIT
structure for income tax purposes.
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121
In addition to the CPI Merger Dividends and the Merger, the following
transactions (the "Other Property Transactions") have been reflected in the
accompanying unaudited pro forma financial statements using the purchase method
of accounting. Investments in non-controlled joint ventures are reflected using
the equity method. Controlled properties have been consolidated.
- On September 29, 1997, SDG completed its cash tender offer for all of the
outstanding shares of beneficial interests of The Retail Property Trust
("RPT"). RPT owned 98.8% of Shopping Center Associates ("SCA"), which
owned or had interests in twelve regional malls and one community
shopping center. Following the completion of the tender offer, the SCA
portfolio was restructured. SDG exchanged its 50% interest in two SCA
properties with a third party for similar interests in two other SCA
properties, in which SDG had 50% interests, with the result that SCA now
owns interests in a total of eleven properties. Effective November 30,
1997, SDG also acquired the remaining 50% interest in another of the SCA
properties. In addition, SDG acquired the remaining 1.2% interest in SCA.
At the completion of these transactions, SDG held a 100% interest in ten
of the eleven properties, and a noncontrolling 50% ownership interest in
the remaining property. The total cost for the acquisition of RPT and
related transactions was approximately $1,300,000, which includes SDG
common stock issued valued at approximately $50,000, units of the SDG
Operating Partnership valued at approximately $25,300, and the assumption
of consolidated debt and SDG's pro rata share of joint venture
indebtedness of approximately $475,300. The balance of the transaction
costs was borrowed under SDG Operating Partnership's credit facility.
- On December 29, 1997, SDG completed the acquisition of the Fashion Mall
at Keystone at the Crossing, a regional mall located in Indianapolis,
Indiana, for $124,500. The purchase price was financed by additional
borrowings under SDG's credit facility of approximately $59,700 and the
assumption of approximately $64,800 in mortgage debt. The mortgage debt
bears interest at 7.85%.
- In January 1998, CPI acquired Phipps Plaza, a super regional mall located
in Atlanta, Georgia, for approximately $198,800. The transaction was
financed with cash of $158,800 and debt of $40,000.
- In January 1998, CPI sold one of its shopping centers (Burnsville Mall)
for $80,672 cash. The selling price exceeded Burnsville Mall's historical
net assets of $37,581 at December 31, 1997, by $43,091. A portion
($40,000) of the proceeds received in the Burnsville transaction was used
to repay the amount borrowed in connection with the acquisition of Phipps
Plaza.
- In January 1998, SDG acquired Cordova Mall, a regional mall in Pensacola,
Florida, for $94,000. This acquisition was financed by issuing units of
the SDG Operating Partnership valued at $55,523, the assumption of
mortgage debt of $28,935 and other liabilities of $6,842 and cash of
$2,700. The mortgage debt, which bore interest at 12.125%, has been
refinanced through the SDG Operating Partnership's credit facility.
- In February 1998, SDG, through a joint venture with another REIT,
acquired an interest in a portfolio of twelve regional malls comprising
approximately 10.7 million square feet of GLA. SDG's non-controlling 50%
share of the total purchase price of $487,250 was financed with a
$242,000 unsecured loan which bears interest at 6.4% per annum, accrued
payables of $2,750 and the assumption of $242,500 of mortgage debt. The
weighted average interest rate on the mortgage debt assumed was 6.94%.
- In May 1998, CPI entered into a contract to sell the General Motors
Building for $800,000. The net proceeds of $798,000 will be used to pay
off certain liabilities ($4,000) and the building's mortgage balance
($11,976 and $13,230 as of March 31, 1998 and December 31, 1997,
respectively) with the remainder available to partially finance a portion
of the CPI Merger Dividends.
Further, since the beneficial interests in CRC are stapled to the common
stock of Simon Group and can only be transferred in tandem, the accompanying pro
forma financial statements include the balance sheet and operating results of
CRC on a combined basis. The accompanying pro forma combined condensed Balance
Sheets were prepared by SDG as if the CPI Merger Dividends, the Merger and the
Other Property Transactions described above which occurred subsequent to the
balance sheet date had occurred as of March 31, 1998 and December 31, 1997. The
accompanying pro forma combined condensed Statements of Operations are presented
by SDG as if the CPI Merger Dividends, the Merger and the Other Property
Transactions previously described had occurred on January 1, 1997, and the
combined entity qualified as a REIT, distributed all of its taxable income and,
therefore, incurred no federal income tax for the period presented. Certain
reclassifications have been made in CPI's and CRC's historical financial
statements to conform them
112
122
to SDG's historical presentation and certain reclassifications have been made in
each companies' historical financial statements to conform them to the condensed
combined pro forma presentation.
These pro forma financial statements should be read in conjunction with the
historical financial statements and notes thereto of SDG, CPI and CRC. In the
opinion of management of SDG, all adjustments necessary to reflect the effects
of the Merger and related transactions and the Other Property Transactions
previously described have been made. Certain adjustments have been estimated by
SDG based on information currently available. Final adjustments are not expected
by SDG to materially impact the pro forma results reported.
The pro forma financial statements are not necessarily indicative of the
actual financial position at March 31, 1998 and December 31, 1997, or what the
actual results of operations would have been assuming the Merger and the Other
Property Transactions had been completed as of January 1, 1997, nor are they
indicative of the results of operations for future periods.
2. Pro Forma Adjustments by SDG to Pro Forma Combined Condensed Balance Sheets
(A) Certain reclassifications have been made by SDG to the SDG, CPI and CRC
historical balance sheets to conform to the pro forma combined condensed
balance sheet presentation.
(B) Adjustments to reflect the sale of the General Motors Building for
$800,000, and $2,000 of transaction costs, resulting in net proceeds of
$798,000. The historical carrying value of the building and improvements
was $585,000 at March 31, 1998 and $580,000 at December 31, 1997. A portion
of the net proceeds of $798,000 will be used to pay off certain liabilities
($4,000) and the building's mortgage balance ($11,976 and $13,230 as of
March 31, 1998 and December 31, 1997, respectively) yielding net cash of
$782,024 and $780,077 as of March 31, 1998 and December 31, 1997,
respectively.
(C) Determination of Combined Purchase Price of CPI:
As described in "THE MERGER AGREEMENT AND RELATED MATTERS -- Terms of the
Merger -- The Merger Consideration," the stockholders of CPI will receive
consideration in the Merger aggregating approximately $179 for each share
of CPI common stock. The $179 consideration includes a $90 cash dividend,
approximately $70 of value of Simon Group common stock and approximately
$19 of value of Simon Group 6.5% Series B Preferred Stock. The common stock
component of the Merger consideration is based upon a fixed exchange ratio
using SDG's February 18, 1998 closing price of $33 5/8 per share and is
subject to a 15% symmetrical collar based upon the price of SDG's common
stock determined on the fifth trading day prior to closing. In the event
SDG's stock price is outside the collar, an adjustment will be made in the
cash dividend component of CPI Merger Dividends which will be increased or
reduced by an amount equal to 2.0818 times the amount the SDG stock price
at the measurement date falls outside the collar. As of March 31, 1998 and
December 31, 1997, there were 25,323,409 and 25,326,855 shares of CPI
common stock outstanding, respectively. As of both March 31, 1998 and
December 31, 1997, there were approximately 814,000 exercisable options.
The following recap of the Merger consideration assumes the options are
exercised, therefore, 26,137,409 and 26,140,855 shares are assumed to be
outstanding as if the Merger occurred on March 31, 1998 and December 31,
1997, respectively. The Series A Convertible Preferred Stock will remain
outstanding after the completion of the Merger. The Series A Convertible
Preferred Stock was convertible into 1,505,000 shares of CPI common stock
pre-Merger. In connection with the Merger, they have been valued by
multiplying the per-share Merger consideration of $179 by the number of
shares of common stock issuable upon conversion. At the Effective Time, the
Series A Convertible Preferred Stock will be convertible into 7,950,492
shares of Simon Group Common Stock.
113
123
AS OF AS OF
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
Merger Consideration distributed to CPI stockholders
(assuming outstanding shares of 26,137,409 and 26,140,855,
respectively)
Cash Dividend............................................... $2,352,367 $2,352,677
Common Stock (54,412,100 and 54,420,032 shares and
beneficial interests issued, respectively)................ 1,829,619 1,829,860
Series B Preferred Stock (4,966,038 and 4,966,762 shares
issued, respectively)..................................... 496,611 496,676
Fair Value of Series A Preferred Stock...................... 269,329 269,329
Fair Value of mortgages and other indebtedness.............. 904,672 904,830
Other liabilities........................................... 142,996 177,546
SDG Merger costs (see below)................................ 24,000 24,000
Less:
$90 cash portion of the Merger Consideration retained as an
offset to proceeds due upon exercise of option shares..... (73,260) (73,260)
Notes receivable issued by CPI in connection with the
exercise of 814,000 options at an average exercise price
of $127.39 per share less $90 cash portion of the Merger
Consideration............................................. (30,435) (30,435)
Permanent restrictions to notes receivable from former CPI
stockholders.............................................. (19,000) (19,000)
Other....................................................... (107) (417)
---------- ----------
Total Purchase Price.............................. $5,896,792 $5,931,806
========== ==========
Estimated fees and expenses of the Merger are as follows: Of
these expenses, approximately $7,500 have been incurred by
CPI during the period ended March 31, 1998.
Advisory fees............................................. $ 27,000
Legal and accounting...................................... 12,600
Severance, transfer taxes and related costs............... 53,000
----------
92,600
Less: CPI expenses........................................ (68,600)
----------
SDG Merger costs.......................................... $ 24,000
==========
(D) Allocation of purchase price of CPI:
The following pro forma adjustments are necessary as of March 31, 1998 and
December 31, 1997 in the opinion of SDG to reflect the assets and
liabilities of CPI at fair value. The purchase price has been allocated
utilizing the purchase method of accounting.
114
124
AS OF MARCH 31, 1998:
MERGER
AND RELATED
LESS CPI HISTORICAL, TRANSACTIONS
ALLOCATION OF AS ADJUSTED FOR THE SALE PRO FORMA
PURCHASE PRICE(DA) OF THE GM BUILDING(B) ADJUSTMENT
------------------ ------------------------ ------------
ASSETS:
Investment in properties, partnership and
joint ventures, net........................ $4,936,058 $2,066,323 $2,869,735
Goodwill...................................... 99,898 -- 99,898
Cash and cash equivalents and short-term
investments................................ 789,119 798,220 (9,101)(Db)
Receivables, net.............................. 27,003 61,311 (34,308)(Dc)
Investment, notes receivable and advances from
management company and affiliate........... -- -- --
Other assets.................................. 44,714 42,866 1,848(Dd)
---------- ---------- ----------
Total assets.......................... $5,896,792 $2,968,720 $2,928,072
========== ========== ==========
LIABILITIES:
Mortgages and other indebtedness.............. $3,183,672 $ 845,672 $2,338,000(De)
Accounts payable, accrued expenses and other
liabilities................................ 166,996 81,896 85,100(Df)
---------- ---------- ----------
Total liabilities..................... 3,350,668 927,568 2,423,100
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock...................... 269,329 209,249 60,080
Series B Preferred Stock...................... 496,611 -- 496,611
Common stock.................................. 5 26,415 (26,410)
Capital in excess of par and other............ 1,780,179 1,602,067 178,112
Accumulated (deficit) surplus................. -- 317,390 (317,390)
Treasury stock................................ -- (113,969) 113,969
---------- ---------- ----------
Total stockholders' equity............ 2,546,124 2,041,152 504,972
---------- ---------- ----------
Total liabilities and stockholders'
equity.............................. $5,896,792 $2,968,720 $2,928,072
========== ========== ==========
115
125
AS OF DECEMBER 31, 1997:
LESS CPI MERGER AND
HISTORICAL, AS ADJUSTED RELATED TRANSACTIONS
ALLOCATION OF FOR THE SALE OF THE PRO FORMA
PURCHASE PRICE(DA) GM BUILDING (B) ADJUSTMENT
------------------ ----------------------- --------------------
ASSETS:
Investment in properties, partnership and
joint ventures, net....................... $4,820,221 $1,910,862 $2,909,359
Goodwill..................................... 94,025 -- 94,025
Cash and cash equivalents and short-term
investments............................... 936,167 945,578 (9,411)(Db)
Receivables, net............................. 32,154 71,363 (39,209)(Dc)
Investment, notes receivable and advances
from management company and affiliate..... -- -- --
Other assets................................. 49,239 47,587 1,652(Dd)
---------- ---------- ----------
Total assets......................... $5,931,806 $2,975,390 $2,956,416
========== ========== ==========
LIABILITIES:
Mortgages and other indebtedness............. $3,183,830 $ 845,830 $2,338,000(De)
Accounts payable, accrued expenses and other
liabilities............................... 201,546 108,946 92,600(Df)
---------- ---------- ----------
Total liabilities.................... 3,385,376 954,776 2,430,600
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Series A Preferred Stock..................... 269,329 209,249 60,080
Series B Preferred Stock..................... 496,676 -- 496,676
Common stock................................. 5 26,419 (26,414)
Capital in excess of par and other........... 1,780,420 1,602,111 178,309
Accumulated (deficit) surplus................ -- 296,851 (296,851)
Treasury stock............................... -- (114,016) 114,016
---------- ---------- ----------
Total stockholders' equity........... 2,546,430 2,020,614 525,816
---------- ---------- ----------
Total liabilities and stockholders'
equity............................. $5,931,806 $2,975,390 $2,956,416
========== ========== ==========
(Da) The purchase price has been allocated based on the estimated fair market
value of the assets and liabilities of CPI using information currently
available.
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(Db) To reflect the decrease in cash and cash equivalents
related to the CPI Merger Dividends and the Merger:
Proceeds of indebtedness incurred in conjunction
with the Merger............................... $ 1,499,000 $ 1,499,000
Cash proceeds from the sale of GM Building used
to finance a portion of the CPI Merger
Dividends..................................... 780,000 780,000
Debt issuance costs............................. (8,994) (8,994)
Cash portion of CPI Merger Dividends............ (2,352,367) (2,352,677)
Proceeds from exercise of CPI stock options..... 73,260 73,260
----------- -----------
$ (9,101) $ (9,411)
----------- -----------
Less: Cash used to pay portion of CPI Merger
Dividends(De)................................. (780,000) (780,000)
----------- -----------
$ (789,101) $ (789,411)
=========== ===========
116
126
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(Dc) To reflect the adjustment by SDG to eliminate CPI's
deferred asset related to the straight-lining of rent
related to leases..................................... $ (34,308) $ (39,209)
========== ==========
(Dd) Adjustments to other assets:
To eliminate historical unamortized deferred financing
costs of CPI........................................... $ (7,146) $ (7,342)
To record deferred financing cost related to $1,499,000
assumed borrowed to finance the cash portion of the
Merger consideration................................... 8,994 8,994
---------- ----------
$ 1,848 $ 1,652
========== ==========
(De) Adjustments to mortgages and other indebtedness:
To record a premium required to adjust CPI mortgage and
other indebtedness to fair value using an estimated
discount rate available to SDG on an instrument by
instrument basis....................................... $ 59,000 $ 59,000
---------- ----------
To record the debt required to finance the cash portion of
the CPI Merger Dividends consisting of:
Binding commitment from a lender, two-year term loan,
interest at LIBOR plus 80 basis points.............. 1,400,000 1,400,000
Borrowing under SDG's credit facility, interest at
LIBOR plus 65 basis points.......................... 99,000 99,000
Net cash proceeds from contract to sell the General
Motors Building see item............................ 780,000 780,000
---------- ----------
2,279,000 2,279,000
---------- ----------
$2,338,000 $2,338,000
========== ==========
Less: Net cash used to pay portion of CPI Merger Dividends
from the sale of the GM Building (Db).................. (780,000) (780,000)
---------- ----------
$1,558,000 $1,558,000
========== ==========
(Df) To accrue Merger expenses and severance costs related
to the Merger......................................... $ 85,100 $ 92,600
========== ==========
(E) Adjustment required to reduce equity of the combined entity Simon Group by
$339,128 as of March 31, 1998 and $339,061 as of December 1997 to reflect
SDG preferred stockholders' interest in SDG as minority interest (preferred
stock of subsidiary). SDG preferred stockholders hold an interest in SDG not
in the combined entity. As a result of the Merger, SDG becomes a subsidiary
of the combined entity.
(F) Adjustment required to reflect $22,000 cash contributed by the SDG Operating
Partnership on behalf of the SDG stockholders ($14,000) and the limited
partners of the SDG Operating Partnership ($8,000) to obtain beneficial
interests in CRC to be paired with shares of common stock issued by Simon
Group and to obtain units in the CRC Operating Partnership whereby the
limited partners of the SDG Operating Partnership will hold the same
proportionate interest in the CRC Operating Partnership as they hold in the
SDG Operating Partnership. The amount of cash is based on a preliminary
estimate of the fair value of the net assets of CRC. At the Effective Time,
the Board of Directors of CRC will make a determination of the fair market
value of CRC's net assets based upon information then available. SDG
management does not expect that the final amount will differ materially from
the preliminary estimates.
COMBINED
PRO FORMA
SDG CRC ADJUSTMENT
-------- ------- ----------
Cash and Cash Equivalents................................... $(22,000) $22,000 $ --
Limited Partners' Interest.................................. (8,000) 8,000 --
Common Stock and Beneficial Interests....................... -- 11 11
Capital in Excess of Par.................................... -- 13,989 13,989
Accumulated Deficit......................................... (14,000) -- (14,000)
117
127
(G) To adjust the Limited Partners' interest (before preferred units) in the
Operating Partnerships and Stockholders' Equity to reflect the CPI Merger
Dividends, the Merger and Other Property Transactions:
AS OF MARCH 31, 1998
------------------------------------------
DOLLAR AMOUNTS OUTSTANDING OWNERSHIP
(IN THOUSANDS) SHARES/UNITS PERCENTAGE
-------------- ------------ ----------
Common Stockholders' Equity Before Unamortized
Restricted Stock Award -- SDG Historical............... $1,229,940 109,694,509
Common Equity issued in connection with the Merger..... 1,780,184 54,412,100
---------- -----------
Simon Group............................................ 3,010,124 164,106,609
Less: Equity in assets held by Simon Group............. (153,100) (4,553,160)
---------- -----------
Simon Group before adjustments and Limited Partners'
Interest............................................... 2,857,024 159,553,449 71.4%
---------- ----------- -----
Limited Partners' Interest -- SDG Historical........... 718,264 64,059,705 28.6%
---------- -----------
Total Equity of the SDG Operating Partnerships Before
Preferred Units and adjustment......................... $3,575,288 223,613,154 100%
---------- ===========
Pro forma adjustment (F)............................... (14,000)
Adjusted Equity of CRC Operating Partnership -
Historical............................................. 18,002
----------
Adjusted Equity of the SDG Operating Partnership....... $3,579,290
==========
Limited Partners' Pro Forma Ownership Interest......... 28.6%
Pro Forma Limited Partners' Equity Interest............ $1,023,677
Less: Historical Values................................ (718,264)
----------
Pro Forma Adjustment................................... $ 305,413
==========
AS OF DECEMBER 31, 1997
--------------------------------------------
DOLLAR AMOUNTS OUTSTANDING OWNERSHIP
(IN THOUSANDS) SHARES/UNITS PERCENTAGE
-------------- ------------ ----------
Common Stockholders' Equity Before Unamortized
Restricted Stock Award -- SDG Historical............ $1,231,031 109,643,001
Common Equity issued in connection with the Merger.... 1,780,425 54,420,032
---------- -----------
Simon Group........................................... 3,011,456 164,063,033
Less: Equity in assets held by Simon Group............ (153,100) (4,553,160)
---------- -----------
Simon Group before adjustments and Limited Partners'
Interest............................................ 2,858,356 159,509,873 71.5%
---------- -----------
Limited Partners' Interest -- SDG Historical.......... 694,437 61,850,762
Other Property Transaction: Units issued to acquire
Cordorva Mall....................................... 55,523 1,713,016
---------- -----------
Limited Partner....................................... 749,960 63,563,778 28.5%
---------- ----------- -----
Total Equity of the SDG Operating Partnerships Before
Preferred Units and adjustment...................... $3,608,316 223,073,651 100%
---------- =========== =====
Pro forma adjustment (F).............................. (14,000)
Adjusted Equity of CRC Operating Partnership -
Historical.......................................... 18,316
----------
Adjusted Equity of the SDG Operating Partnership...... $3,612,632
==========
Limited Partners' Pro Forma Ownership Interest........ 28.5%
Pro Forma Limited Partners' Equity Interest........... $1,029,600
Less: Historical Values............................... (694,437)
Less: Other Pro Forma Adjustments..................... (55,523)
----------
Pro Forma Adjustment.................................. $ 279,640
==========
Generally accepted accounting principles, as specified in Financial
Accounting Standards Board Emerging Issues Task Force ("EITF") 94-2
("Treatment of Minority Interests in Certain Real Estate investment
Trusts")
118
128
and 95-7 ("Implementation Issues Relating to the Treatment of Minority
Interests in Certain Real Estate Investment Trusts"), provide for the
allocation of the pro forma financial reporting amounts of Simon Group
Stockholder's Equity and the respective interests of Simon Group and the
limited partners in the Operating Partnerships based upon their respective
ownership percentages. The above tables compute the financial reporting pro
forma equity amounts and allocations thereof in accordance with GAAP
resulting in, for financial reporting purposes, an increase in the limited
partners' minority interests and a reduction in capital in excess of par
value in the amount of $305,413 at March 31, 1998 and $279,640 as of
December 31, 1997. That financial reporting allocation is not determinative
of the future allocation of the Operating Partnerships' distributions or
the number of shares of Simon Group Common Stock into which the SDG Units
are convertible, both of which will be determined by the actual number of
SDG Units held by Simon Group and the SDG Limited Partners.
(H) The following adjustments by SDG are necessary to reflect the Other Property
Transactions:
AS OF DECEMBER 31, 1997
---------------------------------------------------------------------
ALLOCATION OF
PURCHASE PRICE FINANCING
----------------------------- ------------------------------------
INVESTMENT
IN PROPERTIES, ACCOUNTS SDG
PARTNERSHIPS PAYABLE OPERATING
AND JOINT AND OTHER PARTNERSHIP
VENTURES LIABILITIES CASH DEBT UNITS
-------------- ----------- --------- -------- -----------
Acquisition of Phipps Plaza........... $ 198,848 $ -- $(158,848) $ 40,000 $ --
Sale of Burnsville Mall............... (80,672) -- 40,672 (40,000) --
Cordova Mall.......................... 94,000 6,842 (2,700) 28,935 55,523
Acquisition of 50% Joint Venture
interest............................ 244,750 2,750 -- 242,000 --
--------- ------ --------- -------- -------
Pro Forma Adjustments................. $ 456,926 $9,592 $(120,876) $270,935 $55,523
========= ====== ========= ======== =======
(I) Pro forma adjustment to reflect the adjustment to the par value of CRC stock
from a par value of $.10 per share to $.0001 per share resulting in a
reclassification of $263 from Common Stock to Capital in Excess of Par and
Other as of March 31, 1998 and December 31, 1997.
3. Analysis of Stockholders' Equity
The following analysis reflects the individual equity accounts of Simon
Group and CRC on a pro forma basis.
MARCH 31, 1998
------------------------------------
PRO FORMA
COMBINED
SIMON GROUP CRC TOTAL
----------- ------- ----------
Series A Convertible Preferred Stock........................ $ 269,329 $ -- $ 269,329
Series B Convertible Preferred Stock........................ 496,611 -- 496,611
Common Stock................................................ 16 16 32
Capital in Excess of Par and Other.......................... 2,998,949 28,166 3,027,115
Accumulated Deficit......................................... (308,817) (9,617) (318,434)
Unrestricted Stock Award.................................... (11,883) -- (11,883)
---------- ------- ----------
Total Stockholders' Equity.................................. $3,444,205 $18,565 $3,462,770
========== ======= ==========
DECEMBER 31, 1997
------------------------------------
PRO FORMA
COMBINED
SIMON GROUP CRC TOTAL
----------- ------- ----------
Series A Convertible Preferred Stock........................ $ 269,329 $ -- $ 269,329
Series B Convertible Preferred Stock........................ 496,676 -- 496,676
Common Stock................................................ 16 16 32
Capital in Excess of Par and Other.......................... 2,994,609 28,103 3,022,712
Accumulated Deficit......................................... (277,308) (9,304) (286,612)
Unrestricted Stock Award.................................... (13,230) -- (13,230)
---------- ------- ----------
Total Stockholders' Equity.................................. $3,470,092 $18,815 $3,488,907
========== ======= ==========
119
129
4. Outstanding Shares of Capital Stock
Following is an analysis of the number of authorized and issued shares of
capital stock of SDG Historical and Simon Group Pro Forma as of March 31, 1998
and December 31, 1997.
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
----------- ----------- ----------- -----------
Common Stock
Authorized................................... 387,800,000 387,800,000 387,800,000 387,800,000
Issued....................................... 109,694,509 164,106,609 109,643,001 164,063,033
Series B Cumulative Redeemable Preferred Stock
Authorized................................... 9,200,000 9,200,000 9,200,000 9,200,000
Issued....................................... 8,000,000 8,000,000 8,000,000 8,000,000
Series C Cumulative Redeemable Preferred Stock
Authorized................................... 3,000,000 3,000,000 3,000,000 3,000,000
Issued....................................... 3,000,000 3,000,000 3,000,000 3,000,000
Series A Convertible Preferred Stock
Authorized................................... -- 209,249 -- 209,249
Issued....................................... -- 209,249 -- 209,249
Series B Convertible Preferred Stock
Authorized................................... -- 4,966,038 -- 4,966,762
Issued....................................... -- 4,966,038 -- 4,966,762
The Common Stock share information includes share information for all
classes of Common Stock authorized and issued. Additionally, as a result of the
Merger, a beneficial interest in CRC is stapled to each pro forma share of
common stock of Simon Group. As of March 31, 1998 and December 31, 1997, Simon
Group and SDG, on a pro forma and a historical basis, had no treasury shares
outstanding.
120
130
SIMON GROUP
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED, IN THOUSANDS EXCEPT UNIT AND PER UNIT AMOUNTS)
PRO FORMA
---------------------------
MERGER AND
SALE OF GM RELATED
SDG CPI CRC BUILDING TRANSACTIONS
(HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) ADJUSTMENTS
------------ ------------ ------------ ------------ ------------
REVENUE
Minimum rent..................................... $ 184,460 $ 85,481 $ 782 $(19,920) $ 750(A)
Overage rent..................................... 9,782 3,098 -- (164) --
Tenant reimbursements............................ 90,160 36,973 212 (3,474) --
Other income..................................... 15,855 2,852 148 187 (200)(B)
----------- -------- ------ -------- --------
Total revenue.............................. 300,257 128,404 1,142 (23,371) 550
----------- -------- ------ -------- --------
EXPENSES
Property & other expenses........................ 108,285 57,934 690 (9,718) (7,539)(I)
Depreciation and amortization.................... 58,305 22,334 229 (2,921) 10,850(C)
----------- -------- ------ -------- --------
Total expenses............................. 166,590 80,268 919 (12,639) 3,311
----------- -------- ------ -------- --------
INCOME BEFORE ITEMS BELOW.......................... 133,667 48,136 223 (10,732) (2,761)
INTEREST EXPENSE................................... 91,910 16,474 338 (142) 21,917(D)
----------- -------- ------ -------- --------
INCOME BEFORE MINORITY INTEREST.................... 41,757 31,662 (115) (10,590) (24,678)
MINORITY PARTNERS' INTEREST........................ (1,442) -- -- -- --
GAIN ON SALES OF ASSETS............................ 0 44,311 -- -- --
----------- -------- ------ -------- --------
INCOME BEFORE UNCONSOLIDATED ENTITIES.............. 40,315 75,973 (115) (10,590) (24,678)
INCOME FROM UNCONSOLIDATED ENTITIES................ 4,809 5,554 70 -- --
----------- -------- ------ -------- --------
INCOME OF THE OPERATING PARTNERSHIPS AND OTHER..... 45,124 81,527 (45) (10,590) (24,678)
LESS LIMITED PARTNERS' INTEREST IN THE OPERATING
PARTNERSHIPS..................................... 13,842 -- -- -- 5,686(G)
PREFERRED DIVIDENDS................................ 7,334 3,428 -- -- 8,070(E)
----------- -------- ------ -------- --------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS BEFORE
EXTRAORDINARY ITEMS.............................. $ 23,948 $ 78,099 $ (45) $(10,590) $(38,434)
=========== ======== ====== ======== ========
NET INCOME PER SHARE -- BASIC AND DILUTED........ $ 0.22
===========
WEIGHTED AVERAGE SHARES OUTSTANDING.............. 109,684,252
===========
PRO FORMA
-----------------------------
OTHER
PROPERTY
TRANSACTIONS(F) TOTAL
--------------- -----------
REVENUE
Minimum rent..................................... $ (248) $ 251,305
Overage rent..................................... 33 12,749
Tenant reimbursements............................ (616) 123,255
Other income..................................... (71) 18,771
-------- -----------
Total revenue.............................. (902) 406,080
-------- -----------
EXPENSES
Property & other expenses........................ (613) 149,039
Depreciation and amortization.................... 439 89,236
-------- -----------
Total expenses............................. (174) 238,275
-------- -----------
INCOME BEFORE ITEMS BELOW.......................... (728) 167,805
INTEREST EXPENSE................................... 2,827 133,324
-------- -----------
INCOME BEFORE MINORITY INTEREST.................... (3,555) 34,481
MINORITY PARTNERS' INTEREST........................ -- (1,442)
GAIN ON SALES OF ASSETS............................ -- 44,311
-------- -----------
INCOME BEFORE UNCONSOLIDATED ENTITIES.............. (3,555) 77,350
INCOME FROM UNCONSOLIDATED ENTITIES................ 1,879 12,312
-------- -----------
INCOME OF THE OPERATING PARTNERSHIPS AND OTHER..... (1,676) 89,662
LESS LIMITED PARTNERS' INTEREST IN THE OPERATING
PARTNERSHIPS..................................... -- 19,528
PREFERRED DIVIDENDS................................ -- 18,832
-------- -----------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS BEFORE
EXTRAORDINARY ITEMS.............................. $ (1,676) $ 51,302
======== ===========
NET INCOME PER SHARE -- BASIC AND DILUTED........ $ 0.31
===========
WEIGHTED AVERAGE SHARES OUTSTANDING.............. 164,096,352(H)
===========
The accompanying notes and SDG management's assumptions are an integral part of
this statement.
121
131
SIMON GROUP
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT UNIT AND PER UNIT AMOUNTS)
PRO FORMA
---------------------------------------------
MERGER AND
SALE OF GM RELATED OTHER
SDG CPI CRC BUILDING TRANSACTIONS PROPERTY
(HISTORICAL) (HISTORICAL) (HISTORICAL) (HISTORICAL) ADJUSTMENTS TRANSACTIONS(F)
------------ ------------ ------------ ------------ ------------ ---------------
REVENUE
Minimum rent.................. $ 641,352 $319,862 $3,108 $(77,707) $ 3,000(A) $ 88,305
Overage rent.................. 38,810 10,489 -- (536) -- 5,119
Tenant reimbursements......... 322,416 138,579 968 (12,297) -- 49,251
Other income.................. 51,589 24,858 2,539 (962) (800)(B) 4,463
---------- -------- ------ -------- --------- --------
Total revenue........... 1,054,167 493,788 6,615 (91,502) 2,200 147,138
---------- -------- ------ -------- --------- --------
EXPENSES
Property & other expenses..... 376,237 199,503 5,592 (40,420) --(I) 53,779
Depreciation and
amortization................ 200,900 91,312 889 (17,764) 38,400(C) 28,866
---------- -------- ------ -------- --------- --------
Total expenses.......... 577,137 290,815 6,481 (58,184) 38,400 82,645
---------- -------- ------ -------- --------- --------
INCOME BEFORE ITEMS BELOW....... 477,030 202,973 134 (33,318) (36,200) 64,493
INTEREST EXPENSE................ 287,823 69,562 1,365 (716) 87,668(D) 82,870
---------- -------- ------ -------- --------- --------
INCOME BEFORE MINORITY
INTEREST...................... 189,207 133,411 (1,231) (32,602) (123,868) (18,377)
MINORITY PARTNERS' INTEREST..... (5,270) -- -- -- -- --
GAINS ON SALE OF ASSETS......... 20 122,410 1,259 -- -- --
---------- -------- ------ -------- --------- --------
INCOME BEFORE UNCONSOLIDATED
ENTITIES...................... 183,957 255,821 28 (32,602) (123,868) (18,377)
INCOME FROM UNCONSOLIDATED
ENTITIES...................... 19,176 21,390 1,149 -- -- 8,770
---------- -------- ------ -------- --------- --------
INCOME OF THE OPERATING
PARTNERSHIPS AND
OTHER......................... 203,133 277,211 1,177 (32,602) (123,868) (9,607)
LESS LIMITED PARTNERS' INTEREST
IN THE SDG OPERATING
PARTNERSHIPS.................. 65,954 -- -- -- 2,677(G) --
PREFERRED DIVIDENDS............. 29,248 13,712 -- -- 32,284(E) --
---------- -------- ------ -------- --------- --------
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS BEFORE
EXTRAORDINARY ITEMS........... $ 107,931 $263,499 $1,177 $(32,602) $(158,829) $ (9,607)
========== ======== ====== ======== ========= ========
NET INCOME PER SHARE -- BASIC
AND DILUTED................... $ 1.08
==========
WEIGHTED AVERAGE SHARES
OUTSTANDING................... 99,920,280
==========
PRO FORMA
------------
TOTAL
------------
REVENUE
Minimum rent.................. $ 977,920
Overage rent.................. 53,882
Tenant reimbursements......... 498,917
Other income.................. 81,687
------------
Total revenue........... 1,612,406
------------
EXPENSES
Property & other expenses..... 594,691
Depreciation and
amortization................ 342,603
------------
Total expenses.......... 937,294
------------
INCOME BEFORE ITEMS BELOW....... 675,112
INTEREST EXPENSE................ 528,572
------------
INCOME BEFORE MINORITY
INTEREST...................... 146,540
MINORITY PARTNERS' INTEREST..... (5,270)
GAINS ON SALE OF ASSETS......... 123,689
------------
INCOME BEFORE UNCONSOLIDATED
ENTITIES...................... 264,959
INCOME FROM UNCONSOLIDATED
ENTITIES...................... 50,485
------------
INCOME OF THE OPERATING
PARTNERSHIPS AND
OTHER......................... 315,444
LESS LIMITED PARTNERS' INTEREST
IN THE SDG OPERATING
PARTNERSHIPS.................. 68,631
PREFERRED DIVIDENDS............. 75,244
------------
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS BEFORE
EXTRAORDINARY ITEMS........... $ 171,569
============
NET INCOME PER SHARE -- BASIC
AND DILUTED................... $ 1.10
============
WEIGHTED AVERAGE SHARES
OUTSTANDING................... 155,773,755(H)
============
The accompanying notes and SDG management's assumptions are an integral part of
this statement.
122
132
5.Pro forma Adjustments by SDG to Unaudited Pro Forma Combined Condensed
Statements of Operations
In connection with the Merger, CPI will incur $68,600 of expenses which
have not been included in the Pro Forma Combined Condensed Statement of
Operations. Further, the estimated gain of $213,000 and $218,000, respectively,
related to the probable sale of the General Motors Building has been excluded
from the unaudited Pro Forma Combined Condensed Statement of Operations.
FOR THE FOR THE
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
1998 1997
--------------- ------------
(A) To recognize revenue from straight-lining rent related to
leases which will be reset in connection with the Merger... $ 750 $ 3,000
======= =========
(B) To reflect a reduction in interest income due to
forgiveness of Notes Receivable from CPI employees ($13,200
multiplied by 6%).......................................... $ (200) $ (800)
======= =========
(C) To reflect the increase in depreciation and amortization as
a result of recording the investment properties at
acquisition value, allocating 20% of the premium to land,
versus historical cost and utilizing an estimated useful
life of 35 years for investment properties and goodwill.... $10,850 $ 38,400
======= =========
(D) To reflect the following adjustments to interest expense:
(1) To reflect the elimination of amortization of deferred
financing costs related to CPI written off in
connection with the Merger............................ $ (217) $ (868)
(2) To reflect the amortization of the estimated costs
incurred to finance the cash portion of the Merger
consideration......................................... 225 899
(3) To reflect the amortization of the premium required to
adjust mortgages and other notes payable to fair
value................................................. (2,225) (8,900)
(4) To reflect interest expense for debt borrowed to
finance the CPI Merger Dividends:
Term loan commitment $1,400,000 at LIBOR plus 80 basis
points -- 6.45%....................................... 22,575 90,300
Revolving credit facility at LIBOR plus 65 basis
points -- 6.30%....................................... 1,559 6,237
------- ---------
24,134 96,537
------- ---------
$21,917 $ 87,668
======= =========
(A 1/8% change in the LIBOR rate would change the
annual pro forma adjustment to interest expense by
$1,875.)
(E) To reflect annual dividends on 6.5% Series B Convertible
Preferred Stock issued in connection with the Merger....... $ 8,070 $ 32,284
======= =========
(F) Other Property Transactions represent the historical
operating results of the properties for the appropriate
period to reflect a full year of activities in the
unaudited pro forma statements of operations. The pro forma
adjustments by SDG give effect when applicable to:
(1) An increase in depreciation expense as a result of
recording the properties at SDG's estimate of fair
value
(2) An increase in interest expense primarily resulting
from debt incurred to finance the transactions
(3) The elimination of expenses included in the historical
results incurred by the seller directly related to the
transaction
(4) The elimination of the historical results to reflect
the sale of Burnsville Mall
123
133
The Other Property Transactions include:
(1) The acquisition of the RPT portfolio in September and November
1997
(2) The acquisition of Fashion Mall Keystone at the Crossing in
December 1997
(3) The acquisition of Phipps Plaza in January 1998
(4) The sale of Burnsville Mall in January 1998
(5) The acquisition of Cordova Mall January 1998
(6) The acquisition of a 50% interest in a portfolio of twelve
properties in February 1998
FOR THE
THREE MONTHS FOR THE YEAR
ENDED ENDED
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(G) To adjust the allocation of the Limited
Partners' interest in the net income of the
Operating Partnerships, after consideration of
the preferred unit distributions. The Limited
Partners' weighted average pro forma ownership
interest in the Operating Partnerships for the
three months ended March 31, 1998 and for the
year ended December 31, 1997 were 28.6% and
29.6%, respectively............................. $ 5,686 $ 2,677
=========== ============
(H) The pro forma weighted average shares
outstanding is computed as follows:
SDG Historical Weighted Average Shares
Outstanding................................... 109,684,252 99,920,280
Pro forma adjustments:
Common stock issued related to RPT
transaction..................................... -- 1,433,443
Common stock issued related to the Merger....... 54,412,100 54,420,032
----------- ------------
Pro forma weighted average shares and beneficial
interests outstanding........................... 164,096,352 155,773,755
=========== ============
(I) To eliminate Merger expenses incurred by CPI
during the period............................... $ (7,539) $ --
=========== ============
6. New Accounting Pronouncement
On May 21, 1998, the Emerging Issues Task Force reached a final consensus
regarding Issue 98-9, "Accounting for Contingent Rent in Interim Financial
Periods." The final consensus requires that the lessor should defer recognition
of contingent rental income (overage rent) until the specified targets are met.
This consensus is not expected to have a material impact on Simon Group's annual
results.
124
134
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRO FORMA RESULTS OF OPERATIONS FOR SIMON GROUP (DOLLARS IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
Pro forma results of operations are not necessarily indicative of what
Simon Group's, including CRC, results of operations would have been had the
Merger and Other Property Transactions been consummated on the dates indicated,
nor do they purport to project future results of operations. The pro forma
financial information is based on assumptions deemed appropriate by the
management of SDG. The following discussion and analysis of pro forma financial
condition and results of operations has been prepared by management of SDG and
reflects such pro forma financial information.
The following discussion should be read in conjunction with the information
set forth under PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA and
SDG's, CPI's and CRC's historical financial statements and notes thereto
incorporated by reference or included elsewhere herein. Certain statements made
in this section may constitute "forward-looking statements." Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of Simon
Group to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, which will, without limitation, affect demand for retail space or
retail goods, availability and creditworthiness of prospective tenants, lease
rents and availability of financing; adverse changes in the real estate markets
including, without limitation, competition with other companies; risks of real
estate development and acquisition; risks relating to Year 2000 issues;
governmental actions and initiatives; and environmental/safety requirements.
PRO FORMA FOR THE THREE MONTHS ENDED MARCH 31, 1998
On a pro forma basis for the three months ended March 31, 1998 revenues for
Simon Group were $406,080. Total revenues include minimum rent, overage rent,
tenant reimbursements and other income of $251,305, $12,749, $123,255, and
$18,771, respectively.
Pro forma operating expenses for the quarter ended March 31, 1998 of
$238,275 includes depreciation and amortization of $89,236.
Pro forma operating income and earnings before interest, taxes,
depreciation, and amortization (EBITDA) totaled $167,805 and $257,041 for the
quarter March 31, 1998, respectively. Simon Group's consolidated pro forma
operating margin (before depreciation and amortization) for the period was
63.3%.
Pro forma interest expense of $133,324 includes interest costs of $24,359
incurred to finance the CPI Merger Dividends.
Income of the SDG Operating Partnership of $89,662 includes a non-recurring
gain on the sale of real estate of Burnsville Mall of $44,311. Income of the SDG
Operating Partnership was allocated to Simon Group based on Simon Group's
preferred unit preference and ownership interest in the Operating Partnerships
during the period.
Pro forma preferred dividends of $18,832 include $8,070 of dividends
associated with the issuance of the Series B Preferred Stock.
Pro forma net income on a per share basis (basic and diluted) for the
period was $.31 for the three month period ended March 31, 1998. Excluding the
gain on the sale of real estate, pro forma net income per share would have been
$.12 as compared to historical earnings per share of $.22.
PRO FORMA FOR THE YEAR ENDED DECEMBER 31, 1997
On a pro forma basis for the year ended December 31, 1997 revenues for
Simon Group were $1,612,406. Total revenues include minimum rent, overage rent,
tenant reimbursements and other income of $977,920, $53,882, $498,917, and
$81,687, respectively.
Pro forma operating expenses for the year ended December 31, 1997 of
$937,294 includes depreciation and amortization of $342,603.
Pro forma operating income and earnings before interest, taxes,
depreciation, and amortization (EBITDA) totaled $675,112 and $1,017,715 for the
year ended December 31, 1997, respectively. Simon
125
135
Group's consolidated pro forma operating margin (before depreciation and
amortization) for the period was 63.1%.
Pro forma interest expense of $528,572 includes interest costs of $97,436
incurred to finance the CPI Merger Dividends.
Income of the SDG Operating Partnership of $315,444 includes gains on sale
of assets of $123,689. Income of the Operating Partnerships was allocated to
Simon Group based on Simon Group's preferred unit preference and ownership
interest in the operating partnerships during the period.
Pro forma preferred dividends of $75,244 include $32,284 of dividends
associated with the issuance of the Series B Preferred Stock.
Pro forma net income on a per share basis (basic and diluted) for the
period was $1.10 for the year ended December 31, 1997. Excluding the gain on the
sale of real estate, pro forma net income per share would have been $.54 as
compared to historical earnings per share of $1.08.
Liquidity and Capital Resources
As of March 31, 1998, the Simon Group's pro forma balance of unrestricted
cash and cash equivalents was $115,016. In addition to the cash balance, the
Simon Group has unsecured revolving credit facilities (the "Credit Facilities")
aggregating $1,550,000 which had $245,800 available after outstanding borrowings
and letters of credit at March 31, 1998 on a pro forma basis. After taking into
account $1,062,000 of net proceeds of SDG's $1,075,000 private offering and the
cancellation of a $300,000 credit facility and on a pro forma basis, the Credit
Facilities had $1,007,800 available after outstanding borrowings and letters of
credit at March 31, 1998. Simon Group expects to have access to public and
private equity and debt markets.
SDG management anticipates that cash generated from operating performance
will provide the necessary funds on a short- and long-term basis for its
operating expenses, interest expense on outstanding indebtedness, recurring
capital expenditures, and distributions to shareholders in accordance with REIT
requirements. Sources of capital for nonrecurring capital expenditures, such as
major building renovations and expansions, as well as for scheduled principal
payments, including balloon payments, on outstanding indebtedness are expected
to be obtained from: (i) excess cash generated from operating performance; (ii)
working capital reserves; (iii) additional debt financing; and (iv) additional
equity raised in the public markets.
Financing and Debt
At March 31, 1998, the Simon Group had consolidated pro forma debt of
$7,734,500, which includes $2.405 billion of indebtedness associated with the
assumption of CPI and CRC's indebtedness and financing of the CPI Merger
Dividends. Of this pro forma amount, $4,329,332 is fixed-rate debt and
$3,405,168 is variable-rate debt. At March 31, 1998, the Simon Group had
consolidated pro forma fixed-rate debt, after considering the net proceeds from
the $1,075,000 debt offering, of $5,391,332 and consolidated variable-rate debt
of $2,343,168.
On a pro forma basis, $245,800 was available under the Credit Facilities as
of March 31, 1998. On June 22, 1998, the SDG Operating Partnership consummated a
private placement of $1,075,000 aggregate principal amount of notes, the net
proceeds of $1,062,000 were used primarily to repay amounts outstanding under
the Credit Facilities. In connection with this transaction, a Credit Facility of
$300,000 was cancelled. The combination of these transactions would have
increased the amount available under the Credit Facilities to $1,007,800 on a
pro forma basis.
Scheduled principal payments of pro forma consolidated mortgages and
indebtedness after considering the $1,075,000 debt offering but prior to
considering the fair value premium over the next five years is $3,599,826, with
$4,077,946 thereafter. Simon Group's pro forma ratio of debt to market
capitalization, excluding a pro rata share of joint venture indebtedness, was
46.4% at March 31, 1998.
New Accounting Pronouncement
On May 21, 1998, the Emerging Issues Task Force reached a final consensus
regarding Issue 98-9 "Accounting for Contingent Rent in Interim Financial
Periods." The final consensus requires that the lessor should defer recognition
of contingent rental income (overage rent) until the specified targets are met.
This consensus is not expected to have a material impact on Simon Group's annual
results.
126
136
SELECTED HISTORICAL FINANCIAL DATA OF SDG
The following table sets forth selected consolidated financial data for SDG
and combined historical financial data of the Predecessor. The information under
Balance Sheet Data as at March 31, 1998 and 1997 and all other selected
financial data for the three months ended March 31, 1998 and 1997 have been
derived from the unaudited consolidated financial statements of SDG incorporated
herein by reference. The selected historical balance sheet data of SDG as at
December 31, 1993, 1994, 1995, 1996 and 1997 and all other selected historical
financial data for SDG and the Predecessor, as applicable, for the years ended
December 31, 1994, 1995, 1996 and 1997 and the periods ended December 19, 1993
and December 31, 1993 are derived from the audited financial statements of SDG
and the Predecessor, as applicable, incorporated herein by reference. The
financial data should be read in conjunction with the financial statements and
notes thereto and other financial data of SDG and the Predecessor incorporated
herein by reference.
Other data management believes is important in understanding trends in the
SDG's business is also included in the table.
SDG
FOR THE THREE MONTHS -------------------------------------------------
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------------------
1998 1997 1997(1) 1996(1) 1995(1) 1994
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenue................ $ 300,257 $ 242,414 $1,054,167 $ 747,704 $ 553,657 $ 473,676
Income (loss) of the SDG
Operating Partnership
before extraordinary
items...................... 45,124 43,062 203,133 134,663 101,505 60,308
Net income (loss) available
to common shareholders..... $ 23,948 $ 8,233 $ 107,989 $ 72,561 $ 57,781 $ 23,377
BASIC EARNINGS PER COMMON
SHARE(2):
Income before extraordinary
items...................... $ 0.22 $ 0.23 $ 1.08 $ 1.02 $ 1.08 $ 0.71
Extraordinary items.......... -- (0.15) -- (0.03) (0.04) (0.21)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 0.22 $ 0.08 $ 1.08 $ 0.99 $ 1.04 $ 0.50
========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding................ 109,684 96,973 99,920 73,586 55,312 47,012
DILUTED EARNINGS PER COMMON
SHARE(2):
Income before extraordinary
items...................... $ 0.22 $ 0.23 $ 1.08 $ 1.01 $ 1.08 $ 0.71
Extraordinary items.......... -- (0.15) -- (0.03) (0.04) (0.21)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 0.22 $ 0.08 $ 1.08 $ 0.98 $ 1.04 $ 0.50
========== ========== ========== ========== ========== ==========
Diluted weighted average
shares outstanding......... 110,071 97,370 100,304 73,721 55,422 47,214
Distributions per common
share(3)................... $ 0.5050 $ 0.4925 $ 2.01 $ 1.63 $ 1.97 $ 1.90
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 101,997 $ 41,946 $ 109,699 $ 64,309 $ 62,721 $ 105,139
Total assets................. 7,956,808 5,908,896 7,662,667 5,895,910 2,556,436 2,316,860
Mortgages and other
indebtedness............... 5,329,707 3,746,992 5,077,990 3,681,984 1,980,759 1,938,091
Shareholders' equity......... $1,557,185 $1,265,466 $1,556,862 $1,304,891 $ 232,946 $ 57,307
OTHER DATA:
Cash flow provided by (used
in):
Operating activities....... $ 119,472 $ 89,517 $ 370,907 $ 236,464 $ 194,336 $ 128,023
Investing activities....... (251,481) (72,040) (1,243,804) (199,742) (222,679) (266,772)
Financing activities....... 124,307 (39,840) 918,287 (35,134) (14,075) 133,263
Funds from Operations (FFO)
of the SDG Operating
Partnership(4)............. $ 108,907 $ 87,939 $ 415,128 $ 281,495 $ 197,909 $ 167,761
========== ========== ========== ========== ========== ==========
FFO allocable to SDG (4)..... $ 69,015 $ 53,992 $ 258,049 $ 172,468 $ 118,376 $ 92,604
========== ========== ========== ========== ========== ==========
SDG PREDECESSOR
-------------- ------------
DECEMBER 20 TO JANUARY 1 TO
DECEMBER 31, DECEMBER 19,
1993 1993
-------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenue................ $ 18,424 $ 405,869
Income (loss) of the SDG
Operating Partnership
before extraordinary
items...................... 8,707 6,912
Net income (loss) available
to common shareholders..... $ (11,366) $ 33,101
BASIC EARNINGS PER COMMON
SHARE(2):
Income before extraordinary
items...................... $ 0.11 N/A
Extraordinary items.......... (0.39) N/A
----------
Net income (loss)............ $ (0.28) N/A
==========
Weighted average shares
outstanding................ 40,950 N/A
DILUTED EARNINGS PER COMMON
SHARE(2):
Income before extraordinary
items...................... $ 0.11 N/A
Extraordinary items.......... (0.39) N/A
----------
Net income (loss)............ $ (0.28) N/A
==========
Diluted weighted average
shares outstanding......... 40,957 N/A
Distributions per common
share(3)................... -- N/A
BALANCE SHEET DATA:
Cash and cash equivalents.... $ 110,625 N/A
Total assets................. 1,793,654 N/A
Mortgages and other
indebtedness............... 1,455,884 N/A
Shareholders' equity......... $ 29,521 N/A
OTHER DATA:
Cash flow provided by (used
in):
Operating activities....... N/A N/A
Investing activities....... N/A N/A
Financing activities....... N/A N/A
Funds from Operations (FFO)
of the SDG Operating
Partnership(4)............. N/A N/A
FFO allocable to SDG (4)..... N/A N/A
- ---------------
(1) Refer to Note 3 to SDG's audited financial statements included in SDG's Form
10-K and Form 10-K/A for the year ended December 31, 1997 which are
incorporated by reference herein to describe the DeBartolo Merger, which
occurred on August 9, 1996, and the 1997, 1996, and 1995 real estate
acquisitions and development.
(2) Per share data is reflected only for SDG, because the historical combined
financial statements of the Predecessor are a combined presentation of
partnerships and corporations.
127
137
(3) Represents distributions declared per period. A distribution of $0.1515 per
share was declared on August 9, 1996, in connection with the DeBartolo
Merger, designated to align the time periods of distributions of the merged
companies. The current annual distribution rate is $2.02 per share.
(4) FFO, as defined by NAREIT, means the consolidated net income of the SDG
Operating Partnership and its subsidiaries without giving effect to real
estate related depreciation and amortization, gains or losses from
extraordinary items, gains or losses on sales of real estate, gains or
losses on investments in marketable securities and any provision/benefit for
income taxes for such period, plus the allocable portion, based on the SDG
Operating Partnership's ownership interest, of funds from operations of
unconsolidated joint ventures, all determined on a consistent basis in
accordance with generally accepted accounting principles. Management
believes that FFO is an important and the widely used measure of the
operating performance of REITs, which provides a relevant basis for
comparison among REITs. FFO is presented to assist investors in analyzing
the performance of SDG. SDG's method of calculating FFO may be different
from the methods used by other REITs. FFO: (i) does not represent cash flow
from operations as defined by generally accepted accounting principles; (ii)
should not be considered as an alternative to net income as a measure of
SDG's operating performance or to cash flows from operating, investing and
financing activities; and (iii) is not an alternative to cash flows as a
measure of SDG's liquidity. In March 1995, NAREIT modified its definition of
FFO. The modified definition provides that amortization of deferred
financing costs and depreciation of nonrental real estate assets are no
longer to be added back to net income in arriving at FFO. This modification
was adopted by SDG beginning in 1996. Additionally the FFO for prior periods
has been restated to reflect the modification in order to make the amounts
comparative. Under the previous definition, FFO for the years ended December
31, 1995 and 1994, was $208.3 million and $176.4 million, respectively.
The following summarizes FFO of the SDG Operating Partnership and reconciles
income of the SDG Operating Partnership before extraordinary items to FFO
for the periods presented:
FOR THE THREE
MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------------------------
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
FFO of SDG Operating
Partnership............... $108,907 $87,939 $ 415,128 $ 281,495 $ 197,909 $ 167,761
======== ======= =============== =============== =============== ===============
Increase in FFO from prior
period.................... 23.8% 80.6% 47.5% 42.2% 18.0% N/A
======== ======= =============== =============== =============== ===============
Reconciliation:
Income of SDG Operating
Partnership before
extraordinary items... $ 45,124 $43,062 $ 203,133 $ 134,663 $ 101,505 $ 60,308
Plus:
Depreciation and
amortization from
consolidated
properties............ 58,079 43,312 200,084 135,226 92,274 75,663
SDG Operating
Partnership's share of
depreciation and
amortization from
unconsolidated
affiliates............ 14,804 8,858 46,760 20,159 6,466 7,251
Merger integration
costs................. -- -- -- 7,236 -- --
SDG Operating
Partnership's share of
(gains) or losses on
sales of real
estate................ -- (37) (20) (88) 2,054 --
Unusual item............ -- -- -- -- -- 27,184
Less:
Minority interest
portion of
depreciation and
amortization.......... (1,766) (850) (5,581) (3,007) (2,900) (2,645)
Preferred dividends..... (7,334) (6,406) (29,248) (12,694) (1,490) --
-------- ------- --------------- --------------- --------------- ---------------
FFO of SDG Operating
Partnership............... $108,907 $87,939 $ 415,128 $ 281,495 $ 197,909 $ 167,761
======== ======= =============== =============== =============== ===============
FFO allocable to SDG........ $ 69,015 $53,992 $ 258,049 $ 172,468 $ 118,376 $ 92,604
======== ======= =============== =============== =============== ===============
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SELECTED HISTORICAL FINANCIAL DATA OF CPI
The following table sets forth selected historical financial data for CPI
and should be read in conjunction with the audited and unaudited consolidated
financial statements of CPI and the related notes, included elsewhere herein.
The information under Balance Sheet Data as at March 31, 1998 and all other
selected financial information for the three months ended March 31, 1998 and
1997 has been derived from the unaudited consolidated financial statements of
CPI included herein. The information under Balance Sheet Data as at December 31,
1997 and 1996 and all other selected financial information for the years ended
December 31, 1997, 1996 and 1995 has been derived from the annual audited
consolidated financial statements of CPI included herein. Such statements
account for the investments in real estate joint ventures under the equity
method of accounting. The audited financial statements for other years and
years-end were based on pro rata consolidation of CPI's investment in real
estate joint ventures. The financial information presented below for such years
has been derived from the audited financial statements after adjustments to
reflect the investments in real estate joint ventures under the equity method.
The information under Balance Sheet Data as of March 31, 1997 has been derived
from the unaudited consolidated financial statements of CPI.
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE)
INCOME STATEMENT DATA:
Total revenue.................... $128,404 $ 119,090 $ 493,788 $ 349,109 $ 308,232 $ 298,150 $ 284,557
Gain on sale of properties....... $ 44,311 $ 116,522 $ 122,410 $ 74,084 $ 398 $ 85,090 $ 13,316
Income before extraordinary
items.......................... $ 81,527 $ 151,958 $ 277,211 $ 184,371 $ 119,355 $ 137,224 $ 99,984
Net income available to common
shareholders................... $ 78,099 $ 148,530 $ 263,499 $ 170,659 $ 105,713 $ 132,835 $ 92,670
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary
items(1)....................... $ 3.08 $ 5.70 $ 10.20 $ 7.74 $ 5.00 $ 6.28 $ 4.72
Extraordinary items.............. -- -- -- -- -- -- (0.35)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 3.08 $ 5.70 $ 10.20 $ 7.74 $ 5.00 $ 6.28 $ 4.37
======== ========== ========== ========== ========== ========== ==========
Weighted average shares
outstanding.................... 25,353 26,066 25,835 22,045 21,160 21,157 21,200
DILUTED EARNINGS PER COMMON
SHARE:
Income before extraordinary
items(2)....................... $ 3.01 $ 5.51 $ 10.14 $ 7.74 $ 5.00 $ 6.28 $ 4.72
Extraordinary items.............. -- -- -- -- -- -- (0.35)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 3.01 $ 5.51 $ 10.14 $ 7.74 $ 5.00 $ 6.28 $ 4.37
======== ========== ========== ========== ========== ========== ==========
Diluted weighted average shares
outstanding.................... 27,095 27,571 27,348 23,550 22,667 21,637 21,200
Distributions per common
share(3)....................... $ 1.94 $ 1.865 $ 7.685 $ 7.3825 $ 7.0625 $ 7.80 $ 6.80
MARCH 31, DECEMBER 31,
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 16,196 $ 95,745 $ 124,808 $ 106,495 $ 82,838 $ 46,640 $ 49,834
Total assets.................... $2,808,756 $2,932,808 $2,810,254 $3,114,910 $1,988,810 $2,010,354 $1,832,988
Mortgages and notes and bonds
payable....................... $ 857,648 $ 863,337 $ 859,060 $ 964,690 $ 695,562 $ 695,966 $ 696,418
Shareholders' equity............ $1,828,152 $1,909,733 $1,802,614 $1,955,778 $1,176,393 $1,198,482 $1,033,572
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FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- ---------- ---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS EXCEPT PER SHARE DATA)
OTHER DATA:
Cash flow provided by (used in):
Operating activities............ $ 46,501 $ 26,266 $ 219,492 $ 124,030 $ 128,359 $ 117,017 $ 102,814
Investing activities............ $(97,764) $ 119,649 $ 194,514 $ (161,287) $ 49,196 $ (147,658) $ (46,287)
Financing activities............ $(57,349) $ (156,665) $ (395,693) $ 60,914 $ (141,357) $ 27,447 $ (140,413)
Funds from Operations (FFO)(4):
Net income...................... $ 81,527 $ 151,958 $ 277,211 $ 184,371 $ 119,355 $ 137,224 $ 92,670
Plus:
Depreciation of real estate
and amortization of
department store and tenant
inducements and leasing
costs....................... 24,324 24,701 99,515 82,124 73,395 74,146 68,461
Merger-related costs.......... 7,539 -- -- -- -- -- --
Write-down of real estate and
related assets and provision
for possible real estate
losses...................... -- -- -- 8,200 -- 44,972 10,100
Provision for retirement
benefits.................... -- -- -- -- -- 4,000 --
Prepayment penalties on
refinancing of mortgage
debt........................ -- -- -- -- -- 88 7,432
Less:
Gain on sales of properties... (44,311) (116,522) (122,410) (74,084) (398) (85,090) (13,316)
Preference share dividends
earned...................... (3,428) (3,428) (13,712) (13,712) (13,642) (4,389) --
-------- ---------- ---------- ---------- ---------- ---------- ----------
FFO allocable to holders of CPI
Common Stock.................. $ 65,651 $ 56,709 $ 240,604 $ 186,899 $ 178,710 $ 170,951 $ 165,347
======== ========== ========== ========== ========== ========== ==========
- ---------------
(1) Includes gain on sales of properties of $1.75 and $4.47 for the three months
ended March 31, 1998 and 1997, respectively, and $4.74, $3.36, $.02, $4.02
and $.63 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(2) Includes gain or sales of properties of $1.64 and $4.23 for the three months
ended March 31, 1998 and 1997, respectively, and $4.48, $3.15, $.02, $3.93,
$.63 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
(3) During 1994 a $1.00 extraordinary distribution relating to the sale of
properties was paid.
(4) FFO, as used in the above table and as defined by NAREIT, means the
consolidated net income of CPI without giving effect to depreciation and
amortization (excluding amortization of deferred financing costs or assets
other than those uniquely significant to the real estate industry and
depreciation of non-rental real estate assets), gains or losses from
extraordinary items, gains or losses on sales of real estate and gains or
losses on investments in marketable securities, plus the allocable portion,
based on CPI's ownership interest, of FFO of unconsolidated entities, all
determined on a consistent basis in accordance with generally accepted
accounting principles. CPI's management believes that FFO is a widely used
supplemental measure of the operating performance of REITs which provides a
relevant basis for comparison of REITs. FFO is presented to assist investors
with such comparisons and in analyzing the operating performance of CPI.
CPI's method of calculating FFO may be different from the methods used by
other REITs. FFO: (i) does not represent cash flow from operations as
defined by generally accepted accounting principles; (ii) should not be
considered as an alternative to net income as a measure of operating
performance or to cash flows from operating, investing and financing
activities; and (iii) is not an alternative to cash flows as a measure of
liquidity.
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Selected Historical Financial Data of CRC
The following table sets forth summary historical financial data for CRC
and should be read in conjunction with the audited and unaudited consolidated
financial statements of CRC and the related notes, included elsewhere herein.
The information under Balance Sheet Data as at March 31, 1998 and all other
summary financial information for the three months ended March 31, 1998 and 1997
has been derived from the unaudited consolidated financial statements of CRC
included herein. The information under Balance Sheet Data as December 31, 1997
and 1996 and all other summary financial information for the years ended
December 31, 1997, 1996 and 1995 has been derived from the annual audited
consolidated financial statements of CRC included herein. The information under
Balance Sheet Data as at March 31, 1997 and December 31, 1995, 1994 and 1993 and
all other summary financial information for the years ended December 31, 1994
and 1993 has been derived from the unaudited consolidated financial statements
of CRC.
FOR THE THREE
MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE)
OPERATING DATA:
Total revenue................................... $ 1,065 $ 1,725 $ 6,214 $ 9,805 $10,423 $11,184 $12,216
Net income (loss) available to common
shareholders.................................. $ (45) $ (21) $ 1,177 $ (920) $ (6) $ 387 $(2,029)
EARNINGS PER COMMON SHARE:
Net income (loss) per share -- basic and
diluted....................................... $ (0.02) $ (0.01) $ 0.43 $ (0.39) $ Nil $ 0.18 $ (0.96)
Basic weighted average shares outstanding....... 2,684 2,755 2,732 $ 2,353 $ 2,264 $ 2,163 $ 2,120
Diluted weighted average shares outstanding..... 2,708 2,755 2,733 2,353 2,264 2,163 2,120
Distributions per common share.................. $ 0.10 $ 0.10 $ 0.40 $ 0.425 $ 0.625 $ 1.00 $ 1.00
MARCH 31, DECEMBER 31,
----------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 3,900 $ 4,558 $ 4,147 $ 4,797 $ 2,759 $ 4,588 $ 4,439
Total assets..................................... $47,208 $30,250 $46,063 $31,054 $30,929 $32,239 $33,560
Mortgages and notes payable...................... $38,181 $21,931 $36,818 $21,988 $22,208 $22,409 $22,595
Shareholders' equity............................. $ 4,002 $ 4,263 $ 4,316 $ 5,039 $ 4,320 $ 5,650 $ 6,726
FOR THE THREE
MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
--------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ----- -------- ------ ------- ------- -------
(IN THOUSANDS)
OTHER DATA:
Cash flow provided by (used in):
Operating activities............................ $ 213 $ 231 $ 493 $ 769 $ 271 $ 1,790 $ 1,044
Investing activities............................ $(1,090) $ 342 $(12,970) $ (150) $ (575) $ 8 $ (526)
Financing activities............................ $ 630 $(812) $ 11,827 $1,419 $(1,525) $(1,649) $(2,278)
Funds from Operations(1):
Net income (loss)............................... $ (45) $ (21) $ 1,177 $ (920) $ (6) $ 387 $(2,029)
Plus:
Depreciation and amortization................. 229 213 889 938 920 1,483 1,582
Write-down of investment...................... -- -- -- 1,100 -- -- 1,500
Less:
Gain on sale of partnership interests......... -- -- (1,259) -- -- -- --
------- ----- -------- ------ ------- ------- -------
Funds from Operations........................... $ 184 $ 192 $ 807 $1,118 $ 914 $ 1,870 $ 1,053
======= ===== ======== ====== ======= ======= =======
- ---------------
(1) CRC is not a REIT and accordingly it is a taxable entity. CRC computes Funds
from Operations, as used in the above table, as consolidated net income
without giving effect to depreciation and amortization (excluding
amortization of deferred financing costs or assets other than those uniquely
significant to the real estate industry and depreciation of non-rental real
estate assets), gains or losses from extraordinary items, gains or losses on
sales of real estate plus the allocable portion, based on CRC's ownership
interest, of Funds from Operations of unconsolidated entities, all
determined on a consistent basis in accordance with generally accepted
accounting principles. CRC's management believes that Funds from Operations
is a widely used supplemental measure of the operating performance of real
estate companies which provides a relevant basis for comparison among real
estate companies. Funds from Operations is presented to assist investors in
analyzing the performance of CRC. CRC's method of calculating Funds from
Operations may be different from the methods used by other real estate
companies and is different from the method used by CPI and SDG because a
provision for income taxes is deducted from net income. Funds from
Operations: (i) does not represent cash flow from operations as defined by
generally accepted accounting principles; (ii) should not be considered as
an alternative to net income as a measure of operating performance or to
cash flows from operating, investing and financing activities; and (iii) is
not an alternative to cash flows as a measure of liquidity.
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141
CPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
set forth under "PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA" and
CPI's historical consolidated financial statements and notes thereto included
elsewhere herein. Certain statements made in this section may constitute
"forward-looking statements." Any forward-looking statements contained herein do
not take into account the Merger and the consummation of the transactions
contemplated by the Merger Agreement. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of CPI to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, which will, without
limitation, affect demand for retail space or retail goods, availability and
creditworthiness of prospective tenants, lease rents and availability of
financing; adverse changes in the real estate markets including, without
limitation, competition with other companies; risks of real estate development
and acquisition; risks relating to Year 2000 issues; governmental actions and
initiatives; and environmental/safety requirements.
The financial results reported reflect:
1. 1994 through 1997 expansions and renovations of Roosevelt Field, Lenox
Square, Burlington, Maplewood (sold at year-end 1996), Nanuet, Northlake
and South Shore Plaza (wholly owned presently or at the time of the
expansion(s)) and Crystal and Haywood malls ("joint ventures");
2. The purchases, in November and December 1996, of $984 million of
partnership interests in seven super-regional or regional shopping
centers, one mixed-use development and the General Motors Building, New
York City in exchange for shares of CPI Common Stock and related
interests in CRC ("Roll-ups");
3. The redemptions (in December 1996 and January 1997) at a cost of $343
million, of 2.6 million shares of CPI Common Stock (and related
interests in CRC) in exchange for Countryside and Maplewood Mall
shopping centers, a joint venture interest in North Star Mall and $13
million in cash ("Redemption");
4. The sale for $153 million, in December 1994, of Broadway Square, Orange
Park and University Mall regional shopping centers ("Sale");
5. The purchase for $198 million of the Phipps Plaza, Atlanta, Georgia
regional shopping center and peripheral land in January 1998; and
6. The sale for $81 million in cash of Burnsville Center, Minneapolis,
Minnesota in January 1998.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997
Total revenue increased by $9.3 million, or 7.8%, in the first quarter of
1998 as compared to the same period in 1997. Principal positive changes were the
acquisition of Phipps Plaza regional shopping center ($4.6 million), the net
effect of new leases commencing at an average effective rent (minimum and
percentage rents) per square foot of $39 versus leases expiring at an average
effective rent of $31 per square foot ($4.5 million), increased occupancy levels
($4.0 million) and promotion fund revenues previously received by independent
merchants' associations ($1.8 million). Other revenue changes were a decrease in
interest income (described below), and revenues ($3.1 million) resulting from
the sales of Burnsville Center shopping center and the Roosevelt Field Office
Building, and increases, aggregating approximately $2.6 million, in cost
recoveries from tenants (principally real estate taxes and common area
expenditures), percentage rents and expanded cart and credit card programs.
Interest income decreased by $5.1 million on a comparable basis principally
as a result of the repayment, in March 1997, of mortgages receivable on two
regional shopping centers in which CPI was also a joint
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142
venturer ($1.2 million) and a decrease in average outstanding short-term money
market investments ($3.9 million).
Total expenses increased by .3% ($.3 million) principally as a result of
new promotion fund costs ($2 million), increases in other property expenses ($.8
million) and a $2.5 million decrease in interest expense resulting from the
repayment at maturity of $100 million of 8- 3/4% Notes in March 1997.
The sale, in January 1998, of Burnsville Center resulted in substantially
all of the approximately $44 million gain on sales of property in the first
quarter of 1998 and a portion of the Redemption resulted in substantially all of
the approximately $116 million of such gains in the comparable quarter of 1997.
Merger related costs of $7.5 million were incurred in the first quarter of
1998.
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
Total revenue increased by $145 million, or 41.4%, in 1997 as compared to
1996. This increase is primarily the result of the net effect of the Roll-ups
($149 million increase) and Redemption ($15 million decrease). Expansions of
Roosevelt Field and South Shore Plaza shopping centers resulted in $9 million of
additional revenues. Other revenue changes were a decrease in interest income
(described below), the net positive effect, aggregating approximately $11
million, of new leases commencing at an average effective rent (minimum and
percentage rents) per square foot of $39 versus leases expiring at an average
effective rent of $33 per square foot and increases in cost recoveries from
tenants (principally real estate taxes and common area expenditures).
Interest income decreased by $9 million on a comparable basis principally
as a result of the repayment, in March 1997, of mortgages receivable on two
regional shopping centers in which CPI was also a joint venturer ($4 million)
and a decrease in average outstanding short-term money market investments ($5
million).
Total expenses increased by $73 million, or 25.3%, from year-to-year.
Excluding the effects of the Roll-ups ($87 million increase) and Redemption ($11
million decrease) the principal changes in expenses were an increase in
depreciation and amortization expense ($3 million) resulting from expansion and
renovation activities and a net $3 million increase in interest expense
resulting from (i) the issuance, in March 1996, of $250 million of 7 7/8% Notes
due 2016, (ii) the repayment at maturity of $100 million of 8 3/4% Notes in
March 1997 and (iii) a decrease in interest capitalized to expansions and
renovations in progress and the approximately $8 million write-down to estimated
fair value, in 1996, of CPI's investment in another REIT.
Equity in earnings of joint ventures decreased by $27 million as a result
of the Roll-ups ($17 million decrease), Redemption ($9 million decrease) and
mortgage financing, in 1997, of two regional shopping centers in which CPI is a
joint venturer ($3 million decrease) partially offset by an increase in joint
venture rental revenues of which CPI's share was $2 million.
The Redemption resulted in substantially all of the approximately $48
million increase in gain on sales of properties inasmuch as the property
exchanged for common shares in January 1997 resulted in a gain of $115 million
versus the $72 million gain on exchange of two other properties in December
1996. Various other property sales resulted in net gains of $7 million and $2
million in 1997 and 1996, respectively.
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
Total revenue increased by $41 million, or 13.3%, in 1996 as compared to
1995. The Roll-ups accounted for $20 million of the increase and expansions of
Lenox Square and Roosevelt Field resulted in approximately $8 million of
additional revenue. Other revenue changes were a (i) $7 million increase in cost
recoveries from tenants, (ii) $2 million increase in lease settlement receipts
(principally as a result of a significantly higher level of tenant bankruptcies
and abandonments in 1996), (iii) $2 million increase in leasing fees and (iv) $1
million increase in revenues from seasonal vendors.
Total expenses increased by approximately $47 million, or 19.8%, from
year-to-year. Significant increases resulted from (i) the issuance, in March
1996, of $250 million of 7 7/8% Notes due 2016 resulting in an increase in
interest expense of approximately $15 million, (ii) the Roll-ups ($12 million
increase), (iii) the approximately $8 million write-down to estimated fair value
in 1996 of CPI's investment in another real estate
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143
investment trust, (iv) increased depreciation and amortization expense ($4
million) resulting from expansion and renovation activities and (v) increased
real estate taxes and common area costs ($3 million each).
Equity in earnings of joint ventures decreased by $2 million principally as
a result of the Roll-ups.
The portion of the Redemption which closed in December 1996 resulted in $72
million of the over $73 million increase in gain on sales of property.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, cash, cash equivalents and short-term (money
market) investments aggregated $165 million. In addition, at that date, CPI had
an undrawn $250 million unsecured revolving credit agreement (the "CPI Revolving
Credit Agreement").
In January 1998, CPI (i) purchased Phipps Plaza, a regional shopping center
in Atlanta, Georgia, and adjacent land parcels for $198 million using
substantially all of its cash, cash equivalents and short-term investments and
$40 million borrowed under the CPI Revolving Credit Agreement and (ii)
subsequently thereto, sold Burnsville Mall, a regional shopping center in
Minneapolis, Minnesota, for net $81 million of which $40 million was used to
repay all outstanding amounts under the CPI Revolving Credit Agreement and the
remainder was invested in short-term investments.
CPI sold the General Motors Building which is located in New York City on
July 31, 1998 for approximately $800 million. See "BUSINESS OF SDG, CPI AND
CRC -- CPI -- Acquisitions and Distributions." Such sale resulted in a gain of
$204 million ($8.05 per share of CPI Common Stock).
CPI management anticipates that, prior to the Effective Time of the Merger,
cash generated from CPI stand-alone operations will provide necessary funds for
operating expenses, periodic debt service on outstanding indebtedness,
distributions on $209 million of outstanding CPI Series A Preferred Stock and
periodic distributions to common stockholders (anticipated in August 1998 and
immediately prior to the Effective Time of the Merger).
In the summer of 1997, because of the activities specified herein in "THE
PROPOSED MERGER AND RELATED MATTERS -- BACKGROUND OF THE MERGER," CPI suspended
all material capital raising activities with the exception of the (i)
aforementioned sale of Burnsville Mall, (ii) construction and permanent
financing of the Mall of Georgia in Buford, Georgia and (iii) sale of the
General Motors Building, New York City (see above).
As of June 30, 1998, cash and cash equivalents aggregated $60 million, and
$237 million of the CPI Revolving Credit Agreement remained undrawn. It is
anticipated that future drawdowns, the proceeds from the sale of the General
Motors Building and the anticipated construction financing for the Mall of
Georgia development will be sufficient to fund all capital expenditures,
principally construction, expansion, renovation and department store and mall
tenant inducement costs, and scheduled balloon principal payments on outstanding
indebtedness prior to the Effective Time of the Merger. Expenditures for realty
projects previously approved by the CPI Board of Directors, are expected to
aggregate $25 million prior to the anticipated Effective Time of the Merger and
$185 million thereafter to completion. The following are significant anticipated
capital expenditures and financings:
1. CPI is undertaking a complete renovation of Walt Whitman mall which is
expected to be completed in fall 1998. Walt Whitman is presently a two
department store shopping center with 285,000 square feet of mall GLA.
The present department store anchors are Macy's, which opened a complete
renovation of its 302,000 square foot store in October 1997, and
Bloomingdales, which is in the process of completely renovating its
220,000 square foot store. Such renovated store is scheduled to re-open
in August 1998. Lord & Taylor is presently constructing a new 120,000
square foot store anticipated to open in November 1998 and Saks Fifth
Avenue is commencing construction of a 100,000 square foot specialty
store projected to open in spring 1999. Projected capital expenditures
by CPI aggregate approximately $66 million, of which approximately $25
million is anticipated to be funded prior to the Effective Time of the
Merger;
2. CPI and local development partners have commenced construction of the
Mall of Georgia -- a 1.6 million square foot regional shopping center in
Buford, Georgia (a suburb of Atlanta) to be anchored by Nordstrom, Lord
& Taylor, J.C. Penney and Dillard's department stores. Mall store space
will
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approximate 500,000 square feet, a "village" area of 120,000 square feet
will be dedicated to lifestyle uses and approximately 105,000 square
feet of theater and IMAX complex space is to be built. Opening is
projected for fall 1999 and spring 2000. On June 30, 1998 a $200 million
construction and permanent loan, guaranteed by CPI, maturing July 1,
2010 with interest at 7.09% per annum has been issued by two lenders.
Simultaneously the first draw down for $71 million was made.
3. The CPI Board has approved the expansion and renovation of Town Center
at Boca Raton (Florida) an existing 1.3 million square foot regional
mall presently anchored by Sears, Burdines, Saks Fifth Avenue,
Bloomingdales and Lord & Taylor. The expansion and renovation which are
projected to cost approximately $65 million, substantially all of which
is anticipated to be funded subsequent to the Effective Time of the
Merger, will include a new 170,000 square foot Nordstrom store (to open
in 2000), approximately 94,000 square feet of additional enclosed mall
GLA and approximately 50,000 square feet of additional space in existing
department stores.
CPI has a number of smaller expansion and/or renovation projects currently
in the predevelopment phase. Aggregate expenditures prior to the Effective Time
of the Merger for such projects, department store and mall tenant inducements
and a scheduled balloon debt payment are projected to be approximately $35
million.
Interest payable on the presently undrawn CPI Revolving Credit Agreement is
based upon the London Interbank Offered Rate ("LIBOR") and accordingly, CPI's
future earnings, cash flows and future values relative to outstanding
indebtedness may, to some extent, be dependent upon future indebtedness
outstanding under the CPI Revolving Credit Agreement at floating interest rates.
All presently outstanding indebtedness is at fixed interest rates.
Acquisitions, construction, expansion and renovation activities have been
an integral part of CPI's activities. Capital expenditures, based upon CPI's
share of joint venture expenditures, and financing related thereto for the
period ended June 30, 1998 and years ended December 31, 1997, 1996 and 1995,
respectively, are summarized in the table below.
THROUGH
JUNE 30,
1998 1997 1996 1995
-------- ----- ------ ----
($ IN MILLIONS)
Expenditures:
Acquisitions................................... $198 $ -- $ 984 $ --
Development.................................... 19 24 14 1
Expansions and renovations(1).................. 15 52 150 108
Department store, office building & mall tenant
inducements................................. 12 31 23 10
Recoverable from tenants....................... -- 9 3 5
Other.......................................... 3 8 4 3
---- ----- ------ ----
$247 $ 124 $1,178 $127
==== ===== ====== ====
Financings:
Equity
-- issuance................................. $ -- $ -- $ 981 $ 23
-- repurchase/redemption.................... -- (220) (198) --
Unsecured recourse debt
-- issuance................................. 53 -- 250 --
-- repayment................................ (40) (100) -- --
Secured debt
-- issuance................................. 36 46 -- --
-- repayment................................ -- -- -- --
---- ----- ------ ----
$ 49 ($274) $1,033 $ 23
==== ===== ====== ====
- ---------------
(1) including department store and mall tenant inducements for expansion GLA.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA")
CPI management believes that there are several important factors that
contribute to the ability of CPI to operate and improve its profitability,
including aggregate tenant sales volume, sales per square foot, occupancy
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145
levels and tenant costs. Each of these factors has a significant effect on
EBITDA from company operations. CPI management believes that EBITDA from company
operations is, among others, a reasonable measure of operating performance
because: (i) it is industry practice to evaluate real estate companies based on
operating income before interest, taxes, depreciation and amortization, which is
generally equivalent to EBITDA; and (ii) EBITDA is unaffected by the liquidity,
debt and equity structure of the company. EBITDA: (i) does not represent cash
flow from operations as defined by generally accepted accounting principles;
(ii) should not be considered as an alternative to net income as a measure of
operating performance; (iii) is not indicative of cash flows from operating,
investing and financing activities; and (iv) is not an alternative to cash flows
as a measure of liquidity.
EBITDA (which excludes corporate level interest income resulting from the
investment of CPI's significant past liquidity in short-term, money-market
investments) increased from $210 million in 1993 to $315 million in 1997; a
compound annual growth rate of 10.6%. The Roll-ups, Redemption and Sale had
significant effects upon the change in EBITDA as follows:
($ IN MILLIONS) % OF TOTAL CHANGE
--------------- -----------------
Total change.......................................... $105 100%
Roll-ups.............................................. (80) (76)
Redemption............................................ 18 17
Sale.................................................. 13 12
---- ---
Remainder............................................. $ 56 53%
==== ===
The remainder specified above principally results from the addition of mall
GLA resulting principally from expansions and increased rental rates. The
following table summarizes CPI's EBITDA from operations and operating profit
margin, defined as EBITDA from operations as a percentage of revenue (both
excluding corporate level short-term interest income) and reconciles net income,
computed in accordance with generally accepted accounting principles, to EBITDA
from operations:
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
($ IN MILLIONS)
Net income.............................. $ 81.5 $151.9 $277.2 $184.4 $119.3 $137.2(1) $ 92.7
Gain on sales of properties............. (44.3) (116.5) (122.4) (74.1) (0.4) (85.1) (13.3)
Merger-related costs.................... 7.5 -- -- -- -- -- --
Write-down of real estate investment.... -- -- -- 8.2 -- -- --
Provision for possible real estate
losses................................ -- -- -- -- -- -- 10.1
Prepayment penalties on refinancing of
mortgage debt......................... -- -- -- -- -- 0.1 7.4
Corporate level short-term interest
income................................ (1.3) (6.4) (18.0) (27.6) (27.3) (12.7) (13.0)
Interest expense........................ 19.2 20.7 78.6 72.3 57.7 58.6 58.0
Depreciation of real estate and
amortization of department store and
tenant inducements and leasing
costs................................. 24.3 24.7 99.5 82.1 73.4 74.1 68.5
------ ------ ------ ------ ------ ------ ------
EBITDA.................................. $ 86.9 $ 74.4 $314.9 $245.3 $222.7 $172.2(1) $210.4
====== ====== ====== ====== ====== ====== ======
Operating Profit Margin................. 61.1% 58.6% 58.9% 56.2% 55.9% 43.0%(1) 55.1%
- ---------------
(1) Includes the effect of a $45 million write-down of department store and mall
tenant inducements and expansion rights and a $4 million provision for
retirement benefits to a former executive officer.
FUNDS FROM OPERATIONS ("FFO")
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as net income without giving effect to depreciation and amortization
(excluding amortization of deferred financing costs or assets other than those
uniquely significant to the real estate industry and depreciation of non-real
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estate assets), gains or losses from (i) extraordinary terms, (ii) sales of real
estate, or (iii) investments in marketable securities, plus the allocable
portion of FFO from unconsolidated entities, all determined on a consistent
basis in accordance with generally accepted accounting principles. CPI
management believes that FFO is a widely used supplemental measure of the
operating performance of REITs which provides a basis for comparison of REITs
and is presented to assist investors with such comparisons and in analyzing the
operating performance of CPI. CPI's method of calculating Funds From Operations
may be different from the method used by other REITs. FFO: (i) does not
represent cash flow from operations as defined by generally accepted accounting
principles; (ii) should not be considered as an alternative to net income as a
measure of operating performance or to cash flows from operating, investing and
financing activities: and (iii) is not an alternative to cash flows as a measure
of liquidity.
The table below summarizes FFO allocable to holders of CPI Common Stock for
the periods presented and reconciles net income, computed in accordance with
generally accepted accounting principles, to FFO allocable to holders of CPI
Common Stock.
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -------------------------
1998 1997 1997 1996 1995
-------- -------- ------- ------ ------
($ IN MILLIONS)
Net income............................ $ 81.5 $ 151.9 $ 277.2 $184.4 $119.3
Gain on sales of properties........... (44.3) (116.5) (122.4) (65.9) (.4)
Merger costs.......................... 7.5 -- -- -- --
Preference Share dividends earned..... (3.4) (3.4) (13.7) (13.7) (13.6)
Depreciation of real estate and
amortization of department store and
tenant inducements and leasing
costs............................... 24.3 24.7 99.5 82.1 73.4
------- ------- ------- ------ ------
FFO allocable to holders of CPI Common
Stock............................... $ 65.6 $ 56.7 $ 240.6 $186.9 $178.7
======= ======= ======= ====== ======
MALL TENANT SALES
The average mall tenant sales productivity of shopping centers owned by CPI
has been amongst the highest in the United States. The table below summarizes
annualized sales data for those mall tenants-in-occupancy at each year-end at
all shopping centers owned by CPI adjusted to eliminate the effect of mall
tenants which CPI believes are atypical (Phipps Plaza, acquired in 1998, at
which projected average annualized mall tenant sales per square foot exceed $500
has been excluded).
1997 1996 1995
---- ---- ----
Combined per square foot of GLA............................. $388 $377 $358
# of shopping centers:
-- over $500 per square foot.............................. 3 2 2
-- $400-$499 per square foot.............................. 3 4 3
-- $300-$399 per square foot.............................. 11 10 10
-- under $300 per square foot............................. 5 6 7
---- ---- ----
22 22 22
==== ==== ====
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The following illustrates the comparable, defined as tenants in occupancy
for at least two years, and total dollar mall tenant sales at shopping centers
presently owned by CPI. For comparison purposes, 1997 year to date data includes
Phipps Plaza which was purchased in January of 1998.
COMPARABLE TOTAL
------------------------- -------------------------
$ IN BILLIONS % CHANGE $ IN BILLIONS % CHANGE
------------- -------- ------------- --------
For the five months ended May 1998..... $0.94 3.3% $1.10 7.8%
For the five months ended May 1997..... $0.91 $1.02
1997................................... $2.29 1.3% $2.91 7.4%
1996................................... $2.26 1.4% $2.71 1.5%
1995................................... $2.23 (.9%) $2.67 1.1%
1994................................... $2.25 $2.64
Mall retail sales levels affect future revenue and profitability because
they are one of the most significant factors in the determination of the amounts
of minimum rent that can be charged and the recoverable expenditures
(principally real estate taxes and common area costs) that mall tenants can
afford to pay. In addition, they determine the amount of percentage rents
payable by tenants.
MALL TENANT OCCUPANCY LEVELS
Mall GLA occupied by tenants with an initial lease term under one-year is
considered vacant by CPI for purposes of computing occupancy data. Average
occupancy levels have been 88.2% (1997), 87.0% (1996) and 91.1% (1995). The
trend in comparative (month-to-month) occupancy levels has been upward since
July 1997. Indicative of such positive trends are occupancy levels for the
following comparable periods:
AVERAGE OCCUPANCY
--------------------------------------------------------------
1997 1998
----------------------------- -----------------------------
PERMANENT TEMPORARY TOTAL PERMANENT TEMPORARY TOTAL
--------- --------- ----- --------- --------- -----
January 1-March 31....................... 87.3% 1.5% 88.8% 91.3% 2.1% 93.4%
January 1-June 30........................ 87.3% 1.4% 88.7% 91.5% 1.7% 93.2%
July 1-December 31....................... 89.2% 2.0% 91.2%
Occupancy levels since July 1997 have benefited significantly from a
reduced number of mall tenant bankruptcies and abandonments of space.
MALL TENANT OCCUPANCY COSTS
Average mall tenants' occupancy costs as a percentage of sales were 13.2%
(1997), 12.8% (1996) and 12.6% (1995). A mall tenant's ability to pay rent is
affected by the percentage of its sales represented by occupancy costs
(including expense recoveries). CPI management believes that continuing efforts
to increase sales, control property operating expenditures and remerchandise
space will allow the continuance of the past trend of increasing minimum rents.
AVERAGE EFFECTIVE RENTS
Average effective (minimum and percentage) rents per square foot of mall
tenant GLA increased from 1995 to 1997 as follows:
1997........................................................ $35.40
1996........................................................ $33.60
1995........................................................ $30.70
Such increase represents a compound annual growth rate of 4.6%. CPI
management believes that CPI's average effective rents are amongst the highest
charged in the industry and reflect the quality of the properties in the
portfolio and the ability they afford to retailers to achieve attractive sales
levels.
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INFLATION
Inflation has remained relatively low during the past four years and has
had a relatively low impact on the operating performance of CPI's properties.
Nonetheless, substantially all of the mall tenants' leases contain provisions
designed to lessen the impact of inflation. Such provisions include clauses
providing for percentage rentals based on tenants' gross sales, which generally
increase as prices rise, and/or escalation clauses, which generally increase
rental rates during the terms of the leases. Substantially all of the shopping
center leases, other than those for anchors, require the tenants to pay a
proportionate share of operating expenses, including common area maintenance,
real estate taxes and insurance, thereby reducing CPI's exposure to increases in
costs and operating expenses resulting from inflation.
However, inflation may have a negative impact on some of CPI's other
operating items. Interest and general and administrative expenses may be
adversely affected by inflation as these specified costs could increase at a
rate higher than rents. Presently a preponderant portion of CPI's indebtedness
is long-term and all outstanding amounts are at fixed interest rates. Also, for
tenant leases with stated rent increases, inflation may have a negative effect
as the stated rent increases in these leases could be lower than the increase in
inflation at any given time. Such effect, if it occurs, may be partially offset
by increases in percentage rents resulting from inflation.
YEAR 2000 COST
CPI management continues to assess the impact of the Year 2000 Issue on its
reporting systems and operations. The Year 2000 issue exists because many
computer systems and applications abbreviate dates by eliminating the first two
digits of the year, assuming that these two digits would always be "19". Unless
corrected, this shortcut would cause problems when the century date occurs. On
that date, some computer programs may misinterpret the date January 1, 2000 as
January 1, 1900. This could cause systems to incorrectly process critical
financial and operational information, or stop processing altogether.
To help facilitate CPI's future operations, substantially all of the
computer systems and applications in use in its home office have been, or are in
the process of being, upgraded and modified. CPI is of the opinion that, in
connection with those upgrades and modifications, it has addressed applicable
Year 2000 Issues as they might affect the computer systems and applications
located in its home office. CPI continues to evaluate what effect, if any, the
Year 2000 Issue might have at its properties. CPI anticipates that the process
of reviewing this issue at its properties and the implementation of solutions to
any Year 2000 Issue which it may discover may require the expenditure of sums
which CPI does not expect to be material. CPI management expects to have all
systems appropriately modified before any significant processing malfunctions
could occur and does not expect the Year 2000 Issue will materially impact the
financial condition or operations of CPI.
SEASONALITY
The shopping center industry is seasonal in nature, particularly in the
fourth quarter during the holiday season, when tenant occupancy and retail sales
are typically at their highest levels. In addition, shopping malls achieve most
of their temporary tenant rents during the holiday season. As a result of the
above, earnings are generally highest in the fourth quarter of each year.
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CRC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
set forth under "PRO FORMA COMBINED AND SELECTED HISTORICAL FINANCIAL DATA" and
CRC's historical consolidated financial statements and notes thereto included
elsewhere herein. Certain statements made in this section may constitute
"forward-looking statements." Any forward-looking statements contained herein do
not take into account the Merger and the consummation of the transactions
contemplated by the Merger Agreement. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of CRC to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, which will, without
limitation, affect demand for office and retail space, availability and
creditworthiness of prospective tenants, lease rents and availability of
financing; adverse changes in the real estate markets including, without
limitation, competition with other companies, risks of real estate development
and acquisition; risks relating to Year 2000 issues; governmental actions and
initiatives; and environmental safety requirements.
The financial results reported reflect:
1. The sale for $2.36 million to CPI in April of 1997 of its minority
partnership interests in Rockaway Townsquare Mall, the Rockaway Office
Building and the Livingston Mall;
2. The issuance of shares in November and December 1996 of $3.29 million
in conjunction with the CPI Roll-ups;
3. The redemption of shares in December 1996 and January 1997 of $1.15
million as part of the CPI Redemption;
4. The acquisition and development of the peripheral land in conjunction
with local partners at the regional shopping center in Buford, Georgia
(a suburb of Atlanta), being developed by CPI and local development
partners; and
5. The ownership of the leasehold position of an office building at 305
East 47th Street in New York, New York, of which the principal tenant
is CPI.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997
Total revenue decreased by $0.7 million, or 38%, in the first quarter of
1998 as compared to the same period in 1997 resulting principally from (i) a
decrease of approximately $0.4 million in revenue for providing property related
services resulting from a decrease in properties managed and (ii) a decrease in
minimum rent and expense recoveries of approximately $0.2 million as a result of
increased vacancies, rental concessions and the renewal of CPI's lease at the
305 East 47th Street office building.
Total expenses decreased by approximately $0.5 million, or 26%, in the
first quarter of 1998 compared to the first quarter of 1997. The principal
change was a decrease in management fees paid to CPI as a result of a reduction
in CRC's management services in 1998.
Equity in earnings of joint ventures have decreased by approximately $0.1
million primarily as a result of equity in earnings of Mill Creek Land, LLC
(formed after the first quarter of 1997) which approximated $0.1 million and a
decrease of approximately $0.2 million related to a decrease in the net income
of Corporate Realty Capital, which ceased operations after the first quarter of
1997.
Year Ended December 31, 1997 vs. Year Ended December 31, 1996
Total revenue decreased by approximately $3.6 million, or 37%, in 1997 as
compared to 1996. The decrease is primarily related to a decrease of $2.9
million in fee income resulting from (i) the termination of
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an agreement to provide asset management services to the partners in the General
Motors Building, resulting in a decrease of approximately $1.7 million and (ii)
a decrease of approximately $1.2 million in revenue for providing property
related services resulting from a decrease in properties managed. Other revenue
changes include a decrease in minimum rent and expense recoveries of
approximately $0.6 million as a result of increased vacancies, rental
concessions and the renewal of CPI's lease at the 305 East 47th Street office
building.
Total expenses decreased by approximately $3.8 million, or 34%, from 1996
to 1997. The principal changes in expenses are (i) a decrease in management fees
paid to CPI of $1.3 million due to a decrease in the properties CRC managed in
1997, (ii) a decrease in asset management and other expenses of approximately
$1.2 million associated with the management of the General Motors Building (see
reduction in fee revenue specified above) and (iii) a $1.1 million write-down to
estimated fair market value of land located in Putnam County, New York in 1996.
Equity in earnings of joint ventures increased by approximately $1.6
million primarily as a result of (i) equity in earnings of Mill Creek Land, LLC
(formed in 1997) which approximated $0.6 million, (ii) an increase of
approximately $0.6 million related to an increase in the net income of Corporate
Realty Capital, which ceased its principal operations in 1997 and (iii) an
increase of $0.4 million related to an increase in the net income of Cambridge
Hotel Associates.
The increase in gain on sale of partnership interests of $1.3 million is
the result of the sale to CPI of partnership interests in Rockaway Townsquare
Mall, the Rockaway Office Building and the Livingston Mall.
The increase in the provision for income taxes is due to CRC recognizing a
significantly higher net income in 1997, principally due to the sale of
partnership interests.
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
Total revenue decreased by approximately $0.6 million, or 6%, primarily as
a result of a decrease in the recovery of certain operating expenses in 1996.
Total expenses increased by approximately $0.6 million, or 6%, due to a
$1.1 million write-down to estimated fair market value of land located in Putnam
County, New York in 1996, offset by decreases in property operating expenses,
management fees and administrative and other expenses, which aggregated
approximately $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, cash and cash equivalents aggregated $3.9 million.
In 1997 and the first quarter of 1998, CRC invested $16.7 million and $1.1
million, respectively, in Mill Creek Land LLC partially funded by unsecured
borrowings from CPI of $13.9 million and $1.0 million, respectively. During the
second quarter of 1998 CRC invested an additional $1.7 million partially
financed by an additional unsecured borrowing of $0.4 million from CPI.
CRC management anticipates that, prior to the Effective Time of the Merger,
cash generated from CRC stand-alone operations will provide necessary funds for
operating expenses, periodic debt service on outstanding indebtedness, and
normal periodic distributions to CRC stockholders (anticipated in August 1998
and immediately prior to the Effective Time of the Merger).
CRC management anticipates that current cash and cash equivalents plus the
construction financing of the Mill Creek Land project will be sufficient to fund
all capital expenditures prior to the Effective Time of the Merger.
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INFLATION
Inflation has remained relatively low during the past four years and has
had a relatively low impact on the operating performance of CRC's properties.
The interest rates payable on certain portions of CRC's indebtedness may be
subject to increase as a result of inflation, however a preponderant portion of
CRC's current indebtedness is owed to CPI.
With respect to CRC's office rental business, interest and general and
administrative expenses may be adversely affected by inflation as these
specified costs could increase at a higher rate than rents. Also, for tenant
leases with stated rent increases, inflation may have a negative effect as the
stated rent increases in these leases could be lower than the increase in
inflation at any given time. Such effect, if it occurs, may be partially offset
by increases in percentage rents resulting from inflation.
The effect of inflation on CRC's land development business is uncertain.
Inflation may cause the value of CRC's land holdings to increase. However, the
occurrence of inflation may also negatively impact the demand for undeveloped
land, which would have an adverse effect on CRC.
YEAR 2000 COST
CRC management continues to assess the impact of the Year 2000 Issue on its
reporting systems and operations. To help facilitate CRC's future operations,
substantially all of the computer systems and applications in use in its home
office (which computer systems and applications are shared with CPI) have been,
or are in the process of being, upgraded and modified. See "CPI MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Year
2000 Cost." CRC is of the opinion that, in connection with those upgrades and
modifications, the applicable Year 2000 Issues as they might affect the computer
systems and applications located in its home office have been addressed. CRC
continues to evaluate what effect, if any, the Year 2000 Issue might have at its
properties. CRC anticipates that the process of reviewing this issue at its
properties and the implementation of solutions to any Year 2000 Issue which it
may discover may require the expenditure of sums which CRC does not expect to be
material. CRC management expects that all systems will have been appropriately
modified before any significant processing malfunctions could occur and does not
expect the Year 2000 Issue will materially impact the financial condition or
operations of CRC.
SEASONALITY
CRC's principal businesses, office building rental and land development,
are not subject to seasonality. However, income from its land development
business is generated at irregular intervals and is unpredictable.
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BUSINESS OF SDG, CPI AND CRC
SDG
The following is a summary description of SDG's business and properties.
The description does not purport to be complete and is qualified in its entirety
by reference to SDG's Annual Report on Form 10-K and Form 10-K/A for the year
ended December 31, 1997 and SDG's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998 which are incorporated herein by
reference. Stockholders of SDG are urged to read SDG's Annual Report on Form
10-K and Form 10-K/A for the year ended December 31, 1997 and SDG's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1998, in their
entirety.
SDG, a Maryland corporation, is a self-administered and self-managed REIT
under the Code. The SDG Operating Partnership is a majority-owned subsidiary
partnership of SDG. SDG, through the SDG Operating Partnership, is engaged
primarily in the ownership, operation, management, leasing, acquisition,
expansion and development of real estate properties, primarily regional malls
and community shopping centers.
As of March 31, 1998, the SDG Operating Partnership owned or held an
interest in 217 income-producing properties, which consisted of 133 regional
malls, 74 community shopping centers, three specialty retail centers, four
mixed-use properties and three value-oriented super-regional malls located in 34
states. As of that same date, the SDG Operating Partnership also owned direct or
indirect interests in one specialty retail center and two community centers
under construction, an additional two community centers in the final stages of
preconstruction development and seven parcels of land either in preconstruction
development or held for future development. The SDG Operating Partnership
self-manages the SDG Properties wholly owned, directly or indirectly, by the SDG
Operating Partnership. The SDG Operating Partnership holds substantially all of
the economic interest in the SDG Management Company, while substantially all of
the voting stock of the SDG Management Company is held by Melvin Simon, Herbert
Simon and David Simon. The SDG Management Company manages SDG Properties not
wholly owned by the SDG Operating Partnership and certain other properties, and
also engages in certain property development activities. The SDG Operating
Partnership also holds substantially all of the economic interest in, and the
SDG Management Company holds substantially all of the voting stock of, DPMI,
which provides architectural, design, construction and other services to
substantially all of the SDG Portfolio Properties, as well as certain other
regional malls and community shopping centers owned by third parties. At March
31, 1998 and December 31, 1997, SDG's ownership interest in the SDG Operating
Partnership was 63.1% and 63.9%, respectively, and the SDG Limited Partners held
the remaining interests in the SDG Operating Partnership not held directly or
indirectly by SDG.
The DeBartolo Merger. On August 9, 1996, SDG acquired the national
shopping center business of DRC for an aggregate value of approximately $3.0
billion (the "DeBartolo Merger"). The acquired portfolio consisted of 49
regional malls, 11 community centers and one mixed-use property. These
properties include approximately 47.1 million square feet of retail GLA and
approximately 550,000 of office GLA. Pursuant to the DeBartolo Merger, SDG
issued a total of 37,873,965 shares of SDG Common Stock to the DRC stockholders
and DRC became a subsidiary of SDG. In addition, the SDG Management Company
purchased from EJDC all of the voting stock of DPMI for $2.5 million in cash.
The SDG Partnership Merger. On December 31, 1997, Simon Property Group,
L.P., a Delaware limited partnership ("SPG, LP"), merged (the "SDG Partnership
Merger") into the SDG Operating Partnership. Prior to the SDG Partnership
Merger, the SDG Operating Partnership and SDG held all of the partnership
interests of SPG, LP which in turn held interests in certain of the SDG
Portfolio Properties. As a result of the SDG Partnership Merger, the SDG
Operating Partnership now directly or indirectly owns or holds interests in all
of the SDG Portfolio Properties and directly holds substantially all of the
economic interest in the SDG Management Company. For periods prior to the
DeBartolo Merger, references to the SDG Operating Partnership refer to SPG, LP
only, unless otherwise indicated.
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GENERAL
As of March 31, 1998, the SDG Operating Partnership owned or held interests
in a diversified portfolio of 217 income-producing SDG Properties, which
consisted of 133 enclosed regional malls, 74 community shopping centers, three
specialty retail centers, four mixed-use SDG Properties and three value-oriented
super-regional malls, located in 34 states. Regional malls, community centers
and the remaining portfolio comprised 82.8%, 8.3%, and 8.9%, of total rent
revenues and tenant reimbursements in 1997. The value-oriented super-regional
malls are not included in consolidated rent revenues and tenant reimbursements
as they are each accounted for using the equity method of accounting. The SDG
Properties contain an aggregate of approximately 140.2 million square feet of
GLA, of which 86.1 million square feet is owned by the SDG Operating Partnership
("Owned GLA"). Approximately 3,600 different retailers occupy more than 14,000
stores in the SDG Properties. Total estimated retail sales at the SDG Properties
exceeded $25 billion in 1997.
SDG and certain of its subsidiaries are taxed as REITs under sections 856
through 860 of the Code and applicable Treasury regulations relating to REIT
qualification. SDG is self-administered and self-managed and does not engage or
pay a REIT advisor. SDG provides management, development, leasing, accounting,
finance and legal, design and construction expertise through its own personnel
or, where appropriate, through outside professionals.
OPERATING STRATEGIES
SDG's primary business objectives are to increase cash generated from
operations per Unit and the value of the SDG Operating Partnership's properties
and operations. SDG plans to achieve these objectives through a variety of
methods discussed below, although no assurance can be made that such objectives
will be achieved.
Leasing. The SDG Operating Partnership pursues an active leasing strategy,
which includes aggressively marketing available space, renewing existing leases
at higher base rents per square foot, and continuing to sign leases that provide
for percentage rents and/or regular or periodic fixed contractual increases in
base rents.
Management. Drawing upon the expertise gained through management of
approximately 140 million square feet of retail and mixed-use SDG Properties,
the SDG Operating Partnership seeks to maximize cash flow through a combination
of an active merchandising program to maintain its shopping centers as inviting
shopping destinations, continuation of its successful efforts to minimize
overhead and operating costs, coordinated marketing and promotional activities,
and systematic planning and monitoring of results.
Acquisitions. The SDG Operating Partnership intends to selectively acquire
individual properties and portfolios of properties that meet its investment
criteria. Currently, the SDG Operating Partnership is reviewing several
acquisition opportunities to acquire both individual properties and portfolios
of properties. Management believes that consolidation will continue to occur
within the shopping center industry, creating further opportunities for the SDG
Operating Partnership to acquire additional individual properties and portfolios
of shopping centers and increase operating profit margins. Management also
believes that its extensive experience in the shopping center business, access
to capital markets, national operating scope, familiarity with real estate
markets and advanced management systems will allow it to evaluate and execute
acquisitions competitively. Additionally, the SDG Operating Partnership may be
able to acquire properties on a tax-advantaged basis for the transferors.
During 1997, the SDG Operating Partnership, through the acquisition of RPT
and other related transactions, acquired a portfolio of ten wholly owned SDG
Properties and one 50%-owned SDG Property comprising in the aggregate
approximately 12.0 million square feet of GLA in eight states. Subsequently, in
February 1998, the SDG Operating Partnership sold the only community center
included in the RPT acquisition. RPT is also a REIT. In addition, the SDG
Operating Partnership made several other acquisitions in 1997 and 1998. The SDG
Operating Partnership acquired a 50% ownership interest in Dadeland Mall and an
additional 48% ownership interest in West Town Mall, increasing its ownership in
that SDG Property to 50%. In addition, the SDG Operating Partnership acquired
The Fashion Mall at Keystone at the Crossing, a 597,000 square-foot regional
mall, along with an adjacent community center. Also acquired in 1997 was the
remaining 30% ownership interest in Virginia Center Commons. On December 29,
1997, the SDG Operating
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Partnership formed a joint venture partnership with The Macerich Company
("Macerich") to acquire a portfolio of twelve regional malls comprising
approximately 10.7 million square feet of GLA. This transaction closed on
February 27, 1998, with the SDG Operating Partnership, through the SDG
Management Company, assuming leasing and management responsibilities for six of
the regional malls and Macerich assuming leasing and management for the
remaining properties. On January 26, 1998, the SDG Operating Partnership
acquired Cordova Mall, an 874,000 square foot regional mall.
Development. The SDG Operating Partnership's focus is to selectively
develop new SDG Properties in major metropolitan areas that exhibit strong
population and economic growth. During 1997, the SDG Operating Partnership
opened one new regional mall, two value-oriented super-regional malls and one
new community shopping center. On September 5, 1997, the SDG Operating
Partnership opened The Source, a 730,000 square-foot regional mall in Westbury
(Long Island), New York. On October 31, 1997 the SDG Operating Partnership
opened Grapevine Mills, a 1.2 million square foot value-oriented super-regional
mall in Grapevine (Dallas/Fort Worth), Texas, and on November 20, 1997, the SDG
Operating Partnership opened Arizona Mills, a 1.2 million square foot
value-oriented super-regional mall in Tempe, Arizona. In March 1997, the SDG
Operating Partnership opened Indian River Commons, a 265,000 square foot
community shopping center in Vero Beach, Florida.
During the first quarter of 1998, the SDG Operating Partnership opened the
approximately $13.3 million Muncie Plaza in Muncie, Indiana. The SDG Operating
Partnership owns 100% of this 196,000 square foot community center. In addition,
the approximately $34 million Lakeline Plaza opened in April 1998 in Austin,
Texas. The SDG Operating Partnership owns 65% of this 381,000 square foot
community center. Each of these new community centers is adjacent to an existing
regional mall in SDG's portfolio.
Construction continues on the following development projects: The Shops at
Sunset Place, an approximately $150 million destination-oriented retail and
entertainment project containing approximately 510,000 square feet of GLA is
scheduled to open in December 1998 in South Miami, Florida and Concord Mills, an
approximately $218 million, 50%-owned value-oriented super regional mall
project, is scheduled to open in the fall of 1999 in Concord (Charlotte), North
Carolina.
In addition, the SDG Operating Partnership is in the final stages of
predevelopment on Houston Premium Outlets in Houston, Texas and The Shops at
North East Plaza in Hurst, Texas. Houston Premium Outlets is the SDG Operating
Partnership's first project in its joint venture partnership with Chelsea GCA to
develop premium manufacturers' outlet shopping centers. This 50%-owned 462,000
square foot center is scheduled to begin construction in June 1998 and open in
July 1999. The Shops at North East Plaza is a 359,000 square foot community
center project adjacent to North East Mall. This wholly-owned project is
scheduled to begin construction this summer, with a fall 1999 opening date.
Strategic Expansions and Renovations. A key objective of the SDG Operating
Partnership is to increase the profitability and market share of the SDG
Properties through the completion of strategic renovations and expansions. In
1997, the SDG Operating Partnership completed construction and opened fourteen
expansion and/or renovation projects: Alton Square in Alton, Illinois; Aventura
Mall in Miami, Florida; Chautauqua Mall in Jamestown, New York; Columbia Center
in Kennewick, Washington; The Forum Shops at Caesar's in Las Vegas, Nevada;
Knoxville Center in Knoxville, Tennessee; La Plaza in McAllen, Texas; Muncie
Mall in Muncie, Indiana; Northfield Square in Bradley, Illinois; Northgate Mall
in Seattle, Washington; Orange Park Mall in Jacksonville, Florida; Paddock Mall
in Ocala, Florida; Richmond Square in Richmond, Indiana; and Southern Park Mall
in Youngstown, Ohio.
The SDG Operating Partnership's share of projected costs to fund all
renovation and expansion projects in 1998 is approximately $415 million. It is
anticipated that the cost of these projects will be financed principally with
the existing credit facilities, project-specific indebtedness, access to debt
and equity markets, and cash flows from operations. The SDG Operating
Partnership currently has 23 expansion and/or redevelopment projects under
construction and in the preconstruction development stage with targeted 1998
completion dates. Included in consolidated investment properties at March 31,
1998 is approximately $200 million of construction in progress, with another
$145 million in the unconsolidated joint venture investment properties.
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Competition
SDG management believes that the SDG Properties are the largest, as
measured by GLA, of any publicly traded REIT, with more regional malls than any
other publicly traded REIT. SDG management believes that it competes favorably
in the retail real estate business as a result of (i) its use of innovative
retailing concepts, (ii) its management and operational expertise, (iii) its
extensive experience and relationship with retailers and lenders, (iv) the size,
quality and diversity of its SDG Properties and (v) the mall marketing
initiatives of Simon Brand Ventures, which SDG believes is the most
sophisticated initiative aimed at marketing mall space to retailers.
All of the SDG Portfolio Properties are located in developed areas. With
respect to certain of such properties, there are other properties of the same
type within the market area. The existence of competitive properties could have
a material effect on the SDG Operating Partnership's ability to lease space and
on the level of rents the SDG Operating Partnership can obtain.
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with the SDG Operating Partnership. This
results in competition for both acquisition of prime sites (including land for
development and operating properties) and for tenants to occupy the space that
the SDG Operating Partnership and its competitors develop and manage.
SDG Portfolio Properties
The SDG Properties primarily consist of two types: regional malls and
community shopping centers. Regional malls contain two or more anchors and a
wide variety of smaller stores located in enclosed malls connecting the anchors.
Additional stores are usually located along the perimeter of the parking area.
The 133 regional malls in the SDG Properties range in size from approximately
200,000 to 1.6 million square feet of GLA, with 129 regional malls over 400,000
square feet. These regional malls contain in the aggregate over 14,000 occupied
stores, including more than 530 anchors which are mostly national retailers. As
of March 31, 1998, regional malls (including specialty retail centers, and
retail space in the mixed-use SDG Properties) represented 83.0% of total GLA,
78.5% of Owned GLA and 82.9% of total annualized base rent of the SDG
Properties.
Community shopping centers are generally unenclosed and smaller than
regional malls. Most of the 74 community shopping centers in the SDG Properties
range in size from approximately 100,000 to 400,000 square feet of GLA.
Community shopping centers generally are of two types: (i) traditional community
centers, which focus primarily on value-oriented and convenience goods and
services, are usually anchored by a supermarket, drugstore or discount retailer
and are designed to service a neighborhood area; and (ii) power centers, which
are designed to serve a larger trade area and contain at least two anchors that
are usually national retailers among the leaders in their markets and occupy
more than 70% of the GLA in the center. As of March 31, 1998, community shopping
centers represented 12.7% of total GLA, 14.8% of Owned GLA and 8.2% of the total
annualized base rent of the SDG Properties.
The SDG Operating Partnership also has an interest in three specialty
retail centers, four mixed-use SDG Properties and three value-oriented
super-regional malls. The specialty retail centers contain approximately 760,000
square feet of GLA and do not have anchors; instead, they feature retailers and
entertainment facilities in a distinctive shopping environment and location. The
four mixed-use SDG Properties range in size from approximately 500,000 to
1,025,000 square feet of GLA. Two of these SDG Properties are regional malls
with connected office buildings, and two are located in mixed-use developments
and contain primarily office space. The value-oriented super-regional malls are
each joint venture partnerships ranging in size from approximately 1.2 million
to 1.3 million square feet of GLA. These include Arizona Mills, Grapevine Mills
and Ontario Mills. These SDG Properties combine retail outlets, manufacturers,
off-price stores and other value-oriented tenants. As of March 31, 1998,
value-oriented super-regional malls represented 2.6% of total GLA, 4.2% of Owned
GLA and 5.2% of the total annualized base rent of the SDG Properties.
As of March 31, 1998, approximately 86.1% of the mall and freestanding
Owned GLA in regional malls, specialty retail centers and the retail space in
the mixed use SDG Properties was leased, approximately 94.6%
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156
of the Owned GLA in the value-oriented super-regional malls was leased, and
approximately 90.6% of Owned GLA in the community shopping centers was leased.
March 31, 1998, 157 of the 217 SDG Properties were owned 100% by the SDG
Operating Partnership and the remainder were held as joint venture interests.
The SDG Operating Partnership is a general partner of all but eight of the SDG
Properties held as joint venture interests.
The following table summarizes on a combined basis, as of March 31, 1998,
certain information with respect to the SDG Portfolio Properties, in total and
by type of shopping center and retailer:
% OF OWNED AVG. ANNUALIZED
TOTAL % OF GLA BASE RENT PER
GLA OWNED OWNED WHICH IS LEASED SQ. FT. OF
TYPE OF PROPERTY (SQ. FT.) GLA GLA LEASED OWNED GLA
- ---------------- ----------- ---------- ----- ---------- -----------------
Regional Malls
Anchor....................... 70,930,529 24,308,132 28.2% 97.1% $ 3.34
Mall Store................... 39,897,443 39,864,847 46.3 84.2 23.97
Freestanding................. 3,055,145 1,778,236 2.1 88.3 7.62
----------- ---------- -----
Subtotal.................. 42,952,588 41,643,083 48.4 86.1 22.95
Regional Mall Total....... 113,883,117 65,951,215 76.6% 89.0% $15.33
Community Shopping Centers
Anchor....................... 11,985,305 7,636,712 8.9% 94.8% $ 6.00
Mall Store................... 4,707,755 4,621,997 5.4 83.1 10.32
Freestanding................. 981,182 457,562 0.5 97.6 6.51
----------- ---------- -----
Community Shopping Center
Total................... 17,674,242 12,716,271 14.8% 90.6% $ 7.44
Office Portion of Mixed-Use
Properties................... 2,253,907 2,253,907 2.6 93.9 18.87
Value-Oriented Super-Regional
Malls........................ 3,699,726 3,574,726 4.2 94.6 16.19
Properties under
Redevelopment................ 2,684,760 1,592,654 1.8
----------- ---------- -----
GRAND TOTAL............... 140,195,752 86,088,773 100.0%
=========== ========== =====
The following table sets forth selected data for the mall and freestanding
stores at the SDG Operating Partnership's regional malls:
TOTAL MALL AVERAGE BASE
AND PERCENT OF RENT
NUMBER OF FREESTANDING OWNED GLA PER LEASED
DATE PROPERTIES OWNED GLA(1) LEASED(2) SQUARE FOOT(3)
- ---- ---------- ------------ ---------- --------------
March 31, 1998........................ 133 41,643 86.1% $22.95
December 31, 1997..................... 127 36,601 87.3 23.65
December 31, 1996(4).................. 112 33,157 84.7 20.68
December 31, 1995(4).................. 118 33,208 85.5 19.18
December 31, 1994(4).................. 115 31,570 85.6 18.37
December 31, 1993(4).................. 110 29,905 85.9 17.70
- ---------------
(1) In thousands of square feet.
(2) Occupancies for regional malls are generally lower in the initial part of
the calendar year and higher in the latter part of the calendar year.
(3) Base rent does not include the effects of percentage rent or common area
maintenance charges reimbursed by the tenants, nor does it consider the
costs required to obtain new tenants.
(4) Includes the properties acquired in connection with the DeBartolo Merger.
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Anchors
As of March 31, 1998, anchor space represented 28.2% of the Owned GLA in
the SDG Operating Partnership's regional malls, of which 97.1% was occupied. The
following table sets forth, as of March 31, 1998, certain information with
respect to the five largest anchors (by occupied GLA) in the SDG Operating
Partnership's regional malls:
ANCHOR- ANCHOR-OWNED
NUMBER OF LEASED OR LAND-
ANCHOR STORES GLA LEASED GLA TOTAL GLA
- ------ --------- --------- ------------ ----------
JC Penney Co., Inc. ..................... 105 8,255,390 6,507,648 14,763,038
Sears, Roebuck & Co. .................... 99 3,462,969 10,895,506 14,358,475
Federated Department Stores, Inc. ....... 55 3,341,689 6,113,266 9,454,955
Dillard's Department Stores, Inc. ....... 70 860,103 8,395,905 9,256,008
The May Department Stores Co. ........... 39 965,065 4,862,069 5,827,134
Mall Stores and Freestanding Stores
There are over 14,000 mall and freestanding stores in the SDG Operating
Partnership's regional malls. Substantially all of these stores lease space from
the SDG Operating Partnership. Mall and freestanding stores represent over 41.6
million of the approximately 66.0 million square feet of total Owned GLA of
these properties, with no single mall or freestanding store or chain occupying
more than 4.2% of the total Owned GLA in all SDG Portfolio Properties or
accounting for more than 6.0% of the total annualized base rent from the SDG
Portfolio Properties.
The following table sets forth, as of March 31, 1998, certain information
with respect to the five largest mall and freestanding store tenants (by
occupied GLA) in the SDG Operating Partnership's regional malls:
% OF TOTAL
OWNED GLA
NUMBER OF TOTAL GLA LEASED BY
TENANT STORES LEASED (SQUARE FEET) TENANT
- ------ ------------- ------------- ----------
The Limited, Inc............................... 443 3,431,208 4.0%
Venator Group, Inc. (formerly known as
Woolworth Corp.) ............................ 524 1,778,399 2.1
Intimate Brands Inc.(1)........................ 188 785,821 0.9
The Gap, Inc. ................................. 121 737,921 0.9
Musicland Group, Inc. ......................... 133 459,734 0.5
----- --------- ---
Total................................ 1,409 7,193,083 8.4%
===== ========= ===
- ---------------
(1) Intimate Brands Inc. is an affiliate of The Limited, Inc.
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DEBT OF THE SDG OPERATING PARTNERSHIP
As of March 31, 1998, the SDG Operating Partnership's share of total
consolidated debt and joint venture debt was approximately $6,206 million. As of
such date, the weighted average interest rate for this debt was approximately
7.17%. Scheduled maturities of this debt for periods reflected are as follows:
MORTGAGE UNSECURED TOTAL
YEAR OF MATURITY DEBT(1) DEBT(1) DEBT(1)
- ---------------- ---------- ---------- ----------
(IN THOUSANDS)
1998................................................... $ 334,051 $ 212,000 $ 546,051
1999................................................... 262,798 0 262,798
2000................................................... 320,511 1,125,000 1,445,511
2001................................................... 351,025 0 351,025
2002................................................... 608,290 0 608,290
2003................................................... 268,818 100,000 368,818
2004................................................... 546,456 250,000 796,456
2005................................................... 147,540 360,000 507,540
2006................................................... 341,415 250,000 591,415
2007................................................... 199,271 180,000 379,271
Thereafter............................................. 200,859 150,000 350,859
---------- ---------- ----------
Total Principal Maturities................... 3,581,034 2,627,000 6,208,034
Net Unamortized Debt Premiums.......................... (1,931)
----------
SDG Operating Partnership's Share of Total Debt........ $6,206,103
- ---------------
(1) Represents the SDG Operating Partnership's pro rata share of total
consolidated and joint venture debt.
Land Held for Development
The SDG Operating Partnership has direct or indirect ownership interests in
nine parcels of land either in preconstruction development or being held for
future development, containing an aggregate of approximately 677 acres located
in eight states, and, through the SDG Management Company, interest in a mortgage
on a parcel of land held for development containing approximately 134 acres.
Management believes that the SDG Operating Partnership's significant base of
commercially zoned land, together with the SDG Operating Partnership's status as
a fully integrated real estate firm, gives it a competitive advantage in future
development activities over other commercial real estate development companies
in its principal markets.
The following table describes the acreage of the parcels of land either in
preconstruction development or being held for future development in which the
SDG Operating Partnership has an ownership interest, as well as the ownership
percentage of the SDG Operating Partnership's interest in each parcel:
OWNERSHIP
LOCATION ACREAGE INTEREST(1)
-------- ------- -----------
Bowie, MD................................................ 93.74 100%
Concord, NC.............................................. 187.48 50%
Duluth, MN............................................... 11.17 100%
Hurst, TX................................................ 36.09 100%
Lafayette, IN............................................ 22.87 100%
Little Rock, AR.......................................... 97.00 50%
Mt. Juliet, TN........................................... 109.26 100%
Sanford, FL.............................................. 77.24 22.5%
Miami, FL................................................ 41.71 60%
------
676.56
======
- ---------------
(1) The SDG Operating Partnership has a direct ownership interest in each parcel
except Duluth, MN and Mt. Juliet, TN. The SDG Operating Partnership has the
option to acquire those parcels from the SDG Management Company.
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The SDG Management Company has granted options to the SDG Operating
Partnership (for no additional consideration) to acquire for a period of ten
years (expiring December 2003) the SDG Management Company's interest in the two
parcels of land held for development, indicated in footnote (1) to the above
table, at a price equal to the actual cost incurred to acquire and carry such
properties. The SDG Management Company may not sell its interest in any parcel
subject to option through December 1998 without the consent of the SDG Operating
Partnership, and thereafter, may only sell its interest subject to certain
notice and first purchase rights of the SDG Operating Partnership.
The SDG Management Company also holds indebtedness secured by 134 acres of
land held for development, Lakeview at Gwinnett ("Lakeview") in Gwinnett County,
Georgia, in which Melvin Simon, Herbert Simon and certain of their affiliates
hold a 64% partnership interest. In addition, the SDG Management Company holds
unsecured debt owed by Melvin Simon, Herbert Simon and certain of their
affiliates as partners of this partnership. The SDG Management Company has an
option to acquire the partnership interests of Melvin Simon, Herbert Simon and
certain of their affiliates in Lakeview for nominal consideration in the event
the requisite partner consents to such transfers are obtained. The SDG
Management Company is required to fund certain operating expenses and carrying
costs of the partnership that are owed by the Simons as partners thereof. The
SDG Management Company has granted to the SDG Operating Partnership the option
to acquire (i) the partnership interests of Melvin Simon, Herbert Simon and
certain of their affiliates and the secured debt or (ii) the property, if the
SDG Management Company forecloses the secured indebtedness, for nominal
consideration plus the amount of all advances and outstanding debt.
JOINT VENTURES
At certain of the SDG Properties held as joint ventures, the SDG Operating
Partnership and its partners each have rights of first refusal, subject to
certain conditions, to acquire additional ownership in the SDG Property should
the other partner decide to sell its ownership interest. In addition, certain of
the SDG Properties held as joint ventures contain "buy-sell" provisions, which
gives the partners the right to trigger a purchase or sale of ownership interest
amongst the partners.
CPI AND CRC
CPI
CPI is a self-administered and self-managed, privately-held REIT that
primarily owns interests in regional malls and also holds a portfolio of other
commercial income-producing properties through investment in real estate and
investments in joint ventures and partnerships that own or lease real estate.
The 23 regional shopping malls in which CPI owns interests contain an aggregate
GLA of approximately 27 million square feet. CPI also has investments in other
properties.
CPI was organized as a Massachusetts business trust in 1971 and was
incorporated in Delaware on March 10, 1998. Since its organization, CPI has
operated in a manner intended to qualify as a REIT under the Code and
predecessor statutory provisions. As a result of its REIT status, CPI has never
paid or been assessed for any federal income taxes and has paid an immaterial
amount of state income and franchise taxes in those few states in which a REIT
is subject to taxation on a basis that is different than the U.S. federal income
tax treatment of a REIT.
CRC
CRC was formed in October 1975 for the purpose of engaging in real estate
activities that would be problematic for CPI because of CPI's qualification for
federal income tax purposes as a REIT. CPI and CRC are parties to an agreement
pursuant to which CRC may not engage in any activity that could be engaged in by
CPI without jeopardizing its status as a REIT unless CPI shall have been given a
right of first refusal to engage in such activity, and CPI may not refer to any
person other than CRC any business opportunity that could not be engaged in by
CPI without jeopardizing its status as a REIT unless CRC shall have been given
the right of first refusal to take advantage of such opportunity. Since the
holders of CPI Common Stock own a proportionate beneficial interest in one or
more trusts that own all the outstanding shares of CRC Common
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160
Stock, CPI and CRC are treated as a "paired share REIT" for federal income tax
purposes. Since the shares were paired prior to the effective date of the
relevant Code provision that generally precludes such pairing, CPI and CRC are
currently grandfathered from such provision with respect to assets acquired by
either CPI or CRC prior to March 26, 1998. However, currently pending
legislation may limit Simon Group's ability to acquire new property in CRC. See
"RISK FACTORS -- REIT Classification; Legislation Limiting Benefits of Paired
Share Status."
At the present time, CRC's principal business is the development and sale
of approximately 144 acres of land through its 85% ownership interest in Mill
Creek Land, LLC ("Mill Creek"), a joint venture between CRC and Buford
Acquisition Company, L.L.C., an unaffiliated entity, and the ownership of an
office building located at 305 East 47th Street in New York, New York. The land
owned by Mill Creek surrounds CPI's Mall of Georgia project in Buford, Georgia.
See "-- Development -- Mall of Georgia."
All of the shares of CRC Common Stock are held in trust under a Trust
Agreement dated as of October 30, 1979, among the then stockholders of CPI, CRC
and Bank of Montreal Trust Company, the current trustee (the "CRC Trust I") or
under a Trust Agreement dated as of August 26, 1994, among certain holders of
CPI Series A Preferred Stock, CRC and Bank of Montreal Trust Company (the "CRC
Trust II", and together with the CRC Trust I, the "CRC Trusts"). The beneficial
interests (the "CRC Interests") in the CRC Trusts are owned by participating CPI
stockholders in proportion to their ownership of CPI shares. The CRC Interests
are not evidenced by separate certificates and are not transferable separately
from the associated CPI shares. The foregoing arrangements create a
"paired-share REIT" structure for federal income tax purposes. See "THE MERGER
AGREEMENT AND RELATED MATTERS -- Certain Transactions and Agreements Relating to
the Merger -- Simon Group Issuance Agreement," "-- Federal Income Taxation
Considerations Relating to Paired Shares;" and "-- Federal Income Tax
Considerations Relating to Simon Group."
As of June 1, 1998, CRC had 22 officers, all of whom are also officers of
CPI, and no employees. All directors of CRC must be directors of CPI.
CPI'S PROPERTIES
CPI owns direct or indirect interests in 23 regional malls, two office
buildings, land intended to be developed as the Mall of Georgia and the land
underlying (i) an additional office building, (ii) a hotel and (iii) a hotel,
retail and office complex. All references to properties owned by CPI means
properties owned by CPI or entities in which the beneficial ownership interests
are owned, directly or indirectly, by CPI.
The malls contain two or more anchors other than the Walt Whitman Mall
which currently has one operating anchor and three anchors under construction,
and a wide variety of smaller stores. CPI's regional malls range in size from
approximately 695,000 to 2.36 million square feet of GLA, and include over 95
anchors, most of which are national retailers. Rent received from The Limited,
Inc., a national retail clothing chain, accounted for approximately 8% of CPI's
revenue during fiscal 1997. Roosevelt Field, the largest mall owned by CPI,
accounted for approximately 12.8% of CPI's total revenue (excluding equity in
earnings of joint ventures and gain on sale of properties) during fiscal 1997.
Of the 23 malls, 16 are owned 100% by CPI, and CPI owns a 50% interest in the
other seven. Regional malls represented 75% of CPI's total annualized base rent
during fiscal 1997. CPI also is currently developing a mall in Buford, Georgia
pursuant to a limited liability company agreement with Buford Acquisition
Company, L.L.C. See "-- Development -- Mall of Georgia."
CPI also owns two office buildings in New Jersey and Georgia containing an
aggregate of approximately 440,000 square feet of rentable area as well as the
land underlying another office building owned by CRC located at Three Dag
Hammarskjold Plaza in New York City where its principal executive offices are
located. CPI leases its executive office space from CRC.
In addition, CPI owns the land underlying the 375 room JW Marriott Lenox
hotel located in Atlanta, Georgia and land underlying the Charles Square, a
hotel, retail and office complex located in Cambridge, Massachusetts. CPI also
owns a convenience center located in Rockaway, New Jersey and an industrial
property located near Roosevelt Field.
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The following table summarizes on a combined basis, as of March 31, 1998,
certain information with respect to the CPI Portfolio Properties, in total and
by type of property:
TOTAL % OF AVG. ANNUALIZED
OWNED % OF OWNED BASE RENT PER
GLA GLA OWNED GLA THAT IS LEASED SQ. FT. OF
TYPE OF PROPERTY (SQ. FT.) (SQ. FT.) GLA LEASED OWNED GLA
- ---------------- ---------- ---------- ------ ----------- -----------------
Regional Malls
Mall Store.............. 9,390,781 9,352,351 61.05 91.6% $33.24
Freestanding............ 313,864 183,069 1.20 79.7 $10.23
---------- ---------- ------
Subtotal............. 9,704,645 9,535,420 62.25 91.3 $32.85
Anchor.................. 16,762,336 3,444,065 22.48 100.0 $ 4.33
---------- ---------- ------
Regional Mall
Total......... 26,466,981 12,979,485 84.73 93.6 $25.02
Office Buildings and
Office Portion of
Mixed-Use
Properties(1)........... 2,338,544 2,338,544 15.27 84.0 $22.85
---------- ---------- ------
GRAND TOTAL..... 28,805,525 15,318,029 100.00 92.2% $24.95
========== ========== ======
- ---------------
(1) Excludes the General Motors Building, which CPI owned as of March 31, 1998
but which was sold on July 31, 1998.
Regional Malls
CPI's regional malls contain two or more anchors, other than the Walt
Whitman Mall which currently has one operating anchor and three anchors under
construction, and a wide variety of smaller stores. CPI's regional malls range
in size from approximately 695,000 to 2.36 million square feet of GLA, and
include over 95 anchors, most of which are national retailers. Rent received
from The Limited, Inc., a national retail clothing chain, accounted for
approximately 8% of CPI's revenue during fiscal 1997. Roosevelt Field accounted
for approximately 12.8% of CPI's total revenue (excluding equity in earnings of
joint ventures and gain on sale of properties) during fiscal 1997. Of the 23
malls, 16 are owned 100% by CPI and CPI owns a 50% interest in the other seven.
Regional malls represented 75% of CPI's total annualized base rent during fiscal
1997.
The following table sets forth selected data for the mall and freestanding
stores at CPI's regional malls:
TOTAL MALL PERCENT OF
AND OWNED AVERAGE BASE RENT
NUMBER OF FREESTANDING GLA PER LEASED
DATE PROPERTIES OWNED GLA(1) LEASED SQUARE FOOT(2)
- ---- ---------- ------------ ---------- -----------------
March 31, 1998................. 23 9,535 91.3% $32.85
December 31, 1997.............. 23 9,593 94.0 32.20
December 31, 1996.............. 24 10,088 90.4 30.60
December 31, 1995.............. 26 10,572 93.1 27.80
December 31, 1994.............. 26 10,509 92.4 26.50
December 31, 1993.............. 29 11,260 90.8 24.60
- ---------------
(1) In thousands of square feet.
(2) Base rent does not include the effects of percentage rent or common area
maintenance charges reimbursed by the tenants, nor does it consider the
costs required to obtain new tenants.
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Lease Expirations
The following table sets forth scheduled expirations during the given
periods set forth below of leases for mall stores and freestanding stores at
CPI's regional malls, assuming that none of the tenants exercises available
renewal options:
PERCENT OF
TOTAL TOTAL GLA(2)
NUMBER GLA UNDER ANNUALIZED BASE LEASED
OF LEASES EXPIRING LEASES RENT/SQUARE FOOT REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING (1) (SQ. FT.) UNDER EXPIRING LEASES EXPIRING LEASES(%)
- ------------------------ --------- --------------- --------------------- ------------------
03/31/98-12/31/98...... 304 610,172 $33.14 7.34%
1999................... 303 606,475 32.35 7.30%
2000................... 280 526,698 38.87 6.34%
2001................... 231 511,388 32.41 6.15%
2002................... 287 693,460 32.67 8.35%
2003................... 348 1,085,595 32.50 13.07%
2004................... 341 886,352 36.63 10.67%
2005................... 244 765,673 34.20 9.22%
2006................... 294 831,276 37.82 10.00%
2007................... 295 847,518 40.63 10.20%
----- --------- ------ -----
Total........ 2,927 7,364,607 88.64%
===== ========= =====
Weighted
Average.... $35.22
======
- ---------------
(1) All month to month tenants as of March 31, 1998 are considered to have a
lease expiry in 1998.
(2) Total Leased Owned Mall and Freestanding GLA is 8,308,651 sq. ft. as of
March 31, 1998.
Anchors
As of March 31, 1998, anchor space represented 63.3% of the GLA in CPI's
regional malls, of which 100.0% was leased. The following table sets forth, as
of March 31, 1998, certain information with respect to the five largest anchors
(by occupied GLA) in CPI's regional malls:
ANCHOR-OWNED
NUMBER OF ANCHOR-LEASED OR LAND-
ANCHOR STORES GLA LEASED GLA TOTAL GLA
- ------ --------- ------------- ------------ ---------
Federated Department Stores,
Inc. ........................... 29 1,545,969 4,889,676 6,435,645
Sears, Roebuck and Co. ........... 18 163,476 3,107,223 3,270,699
The May Department Stores Co. .... 20 323,512 2,086,172 2,409,684
J.C. Penney Company, Inc. ........ 15 643,517 1,605,143 2,248,660
Dillards Department Stores,
Inc. ........................... 4 80,000 592,000 672,000
Mall Stores and Freestanding Stores
There are nearly 2,900 mall and freestanding stores in CPI's regional
malls. Substantially all of these stores lease space from CPI. Mall and
freestanding stores represent approximately 9.5 million of the 13.0 million
square feet of total Owned GLA of these properties, with no single mall or
freestanding store or chain occupying more than 6.2% of the total Owned GLA in
all CPI Portfolio Properties or accounting for more than 7.3% of the total
annualized base rent from the CPI Portfolio Properties.
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The following table sets forth, as of March 31, 1998, certain information
with respect to the five largest mall and freestanding store tenants by Owned
GLA occupied in CPI's regional malls:
% OF TOTAL
OWNED GLA
NUMBER OF TOTAL GLA LEASED BY
TENANT STORES LEASED (SQUARE FEET) TENANT
- ------ ------------- ------------- ----------
The Limited, Inc. ............................. 141 1,051,719 11.0%
Venator Group Inc. (formerly known as Woolworth
Corp.)....................................... 134 508,725 5.3
The Gap, Inc. ................................. 49 297,369 3.1
Luxottica Group................................ 42 173,009 1.8
The Wet Seal, Inc.............................. 27 119,449 1.3
--- --------- ----
Total................................ 393 2,150,271 22.5%
Roosevelt Field, CPI's most significant asset, is separately described in
detail below. Additional information regarding this and CPI's other principal
assets is set forth in the table that follows.
Roosevelt Field
Roosevelt Field is an enclosed regional mall situated on a 106-acre parcel
located at the junction of the Meadowbrook Parkway and Old Country Road, in the
Town of Hempstead, Nassau County, New York. Access to the shopping center is
provided by the Meadowbrook Parkway which connects directly to the Northern and
Southern State Parkways.
The Town of Hempstead is a mature, suburban Long Island community
approximately 25 miles east of Manhattan at the center of a trade area with a
population of approximately 1.3 million. This trade area extends to Nassau
County's eastern border and into eastern Queens County.
Roosevelt Field was opened as an unenclosed mall in 1956 and the mall was
enclosed in 1968. CPI acquired the leasehold interest in Roosevelt Field in
1973. In 1980, CPI acquired fee title to the mall, the underlying land and
approximately 45 adjacent acres, which have been improved by a variety of
commercial, office and industrial buildings.
A significant renovation and reconfiguration of Roosevelt Field was
completed and opened in April 1993. This project consisted of construction of a
285,000-square foot A&S department store (which opened in October 1992), 165,000
square foot new second level mall store GLA, including a new food court, that
houses approximately 62 new stores and a complete renovation of the remainder of
the shopping center. The A&S department store and new mall stores replaced an
Alexander's department store and approximately 120,000 square feet of obsolete
small store space, which were demolished. A substantial remerchandising program
accompanied this construction project. In 1995 Federated Department Stores
closed all of its A&S department stores. Bloomingdale's replaced A&S at
Roosevelt Field in November 1995. CPI added approximately 175,000 square feet of
new mall store GLA in October 1996. Nordstrom opened its first Long Island store
at Roosevelt Field with a total of 225,000 square feet of GLA in August 1997.
CPI has preliminary plans to add a fashion department store and approximately
35,000 square feet of GLA to Roosevelt Field.
Roosevelt Field's primary competitors are two regional shopping centers,
Sunrise Mall and Green Acres Shopping Center. Sunrise Mall contains three
anchors and 190 mall stores and is located less than twelve miles southeast of
Roosevelt Field. Green Acres Shopping Center contains four anchors and 212 mall
stores and is located approximately eight miles southwest of Roosevelt Field.
The Source, a 732,820 square foot mall, owned 25% by SDG and managed by an
affiliate of SDG, opened in the third quarter of 1997 within five miles of
Roosevelt Field. Roosevelt Field also competes with certain discount stores in
the area. In addition, The Taubman Company has preliminary plans to develop an
upscale mall located midway between Roosevelt Field and Walt Whitman Mall which
could accommodate three department stores and approximately 120 mall stores;
however, these plans have not been approved. The Company believes that Roosevelt
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Field is well positioned within its market due to its strong anchor stores and
the high population density of the area.
The operating data for Roosevelt Field is as follows:
The principal business carried on in Roosevelt Field is retail.
The occupancy rate (based on a weighted average at year-end, excluding
seasonal-in-line) for each of the years 1993 through 1997 and for the
three-months ended March 31, 1998 is 94.6%, 97.0%, 95.1%, 93.0%, 95.2% and
96.6%, respectively.
Stores owned by The Limited, Inc., a retail apparel company, occupy 10% or
more of the rentable square footage (excluding department stores) at Roosevelt
Field. The principal lease provisions for such stores are as follows:
NAME RENT/YR/SF EXPIRATION RENEWAL OPTION
- ---- ---------- ---------- --------------
The Limited, Inc. doing business as:
1. Lerner NY................................. $36.00 Nov-06 None
2. Victoria's Secret......................... 49.50 Jan-04 None
3. Express................................... 35.83 Oct-06 None
4. The Limited............................... 39.00 Jan-04 None
5. Cacique................................... 50.00 Jan-04 None
6. Lane Bryant............................... 42.00 Jan-04 None
7. Structure................................. 60.00 Jan-07 None
8. Abercrombie & Fitch....................... 55.00 Jan-07 None
------
Total Weighted Average.............. $43.85
The average effective annual rent per square foot for each of the years
1993 through 1997 is $34.20, $45.10, $49.90, $49.90 and $53.00, respectively.
The following is a schedule of lease expirations for stores located at
Roosevelt Field:
PERCENT OF
PERCENT OF TOTAL
TOTAL ANNUALIZED
GLA GLA(2) BASE
NUMBER UNDER TOTAL ANNUALIZED LEASED RENT(3)
OF EXPIRING TOTAL ANNUALIZED BASE RENT/SQUARE REPRESENTED REPRESENTED
YEAR OF LEASE LEASES LEASES(1) BASE RENT UNDER FOOT UNDER BY EXPIRING BY EXPIRING
EXPIRATION EXPIRING (SQ. FT.) EXPIRING LEASES EXPIRING LEASES LEASES(%) LEASES(%)
------------- --------- --------- ---------------- ---------------- ----------- -----------
03/31/98 - 12/31/98.. 4 7,420 $ 474,220 $63.91 1.04% 1.32%
1999........ 5 13,387 888,432 66.37 1.88% 2.47%
2000........ 14 29,105 1,783,059 61.26 4.09% 4.96%
2001........ 7 30,560 423,299 13.85 4.29% 1.18%
2002........ 3 5,232 334,178 63.87 0.74% 0.93%
2003........ 49 126,306 7,166,946 56.74 17.74% 19.95%
2004........ 30 78,748 4,337,193 55.08 11.06% 12.08%
2005........ 16 53,243 3,035,919 57.02 7.48% 8.45%
2006........ 39 104,429 6,088,716 58.30 14.67% 16.96%
2007........ 35 95,650 6,003,534 62.77 13.44% 16.72%
--- ------- ----------- ------ ----- -----
Total............. 202 544,080 $30,535,495 76.43% 85.02%
=== ======= =========== ===== =====
Weighted
Average......... $56.12
======
- ---------------
(1) All month to month tenants as of March 31, 1998 are considered to have a
lease expiry in 1998.
(2) Total Leased GLA is 711.813 sq. ft. as of March 31, 1998.
(3) Total Annualized Rent is $35,915,975 as of March 31, 1998.
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The following chart lists tax depreciation terms (for purposes of this
chart, any construction allowances, deferred costs, development costs, leasing
commissions, free rent and similar items are not included):
DESCRIPTION (I) BASIS (II) RATE (III) METHOD (IV) LIFE-YRS
- ----------- ----------- ----------- ------------- --------------
Building and Building
Improvements (including
costs of asbestos
abatement)............. 307,117,760 .0250-.0286 Straight Line 35-40
Mall Equipment........... 34,130 .1000 Straight Line 10
Carts.................... 417,330 .2000 Straight Line 5
Land Improvements........ 433,320 .0500 Straight Line 20
The realty tax rate for Roosevelt Field is $67.50 per $100 of assessed
value. Annual realty taxes are $13,454,216. Annual realty taxes for Roosevelt
Field in 1999 are estimated to be $14,366,041.
DEVELOPMENT
Development activities are ongoing at several locations including:
Development of Mall of Georgia
In April 1997, CPI entered into a limited liability company agreement with
Buford Acquisition Company, L.L.C., an unaffiliated entity, forming an entity,
Mall of Georgia L.L.C., to develop a 1.5 million square foot regional mall on
approximately 145 acres of land in Buford, Georgia. Mall of Georgia L.L.C. also
owns a 45 acre parcel on which a power center of 390,000 square feet of GLA is
planned. There are letters of intent with Nordstrom (160,000 square feet of
GLA), Lord & Taylor (120,000 square feet of GLA), Dillard's (240,000 square feet
of GLA), J.C. Penney (146,000 square feet of GLA), Galyan's (85,000 square feet
of GLA), Regal Cinema (105,000 square feet of GLA), Barnes & Noble (26,000
square feet of GLA) and 180,885 square feet of GLA for smaller stores. Letters
of intent for these smaller stores represent approximately 40% of the mall's GLA
for smaller stores.
The project budget for the Mall of Georgia project is approximately $254
million, including land costs. CPI is funding 85% of the capital requirements
for the project. CPI is the managing member of the entity developing the mall
and is responsible for the development. The Mall of Georgia L.L.C. has obtained
a construction and permanent loan for $200 million (which as of June 30, 1998
$71 million has been drawn down), which results in a project equity requirement
of $54 million (of which CPI's share would be $45.9 million). CPI's interest in
the mall is 50% after the return of its equity investment and a 9% return
thereon. Construction of the mall building commenced in March 1998 for an
anticipated opening of the mall and department stores in August 1999.
Town Center at Boca Raton Expansion/Renovation
An expansion plan for Town Center at Boca Raton, a wholly owned property
located in Palm Beach County, Florida, was approved by the Palm Beach County
Development Review Committee in April 1998. The plan includes a renovation of
the food court and the mall common area, the relocation of Saks Fifth Avenue to
a location which was once a Mervyn's store and the addition of 94,000 square
feet of GLA for smaller stores in the space formerly occupied by the Saks store.
It is expected that a new Nordstrom store of 170,000 square feet of GLA will
anchor the expansion wing. The relocation of Saks will almost double the size of
its store from 73,000 to 140,000 square feet of GLA. As part of this expansion
plan, Bloomingdale's would add 37,000 square feet of GLA and Lord & Taylor
14,000 square feet of GLA to their existing stores. A letter of intent was
signed with Nordstrom in May 1997. Management and Saks Fifth Avenue have agreed
in principle upon the terms of its relocation and expansion. Saks is scheduled
to open in August 1999 and Nordstrom in August 2000. The preliminary budget for
this expansion/renovation project is estimated at $68.6 million.
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Walt Whitman Mall Renovation
CPI expects that Walt Whitman Mall, with respect to which CPI owns 100% of
the land and operating position and 98.3% of the tenants-in-common leasehold
interest and which is currently anchored only by Macy's, will contain a
Bloomingdale's store and a Lord & Taylor store in 1998 and a Saks Fifth Avenue
store in 1999. The mall is in the process of being thoroughly renovated and
approximately 25,000 square feet of GLA for smaller stores will be added. The
total budget for the renovation project is approximately $81.3 million. The Town
of Huntington, New York has completed its review and approved the final
expansion plan.
Other Renovation and Development Projects
In addition to the developments and renovations at Mall of Georgia, Town
Center at Boca Raton and Walt Whitman Mall, CPI is also conducting renovations
and/or developments at Gwinnett Place Mall, Palm Beach Mall, Rockaway Townsquare
and Town Center at Cobb. The total budget for these projects is approximately
$62.5 million, of which CPI's share is estimated to be $35.8 million.
Simon Group intends to finance its share of the projects at Town Center at
Boca Raton, Walt Whitman Mall and the other renovations and/or developments
described above with cash on hand, cash flow from properties and borrowings
under any then existing credit agreements.
ACQUISITIONS AND DISPOSITIONS
In 1994, CPI sold three shopping centers: Broadway Square in Tyler, Texas;
Orange Park Mall in Jacksonville, Florida; and University Mall in Pensacola,
Florida to SDG. In that same year, CPI eliminated its investment in the
developed portion of the Talleyrand Office Park in Westchester, New York and in
First Union Financial Center in Miami, Florida. In late 1996 and early 1997, CPI
sold its interests in Countryside Mall in Clearwater, Florida; Maplewood Mall in
Maplewood, Minnesota; and Northstar Mall in San Antonio, Texas in exchange for
shares of CPI Common Stock. In 1996, CPI acquired the interests of its partners
in seven shopping centers, one mixed-use property and the General Motors
Building in exchange for shares of CPI Common Stock. In early 1998, CPI sold
Burnsville Mall in Burnsville, Minnesota and acquired Phipps Plaza in Atlanta,
Georgia. In July 1998, CPI sold the General Motors Building in New York City,
New York.
COMPETITION
With gross real estate assets as of December 31, 1997 of approximately $4.8
billion and $2.6 billion on appraisal and financial reporting bases,
respectively, CPI management believes it is one of the largest regional mall
REITs in the United States. CPI management believes that it competes favorably
in the retail real estate business as a result of (i) its portfolio of quality
assets, (ii) its concentration of large properties in major, geographically
diverse markets and (iii) its management and operational expertise.
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with CPI in its trade areas. This results in
competition for both acquisition of prime sites (including land for development
and operating properties) and for tenants to occupy the space that CPI and its
competitors develop and manage.
In addition, all of CPI's properties are located in developed areas, and
there are other retail properties in such areas which currently or potentially
compete with CPI's properties. The existence of competitive properties could
have a material effect on CPI's ability to lease space and on the level of rents
CPI can obtain.
ENVIRONMENTAL MATTERS
CPI is not aware of any environmental liability that it believes would have
a material adverse effect on CPI. CPI believes that its properties are in
compliance, in all material respects, with all Federal, state and local
environmental laws, ordinances and regulations. However, no assurance can be
given that all environmental liabilities have been identified or that no prior
owner, prior tenant or current tenant has created any material environmental
condition not known to CPI, that the current environmental condition of CPI's
properties will not be affected by tenants and occupants, by the condition of
nearby properties, or by unrelated
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third parties, or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations or the interpretation
thereof) will not result in the imposition of environmental liability.
Asbestos-Containing Materials
Asbestos-containing materials are present in most of CPI's properties,
primarily in the form of vinyl asbestos tile, mastics and roofing materials,
which are generally in good condition. Asbestos-containing materials in the form
of spray-on fireproofing and thermal system insulation are also present in
certain of CPI's properties in limited concentrations or in limited areas. The
presence of such asbestos-containing materials does not violate currently
applicable laws. Asbestos-containing materials are removed by CPI in the
ordinary course of any renovation, reconstruction and expansion, and in
connection with the retenanting of space. Although it is difficult to assess the
costs of abatement or removal of such asbestos-containing materials at this
time, and no assurance can be given as to the magnitude of such costs, CPI does
not believe that such costs will be material to CPI's financial condition or
results of operations. CPI has developed and is implementing an operations and
maintenance program that establishes operating procedures with respect to
asbestos-containing materials.
Underground Storage Tanks
Some of CPI's properties and certain adjacent properties contain, or at one
time contained, underground storage tanks used to store heating oil for on-site
consumption or petroleum products. At present, CPI is aware of three underground
storage tanks owned and operated by CPI, and is either currently in compliance
with applicable environmental regulations or has begun or scheduled appropriate
compliance activities in all cases. CPI is also aware of additional underground
storage tanks at its properties operated by tenants or subtenants that are also
responsible for compliance with respect to such tanks. Upon any such tenant's or
subtenant's failure to cause such compliance activities, CPI could become
primarily responsible for such compliance.
In addition, CPI has begun soil remediation to address contamination
associated with an underground storage tank which was located on a tract of
undeveloped land owned by CPI near Roosevelt Field in Garden City, New York.
Such remediation is being conducted in accordance with applicable environmental
laws and is expected to be completed in the spring of 2001.
The costs of underground storage tank compliance, closure, removal and
remediation activities are not expected to have a material adverse effect on
CPI's financial condition or results of operations.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or threatened against CPI.
EMPLOYEES
As of June 1, 1998, CPI employed a full-time staff of 502 persons and a
part-time staff of 461 persons. Twenty-seven of CPI's employees are covered by
collective bargaining agreements. CPI's management considers its union relations
to be good.
INSURANCE
CPI has commercial general liability, fire, flood, extended coverage and
rental loss insurance with respect to all its properties and believes that such
insurance provides adequate coverage.
Additional Information
The following schedule sets forth certain information regarding certain of
CPI's properties.
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INFORMATION SCHEDULE
OWNERSHIP
INTEREST CPI'S YEAR BUILT TOTAL
(EXPIRATION IF PERCENTAGE OR GLA
NAME/LOCATION GROUND LEASE)(1) INTEREST ACQUIRED (SQUARE FEET) ANCHORS/SPECIALTY ANCHORS
------------- ---------------- ---------- ---------- ------------- -------------------------------
REGIONAL MALLS
1. Aurora Mall......... Fee 100.0% 1975 950,000 JC Penney, Foley's, Sears
Aurora, CO
2. Brea Mall........... Fee 100.0% 1977 1,300,000 Macy's, JC Penney, Nordstrom,
Brea, CA Robinson-May, Sears
3. Burlington Mall..... Fee 100.0% 1968 1,255,000 Filene's, Macy's, Lord &
Taylor,
Burlington, MA Sears
4. Crystal Mall........ Fee 50.0% 1984 790,000 Filene's, Macy's, Sears,
Waterford, CT JC Penney
5. Gwinnett Place...... Fee 50.0% 1984 1,240,000 Macy's, Parisian, Rich's,
Sears,
Atlanta, GA JC Penney
6. Haywood Mall........ Fee and 50.0% 1980 1,255,000 Belk-Simpson, Dillard's,
Greenville, SC Ground Lease JC Penney, Rich's, Sears
(May 2067)
7. Highland Mall....... Fee and 50.0% 1971 1,100,000 Dillard's, Foley's, JC Penney
Austin, TX Ground Lease
(October 2070)
8. Lenox Square........ Fee 100.0% 1959 1,530,000 Macy's, Neiman Marcus, Rich's
Atlanta, GA
9. Livingston Mall..... Fee 100.0% 1972 990,000 Lord & Taylor, Macy's, Sears
Livingston, NJ
10. Metrocenter......... Fee 50.0% 1973 1,350,000 Macy's, Dillard's East,
Phoenix, AZ JC Penney, Robinson-May, Sears
11. Nanuet Mall......... Fee 100.0% 1969 910,000 Macy's, Sears, Stern's
Nanuet, NY
12. Northlake Mall...... Fee 100.0% 1971 950,000 JC Penney, Macy's, Parisian,
Atlanta, GA Sears
13. Ocean County Mall... Fee 100.0% 1976 870,000 JC Penney, Macy's, Sears,
Toms River, NJ Stern's
14. Palm Beach Mall..... Fee 50.0% 1967 1,200,000 Burdines, JC Penney, Lord &
West Palm Beach, FL Taylor, Sears, Dillard's(2)
15. Phipps Plaza........ Fee 100.0% 1968 820,000 Lord & Taylor, Parisian, Saks
Atlanta, GA Fifth Avenue
16. Rockaway Fee 100.0% 1977 1,210,000 JC Penney, Lord & Taylor,
Townsquare..........
Rockaway, NJ Macy's, Sears
17. Roosevelt Field..... Fee 100.0% 1956 2,360,000 Bloomingdales, JC Penney,
Garden City, NY Macy's, Nordstrom, Stern's
18. Santa Rosa Plaza.... Fee 100.0% 1982 695,000 Macy's, Mervyn's, Sears
Santa Rosa, CA
19. South Shore Plaza... Fee 100.0% 1961 1,585,000 Filene's, Macy's, Lord &
Braintree, MA Taylor, Sears
20. Town Center at
Boca Raton.......... Fee 100.0% 1980 1,320,000 Bloomingdales, Burdines, Lord
Boca Raton, FL & Taylor, Saks, Sears,
Nordstrom (signed letter of
intent to open in 2000)
21. Town Center at Fee 50.0% 1986 1,275,000 Macy's, Parisian, Rich's,
Cobb................ Sears,
Atlanta, GA JC Penney
22. Walt Whitman Mall... Fee and 98.0% 1962 965,000 Macy's, Bloomingdales, Saks,
Huntington, NY Ground Lease Lord & Taylor(3)
(December 2052)
23. Westminster Mall.... Fee 100.0% 1974 1,095,000 JC Penney, Robinson-May,
Westminster, CA Robinson-May Home Store, Sears
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OWNERSHIP
INTEREST CPI'S YEAR BUILT TOTAL
(EXPIRATION IF PERCENTAGE OR GLA
NAME/LOCATION GROUND LEASE)(1) INTEREST ACQUIRED (SQUARE FEET) ANCHORS/SPECIALTY ANCHORS
------------- ---------------- ---------- ---------- ------------- -------------------------------
OFFICE BUILDINGS
1. The Lenox Fee 100.0% 1987 350,000 N/A
Building............
Atlanta, GA
2. Rockaway Office Fee 100.0% 1983 90,000 N/A
Building............
Rockaway, NJ
MIXED USE/OTHER
1. Rockaway Convenience
Center.............. Fee 100.0% 1980 N/A N/A
Rockaway, NJ
2. Roosevelt Field
Industrial Park..... Fee 100.0% N/A N/A N/A
Garden City, NY
3. Charles Square(4)... Fee 100.0% 1985 N/A N/A
Cambridge, MA
4. JW Marriott Fee 100.0% 1987 N/A N/A
Lenox(5)............
Atlanta, GA
- ---------------
(1) The date listed is the expiration date of the last renewal option available
to CPI under the ground lease. In a majority of the ground leases, the
lessee has either a right of first refusal or the right to purchase the
lessor's interest. Unless otherwise indicated, each ground lease listed in
this column covers at least 50% of its respective property.
(2) Dillard's is scheduled to open in June of 1999.
(3) Bloomingdales is scheduled to open in August 1998, Lord & Taylor is
scheduled to open in late 1998 and Saks is scheduled to open in early 1999.
(4) Land under hotel, retail and office complex.
(5) Land under 375-room hotel.
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CRC'S PROPERTIES
CRC owns (i) the building located at Three Dag Hammarskjold Plaza in New
York City where CPI's executive offices are currently located; (ii) a 200,000
square foot building in Norfolk, Virginia which is leased to the J.C. Penney
Company; (iii) an 85% interest in land owned by Mill Creek in Buford, Georgia
(see "-- CPI and CRC"); (iv) 37 acres of vacant land, zoned for retail business,
being held for development adjacent to a shopping center owned by CPI in
Rockaway, New Jersey and (v) 203 acres of vacant land zoned for single family
housing in Putnam, New York which is being marketed for sale.
Three Dag Hammarskjold Plaza ("305 East 47 Street") is located on the north
side of East 47th Street between First and Second Avenue in New York City, New
York. The building is a 12-story office structure containing 123,000 square feet
of rentable area. Following remeasurement, the total rentable area of the
building will increase to approximately 139,000 square feet. Extensive
renovations to the building were completed in 1983 and the result is a modern
office building of high quality. There is no asbestos present in the structure.
CRC holds a 100% leasehold interest in the multi-tenant office building
that also serves as CPI and CRC headquarters in New York City. In addition, CPI
holds a leasehold mortgage on the improvements which bears interest at 6% and
requires annual interest payments to CPI of $1,233,907, and beginning January 1,
1999 through the maturity date of December 31, 2013 bears interest at 15% and
requires annual interest and principal payments to CPI of $3,186,396. At
maturity, a balloon payment of approximately $15 million is due. As of March 31,
1998, the principal amount outstanding on such loan was $20,565,000. CPI also
owns a 100% fee interest in the land underlying the improvements.
The operating data for 305 East 47 Street is as follows:
The occupancy rate (based on a weighted average at year-end) for each of
the years 1993 through 1997 and the three months ended March 31, 1998 is 100%,
88%, 83%, 83%, 81% and 77%, respectively. CPI is the only tenant occupying more
than 10% of the rentable square feet of the building.
The principal provisions of the lease with CPI are as follows. CPI
currently rents 61,086 square feet of the building at an average base rent of
$23.94 per square foot pursuant to a lease, which expires December 31, 2005.
Davis Polk & Wardwell, a law firm, has executed a lease at 305 East 47 Street.
The lease commenced on June 22, 1998. Davis Polk & Wardwell will occupy 29,480
square feet of space at an average base rent of $24.00 per square foot. Davis
Polk & Wardwell's lease expires on March 21, 2009.
The following is a schedule of lease expirations:
% OF TOTAL % OF TOTAL
GLA GLA(2) ANNUALIZED
NUMBER UNDER TOTAL ANNUALIZED LEASED BASE RENT(3)
OF EXPIRING TOTAL ANNUALIZED BASE RENT/SQUARE REPRESENTED REPRESENTED
YEAR OF LEASE LEASES LEASES(1) BASE RENT UNDER FOOT UNDER BY EXPIRING BY EXPIRING
EXPIRATION EXPIRING (SQ. FT.) EXPIRING LEASES EXPIRING LEASES LEASES(%) LEASES(%)
------------- --------- --------- ---------------- ---------------- ----------- ------------
03/31/98 - 12/31/98.. 1 3,200 $ 112,000 $ 35.00 6.90% 9.21%
1999........ -- -- -- -- 0.00% 0.00%
2000........ -- -- -- -- 0.00% 0.00%
2001........ -- -- -- -- 0.00% 0.00%
2002........ 1 8,933 223,325 25.00 19.27% 18.36%
2003........ 1 9,800 186,200 19.00 21.14% 15.31%
2004........ -- -- -- -- 0.00% 0.00%
2005........ 1 11,667 280,008 24.00 25.16% 23.02%
2006........ -- -- -- -- 0.00% 0.00%
2007........ 1 12,766 414,895 32.50 27.53% 34.11%
--- ------- ---------- -------- ------ ------
Total............. 5 46,366 $1,216,428 100.00% 100.00%
=== ======= ========== ====== ======
Weighted Average... $ 26.24
- ---------------
(1) All month-to-month tenants as of March 31, 1998 are considered to have a
lease expiring in 1998.
(2) Total Leased GLA is 46,366 square feet as of March 31, 1998 excluding 49,873
square feet leased to CPI.
(3) Total Annualized Rent is $1,216,428 as of March 31, 1998.
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The following chart lists tax depreciation terms (for purposes of this
chart, any construction allowances, deferred costs, development costs, leasing
commissions, free rent and similar items are not included):
DESCRIPTION (I) BASIS (II) RATE (III) METHOD (IV) LIFE-YEARS
----------- ---------- --------- ------------ ---------------
Building and Building Step-Up.......... $28,680,006 0.0286 Straight Line 35
Building Improvements.................. 42,815 0.0286 Straight Line 35
The realty tax rate for 305 East 47 Street is $10.164 per $100 of assessed
value. Annual realty taxes are $764,735. There are currently no proposed
improvements anticipated to be made with respect to the building. Annual realty
taxes for the 1999 tax year are estimated to be $766,569.
ACQUISITIONS AND DISPOSITIONS
On April 1, 1997 CRC sold its limited partner interests in three
partnerships, each of which owned property held for investment, to the general
partner, CPI, for approximately $2.4 million.
In addition, CRC's asset management contract with respect to the General
Motors Building ended in December of 1996 when the General Motors Building
became wholly owned by CPI, and CRC no longer receives fees with respect to such
contract. CRC received asset management fees of approximately $1.6 million and
$1.4 million for 1996 and 1995, respectively in connection with its management
of the General Motors Building.
COMPETITION
CRC management believes that it competes favorably in the office building
and land development businesses primarily as a result of its management and
operational expertise and its relationship with CPI. See "BUSINESS OF SDG, CPI
and CRC -- CPI and CRC -- CRC."
There are numerous commercial developers, real estate companies and other
owners of real estate that compete with CRC in its trade areas. This results in
competition for both acquisition of prime sites (including land for development
and operating properties) and for tenants to occupy the space that CRC and its
competitors develop and lease.
The office building owned by CRC is located in midtown Manhattan in New
York City, and there are other office buildings in the area which currently or
potentially compete with the office building owned by CRC. The existence of
competitive properties could have a material adverse effect on CRC's ability to
lease space and on the level of rents CRC can obtain.
The land held by CRC for development is located in relatively undeveloped
areas where other developers could potentially acquire nearby properties and
compete with CRC. The existence of other available land in such areas could have
a material adverse effect on CRC's ability to sell its land and on the price CRC
can obtain.
ENVIRONMENTAL MATTERS
CRC is not aware of any environmental liability that it believes would have
a material adverse effect on CRC. CRC believes that its properties are in
compliance, in all material respects, with all federal, state and local
environmental laws, ordinances and regulations. However, no assurance can be
given that all environmental liabilities have been identified or that no prior
owner, prior tenant or current tenant has created any material environmental
condition not known to CRC, that the current environmental condition of CRC's
properties will not be affected by tenants and occupants, by the condition of
nearby properties, or by unrelated third parties, or that future uses or
conditions (including, without limitation, changes in applicable environmental
laws and regulations or the interpretation thereof) will not result in the
imposition of environmental liability.
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Asbestos-Containing Materials
Asbestos-containing materials are present in certain of CRC's properties,
primarily in the form of vinyl asbestos tile, mastics and roofing materials,
which are generally in good condition. Asbestos-containing materials in the form
of spray-on fireproofing and thermal system insulation are also present in
certain of CRC's properties in limited concentrations or in limited areas. The
presence of such asbestos-containing materials does not violate currently
applicable laws. Asbestos-containing materials are removed by CRC in the
ordinary course of any renovation, reconstruction and expansion, and in
connection with the retenanting of space. Although it is difficult to assess the
costs of abatement or removal of such asbestos-containing materials at this
time, and no assurance can be given as to the magnitude of such costs, CRC does
not believe that such costs will be material to CRC's financial condition or
results of operations.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to its knowledge,
threatened against CRC.
EMPLOYEES
As of June 1, 1998, CRC had no employees.
INSURANCE
CRC has commercial general liability, fire, flood, extended coverage and
rental loss insurance with respect to all its properties and believes that such
insurance provides adequate coverage.
JOINT VENTURES
At certain of CPI's properties held as joint ventures, CPI and its partners
each have rights of first refusal, subject to certain conditions, to acquire
additional ownership in such property should the other partner decide to sell
its ownership interest. In addition, certain of CPI's properties held as joint
ventures contain "buy-sell" provisions, which give the partners the right to
trigger a purchase or sale of ownership interest amongst the partners.
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MORTGAGE FINANCING ON PROPERTIES
See the table below which sets forth certain information regarding the
mortgages and other debt encumbering the properties owned by CPI and CRC. All
mortgages on the properties are non-recourse.
MORTGAGE AND OTHER DEBT ON PORTFOLIO PROPERTIES(1)
FACE AMOUNT
MARCH 31, ANNUAL DEBT MATURITY
PROPERTY NAME INTEREST RATE 1998 SERVICE DATE
- ------------- ------------- ----------- ----------- --------
CPI
Net Leased Properties
J.C. Penney, Northgate Mall, Hixon,
TN(2)................................ 6.80% $ 1,003,495 $ 273,864 05/31/02
Consolidated Properties
Northlake Mall (J.C. Penney site)(3).... 8.00% $ 1,181,997 $ 262,543 12/01/02
South Shore Plaza (outparcel)(4)........ 9.75% $ 123,537 $ 65,772 04/01/00
Joint Venture Properties
Crystal Mall............................ 8.66% $51,048,592 $5,384,496 02/01/03
Metrocenter............................. 8.45% $31,467,604 $3,030,876 02/28/08
Gwinnett Place.......................... 7.54% $40,161,512 $3,411,504 04/01/07
Highland Mall........................... 9.75% $ 8,171,848 $1,175,323 12/01/09
Highland Mall........................... 8.50% $ 349,374 $ 115,756 10/01/01
Highland Mall........................... 9.50% $ 3,291,092 $1,087,225 11/01/01
Town Center at Cobb..................... 7.54% $51,168,742 $4,346,508 04/01/07
Palm Beach Mall......................... 8.21% $51,144,758 $5,072,424 12/15/02
CRC
J.C. Penney, Norfolk, VA................ 8.50% $ 1,121,203 $ 352,305 11/30/01
- ---------------
(1) During the term of these loans, there is amortization of the principal
amount.
(2) Property is net leased to J.C. Penney at Northgate Mall.
(3) Mortgage encumbers only J.C. Penney store at Northlake Mall.
(4) Mortgage encumbers only office building on outparcel at South Shore Plaza.
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CPI AND CRC SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of CPI Common Stock (and the proportionate beneficial interest in CRC
Common Stock) and CPI Series A Preferred Stock (and the proportionate beneficial
interest in CRC Common Stock) as of June 15, 1998, as determined in accordance
with Rule 13d-3 under the Exchange Act, with respect to (i) each of CPI's
directors and executive officers, (ii) each person who is known by CPI to
beneficially own more than 5% of CPI Common Stock or CPI Series A Preferred
Stock, and (iii) all current directors and executive officers of CPI as a group.
Each individual or entity named has sole investment and voting power with
respect to shares of CPI Common Stock or CPI Series A Preferred Stock
beneficially owned by him or her.
BENEFICIAL OWNERSHIP PRIOR
TO CPI MERGER DIVIDENDS BENEFICIAL OWNERSHIP AFTER THE MERGER(1)
AND THE MERGER ------------------------------------------------------------
-------------------------------------- SIMON GROUP
CPI SERIES A SIMON GROUP SERIES A SIMON GROUP
CPI COMMON PREFERRED COMMON PREFERRED SERIES B
STOCK(2) STOCK(2) STOCK(2) STOCK(2) PREFERRED STOCK(2)
------------------ ----------------- ------------------- ----------------- ------------------
NAME AND ADDRESS OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
BENEFICIAL OWNER(3) SHARES % SHARES % SHARES %(4) SHARES % SHARES %
- ------------------- --------- ----- --------- ----- ---------- ----- --------- ----- --------- -----
Abdlatif Y. Al-Hamad...... 10,767(5) * -- -- 22,414 * -- -- 2,045 *
Saleh F. Alzouman......... 1,000(6) * -- -- 2,081 * -- -- 190 *
Robert E Angelica......... --(7) -- -- -- --(7) -- -- -- --(7) --
Gilbert Butler............ 8,000(8) * -- -- 16,654 * -- -- 1,520 *
David P. Feldman.......... 8,000(8) * -- -- 16,654 * -- -- 1,520 *
Andrea Geisser............ 10,374(9) * -- -- 21,596 * -- -- 1,971 *
Hans C. Mautner........... 243,767(10) * -- -- 507,474 * -- -- 46,315 *
Damon Mezzacappa.......... 8,000(8) * -- -- 16,654 * -- -- 1,520 *
S. Lawrence Prendergast... --(11) -- -- -- --(11) -- -- -- --(11) --
Daniel Rose............... 13,245(12) * -- -- 27,573 * -- -- 2,516 *
Dirk van den Bos.......... --(13) * -- -- --(13) * -- -- --(13) *
Jan H.W.R. van der
Vlist.................... --(13) * -- -- --(13) * -- -- --(13) *
Mark S. Ticotin........... 107,000(14) * -- -- 222,752 * -- -- 20,330 *
G. Martin Fell............ 88,610(15) * -- -- 184,468 * -- -- 16,835 *
Michael L. Johnson........ 56,667(16) * -- -- 117,969 * -- -- 10,766 *
J. Michael Maloney........ 91,500(15) * -- -- 190,484 * -- -- 17,385 *
Telephone Real Estate
Equity Trust(17)......... 8,641,397(18) 34.09 3,450 1.65 17,989,660(19) 10.70 3,450 1.65 1,641,865 34.11
Kuwait.................... 4,411,967(20) 17.42 -- -- 9,184,832 5.46 -- -- 838,273 17.42
Kuwait Fund for Arab
Economic
Development(21).......... 1,507,744 5.95 -- -- 3,138,821 1.87 -- -- 286,471 5.95
The Public Institution for
Social Security --
Kuwait(22)............... 389,449 1.54 -- -- 810,754 * -- -- 73,955 1.54
Stichting Pensioenfonds
Voor De Gezondheid
Geestelijke En
Maatschappelijke
Belangen................. 1,965,588(23) 7.44 150,000 71.68 4,091,161(24) 2.43% 150,000 71.68 373,461 7.76
All directors and
executive officers of CPI
as a group (16
persons)................. 646,930 2.51 -- -- 1,346,773 * -- -- 122,913 2.55
- ---------------
* Less than 1.0%
(1) Assumes that all options to purchase CPI Common Stock are exercised prior
to the Effective Time.
(2) Includes proportionate beneficial ownership in CRC Common Stock held in the
CRC Trusts.
(3) Unless otherwise indicated, the address of each person is c/o Corporate
Property Investors, Inc., Three Dag Hammarskjold Plaza, 305 East 47th
Street, New York, New York 10017-2391.
(4) Based upon number of shares of SDG Common Stock outstanding on June 30,
1998.
(5) Includes options to purchase 8,000 shares of CPI Common Stock.
(6) Represents options to purchase 1,000 shares of CPI Common Stock.
(7) Mr. Angelica assigned the economic benefit of options to purchase 1,000
shares of CPI Common Stock granted to him to the Telephone Real Estate
Equity Trust pursuant to an agreement dated May 7, 1997. See note (18).
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(8) Represents options to purchase 8,000 shares of CPI Common Stock.
(9) Includes options to purchase 8,000 shares of CPI Common Stock, 1,259 shares
of CPI Common Stock held in custodianship for his daughter Carla E. Geisser
and 660 shares of CPI Common Stock held in custodianship for his son Daniel
Geisser.
(10) Includes options to purchase 110,000 shares of CPI Common Stock.
(11) Mr. Prendergast assigned the economic benefit of options to purchase 1,000
shares of CPI Common Stock granted to him to the Telephone Real Estate
Equity Trust pursuant to an agreement dated July 14, 1997. See note (18).
(12) All shares are held by Mr. Rose as Trustee pursuant to a Trust Agreement
dated August 28, 1972 for the benefit of his children, Emily Rose, Joseph
B. Rose and Gideon G. Rose.
(13) Mr. van den Bos and Mr. van der Vlist have each assigned the economic
benefit of options to purchase 1,000 shares of CPI Common Stock granted to
them to PGGM. See note (22).
(14) Includes options to purchase 85,000 shares of CPI Common Stock.
(15) Includes options to purchase 75,000 shares of CPI Common Stock.
(16) Includes options to purchase 44,167 shares of CPI Common Stock, including
options to purchase 13,333 shares of CPI Common Stock which were
transferred pursuant to a Trust Agreement dated April 21, 1997 for the
benefit of Mr. Johnson's children, Katharine A. Johnson and Christopher A.
Johnson. Mr. Johnson does not exercise any control over such trust.
(17) State Street Bank & Trust Company, the address of which is Master Trust
Division -- W6C, One Enterprise Drive, North Quincy, Massachusetts 02171,
holds all such shares, not individually, but solely as Trustee of the
Telephone Real Estate Equity Trust.
(18) Includes 24,808 shares of CPI Common Stock issuable upon the conversion of
all 3,450 shares of CPI Series A Preferred Stock held by the Telephone Real
Estate Equity Trust at a conversion price of $139.065 per share. Includes
options to purchase 1,000 shares of CPI Common Stock granted to Robert E.
Angelica and options to purchase 1,000 shares of CPI Common Stock granted
to S. Lawrence Prendergast. Mr. Angelica and Mr. Prendergast assigned the
economic benefit of such options to the Telephone Real Estate Equity Trust
pursuant to agreements dated May 7, 1997 and July 14, 1997, respectively.
(19) Assumes conversion of all 3,450 shares of CPI Series A Preferred Stock held
by the Telephone Real Estate Equity Trust prior to the Merger.
(20) All such shares are held by the Kuwait Investment Authority as agent for
the Government of Kuwait, the address of which is P.O. Box 64, Safat,
Kuwait, Attn.: Dr. Adnan Al-Sultan.
(21) The address of the Kuwait Fund for Arab Economic Development is c/o the
United Bank of Kuwait, PLC, P.O. Box 2921, Safat, 13030 Kuwait, Attn.: Mr.
Bader Al-Humaidhi.
(22) The address of The Public Institution for Social Security-Kuwait; the
address of which is P.O. Box 24523, Safati, 13104 Kuwait, Attn.: Mr. Majed
Al-Ajeel.
(23) Includes 1,078,632 shares of CPI Common Stock issuable upon the conversion
of all 150,000 shares of CPI Series A Preferred Stock held by PGGM at a
conversion price of $139.065 per share. The address of PGGM is
Kroostweg-Noord 149, Postbus 117, 3700AC Zeist, The Netherlands. Includes
options to purchase 1,000 shares of CPI Common Stock granted to Mr. van den
Bos and options to purchase 1,000 shares of CPI Common Stock granted to Mr.
van der Vlist. Mr. van den Bos and Mr. van der Vlist have each assigned the
economic benefit of such options to PGGM.
(24) Assumes conversion of all 150,000 shares of CPI Series A Preferred Stock
held by PGGM prior to the Merger.
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DESCRIPTION OF SIMON GROUP AND CRC CAPITAL STOCK
The following summary is a description of certain provisions of the
Restated Certificate of Incorporation (the "Simon Group Charter"), the Restated
Certificate of Incorporation of CRC (the "CRC Charter"), the Restated By-laws
(the "Simon Group By-laws") of Simon Group and the Restated By-laws (the "CRC
By-laws"), as each will be in effect at the consummation of the Merger. This
summary does not purport to be complete and is qualified by reference to the
Simon Group Charter the CRC Charter and Simon Group By-laws the CRC By-laws,
forms of which have been filed as exhibits to the Registration Statement of
which this Proxy Statement/Prospectus is a part.
Under the Simon Group Charter, the total number of shares of all classes of
capital stock that Simon Group will have authority to issue is 750,000,000
shares, par value $0.0001 per share, consisting of 400,000,000 shares of Simon
Group Common Stock, 12,000,000 shares of Simon Group Class B Common Stock, 4,000
shares of Simon Group Class C Common Stock, 237,996,000 shares of Excess Common
Stock, par value $0.0001 per share ("Simon Group Excess Common Stock") and
100,000,000 shares of Preferred Stock, par value $0.0001 per share ("Simon Group
Preferred Stock"), of which 209,249 shares will be designated 6.50% Series A
Simon Group Convertible Preferred Stock (the "Simon Group Series A Preferred
Stock"), 5,000,000 shares will be designated 6.50% Series B Simon Group
Convertible Preferred Stock (the "Simon Group Series B Preferred Stock"),
209,249 shares will be designated Series A Excess Preferred Stock (the "Simon
Group Series A Excess Preferred Stock") and 5,000,000 shares have been
designated Series B Excess Preferred Stock (the "Simon Group Series B Excess
Preferred Stock" and, together with the Simon Group Series A Preferred Stock,
the Simon Group Series B Preferred Stock and the Simon Group Series A Excess
Preferred Stock, the "Simon Group Convertible Preferred Stock").
Under the CRC Charter, CRC will have authority to issue 750,000 shares of
Common Stock par value $0.0001 per share, of CRC ("CRC Common Stock").
COMMON STOCK; BENEFICIAL OWNERSHIP OF CRC COMMON STOCK
SIMON GROUP COMMON STOCK, SIMON GROUP CLASS B COMMON STOCK AND SIMON GROUP
CLASS C COMMON STOCK
As of March 31, 1998, after giving pro forma effect to the Merger and
assuming the exercise of all CPI options, Simon Group will have 160,902,609
shares of Simon Group Common Stock outstanding, 3,200,000 shares of Simon Group
Class B Common Stock outstanding and 4,000 shares of Simon Group Class C Common
Stock outstanding. Holders of Simon Group Common Stock, Simon Group Class B
Common Stock and Simon Group Class C Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of the
stockholders, other than the election of directors elected exclusively by the
holders of Simon Group Class B Common Stock and the election of directors
elected exclusively by the holders of Simon Group Class C Common Stock. Holders
of Simon Group Common Stock, Simon Group Class B Common Stock and Simon Group
Class C Common Stock have no right to cumulative voting for the election of
directors. Subject to preferential rights of holders of Simon Group Preferred
Stock, the holders of Simon Group Common Stock, Simon Group Class B Common Stock
and Simon Group Class C Common Stock are entitled to receive ratably such
dividends as may be declared by the Simon Group Board of Directors out of funds
legally available therefor. If Simon Group is liquidated, subject to the right
of the holders of Simon Group Preferred Stock (including any Simon Group Excess
Preferred Stock (as defined below) into which shares such series has been
converted) to receive preferential distributions, each outstanding share of
Simon Group Common Stock, Simon Group Class B Common Stock and Simon Group Class
C Common Stock, including shares of Simon Group Excess Common Stock, if any,
will be entitled to participate pro rata in the assets remaining after payment
of, or adequate provision for, all known debts and liabilities of Simon Group.
Special Rights of Simon Group Class B Common Stock
Upon consummation of the Merger, all outstanding shares of Simon Group
Class B Common Stock will be held by the Simons. The holders of Simon Group
Class B Common Stock are entitled to elect four of the
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13 directors of Simon Group, unless their portion of the aggregate equity
interest of Simon Group (including Simon Group Common Stock, Simon Group Class B
Common Stock and SDG Units considered on an as-converted basis) decreases to
less than 50% of the amount that they owned as of August 9, 1996, in which case
they will be entitled to elect only two directors of Simon Group.
Shares of Simon Group Class B Common Stock may be converted at the holder's
option into an equal number of shares of Simon Group Common Stock. If the
Simons' aggregate equity interest in Simon Group on a fully diluted basis has
been reduced to less than 5%, the outstanding shares of Simon Group Class B
Common Stock convert automatically into an equal number of shares of Simon Group
Common Stock. Shares of Simon Group Class B Common Stock also convert
automatically into an equal number of shares of Simon Group Common Stock upon
the sale or transfer thereof to a person not affiliated with the Simons. Holders
of shares of Simon Group Common Stock and Simon Group Class B Common Stock have
no sinking fund rights, redemption rights or preemptive rights to subscribe for
any securities of Simon Group.
Special Rights of Simon Group Class C Common Stock
Upon consummation of the Merger, all outstanding shares of Simon Group
Class C Common Stock will be held by the DeBartolos. Except with respect to the
right to elect directors, as summarized below, each share of Simon Group Class C
Common Stock has the same rights and restrictions as a share of Simon Group
Class B Common Stock.
The holders of Simon Group Class C Common Stock are entitled to elect two
of the 13 directors of Simon Group, unless their portion of the aggregate equity
interest of Simon Group (including Simon Group Common Stock, Simon Group Class B
Common Stock and SDG Units considered on an as-converted basis) decreases to
less than 50% of the amount that they owned as of August 9, 1996, in which case
they will be entitled to elect only one director of Simon Group. Shares of Simon
Group Class C Common Stock may be converted at the holder's option into an equal
number of shares of Simon Group Common Stock. If the DeBartolos' aggregate
equity interest in Simon Group on a fully diluted basis is reduced to less than
5%, the outstanding shares of Simon Group Class C Common Stock convert
automatically into an equal number of shares of Simon Group Common Stock. Shares
of Simon Group Class C Common Stock also convert automatically into an equal
number of shares of Simon Group Common Stock upon the sale or transfer thereof
to a person not affiliated with the DeBartolos. Holders of shares of Simon Group
Class C Common Stock have no sinking fund rights, redemption rights or
preemptive rights to subscribe for any securities of Simon Group.
NUMBER OF DIRECTORS; INDEPENDENT DIRECTORS; VACANCIES; REMOVAL
Under the Simon Group Charter, so long as any shares of both Simon Group
Class B Common Stock and Simon Group Class C Common Stock are outstanding, the
number of members of the Simon Group Board of Directors shall be 13, so long as
any shares of Simon Group Class B Common Stock (but no Simon Group Class C
Common Stock) are outstanding, or if any shares of Simon Group Class C Common
Stock (but no shares of Simon Group Class B Common Stock) are outstanding, the
number of members of the Simon Group Board of Directors shall be nine, and if no
shares of Simon Group Class B Common Stock or Simon Group Class C Common Stock
are outstanding, the number of members of the Simon Group Board of Directors
shall be fixed by the Simon Group Board of Directors from time to time. Under
the Simon Group Charter, at least a majority of the directors shall be
Independent Directors. The Simon Group Charter further provides that, subject to
any separate rights of holders of Simon Group Preferred Stock or as described
below, any vacancies on the Simon Group Board of Directors resulting from death,
disability, resignation, retirement, disqualification, removal from office, or
other cause of a director shall be filled by a vote of the stockholders or a
majority of the directors then in office.
Any vacancies on the Simon Group Board of Directors with respect to a
director elected by the holders of Simon Group Class C Common Stock shall be
filled as follows: (a) any vacancy resulting from the death, disability,
resignation, retirement, disqualification, removal from office or other cause of
Mr. Frederick W. Petri (and any person duly nominated and elected to serve as
his replacement) shall be filled by the holders of
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Simon Group Class C Common Stock, voting as a separate class, to elect as a
replacement director a candidate who is an Independent Director, who has similar
experience and standing in the business community to the Independent Directors
and who has been approved by a majority of the Independent Directors elected by
the holders of Simon Group Common Stock and other capital stock entitled to vote
with the Simon Group Common Stock as a single class. If such Independent
Directors do not approve such candidate, the holders of Simon Group Class C
Common Stock may propose another candidate for approval by a majority of such
Independent Directors. The right of holders of Simon Group Class C Common Stock
to propose candidates to the Independent Directors shall continue until one such
candidate is approved by a majority of such Independent Directors; (b) at any
time prior to December 31, 2003, any vacancy in the seat on the Board of
Directors occupied by Ms. Marie Denise DeBartolo York at the Effective Time
other than one resulting from her death or disability shall reduce by such
vacancy an equivalent number of the directors that holders of Simon Group Class
C Common Stock may, voting as a separate class, elect, and such vacancy shall be
filled by a majority of the entire Board of Directors; and (c) any vacancy in
the seat on the Board of Directors occupied by Ms. DeBartolo York at the
Effective Time resulting from the death or disability of Ms. DeBartolo York, or
(ii) at any time on or subsequent to December 31, 2003, shall be filled by
holders of Simon Group Class C Common Stock, voting as a separate class, to
elect as a replacement director a candidate who is either (i) the Chief
Executive Officer of EJDC (or any successor to such corporation), (ii) the Chief
Financial Officer of EJDC (or any successor to such corporation), provided that
such person was the Chief Financial Officer of EJDC at the Effective Time or
(iii) an Independent Director, who has similar experience and standing in the
business community to the Independent Directors and who has been approved by a
majority of the Independent Directors elected by the holders of Simon Group
Common Stock and other capital stock entitled to vote with the Simon Group
Common Stock as a single class. If such Independent Directors do not approve
such candidate, the holders of Simon Group Class C Common Stock may propose
another candidate for approval by a majority of such Independent Directors. The
right of holders of Simon Group Class C Common Stock to propose candidates to
the Independent Directors shall continue until one such candidate is approved by
a majority of such Independent Directors.
The Simon Group Charter provides that, subject to the right of holders of
any class or series separately entitled to elect one or more directors, if any
such right has been granted, directors may be removed with or without cause upon
the affirmative vote of holders of at least a majority of the voting power of
all the then outstanding shares entitled to vote generally in the election of
directors, voting together as a single class.
BENEFICIAL OWNERSHIP OF CRC COMMON STOCK
All of the outstanding stock of CRC will be owned by the CRC Trusts for the
benefit of Simon Group's stockholders, in proportion to the number of shares of
common stock of Simon Group held by them, pursuant to a Trust Agreement, dated
as of October 30, 1979 (the "Common Stock Trust Agreement"), a Trust Agreement,
dated as of August 26, 1994 (the "Preference Shares Trust Agreement" and,
together with the Common Stock Trust Agreement, the "Trust Agreements"). The
Trust Agreements provide, and any CRC Trusts created in the future will provide,
that all cash dividends and other assets received by the trustee for the
relevant CRC Trust, exclusive of shares of stock, warrants and rights to
purchase shares of stock, of CRC, will be distributed currently by such trustee
to the beneficiaries of the CRC Trust in proportion to the respective number of
shares of Simon Group Equity Stock held by them. Each of the Trust Agreements
provides that the beneficial interest of the shares of CRC Common Stock held in
trust are not transferable separately but only by and as part of a transfer of
shares of Simon Group Equity Stock, and every sale or transfer of Simon Group
Equity Stock shall include all or a proportionate part of such transferor's
beneficial interest in the shares of stock of CRC or in any other assets held in
the CRC Trust. Each of the Trust Agreements provides that the CRC Trusts shall
terminate upon the earlier to occur of (i) the dissolution of Simon Group or
(ii) upon notification to the trustee under the Trust Agreements of the vote to
that effect, at a meeting or by proxy, of beneficiaries of the respective CRC
Trust holding two-thirds of the outstanding shares of Simon Group Equity Stock.
In addition, the Preference Shares Trust Agreement provides that shares held by
the trustee thereunder will be transferred to the trustee under the Common Stock
Trust Agreement as Simon Group Series A Preferred Stock and Simon Group Series B
Preferred Stock is converted into Simon Group Common Stock.
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Upon termination of any CRC Trust, the assets of such trust will be transferred
and assigned to the beneficiaries of such CRC Trust.
Under the CRC Charter, the number of members of the CRC Board of Directors
shall be 13 initially and may be fixed by the CRC Board of Directors in the
future. The CRC Charter further provides that only directors of Simon Group may
serve as directors of CRC. Under the CRC Charter, at least a majority of the
directors shall be Independent Directors. Any vacancies on the CRC Board of
Directors resulting from death, disability, resignation, retirement,
disqualification, removal from office, or other cause shall be filled by a vote
of the stockholders or a majority of the directors then in office. The CRC
Charter provides that directors may be removed with or without cause upon the
affirmative vote of holders of at least a majority of the voting power of all of
the then outstanding shares entitled to vote generally in the election of
directors.
Board of Directors of CRC. The trustee under each Trust Agreement is
obligated under the Trust Agreement to which it is a party to vote the CRC
Common Stock held by it so that each member of the Board of Directors of CRC is
also a director of Simon Group.
PREFERRED STOCK
Subject to the restrictions prescribed by Delaware law and the Simon Group
Charter, the Simon Group Board of Directors has the authority to issue the
remaining authorized but unissued shares of Simon Group Preferred Stock in one
or more series and to fix the designation, relative rights, preferences and
limitations of shares of each series, including dividend rights, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Simon Group Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Simon Group Common Stock, Simon Group
Class B Common Stock and Simon Group Class C Common Stock and may have the
effect of delaying, deferring or preventing a change in control of Simon Group.
Pursuant to the Simon Group Charter, whenever Simon Group designates a series of
Simon Group Preferred Stock convertible into shares of Simon Group Common Stock,
it must also designate an additional series of excess preferred stock of such
series having substantially identical terms to such series of Simon Group
Preferred Stock, but being subject to the transfer restrictions described below
under "RESTRICTIONS ON TRANSFER". Any such series of excess preferred stock so
designated, including the Simon Group Series A Excess Preferred Stock and the
Simon Group Series B Excess Preferred Stock, are referred to herein collectively
as "Simon Group Excess Preferred Stock."
SIMON GROUP CONVERTIBLE PREFERRED STOCK
At March 31, 1998, after giving pro forma effect to the CPI Merger
Dividends and assuming the exercise of all CPI options, based upon the number of
shares of capital stock of CPI outstanding as of March 31, 1998, Simon Group
would have had 209,249 shares of Simon Group Series A Preferred Stock and
4,966,038 shares of Simon Group Series B Preferred Stock outstanding.
Priority
The Simon Group Convertible Preferred Stock ranks, with respect to
dividends, and the distribution of assets upon liquidation, senior to the Simon
Group Equity Stock. The Simon Group Series A Preferred Stock and the Simon Group
Series B Preferred Stock rank on a parity with respect to each of such rights.
Classification of authorized but unissued capital stock into additional shares
of Simon Group Preferred Stock and issuance thereof, unless ranking junior to or
on a parity with Simon Group Series A Preferred Stock, must be approved by
two-thirds vote of the holders of each of the Simon Group Series A Preferred
Stock and Simon Group Series B Preferred Stock.
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Conversion Rights
Conversion Rate for Simon Group Series A Preferred Stock. Based upon the
conversion price in effect at December 31, 1997, the holders of Simon Group
Series A Preferred Stock would have the right to convert their shares into the
number of shares of Simon Group Common Stock obtained by dividing $1,000 (the
liquidation preference) by $26.319 (the conversion price as adjusted for the
Merger). The conversion price for the Simon Group Series A Preferred Stock is
subject to adjustment in connection with certain events discussed below under
"-- Adjustments to Conversion Rates."
Conversion Rate for Simon Group Series B Preferred Stock. The holders of
Simon Group Series B Preferred Stock have the right to convert their shares into
a number of shares of Simon Group Common Stock obtained by dividing $100 (the
liquidation preference) by $38.669 (the conversion price). The conversion price
for the Simon Group Series B Preferred Stock is subject to adjustment in
connection with certain events discussed below under "-- Adjustments to
Conversion Rates."
Adjustments to Conversion Rates. The conversion prices for the Simon Group
Series A Preferred Stock and the Simon Group Series B Preferred Stock are
subject to adjustment in connection with certain events, including (i) any
subdivision or combination of shares of Simon Group Common Stock or the
declaration of a distribution payable to holders of Simon Group Common Stock in
additional shares of Simon Group Common Stock, (ii) issuances of rights or
warrants to all holders of Simon Group Common Stock having an exercise price
less than the current market price per share of Simon Group Common Stock, and
(iii) any consolidation or merger to which Simon Group is a party (other than in
which Simon Group is the surviving person), any sale or conveyance to another
person of all or substantially all the assets of Simon Group or any statutory
exchange of securities with another person. In addition, the conversion price of
Simon Group Series A Preferred Stock is subject to adjustment in the event that
Simon Group retains cash flow after the payment of distributions on Simon Group
Equity Stock.
Dividends
Holders of Simon Group Series A Preferred Stock are entitled to receive
cumulative annual cash dividends when, as and if declared by the Simon Group
Board of Directors, in their sole discretion, of $65.53 per share (an
approximately 6.50% annual dividend, based upon the $1,000 liquidation
preference per share) payable in equal semiannual installments on March 31 and
September 30 of each year. Holders of Simon Group Series B Preferred Stock are
entitled to receive cumulative annual cash dividends when, as and if declared by
the Simon Group Board of Directors, in their sole discretion, of $6.50 per share
(an approximately 6.50% annual dividend, based upon the $100 liquidation
preference per share) payable in equal quarterly installments on March 31, June
30, September 30 and December 31 of each year.
Simon Group may not declare or pay any dividend on the Simon Group Common
Stock, the Simon Group Class B Common Stock or the Simon Group Class C Common
Stock or on any other class of stock ranking junior to Simon Group Convertible
Preferred Stock as to dividends and upon liquidation, distribution or winding up
of Simon Group (the Simon Group Common Stock, Simon Group Class B Common Stock,
and Simon Group Class C Common Stock, and any other such junior class being
referred to as the "Junior Stock"), other than in shares of Junior Stock or
rights to purchase or acquire Junior Stock, and Simon Group may not redeem or
make any payment on account of, or set apart money for, a sinking or other
analogous fund for the purchase, redemption or other retirement of any Junior
Stock or make any distribution in respect thereof, in each case, either directly
or indirectly and whether in cash or property or in obligations or shares of
Simon Group, unless and until such time as all accrued and unpaid dividends with
respect to Simon Group Convertible Preferred Stock have been paid (or declared
and a sum sufficient for the payment thereof is set apart for such payment) and
sufficient funds have been set apart for the payment of the dividend for the
current dividend period with respect to Simon Group Convertible Preferred Stock.
Redemption of Simon Group Series A Preferred Stock
Simon Group may redeem shares of the Simon Group Series A Preferred Stock
for the purpose of maintaining or bringing the direct or indirect ownership of
the capital stock of Simon Group into conformity
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with the requirements of Section 856(a)(6) of the Code at the greater of (i) a
price equal to the liquidation preference of the Simon Group Series A Preferred
Stock ($1,000 per share), plus dividends accrued and unpaid to the date of
redemption, and (ii) the current market price of the Simon Group Common Stock
issuable upon conversion of such shares of Simon Group Series A Preferred Stock.
Redemption of Simon Group Series B Preferred Stock
Simon Group may redeem shares of the Simon Group Series B Preferred Stock
at any time beginning on the fifth anniversary of the Effective Time at the
following redemption prices (expressed as a percentage of the liquidation
preference of the Simon Group Series B Preferred Stock -- i.e., $100 per share),
plus dividends accrued and unpaid to the date of redemption:
YEAR %
---- ----
2003................................................. 105%
2004................................................. 104%
2005................................................. 103%
2006................................................. 102%
2007................................................. 101%
2008 and thereafter.................................. 100%
Voting Rights of the Simon Group Series A Preferred Stock
The holders of Simon Group Series A Preferred Stock have the right to vote
with the holders of the Simon Group Common Stock on all matters, voting together
with the holders of shares of Simon Group Common Stock as a single class, on an
as-converted basis.
In addition, without the affirmative consent or approval of the holders of
at least two-thirds of the shares of Simon Group Series A Preferred Stock, Simon
Group may not:
(i) authorize any class of stock ranking prior to the Simon Group
Series A Preferred Stock with respect to dividends or distribution of
assets upon dissolution or winding up of Simon Group;
(ii) amend, alter or repeal any of the provisions of the Simon Group
Charter so as to affect adversely the powers, preferences or rights of the
holders of Simon Group Series A Preferred Stock;
(iii) authorize or create, or increase the authorized amount of, any
shares, or any security convertible into stock, of any class ranking prior
to the Simon Group Series A Preferred Stock with respect to dividends or
distribution of assets upon dissolution or winding up of Simon Group;
(iv) merge or consolidate with or into any other person, unless each
holder of shares of Simon Group Series A Preferred Stock immediately
preceding such merger or consolidation shall receive or continue to hold in
the resulting person the same number of shares, with substantially the same
rights and preferences, as correspond to the shares of Simon Group Series A
Preferred Stock so held;
(v) increase the authorized number of shares of the Simon Group Series
A Preferred Stock;
(vi) amend, alter or modify any of the provisions of the Simon Group
Series A Preferred Stock; or
(vii) otherwise alter or change the powers, preferences, or rights, or
qualifications, limitations or restrictions of the shares of the Simon
Group Series A Preferred Stock so as to affect the holders thereof
adversely.
Voting Rights of the Simon Group Series B Preferred Stock
In the event dividends or amounts payable to the Simon Group Series B
Preferred Stock upon liquidation remain unpaid for six consecutive quarterly
dividend periods, the size of the Board of Directors will automatically be
increased by two and the holders of shares of Simon Group Series B Preferred
Stock will
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have the right to elect two directors to fill such vacant positions until such
time as all dividends accrued and unpaid are paid in full.
In addition, without the affirmative consent or approval of the holders of
at least two-thirds of the shares of Simon Group Series B Preferred Stock, Simon
Group may not:
(i) amend, alter or repeal any provision of the Simon Group Charter so
as to materially adversely affect the rights, preferences, privileges or
voting power of the holders of shares of Simon Group Series B Preferred
Stock; or
(ii) authorize, create or increase the authorized or issued amount of
any class or series of stock having rights senior to the Simon Group Series
B Preferred Stock with respect to the payment of distributions or amounts
upon liquidation, dissolution or winding up the affairs of Simon Group or
to create, authorize or issue any obligation or security convertible into
or evidencing the right to purchase such shares.
Liquidation Rights
In the event of any liquidation, dissolution or winding up of the affairs
of Simon Group (any or all of such events, a "liquidation"), the holders of
Simon Group Convertible Preferred Stock then outstanding shall be entitled to be
paid out of the assets of Simon Group, before any payment shall be made to the
holders of the Junior Stock, an amount equal to the relevant series of Simon
Group Preferred Stock's liquidation preference -- $1,000 per share, in the case
of the Simon Group Series A Preferred Stock, and $100 per share, in the case of
the Simon Group Series B Preferred Stock -- plus an amount equal to any unpaid
cumulative dividends on the Simon Group Convertible Preferred Stock accrued to
the date when such payment shall be made available to the holders thereof.
CERTAIN PROVISIONS OF THE SDG OPERATING PARTNERSHIP AGREEMENT, THE SRC OPERATING
PARTNERSHIP AGREEMENT, THE SIMON GROUP CHARTER, THE CRC CHARTER, SIMON GROUP
BY-LAWS AND CRC BY-LAWS AND DELAWARE LAW
SDG OPERATING PARTNERSHIP AGREEMENT AND THE SRC OPERATING PARTNERSHIP AGREEMENT
The SDG Operating Partnership Agreement provides that Simon Group may not
merge, consolidate or engage in any combination with another person other than a
general partner of the SDG Operating Partnership or sell all or substantially
all of its assets without the approval of the holders of a majority of the SDG
Units held by the SDG Limited Partners. These voting requirements might limit
the possibility for the acquisition or change in control of Simon Group, even if
some of Simon Group's stockholders deem such a change to be in Simon Group's and
their best interest.
The SRC Operating Partnership Agreement provides that CRC may not merge,
consolidate or engage in any combination with another person or sell all or
substantially all of its assets without the approval of the holders of a
majority of the CRC Units held by the limited partners of the SRC Operating
Partnership. These voting requirements might limit the possibility for the
acquisition or change in control of CRC, even if some of the holders of
beneficial interests in CRC deem such a change to be in CRC's and their best
interest. See "THE MERGER AGREEMENT AND RELATED MATTERS -- Certain Transactions
and Agreements Relating to the Merger -- The Operating Partnerships; Simon Group
Contribution Agreement."
DELAWARE LAW AND CERTAIN SIMON GROUP CHARTER, THE CRC CHARTER, SIMON GROUP
BY-LAW AND
CRC BY-LAW PROVISIONS
The Simon Group Charter and Simon Group By-laws and certain provisions of
the DGCL may be deemed to have an anti-takeover effect and that may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in its best interest, including an attempt that might result in a premium over
the market price for the shares held by stockholders. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire
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control of Simon Group to negotiate first with its Board of Directors. Simon
Group's management believes that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms.
Delaware Anti-Takeover Law
Simon Group and CRC, Delaware corporations, are subject to the provisions
of Section 203 of the DGCL ("Section 203"). In general, Section 203 prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the time at which
such person became an interested stockholder unless: (i) prior to such time, the
Board of Directors approved either the business combination or transaction in
which the stockholder became an interested stockholder; or (ii) upon becoming an
interested stockholder, the stockholder owned at least 85% of the corporation's
outstanding voting stock other than shares held by directors who are also
officers and certain employee benefit plans; or (iii) the business combination
is approved by both the Board of Directors and by holders of at least 66 2/3% of
the corporation's outstanding voting stock (at a meeting and not by written
consent), excluding shares owned by the interested stockholder. For these
purposes, the terms "business combination" includes mergers, asset sales and
other similar transactions with an "interested stockholder," and "interested
stockholder" means a person who, together with its affiliates and associates,
owns (or, under certain circumstances, has owned within the prior three years)
more than 15% of the outstanding voting stock. Although Section 203 permits a
corporation to elect not to be governed by its provisions, neither Simon Group
nor CRC have made this election.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Simon Group By-laws and the CRC By-laws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or bring other business before an annual meeting of stockholders of
Simon Group or CRC, as applicable. This procedure provides that (i) only persons
who are nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified information
to the Secretary prior to the meeting at which directors are to be elected, will
be eligible for election as directors of Simon Group or CRC, as applicable, and
(ii) at an annual meeting only such business may be conducted as has been
brought before the meeting by, or at the direction of, the Chairman of the Board
of Directors or by a stockholder who has given timely written notice to the
Secretary of such stockholder's intention to bring such business before such
meeting. In general, for notice of stockholder nominations or business to be
made at an annual meeting to be timely, such notice must be received by Simon
Group or CRC, as applicable, not less than 60 days nor more than 90 days prior
to the first anniversary of the previous year's annual meeting. Such notice must
contain information concerning the person or persons to be nominated or the
matters to be brought before the meeting and concerning the stockholder
submitting the proposal.
The purpose of requiring stockholders to give Simon Group or CRC advance
notice of nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform stockholders and
make recommendations about such qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of stockholders.
Although neither the Simon Group By-laws nor the CRC By-laws give the applicable
Board of Directors any power to disapprove stockholder nominations for the
election of directors or proposals for action, they may have the effect of
precluding a contest for the election of directors or the consideration of
stockholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to Simon Group and CRC and their stockholders.
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DIRECTOR ACTION
The Simon Group Charter, CRC Charter, Simon Group By-laws, CRC By-laws and
DGCL generally require that a majority of a quorum is necessary to approve any
matter to come before the Simon Group or CRC Board of Directors; however,
certain matters including sales of property, transactions with the Simons or the
DeBartolos and certain affiliates and certain other matters will also require
approval of a majority of the Independent Directors on the Simon Group and CRC
Board of Directors.
DIRECTOR LIABILITY LIMITATION AND INDEMNIFICATION
Both the Simon Group Charter and the CRC Charter provide that no director
of Simon Group will be personally liable to the corporation or to its
stockholders for monetary damages for breach of fiduciary duty as a director;
provided, however, that such provision will not eliminate or limit the liability
of a director for: (i) any breach of the director's duty of loyalty to the
corporation and its stockholders; (ii) acts or omissions not in good faith;
(iii) any transaction from which the director derived an improper personal
benefit; or (iv) any matter in respect of which such director would be liable
under Section 174 of the DGCL. These provisions may have the effect of
discouraging stockholders' actions against directors. The personal liability of
a director for violation of the federal securities laws is not limited or
otherwise affected. In addition, these provisions do not affect the ability of
stockholders to obtain injunctive or other equitable relief from the courts with
respect to a transaction involving gross negligence on the part of a director.
The Simon Group Charter and the CRC Charter provide that Simon Group shall
indemnify to the fullest extent permitted under and in accordance with the laws
of the State of Delaware any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director or officer of Simon Group or CRC, as applicable, or
is or was serving at the request of Simon Group or CRC, as applicable, as a
director, officer or trustee of or in any other capacity with another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Simon Group
or CRC, as applicable, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The DGCL provides
that indemnification is mandatory where a director, or officer has been
successful on the merits or otherwise in the defense of any proceeding covered
by the indemnification statute.
The DGCL generally permits indemnification for expenses incurred in the
defense or settlement of third-party actions or action by or in right of the
corporation, and for judgments in third party actions, provided there is a
determination by directors who were not parties to the action, or if directed by
such directors, by independent legal counsel or by a majority vote of a quorum
of the stockholders, that the person seeking indemnification acted in good faith
and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation, or in a criminal proceeding that the person had no
reason to believe his or her conduct to be unlawful. Without court approval,
however, no indemnification may be made in respect of any action by or in right
of the corporation in which such person is adjudged liable. The DGCL states that
the indemnification provided by statute shall not be deemed exclusive of any
rights under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise. In addition, the liability of officers may not be
eliminated or limited under Delaware law.
The right of indemnification, including the right to receive payment in
advance of expenses, conferred by each of the Simon Group Charter and the CRC
Charter is not exclusive of any other rights to which any person seeking
indemnification may otherwise be entitled.
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RESTRICTIONS ON TRANSFER
The Simon Group Charter contains certain restrictions on the number of
shares of capital stock of Simon Group (including the Simon Group Common Stock,
Simon Group Class B Common Stock, Simon Group Class C Common Stock, Simon Group
Convertible Preferred Stock and any other series of Simon Group Preferred Stock
convertible into any class of common stock of Simon Group) that individual
stockholders may own. For Simon Group to qualify as a REIT under the Code, in
addition to other requirements discussed in "Federal Income Tax Considerations,"
not more than 50% in value of the outstanding capital stock of Simon Group may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) during the last half of a taxable year
(other than the first year) and the capital stock also must be beneficially
owned by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year. In part because
the management of Simon Group currently believes it is essential for Simon Group
to maintain its status as a REIT, the provisions of the Simon Group Charter with
respect to Simon Group Excess Stock contain restrictions on the acquisition of
its capital stock intended to ensure compliance with these requirements.
The Simon Group Charter provides that, subject to certain specified
exceptions, no stockholder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than the ownership limit (the
"Ownership Limit"), which is equal to 8% (18% in the case of the Simons) of any
class of capital stock of Simon Group (calculated based on the lower of
outstanding shares, voting power or value). In the event of a purported transfer
or other event that would, if effective, result in the ownership of shares of
stock in violation of the Ownership Limit, such transfer or other event with
respect to that number of shares that would be owned by the transferee in excess
of the Ownership Limit would be deemed void ab initio and the intended
transferee would acquire no rights in such shares of stock. Such shares of stock
would automatically be converted into shares of Simon Group Excess Stock
according to rules set forth in the Simon Group Charter, to the extent necessary
to ensure that the purported transfer or other event does not result in
ownership of shares of stock in violation of the Ownership Limit. The Simon
Group Board of Directors may exempt a person from the Ownership Limit if they
receive a ruling from the IRS or an opinion of tax counsel that such ownership
will not jeopardize Simon Group's status as a REIT. Stock of Simon Group that is
held by a "qualified trust" within the meaning of Section 856(h)(3) of the Code
is treated as held proportionately by the beneficiaries of such trust. Simon
Group has agreed to waive its charter provisions such that the Telephone Real
Estate Equity Trust may acquire up to 11% of the capital stock of Simon Group,
provided that it remains treated as a "qualified trust," but will become subject
to the 8% limitation if it fails to be so treated.
Upon a purported transfer or other event that results in either Simon Group
Excess Common Stock or Simon Group Excess Preferred Stock (collectively, "Simon
Group Excess Stock"), the Simon Group Excess Stock will be deemed to have been
transferred to a trustee to be held in trust for the exclusive benefit of a
qualifying charitable organization designated by Simon Group. Such Simon Group
Excess Stock will be issued and outstanding stock of Simon Group, and it will be
entitled to dividends equal to any dividends which are declared and paid on such
stock. Any dividend or distribution paid prior to the discovery by Simon Group
that stock has been converted into Simon Group Excess Stock is to be repaid upon
demand. The recipient of such dividend will be personally liable to the trust.
Any dividend or distribution declared but unpaid will be rescinded as void ab
initio with respect to such shares of stock and will automatically be deemed to
have been declared and paid with respect to the shares of Simon Group Excess
Stock into which such shares were converted. Such Simon Group Excess Stock will
also be entitled to such voting rights as are ascribed to the stock from which
such shares of Simon Group Excess Stock were converted. Any voting rights
exercised prior to discovery by Simon Group that shares of stock were converted
to Simon Group Excess Stock will be rescinded and recast as determined by the
trustee.
While Simon Group Excess Stock is held in trust, an interest in that trust
may be transferred by the purported transferee, or other purported holder with
respect to such Simon Group Excess Stock only to a person whose ownership of the
shares of stock would not violate the Ownership Limit, at which time the Simon
Group Excess Stock will be automatically exchanged for the same number of shares
of stock of the same type and class as the shares of stock for which the Simon
Group Excess Stock was originally exchanged.
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The Simon Group Charter contains provisions that are designed to ensure
that the purported transferee or other purported holder of the Simon Group
Excess Stock may not receive in return for such a transfer an amount that
reflects any appreciation in the shares of stock for which such Simon Group
Excess Stock was exchanged during the period that such Simon Group Excess Stock
was outstanding. Any amount received by a purported transferee or other
purported holder in excess of the amount permitted to be received must be paid
over to the trust. If the foregoing restrictions are determined to be void or
invalid by virtue of any legal decision, statute, rule or regulation, then the
intended transferee or holder of any Simon Group Excess Stock may be deemed, at
the option of Simon Group, to have acted as an agent on behalf of the trust in
acquiring or holding such Simon Group Excess Stock and to hold such Simon Group
Excess Stock on behalf of the trust.
The Simon Group Charter further provides that Simon Group may purchase, for
a period of 90 days during the time the Simon Group Excess Stock is held by the
trustee in trust, all or any portion of the Simon Group Excess Stock from the
original transferee-stockholder at the lesser of the price paid for the stock by
the purported transferee (or if no notice of such purchase price is given, at a
price to be determined by the Simon Group Board of Directors, in its sole
discretion, but no lower than the lowest market price of such stock at any time
prior to the date Simon Group exercises its purchase option) and the closing
market price for the stock on the date Simon Group exercises its option to
purchase. The 90-day period begins on the date of the violative transfer or
other event if the original transferee-stockholder gives notice to Simon Group
of the transfer or (if no notice is given) the date the Simon Group Board of
Directors determines that a violative transfer or other event has been made.
The Simon Group Charter further provides that in the event of a purported
issuance or transfer that would, if effective, result in Simon Group being
beneficially owned by fewer than 100 persons, such issuance or transfer would be
deemed null and void ab initio, and the intended transferee would acquire no
rights to the stock.
All certificates representing shares of any class of stock of Simon Group
bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage as may be required by the Code
or regulations promulgated thereunder) of the outstanding stock must file an
affidavit with Simon Group containing the information specified in the Simon
Group Charter before January 30 of each year. In addition, each stockholder
shall, upon demand, be required to disclose to Simon Group in writing such
information with respect to the direct, indirect and constructive ownership of
shares as the Board of Directors deems necessary to comply with the provisions
of the Simon Group Charter or the Code applicable to a REIT.
The Simon Group Excess Stock provision will not be removed automatically
even if the REIT provisions of the Code are changed so as to no longer contain
any ownership concentration limitation or if the ownership concentration
limitation is increased. In addition to preserving Simon Group's status as a
REIT, the Ownership Limit may have the effect of precluding an acquisition of
control of Simon Group without the approval of the Simon Group Board of
Directors.
Beneficial interests in the CRC Common Stock are not certificated and are
not separately transferable from Simon Group Equity Stock.
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COMPARISON OF RIGHTS OF HOLDERS OF SDG
COMMON STOCK AND SIMON GROUP AND CRC COMMON STOCK
SDG is organized under the laws of the State of Maryland and Simon Group is
organized under the laws of the State of Delaware. The following discussion
summarizes certain material differences between the SDG Charter and SDG By-laws
and the Simon Group Charter and Simon Group By-laws and the CRC Charter and CRC
By-laws and between certain provisions of the MGCL and the DGCL affecting
stockholders' rights. This summary of the comparative rights of the stockholders
of SDG and the stockholders of Simon Group does not purport to be complete and
is subject to and qualified in its entirety by reference to the MGCL and the
DGCL and also to the SDG Charter, SDG By-laws, Simon Group Charter, Simon Group
By-laws, CRC Charter and CRC By-laws. Copies of the SDG Charter, SDG By-laws,
Simon Group Charter, Simon Group By-laws, CRC Charter and CRC By-laws are
available for inspection at the principal executive offices of SDG and copies
will be sent to holders of SDG Equity Stock upon request.
Number of Directors
Under the SDG Charter, the number of directors of SDG shall never be less
than the minimum number permitted by the MGCL and so long as any shares of both
SDG Class B Common Stock and SDG Class C Common Stock are outstanding, the
number of directors of SDG shall be thirteen; so long as any shares of SDG Class
B Common Stock (but no SDG Class C Common Stock) are outstanding, the number of
directors of SDG shall be nine; and so long as any shares of SDG Class C Common
Stock (but no SDG Class B Common Stock) are outstanding, the number of directors
of SDG shall be nine. At least a majority of the directors shall be Independent
Directors. There are currently 13 directors serving on the SDG Board of
Directors.
Under the Simon Group Charter and the CRC Charter, the Simon Group Board of
Directors and the CRC Board of Directors shall never be less than the minimum
number permitted by the DGCL. In addition, so long as any shares of both Simon
Group Class B Common Stock and Simon Group Class C Common Stock are outstanding,
the number of directors of Simon Group shall be thirteen; so long as any shares
of Simon Group Class B Common Stock (but no Simon Group Class C Common Stock)
are outstanding, the number of directors of Simon Group shall be nine; so long
as any shares of Simon Group Class C Common Stock (but no Simon Group Class B
Common Stock) are outstanding, the number of directors of Simon Group shall be
nine; and so long as no shares of Simon Group Class B Common Stock or Simon
Group Class C Common Stock are outstanding, the number of directors of Simon
Group shall be fixed by the Simon Group Board of Directors from time to time.
The number of directors of CRC shall be fixed by CRC Board of Directors from
time to time. The CRC Charter further provides that only directors of Simon
Group may serve as directors of CRC. At least a majority of the directors on
each of the Simon Group Board of Directors and the CRC Board of Directors shall
be Independent Directors. There are currently 13 directors serving on each of
the Simon Group Board of Directors and the CRC Board of Directors. See
"DESCRIPTION OF SIMON GROUP CAPITAL STOCK -- COMMON STOCK; BENEFICIAL OWNERSHIP
OF CRC COMMON STOCK -- Number of Directors; Independent Directors; Vacancies;
Removal."
Removal of Directors
Under the MGCL, except as otherwise provided in a corporation's charter,
the stockholders generally may remove any director, with or without cause, by
the vote of a majority of all the votes entitled to be cast in the election of
the directors. The SDG Charter provides that, subject to the rights of the
holders of any class of stock separately entitled to elect one or more
directors, a director may only be removed for cause, by the affirmative vote of
a majority of the holders of at least a majority of the combined voting power of
all the votes entitled to be cast in the election of the directors.
Under the DGCL, the affirmative vote of a majority of the shares entitled
to vote at the election of directors is required to remove directors, with or
without cause, except that whenever the holders of a class or series are
entitled to elect one or more directors by the certificate of incorporation,
then with respect to the removal without cause of a director or directors so
elected, the vote of the holders of the outstanding shares of that class or
series and not the vote of the outstanding shares as a whole shall be required.
The Simon Group Charter provides that, subject to the rights of holders of any
class separately entitled to elect one or more
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directors, the affirmative vote of the holders of a majority of the combined
voting power of all shares entitled to vote in the election for directors is
required to remove a director with or without cause. The CRC Charter provides
that directors may be removed with or without cause upon the affirmative vote of
holders of at least a majority of the voting power of all of the then
outstanding shares entitled to vote generally in the election of directors.
Filling Vacancies on the Board of Directors
Under the MGCL, stockholders may elect a successor to fill a vacancy on the
board of directors which results from the removal of a director. A director
elected by the stockholders to fill a vacancy which results from the removal of
a director serves for the balance of the term of the removed director.
Otherwise, the MGCL provides that a majority of the remaining directors may fill
a vacancy, unless it results from an increase in the size of the board. Any
vacancy resulting from the increase in the number of directors may be filled by
a majority of the entire board. A director elected by the board of directors to
fill a vacancy serves until the next annual meeting of stockholders and until
his successor is elected and qualified. There is no provision in the MGCL
providing for the filling of vacancies on the board of directors by Maryland
courts.
The DGCL provides that vacancies and newly created directorships may be
filled by a majority of the directors then in office or a sole remaining
director (even though less than quorum) unless otherwise provided in the
certificate of incorporation or by-laws. However, the DGCL also provides that if
the directors then in office constitute less than a majority of the
corporation's whole board of directors (as constituted prior to any such
increase), then, upon application by stockholders representing at least 10% of
outstanding shares entitled to vote for such directors, the Court of Chancery
may order a stockholder election of directors to be held.
Each of the Simon Group Charter and the CRC Charter provides substantially
the same provisions with respect to the filling of vacancies of the Board of
Directors as the SDG Charter. See "DESCRIPTION OF SIMON GROUP CAPITAL
STOCK -- COMMON STOCK; BENEFICIAL OWNERSHIP OF CRC COMMON STOCK -- Number of
Directors; Independent Directors; Vacancies; Removal."
Interested Director Transactions
Under both the MGCL and the DGCL, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable solely because of such interest if such contract or transaction (a) is
ratified by the stockholders (as set forth below) or a majority of disinterested
members of the board of directors or a committee thereof if the material facts
are disclosed or known thereto, or (b) was fair (and under the MGCL, reasonable)
to the corporation at the time it was approved. Under the MGCL, such
ratification must be made by a majority of the disinterested stockholders. Under
the DGCL, any ratification of such a contract or transaction by the stockholders
must be made by a majority of all stockholders in good faith.
Amendment to Charter or Certificate of Incorporation
Under the MGCL, the affirmative vote of at least two-thirds of the votes
entitled to be cast on the matter is required to amend a corporation's charter;
however, the charter of the corporation may provide for a greater or lesser
proportion of the votes entitled to be cast to approve a charter amendment as
long as the vote is not less than a majority of the votes entitled to be cast.
Under the DGCL, the affirmative vote of a majority of the outstanding
shares entitled to vote is required to amend a corporation's certificate of
incorporation. Under the DGCL, the holders of the outstanding shares of a class
shall be entitled to vote as a class upon a proposed amendment, whether or not
entitled to vote thereon by the certificate of incorporation, if the amendment
would increase or decrease the aggregate number of authorized shares of such
class, increase or decrease the par value of the shares of such class, or alter
or change the powers, preferences, or special rights of the shares of such class
so as to affect them adversely. If any proposed amendment would alter or change
the powers, preferences, or special rights of one or more series of any class so
as to affect them adversely, but shall not so affect the entire class, then only
the shares of the series so affected by the amendment shall be considered a
separate class for the purposes of this provision.
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The SDG Charter provides that the SDG Charter may be amended by the
affirmative vote of the holders of not less than a majority of the aggregate
votes entitled to be cast thereon (considered for these purposes as a single
class) at either a special or annual meeting of the stockholders. However, the
SDG Charter provides that the affirmative vote of 80% of the aggregate votes
entitled be cast, voting as a single class, is required to amend certain
sections of the charter, including the provisions that require the SDG Board of
Directors to consider constituencies other than stockholders when considering
Business Combinations, eliminate the personal liability of a director to SDG,
and address stockholder proposals. In addition, amendments with respect to (x)
the composition of the SDG Board of Directors will require the affirmative vote
of not less than 80% of the aggregate votes entitled to be cast thereon, voting
as a single class, and the affirmative vote of not less than a majority of the
aggregate votes entitled to be cast thereon by holders of each of the SDG Class
B Common Stock and SDG Class C Common Stock, each voting as a separate class;
and (y) rights or restrictions of SDG Class B Common Stock or SDG Class C Common
Stock will require the affirmative vote of not less than 80% of the aggregate
votes entitled to be cast thereon, voting as a single class, and the affirmative
vote of not less than a majority of the aggregate votes entitled to be cast by
the holders of SDG Class B Common Stock or SDG Class C Common Stock, as the case
may be. The Simon Group Charter provides substantially the same provisions as
the SDG Charter, except that there is no similar provision requiring the Simon
Group Board of Directors to consider constituencies other than stockholders. The
CRC Charter has substantially the same provisions as the Simon Group Charter
except that there is only one class of common stock and so there are no special
provision requiring the affirmative vote of holders of other classes of stock as
discussed in clauses (x) and (y) above.
Amendment of By-laws
Under the MGCL, the power to adopt, amend, or repeal a corporation's
by-laws is vested in the corporation's stockholders, except to the extent the
corporation's charter or by-laws vest it in the board of directors. The SDG
By-laws provide, subject to the certain provisions relating to the number and
election of directors as contained in the SDG Charter, that the By-laws may be
repealed, altered, amended or rescinded (a) by the stockholders (considered for
this purpose as one class) by the affirmative vote of not less than 80% of all
the votes entitled to be cast generally in the election of directors which are
cast on the matter at any meeting of the stockholders called for that purpose or
(b) by a vote of two-thirds of the SDG Board of Directors (including at least a
majority of the directors elected by the SDG Class B Common Stock and at least
one director elected by SDG Class C Common Stock) at a meeting of the SDG Board
of Directors (except for the provision in the SDG By-laws which requires the
affirmative vote of six Independent Directors to cause the sale of property
owned by partnerships in which SDG acts as a general partner).
Under the DGCL, the by-laws may be amended by the action of the
stockholders and, if so provided in the charter, the directors. Both the Simon
Group Charter and the CRC Charter provide that the By-laws may be amended,
altered, or repealed only by the affirmative vote of 80% of the stockholders or
by a vote of two-thirds of the Simon Group Board of Directors (including at
least a majority of the directors elected by the Simon Group Class B Common
Stock and at least one director elected by Simon Group Class C Common Stock) or
the CRC Board of Directors, as applicable, at a meeting of such Board of
Directors.
Stockholder Meetings and Provisions for Notices; Proxies
Under the MGCL and the DGCL, stockholder meetings may be held at any place,
as provided in the by-laws. However, the MGCL requires the meetings to be held
in the United States. The DGCL has no such requirement. Under both the MGCL and
the DGCL, written notice of a stockholders meeting must state the place, date,
and time of the meeting, and if a special meeting, the purpose or purposes for
which the meeting is to be held. Under the SDG By-laws, not less than 10 days
nor more than 90 days before the date of every stockholders' meeting, the SDG
Secretary shall give, to each stockholder entitled to vote at the meeting and
each other stockholder entitled to notice of the meeting, written or printed
notice stating the time and place of the meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, either by mail
or by presenting it to him personally or by leaving it at his residence or usual
place of business. Both the Simon Group By-laws and the CRC By-laws provide that
written notice of every meeting of the stockholders, stating the place, date,
and hour of the meeting and, in the case of a special meeting, the purpose
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or purposes for which the meeting is called, will be given not less than 10 nor
more than 60 calendar days before the date of the meeting to each stockholder of
record entitled to vote at such meeting.
Under the MGCL, proxies are valid for 11 months from their date, unless the
proxy otherwise provides. Under the DGCL, however, stockholder proxies are valid
for three years from their date unless the proxy provides for a longer period.
Voting by Stockholders
The SDG Charter provides that holders of SDG Common Stock, SDG Class B
Common Stock and SDG Class C Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders,
other than the election of directors elected exclusively by the holders of SDG
Class B Common Stock and the election of directors elected exclusively by the
holders of SDG Class C Common Stock. Holders of SDG Common Stock, SDG Class B
Common Stock and SDG Class C Common Stock have no right to cumulative voting for
the election of directors. The SDG By-laws provide that, in all elections for
directors, every stockholder shall have the right to vote, in person or by
proxy, the shares owned of record by the stockholder. At all meetings of
stockholders, the proxies and ballots shall be received by the chairman of the
meeting. If demanded by stockholders entitled to cast 10% in number of votes
entitled to be cast, or if ordered by the chairman of the meeting, the voting
shall be conducted by two inspectors. The stockholders at any meeting may choose
the inspectors, however, no candidate for election as a director at a meeting
shall serve as an inspector at any meeting of stockholders.
The Simon Group Charter provides that holders of Simon Group Common Stock,
Simon Group Class B Common Stock and Simon Group Class C Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders, other than the election of directors elected
exclusively by the holders of Simon Group Class B Common Stock and the election
of directors elected exclusively by the holders of Simon Group Class C Common
Stock. Holders of Simon Group Common Stock, Simon Group Class B Common Stock and
Simon Group Class C Common Stock have no right to cumulative voting for the
election of directors. Under the CRC Charter, holders of CRC Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders and holders of CRC Common Stock have no right to
cumulative voting for the election of directors. Under both the Simon Group
By-laws and the CRC By-laws, at all meetings of stockholders the proxies and
ballots shall be received by the chairman of the meeting. If demanded by
stockholders entitled to cast 10% in number of votes entitled to be cast, or if
ordered by the chairman, the voting shall be taken either by ballot or conducted
by an inspector.
Stockholder Action Without a Meeting
Under the MGCL, stockholders may act by written consent only if all
stockholders entitled to vote on the matter that is the subject of the written
consent sign the consent. Under the DGCL, unless otherwise provided in the
certificate of incorporation, actions may be taken by the stockholders of a
Delaware corporation by written consent, provided that the written consent is
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take the action at a
meeting at which all shares entitled to vote on the matter were present and
voted. The Simon Group Charter provides that stockholder actions must be taken
at an annual or special meeting and may not be taken by written consent, except
that holders of Simon Group Class B Common Stock and Simon Group Class C Common
Stock may act by written consent without a meeting on matters submitted
exclusively to the vote of the holder of Simon Group Class B Common Stock or
Simon Group Class C Common Stock. The CRC Charter provides for stockholder
action to be taken by written consent without a meeting.
Business Combinations
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and (i) any person who beneficially owns 10% or more of the voting
power of the corporation's shares, (ii) an affiliate of such corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
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voting stock of the corporation (in either case, an "Interested Stockholder"),
or (iii) any affiliate of an Interested Stockholder, are prohibited for five
years after the most recent date on which the Interested Stockholder became an
Interested Stockholder, and thereafter must be recommended by the board of
directors of the Maryland corporation and approved by the affirmative vote of at
least (a) 80% of the votes entitled to be cast by holders of its outstanding
voting shares, and (b) two-thirds of the votes entitled to be cast by holders of
such outstanding voting shares, other than shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is to
be effected unless, among other conditions, the corporation's stockholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Stockholder for its shares. These provisions of the MGCL do not apply
to business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder.
Under Section 203, certain "business combinations" with "interested
stockholders" (each as defined in Section 203) of Delaware corporations are
subject to a three-year moratorium unless specified conditions are met. See
"CERTAIN PROVISIONS OF THE SDG PARTNERSHIP AGREEMENT, SRC PARTNERSHIP AGREEMENT,
THE SIMON GROUP CHARTER, THE CRC CHARTER, SIMON GROUP BY-LAWS AND CRC BY-LAWS
AND DELAWARE LAW -- Delaware Law and Certain Simon Group Charter, CRC Charter,
Simon Group By-law and CRC By-laws Provisions -- Delaware Anti-Takeover Law."
Appraisal Rights
Under the MGCL, holders of shares of SDG Class B Common Stock and SDG Class
C Common Stock will be entitled to appraisal rights under Maryland law with
respect to the Merger; however, holders of shares of SDG Common Stock, SDG
Series B Preferred Stock and SDG Series C Preferred Stock will not have
appraisal rights under Maryland law with respect to the Merger. See "THE MERGER
AGREEMENT AND RELATED MATTERS -- Appraisal Rights" and Annex E.
Under the DGCL, stockholders of a corporation who do not consent to certain
major corporate transactions may, under varying circumstances, be entitled to
appraisal rights pursuant to which such stockholders may receive cash in the
amount of the fair market value of their shares in lieu of the consideration
which otherwise would have been received in the transaction. Unless the
corporation's certificate of incorporation provides otherwise, such appraisal
rights are not available in certain circumstances, including without limitation,
(a) with respect to the sale, lease, or exchange of all or substantially all of
the assets of a corporation, (b) with respect to a merger or consolidation by a
corporation the shares of which are either listed on a national securities
exchange or are held of record by more than 2,000 holders if such stockholders
receive only shares of the surviving corporation or shares of any other
corporation which are either listed on a national securities exchange or held of
record by more than 2,000 holders, plus cash in lieu of fractional shares, or
(c) to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to the
merger is an identical outstanding or treasury share after the merger, and the
number of shares to be issued in the merger does not exceed 20% of the shares of
the surviving corporation outstanding immediately prior to the merger and if
certain other conditions are met.
Dividends
The MGCL permits a corporation, subject to any provision in its charter, to
make a distribution, including dividends, redemptions or stock repurchases,
unless, after such distribution, the corporation would not be able to pay its
debts as they become due in the usual course of business or the corporation's
total assets would be less than the sum of its liabilities and, unless the
charter provides otherwise, liquidation preferences of stock senior to the stock
on which the distribution is proposed to be made. For purposes of determining
whether a distribution is lawful, the corporation's assets may be based upon
fair value or any other method of valuation that is reasonable under the
circumstances.
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The DGCL permits a corporation to declare and pay dividends out of surplus
or, if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the amount
of capital of the corporation following the declaration and payment of the
dividend is not less than the aggregate amount of the capital represented by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, the DGCL generally provides that a
corporation may redeem or repurchase its shares only if such redemption or
repurchase would not impair the capital of the corporation, except that it may
repurchase shares having a preference upon the distribution of any of its assets
or, if no shares entitled to a preference are outstanding, any of its shares if
it retires such shares upon acquisition and reduces the corporation's capital in
connection therewith (and provided, that after any reduction in capital made in
connection with such retirement of shares, the corporation's remaining assets
must be sufficient to pay any debts not otherwise provided for).
Limitation of Liability and Indemnification of Directors and Officers
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The SDG Charter
contains such a provision which eliminates such liability to the maximum extent
permitted by Maryland law.
The SDG Charter authorizes SDG, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to any director or officer, whether serving
SDG or, at its request, any other entity. The SDG Charter and SDG Bylaws also
permit SDG to indemnify and advance expenses to any employee or agent of SDG.
The MGCL requires a corporation (unless its charter provides otherwise,
which the SDG Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
See "CERTAIN PROVISIONS OF THE SDG OPERATING PARTNERSHIP AGREEMENT, THE
SIMON GROUP CHARTER, CRC CHARTER, SIMON GROUP BY-LAWS AND CRC BY-LAWS AND
DELAWARE LAW -- Director Liability Limitation and Indemnification" for a
discussion of the director liability limitation and indemnification provisions
in the Simon Group Charter, the CRC Charter, Simon Group By-laws and CRC By-laws
and under Delaware law.
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SDG ANNUAL MEETING MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of SDG Equity Stock and SDG Units as of March 31, 1998, by (i) each
director and nominee for director, (ii) the executive officers named in the
Summary Compensation Table, (iii) each person who is known by SDG to
beneficially own more than 5% of SDG Equity Stock, and (iv) all current
directors and executive officers of SDG as a group. Unless otherwise indicated
in the footnotes, shares of SDG Equity Stock or SDG Units are owned directly,
and the indicated person has sole voting and investment power.
PERCENT OF
NUMBER OF SHARES OF SDG EQUITY PERCENT OF
SDG EQUITY STOCK STOCK NUMBER OF SDG SDG UNITS
BENEFICIALLY OWNED BENEFICIALLY UNITS BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER (1)(2)(3) OWNED(4) OWNED OWNED(5)
------------------------ ------------------- ------------ ------------------ ------------
Birch Bayh.............................. 17,000 * 0 --
William T. Dillard, II.................. 20,200(7) * 0 --
G. William Miller....................... 10,440 * 0 --
Frederick W. Petri...................... 14,520 * 0 --
Terry S. Prindiville.................... 13,000 * 0 --
David Simon............................. 2,250,420(8) 2.0% 2,013,010 1.2%
Herbert Simon........................... 5,597,851(9) 4.9% 5,554,250(9) 3.2%
Melvin Simon............................ 7,153,795(9) 6.1% 7,116,385(9) 4.1%
J. Albert Smith, Jr..................... 15,000 * 0 --
Richard S. Sokolov...................... 191,960 * 60,835 *
M. Denise DeBartolo York................ 1,318,062(6) 1.2% 1,290,439(6) *
Philip J. Ward.......................... 6,802 * 0 --
James M. Barkley........................ 104,920 * 0 *
William J. Garvey....................... 111,130 * 21,200 *
James A. Napoli......................... 79,560 * 0 --
All directors and executive officers as
a group(10) (20 persons).............. 51,403,696 32.7% 46,932,423 27.0%
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* Less than one percent
(1) Includes the following shares of SDG Common Stock that may be purchased
pursuant to stock options that are exercisable within 60 days: Birch
Bayh -- 17,000; William T. Dillard, II -- 14,000; G. William
Miller -- 6,360; Fredrick W. Petri -- 6,360; Terry S.
Prindiville -- 11,000; David Simon -- 200,000; J. Albert Smith,
Jr. -- 14,000; M. Denise DeBartolo York -- 3,000; Philip J. Ward -- 6,360;
James M. Barkley -- 75,000; William J. Garvey -- 55,000; James A.
Napoli -- 50,000; and all directors and executive officers as a
group -- 680,580.
(2) Includes the following shares of SDG Common Stock that may be received upon
exchange of SDG Units held by the following persons on March 31, 1998:
David Simon -- 2,013,010; Herbert Simon -- 5,554,250; Melvin
Simon -- 7,116,385; Richard S. Sokolov -- 60,835; M. Denise DeBartolo
York -- 1,290,439; William J. Garvey -- 21,200; and all directors and
executive officers as a group -- 46,932,423. SDG Units held by limited
partners are exchangeable either for shares of SDG Common Stock (on a
one-to-one basis) or for cash as selected by SDG Independent Directors.
(3) Includes the following restricted shares which are subject to vesting
requirements: David Simon -- 32,760; Richard S. Sokolov -- 24,163; James M.
Barkley -- 29,920; William J. Garvey -- 32,760; James A. Napoli -- 29,560;
and all directors and executive officers as a group -- 291,443.
(4) At March 31, 1998, there were 106,490,509 shares of SDG Common Stock,
3,200,000 of SDG Class B Common Stock and 4,000 shares of SDG Class C
Common Stock outstanding. Upon the occurrence of certain events, shares of
SDG Class B Common Stock and SDG Class C Common Stock convert automatically
into SDG Common Stock (on a one-to-one basis). The percentages in this
column assume the exercise of stock options and exchange of SDG Units for
shares of SDG Common Stock.
(5) At March 31, 1998, there were 173,754,214 outstanding SDG Units of which
SDG owned, directly or indirectly, 109,694,509, or 63.1%. The percentages
in this column assume that no SDG Units are exchanged for shares of SDG
Common Stock.
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(6) Does not include shares of SDG Equity Stock and SDG Units held by
DeBartolo, Inc. and certain related persons and entities. See "-- Principal
Stockholders."
(7) Does not include 10,000 shares of SDG Common Stock owned by Mr. Dillard's
spouse who has sole voting and investment power of such shares.
(8) Includes SDG Units owned by trusts of which David Simon is a beneficiary.
(9) Does not include shares of SDG Equity Stock and SDG Units held by MSA. See
"-- Principal Stockholders."
(10) Includes shares of SDG Equity Stock and SDG Units held by DeBartolo, Inc.
and MSA. See "-- Principal Stockholders."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning each person
(including any group) known to SDG to beneficially own more than five percent
(5%) of any class of SDG Equity Stock as of March 31, 1998. Unless otherwise
indicated in the footnotes, shares are owned directly, and the indicated person
has sole voting and investment power.
AMOUNT AND NATURE PERCENT OF VOTING
NAME AND ADDRESS OF OF BENEFICIAL STOCK BENEFICIALLY
BENEFICIAL OWNER OWNERSHIP(1) OWNED(2)
------------------- ----------------- ------------------
DeBartolo, Inc. et al.(3).................................. 22,239,511(4) 16.9%
7620 Market Street
Youngstown, OH 44513
Melvin Simon & Associates, Inc.(5)......................... 14,651,581(6) 12.1%
115 W. Washington Street
Indianapolis, IN 46204
Princeton Services, Inc.................................... 9,059,375(7) 8.3%
800 Scudders Mill Road
Plainsboro, NJ 08536
Stichting Pensioenfonds ABP................................ 6,107,192(8) 5.6%
P.O. Box 2889
6401 D J Harleen
The Netherlands
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(1) SDG Equity Stock includes shares of SDG Common Stock, SDG Class B Common
Stock, and SDG Class C Common Stock. Upon the occurrence of certain events,
shares of SDG Class B Common Stock and SDG Class C Common Stock convert
automatically into SDG Common Stock (on a one-to-one basis). The amounts in
the table also include shares of SDG Common Stock that may be issued upon
the exchange of SDG Units. SDG Units held by limited partners are
exchangeable either for shares of SDG Common Stock (on a one-to-one basis)
or for cash as selected by the Independent Directors.
(2) The percentages in this column assume the exercise of stock options and
exchange of SDG Units for shares of SDG Common Stock.
(3) The beneficial owners of the securities are DeBartolo, Inc. ("DI"), certain
subsidiaries of DI, held directly or indirectly through EJDC, the estate of
the late Edward J. DeBartolo, members of the DeBartolo family, including
Edward J. DeBartolo, Jr. and M. Denise DeBartolo York, or trusts established
for the benefit of members of the DeBartolo family or partnerships in which
the foregoing persons hold partnership interests.
(4) Includes 22,207,888 shares of SDG Common Stock issuable upon exchange of SDG
Units, 3,000 shares of SDG Common Stock issuable pursuant to stock options
and 4,000 shares of SDG Class C Common Stock.
(5) MSA is owned 69% by Melvin Simon and 31% by Herbert Simon.
(6) Includes 11,451,581 shares of SDG Common Stock issuable upon exchange of SDG
Units and 3,200,000 shares of SDG Class B Common Stock.
(7) According to a Schedule 13G dated January 26, 1998, the reporting person,
who is the managing general partner of Merrill Lynch Asset Management, L.P.
and Fund Asset Management, L.P., owns 9,059,375 shares of SDG Common Stock.
(8) According to a Schedule 13G filed for the period ended December 31, 1997,
the reporting person beneficially owns 6,107,192 shares of SDG Common Stock.
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ELECTION OF DIRECTORS
At the SDG Annual Meeting, eleven (11) directors are to be elected to serve
until their successors are elected and have qualified. Five (5) Independent
Directors are to be elected by the holders of SDG Equity Stock, four (4)
directors are to be elected by the holders of SDG Class B Common Stock and two
(2) directors are to be elected by the holders of SDG Class C Common Stock. It
is the intention of the persons named in the Proxy hereby solicited to vote for
the directors to be elected by the holders of SDG Equity Stock, named below,
unless otherwise specified in the Proxy. Should any of these nominees become
unable to accept nomination or election (which is not anticipated), it is the
intention of the persons designated as proxies to vote for the election of the
remaining nominees and for such substitute nominees as the SDG Board of
Directors may designate.
By virtue of a voting trust agreement, the shares of SDG Class B Common
Stock are held until December 20, 2003, by a voting trust and such trust is
obligated to elect Melvin Simon, Herbert Simon and David Simon as directors of
SDG. A plurality of the votes cast is required to elect directors. Abstentions
and broker non-votes will have no effect on such voting. Holders of SDG Class B
Common Stock have informed SDG that they intend to cause all such shares to be
voted in favor of Messrs. Melvin Simon, Herbert Simon and David Simon. Holders
of SDG Class C Common Stock have informed SDG that they intend to cause all such
shares to be voted in favor of Mr. Frederick W. Petri and Ms. M. Denise
DeBartolo York.
Set forth below are the names of and certain other information regarding
the nominees for the five (5) director positions to be elected by the holders of
the SDG Equity Stock, the nominees for the four (4) director positions to be
elected by the holders of SDG Class B Common Stock and the nominees for the two
(2) director positions to be elected by the holders of SDG Class C Common Stock
at the SDG Annual Meeting. Information about each nominee's ownership of equity
securities of SDG appears in "-- Security Ownership of Certain Beneficial Owners
and Management."
THE SDG BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION
OF EACH OF THE NOMINEES NAMED BELOW
NOMINEES FOR DIRECTORS TO BE ELECTED BY HOLDERS OF SDG EQUITY STOCK
Robert E. Angelica, 51, has been a director of CPI since 1997. He is
President and Chief Investment Officer of the AT&T Investment Management
Corporation, a position he has held since 1992. Mr. Angelica is also a board
member of The Emerging Markets Growth Fund, Inc. and The India Magnum Fund, Ltd.
Birch Bayh, 70, has been a director of SDG since 1993. He has been a
partner in the Washington, D.C. law firm of Oppenheimer, Wolff, Donnelly & Bayh
LLP (formerly Bayh, Connaughton, & Stewart, P.C.) for more than five years. He
served as a United States Senator from Indiana from 1963 to 1981. Mr. Bayh also
serves as a director of ICN Pharmaceuticals, Inc. and Acordia, Inc.
Hans C. Mautner, 60, is Chairman of the Board of Directors and Chief
Executive Officer of CPI and CRC. He has been a director of CPI since 1973 and
of CRC since 1975. He served as Vice President of CPI from 1972 to 1973, when he
was appointed Executive Vice President. Mr. Mautner was elected President of CPI
and CRC in 1976, was elected Chairman and President in 1988, and was elected
Chairman, President and Chief Executive Officer of CPI and CRC in 1989. Prior to
joining CPI, he was a General Partner of Lazard Freres. Mr. Mautner is currently
a director of Cornerstone Properties Inc. and a board member for seven funds in
The Dreyfus Family of Funds.
G. William Miller, 73, has been a director of SDG since the DeBartolo
Merger. He has been Chairman of the Board and Chief Executive Officer of G.
William Miller & Co. Inc., a merchant banking firm, since 1983. He is a former
Secretary of the U.S. Treasury and a former Chairman of the Federal Reserve
Board. From January 1990 until February 1992, he was Chairman and Chief
Executive Officer of Federated Stores, Inc., the parent company of predecessors
to Federated Department Stores, Inc. Mr. Miller is Chairman of the Board and a
director of Waccamaw Corporation. He is also a director of GS Industries, Inc.,
Kleinwort Benson Australian Income Fund, Inc. and Repligen Corporation.
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Pieter S. van den Berg, 52, has been Director Controller of PGGM, a Dutch
pension fund, since 1991.
NOMINEES FOR CLASS B DIRECTORS TO BE ELECTED BY HOLDERS OF SDG CLASS B COMMON
STOCK
Melvin Simon, 71, is the Co-Chairman of the Board of SDG and has been a
director since SDG'S incorporation. In addition, he is the Co-Chairman of the
Board of MSA, a company he founded in 1960 with his brother, Herbert Simon.
Herbert Simon, 63, is the Co-Chairman of the Board of SDG and has been a
director since SDG's incorporation. Mr. Simon served as Chief Executive Officer
from SDG's incorporation through January 2, 1995, when he was appointed
Co-Chairman of the Board. In addition, Mr. Simon is the Co-Chairman of the Board
of MSA. Mr. Simon is also a director of Kohl's Corporation, a specialty
retailer.
David Simon, 36, is the Chief Executive Officer of SDG and has been a
director since SDG's incorporation. Mr. Simon served as President of SDG from
SDG's incorporation until 1996 and was appointed Chief Executive Officer on
January 3, 1995. In addition, he has been Executive Vice President, Chief
Operating Officer and Chief Financial Officer of MSA since 1990. From 1988-1990,
Mr. Simon was Vice President of Wasserstein Perella & Company, a firm
specializing in mergers and acquisitions. In addition, Mr. Simon serves as a
member of the Board of Governors of NAREIT and the Urban Land Institute and is a
trustee and member of the International Council of Shopping Centers. He is the
son of Melvin Simon, the nephew of Herbert Simon and a director of Healthcare
Compare Corp.
Richard S. Sokolov, 48, has been a director of SDG since the DeBartolo
Merger. He served as the President and Chief Executive Officer and a director of
DRC from its incorporation until the DeBartolo Merger. Prior to that he had
served as Senior Vice President, Development of EJDC since 1986 and as Vice
President and General Counsel since 1982. In addition, Mr. Sokolov is a trustee,
the incoming chairman (commencing May 1998) and a member of the Executive
Committee of the International Council of Shopping Centers.
NOMINEES FOR CLASS C DIRECTORS TO BE ELECTED BY HOLDERS OF SDG CLASS C COMMON
STOCK
Fredrick W. Petri, 51, has been a director of SDG since the DeBartolo
Merger. He is a partner of Petrone, Petri & Company, a real estate investment
firm he founded in 1993, and an officer of Housing Capital Company since its
formation in 1994. Prior thereto, he was an Executive Vice President of Wells
Fargo Bank, where for over 18 years he held various real estate positions. Mr.
Petri is currently a trustee of the Urban Land Institute and a director of
Storage Trust Realty. He previously was a member of the Board of Governors and a
Vice President of NAREIT and a director of the National Association of
Industrial and Office Park Development. He is a director of the University of
Wisconsin's Real Estate Center.
M. Denise DeBartolo York, 47, has been a director of SDG since the
DeBartolo Merger. She served as a director of DRC from its incorporation until
the DeBartolo Merger. She serves as Chairman of the Board and Chief Executive
Officer of EJDC and DeBartolo, Inc. Ms. DeBartolo York previously served EJDC as
Executive Vice President of Personnel/Communications and has been associated
with EJDC in an executive capacity since 1975. She is the daughter of the late
Edward J. DeBartolo.
DIRECTORS CONTINUING IN OFFICE UNTIL 1999
J. Albert Smith, Jr., 58, has been a director of SDG since 1993. He is the
President of Bank One, Indiana, NA, a commercial bank, a position he has held
since September 30, 1994. Prior to his current position, he was the President of
Banc One Mortgage Corporation, a mortgage banking firm, a position he held since
1975.
Philip J. Ward, 49, has been a director of SDG since the DeBartolo Merger.
He has been Senior Managing Director, Head of Real Estate Investments, for CIGNA
Investments, Inc., a wholly owned subsidiary of CIGNA Corporation since 1985. He
is a member of the International Council of Shopping Centers, the Urban Land
Institute, the National Association of Industrial and Office Parks and the
Society of
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Industrial and Office Realtors. He is a director of the Connecticut Investment
Fund and Wyndham Hotel Corporation.
ATTENDANCE AND COMMITTEES OF THE BOARD OF DIRECTORS
The SDG Board of Directors held nine meetings during 1997. The SDG Board of
Directors has established four standing committees: the SDG Compensation
Committee, the SDG Audit Committee, the SDG Executive Committee and the SDG
Nominating Committee. All incumbent directors attended 75% or more of the
meetings of the SDG Board of Directors and each committee on which they served.
The SDG Compensation Committee, which currently consists of Messrs. Bayh,
DeBartolo, Prindiville, Herbert Simon and Ward, sets remuneration levels for
officers of SDG, reviews significant employee benefit programs and establishes,
as it deems appropriate, and administers executive compensation programs,
including bonus plans, stock option and other equity-based programs, deferred
compensation plans and any other cash or stock incentive programs. The SDG
Compensation Committee met two times during 1997.
The SDG Audit Committee, which currently consists of Messrs. Dillard,
Miller, Petri and Smith, makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the scope of the audit engagement, reviews the independent public accountants'
letter of comments and management's responses thereto, approves professional
services provided by the independent public accountants, reviews the
independence of the independent public accountants, reviews any major accounting
changes made or contemplated, considers the range of audit and non-audit fees,
and reviews the adequacy of SDG's internal accounting controls. The SDG Audit
Committee met two times during 1997.
The SDG Executive Committee, which currently consists of Messrs. David
Simon, Herbert Simon, Melvin Simon and Sokolov, approves the acquisition and
disposition of real property, authorizes the execution of certain contracts and
agreements, including those related to the borrowing of money by SDG, and
generally exercises all other powers of the SDG Board of Directors between
meetings of the SDG Board of Directors, except in cases where action of the
entire SDG Board of Directors is required by the SDG Charter, the SDG By-laws or
applicable law and except where action by SDG's Independent Directors (as
defined in SDG's Charter) is required by SDG's conflict of interest policies.
The SDG Executive Committee met four times during 1997.
The SDG Nominating Committee, which currently consists of Ms. DeBartolo
York and Messrs. Bayh, Prindiville, David Simon and Herbert Simon, nominates
persons to serve as directors who are elected by the holders of SDG Equity
Stock. In considering persons to nominate, the SDG Nominating Committee will
consider persons recommended by stockholders. The SDG Nominating Committee met
one time in 1997.
The SDG By-laws require that each committee except the SDG Audit Committee
and the SDG Nominating Committee must have at least one member who was elected
by the SDG Class B Common Stock and at least one member elected by the SDG Class
C Common Stock. The entire SDG Audit Committee and a majority of the SDG
Compensation Committee must be composed of SDG's Independent Directors. Further,
the SDG Nominating Committee is required to have five members, of which two
shall be SDG's Independent Directors, with two members elected by the SDG Class
B Common Stock and one member elected by the SDG Class C Common Stock.
At the meeting of directors to be held following the SDG Annual Meeting,
the SDG Board of Directors will reappoint members of the SDG Board of Directors
to the four standing committees.
COMPENSATION OF DIRECTORS
SDG pays its directors who are not employees of SDG annual compensation of
$20,000 plus $1,000 for attendance (in person or by telephone) at each meeting
of the SDG Board of Directors or a committee thereof. Directors of SDG who are
employees of SDG do not receive any compensation for their services as
directors. In addition, all directors are reimbursed for their expenses incurred
in attending directors' meetings.
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Each director who is not an employee of SDG also participates in SDG's
Director Stock Option Plan (the "Director Plan"). Each eligible director is
automatically granted options ("Director Options") to purchase at the fair
market value on the date of grant (i) 5,000 shares of SDG Common Stock upon the
director's initial election to the Board of Directors and (ii) 3,000 shares of
SDG Common Stock upon each reelection of such director to the Board of
Directors. Director Options become exercisable on the first anniversary of the
date of grant or at such earlier time as a change in control of SDG (as defined
in the Director Plan) occurs, and remain exercisable through the tenth
anniversary of the date of grant (the "Expiration Date"). Director Options that
are exercisable terminate 30 days after the optionee ceases to be a member of
the Board of Directors. The SDG Board of Directors may amend, suspend or
discontinue the Director Plan at any time. Certain specified amendments must be
approved by the stockholders. In May 1997, in connection with the election of
directors, Director Options to purchase an aggregate of 9,000 shares of SDG
Common Stock were granted to the three directors reelected in 1997. Such
Director Options will become exercisable one year from the date of grant, or
such earlier time as a change in control occurs.
If the SDG stockholders approve the 1998 Stock Incentive Plan, no further
option awards will be made under the Director Plan; however, Eligible Directors
of Simon Group will receive similar option awards under the 1998 Stock Incentive
Plan. See "APPROVAL OF 1998 STOCK INCENTIVE PLAN."
COMPLIANCE WITH SECTION 16(a) REPORTING
Section 16(a) of the Exchange Act requires the SDG's directors, executive
officers and beneficial owners of more than 10% of SDG's capital stock to file
reports of ownership and changes of ownership with the Commission and the NYSE.
Based solely on its review of the copies of such forms received by it, and/or
written representations from certain reporting persons, SDG believes that,
during the year ended December 31, 1997, its directors, executive officers and
beneficial owners of more than 10% of the SDG's Common Stock have complied with
all filing requirements applicable to them.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
services in all capacities to the SDG for the years ended December 31, 1997,
1996 and 1995, for the Chief Executive Officer and the four other most highly
compensated executive officers of the SDG for the years ended December 31, 1997,
1996 and 1995, (the "Named Executives"):
SUMMARY COMPENSATION TABLE
RESTRICTED SECURITIES
ANNUAL SALARY STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR COMPENSATION BONUS(1) AWARDS(2) OPTIONS COMPENSATION(3)
- --------------------------- ---- ------------ -------- ---------- ---------- ---------------
David Simon................. 1997 $534,100 $450,000(4) -- -- $11,012
Chief Executive Officer 1996 400,000 300,000 -- -- 11,056
1995 400,000 102,735 $1,365,000 -- 10,996
Richard S. Sokolov(5)....... 1997 $522,264 $250,000 -- -- $ 8,302
President and Chief 1996 202,134 175,000 -- -- --
Operating Officer
William J. Garvey........... 1997 $395,977 $100,000 -- -- $15,563
Executive Vice
President -- 1996 375,000 85,000 -- -- 12,362
Property Development 1995 353,846 75,000 $1,365,000 -- 12,450
James A. Napoli............. 1997 $366,149 $125,000 -- -- $12,807
Executive Vice
President -- 1996 316,154 110,000 -- -- 11,684
Leasing 1995 300,000 100,000 $1,365,000 -- 11,773
James M. Barkley............ 1997 $291,954 $115,000 -- -- $11,463
General Counsel and 1996 246,154 100,000 -- -- 11,660
Secretary 1995 228,269 75,000 $ 830,000 -- 11,468
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- ---------------
(1) Bonus awards are deemed earned in the year indicated, but generally are paid
in the following year.
(2) Pursuant to SDG's five-year Stock Incentive Program, a total of 1,000,000
restricted shares of Common Stock were allocated to certain key employees of
SDG on March 22, 1995, having a total value at the date of grant of $25.0
million. A portion of the restricted shares allocated are awarded and earned
only if SDG attains annual and cumulative targets for growth in Funds From
Operations. See "MANAGEMENT OF SIMON GROUP AND CRC FOLLOWING THE
MERGER -- CPI and Simon Group Benefit Plans." The amounts indicated in the
table represent the total amount of restricted shares allocated to the Chief
Executive Officer and other named executive officers, which are subject to
performance-based conditions before they are awarded and earned, and to
subsequent vesting requirements. Dividends are paid on restricted shares
that are earned. Earned shares vest in four equal annual installments
beginning on January 1 of the year following the year in which the
restricted shares are deemed earned and awarded; provided that the
participant remains an employee immediately prior to the vesting date. At
December 31, 1997, the total number of restricted shares (and value at such
date) that have been earned by the persons named in the table, and have been
issued and are outstanding, were as follows: David Simon -- 32,760
restricted shares ($1,070,843); William J. Garvey -- 32,760 restricted
shares ($1,070,843); and James A. Napoli -- 29,560 restricted shares
($966,243); James M. Barkley -- 29,920 restricted shares ($978,010); and
Richard S. Sokolov -- 24,163 restricted shares ($789,828).
(3) Represents annualized amounts of (i) employer paid contributions to SDG's
401(k) retirement plan and (ii) SDG paid employee and dependent life
insurance premiums. Employer contributions to the 401(k) retirement plan
become vested 30% after completion of three years of service, 40% after four
years and an additional 20% after each additional year until fully vested
after seven years.
(4) Although the SDG Compensation Committee approved an increase in Mr. Simon's
annual salary to $600,000 effective May 1, 1997, the increase did not occur
until February 28, 1998. Mr. Simon is entitled to a retroactive payroll
adjustment for the period from May 1, 1997 to February 28, 1998.
(5) Does not include compensation paid by DRC prior to the DeBartolo Merger.
The following table sets forth information with respect to the unexercised
stock options granted to the Named Executives under the Employee Plan and held
by them at December 31, 1997. No stock options were granted to the Named
Executives in 1997.
AGGREGATED OPTION EXERCISES IN 1997 AND
DECEMBER 31, 1997 OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
David Simon............ -- -- 200,000 -- $2,087,500 --
William J. Garvey...... 20,000 $180,000 55,000 -- 574,063 --
James A. Napoli........ -- -- 50,000 -- 521,875 --
James M. Barkley....... -- -- 75,000 -- 782,813 --
Richard S. Sokolov..... -- -- -- -- -- --
- ---------------
(1) The closing price of the SDG Common Stock as reported by the New York Stock
Exchange on December 31, 1997 was $32.6875. Value is calculated on the basis
of the difference between the exercise price and $32.6875, multiplied by the
number of shares of SDG Common Stock underlying "in-the-money" options.
For a description of the employee benefit plans of SDG, see "MANAGEMENT OF
SIMON GROUP AND CRC FOLLOWING THE MERGER -- CPI and Simon Group Benefit Plans."
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REPORT OF SDG COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
General Principles. As a general matter, SDG has adopted a compensation
philosophy which embraces the concept of pay-for-performance. SDG's strategy is
to link executive management compensation with SDG's performance and stockholder
return and to reward management for results that are consistent with the key
goals of SDG. This is described further below under "-- 1997 Executive Officer
Compensation." SDG believes that its compensation program attracts
result-oriented employees and motivates them to achieve higher levels of
performance.
It is SDG's policy to establish executive officer base salary at levels
which are slightly below industry statistical norms for comparable REITs, while
providing significant additional compensation opportunities through programs
which are linked directly to SDG performance.
1997 CEO Compensation. David Simon earned a base salary of $534,100 for
1997 and a bonus of $450,000. No options were granted. At December 31, 1997, he
held exercisable options to acquire 200,000 shares of SDG Common Stock. Of David
Simon's total allocation under the Stock Incentive Program of 54,600 shares of
restricted stock, 32,760 shares were earned and awarded as of December 31, 1997,
because SDG met its targets for growth in Funds From Operations for 1994, 1995
and 1996. Based on information provided by SDG's compensation consultants,
management believes that David Simon's total cash compensation in 1997 was below
the 40th percentile for chief executive officers of companies with comparable
market capitalizations.
1997 Executive Officer Compensation. SDG compensates its executive
officers through four principal elements. The first element, base pay, is
determined through a review and analysis of peers in the REIT industry in order
to determine reasonable and competitive compensation levels. The second element
is participation in a discretionary Bonus Plan. Under the Bonus Plan,
participants have opportunities to participate in an incentive pool depending
upon performance of SDG, the participant's business SDG Unit and the individual
participant. Bonuses of $1,028,750 were paid in 1998 to the ten eligible
executive officers with respect to 1997 performance. See "-- Executive
Compensation -- Incentive Bonus Plan." The two remaining compensation elements
are intended to link executive compensation more directly to increases in value
of the SDG Common Stock. The third element consists of option awards under the
Employee Plan, no options were granted during 1997. At March 31, 1998 the ten
eligible executive officers held vested options to acquire an aggregate of
602,500 shares that were previously granted under the Employee Plan. The fourth
element consists of allocation of restricted stock under SDG's five-year Stock
Incentive Program. Under the Stock Incentive Program, allocations of restricted
shares are earned and awarded if the performance-based goals of the program are
met. Of the total 892,440 shares of restricted stock allocated to the ten
eligible executive officers under the Stock Incentive Program, 291,443 shares
were earned and awarded as of December 31, 1997 because SDG met its targets for
growth in Funds From Operations for 1994, 1995 and 1996. See "MANAGEMENT OF
SIMON GROUP AND CRC FOLLOWING THE MERGER -- CPI and Simon Group Benefit Plans."
SDG believes that each element of its executive compensation program attracts
results-oriented individuals and motivates them to achieve levels of performance
which are consistent with the performance goals of SDG and its stockholders.
The SDG Compensation Committee does not presently have a specific policy
with respect to compensation deduction limits imposed under Section 162(m) of
the Code. However, to date, the deductibility of executive compensation has not
been affected by the deduction limits.
SDG Compensation Committee:
Philip J. Ward, Chairman
Birch Bayh
Terry S. Prindiville
Herbert Simon
SDG Compensation Committee Interlocks And Insider Participation. No member
of the SDG Compensation Committee during 1997 was an officer, employee or former
officer of SDG or any of its subsidiaries or had any relationship requiring
disclosure herein pursuant to regulations of the Commission. No executive
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officer of SDG served as a member of a compensation committee or a director of
another entity under circumstances requiring disclosure herein pursuant to
regulations of the Commission.
PERFORMANCE GRAPH
The following line graph sets forth a comparison of the percentage change
in the cumulative total stockholder return on the SDG Common Stock compared to
the cumulative total return of the S&P Composite -- 500 Stock Index and the
NAREIT Equity REIT Total Return Index for the period December 14, 1993, the date
on which trading of SDG's Common Stock commenced, through December 31, 1997. The
graph assumes an investment of $100 on December 14, 1993, a reinvestment of
dividends and actual increase of the market value of the SDG Common Stock
relative to an initial investment of $100. The comparisons in this table are
required by the Commission and are not intended to forecast or be indicative of
possible future performance of the SDG Common Stock.
NAREIT Equity
Measurement Period 'Simon DeBartolo REIT Total Return
(Fiscal Year Covered) Group, Inc.' Index S&P 500
12/14/93 100.0000 100.0000 100.0000
12/31/93 101.6850 99.8983 100.7160
12/31/94 117.2120 103.0710 102.0350
12/31/95 124.9300 118.8090 140.2190
12/31/96 173.4440 160.7060 172.4140
12/31/97 195.2450 193.2590 229.9560
CERTAIN TRANSACTIONS
Transactions With The Simons. SDG has entered into noncompetition
agreements with Messrs. Melvin Simon, Herbert Simon and David Simon, all of whom
are executive officers of SDG. Pursuant to such agreements and except as set
forth below, Melvin Simon and Herbert Simon are prohibited from engaging in the
shopping center business in North America other than through SDG or as passive
investors until the later of (i) December 20, 2003, or (ii) the date that they
are no longer directors or officers of SDG, and David Simon is prohibited from
engaging in the shopping center business in North America other than through SDG
and, with certain exceptions, for two years thereafter if he resigns or is
terminated for cause. The foregoing restrictions will not prohibit Melvin Simon,
Herbert Simon or David Simon from having an ownership interest in the properties
in which they previously owned an interest that were not contributed to SDG or
SPG, LP (the "Excluded Properties"), and in the SDG Management Company, and
serving as directors and officers of the SDG Management Company. It is
anticipated that such commitments will not, in the aggregate, involve a material
amount of time, but no assurance can be given in this regard. In addition,
Melvin Simon and Herbert Simon may pursue other investment activities in which
they are currently engaged.
Messrs. Melvin Simon, Herbert Simon and David Simon continue to own, in
whole or in part, the Excluded Properties. The SDG Management Company has
entered into management agreements with the partnerships that hold the Excluded
Properties, some of which agreements were not negotiated on an arm's-length
basis. Management believes, however, that the terms of such management
agreements are fair to SDG.
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In connection with the use of the aggregate proceeds of the initial public
offering of Simon Property Group, Inc. common stock in December 1993 and related
financing to repay certain indebtedness encumbering the SDG Operating
Partnership's properties, SDG repaid approximately $180 million of indebtedness
owed to Messrs. Melvin Simon, Herbert Simon and David Simon, which represented
loans made by Messrs. Melvin Simon, Herbert Simon and David Simon in lieu of
third-party financing. Of this amount, approximately $110 million was used by
Messrs. Melvin Simon, Herbert Simon and David Simon to pay income taxes and
other third-party obligations associated with their real estate business. In
addition, Messrs. Melvin Simon, Herbert Simon and David Simon were released from
personal liability under guaranties provided by Messrs. Melvin Simon, Herbert
Simon and David Simon by substituting guaranties by SDG, or the provision by SDG
of back-up guaranties in favor of Messrs. Melvin Simon, Herbert Simon and David
Simon, on approximately $111 million of such debt.
SDG Management Company. The SDG Management Company manages regional malls
and community shopping centers not wholly-owned by the SDG Operating Partnership
and certain other properties and also engages in certain property development
activities. Of the outstanding voting common stock of the SDG Management
Company, 95% is owned by Messrs. Melvin Simon, Herbert Simon and David Simon,
which will enable them to control the election of the board of directors of the
SDG Management Company. The SDG Operating Partnership owns common stock
representing 80% of the value of the outstanding stock of the SDG Management
Company, all of the outstanding participating preferred stock of the SDG
Management Company and a mortgage note of the SDG Management Company, which
entitles SDG to more than 90% of the anticipated after-tax economic benefits, in
the form of dividends and interest, of the SDG Management Company. The SDG
Management Company must receive the approval of a majority of the Independent
Directors in order to provide services for any property not currently managed by
the SDG Management Company unless SDG owns at least a 25% interest in such
property. The SDG Management Company has agreed with SDG that, if in the future
SDG is permitted by applicable tax law and regulations to conduct any or all of
the activities that are now being conducted by the SDG Management Company, the
SDG Management Company will not compete with SDG with respect to new or renewal
business of this nature.
Relationship With Oppenheimer, Wolff, Donnelly & Bayh LLP. During 1997,
SDG engaged the Washington, D.C. law firm of Oppenheimer, Wolff, Donnelly & Bayh
LLP (formerly Bayh, Connaughton & Stewart, P.C.) to provide certain legal
services. Birch Bayh, a director of SDG, is a member of such firm.
Other Transactions. Phillip J. Ward, a director of SDG, is the Head of
Real Estate Investments for CIGNA Investments, Inc., which has, or its
affiliates have, made mortgage loans to SDG or its affiliates totaling
approximately $290 million. These loans are considered to be arm's-length
agreements.
An affiliate of SDG is a general partner in Lakeline Developers and
Lakeline Plaza Developers, both Texas general partnerships in which Dillard's,
Inc. is the other general partner. Mr. William Dillard II, a member of SDG's
Board of Directors, is an officer, director and shareholder of Dillard's Inc. On
January 31, 1998, Dillard's, Inc. contributed a 15% interest in both Lakeline
Developers and Lakeline Plaza Developers to the SDG Operating Partnership in
exchange for 191,634 SDG Units.
APPROVAL OF 1998 STOCK INCENTIVE PLAN
GENERAL
The SDG Board of Directors is proposing for approval by SDG stockholders
the 1998 Stock Incentive Plan which will become effective upon consummation of
the Merger. The 1998 Stock Incentive Plan has been approved by the CPI Board of
Directors and CPI stockholders. If the 1998 Stock Incentive Plan is approved by
SDG stockholders, no further awards will be granted under the SDG Employee Plan
or the SDG Director Plan after consummation of the Merger.
The following summary of the 1998 Stock Incentive Plan is qualified in its
entirety by express reference to the text of the 1998 Stock Incentive Plan as
filed with the Securities and Exchange Commission. The 1998 Stock Incentive Plan
provides for the grant of equity-based awards during the ten-year period
following its adoption, in the form of options to purchase Simon Group Common
Stock ("Options"), stock appreciation
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rights ("SARs"), restricted stock awards and performance unit awards
(collectively, "Awards"). Options may be granted which are qualified as
"incentive stock options" ("ISOs") within the meaning of Section 422 of the Code
and Options which are not so qualified ("NQSOs").
PURPOSE AND ELIGIBILITY
The primary purpose of the 1998 Stock Incentive Plan is to attract and
retain the best available officers, key employees, "Eligible Directors" (as
defined below), advisors and consultants for positions of substantial
responsibilities with the SDG Operating Partnership and any of its "affiliates"
(as defined in the 1998 Stock Incentive Plan) and to provide an additional
incentive to such officers, key employees, Eligible Directors, advisors and
consultants to exert their maximum efforts toward the success of the SDG
Operating Partnership, its affiliates and Simon Group. "Eligible Directors" are
directors of Simon Group who are not employees of the SDG Operating Partnership
or its affiliates. All officers, key employees, advisors and consultants of the
SDG Operating Partnership and its affiliates (except for Melvin Simon and
Herbert Simon) and all Eligible Directors are eligible to be granted Awards
under and participate in the 1998 Stock Incentive Plan. In addition, Eligible
Directors will receive automatic grants, as described below. The number of
individuals eligible to participate in the 1998 Stock Incentive Plan is
approximately 150.
ADMINISTRATION
The 1998 Stock Incentive Plan is administered by a committee appointed by
the General Partner(s) of the SDG Operating Partnership (the "Committee"). The
Committee, in its sole discretion, determines which eligible individuals may
participate in the 1998 Stock Incentive Plan ("Participants") and the type,
extent and terms of the Awards to be granted to them. In addition, the Committee
interprets the 1998 Stock Incentive Plan and makes all other determinations
deemed advisable for the administration of the 1998 Stock Incentive Plan. The
Committee may, with the consent of the grantee of an Award, provide for the
accelerated vesting and exercisability of an Award and/or extend the scheduled
termination or expiration date of an Award upon the occurrence of such events as
it deems appropriate.
SHARES SUBJECT TO THE 1998 STOCK INCENTIVE PLAN
The aggregate number of shares of Simon Group Common Stock that may be
issued under the 1998 Stock Incentive Plan is 6,300,000 shares. No more than
600,000 shares of Simon Group Common Stock may be issued to any one individual
pursuant to Awards during any one year.
It is expected that replacement or substitute Awards relating to an
aggregate of approximately 2.2 million shares of Simon Group Common Stock will
be made to the holders of unexercised Awards granted under the SDG Employee Plan
and the SDG Director Plan.
DISCRETIONARY AWARDS
The terms and conditions of Options, SARs and restricted stock awards
granted under the 1998 Stock Incentive Plan will be set out in written
agreements which will contain such provisions as the Committee from time to time
deems appropriate.
The terms of Options granted under the 1998 Stock Incentive Plan will
generally be determined by the Committee within the terms of the 1998 Stock
Incentive Plan. The exercise price for any Option will not be less than the fair
market value of a share of Simon Group Common Stock on the date of grant. No
Option will be exercisable after the expiration of ten years from the date of
its grant. The 1998 Stock Incentive Plan provides that, unless otherwise
determined by the Committee, Options generally vest 40% on the first anniversary
of the date of grant, an additional 30% on the second anniversary of the date of
grant and become 100% vested three years after the date of grant. The Option
exercise price may be paid (i) by certified or official bank check, (ii) in the
discretion of the Committee, by personal check, (iii) in shares of Simon Group
Common Stock owned by the optionee for at least six months and which have a fair
market value on the date of exercise equal to the exercise price, (iv) in the
discretion of the Committee, by delivery to Simon Group of a promissory note and
agreement providing for payment with interest on any unpaid balance, (v) through
a
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brokered exercise, (vi) by any combination of the above, or (vii) by any other
means permitted by the Committee, in its discretion.
A SAR may be granted in connection with all or any part of an Option
granted under the 1998 Stock Incentive Plan or may be granted independent of any
Option. SARs granted in connection with an Option will become exercisable and
lapse according to the same vesting schedule and lapse rules that are
established for the corresponding Option. SARs granted independent of any Option
will vest and lapse according to the terms and conditions set by the Committee.
A SAR will entitle its holder to be paid an amount equal to the excess of the
fair market value of the Simon Group Common Stock subject to the SAR on the date
of exercise over the exercise price of the related Option, in the case of a SAR
granted in connection with an Option, or the fair market value of the Simon
Group Common Stock subject to the SAR on the date of exercise over the fair
market value on the date of grant, in the case of a SAR granted independent of
an Option.
Subject to the discretion of the Committee, certificates representing
restricted stock awards may (i) be issued to a grantee bearing an appropriate
legend specifying that such shares are subject to restrictions or (ii) be held
in escrow until the end of the restricted period set by the Committee. During
the restricted period, restricted stock will be subject to transfer restrictions
and forfeiture in the event of termination of employment with the SDG Operating
Partnership or any affiliate and such other restrictions and conditions
established by the Committee at the time the restricted stock is granted.
To the extent deemed necessary and desirable by the Committee, the terms
and conditions of performance unit awards granted under the 1998 Stock Incentive
Plan will be set out in written agreements. Performance unit awards provide for
future payment of cash or shares of Simon Group Common Stock, or any other
equivalent consideration deemed appropriate by the Committee, to the grantee
upon the attainment of certain "Performance Goals" (as defined in the 1998 Stock
Incentive Plan) established by the Committee over specified periods. At the end
of each performance award period, the Committee decides the extent to which the
Performance Goals have been attained and the amount of cash, Simon Group Common
Stock, or other consideration, to be distributed to the grantee.
AUTOMATIC AWARDS FOR ELIGIBLE DIRECTORS
The 1998 Stock Incentive Plan provides for automatic grants of Options
("Director Options") to Eligible Directors. Upon the first day of the first
calendar month following the month in which any person first becomes an Eligible
Director, such person will be automatically granted without further action by
the Board of Directors of Simon Group a Director Option to purchase 5,000 shares
of Simon Group Common Stock (an "Initial Award"); provided, however, that an
Eligible Director who previously served as a director of SDG or CPI shall not
receive an Initial Award. Thereafter, on the date of each of Simon Group's
annual meeting of stockholders (the "Annual Meeting") held after January 1,
1999, each Eligible Director who continues as an Eligible Director will
automatically be granted each year, without further action by the Board of
Directors of Simon Group, a Director Option to purchase 3,000 shares of Simon
Group Common Stock multiplied by the number of calendar years that have elapsed
since such person's last election to the Board of Directors of Simon Group, SDG
or CPI (the "Annual Award"); provided, however, that if any person becomes an
Eligible Director during the 60-day period prior to the Annual Meeting in any
year, then such Eligible Director will not receive the Annual Award.
The exercise price per share of Director Options is 100% of the fair market
value of the Simon Group Common Stock on the date the Director Option is
granted. All Director Options shall become vested and exercisable on the first
anniversary of the date of grant or such earlier time in the event of a "Change
in Control" (as defined in the 1998 Stock Incentive Plan). Upon termination of
any person's service as an Eligible Director, all Director Options granted will
expire 30 days following the date of termination.
SPECIAL CONDITIONS APPLICABLE TO ISOs
ISOs may not be granted under the 1998 Stock Incentive Plan to a person who
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the optionee's employer corporation or of its parent or
subsidiary corporation unless (i) the exercise price of the ISO is at least 110%
of
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the fair market value of the Simon Group Common Stock on the date of grant, and
(ii) the term of the ISO is not longer than five years. If the fair market value
of the Simon Group Common Stock with respect to which ISOs are exercisable for
the first time by any optionee during any calendar year (under all plans of the
SDG Operating Partnership or any affiliate) exceeds $100,000, such ISOs will be
treated, to the extent of such excess, as NQSOs.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
If any change is made to the Simon Group Common Stock by reason of any
subdivision or combination of shares or other capital adjustments or the payment
of a stock dividend or other change in such shares effected without receipt of
consideration by Simon Group, appropriate adjustments will be made by the
Committee to the number of shares of Simon Group Common Stock available under
the 1998 Stock Incentive Plan, the number of shares of Simon Group Common Stock
subject to Awards, the Option exercise price and appreciation base of Options
and SARs previously granted, and the amount payable by a Participant in respect
of an Award.
In the event Simon Group is merged or consolidated with another corporation
and there is a change in the shares of Simon Group Common Stock by reason of
such merger or consolidation, or in the event that all or substantially all of
the assets of Simon Group are acquired by another person, or in the event of a
reorganization or liquidation of Simon Group (each such event being hereinafter
referred to as a "Corporate Event") or in the event that the Board of Directors
of Simon Group shall propose that Simon Group enter into a Corporate Event, then
the Committee may provide that Options and SARs will be terminated unless
exercised within 30 days (or such longer period as the Committee determines)
after notice; provided that if the Committee takes such action, it must also
accelerate the dates upon which all outstanding Options and SARs will be
exercisable. The Committee may also provide that all or some of the restrictions
on any Award will lapse in the event of a Corporate Event.
TRANSFERABILITY OF AWARDS
Except as otherwise determined by the Committee, no Award granted under the
1998 Stock Incentive Plan, or any right or interest therein, is assignable or
transferable except by will or the laws of descent and distribution and, during
the lifetime of a grantee, Options and SARs are exercisable only by the grantee
or his legal representative.
TERMINATION OR AMENDMENT
The 1998 Stock Incentive Plan will terminate 10 years after the date of its
adoption by stockholders of SDG and CPI. The General Partner(s) of the SDG
Operating Partnership may amend, suspend or discontinue the 1998 Stock Incentive
Plan at any time; provided that certain specified amendments which, pursuant to
applicable law or regulation, require shareholder approval, must be approved by
the holders of a majority of the issued and outstanding shares of Simon Group
voting stock.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief discussion of the Federal income tax consequences
of transactions under the 1998 Stock Incentive Plan based on the Code, as in
effect as of the date of this summary. This discussion is not intended to be
exhaustive and does not describe the state or local tax consequences.
ISOs. No taxable income is realized by the optionee upon the grant or
exercise of an ISO. If shares of Simon Group Common Stock are issued to an
optionee pursuant to the exercise of an ISO, and if no disqualifying disposition
of such shares is made by such optionee within two years after the date of grant
or within one year after the transfer of such shares to such optionee, then (1)
upon sale of such shares, any amount realized in excess of the Option price will
be taxed to such optionee as a long-term capital gain and any loss sustained
will be a long-term capital loss, and (2) no deduction will be allowed to the
optionee's employer for federal income tax purposes.
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206
If the Simon Group Common Stock acquired upon the exercise of an ISO is
disposed of prior to the expiration of either holding period described above,
generally (1) the optionee will realize ordinary income in the year of
disposition in an amount equal to the excess (if any) of the fair market value
of such shares at exercise (or, if less, the amount realized on the disposition
of such shares) over the Option price paid for such shares, and (2) the
optionee's employer will be entitled to deduct such amount for federal income
tax purposes if the amount represents an ordinary and necessary business
expense. Any further gain (or loss) realized by the optionee upon the sale of
the Simon Group Common Stock will be taxed as short-term or long-term capital
gain (or loss), depending on how long the shares have been held, and will not
result in any deduction by the employer.
Subject to certain exceptions for disability or death, if an ISO is
exercised more than three months following termination of employment, the
exercise of the Option will generally be taxed as the exercise of a NQSO.
For purposes of determining whether an optionee is subject to any
alternative minimum tax liability, an optionee who exercises an ISO generally
would be required to increase his or her alternative minimum taxable income, and
compute the tax basis in the stock so acquired, in the same manner as if the
optionee had exercised an NQSO. Each optionee is potentially subject to the
alternative minimum tax. In substance, a taxpayer is required to pay the higher
of his/her alternative minimum tax liability or his/her "regular" income tax
liability. As a result, a taxpayer has to determine his/her potential liability
under the alternative minimum tax.
NQSOs. With respect to NQSOs, including Director Options: (1) no income is
realized by the optionee at the time the Option is granted; (2) generally, at
exercise, ordinary income is realized by the optionee in an amount equal to the
excess, if any, of the fair market value of the shares on such date over the
exercise price, and the optionee's employer is generally entitled to a tax
deduction in the same amount, subject to applicable tax withholding
requirements; and (3) at sale, appreciation (or depreciation) after the date of
exercise is treated as either short-term or long-term capital gain (or loss)
depending on how long the shares have been held.
Limitation on Deductions. Simon Group generally will be entitled to a tax
deduction for Awards granted under the 1998 Stock Incentive Plan only to the
extent that the Participants recognize ordinary income from the Award. Code
section 162(m) contains special rules regarding the federal income tax
deductibility of compensation paid to Simon Group's Chief Executive Officer and
to each of the other four most highly compensated executive officers The general
rule is that annual compensation paid to any of these specified executives will
be deductible only to the extent that it does not exceed $1,000,000 or it
qualifies as "performance-based compensation" under Code section 162(m). The
1998 Stock Incentive Plan has been designed to permit the Committee to grant
Awards which qualify as "performance-based compensation" under Code section
162(m).
NEW PLAN BENEFITS
Other than the automatic grant of Director Options to Eligible Directors,
the grant of Awards under the 1998 Stock Incentive Plan is entirely within the
discretion of the Committee. The SDG Operating Partnership cannot determine the
extent of discretionary Award grants that will be made in the future; therefore,
with respect to discretionary Awards, the tabular disclosure of the benefits or
amounts allocated under the 1998 Stock Incentive Plan has been omitted.
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207
The following table sets forth the Director Options to be granted to
Eligible Directors in 1999 pursuant to the automatic grant made at the Annual
Meeting and discretionary awards of Options to persons who have served for more
than one year as a director of SDG without receiving an automatic grant under
the Director Plan, assuming such persons are elected to the Board of Directors
of Simon Group at the Annual Meeting. Future grants will be made in accordance
with the formula described above.
SIMON PROPERTY GROUP, L.P. 1998 STOCK INCENTIVE PLAN
ELIGIBLE DIRECTORS DOLLAR VALUE($) NUMBER OF OPTIONS
- ------------------ --------------- -----------------
Robert E. Angelica.......................................... N/A 3,000(1)
Birch Bayh.................................................. N/A 3,000
G. William Miller........................................... N/A 6,000
Fredrick W. Petri........................................... N/A 6,000
J. Albert Smith, Jr......................................... N/A 6,000
Pieter S. van den Berg...................................... N/A 5,000(2)
Philip J. Ward.............................................. N/A 6,000
M. Denise DeBartolo York.................................... N/A 3,000
- ---------------
(1) Mr. Angelica will assign the economic benefit of these options granted to
him to the Telephone Real Estate Equity Trust pursuant to an agreement dated
May 7, 1997.
(2) Mr. van den Berg will assign the economic benefit of these options granted
to him to PGGM.
APPROVAL BY STOCKHOLDERS
The effectiveness of the 1998 Stock Incentive Plan and any Award granted
thereunder is subject to approval by an affirmative vote of a majority of the
votes cast on the matter at the SDG Annual Meeting, in person or by proxy. Until
such approval is obtained, the 1998 Stock Incentive Plan shall not be effective.
If the 1998 Stock Incentive Plan is not approved, the Employee Plan and Director
Plan will continue in operation and Awards may continue to be granted
thereunder.
THE SDG BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
FOR APPROVAL OF THE 1998 STOCK INCENTIVE PLAN.
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The SDG Board of Directors has selected Arthur Andersen LLP as SDG's
independent accountants for 1998, subject to stockholder approval. Arthur
Andersen LLP has served as SDG's independent accountants since SDG's inception.
SDG expects that representatives of Arthur Andersen LLP will be present at the
SDG Annual Meeting and will be afforded an opportunity to make a statement if
they desire to do so. SDG also expects that such representatives of Arthur
Andersen LLP will be available at that time to respond to appropriate questions
addressed to the officer presiding at the SDG Annual Meeting.
THE SDG BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
FOR RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS SDG'S INDEPENDENT
ACCOUNTANTS FOR 1998.
STOCKHOLDER PROPOSALS AT 1999 ANNUAL MEETING
The date by which stockholder proposals must be received by Simon Group (if
the Merger is consummated) or SDG (if the Merger is not consummated) for
inclusion in the proxy materials relating to the 1999 annual meeting of
stockholders is April 15, 1999. Notice of any other stockholder proposals must
be received by Simon Group or SDG, as applicable, between June 25, 1999 and July
25, 1999, as more fully set forth in the Simon Group By-laws or the SDG By-laws.
In the event that the 1999 annual meeting of stockholders is called for a date
that is not within thirty (30) days before or after September 23, 1999, in order
to be timely, notice by the stockholder must be received not later than the
close of business on the tenth day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure of the date of
the annual meeting was made, whichever first occurs. Such proposals must comply
with all of the requirements set forth in the rules and regulations of the
Commission. In addition, any stockholder interested in making a proposal is
referred to the advance notification requirements set forth in the Simon Group
By-laws or the SDG By-laws.
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208
EXPERTS
SDG
The audited financial statements and schedule of SDG incorporated by
reference in the Registration Statement of which this Proxy Statement/Prospectus
is a part, have been audited, and the pro forma combined condensed balance sheet
as of December 31, 1997 and the pro forma combined condensed statement of
operations for the year ended December 31, 1997 of Simon Group included
elsewhere in this Registration Statement of which this Proxy
Statement/Prospectus is a part, have been examined by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference or included herein in reliance upon
the authority of said firm as experts in giving said reports.
CPI
The audited financial statements of CPI and CRC at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997
included elsewhere in this Proxy Statement/Prospectus have been audited by Ernst
& Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain tax matters related to SDG as described under "THE MERGER AGREEMENT
AND RELATED MATTERS -- Federal Income Tax Consequences to Holders of SDG Equity
Stock" will be passed upon by Willkie Farr & Gallagher, New York and certain tax
matters as described under "THE MERGER AGREEMENT AND RELATED MATTERS -- Opinion
of SDG's and CPI's Counsel" will be passed upon by Baker & Daniels,
Indianapolis, Indiana. The validity of the issuance of the shares of Simon Group
Equity Stock offered pursuant to this Proxy Statement/Prospectus and certain tax
matters related to CPI and certain tax matters as described under "THE MERGER
AGREEMENT AND RELATED MATTERS -- Opinion of SDG's and CPI's Counsel" will be
passed upon by Cravath, Swaine & Moore, New York, New York. Certain partners of
Cravath, Swaine & Moore (or trusts for the benefit of their families) owned, as
of May 13, 1998, an aggregate of 24,729 shares of CPI Common Stock and related
beneficial interests in CRC Common Stock.
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209
INDEX TO FINANCIAL PAGES
REPORT OF INDEPENDENT AUDITORS.............................. F-2
CONSOLIDATED BALANCE SHEETS OF CORPORATE PROPERTY
INVESTORS, INC. .......................................... F-3
CONSOLIDATED STATEMENTS OF INCOME OF CORPORATE PROPERTY
INVESTORS, INC. .......................................... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS OF CORPORATE PROPERTY
INVESTORS, INC. .......................................... F-5
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY OF CORPORATE
PROPERTY INVESTORS, INC. ................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CORPORATE
PROPERTY INVESTORS, INC. ................................. F-7
REPORT OF INDEPENDENT AUDITORS.............................. F-21
CONSOLIDATED BALANCE SHEETS OF CORPORATE REALTY CONSULTANTS,
INC. AND CONSOLIDATED SUBSIDIARIES........................ F-22
CONSOLIDATED STATEMENTS OF OPERATIONS OF CORPORATE REALTY
CONSULTANTS, INC. AND CONSOLIDATED SUBSIDIARIES........... F-23
CONSOLIDATED STATEMENTS OF CASH FLOWS OF CORPORATE REALTY
CONSULTANTS, INC. AND CONSOLIDATED SUBSIDIARIES........... F-24
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY OF CORPORATE
REALTY CONSULTANTS, INC. AND CONSOLIDATED SUBSIDIARIES.... F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CORPORATE
REALTY CONSULTANTS, INC. AND CONSOLIDATED SUBSIDIARIES.... F-26
F-1
210
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of Corporate Property Investors
We have audited the accompanying consolidated balance sheets of Corporate
Property Investors as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of Corporate Property Investors' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Corporate Property Investors at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
New York, NY
February 5, 1998
except for the note, Commitments,
Contingencies and Other Comments
item (1), as to which the date is
February 19, 1998
F-2
211
CORPORATE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
----------- ------------------------
1998 1997 1996
---- ---- ----
(UNAUDITED)
($ IN THOUSANDS)
ASSETS
Real estate investments:
Operating properties................................. $1,909,854 $2,341,678 $2,377,177
Operating property held for sale..................... 584,967 -- --
Investments in real estate joint ventures............ 111,704 109,172 159,453
Construction-in-progress and pre-construction costs
($20,773, $20,510 and $2,605)..................... 37,315 31,697 77,032
Land held for development............................ 23,845 22,420 6,809
Properties subject to net lease and other............ 20,698 21,529 16,974
---------- ---------- ----------
2,688,383 2,526,496 2,637,445
Cash and cash equivalents.............................. 16,196 124,808 106,495
Short-term investments................................. -- 40,000 248,459
Receivables and other assets........................... 104,177 118,950 122,511
---------- ---------- ----------
Total assets................................. $2,808,756 $2,810,254 $3,114,910
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgages payable.................................... $ 14,285 $ 15,645 $ 21,079
Notes and Bonds payable.............................. 843,363 843,415 943,611
Accounts payable and other liabilities............... 122,956 148,580 194,442
---------- ---------- ----------
Total liabilities............................ 980,604 1,007,640 1,159,132
---------- ---------- ----------
Shareholders' equity:
6.5% First Series Perpetual Preference Shares, $1,000
par value, 209,249 shares authorized, issued and
outstanding....................................... 209,249 209,249 209,249
Series A Common Shares, $1 par value, 33,423,973,
33,427,848 and 34,445,889 authorized, and
26,415,480, 26,419,355 and 27,437,396 issued and
outstanding....................................... 26,415 26,419 27,437
Capital in excess of par value....................... 1,602,067 1,602,111 1,743,807
Undistributed net income............................. 104,390 78,851 14,161
Treasury shares, 1,092,071, 1,092,500 and 404,967
Common Shares at cost............................. (113,969) (114,016) (38,876)
---------- ---------- ----------
Total shareholders' equity................... 1,828,152 1,802,614 1,955,778
---------- ---------- ----------
Total liabilities and shareholders' equity... $2,808,756 $2,810,254 $3,114,910
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-3
212
CORPORATE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
-------------------- ------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
($ IN THOUSANDS)
REVENUE:
Minimum rent........................... $ 85,481 $ 75,764 $319,862 $194,661 $169,344
Overage rent........................... 3,098 2,373 10,489 7,572 6,561
Expense recoveries..................... 36,973 33,620 138,579 111,708 101,429
Other revenues......................... 1,544 972 7,257 8,322 4,283
Interest income........................ 1,308 6,361 17,601 26,846 26,615
-------- -------- -------- -------- --------
Total revenue.................. 128,404 119,090 493,788 349,109 308,232
-------- -------- -------- -------- --------
EXPENSES:
Property expenses...................... 47,463 44,590 187,911 135,978 119,891
Provision for bad debts................ 726 629 2,732 2,181 3,048
Depreciation and amortization.......... 22,334 22,488 91,312 65,581 56,795
Administrative, trustee and other
expenses............................ 2,206 2,187 8,860 9,028 8,422
Interest expense....................... 16,474 19,014 69,562 66,536 51,828
Write-down of investment............... -- -- -- 8,200 --
-------- -------- -------- -------- --------
Total expenses................. 89,203 88,908 360,377 287,504 239,984
-------- -------- -------- -------- --------
Income before equity in earnings of joint
ventures............................... 39,201 30,182 133,411 61,605 68,248
Equity in earnings of joint ventures..... 5,554 5,254 21,390 48,796 50,709
-------- -------- -------- -------- --------
Income before gain on sales of properties
and merger-related costs............... 44,755 35,436 154,801 110,401 118,957
Gain on sales of properties.............. 44,311 116,522 122,410 73,970 398
-------- -------- -------- -------- --------
Merger-related costs..................... (7,539) -- -- -- --
Net income............................... 81,527 151,958 277,211 184,371 119,355
Preference share distributions earned.... (3,428) (3,428) (13,712) (13,712) (13,642)
-------- -------- -------- -------- --------
Net Income available to Common
Shareholders........................... $ 78,099 $148,530 $263,499 $170,659 $105,713
======== ======== ======== ======== ========
Net Income per average Common Share
outstanding............................ $3.08 $5.70 $10.20 $7.74 $5.00
-------- -------- -------- -------- --------
Net Income per average Common Share
outstanding assuming dilution.......... $3.01 $5.51 $10.14 $7.74 $5.00
-------- -------- -------- -------- --------
The accompanying notes are an integral part of these statements.
F-4
213
CORPORATE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
---------------------- -----------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net Income.......................................... $ 81,527 $ 151,958 $ 277,211 $ 184,371 $ 119,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of real estate joint
ventures........................................ (5,554) (5,254) (21,390) (48,796) (50,709)
Depreciation and amortization..................... 22,334 22,488 91,312 65,581 56,795
Gain on disposition of properties................. (44,311) (116,522) (122,410) (73,970) (398)
Write-down of investment.......................... -- -- -- 8,200 --
Decrease/(increase) in receivables and other
assets.......................................... 13,397 10,478 1,298 (5,787) 2,840
(Decrease)/increase in accounts payable and
accrued expenses................................ (20,892) (36,882) (6,529) (5,569) 476
--------- --------- --------- --------- ---------
Net cash provided by operating activities........... 46,501 26,266 219,492 124,030 128,359
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Investments in real estate.......................... (222,334) (20,926) (71,268) (155,144) (116,362)
Investments in real estate joint ventures........... (4,095) -- (22,566) -- (12,490)
Distributions from real estate joint ventures....... 6,723 51,495 68,392 49,168 50,926
Purchases of short-term investments................. -- (135,450) (205,450) (400,353) (104,574)
Sales and maturities of short-term investments...... 40,000 177,888 413,909 285,536 234,834
Cash (paid)/acquired in connection with acquisition
of property interests to pay related net
liabilities assumed of $76,346 in 1996............ -- -- (37,807) 58,004 --
Proceeds from repayment of mortgages receivable from
real estate joint venture partners................ -- 45,822 45,822 -- --
Proceeds from disposition of properties............. 82,337 1,657 3,482 3,500 865
Other............................................... (395) (837) -- (1,998) (4,003)
--------- --------- --------- --------- ---------
Net cash provided by/(used in) investing
activities........................................ (97,764) 119,649 194,514 (161,287) 49,196
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Issuance of Notes................................... -- -- -- 246,943 --
Repayment of Bonds payable at maturity.............. -- (100,000) (100,000) --
Proceeds from revolving credit drawdown............. 40,000 -- -- -- --
Repayment of revolving credit drawdown.............. (40,000) -- -- -- --
Issuance of Common Shares........................... 47 60 60 68 22,545
Acquisition of Common Shares........................ (48) -- (75,140) -- --
Acquisition and retirement of Common Shares......... -- -- (2,805) (15,504) --
Principal payments on mortgages..................... (1,360) (1,306) (5,287) (383) (242)
Cash distributions.................................. (55,988) (55,419) (212,521) (170,210) (163,660)
--------- --------- --------- --------- ---------
Net cash (used in)/provided by financing
activities........................................ (57,349) (156,665) (395,693) 60,914 (141,357)
--------- --------- --------- --------- ---------
(Decrease)/increase in cash and cash equivalents...... (108,612) (10,750) 18,313 23,657 36,198
Cash and cash equivalents at beginning of period...... 124,808 106,495 106,495 82,838 46,640
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period............ $ 16,196 $ 95,745 $ 124,808 $ 106,495 $ 82,838
========= ========= ========= ========= =========
Supplemental Disclosure:
Interest paid (net of amounts capitalized) during
the period........................................ $ 28,988 $ 41,054 $ 74,200 $ 60,470 $ 50,848
Non-cash investing and financing activities:
Real estate interests, subject to mortgages of
$34,755, acquired for common shares............. -- -- -- $ 968,457 --
Redemption of common shares in exchange for real
estate interests, subject to mortgages of
$14,962 (1996).................................. -- $ 142,521 $ 142,521 $ 187,581 --
Mortgage note for $7,000 and land valued at $4,100
received in exchange for property with book
value of $6,528 (1997).......................... -- -- -- -- --
The accompanying notes are an integral part of these statements.
F-5
214
CORPORATE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHARES OF BENEFICIAL INTEREST
---------------------------------------------
FOR THE THREE YEARS ENDED 6.5% FIRST SERIES A
DECEMBER 31, 1997 AND THE SERIES PERPETUAL COMMON CAPITAL IN
THREE MONTHS ENDED PREFERENCE SHARES SHARES EXCESS OF UNDISTRIBUTED TREASURY
MARCH 31, 1998 (UNAUDITED) $1,000 PAR VALUE $1 PAR VALUE PAR VALUE NET INCOME SHARES TOTAL
-------------------------- ----------------- ------------ ---------- ------------- --------- ----------
($ IN THOUSANDS)
Balance at January 1, 1995............... $209,249 $21,450 $1,007,131 $ -0- $ (39,348) $1,198,482
Net income for the year................ -- -- -- 119,355 -- 119,355
Dividends paid:
$69.7873 per 6.5% First Series
Perpetual Preference Share......... -- -- -- (14,603) -- (14,603)
$7.0625 per Common Share............. -- -- (44,305) (104,752) -- (149,057)
Net proceeds from issuance of Common
Shares............................... -- 167 21,969 -- 409 22,545
Acquisition and retirement of Common
Shares and other..................... -- (2) (327) -- -- (329)
-------- ------- ---------- --------- --------- ----------
Balance at December 31, 1995............. 209,249 21,615 984,468 -0- (38,939) 1,176,393
Net income for the year................ -- -- -- 184,371 -- 184,371
Dividends paid:
$65.5282 per 6.5% First Series
Perpetual Preference Share......... -- -- -- (13,712) -- (13,712)
$7.3825 per Common Share............. -- -- -- (156,498) -- (156,498)
Exchange of Common Shares for partners'
interests in certain operating
properties........................... -- 7,392 961,065 -- -- 968,457
Net proceeds from issuance of Common
Shares............................... -- -- -- -- 68 68
Redemption and retirement of Common
Shares in exchange for interests in
certain operating properties......... -- (1,514) (196,667) -- -- (198,181)
Acquisition and retirement of Common
Shares and other..................... -- (56) (5,059) -- (5) (5,120)
-------- ------- ---------- --------- --------- ----------
Balance at December 31, 1996............. 209,249 27,437 1,743,807 14,161 (38,876) 1,955,778
Net income for the year................ -- -- -- 277,211 -- 277,211
Dividends paid:
$65.5282 per 6.5% First Series
Perpetual Preference Share......... -- -- -- (13,712) -- (13,712)
$7.685 per Common Share.............. -- -- -- (198,809) -- (198,809)
Net proceeds from issuance of Common
Shares............................... -- -- -- -- 60 60
Redemption and retirement of Common
Shares in exchange for interests in
certain operating property........... -- (1,089) (143,859) -- -- (144,948)
Acquisition and retirement of Common
Shares and other..................... -- 71 2,163 -- (75,200) (72,966)
-------- ------- ---------- --------- --------- ----------
Balance at December 31, 1997............. 209,249 26,419 1,602,111 78,851 (114,016) 1,802,614
Net income for the period................ -- -- -- 81,527 -- 81,527
Dividends paid:
$32.7641 per 6.5% First Series
Perpetual Preference Share........... -- -- -- (6,855) -- (6,855)
$1.94 per Common Share................. -- -- -- (49,133) -- (49,133)
Net proceeds from issuance of Common
Shares................................. -- -- -- -- 47 47
Acquisition of Common Shares and
other................................ -- (4) (44) -- -- (48)
-------- ------- ---------- --------- --------- ----------
Balance at March 31, 1998(unaudited)..... $209,249 $26,415 $1,602,067 $ 104,390 $(113,969) $1,828,152
======== ======= ========== ========= ========= ==========
The accompanying notes are an integral part of these statements.
F-6
215
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
DESCRIPTION OF BUSINESS
Corporate Property Investors, Inc. ("CPI") is a self managed real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended.
On March 13, 1998, CPI, formerly a Massachusetts business trust, reorganized
into a corporation under the laws of the State of Delaware. CPI engages in the
ownership, operation, management, leasing, acquisition, development and
expansion of income producing properties located throughout the United States.
As of March 31, 1998, CPI owns interests in, directly or through interests in
joint ventures, 23 super-regional and regional shopping centers, the General
Motors Building, N.Y.C., three smaller office buildings and other properties.
The proportionate property revenues of CPI's lines of business are
summarized as follows:
MARCH 31, DECEMBER 31,
------------ --------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
Super-regional and regional shopping
centers........................... 80% 78% 79% 87% 88%
General Motors Building............. 17 18 17 8 7
Other office buildings.............. 2 3 3 4 4
Other............................... 1 1 1 1 1
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CPI and its
consolidated subsidiaries. Significant intercompany balances, transactions and
accounts are eliminated in consolidation. CPI accounts for its investments in
real estate joint ventures which represent non-controlling ownership interests
under the equity method of accounting as CPI exercises significant influence
over the operating and financial policies of such joint ventures.
On December 31, 1997, CPI changed its method of accounting for investments
in real estate joint ventures from proportionate consolidation, whereby CPI's
financial statements included its proportionate share of the individual assets,
liabilities and items of income and expense of such partnerships, to the equity
method of accounting, whereby CPI's investments in such ventures are recorded
initially at cost and subsequently adjusted for net equity in income/(loss) and
cash contributions and distributions. CPI is accounting for this change
retroactively and, accordingly, has recast the 1997 quarterly and the 1996 and
1995 financial statements presented. This change did not affect CPI's reported
net income or financial position.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
REAL ESTATE AND DEPRECIATION AND AMORTIZATION POLICY
Real estate to be held and used in operations is stated at cost.
Depreciation and amortization are computed utilizing the straight-line method
over the estimated useful lives of the buildings and leaseholds.
Real estate held for sale is recorded at the lower of its carrying amount
or fair value less cost to sell. Depreciation is not recorded during the period
real estate is held for sale.
F-7
216
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
REAL ESTATE AND DEPRECIATION AND AMORTIZATION POLICY -- (CONTINUED)
Interest, real property taxes, salaries and related costs, and other
carrying costs are capitalized during periods of construction, development or
improvement. Department store and tenant inducements and costs associated with
leasing of operating properties are capitalized and amortized on a straight-line
basis over the lives of the related operating covenants and tenant leases.
Interest costs capitalized during the three months ended March 31, 1998 and
1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995 were
$1.2 million, $0.8 million, $3.7 million, $7.8 million, and $7.0 million,
respectively.
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing the fair value of the asset less cost to sell to
its carrying amount. Effective January 1, 1996, CPI adopted Statement 121 for
which no provision was required.
DEFERRED CHARGES
Direct financing and issue costs on debt are deferred and amortized over
the terms of the related debt as a component of interest expense.
REVENUE RECOGNITION
Minimum rents are accrued on a straight-line basis over the terms of the
respective leases. Overage rents are recognized when earned. Expense recoveries
from tenants for real estate taxes and other recoverable operating expenses are
recognized as revenue in the period the applicable expenditures are chargeable
to tenants.
TAXES
CPI intends to continue to qualify as a real estate investment trust as
defined in the Internal Revenue Code, and as such will not be taxed on that
portion of its taxable income which is distributed to shareholders, provided
that at least 95% of its real estate investment trust taxable income is
distributed. CPI has distributed all of its taxable income for 1995 and 1996 and
intends to distribute all of its 1997 and 1998 taxable income and, accordingly,
no provision for Federal income taxes has been made in the financial statements.
INVESTMENTS IN REAL ESTATE JOINT VENTURES
During 1996 and 1995 CPI had interests ranging from 15% to 62 1/2% in
twelve real estate joint ventures which operated and net leased real estate. In
November and December 1996, CPI acquired its partners' interests in certain
joint ventures and sold a joint venture interest in January 1997 (see
"Acquisitions and Dispositions"). Accordingly, income and expenses shown below
include amounts for such joint ventures for the respective period the joint
ventures were owned by CPI.
As a result of the aforementioned transactions CPI has a 50% interest in
seven real estate joint ventures each of which own and operate a shopping
center. In addition, CPI has a 50% interest in a joint venture which is
developing a super-regional shopping center in Georgia for which CPI is
providing 85% of the construction funding. Generally, net income/(loss) for each
joint venture is allocated consistent with the ownership interests held by each
joint venturer. As of March 31, 1998 (unaudited) and December 31, 1997 and 1996,
the
F-8
217
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
INVESTMENTS IN REAL ESTATE JOINT VENTURES -- (CONTINUED)
unamortized excess of CPI's investment over its share of the equity in the
underlying net assets of the joint ventures was approximately $42.1 million,
$42.4 million and $45.6 million, respectively. This excess is amortized over the
estimated lives of the related real estate assets. The combined condensed
balance sheets of the real estate joint ventures, after elimination of mortgages
payable to CPI in 1996, as of March 31, 1998 (unaudited), December 31, 1997 and
1996 and the related statements of net income for the three months ended
March 31, 1998 and 1997 (unaudited) and for the years ended December 31, 1997,
1996 and 1995 follows:
MARCH 31, DECEMBER 31,
---------------- --------------------
1998 1997 1996
---------------- -------- --------
(UNAUDITED)
($ IN THOUSANDS)
Assets
Real estate assets................................... $327,729 $322,467 $351,043
Other................................................ 22,698 26,995 19,550
-------- -------- --------
Total Assets................................. $350,427 $349,462 $370,593
======== ======== ========
Liabilities
Mortgages payable.................................... $236,802 $237,868 $149,540
Other................................................ 9,750 10,675 11,396
-------- -------- --------
Total Liabilities............................ $246,552 $248,543 $160,936
======== ======== ========
Joint Venturers' Equity
CPI.................................................. $ 69,577 $ 66,816 $113,824
Others............................................... 34,298 34,103 95,833
-------- -------- --------
Total Joint Venturers' Equity................ $103,875 $100,919 $209,657
======== ======== ========
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- --------- ---------
(UNAUDITED)
($ IN THOUSANDS)
Income............................ $ 30,724 $ 28,725 $118,461 $ 293,293 $ 299,559
Expenses.......................... (19,125) (20,218) (76,284) (173,303) (177,439)
-------- -------- -------- --------- ---------
Net Income........................ $ 11,599 $ 8,507 $ 42,177 $ 119,990 $ 122,120
======== ======== ======== ========= =========
F-9
218
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. All earnings per share amounts for all periods have been
presented to conform to Statement 128 requirements. The following table sets
forth the computation of basic and diluted earnings per common share:
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
----------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ----------- ----------- -----------
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
NUMERATOR:
Net income................ $ 81,527 $ 151,958 $ 277,211 $ 184,371 $ 119,355
Preference Share
distributions earned... (3,428) (3,428) (13,712) (13,712) (13,642)
----------- ----------- ----------- ----------- -----------
Numerator for basic
earnings per
share -- income
available to Common
Shareholders........... 78,099 148,530 263,499 170,659 105,713
Effect of dilutive
securities:
Preference Share
distributions
earned............... 3,428 3,428 13,712 13,712 13,642
----------- ----------- ----------- ----------- -----------
Numerator for diluted
earnings per share..... $ 81,527 $ 151,958 $ 277,211 $ 184,371 $ 119,355
=========== =========== =========== =========== ===========
DENOMINATOR:
Denominator for basic
earnings per share --
weighted average
shares................. 25,353,000 26,066,000 25,835,000 22,045,000 21,160,000
Effect of dilutive
securities:
Employee Stock Options.... 237,000 8,000
Convertible Preference
Shares................. 1,505,000 1,505,000 1,505,000 1,505,000 1,507,000
----------- ----------- ----------- ----------- -----------
Denominator for diluted
earnings per share..... 27,095,00 27,571,000 27,348,000 23,550,000 22,667,000
=========== =========== =========== =========== ===========
Basic earnings per
share.................. $ 3.08 $ 5.70 $ 10.20 $ 7.74 $ 5.00
=========== =========== =========== =========== ===========
Diluted earnings per
share.................. $ 3.01 $ 5.51 $ 10.14 $ 7.74 $ 5.00
=========== =========== =========== =========== ===========
The above computations are based upon the dilutive effects of agreements
presently in effect. The basis for such computations is anticipated to change in
the event the merger with Simon DeBartolo Group, Inc. (see "Commitments,
Contingencies and Other Comments") is completed.
F-10
219
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
SHORT TERM INVESTMENTS
At March 31, 1998 (unaudited) and December 31, 1997 and 1996, short-term
investments, including cash equivalents, are stated at amortized cost (which
equates to market) and consist principally of U.S. Government securities and
repurchase agreements collateralized by U.S. Government securities which mature
within one year and are intended to be held to maturity. CPI considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
EMPLOYEE STOCK BASED PLANS
CPI follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock based plans. Accordingly, because the purchase price under the employee
share purchase plan and the exercise price under the share option plan equals
the fair value of CPI's stock at the dates of purchase or grant, respectively,
no compensation expense is recognized under the plans.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for fiscal years beginning after December 15, 1997. CPI is
assessing the operating and reportable segment rules and is considering the
impact of this Statement on its financial statement disclosures.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the presentation for the period ended March 31, 1998.
These reclassifications have no significant impact on CPI's financial
statements.
F-11
220
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITIONS AND DISPOSITIONS
On November 15, 1996, CPI issued 5.76 million Series A Common Shares, and
caused Corporate Realty Consultants, Inc. ("CRC") to issue related interests in
CRC, to a shareholder in exchange for $757 million of partnership interests in
certain operating properties holding interests in seven regional shopping
centers, one mixed-use development and the General Motors Building. In addition,
on December 13, 1996, CPI issued 1.72 million Series A Common Shares, and caused
CRC to issue related interests in CRC, to an affiliate of a shareholder in
exchange for a $227 million partnership interest holding the remaining interest
in the General Motors Building. The transactions were accounted for using the
purchase method of accounting and, accordingly, commencing on November 15, 1996,
100% of the assets, liabilities, revenues and expenses of the wholly-owned
properties are included in CPI's financial statements. Prior thereto, CPI had
accounted for its investment in these properties under the equity method of
accounting.
On December 31, 1996 and January 2, 1997, respectively, CPI, at a cost of
$198 million and $145 million, respectively, redeemed 1.51 million and 1.09
million Series A Common Shares (and acquired related interests in CRC) held by a
shareholder in exchange for cash of $13 million and interests in three shopping
center properties valued at $330 million. The exchanges resulted in gain on
disposition of the properties of $186.7 million, of which $71.7 million was
recognized in December 1996 and $115 million was recognized in January 1997.
On January 9, 1998, CPI purchased a super-regional shopping center and
adjoining land parcels located in Atlanta, Georgia for $198 million.
Approximately $40 million was borrowed under a revolving credit facility to
partially fund the purchase.
On January 30, 1998, CPI sold a super-regional shopping center for $81
million. Proceeds from the sale were used to repay the aforementioned borrowing
under the revolving credit facility.
The following unaudited pro forma results of operations assume the
acquisitions and dispositions closed as of January 1, 1995, and give effect to
adjustments for depreciation expense related to the interest in properties
acquired and elimination of gain on the disposition of the properties.
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Rentals and related property
income.................... $ 126,132 $ 114,147 $ 481,907 $ 443,391 $ 419,496
=========== =========== =========== =========== ===========
Net Income.................. $ 38,256 $ 38,053 $ 167,683 $ 141,033 $ 149,928
=========== =========== =========== =========== ===========
Net Income per average
Common Share
outstanding............... $ 1.37 $ 1.33 $ 5.96 $ 4.90 $ 5.25
=========== =========== =========== =========== ===========
Average Common Shares
outstanding............... $25,353,000 $26,066,000 $25,835,000 $26,011,000 $25,949,000
=========== =========== =========== =========== ===========
F-12
221
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE
CONSTRUCTION & LAND HELD ACCUMULATED
MARCH 31, 1998 BUILDINGS & PRE-CONSTRUCTION FOR DEPRECIATION AND MORTGAGES
(UNAUDITED) LAND LEASEHOLDS COSTS DEVELOPMENT AMORTIZATION PAYABLE
- -------------- -------- ----------- ---------------- ----------- ---------------- ---------
($ IN THOUSANDS)
Shopping centers........ $225,214 $2,116,858 $37,315 $ 6,834 $502,899 $ 1,306
Office building held for
sale.................. 12,933 679,623 -- -- 107,589 11,976
Office buildings
(including related
mortgage loan of
$20,565) and
industrial park....... 12,886 80,439 -- 516 22,644 --
Properties subject to
net lease (principally
retail facilities) and
other (including
mortgage loans of
$23,465 of which
$16,495 is related)... 6,040 21,003 -- 16,495 6,345 1,003
-------- ---------- ------- ------- -------- -------
$257,073 $2,897,923 $37,315 $23,845 $639,477 $14,285
======== ========== ======= ======= ======== =======
DECEMBER 31, 1997
- -----------------
Shopping centers........ $196,052 $2,013,456 $30,994 $ 6,835 $517,386 $ 1,361
Office buildings
(including related
mortgage loan of
$20,565) and
industrial park....... 25,819 744,839 703 516 121,102 13,230
Properties subject to
net lease (principally
retail facilities) and
other (including
mortgage loans of
$22,054 of which
$15,069 is related)... 6,796 20,993 -- 15,069 6,260 1,054
-------- ---------- ------- ------- -------- -------
$228,667 $2,779,288 $31,697 $22,420 $644,748 $15,645
======== ========== ======= ======= ======== =======
DECEMBER 31, 1996
- -----------------
Shopping centers
(including related
mortgage loans of
$45,835).............. $191,759 $1,963,579 $77,032 $ 6,293 $442,202 $ 1,568
Office buildings
(including mortgage
loan of $20,565) and
industrial park....... 26,003 748,802 -- 516 110,764 18,100
Properties subject to
net lease (principally
retail facilities) and
other................. 8,370 15,233 -- -- 6,629 1,411
-------- ---------- ------- ------- -------- -------
$226,132 $2,727,614 $77,032 $ 6,809 $559,595 $21,079
======== ========== ======= ======= ======== =======
F-13
222
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECEIVABLES AND OTHER ASSETS
MARCH 31, DECEMBER 31,
---------------- --------------------
1998 1997 1996
---------------- -------- --------
(UNAUDITED)
($ IN THOUSANDS)
Receivables (principally rentals) less allowance of
$18,165, $18,429 and $19,165......................... $ 61,310 $ 71,363 $ 75,474
Prepaid expenses and deferred charges.................. 14,213 20,301 19,624
Deferred compensation plan investments................. 14,607 13,643 13,866
Issue costs on recourse debt, net of accumulated
amortization of $3,810, $3,614 and $5,018............ 6,481 6,677 7,539
Tenant security deposits............................... 2,173 2,380 2,380
Other.................................................. 5,393 4,586 3,628
-------- -------- --------
$104,177 $118,950 $122,511
======== ======== ========
MORTGAGES, NOTES AND BONDS PAYABLE
Mortgages payable are due in installments over various periods through
2009. Interest rates on the mortgages range from 4 3/4% to 9 3/4% per annum. The
mortgage lenders have no recourse beyond the related property for repayment of
mortgage loans.
NOTES AND BONDS PAYABLE
MARCH 31, DECEMBER 31,
---------------- --------------------
1998 1997 1996
---- ---- ----
(UNAUDITED)
($ IN THOUSANDS)
8.75% Bonds due 1997 (effective rate of 8.7%).......... -- -- $100,000
9.625% Note due 1998................................... $ 18,363 $ 18,415 18,611
9% Notes due 2002 (effective rate of 9.1%)............. 250,000 250,000 250,000
7.05% Notes due 2003 (effective rate of 7.2%).......... 100,000 100,000 100,000
7.75% Notes due 2004 (effective rate of 7.9%).......... 150,000 150,000 150,000
7.18% Notes due 2013 (effective rate of 7.2%).......... 75,000 75,000 75,000
7.875% Notes due 2016 (effective rate of 7.9%)......... 250,000 250,000 250,000
-------- -------- --------
$843,363 $843,415 $943,611
======== ======== ========
As of December 31, 1997, principal payments required on all debt are:
AMOUNT
----------
($ IN
THOUSANDS)
Years ending December 31,
1998........................................................ $ 23,954
1999........................................................ $ 5,820
2000........................................................ $ 3,232
2001........................................................ $ 470
2002........................................................ $250,584
Thereafter.................................................. $575,000
The fair value of (i) mortgages and (ii) notes and bonds payable is
estimated to be $13.9 million and $879 million, respectively, at March 31, 1998
(unaudited), $15.2 million and $902 million, respectively, at
F-14
223
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGES, NOTES AND BONDS PAYABLE -- (CONTINUED)
December 31, 1997, and $19.9 million and $973 million, respectively, at December
31, 1996 using discounted cash flow analyses based upon indications of market
pricing for similar types of debt.
CORPORATE REALTY CONSULTANTS, INC.
Substantially all of the outstanding shares of CRC have been deposited in
trusts, the beneficial interests in which are owned by participating CPI
shareholders in proportion to their respective number of CPI shares.
The condensed consolidated balance sheets of CRC and its subsidiaries and
the related statements of operations, which are not included in the financial
statements of CPI, are summarized as follows:
BALANCE SHEETS
MARCH 31, DECEMBER 31,
----------- --------------------
1998 1997 1996
---- ---- ----
(UNAUDITED)
($ IN THOUSANDS)
Assets:
Buildings............................................... $17,076 $16,938 $17,399
Investments in joint ventures........................... 19,341 18,007 449
Land.................................................... 4,595 4,595 4,595
Other investments....................................... -- -- 1,104
------- ------- -------
41,012 39,540 23,547
Cash and cash equivalents............................... 3,900 4,147 4,797
Receivables and other assets............................ 2,296 2,376 2,710
------- ------- -------
Total Assets.................................. $47,208 $46,063 $31,054
======= ======= =======
Liabilities and Stockholders' Equity:
Mortgage and notes payable.............................. $38,181 $36,818 $21,988
Other liabilities....................................... 5,025 4,929 4,027
------- ------- -------
Total liabilities....................................... 43,206 41,747 26,015
Stockholders' equity.................................... 4,002 4,316 5,039
------- ------- -------
Total Liabilities and Stockholders' Equity.... $47,208 $46,063 $31,054
======= ======= =======
STATEMENTS OF OPERATIONS
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------- ------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(UNAUDITED)
($ IN THOUSANDS)
Net income/(loss)............................... $ (45)(1) $ (21) $1,177(1)(2) $(920)(3) $ (6)
Per CRC average common share outstanding........ $(.02) $(.01) $ .43 $(.39) $ Nil
Per CPI average common share outstanding........ Nil Nil $ .04 $(.04) $ Nil
- ---------------
(1) Includes 85% share of gain on sale of land by a joint venture.
(2) Includes gain on sale of partnership interests of $1,259,000.
(3) Includes write-down of $1,100,000 on land held for sale.
F-15
224
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CORPORATE REALTY CONSULTANTS, INC. -- (CONTINUED)
For the three months ended March 31, 1998 and 1997 (unaudited) CRC paid
distributions of $268,000 and $276,000. Such distributions are equivalent to one
cent per CPI common share for each period. For the years ended December 31,
1997, 1996 and 1995, CRC paid distributions of $1,095,000, $965,000 and
$1,413,000, respectively. Such distributions are equivalent to 4, 4 1/4 and
6 1/4 cents, respectively, per CPI common share for each year.
LEASES
CPI has various interests in regional shopping centers, office buildings
and other operating properties located primarily in the northeast and southern
regions of the United States. Rental income from such properties is earned under
leases that are classified and accounted for as operating leases. Leases with
retail stores generally provide for minimum rentals plus overage rentals based
on the tenants' sales volume and also require the tenant to pay a portion of
property operating expenses. Office tenant leases provide for rent plus
reimbursement of operating expenses. Terms of leases generally range from 5 to
30 years and contain various renewal options. Terms of net leases range from 15
to 30 years excluding various renewal options. In addition, CPI owns land under
an office building net leased to CRC for a period of 99 years at an annual
rental of $450,000.
At December 31, 1997, future minimum rentals to be received under the
above-mentioned leases are:
AMOUNT
----------------
($ IN THOUSANDS)
Years ending December 31,
1998........................................................ $ 302,830
1999........................................................ 280,920
2000........................................................ 266,000
2001........................................................ 252,460
2002........................................................ 228,520
Thereafter.................................................. 893,030
----------
Total............................................. $2,223,760
==========
At December 31, 1997, future minimum rentals to be paid under
non-cancellable ground leases and shopping center operating leases (which expire
principally in 2002, 2009 and 2070) are $.75 million for each of the years
ending December 31, 1998 through December 31, 2001, $.6 million for the year
ending December 31, 2002 and $8.5 million thereafter for a total of $12.1
million. The leases provide for renewals at the end of the initial lease terms
for periods ranging from 5 to 60 years.
PREFERENCE SHARES
The 6.5% First Series Perpetual Preference Shares are convertible into
voting Series A Common Shares at the adjusted conversion price of $139.07 per
Common Share for years ended December 31, 1997 and 1996 and $138.87 per Common
Share for year ended December 31, 1995, (subject to adjustment in certain
events), at the option of the holder after the later of August 31, 2000, and the
end of the first year in which distributions that would have been payable on the
voting Series A Common Shares into which a single 6.5% First Series Perpetual
Preference Share could have been converted on the preceding December 31 would
have exceeded $65.53. Conversion may occur before such date if more than 50% of
the outstanding 6.5% First Series Perpetual Preference Shares elect to convert.
A total of 1,600,000 voting Series A Common Shares have been reserved for
issuance upon conversion. The dividends on 6.5% First Series Perpetual
Preference Shares are cumulative, computed on a compound quarterly basis and
payable semi-annually on March 31 and September 30, when and as declared by
CPI's Board of Directors.
F-16
225
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES -- (CONTINUED)
The dividends are payable solely out of operating cash flow, as defined. At
December 31, 1997, accumulated dividends earned but not yet payable amounted to
$3.4 million ($16.38 per share). The holders of 6.5% First Series Preference
Shares are entitled to vote with voting Series A Common Shares as a single
class; each First Series Preference Share is entitled to a number of votes equal
to its par value divided by the conversion price. The 6.5% First Series
Preference Shares have a liquidation preference of $1,000 par value plus
accumulated and unpaid dividends.
COMMON SHARE PURCHASE PLAN
Certain shareholders have entered into contracts to purchase $4.1 million
of units (Series A Common Shares and related interests in CRC) quarterly through
November 1999. Such units:
(i) will have been tendered by shareholders at prices not to exceed
the appraised net asset value per CPI/CRC unit as of the preceding December
31st (the "Appraised Value") and/or
(ii) will be newly issued at the Appraised Value.
CPI is not obligated to purchase tendered units in excess of units
contracted to be sold to shareholders. The contracts are terminable by CPI at
any time and by each participating shareholder, 30 days after notice to CPI. CPI
has elected to suspend the operation of such contracts until further notice.
DEFERRED COMPENSATION PLAN
CPI has a deferred compensation program which permits trustees and certain
management employees to defer portions of their compensation on a pretax basis.
The participants designate the investment of the deferred funds, based on
various alternatives and the Company historically purchases such investments
which are included in receivables and other assets. Total deferred compensation
liabilities at March 31, 1998 (unaudited) and December 31, 1997 and 1996 were
$23.3 million, $22.2 million and $21.9 million, respectively.
401(K) SAVINGS PLAN
CPI is the sponsor of a defined contribution plan that provides retirement
benefits for full time employees. The plan is administered by a third party. CPI
does not contribute to the plan and plan costs are not significant for the
periods presented.
EMPLOYEE SHARE PURCHASE PLAN
The Employee Share Purchase Plan, as amended, provides for the issuance of
rights to purchase units (Series A Common Shares and related interests in CRC)
at fair value, as defined. The Plan stipulates that consideration for each unit
purchased will be any combination of cash, a recourse note receivable from the
employee and a permanent restriction payable to CPI upon transfer of the unit.
Sales of units issued pursuant to this plan are restricted during periods
ranging up to 60 months following the issuance of rights. No rights were issued
during the three months ended March 31, 1998 or 1997 (unaudited), nor the years
ended December 31, 1997, 1996 and 1995. As of March 31, 1998 (unaudited), $32.3
million of notes receivable and permanent restrictions relating to the 463,000
units purchased by employees has been deducted from "Capital in Excess of Par
Value."
SHARE OPTION PLAN
Under CPI's 1993 Share Option Plan 1,000,000 Series A Common Shares of
Beneficial Interest in CPI (and related interests in CRC) are reserved for
issuance to employees and directors upon exercise of options. The option prices
are to be equal to the fair value of the optioned shares at the date of grant
and each option
F-17
226
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHARE OPTION PLAN -- (CONTINUED)
term shall not exceed ten years. A reconciliation of the share option activity,
and related information, as of March 31, 1998 and 1997 (unaudited) and December
31, 1997, 1996 and 1995 and for the respective three month and twelve month
periods then ended are presented below.
MARCH 31, 1998 MARCH 31, 1997 DECEMBER 31, 1997 DECEMBER 31,1996 DECEMBER 31, 1995
------------------ ------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(UNAUDITED)
Outstanding at
beginning of
period............. 814,000 $127.39 336,000 $138.83 336,000 $138.83 339,000 $138.83 345,000 $138.83
Granted.............. 480,000 120.50 515,000 120.50
Exercised............
Cancelled............ (2,000) 138.83 (37,000) 135.36 (3,000) 138.83 (6,000) 138.83
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Outstanding at end of
period............. 814,000 $127.39 814,000 $128.02 814,000 $127.39 336,000 $138.83 339,000 $138.83
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Exercisable at end of
period............. 814,000 $127.39 250,500 $138.83 814,000 $127.39 252,000 $138.83 170,000 $138.83
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
The per share weighted average estimated fair value of options granted
during 1997 was $1.23. The fair value was estimated on the date of grant using
the Black-Scholes (Minimum Value) option-pricing model with the following
assumptions: risk-free interest rate of 6.74%; dividend yield of 6.5%; and
expected life of five years.
Options outstanding at March 31, 1998 had exercise prices of $120.50 and
$138.83 and have a weighted average remaining contractual life of 7.7 years.
The option prices were equal to the market prices at the date of grant and,
accordingly, no compensation cost has been recognized for stock options in the
financial statements. If CPI had applied a fair value-based method to account
for options granted, net income for the three month period ended March 31, 1997
(unaudited) would have been $151.3 million ($5.67 per share of common stock) and
net income for the year ended December 31, 1997, would have been $276.6 million
($10.18 per share of common stock). The pro forma amounts reflect only options
granted in 1997. The full impact of calculating compensation cost for stock
options under a fair value-based method is not reflected in the pro forma
amounts because compensation cost is reflected over the options' vesting periods
and compensation cost for options granted in 1993 is not required to be
considered.
COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS
(1) On February 19, 1998 CPI and CRC signed a definitive agreement to merge
with Simon DeBartolo Group, Inc. ("SDG"); a publicly-traded real estate
investment trust. The transactions have been approved by all of the companies'
Boards of Directors/Trustees. A majority of CPI's shareholders have agreed to
approve the transaction which is subject to the approval of the shareholders of
SDG, as well as customary regulatory and other conditions. The transaction is
expected to be completed in the third quarter of 1998.
The transaction values CPI at approximately $5.8 billion, including the
assumption of debt. Each CPI common share will be entitled to $90 in cash, $70
in combined REIT common stock and $19 of liquidation preference in 6 1/2%
convertible preferred stock of the combined REIT. The common stock component of
the consideration is based upon a fixed exchange ratio of 2.0818 combined REIT
shares and is subject to a 15% symmetrical collar based upon the price of SDG
common stock determined at closing. Adjustments related to such collar will be
in cash.
F-18
227
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS -- (CONTINUED)
In the first quarter of 1998 CPI incurred approximately $7.5 million of
merger-related costs, principally legal and advisory fees, which is presented on
the accompanying statements of income. If the merger is effected, additional
merger cost, including severance payments pursuant to CPI's present policies,
professional fees and other transaction costs, payable by CPI or its successor
are projected to be approximately $70.7 million.
(2) CPI has entered into commitments for future real estate investments
aggregating approximately $122 million at March 31, 1998 (unaudited) and $122
million, $127 million and $271 million at December 31, 1997, 1996 and 1995,
respectively.
(3) In 1996, CPI determined that the decline in value of its $10 million
investment in a real estate entity was not temporary and, accordingly, wrote
down the investment by $8.2 million to estimated fair value based on an
independent appraisal of the property.
(4) CPI is a defendant in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of both outside
and corporate counsel, resolving these actions will not have a material effect
upon CPI's financial condition.
(5) On May 7, 1998, the Directors declared distributions ($49.1 million) of
$1.94 per common share to shareholders of record at the close of business on May
7, 1998, payable May 15, 1998.
(6) On May 7, 1998, the Directors of CRC declared distributions ($.27
million) of $.10 per CRC common share to shareholders of record at the close of
business on May 7, 1998, payable May 15, 1998. Such distribution is equivalent
to 1 cent per CPI common share.
(7) CPI has entered into a $250 million revolving credit agreement with 13
banks. The agreement terminates on June 26, 2001. Interest, at CPI's choice, is
computed at (1) a rate determined by a competitive bidding process, (2) a rate
equal to a spread (currently 5/8%) over the adjusted London interbank (LIBOR)
rate or (3) a rate equal to a spread (currently 0%) over the higher of the prime
rate or 1/2% over the Federal Funds rate. The interest rate on each LIBOR-based
borrowing is fixed at the time of borrowing. As of June 15, 1998 (unaudited),
$13 million at an average rate of 6.1% is outstanding pursuant to this
agreement.
SUBSEQUENT EVENTS -- (UNAUDITED)
(1) In connection with the Merger, CPI anticipates soliciting consents from
the holders of CPI's Notes to permit CPI to assign substantially all of its
assets to the SDG Operating Partnership and the SDG Operating Partnership to
assume CPI's Note liabilities. Certain of the Note Indentures governing the
Notes would require the redemption of $575 million of the Notes if substantially
all the assets were transferred to an entity that does not qualify as a REIT. If
holders of at least 66 2/3% in outstanding principal amount of each issue of CPI
Notes consent to the proposed amendments to the CPI Indentures prior to the
Merger, the SDG Operating Partnership will become the successor obligor on the
CPI Notes. As an alternative to transferring CPI's assets to the SDG Operating
Partnership, SDG anticipates transferring substantially all of CPI's assets to
The Retail Property Trust ("RPT"), a REIT subsidiary of the SDG Operating
Partnership and RPT will assume CPI's obligations under the Notes. SDG and CPI
have received inquiries from the trustee under the Note Indentures and certain
note holders as to the means being utilized to effect compliance with the terms
of the Note Indentures in connection with the Merger. Certain of such holders
have expressed their view that they do not believe compliance may be effected
without receiving waivers from the requisite percentage of CPI's note holders.
CPI and SDG believe that the transfer of CPI's assets to RPT and RPT's
assumption of CPI's liabilities fully complies with the provisions of the Note
Indentures.
(2) On July 31, 1998 CPI sold the General Motors Building, New York City
for $800 million, resulting in a gain of $204 million ($8.05 per Common Share).
F-19
228
CORPORATE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSEQUENT EVENTS -- (UNAUDITED) -- (CONTINUED)
The carrying amount of the General Motors Building of $585 million is
separately classified in the March 31, 1998 (unaudited) consolidated balance
sheet. Rentals and related property income and net income from this property
included in the consolidated statements of income are summarized as follows:
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------ ------------------
1998 1997 1997 1996
---- ---- ---- ----
(UNAUDITED)
Rentals and related property income................. $23,371 $22,397 $91,502 $11,282
======= ======= ======= =======
Net operating income................................ $10,591 $ 8,008 $32,602 $ 3,571
======= ======= ======= =======
- ---------------
Prior to November 15, 1996 CPI accounted for its 30% investment in the
General Motors Building under the equity method of accounting. See "Acquisitions
and Dispositions." Rentals and related property income of $24,420 and $27,316
and net operating income of $8,278 and $8,114 were included in equity in
earnings of joint ventures for the period ended November 15, 1996 and the year
ended December 31, 1995, respectively.
F-20
229
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Corporate Realty Consultants, Inc.
We have audited the consolidated balance sheets of Corporate Realty
Consultants, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of Corporate Realty Consultants, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Corporate Realty Consultants, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
New York, NY
June 30, 1998
F-21
230
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
MARCH 31, ------------------
1998 1997 1996
--------- ------- -------
(UNAUDITED)
($ IN THOUSANDS)
ASSETS
Real estate investments:
Buildings, net of accumulated depreciation and
amortization of $10,842, $10,613 and $9,724............ $17,076 $16,938 $17,399
Investments in joint ventures............................. 19,341 18,007 449
Land (including $400 held for sale)....................... 4,595 4,595 4,595
Other investments......................................... -- -- 1,104
------- ------- -------
41,012 39,540 23,547
Cash and cash equivalents................................... 3,900 4,147 4,797
Tenant receivables.......................................... 625 478 317
Note receivable due from office building tenant............. 536 584 649
Fees receivable (including $365, $485 and $609 from related
parties).................................................. 419 505 610
Prepaid real estate taxes and other assets.................. 716 809 1,134
------- ------- -------
Total assets...................................... $47,208 $46,063 $31,054
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable (including $20,565 payable to CPI)...... $21,686 $21,749 $21,988
Notes payable to CPI...................................... 16,495 15,069
Deferred taxes............................................ 3,497 3,564 3,045
Other liabilities (including $868, $655 and $350 payable
to CPI)................................................ 1,528 1,365 982
------- ------- -------
43,206 41,747 26,015
------- ------- -------
Stockholders' equity:
Common Stock, $.10 par value, 3,542,767.5 shares
authorized, and 2,683,538.9, 2,683,883.5 and
2,863,917.7 shares issued and outstanding.............. 268 268 286
Capital in excess of par value............................ 13,351 13,352 14,139
Accumulated deficit....................................... (9,617) (9,304) (9,386)
------- ------- -------
4,002 4,316 5,039
------- ------- -------
Total liabilities and stockholders' equity........ $47,208 $46,063 $31,054
======= ======= =======
The accompanying notes are an integral part of these statements.
F-22
231
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE
MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
---------------- ----------------------------------
1998 1997 1997 1996 1995
------ ------ -------- --------- ---------
(UNAUDITED)
($ IN THOUSANDS)
REVENUE:
Minimum rent (including $366, $381,
$1,227, $1,523 and $1,523 from CPI).... $ 782 $ 888 $3,108 $ 3,461 $ 3,382
Expense recoveries (including $154, $180,
$679, $745 and $1,397 from CPI)........ 212 273 968 1,202 1,889
Fee income (including $ --, $435, $1,710,
$4,627 and $4,745 from related
parties)............................... 3 440 1,732 4,638 4,756
Interest and other income................. 68 124 406 504 396
------ ------ ------ ------- -------
Total revenue..................... 1,065 1,725 6,214 9,805 10,423
------ ------ ------ ------- -------
EXPENSES:
Property operating expenses (including
$138, $137, $550, $545 and $543 to
CPI)................................... 673 748 3,051 3,165 3,288
Management fees (including $ --, $350,
$1,400, $2,640 and $2,832 to CPI)...... 7 394 1,576 2,832 3,036
Mortgage interest (including $308, $308,
$1,234, $1,234 and $1,234 to CPI)...... 338 343 1,365 1,364 1,383
Depreciation and amortization............. 229 213 889 938 920
Administrative and other (including $38,
$38, $150, $1,368, and $1,459 to
CPI)................................... 77 97 295 1,540 1,667
Write-down of land investment............. 1,100
------ ------ ------ ------- -------
Total expenses.................... 1,324 1,795 7,176 10,939 10,294
------ ------ ------ ------- -------
Income (loss) before equity in income (loss)
of joint ventures......................... (259) (70) (962) (1,134) 129
Equity in income (loss) of joint ventures... 147 224 1,550 (4) (74)
------ ------ ------ ------- -------
Income (loss) before gain on sale of
partnership interests..................... (112) 154 588 (1,138) 55
Gain on sale of partnership interests....... 1,259
------ ------ ------ ------- -------
Income (loss) before provision for income
taxes..................................... (112) 154 1,847 (1,138) 55
Provision (benefit) for income taxes........ (67) 175 670 (218) 61
------ ------ ------ ------- -------
Net income (loss)........................... $ (45) $ (21) $1,177 $ (920) $ (6)
====== ====== ====== ======= =======
Net income (loss) per average share
outstanding (basic and diluted)........... $(0.02) $(0.01) $ 0.43 $ (0.39) Nil
====== ====== ====== ======= =======
The accompanying notes are an integral part of these statements.
F-23
232
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
1998 1997 1997 1996 1995
--------- -------- --------- -------- --------
(UNAUDITED)
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)...................... $ (45) $ (21) $ 1,177 $ (920) $ (6)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Equity in (income) loss of joint
ventures.......................... (147) (224) (1,550) 4 74
Depreciation and amortization....... 229 213 889 938 920
Write-down of land investment....... 1,100
Gain on sale of partnership
interests to CPI.................. (1,259)
Decrease (increase) in receivables,
prepaid real estate taxes and
other assets (including $120,
$316, $125, $(80) and $70 from
related parties).................. 80 234 334 21 (938)
Increase (decrease) in deferred
taxes and other liabilities
(including $213, $(89), $305,
$(140) and $133 to CPI)........... 96 29 902 (374) 221
------- ------ -------- ------- -------
Net cash provided by operating
activities.......................... 213 231 493 769 271
------- ------ -------- ------- -------
INVESTING ACTIVITIES
Investments in buildings............... (367) (428) (588)
Investments in joint ventures.......... (1,133) (16,732) (165)
Distributions from joint ventures...... 410 342 1,827 15 13
Proceeds from sale of partnership
interests to CPI.................... 2,363
------- ------ -------- ------- -------
Net cash (used in)/provided by
investing activities................ (1,090) 342 (12,970) (150) (575)
------- ------ -------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of notes payable
received from CPI................... 962 13,966
Mortgage principal payments............ (63) (57) (239) (220) (201)
Acquisition and retirement of Common
Stock............................... (1) (479) (805) (691) (1)
Issuance of Common Stock............... 3,295 90
Cash distributions..................... (268) (276) (1,095) (965) (1,413)
------- ------ -------- ------- -------
Net cash provided by (used in)
financing activities................ 630 (812) 11,827 1,419 (1,525)
------- ------ -------- ------- -------
(Decrease) increase in cash and cash
equivalents............................ (247) (239) (650) 2,038 (1,829)
Cash and cash equivalents at beginning of
year................................... 4,147 4,797 4,797 2,759 4,588
------- ------ -------- ------- -------
Cash and cash equivalents at end of
year................................... $ 3,900 $4,558 $ 4,147 $ 4,797 $ 2,759
======= ====== ======== ======= =======
Supplemental Disclosure:
Interest paid (net of amounts
capitalized) during the period
(including $103, $308, $1,234,
$1,234 and $1,234 paid to CPI)...... $ 128 $ 339 $ 1,347 $ 1,367 $ 1,384
Income taxes paid during the period.... $ 134 $ 10 $ 144 $ 150 $ 352
Non-cash investing activity:
Foreclosure on mortgage
receivable........................ $ 1,500
The accompanying notes are an integral part of these statements.
F-24
233
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CAPITAL IN
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 AND THE THREE COMMON STOCK EXCESS OF ACCUMULATED
MONTHS ENDED MARCH 31, 1998 (UNAUDITED) $.10 PAR VALUE PAR VALUE DEFICIT TOTAL
- --------------------------------------------------------- -------------- ---------- ----------- -------
($ IN THOUSANDS)
Balance at January 1, 1995......................... $226 $11,506 $(6,082) $ 5,650
Net loss for the year.............................. (6) (6)
Cash dividends paid of $.625 per share............. (1,413) (1,413)
Proceeds from issuance of Common Stock............. 1 89 90
Acquisition and retirement of Common Stock......... (1) (1)
---- ------- ------- -------
Balance at December 31, 1995....................... 227 11,594 (7,501) 4,320
Net loss for the year.............................. (920) (920)
Cash dividends paid of $.425 per share............. (965) (965)
Proceeds from issuance of Common Stock............. 75 3,220 3,295
Acquisition and retirement of Common Stock......... (16) (675) (691)
---- ------- ------- -------
Balance at December 31, 1996....................... 286 14,139 (9,386) 5,039
Net income for the year............................ 1,177 1,177
Cash dividends paid of $.40 per share.............. (1,095) (1,095)
Acquisition and retirement of Common Stock......... (18) (787) (805)
---- ------- ------- -------
Balance at December 31, 1997....................... 268 13,352 (9,304) 4,316
Net loss for the period............................ (45) (45)
Cash dividends paid of $.10 per share.............. (268) (268)
Acquisition and retirement of Common Stock......... (1) (1)
---- ------- ------- -------
Balance at March 31, 1998 (unaudited).............. $268 $13,351 $(9,617) $ 4,002
==== ======= ======= =======
The accompanying notes are an integral part of these statements.
F-25
234
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Description of Business
Corporate Realty Consultants, Inc. ("CRC"), a Delaware corporation, engages
primarily in the ownership, operation, acquisition and development of real
estate properties either directly or through interests in joint ventures.
All of the outstanding shares of CRC have been deposited in two trusts
under (1) a Trust Agreement dated October 30, 1979, among CRC, Bank of Montreal
Trust Company (the current trustee) and Corporate Property Investors ("CPI"), a
self managed real estate investment trust (REIT) which engages in the ownership,
operation, management, leasing, acquisition, development and expansion of income
producing properties throughout the United States and (2) a Trust Agreement
dated August 26, 1994, among CRC, Bank of Montreal Trust Company (the current
trustee) and certain holders of CPI 6.5% First Series Preference Shares. The
beneficial interests in the CRC Trusts are owned by shareholders of CPI in
proportion to their respective number of CPI shares. Ownership of CRC shares is
not evidenced by a separate stock certificate and cannot be transferred
separately from the corresponding CPI shares. All directors of CRC must be
directors of CPI and the senior executive officers of CPI are also officers of
CRC. The foregoing arrangements create a "Paired-Share REIT" structure for
federal income tax purposes.
Basis of Presentation
The consolidated financial statements include the accounts of CRC and its
wholly-owned consolidated subsidiaries. Significant intercompany balances,
transactions and accounts are eliminated in consolidation. Investments in joint
ventures which represent noncontrolling 25%, 50% and 85% ownership interests and
in which CRC exercises significant influence over the joint ventures' operating
and financial policies are accounted for under the equity method of accounting.
Investments in partnerships in which CRC exercises no influence over the
partnerships' operating and financial policies (reflected as other investments
in the accompanying consolidated balance sheets) are accounted for under the
cost method of accounting. Generally, net income/(loss) for each joint venture
and partnership is allocated consistent with the ownership interests held by
each joint venturer and partner.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Real Estate and Depreciation and Amortization Policy
Real estate to be held and used in operations is stated at cost.
Depreciation and amortization are computed utilizing the straight-line method
over the estimated useful lives of the buildings and leaseholds.
Land held for sale is recorded at the lower of its carrying amount or fair
value less cost to sell.
Tenant inducements and costs associated with leasing of the buildings are
capitalized and amortized on a straight-line basis over the lives of the related
tenant leases which range from three to ten years.
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing
F-26
235
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
Real Estate and Depreciation and Amortization Policy -- (Continued)
the fair value of the asset less cost to sell to its carrying amount. Effective
January 1, 1996 CRC adopted Statement 121 for which no provision was required.
Deferred Charges
Direct financing and issue costs on debt are deferred and amortized over
the terms of the related debt as a component of interest expense.
Buildings
The investments in buildings consist of (1) a 100% leasehold interest in a
120,000 square foot, multi-tenanted office building in New York City ("NYC
Office Building") which also serves as CPI and CRC headquarters and (2) a 100%
leasehold interest in a 200,000 square foot building in Norfolk, Virginia which
is leased to the J.C. Penney Company ("JCPenney Building"). At March 31, 1998,
the NYC Office Building is 78% leased which includes approximately 60% that is
leased to CPI.
Investments in Joint Ventures
At March 31, 1998 (unaudited) and December 31, 1997, CRC's investment in
joint ventures consists of (1) an 85% noncontrolling interest in Mill Creek
Land, L.L.C. ("Mill Creek") which was formed in 1997 to purchase, improve and
sell land in Gwinnett County, Georgia and (2) a 25% limited partner interest in
Cambridge Hotel Associates, a partnership which provides management and advisory
services to the Cambridge Hotel in Cambridge, Massachusetts. CRC and its joint
venture partner at Mill Creek share equally in all the development, operating
and financial policy decision making of the joint venture. CRC funded
approximately $14.9 million of its total contribution to Mill Creek of $17.9
million from notes payable to CPI (see "Mortgages and Notes Payable"). Mill
Creek capitalizes all cost clearly associated with the acquisition, development
and construction of its project and recognizes profit on land sales in
accordance with Financial Accounting Standards Board Statement No. 66,
"Accounting for Sales of Real Estate."
CRC also held a 50% interest in Corporate Realty Capital, a partnership
which generated fee income by providing mortgage banking services. As of
December 31, 1997, Corporate Realty Capital ceased its operations and liquidated
partnership assets. CRC will make no further contributions and expects no
further distributions from Corporate Realty Capital.
As of March 31, 1998 (unaudited), December 31, 1997 and 1996, the excess of
CRC's investment over its share of the equity in the underlying net assets of
the joint ventures was approximately $1.7 million, $1.3 million and $.2 million,
respectively. The combined condensed balance sheets of the joint ventures as of
March 31, 1998 (unaudited), December 31, 1997 and 1996 and the related
statements of net income for the three months ended March 31, 1998 and 1997
(unaudited) and for the years ended December 31, 1997, 1996 and 1995 follows.
F-27
236
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
Investments in Joint Ventures -- (Continued)
DECEMBER 31,
MARCH 31, ---------------
1998 1997 1996
--------- ------- ----
(UNAUDITED)
($ IN THOUSANDS)
Assets:
Real estate assets........................................ $19,464 $18,746 $ --
Other..................................................... 4,152 3,188 696
------- ------- ----
Total assets........................................... $23,616 $21,934 $696
------- ------- ----
Liabilities:
Accounts payable and other................................ $ 2,633 $ 2,088 $ --
------- ------- ----
Joint Venturers' Equity:
CRC....................................................... $17,610 $16,739 $284
Others.................................................... 3,373 3,107 412
------- ------- ----
Total joint venturers' equity.......................... $20,983 $19,846 $696
------- ------- ----
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
-------------- --------------------------
1998 1997 1997 1996 1995
----- ----- ------ ------ ------
(UNAUDITED)
Income........................................... $536 $788 $4,690 $3,305 $2,107
Expenses......................................... 3 271 543 1,193 1,335
---- ---- ------ ------ ------
Net income (loss)................................ $533 $517 $4,147 $2,112 $ 772
---- ---- ------ ------ ------
Land
CRC's land interest consists of (1) 37 acres of vacant land, zoned for
retail business, being held for development adjacent to a shopping center owned
by CPI in Rockaway, New Jersey and (2) a 203 acre vacant tract of land zoned for
single family housing in Putnam, New York ("Putnam Land") which is being
marketed for sale. CRC acquired the Putnam Land through the 1995 foreclosure of
its mortgage receivable investment. On the date of foreclosure, CRC recorded the
Putnam Land at management's estimate of fair value of $1.5 million, which was
also the carrying amount of the mortgage receivable on such date. In 1996, CRC
estimated a decline in the fair value of the Putnam Land and, accordingly, wrote
down the investment by $1.1 million.
Revenue Recognition
Minimum rents are accrued on a straight-line basis over the terms of the
respective leases. Expense recoveries from tenants for real estate taxes and
other recoverable operating expenses are recognized as revenue in the period the
applicable expenditures are chargeable to tenants.
Fee income is recognized when earned in accordance with the terms of the
related partnership and management agreements.
F-28
237
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES -- (CONTINUED)
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered cash equivalents. Cash equivalents are carried at cost,
which equates to market, and principally consist of commercial paper.
Income Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. The weighted average shares of common stock outstanding
used in the basic calculation are 2,684,000 and 2,755,000 for the three months
ended March 31, 1998 and 1997 (unaudited), respectively, and 2,732,000,
2,353,000 and 2,264,000 for 1997, 1996 and 1995, respectively. Exercise of
outstanding stock options would result in an additional 23,700 and 800 shares
outstanding for the three months ended March 31, 1998 (unaudited) and for the
year ended December 31, 1997, respectively. For the three months ended March 31,
1998 (unaudited) diluted earnings per share exclude these options because the
exercise of such options would have been antidilutive.
Income Taxes
CRC has adopted Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes." Statement 109 utilizes the asset and liability
method for computing tax expenses. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying statutory tax rates to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Deferred tax assets are recognized for temporary differences that
will result in deductible amounts in future years and for carryforwards. A
valuation allowance is recognized if it is more likely than not that some
portion of the deferred asset will not be recognized. When evaluating whether a
valuation allowance is appropriate, Statement 109 requires a company to consider
such factors as previous operating results, future earnings potential, tax
planning strategies and future reversals of existing temporary differences. The
valuation allowance is increased or decreased in future years based on changes
in these criteria.
MORTGAGES AND NOTES PAYABLE
The mortgages payable consists of (1) a $20.6 million mortgage payable to
CPI with a maturity date of December 31, 2013 which, through December 31, 1998,
bears interest at 6% and requires annual interest payments to CPI of $1.2
million; beginning January 1, 1999 through maturity bears interest at 15% and
requires annual interest and principal payments to CPI of $3.2 million; requires
a balloon payment at maturity of $14.9 million; and requires a contingent
interest payment, as defined, upon the earlier of the sale of the property
securing the mortgage or the loan maturity date and (2) a mortgage payable to
Ameritas Life Insurance Corp., with an outstanding balance of $1.1 million, $1.2
million and $1.4 million at March 31, 1998 (unaudited) and December 31, 1997 and
1996, respectively, which bears interest at 8.5% and requires annual interest
and principal payments of $.4 million through the maturity date of November 30,
2001. The mortgage payable to CPI is secured by the NYC Office Building and the
mortgage payable to Ameritas Life Insurance Corp. is secured by the JCPenney
Building.
The notes, in the aggregate principal amount of $14.9 million and $14
million at March 31, 1998 (unaudited) and December 31, 1997, respectively, are
unsecured and payable to CPI, mature in 2007 and
F-29
238
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGES AND NOTES PAYABLE -- (CONTINUED)
bear interest at 12%. The interest, which is compounded monthly and capitalized
to the note balances, amounted to $1.6 million and $1.1 million, respectively,
at March 31, 1998 (unaudited) and December 31, 1997. Principal and accrued
interest payable on the notes are due at maturity.
As of December 31, 1997, principal payments required on all debt are:
AMOUNT
------
($ IN THOUSANDS)
Years ending December 31,
1998.......................................... $ 260
1999.......................................... $ 392
2000.......................................... $ 434
2001.......................................... $ 481
2002.......................................... $ 170
Thereafter.................................... $35,081
The fair value of the mortgages is estimated to be approximately $33
million and $32 million, respectively, at December 31, 1997 and 1996 and the
fair value of the notes is estimated to be approximately $20 million at December
31, 1997 using discounted cash flow analyses based upon indications of market
pricing for similar types of debt.
LEASE COMMITMENTS
CRC, as the lessor, receives rental income from the NYC Office Building and
the JCPenney Building under leases that are classified and accounted for as
operating leases. The office tenant leases provide for rent plus reimbursement
of operating expenses and the lease terms range from three to ten years and
contain various renewal options. The lease relating to the JCPenney Building
expires in 2002 and has five renewal options, each for a period of five years.
At December 31, 1997, future minimum rentals to be received under noncancellable
leases are:
AMOUNT
------
($ IN THOUSANDS)
Years ending December 31,
1998.......................................... $ 1,877
1999.......................................... 2,192
2000.......................................... 2,197
2001.......................................... 2,212
2002.......................................... 1,907
Thereafter.................................... 7,328
-------
Total......................................... $17,713
-------
The above future minimum rentals do not include $1.5 million per year to be
received from CPI for its rental space in the NYC Office Building, through
December 31, 2005.
CRC, as the lessee, is obligated under two ground lease agreements with
CPI. A ground lease relating to the NYC Office Building requires annual lease
payments to CPI of $450,000 through May 31, 2081. A ground lease relating to the
JCPenney Building provides for annual rent payments to CPI of approximately
$81,000 through February 28, 2002 and thereafter, $91,000 through February 28,
2042. Pursuant to an amendment to the ground lease dated September 1, 1992,
approximately $47,000 is deferred each year, with interest accruing
F-30
239
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE COMMITMENTS -- (CONTINUED)
at prime, until the related mortgage loan secured by the JCPenney Building is
paid in full (see "Mortgages and Notes Payable"). At March 31, 1998 (unaudited),
December 31, 1997 and 1996 deferred rent plus accrued interest payable to CPI
amounted to $324,167, $306,903 and $240,756, respectively, and is included in
other liabilities on the accompanying consolidated balance sheets.
NOTE RECEIVABLE
In 1995 a tenant in the NYC Office Building borrowed $700,000 from CRC. The
note bears interest at 10% and provides for monthly interest and principal
payments of $14,016 beginning October 1, 1997. The remaining outstanding balance
is due and payable in September 2001. At March 31, 1998 (unaudited), December
31, 1997 and 1996 the note receivable balance was $535,844, $583,600 and
$648,872, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes."
Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The components of the income tax provision (benefit) are as follows:
FOR THE YEARS
ENDED DECEMBER 31,
---------------------
1997 1996 1995
---- ----- ----
($ IN THOUSANDS)
Current federal tax........................................ $151 $ -- $ 53
Current state tax.......................................... -- -- --
Deferred federal tax....................................... 298 (146) (12)
Deferred state tax......................................... 221 (72) 20
---- ----- ----
$670 $(218) $ 61
==== ===== ====
The reconciliation of income tax computed at the U.S. federal statutory
rate to income tax expense is as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
($ IN THOUSANDS)
Tax at U.S. statutory rate......... $524 34.0% $(219) -34.0% $(12) -34.0%
State taxes, net of federal
benefit.......................... 145 9.4% (61) -9.4% 1 3.1%
Non-deductible items............... -- -- -- -- -- --
Effect of permanent differences.... -- -- 10 1.6% 15 45.3%
Change in valuation allowance...... (28) -1.8% 49 3.2% 57 164.5%
Expiration of charitable
contributions.................... 28 1.8% -- -- -- --
Miscellaneous other................ 1 -- 3 0.2% -- --
---- ----- ----- ----- ---- -----
$670 43.5% $(218) -38.5% $ 61 178.9%
==== ===== ===== ===== ==== =====
F-31
240
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
DECEMBER 31,
------------------
1997 1996
------- -------
($ IN THOUSANDS)
Deferred tax assets:
General business credit................................... $ 1,461 $ 1,461
Bad debt expense.......................................... 652 652
Net operating loss carryforward........................... 648 783
AMT credit carryforward................................... 525 374
Basis difference on future sale........................... -- 209
Charitable contributions carryforward..................... 171 199
------- -------
3,457 3,678
Less: valuation allowance................................. (1,632) (1,660)
------- -------
$ 1,825 $ 2,018
------- -------
Deferred tax liabilities:
Book/tax basis difference................................. $ 5,389 $ 5,063
------- -------
Net deferred tax liability.................................. $ 3,564 $ 3,045
------- -------
Statement 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that a $1.6 million and $1.7 million valuation allowance at
December 31, 1997 and 1996, respectively, is necessary to reduce the deferred
tax assets to the amount that will more likely than not be realized.
At December 31, 1997 and 1996, CRC has available unused net operating loss
carryforwards totalling approximately $1.3 million and $1.6 million,
respectively, which expire beginning in 2010.
RELATED PARTY TRANSACTIONS
Management and Consulting Services
CRC paid CPI for management and consulting services. Fees paid to CPI for
the three months ended March 31, 1997 (unaudited) were approximately $.4 million
and for the years ending December 31, 1997, 1996 and 1995 were approximately
$1.4 million, $2.6 million and $2.8 million, respectively. No fees were paid in
1998.
CRC also reimburses CPI for general and administrative expenses and payroll
and related expenses incurred on CRC's behalf. Such reimbursements included in
administrative and other on the accompanying consolidated statements of
operations amounted to approximately $.04 million for each of the three months
ended March 31, 1998 and 1997 (unaudited) and $.15 million, $1.4 million and
$1.5 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Pembrook Management Inc. ("PMI") was the managing agent for all of CPI's
wholly-owned properties and certain properties in which CPI holds a joint
venture interest under various management agreements. PMI assigned certain
property management aspects of these management agreements including leasing,
legal
F-32
241
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RELATED PARTY TRANSACTIONS -- (CONTINUED)
Management and Consulting Services -- (Continued)
and marketing services to CRC for which PMI paid CRC $.4 million for the three
months ended March 31, 1997 (unaudited) and $1.7 million, $2.9 million and $3.3
million in 1997, 1996 and 1995, respectively. Such fees are included in fee
income on the accompanying consolidated statements of operations. PMI ceased
continuing business operations on December 31, 1997 at which time CPI took over
the management of the properties.
In connection with its management of the General Motors Building, a New
York City office building located at 767 Fifth Avenue, CRC was paid an asset
management fee in 1996 and 1995 from the partnership which owns the building and
in which CPI held a partial interest until it became the 100% owner during 1996.
The fees received were approximately $1.6 million and $1.4 million for 1996 and
1995, respectively, representing 1/4% of the average of the current and
preceding year appraisal value of the General Motors Building. No fees were paid
to CRC in 1997 as the General Motors Building became wholly-owned by CPI in 1996
and the asset management contract was ended.
Loan and Lease Commitments
CRC has a mortgage and notes payable to CPI (See "Mortgages and Notes
Payable").
CRC receives rental and operating expense recovery income from CPI for
space leased in the NYC Office Building (see "Lease Commitments"). Rental and
operating expense recovery income earned from CPI amounted to approximately $.5
million and $.6 million, respectively, for the three months ended March 31, 1998
and 1997 (unaudited) and $1.9 million, $2.3 million and $2.9 million for the
years ended December 31, 1997, 1996 and 1995, respectively. In addition, CRC has
a payable to CPI for an overpayment of rent. This overpayment, which resulted
from a lease modification effective January 1, 1997, amounted to $311,659 and
$296,478, respectively, at March 31, 1998 (unaudited) and December 31, 1997 and
is included in other liabilities in the accompanying consolidated balance
sheets.
CRC is the lessee under two ground lease agreements with CPI (see "Lease
Commitments").
Other
On April 1, 1997 CRC sold its approximately 1% limited partner interests in
three partnerships, each which owned property held for investment, to the
general partner, CPI, for approximately $2.4 million and realized a gain on the
sale of approximately $1.3 million. Such interests are included in other
investments on the accompanying consolidated balance sheet as of December 31,
1996.
CPI has in effect a Common Share Purchase Plan, an Employee Share Purchase
Plan and a Share Option Plan which provide for the right or option to purchase,
as defined, CPI Series A Common Shares and related interests in CRC to certain
shareholders, employees and directors. The purchase or redemption of CPI Series
A Common Shares pursuant to the plans affects the related interests in CRC and
is reflected in the accompanying consolidated statement of stockholders' equity.
F-33
242
CORPORATE REALTY CONSULTANTS, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other -- (Continued)
COMMITMENTS, CONTINGENCIES AND OTHER COMMENTS
(1) On February 19, 1998 CPI and CRC signed a definitive agreement to merge with
Simon DeBartolo Group, Inc. ("SDG"), a publicly-traded real estate
investment trust. The transactions have been approved by all of the
companies' Boards of Directors/Trustees. A majority of CPI's shareholders
have agreed to approve the transaction which is subject to the approval of
the shareholders of SDG, as well as customary regulatory and other
conditions. CRC is included as part of the merger agreement between CPI and
SDG. The transaction is expected to be completed in the third quarter of
1998.
(2) On May 7, 1998, the Directors of CRC declared distributions ($.27 million)
of $.10 per CRC common share to shareholders of record at the close of
business on May 7, 1998, payable May 15, 1998.
(3) In November and December 1996 CPI issued common shares (and related
interests in CRC) to a shareholder and an affiliate of a shareholder in
exchange for each's respective partnership interests in certain operating
properties of CPI. In connection with the aforementioned, CRC received in
cash $2.53 million and $.76 million, respectively, and issued 576,454.4 and
172,263.9 shares, respectively, of common stock.
F-34
243
ANNEX A
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 18, 1998
BY AND AMONG
SIMON DEBARTOLO GROUP, INC.,
CORPORATE PROPERTY INVESTORS
AND
CORPORATE REALTY CONSULTANTS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
244
TABLE OF CONTENTS
ARTICLE I. The Reorganization and Distribution; the Merger........................ 1
SECTION 1.1. The Reorganizations and Distributions....................... 1
1.1.1. Reorganizations of C1 and C2................................ 1
1.1.2. Distributions and Recapitalization.......................... 2
1.1.3. Cash Amount and Conversion Number........................... 3
1.1.4. No Fractional Shares........................................ 3
SECTION 1.2. The Merger.................................................. 3
SECTION 1.3. Closing..................................................... 4
SECTION 1.4. Effective Time.............................................. 4
SECTION 1.5. Articles of Incorporation and By-laws....................... 4
1.5.1. C1 Certificate of Incorporation and By-laws................. 4
1.5.2. A1/MS Certificate of Incorporation and By-laws.............. 5
1.5.3. C2 Certificate of Incorporation and By-laws................. 5
SECTION 1.6. Directors and Officers...................................... 5
1.6.1. Directors and Officers of C1................................ 5
1.6.2. Directors and Officers of C2................................ 5
1.6.3. Directors and Officers of the Surviving Corporation......... 5
SECTION 1.7. Effects of the Merger....................................... 5
SECTION 1.8. Further Assurances.......................................... 6
SECTION 2. A1 Stock Issuance........................................... 6
ARTICLE II. Merger Consideration; Conversion of Shares............................ 6
SECTION 2.1. Merger Consideration; Conversion of Capital Stock........... 6
2.1.1. Conversion of A1 Capital Stock.............................. 6
SECTION 2.2. Pairing of Shares........................................... 6
SECTION 2.3. Exchange of Certificates.................................... 6
2.3.1. Rights of Certificateholders................................ 6
2.3.2. Exchange Agent.............................................. 7
2.3.3. Exchange Procedures......................................... 7
2.3.4. Distributions with Respect to Unexchanged Shares............ 7
2.3.5. No Further Ownership Rights in Capital Stock of A1.......... 8
2.3.6. No Fractional Shares........................................ 8
2.3.7. Termination of Exchange Fund and Stock Trust................ 8
ARTICLE III. Representations and Warranties of A1................................. 9
SECTION 3.1. Representations and Warranties of A1........................ 9
3.1.1. Organization and Qualification.............................. 9
3.1.2. Capital Stock............................................... 9
3.1.3. Authority Relative to this Agreement........................ 11
3.1.4. Non-Contravention; Approvals and Consents................... 11
3.1.5. SEC Reports and Financial Statements........................ 12
3.1.6. Absence of Certain Changes or Events........................ 12
3.1.7. [Intentionally Omitted]..................................... 12
3.1.8. Legal Proceedings........................................... 12
3.1.9. Information Supplied........................................ 13
3.1.10. Compliance with Laws and Orders............................. 13
3.1.11. Compliance with Agreements; Certain Agreements.............. 13
i
245
3.1.12. Taxes....................................................... 13
3.1.13. Employee Benefit Plans; ERISA............................... 14
3.1.14. Labor Matters............................................... 14
3.1.15. Environmental Matters....................................... 15
3.1.16. Intellectual Property Rights................................ 16
3.1.17. Real Property............................................... 16
3.1.18. Vote Required............................................... 16
3.1.19. Opinion of Financial Advisor................................ 16
ARTICLE IV. Representations and Warranties of C1 and C2........................... 16
SECTION 4.1. Representations and Warranties of C1........................ 16
4.1.1. Organization and Qualification.............................. 16
4.1.2. Capital Stock............................................... 17
4.1.3. Authority Relative to this Agreement........................ 18
4.1.4. Non-Contravention; Approvals and Consents................... 19
4.1.5. C1 Financial Statements and Other Documents................. 20
4.1.6. Absence of Certain Changes or Events........................ 20
4.1.7. Undisclosed Liabilities..................................... 20
4.1.8. Legal Proceedings........................................... 20
4.1.9. Information Supplied........................................ 20
4.1.10. Compliance with Laws and Orders............................. 21
4.1.11. Compliance with Agreements; Certain Agreements.............. 21
4.1.12. Taxes....................................................... 22
4.1.13. Employee Benefit Plans; ERISA............................... 22
4.1.14. Labor Matters............................................... 23
4.1.15. Environmental Matters....................................... 23
4.1.16. Intellectual Property Rights................................ 23
4.1.17. Real Property............................................... 24
4.1.18. Vote Required............................................... 24
4.1.19. Opinion of Financial Advisor................................ 24
4.1.20. Ownership of A1 Common Stock................................ 24
SECTION 4.2. Representations and Warranties of C2........................ 24
4.2.1. Organization and Qualification.............................. 24
4.2.2. Capital Stock............................................... 25
4.2.3. Authority Relative to this Agreement........................ 26
4.2.4. Non-Contravention; Approvals and Consents................... 26
4.2.5. C2 Financial Statements and Stockholder Reports............. 27
4.2.6. Absence of Certain Changes or Events........................ 27
4.2.7. [Intentionally Omitted]..................................... 28
4.2.8. Legal Proceedings........................................... 28
4.2.9. Information Supplied........................................ 28
4.2.10. Compliance with Laws and Orders............................. 28
4.2.11. Compliance with Agreements; Certain Agreements.............. 28
4.2.12. Taxes....................................................... 29
4.2.13. Employee Benefit Plans; ERISA............................... 29
4.2.14. [Intentionally Omitted]..................................... 29
4.2.15. Environmental Matters....................................... 29
4.2.16. Intellectual Property Rights................................ 30
4.2.17. [Intentionally Omitted.].................................... 30
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4.2.18. Vote Required............................................... 30
4.2.19. Ownership of A1 Common Stock................................ 30
ARTICLE V. Covenants.............................................................. 30
SECTION 5.1. Conduct Pending the Closing................................. 30
5.1.1. Preservation of REIT Status................................. 30
5.1.2. Conduct of Business by C1 and C2 Pending the Closing........ 30
5.1.3. Conduct of Business by A1 Pending the Closing............... 32
5.1.4. Advice of Changes........................................... 33
5.1.5. Notice and Cure............................................. 33
5.1.6. Fulfillment of Conditions................................... 33
SECTION 5.2. No Solicitations by C1 and C2............................... 33
ARTICLE VI. Additional Agreements................................................. 34
SECTION 6.1. Access to Information; Confidentiality...................... 34
SECTION 6.2. Preparation of Registration Statement and Proxy Statement... 34
SECTION 6.3. Approvals of Stockholders................................... 35
6.3.1. A1 Stockholder Approval..................................... 35
6.3.2. C1 and C2 Stockholders' Approvals........................... 35
6.3.3. Cooperation for Stockholders' Meetings...................... 35
SECTION 6.4. Affiliates.................................................. 35
SECTION 6.5. Stock Exchange Listing...................................... 35
SECTION 6.6. Certain Tax Matters......................................... 35
SECTION 6.7. Regulatory and Other Approvals.............................. 36
SECTION 6.8. Employee Benefit Plans...................................... 36
SECTION 6.9. Stock Plans................................................. 36
6.9.1. Treatment of A1 Stock Plans................................. 36
6.9.2. Treatment of C1 Stock Plan.................................. 36
6.9.3. Restricted Stock............................................ 37
SECTION 6.10. Trustees', Directors' and Officers' Indemnification and 37
Insurance...................................................
SECTION 6.11. Expenses.................................................... 38
SECTION 6.12. Brokers or Finders.......................................... 38
SECTION 6.13. Takeover Statutes........................................... 38
SECTION 6.14. Conveyance Taxes............................................ 39
SECTION 6.15. Transfer Tax................................................ 39
SECTION 6.16. Post-Closing Asset Sales.................................... 39
SECTION 6.17. Merger Sub.................................................. 39
SECTION 6.18. Transfer of Assets.......................................... 39
SECTION 6.19. Existing Agreements......................................... 40
ARTICLE VII. Conditions........................................................... 40
SECTION 7.1. Conditions to Each Party's Obligation To Effect the 40
Merger......................................................
7.1.1. Stockholder Approvals....................................... 40
7.1.2. Registration Statement; State Securities Laws............... 40
7.1.3. Exchange Listing............................................ 40
7.1.4. No Injunctions or Restraints................................ 40
7.1.5. Tax Opinions................................................ 41
7.1.6. C1 Delaware Reorganization.................................. 42
SECTION 7.2. Conditions to Obligation of C1 and C2 To Effect the 42
Merger......................................................
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7.2.1. Representations and Warranties.............................. 42
7.2.2. Performance of Obligations.................................. 42
7.2.3. Comfort Letters............................................. 42
7.2.4. No Material Adverse Change.................................. 42
7.2.5. Proceedings................................................. 42
7.2.6. Governmental and Regulatory and Other Consents and 42
Approvals...................................................
SECTION 7.3. Conditions to Obligation of A1 To Effect the Merger......... 42
7.3.1. Representations and Warranties.............................. 43
7.3.2. Performance of Obligations.................................. 43
7.3.3. Comfort Letters............................................. 43
7.3.4. No Material Adverse Change.................................. 43
7.3.5. Proceedings................................................. 43
7.3.6. Related Agreements.......................................... 43
7.3.7. Governmental and Regulatory and Other Consents and 43
Approvals...................................................
ARTICLE VIII. Termination, Amendment and Waiver................................... 43
SECTION 8.1. Termination................................................. 43
SECTION 8.2. Effect of Termination....................................... 44
SECTION 8.3. Amendment................................................... 45
SECTION 8.4. Waiver...................................................... 45
ARTICLE IX. General Provisions.................................................... 45
SECTION 9.1. Non-Survival of Representations, Warranties, Covenants and 45
Agreements..................................................
SECTION 9.2. Notices..................................................... 45
SECTION 9.3. Entire Agreement; Incorporation of Exhibits; Construction... 46
SECTION 9.4. Public Announcements........................................ 46
SECTION 9.5. No Third-Party Beneficiary.................................. 46
SECTION 9.6. No Assignment; Binding Effect............................... 46
SECTION 9.7. Headings.................................................... 47
SECTION 9.8. Invalid Provisions.......................................... 47
SECTION 9.9. Governing Law............................................... 47
SECTION 9.10. Enforcement of Agreement.................................... 47
SECTION 9.11. Certain Definitions......................................... 47
SECTION 9.12. Waiver of Jury Trial........................................ 48
SECTION 9.13. Counterparts................................................ 48
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GLOSSARY OF DEFINED TERMS
The following terms, when used in this Agreement, have the meanings
ascribed to them in the corresponding Sections of this Agreement listed below:
"A1" -- Preamble
"A1 Affiliates" -- Section 6.4
"A1 Class A Stock" -- Section 3.1.2
"A1 Class B Stock" -- Section 3.1.2
"A1 Class C Stock" -- Section 3.1.2
"A1 Common Stock" -- Section 3.1.2
"A1 Disclosure Letter" -- Section 3.1.1
"A1 Employee Benefit Plan" -- Section 3.1.13
"A1 Entities" -- Section 3.1.1
"A1 Financial Statements" -- Section 3.1.5
"A1 Operating Partnership" -- Section 6.16
"A1 Permissible Issuance Arrangements" -- Section 3.1.2
"A1 Permitted Minority Investments" -- Section 3.1.1
"A1 Permits" -- Section 3.1.10
"A1 Preferred Stock" -- Section 3.1.2
"A1 SEC Reports" -- Section 3.1.5
"A1 Series A Preferred Stock" -- Section 3.1.2
"A1 Series B Preferred Stock" -- Section 3.1.2
"A1 Series C Preferred Stock" -- Section 3.1.2
"A1 Stock Option" -- Section 6.9.1
"A1 Stock Plans" -- Section 3.1.2
"A1 Stockholders' Approval" -- Section 6.3.1
"A1 Stockholders' Meeting" -- Section 6.3.1
"A1/MS Articles of Incorporation" -- Section 1.5.2
"A1/MS By-laws" -- Section 1.5.2
"affiliate" -- Section 9.11(a)
"Affiliate Agreement" -- Section 6.4
"Agreement" -- Preamble
"Alternative Proposal for C1 or C2" -- Section 5.2
"Applicable Merger Consideration" -- Section 2.3.3
"Articles of Merger" -- Section 1.4
"beneficially" -- Section 9.11(b)
"business day" -- Section 9.11(c)
"C1" -- Preamble
"C1 and C2 Stockholders' Meeting" -- Section 6.3.2
"C1 By-laws" -- Section 1.5.1
"C1 Class B Common Shares" -- Section 2.1.1
"C1 Class C Common Shares" -- Section 2.1.1
"C1 Common Shares" -- Section 4.1.2
"C1 Charter" -- Section 1.5.1
"C1 Deferral Plans" -- Section 4.1.1
"C1 Delaware" -- Section 1.1.1
"C1 Delaware Common Stock" -- Section 1.1.1
"C1 Delaware Reorganization" -- Recitals
"C1 Disclosure Letter" -- Section 4.1.1
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249
"C1 Employee Benefit Plan" -- Section 4.1.13
"C1 Entities" -- Section 4.1.1
"C1 ESPP Contracts" -- Section 4.1.2
"C1 Financial Statements" -- Section 4.1.5
"C1 Option Plan" -- Section 4.1.2
"C1 Permissible Issuance Arrangements" -- Section 4.1.2
"C1 Permissible Redemption Arrangements" -- Section 4.1.2
"C1 Permits" -- Section 4.1.10
"C1 Permitted Minority Investments" -- Section 4.1.1
"C1 Preference Shares" -- Section 4.1.2
"C1 QSPP" -- Section 4.1.2
"C1 Reports" -- Section 4.1.5
"C1 Series A Preferred Stock" -- Section 1.1.2
"C1 Stock Option" -- Section 6.9.2
"C1 Stockholders' Approval" -- Section 6.3.2
"C1 Termination Agreements" -- Section 4.1.2
"C1 6.50% Preference Shares" -- Section 1.1.1
"C1 and C2 Stockholders' Meeting" -- Section 6.3.2
"C1/C2 Entities" -- Section 4.1.1
"C1/C2 Issuance Agreement" -- Section 1.1.1
"C2" -- Preamble
"C2 By-laws" -- Section 1.5.2
"C2 Certificate of Incorporation" -- Section 1.5.3
"C2 Common Stock" -- Section 4.2.2
"C2 Disclosure Letter" -- Section 4.2.1
"C2 Employee Benefit Plan" -- Section 4.2.13
"C2 Entities" -- Section 4.1.1
"C2 Financial Statements" -- Section 4.2.5
"C2 Merger" -- Section 1.1.1
"C2 Permitted Minority Investments" -- Section 4.2.1
"C2 Permits" -- Section 4.2.10
"C1 Series A Preferred Stock" -- Section 1.1.2
"C2 Stockholders' Approval" -- Section 6.3.2
"C2 Trust Agreements" -- Section 4.2.2
"CERCLA" -- Section 3.1.15
"Certificates" -- Section 2.3.1
"Charter Document Right" -- Section 4.1.7
"Charter Documents" -- Section 3.1.4
"Closing" -- Section 1.3
"Closing Date" -- Section 1.3
"Code" -- Recitals
"cold comfort letters" -- Section 7.3.3
"Confidentiality Agreement" -- Section 6.1
"Consolidated Non-Corporate Affiliate" -- Section 9.11(d)
"Constituent Corporations" -- Section 1.2
"Contracts" -- Section 3.1.4
"control", "controlling", "controlled by" and "under
common control with" -- Section 9.11(a)
"Declaration of Trust" -- Section 4.1.1
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"Delaware Secretary of State" -- Section 4.1.4
"Department Stores" -- Section 4.1.17
"DGCL" -- Section 1.1.1
"Effective Time" -- Section 1.4
"Entities" -- Section 5.1.2
"Environmental Law" -- Section 3.1.15
"Environmental Permits" -- Section 3.1.15
"ERISA" -- Section 3.1.13
"Excess Shares" -- Section 2.3.6
"Excess Stock" -- Section 3.1.2
"Exchange Act" -- Section 3.1.4
"Exchange Agent" -- Section 2.3.2
"Exchange Fund" -- Section 2.3.2
"Fractional Shares" -- Section 2.3.6
"GM Building" -- Section 6.18
"Governmental or Regulatory Authority" -- Section 3.1.4
"group" -- Section 9.11(g)
"Hazardous Material" -- Section 3.1.15
"Indemnified Liabilities" -- Section 6.10(a)
"Indemnified Parties" -- Section 6.10(a)
"Indemnifying Party" -- Section 6.10(a)
"Intellectual Property" -- Section 3.1.16
"knowledge" -- Section 9.11(e)
"laws" -- Section 3.1.4
"Lien" -- Section 3.1.2
"Limited Shares" -- Section 1.5.1
"Maryland Secretary of State" -- Section 1.4
"material", "material adverse effect" and "materially
adverse" -- Section 9.11(f)
"Merger" -- Recitals
"Merger Sub" -- Recitals
"MGCL" -- Section 1.2
"NYSE" -- Section 7.1.3
"Option Plans" -- Section 6.9.2
"Options" -- Section 3.1.2
"orders" -- Section 3.1.4
"Ownership Limit" -- Section 1.5.1
"Paired Shares" -- Section 2.2
"Payment Amount" -- Section 8.2
"Permanent Restriction" -- Section 6.9.3
"person" -- Section 9.11(g)
"Plan" -- Section 3.1.13
"Principal Properties" -- Section 4.1.17
"Proxy Statement" -- Section 3.1.9
"REA" -- Section 4.1.17
"Registration Statement" -- Section 4.1.9
"REIT" -- Section 1.5.1
"REIT Requirements" -- Section 1.5.1
"Representatives" -- Section 9.11(h)
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251
"SEC" -- Section 1.6.1
"Securities Act" -- Section 3.1.4
"Significant Entities" -- Section 9.11(i)
"Stockholder Agreement" -- Recitals
"Stockholders' Meetings" -- Section 6.3.2
"Stock Trust" -- Section 2.3.6
"Subsidiary" -- Section 9.11(j)
"Surviving Corporation" -- Section 1.2
"taxes" -- Section 3.1.12
"Termination Fee" -- Section 8.2
"Transfer Taxes" -- Section 6.15
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This AGREEMENT AND PLAN OF MERGER dated as of February 18, 1998 (this
"Agreement") is made and entered into by and among Simon DeBartolo Group,
Inc., a Maryland corporation ("A1"), Corporate Property Investors, a
Massachusetts business trust ("C1"), and Corporate Realty Consultants,
Inc., a Delaware corporation ("C2").
WHEREAS, the Board of Directors of A1 and the Board of Trustees of C1 have
each determined that it is advisable and in the best interests of their
respective stockholders and shareholders to consummate, and have approved, the
business combination transaction provided for herein in which a newly formed,
wholly owned subsidiary organized under the laws of the State of Maryland
("Merger Sub") of C1 Delaware (the successor to C1 by means of the C1 Delaware
Reorganization (as defined herein)) would merge with and into A1 (the "Merger");
WHEREAS, the Board of Directors of A1 and the Board of Trustees of C1 have
each determined that the Merger is in furtherance of and consistent with their
respective long-term business strategies and is fair to and in the best
interests of their respective stockholders and shareholders;
WHEREAS, prior to the record date for the stockholder meeting of C1
referred to in Section 6.3.2, C1 intends to consummate its long-standing plan to
reorganize as a corporation organized under the laws of the State of Delaware on
the terms described herein (the "C1 Delaware Reorganization");
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Merger is intended to preserve C1's and C2's status as
grandfathered from the application of Section 269B(a)(3) of the Code pursuant to
Section 136(c)(3) of the Deficit Reduction Act of 1984;
WHEREAS, as an inducement to A1 to enter into this Agreement, each of the
Board of Trustees of C1, the Board of Directors of C2 and certain shareholders
of C1 and C2 have approved the terms of a Stockholder Voting Agreement in the
form of Exhibit A (the "Stockholder Agreement") to be entered into by A1 and
holders of C1 Common Shares (as defined herein) representing at least a majority
of all the outstanding C1 Common Shares and C1 Preference Shares (as defined
herein) and a majority of the total voting power of all the outstanding shares
of C2 Common Stock (as defined herein) and by the holders of C1 Preference
Shares representing at least two thirds of the total voting power of all the
outstanding C1 Preference Shares, concurrently with the execution of this
Agreement, pursuant to which each of such shareholders has agreed to vote its
capital stock holdings for approval of the Merger and the transactions
contemplated by this Agreement; and
WHEREAS, A1, C1 and C2 desire to make certain representations, warranties
and agreements in connection with, and also to prescribe various conditions to,
the Merger.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I.
THE REORGANIZATION AND DISTRIBUTION; THE MERGER
Section 1.1. The Reorganizations and Distributions.
1.1.1. Reorganizations of C1 and C2. (a) Prior to the record date for the
stockholder meeting of C1 referred to in Section 6.3.2, C1 shall use its
reasonable best efforts to effect the C1 Delaware Reorganization and thereby
reorganize as a corporation incorporated under the laws of the State of Delaware
(C1, as so reorganized, is referred to herein as "C1 Delaware"). In connection
with the C1 Delaware Reorganization, (i) C1 shall, subject to obtaining the
requisite approval of its shareholders, merge with and into a newly formed
corporation wholly owned by C1 and organized under the laws of the Commonwealth
of Massachu-
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setts and (ii) immediately thereafter, the surviving corporation shall merge
with and into a newly formed corporation wholly owned by such surviving
corporation and organized under the laws of the State of Delaware, in each case
on a basis that is a tax-free reorganization within the meaning of Section
368(a) of the Code and does not adversely affect C1's and C2's status as
grandfathered from the application of Section 269B(a)(3) of the Code pursuant to
Section 136(c)(3) of the Deficit Reduction Act of 1984. In connection with the
C1 Delaware Reorganization, (i) each issued and outstanding C1 Common Share (as
defined in Section 4.1.2) shall be converted into the right to receive one share
of common stock, par value $.01 per share, of C1 Delaware ("C1 Delaware Common
Stock") and (ii) each issued and outstanding 6.50% First Series Preference Share
of C1 issued under a Certificate of Designation executed August 4, 1994 (the "C1
6.50% Preference Shares") shall be converted into one share of 6.50% First
Series Preferred Stock, par value $1,000 per share, of C1 Delaware having
rights, restrictions, privileges and preferences substantially the same as those
provided for with respect to the C1 6.50% Preference Shares on the date hereof.
In connection with the C1 Delaware Reorganization, C1 Delaware shall adopt a
certificate of incorporation and by-laws that do not contain any restrictions on
the consummation of the transactions contemplated hereby that are substantially
more burdensome to C1, C2 or A1 than are currently contained in the Declaration
of Trust and Trustee's Regulations of C1. By virtue of the C1 Delaware
Reorganization, C1 Delaware will succeed to all of the rights and obligations of
C1 under this Agreement.
(b) Also in connection with the C1 Delaware Reorganization, (i) C1 Delaware
and C2 shall enter into an Issuance Agreement in the form set forth as Exhibit B
hereto (the "C1/C2 Issuance Agreement") and (ii) C2 shall engage in a merger
(the "C2 Merger") with a wholly owned Subsidiary of C2 under the appropriate
provisions of the Delaware General Corporation Law (the "DGCL") pursuant to
which (w) C2 shall be the surviving entity, (x) the shares of C2 Common Stock
(as defined in Section 4.2.2) not held pursuant to the C2 Trust Agreements (as
defined in Section 4.2.2) shall be canceled, the holders of any such canceled
shares being entitled to receive cash in an amount equal to $10 times the number
of shares so canceled, (y) each 100 shares of C2 Common Stock outstanding and
held pursuant to the C2 Trust Agreements shall be converted into one such share
and (z) the authorized share capitalization of C2 shall be fixed at 1,000,000
shares of C2 Common Stock and 1,000,000 shares of C2 Permitted Preferred Stock
(as such term is defined in the C1/C2 Issuance Agreement).
1.1.2. Distributions and Recapitalization. Prior to the Effective Time the
following actions shall be taken (without duplication):
(i) A1, with the cooperation and consent of C1 Delaware, shall use
commercially reasonable efforts to obtain financing in an amount sufficient
to finance the cash distribution referred to in clause (ii) below;
(ii) C1 Delaware shall declare a per share dividend on the C1 Common
Shares issued and outstanding prior to the distribution of C1 Common Shares
set forth in clause (iii) of this Section 1.1.2, payable in cash to the
holders of record of such C1 Common Shares as of the close of business on
the business day immediately preceding the day of the Effective Time,
consisting of an amount equal to the Cash Amount (as defined below);
(iii) C1 Delaware shall declare a per share dividend on the issued and
outstanding C1 Common Shares, payable in new C1 Common Shares to the
holders of record of such C1 Common Shares as of the close of business on
the business day immediately preceding the day of the Effective Time,
consisting of 1.0818 C1 Common Shares;
(iv) C1 Delaware shall declare a per share dividend on the C1 Common
Shares issued and outstanding prior to the distribution of C1 Common Shares
set forth in clause (iii) of this Section 1.1.2 payable in shares of Series
A Convertible Preferred Stock, par value $.01 per share, of C1 Delaware
having the rights, restrictions, privileges and preferences as set forth on
Exhibit C hereto (the "C1 Series A Preferred Stock") to holders of record
of such C1 Common Shares as of the close of business on the business day
immediately preceding the day of the Effective Time, consisting of 0.19 of
a share of C1 Series A Preferred Stock for each C1 Common Share; and
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254
(v) C1 Delaware shall take such actions as shall be required to make
the appropriate adjustments to all outstanding options and conversion
rights to acquire C1 Common Shares to reflect the transactions described in
clauses (ii), (iii) and (iv) above in accordance with the terms of such
options and rights (it being understood that in connection with the
adjustment for the distributions set forth in clauses (ii) and (iv) above,
for purposes of the Certificate of Designation for the C1 Preference
Shares, the "current market price" per C1 Common Share shall be $177.67.
1.1.3. Cash Amount and Conversion Number. The amount of the cash dividend
to be declared by C1 Delaware pursuant to Section 1.1.2(ii) above (the "Cash
Amount") shall be $90.00 per C1 Common Share, subject to adjustment as follows:
(i) if the Market Price for the A1 Class A Stock (as defined in
Section 3.1.2.) at the Effective Time exceeds $38.67, then the Cash Amount
shall be reduced by an amount equal to such excess multiplied by 2.0818;
and
(ii) if the Market Price for the A1 Class A Stock at the Effective
Time is less than $28.58, then the Cash Amount shall be increased by an
amount equal to such deficiency multiplied by 2.0818.
For purposes of this Section 1.1.3, the "Market Price for the A1 Class A
Stock at the Effective Time" shall be the average of the closing prices per
share for the A1 Class A Stock on the New York Stock Exchange for the 20
consecutive trading days ending on the fifth trading day prior to the Effective
Time.
1.1.4. No Fractional Shares. (a) No certificate or scrip representing
fractional C1 Common Shares will be issued pursuant to the dividend payments
described in Section 1.1.2, and any such fractional share will not entitle the
owner thereof to vote or to any rights of a stockholder of the C1 Delaware.
(b) As promptly as practicable following the dividend payments described in
Section 1.1.2, C1 Delaware shall cause to be distributed to the holders of C1
Common Shares who are entitled to receive such dividends, in substantially the
same manner described in Section 2.3.6, the amount of cash, if any, to be paid
to such holders of in lieu of any fractional C1 Common Share.
Section 1.2. The Merger. (a) Upon the terms and subject to the conditions
of this Agreement, at the Effective Time, Merger Sub shall be merged with and
into A1 in accordance with the Maryland General Corporation Law (the "MGCL"). At
the Effective Time, the separate existence of Merger Sub shall cease and A1
shall continue as the surviving corporation in the Merger (the "Surviving
Corporation"). A1 and Merger Sub Delaware are sometimes referred to herein as
the "Constituent Corporations". As a result of the Merger, the outstanding
shares of capital stock of the Constituent Corporations shall remain outstanding
or be converted or canceled in the manner provided in Section 2.1.
(b) A1 shall have the right, with the consent of C1 (which consent shall
not be unreasonably withheld), for a period of 30 days from the date hereof, to
request that the parties change the structure of the Merger and the other
transactions contemplated hereby such that a wholly owned subsidiary of A1 would
merge with and into C1, with C1 as the surviving corporation. Such change would
be set forth in an amendment to this Agreement which shall be reasonably
acceptable to C1 and would provide that, among other things,
(x) each issued and outstanding C1 Common Share shall be converted
into:
(i) a number of shares of A1 Common Stock equal to one plus the
number of C1 Common Shares that would otherwise have been received with
respect to each outstanding C1 Common Share pursuant to Article 1
hereof;
(ii) an amount in cash equal to the Cash Amount payable pursuant to
Article I hereof with respect to each C1 Common Share, subject to
adjustment as provided therein; and
(iii) shares of preferred stock of A1 having the rights,
restrictions, privileges and preferences as set forth in Exhibit C
hereto; and
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255
(y) each issued and outstanding C1 6.50% Preference Share shall be
converted into one share of a new series of preferred stock of A1 having
economic terms and rights, restrictions, privileges and preferences
substantially the same as those provided for with respect to the C1 6.50%
Preferences Shares.
If A1 makes such request and C1 consents to such request within such 30-day
period, the parties agree to use their best efforts to promptly prepare, execute
and deliver an amendment to this Agreement that accomplishes the foregoing and
containing other terms and conditions reasonably required therein.
Notwithstanding the foregoing, until any such amendment to this Agreement is
executed, this Agreement shall remain in full force and effect in accordance
with its terms.
Section 1.3. Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section 8.1, and subject to the satisfaction or waiver (where applicable) of the
conditions set forth in Article VII, the closing of the Merger (the "Closing")
will take place at the offices of Willkie Farr & Gallagher, New York, New York,
at 10:00 a.m., local time, on the second business day following satisfaction of
the conditions set forth in Article VII, unless another date, time or place is
agreed to in writing by the parties hereto (the "Closing Date"). At the Closing
there shall be delivered to A1, C1 and C2 the certificates and other documents
and instruments required to be delivered under Article VII.
Section 1.4. Effective Time. At the Closing, articles of merger or other
appropriate documents shall be duly prepared and executed by the Constituent
Corporations (the "Articles of Merger") in accordance with Section 3-110 of the
MGCL and thereafter delivered to the State Department of Assessments and
Taxation of the State of Maryland (the "Maryland Secretary of State") for filing
as provided in Section 107 of the MGCL the Articles of Merger and the Articles
of Merger also shall be filed with any local recording office as required, in
each case, as soon as practicable on the Closing Date. The Merger will become
effective at such time as the Articles of Merger have been filed with the
Maryland Secretary of State or at such other time as may be agreed upon by the
parties and specified in the Articles of Merger in accordance with applicable
law. The date and time when the Merger becomes effective is referred to herein
as the "Effective Time".
Section 1.5. Articles of Incorporation and By-laws.
1.5.1. C1 Certificate of Incorporation and By-laws. (a) At the Effective
Time, (i) the certificate of incorporation of C1 Delaware in effect immediately
prior to the Effective Time shall be amended and restated in its entirety to be
substantially in the form of Exhibit D hereto and, as so amended and restated,
such certificate of incorporation shall be the certificate of incorporation of
C1 (the "C1 Charter") until thereafter amended as provided by law and the C1
Charter and (ii) the By-laws of C1 Delaware shall be amended and restated in
their entirety to be substantially in the form of Exhibit E hereto and, as so
amended and restated, such by-laws shall be the By-laws of C1 (the "C1 By-laws")
until thereafter amended as provided by law, the C1 charter and such By-laws.
(b) In order for C1 to meet the requirements to (i) qualify as a real
estate investment trust which meets the requirements of Sections 856 through 860
of the Code (a "REIT", and the requirements for such qualification, the "REIT
Requirements"), (ii) avoid any Federal income or excise tax liability and (iii)
otherwise maintain the current Federal income tax treatment of the pairing
arrangement for the shares of C2 Common Stock following the Merger, the C1
Charter will provide that, subject to the exceptions set forth therein, no
person or entity shall own, or be deemed to own by virtue of the attribution
provisions of Section 544 of the Code (as modified by Section 856(h)(1)(B) of
the Code) or Section 318 of the Code (as modified by Section 856(d)(5) of the
Code), more than 6.8% of the outstanding Paired Shares (the "Ownership Limit")
at or after the Effective Time. Accordingly, if any holder (other than a holder
which is excepted from Ownership Limit restriction pursuant to the C1 Charter,
but only to the extent of such exception) would receive in connection with the
Merger a number of Paired Shares such that any person or entity would own, or be
deemed to own under the applicable attribution rules of the Code referred to
above, Paired Shares in excess of the Ownership Limit, then such holder shall
acquire no right or interest in such number of Paired Shares which would cause
such person or entity to exceed the Ownership Limit, but such holder shall, in
lieu of receiving those Paired Shares which would cause the Ownership Limit to
be exceeded
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(the "Limited Shares"), have the right to be paid by C1 an amount in cash for
such Limited Shares equal to the product of the Market Price multiplied by the
number of such Limited Shares.
1.5.2. A1/MS Certificate of Incorporation and By-laws. At the Effective
Time, (i) the Amended and Restated Articles of Incorporation of A1 as in effect
immediately prior to the Effective Time shall be amended so that the name of the
Surviving Corporation shall be "SDG Properties, Inc." and, as so amended, such
Amended and Restated Articles of Incorporation shall be the Articles of
Incorporation of the Surviving Corporation (the "A1/MS Articles of
Incorporation") until thereafter amended as provided by law and the A1/MS
Articles of Incorporation and (ii) the Amended and Restated By-laws of A1 as in
effect immediately prior to the Effective Time shall be the By-laws of the
Surviving Corporation (the "A1/MS By-laws") until thereafter amended as provided
by law, the A1/MS Articles of Incorporation and such By-laws.
1.5.3. C2 Certificate of Incorporation and By-laws. At the Effective Time,
(i) the Certificate of Incorporation of C2 as in effect immediately prior to the
Effective Time shall be amended and restated in their entirety to be
substantially in the form of Exhibit F hereto and, as so amended and restated,
such Certificate of Incorporation shall be the Certificate of Incorporation of
C2 (the "C2 Certificate of Incorporation") until thereafter amended as provided
by law and the C2 Certificate of Incorporation and (ii) the By-laws of C2 as in
effect immediately prior to the Effective Time shall be amended and restated in
their entirety to be substantially in the form of Exhibit G hereto and, as so
amended and restated, such By-laws shall be the By-laws of C2 (the "C2 By-laws")
until thereafter amended as provided by law, the C2 Certificate of Incorporation
and such By-laws.
Section 1.6. Directors and Officers.
1.6.1. Directors and Officers of C1. (a) At the Effective Time, the Board
of Directors of C1 will consist of 13 directors and will include Hans C. Mautner
and two other directors to be designated by C1 (which directors shall be
"Independent Directors" (as defined in the C1 Charter)). Such directors of C1
will commence to serve at the Effective Time and will remain directors until
their successors have been duly elected and qualified or until their earlier
death, resignation or removal in accordance with the C1 By-laws.
(b) Immediately after the Effective Time, Mr. Mautner shall serve as Vice
Chairman and Mark S. Ticotin shall serve as an Executive Senior Vice President
of C1 and the remaining officers of C1 shall be designated by A1. Such officers
will commence to serve at the Effective Time and will remain officers until
their successors have been duly elected and qualified or until their earlier
death, resignation or removal in accordance with the C1 By-laws.
1.6.2. Directors and Officers of C2. (a) At Effective Time, the Board of
Directors of C2 will consist of 13 directors and will include Hans C. Mautner
and two other directors to be designated by C1 (which directors shall be
"Independent Directors" (as defined in the C1 Charter)). The directors of C2
will commence to serve at the Effective Time and will remain directors until
their successors have been duly elected and qualified or until their earlier
death, resignation or removal in accordance with the C2 By-laws.
(b) Immediately after the Effective Time, Mr. Mautner shall serve as Vice
Chairman and Mr. Ticotin shall serve as Executive Senior Vice President of C2
and the remaining officers of C2 shall be designated by A1. Such officers will
commence to serve at the Effective Time and will remain officers until their
successors have been duly elected and qualified or until their earlier death,
resignation or removal in accordance with the C2 By-laws.
1.6.3. Directors and Officers of the Surviving Corporation. (a) The
directors of A1 at the Effective Time shall be the directors of the Surviving
Corporation until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
(b) The officers of A1 at the Effective Time shall be the officers of the
Surviving Corporation until the earlier of their resignation or removal or until
their respective successors are duly elected and qualified, as the case may be.
Section 1.7. Effects of the Merger. Subject to the foregoing, the effects
of the Merger shall be as provided in the applicable provisions of the MGCL.
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Section 1.8. Further Assurances. Each party hereto will, either prior to
or after the Effective Time, execute such further documents, instruments, deeds,
bills of sale, assignments and assurances and take such further actions as may
reasonably be requested by one or more of the others to consummate the Merger,
to vest the Surviving Corporation with full title to all assets, properties,
privileges, rights, approvals, immunities and franchises of the Constituent
Corporations or to effect the other purposes of this Agreement.
Section 2. A1 Stock Issuance. At the Effective Time, A1 shall issue to
such persons as may be jointly designated by C1 and A1 such number of whole or
fractional shares of common stock of A1 for such consideration as may be
mutually agreed by C1 and A1 as to preserve A1's status as a REIT.
ARTICLE II.
MERGER CONSIDERATION; CONVERSION OF SHARES
Section 2.1. Merger Consideration; Conversion of Capital Stock.
2.1.1. Conversion of A1 Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder of capital stock of
A1:
(a) Each issued and outstanding share of (i) A1 Class A Stock (as
defined in Section 3.12) (other than shares canceled in accordance with
Section 2.1.1(b)) shall be converted into the right to receive from C1 one
fully paid and nonassessable C1 Common Share, (ii) A1 Class B Stock (as
defined in Section 3.1.2) (other than shares canceled in accordance with
Section 2.1.1(b) or with respect to which a demand to receive payment of
the fair value therefor in accordance with Section 3-203 of the MGCL has
been perfected) shall be converted into the right to receive from C1 one
fully paid and nonassessable C1 Class B Common Share, par value $.0001 per
share (the "C1 Class B Common Shares"), and (iii) A1 Class C Stock (as
defined in Section 3.1.2) (other than shares canceled in accordance with
Section 2.1.1(b) or with respect to which a demand to receive payment of
the fair value therefor in accordance with Section 3-203 of the MGCL has
been perfected) shall be converted into the right to receive from C1 one
fully paid and nonassessable C1 Class C Common Share, par value $.0001 per
share (the "C1 Class C Common Shares"). Each issued and outstanding share
of A1 Preferred Stock (as defined in Section 3.1.2) shall not be affected
by the Merger and will remain one issued and outstanding share of preferred
stock of the Surviving Corporation.
(b) All shares of A1 Common Stock that are owned by A1 as treasury
stock and any shares of A1 Common Stock owned by C1 Delaware, C2, or any
wholly owned Entity (as defined in Section 5.1) of C1 Delaware or C2 shall
be canceled and retired and shall cease to exist and no stock of the C1 or
other consideration shall be delivered in exchange therefor.
(c) Each outstanding option to purchase shares of A1 Common Stock
shall be converted in the manner described in Section 6.9.1.
Section 2.2. Pairing of Shares. At the Effective Time, C1 Delaware and C2
shall take the actions required of them pursuant to the C1/C2 Issuance Agreement
so that each and every C1 Common Share, C1 Class B Common Share or C1 Class C
Common Share, as the case may be, outstanding or issued in connection with the
Merger or Section 1.1.2 will be entitled to a beneficial interest in shares of
C2 Common Stock pursuant to the C2 Trust Agreements (the C1 Common Shares and
the related beneficial interests in C2 Common Stock, the "Paired Shares").
Section 2.3. Exchange of Certificates.
2.3.1. Rights of Certificateholders. At the Effective Time all shares of
A1 Common Stock converted in accordance with Section 2.1 will cease to be
outstanding, will be canceled and retired and will cease to exist, and each
holder of a certificate which, immediately prior to the Effective Time,
represented any such shares (collectively, the "Certificates") will thereafter
cease to have any rights with respect to such Common Stock Certificates, except
the right to receive, without interest, upon exchange of such Common Stock
Certificates in accordance with this Section 2.3, certificates representing the
number of shares of C1 Common Shares,
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C1 Class B Common Shares or C1 Class C Common Shares, as the case may be, to
which the holder thereof is entitled pursuant to Section 2.1, together with the
payments to which such holder is entitled pursuant to this Section 2.3. No
holder of a Certificate shall have any rights as a stockholder of C1 or as the
owner of beneficial interests in capital stock of C2 until such holder's
Certificates have been exchanged for certificates representing the Paired Shares
as provided herein.
2.3.2. Exchange Agent. Promptly following the Effective Time, C1 Delaware
shall make available to an exchange agent to be designated before the Closing
Date by A1 and reasonably acceptable to C1 (the "Exchange Agent"), (x)
certificates representing the number of duly authorized whole Paired Shares
issuable in connection with the Merger and (y) an amount of cash equal to the
aggregate amount payable in accordance with Sections 1.5.1(b) and 2.3.6, to be
held for the benefit of and distributed to the holders of Certificates in
accordance with this Section. The Exchange Agent shall agree to hold such
certificates and funds (such certificates and funds, together with earnings
thereon, being referred to herein as the "Exchange Fund") for delivery as
contemplated by this Section and upon such additional terms as may be agreed
upon by the Exchange Agent and C1 Delaware.
2.3.3. Exchange Procedures. As soon as reasonably practicable after the
Effective Time, C1 shall cause the Exchange Agent to mail to each holder of
record of Certificates (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other provisions as C1, may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for the shares issuable in connection with the Merger and the cash
payable pursuant to Sections 1.5.1(b) and 2.3.6. Upon surrender of a Certificate
for cancelation to the Exchange Agent, together with such letter of transmittal
duly executed and completed in accordance with its terms, the holder of such
Certificate shall be entitled to receive in exchange therefor the aggregate
consideration which such holder has the right to receive pursuant to the
provisions of this Article II (the "Applicable Merger Consideration"), as
adjusted by the cash amount payable in accordance with Section 1.5.1(b) and plus
the cash amount payable in accordance with Section 2.3.6, and the Certificates
so surrendered shall forthwith be canceled. In no event shall the holder of any
Certificate be entitled to receive interest on any funds to be received in the
Merger. In the event of a transfer of ownership of shares of A1 Common Stock,
which is not registered in the transfer records of the issuer thereof, a
certificate representing that number of whole Paired Shares (as adjusted by the
cash amount payable in accordance with Section 1.5.1(b) and plus the cash amount
payable in accordance with Section 2.3.6), may be issued to a transferee if the
Certificate is presented to the Exchange Agent accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.3.3, each Certificate shall be deemed at any time
after the Effective Time for all corporate purposes of C1, except as limited by
Section 2.3.4 below, to represent ownership of the shares into which the shares
shown thereon have been converted as contemplated by this Article II.
Notwithstanding the foregoing, Certificates surrendered for exchange by any
person constituting an "affiliate" of A1 for purposes of Section 6.4 shall not
be exchanged until C1 has received an Affiliate Agreement (as defined in Section
6.4) in accordance with the provisions of Section 6.4.
2.3.4. Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to C1
Common Shares, C1 Class B Common Shares of C1 Class C Common Shares, as the case
may be, with a record date on or after the Effective Time, and no distributions
to be made to the beneficial owners of interests in C2 Common Stock arising out
of a dividend or distribution declared or made by C2 with respect to C2 Common
Stock after the Effective Time with a record date on or after the Effective
Time, shall be paid to the holder of any unsurrendered Certificate with respect
to the shares represented thereby and no cash payment shall be paid to any such
holder pursuant to Sections 1.5.1(b) and 2.3.6 until the holder of record of
such Certificate shall surrender such Certificate in accordance with this
Section. Until paid to the holders of such unsurrendered Certificates in
accordance with this Section 2.3.4, all such dividends and other distributions,
and all cash payments to be paid pursuant to Section 1.5.1(b) and 2.3.6, shall
be delivered to the Exchange Agent and held by it as part of the Exchange Fund.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be paid
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to the record holder of the Certificates representing the Paired Shares issued
in exchange therefor, without interest, (i) at the time of such surrender, the
amount of dividends or other distributions, if any, with a record date on or
after the Effective Time which theretofore became payable, but which were not
paid by reason of the immediately preceding sentence, with respect to such whole
number of C1 Common Shares and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date on or after the Effective
Time but prior to surrender and a payment date subsequent to surrender payable
with respect to such whole number of C1 Common Shares, C1 Class B Common Shares
of C1 Class C Common Shares, as the case may be.
2.3.5. No Further Ownership Rights in Capital Stock of A1. All cash and
Paired Shares issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash paid pursuant to Sections
1.5.1(b) or 2.3.6) shall be deemed to have been issued at the Effective Time in
full satisfaction of all rights pertaining to the shares of capital stock
represented thereby, subject, however, to C1's obligation to pay any dividends
which may have been declared by A1, C1 or C2 on such shares of capital stock in
accordance with the terms of this Agreement and which remained unpaid at the
Effective Time. From and after the Effective Time, the stock transfer books of
A1 shall be closed and there shall be no further registration of transfers on
the stock transfer books of C1 of the shares of capital stock of A1 or Merger
Sub which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to C1 for any reason, they shall
be canceled and exchanged as provided in this Section.
2.3.6. No Fractional Shares. (a) No certificate or scrip representing
fractional C1 Common Shares, C1 Series A Preferred Shares, C1 Class B Common
Shares or C1 Class C Common Shares, as applicable (any such fractional shares,
the "Fractional Shares"), will be issued in the Merger upon the surrender for
exchange of Certificates or issued pursuant to Section 1.1.2(iv), and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a stockholder of C1.
(b) As promptly as practicable following the Effective Time, the Exchange
Agent shall determine the aggregate number of whole shares represented by
Fractional Shares of any class or series to which holders of Fractional Shares
would be entitled but for the provisions of clause (a) of this Section 2.3.6
(such number of shares being herein called the "Excess Shares"). As soon after
the Effective Time as practicable, the Exchange Agent, as agent for the holders
of Fractional Shares, shall sell the Excess Shares at then prevailing prices on
the NYSE, all in the manner provided in paragraph (c) of this Section 2.3.6.
(c) The sale of the Excess Shares by the Exchange Agent shall be executed
on the NYSE through a member firm of the NYSE and shall be executed in round
lots to the extent practicable. Until the net proceeds of such sale or sales
have been distributed to the holders of Fractional Shares, the Exchange Agent
will hold such proceeds in trust for the holders of Fractional Shares (the
"Stock Trust"). C1 shall pay all commissions, transfer taxes and other
out-of-pocket transaction costs, including the expenses and compensation of the
Exchange Agent, incurred in connection with such sale of the Excess Shares. The
Exchange Agent shall determine the portion of the Stock Trust to which each
holder of Fractional Shares shall be entitled, if any, by multiplying the amount
of the aggregate net proceeds comprising the Stock Trust by a fraction the
numerator of which is the amount of the fractional share interest to which such
holder of Fractional Shares is entitled and the denominator of which is the
aggregate amount of fractional share interests to which all holders of
Fractional Shares of the same class or series are entitled.
(d) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Fractional Shares in lieu of any fractional
share interests in accordance with the immediately preceding paragraph, the
Exchange Agent shall make available such amounts to such holders of Fractional
Shares.
2.3.7. Termination of Exchange Fund and Stock Trust. Any portion of the
Exchange Fund and Stock Trust which remains undistributed to the holders of
Certificates or C1 Common Shares, as applicable, for six (6) months after the
Effective Time shall be delivered to C1, upon demand, and any stockholders who
have not theretofore complied with this Article II shall thereafter look only to
C1 (subject to abandoned property, escheat and other similar laws) as general
creditors for payment of their claim for the Applicable Merger Consideration,
any cash payable in respect thereof pursuant to Sections 2.3.1(b) or 2.3.6 and
any dividends or distributions with respect thereto. C1 shall not be liable to
any such holder of shares for Paired Shares (or
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dividends or distributions with respect thereto) or cash payable in respect
thereof delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF A1
Section 3.1. Representations and Warranties of A1. A1 represents and
warrants to C1 and C2 as follows:
3.1.1. Organization and Qualification. Each of A1 and the Subsidiaries (as
defined in Section 9.11) of A1 is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has all requisite power and authority to conduct its business
as and to the extent now conducted and to own, use and lease its assets and
properties, except for such failures to be so incorporated, existing and in good
standing or to have such power and authority which, individually or in the
aggregate, are not having and could not be reasonably expected to have a
material adverse effect on A1 and the Subsidiaries and Consolidated
Non-Corporate Affiliates (as defined in Section 9.11) of A1 (collectively, the
"A1 Entities") taken as a whole. Each of the Consolidated Non-Corporate
Affiliates of A1 is a trust, limited liability company or partnership duly
organized, validly existing and, if applicable, is in good standing under the
laws of its jurisdiction of organization and has all requisite power and
authority to conduct its business as and to the extent conducted and to own, use
and lease its assets and properties, except for such failures to be so
organized, existing or in good standing or to have such power and authority
which, individually or in the aggregate, are not having and could not reasonably
be expected to have a material adverse effect on the A1 Entities taken as a
whole. Each A1 Entity is duly qualified, licensed or admitted to do business and
is in good standing in each jurisdiction in which the ownership, use or leasing
of its assets and properties, or the conduct or nature of its business, makes
such qualification, licensing or admission necessary, except for such failures
to be so qualified, licensed or admitted and in good standing which,
individually or in the aggregate, are not having and could not be reasonably
expected to have a material adverse effect on the A1 Entities taken as a whole.
Section 3.1.1 of the letter dated the date hereof and delivered by A1 to C1
concurrently with the execution and delivery of this Agreement (the "A1
Disclosure Letter") sets forth, as of the date hereof, (i) with respect to each
Subsidiary of A1, (A) the name of such Subsidiary and (B) if such Subsidiary is
not wholly owned, directly or indirectly, by A1, (1) its authorized capital
stock, (2) the number of issued and outstanding shares of its capital stock and
(3) the record and beneficial owners of outstanding shares of its capital stock
and (ii) with respect to each Consolidated Non-Corporate Affiliate of A1, (A)
the name, type of entity and jurisdiction of organization of such Consolidated
Non-Corporate Affiliate and (B) the names of all parties other than A1 Entities
that own equity interests therein. Except for interests in the A1 Entities and
as disclosed in Section 3.1.1 of the A1 Disclosure Letter and as disclosed in
the A1 SEC Reports (as defined below), as of the date hereof, neither A1 nor any
other A1 Entity directly or indirectly owns any equity or similar interest in,
or any interest convertible into or exchangeable or exercisable for any equity
or similar interest in, (i) any corporation or (ii) any trust, limited liability
company, partnership, joint venture or other non-corporate business association
or entity (other than investments in such entities that (A) in the aggregate are
reflected in the latest A1 Financial Statements (as defined herein) as having a
value not exceeding $20,000,000, (B) by operation of law (including the
interposition of a Subsidiary or Consolidated Non-Corporate Affiliate holding
only such investments) expose no A1 Entity (other than such an interposed A1
Entity) to any liability with respect to the obligations of such entities,
whether as a controlling person, partner, guarantor, surety or otherwise and (C)
do not and could not reasonably be expected to cause A1 to fail to meet any REIT
Requirement (the exceptions to the general representation set forth in this
sentence, the "A1 Permitted Minority Investments")). A1 has previously delivered
to C1 and C2 correct and complete copies of its articles of incorporation and
By-laws, each as amended to the date hereof.
3.1.2. Capital Stock. (a) As of the date hereof, the authorized capital
stock of A1 consists solely of 375,796,000 shares of Common Stock, par value
$0.0001 per share (the "A1 Class A Stock"), 12,000,000 shares of Class B Common
Stock, par value $0.0001 per share (the "A1 Class B Stock"), 4,000 shares of
Class C Common Stock, par value $0.0001 per share (the "A1 Class C Stock" and
together with the A1
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Class A Stock and the A1 Class B Stock, the "A1 Common Stock"), 9,200,000 shares
of 8 3/4% Series B Cumulative Redeemable Preferred Stock, par value $0.0001 per
share (the "A1 Series B Preferred Stock"), 3,000,000 shares of 7.89% Series C
Cumulative Step-Up Premium Rate Preferred Stock, par value $0.0001 per share
(the "A1 Series C Preferred Stock" and together with the A1 Series B Preferred
Stock and the A1 Series B Preferred Stock, the "A1 Preferred Stock"), and
250,000,000 shares of Excess Stock, par value $.0001 per share (the "Excess
Stock"). As of February 17, 1998, (i) 106,482,222 shares of A1 Class A Stock,
3,200,000 shares of Class B Stock, 4,000 shares of Class C Stock, no shares of
Series A Preferred Stock, 8,000,000 shares of Series B Preferred Stock,
3,000,000 shares of Series C Preferred Stock and no shares of Excess Stock were
issued and outstanding, (ii) no shares of any of such classes of stock were held
by A1 in its treasury and (iii) 4,595,000 and 100,000 shares of A1 Common Stock
were reserved for issuance pursuant to A1's Employee Stock Option Plan and A1's
Director Stock Option Plan, respectively (collectively, the "A1 Stock Plans")
((i), (ii) and (iii), collectively, the "A1 Permissible Issuance Arrangements").
Between such date and the date hereof, except as set forth in Section 3.1.2 of
the A1 Disclosure Letter, there has been no change in the number of issued and
outstanding shares of A1 Common Stock or shares of A1 Common Stock held in
treasury or reserved for issuance other than pursuant to the A1 Permissible
Issuance Arrangements. All of the issued and outstanding shares of A1 Common
Stock and A1 Preferred Stock are, and all shares reserved for issuance will be,
upon issuance in accordance with the terms specified in the instruments or
agreements pursuant to which they are issuable, duly authorized, validly issued,
fully paid and nonassessable. Except pursuant to this Agreement and except as
set forth in Section 3.1.2 of the A1 Disclosure Letter and as set forth in the
A1 SEC Reports, as of the date hereof, there are no outstanding subscriptions,
options, warrants, rights (including "phantom" stock rights), preemptive rights
or other contracts, commitments, understandings or arrangements, including any
right of conversion or exchange under any outstanding security, instrument or
agreement (together, "Options"), obligating any A1 Entity to issue or sell any
equity interest in A1 or to grant, extend or enter into any Option with respect
thereto other than pursuant to A1 Permissible Issuance Arrangements. Except
pursuant to this Agreement and except as set forth in Section 3.1.2 of the A1
Disclosure Letter, as of the date hereof, there are no outstanding contractual
obligations of any A1 Entity to repurchase, redeem or otherwise acquire any
equity interest in A1.
(b) Except as disclosed in Section 3.1.2 of the A1 Disclosure Letter, all
of the outstanding shares of capital stock of each Subsidiary of A1 are duly
authorized, validly issued, fully paid and nonassessable and are owned,
beneficially and of record, by A1 or any other A1 Entity wholly owned, directly
or indirectly, by A1, free and clear of any liens, claims, mortgages, deeds of
trust, deeds to secure debt, encumbrances, pledges, security interests, equities
and charges of any kind (each a "Lien"). Except as disclosed in Section 3.1.2 of
the A1 Disclosure Letter, all equity interests in the Consolidated Non-Corporate
Affiliates of A1 that are not owned by third parties (as disclosed in Section
3.1.1 of the A1 Disclosure Letter) are owned by other A1 Entities, free and
clear of any Liens. Except as disclosed in Section 3.1.2 of the A1 Disclosure
Letter and as set forth in the A1 SEC Reports, as of the date hereof, there are
no (i) outstanding Options (other than Options in favor of A1 or any other A1
Entity wholly owned, directly or indirectly, by A1) obligating any A1 Entity to
issue or sell any shares of capital stock of, or other equity interest in, any
Subsidiary or Consolidated Non-Corporate Affiliate of A1 or to grant, extend or
enter into any such Option or (ii) voting trusts, proxies or other commitments,
understandings, restrictions or arrangements in favor of any person other than
A1 or an A1 Entity wholly owned, directly or indirectly, by A1 with respect to
the voting of or the right to participate in dividends or other earnings on any
capital stock of any Subsidiary of A1 or an any equity interest in any
Consolidated NonCorporate Affiliate of A1, other than as set forth in such A1
Entity's Charter Documents.
(c) Except as disclosed in Section 3.1.2 of the A1 Disclosure Letter and as
set forth in the A1 SEC Reports, as of the date hereof, there are no outstanding
contractual obligations (other than Options in favor of A1 or an A1 Entity
wholly owned, directly or indirectly, by A1) of any A1 Entity to repurchase,
redeem or otherwise acquire any shares of capital stock of, or other equity
interest in, any Subsidiary or Consolidated Non-Corporate Affiliate of A1.
Except as disclosed in Section 3.1.2 of the A1 Disclosure Letter, as of the date
hereof, there are no outstanding contractual obligations of any A1 Entity to
provide funds to, or to make any investment (in the form of a loan, capital
contribution or otherwise) in, any A1 Entity or other person (except
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for A1 and A1 Entities wholly owned, directly or indirectly, by A1), other than
in connection with A1 Permitted Minority Investments.
3.1.3. Authority Relative to this Agreement. A1 has full corporate power
and authority to enter into this Agreement and, subject, with respect to the
Merger, to obtaining the A1 Stockholders' Approval (as defined in Section
6.3.1), to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by A1 and the consummation by A1 of the transactions contemplated hereby have
been duly and validly approved by its Board of Directors, the Board of Directors
of A1 has recommended adoption of this Agreement by its stockholders and
directed that this Agreement be submitted to its stockholders for their
consideration, and no other corporate proceedings on the part of A1 or its
stockholders are necessary to authorize the execution, delivery and performance
of this Agreement by A1 and the consummation by A1 of the transactions
contemplated hereby, other than obtaining the A1 Stockholders' Approval. This
Agreement has been duly and validly executed and delivered by A1 and constitutes
a legal, valid and binding obligation of A1, enforceable against A1 in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
3.1.4. Non-Contravention; Approvals and Consents. (a) The execution and
delivery of this Agreement by A1 do not, and the performance by A1 of its
obligations hereunder and the consummation of the transactions contemplated
hereby will not, (i) conflict with, result in a violation or breach of,
constitute (with or without notice or lapse of time or both) a default under,
result in or give to any person any right of payment or reimbursement,
termination, cancelation, modification or acceleration of, or result in the
creation or imposition of any Lien upon any of the assets or properties of any
A1 Entity under, any of the terms, conditions or provisions of (x) the
certificate or articles of incorporation or By-laws (in the case of a
corporation), trust agreement, declaration of trust, deed or trustees'
regulations (in the case of a trust), limited liability company or operating
agreement or registration certificate (in the case of a limited liability
company) or agreement or certificate of partnership or joint venture (in the
case of a partnership or joint venture) (including, in each such case, all
amendments, supplements, other modifications and assignments thereof) ("Charter
Documents") of any A1 Entity, or (y) subject to the obtaining of the A1
Stockholders' Approval and the taking of the actions described in paragraph
(b)of this Section and the obtaining of the consents and approvals, the making
of the filings and the giving of the notices described in Section 3.1.4 of the
A1 Disclosure Letter, (1) any statute, law, rule, regulation or ordinance
(together, "laws"), or any judgment, decree, order, writ, permit or license
(together, "orders"), of any court, tribunal, arbitrator, authority, agency,
commission, official or other instrumentality of the United States, any foreign
country or any domestic or foreign state, county, city or other political
subdivision (a "Governmental or Regulatory Authority") applicable to any A1
Entity or any of its assets or properties, or (2) any note, bond, mortgage, deed
of trust, deed to secure debt, security agreement, co-tenancy agreement,
reciprocal easement agreement, management agreement, leasing agreement,
indenture, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind (including, in each case, all
amendments, supplements, other modifications and assignments thereof) (together,
"Contracts") to which any A1 Entity is a party or by which any A1 Entity or any
of its assets or properties is bound, excluding from the foregoing clauses (1)
and (2) conflicts, violations, breaches, defaults, rights of payment or
reimbursement, terminations, cancellations, modifications, accelerations and
creations and impositions of Liens which, individually or in the aggregate,
could not be reasonably expected to have a material adverse effect on the A1
Entities taken as a whole or on the ability of A1 to consummate the transactions
contemplated by this Agreement or (ii) to the knowledge of A1, adversely affect
the qualification of A1 as a REIT.
(b) Except (i) for the filing of the Proxy Statement (as defined in Section
3.1.9) and the Registration Statement (as defined in Section 4.1.9) with the SEC
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Exchange Act"), and the Securities Act of 1933, as
amended, and the rules and regulations thereunder (the "Securities Act"), the
declaration of the effectiveness of the Registration Statement by the SEC and
filings with various state securities authorities that are required in
connection with the transactions contemplated by this Agreement, (ii) for the
filing of the Articles of
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Merger and other appropriate merger documents required by the MGCL with the
Maryland Secretary of State and, in each case, with any local recording office,
and appropriate documents with the relevant authorities of other states in which
any of the Constituent Corporations are qualified to do business, (iii) for such
other consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under (A) the laws of any foreign country in
which any A1 Entity conducts any business or owns any property or assets or (B)
any federal, state, local or foreign Environmental Law (as defined below) and
(iv) as disclosed in Section 3.1.4 of the A1 Disclosure Letter, no consent,
approval or action of, filing with or notice to any Governmental or Regulatory
Authority or other public or private third party is necessary or required under
any of the terms, conditions or provisions of any law or order of any
Governmental or Regulatory Authority or any Contract to which any A1 Entity is a
party or by which any A1 Entity or any of its assets or properties is bound for
the execution and delivery of this Agreement by A1, the performance by A1 of its
obligations hereunder or the consummation by A1 of the transactions contemplated
hereby, other than such consents, approvals, actions, filings and notices which
the failure to make or obtain, as the case may be, individually or in the
aggregate, could not be reasonably expected to have a material adverse effect on
the A1 Entities taken as a whole or on the ability of A1 to consummate the
transactions contemplated by this Agreement.
3.1.5. SEC Reports and Financial Statements. A1 has delivered to C1 and C2
prior to the execution of this Agreement a true and complete copy of each form,
report, schedule, registration statement (as declared effective and any
posteffective amendments), definitive proxy statement and other document
(together with all amendments thereof and supplements thereto, except as
provided above with respect to registration statements) filed by A1 or any other
A1 Entity with the SEC since January 1, 1996 (as such documents have since the
time of their filing been amended or supplemented, the "A1 SEC Reports"), which
are all the documents (other than preliminary material) that A1 or any other A1
Entity were required to file with the SEC since such date. As of their
respective dates, the A1 SEC Reports (i) complied as to form in all material
respects with the requirements of the Securities Act or the Exchange Act, as the
case may be, and (ii) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The audited consolidated financial statements
and unaudited interim consolidated financial statements (including, in each
case, the notes, if any, thereto) included in the A1 SEC Reports (the "A1
Financial Statements") complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved (except as may be indicated therein
or in the notes thereto and except with respect to unaudited statements as
permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of
the unaudited interim financial statements, to normal, recurring year-end audit
adjustments (which are not expected to be, individually or in the aggregate,
materially adverse to the A1 Entities taken as a whole)) the consolidated
financial position of A1 and its consolidated subsidiaries as at the respective
dates thereof and the consolidated results of their operations and cash flows
for the respective periods then ended. Except as set forth in Section 3.1.5 of
the A1 Disclosure Letter, each Subsidiary and Consolidated Non-Corporate
Affiliate of A1 in existence on the date hereof is fully consolidated with A1 in
the A1 Financial Statements for all periods covered thereby.
3.1.6. Absence of Certain Changes or Events. Except as disclosed in the A1
SEC Reports filed prior to the date of this Agreement, between September 30,
1997 and the date hereof there has not been any change, event or development
having, or that could be reasonably expected to have, individually or in the
aggregate, a material adverse effect on the A1 Entities taken as a whole.
3.1.7. [Intentionally Omitted].
3.1.8. Legal Proceedings. Except as disclosed in the A1 SEC Reports filed
prior to the date of this Agreement or in Section 3.1.8 of the A1 Disclosure
Letter, as of the date hereof, (i) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of A1, threatened against, relating to
or affecting, nor to the knowledge of A1 are there any Governmental or
Regulatory Authority investigations or audits pending or threatened against,
relating to or affecting any A1 Entity or any of its assets and properties
which, individually or in the aggregate, could be reasonably expected to have a
material adverse effect on the A1 Entities taken as a whole or on the ability of
A1 to consummate the transactions contemplated by this
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Agreement and (ii) no A1 Entity is subject to any order of any Governmental or
Regulatory Authority which, individually or in the aggregate, is having or could
be reasonably expected to have a material adverse effect on the A1 Entities
taken as a whole or on the ability of A1 to consummate the transactions
contemplated by this Agreement.
3.1.9. Information Supplied. The joint proxy statement relating to the
Stockholders' Meetings (as defined in Section 6.3.2), as amended or supplemented
from time to time (as so amended and supplemented, the "Proxy Statement"), and
any other documents to be filed by A1 with the SEC or any other Governmental or
Regulatory Authority in connection with the Merger and the other transactions
contemplated hereby will (in the case of the Proxy Statement and any such other
documents filed with the SEC under the Exchange Act or the Securities Act)
comply as to form in all material respects with the requirements of the Exchange
Act and the Securities Act, as applicable, and will not, on the date of its
filing or, in the case of the Proxy Statement, at the date it is first mailed to
stockholders of A1 and at the time of the A1 Stockholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading, except
that no representation is made by A1 with respect to information supplied by or
on behalf of C1 or C2 or any of their respective Subsidiaries, shareholders or
stockholders expressly for inclusion therein.
3.1.10. Compliance with Laws and Orders. The A1 Entities hold all permits,
licenses, variances, exemptions, orders and approvals of all Governmental and
Regulatory Authorities necessary for the lawful conduct of their respective
businesses (the "A1 Permits"), except for failures to hold such permits,
licenses, variances, exemptions, orders and approvals which, individually or in
the aggregate, are not having and could not be reasonably expected to have a
material adverse effect on the A1 Entities taken as a whole. The A1 Entities are
in compliance with the terms of the A1 Permits, except failures so to comply
which, individually or in the aggregate, are not having and could not be
reasonably expected to have a material adverse effect on the A1 Entities taken
as a whole. Except as disclosed in the A1 SEC Reports filed prior to the date of
this Agreement or in Section 3.1.10 of the A1 Disclosure Letter, the A1 Entities
are not in violation of or default under any law or order of any Governmental or
Regulatory Authority, except for such violations or defaults which, individually
or in the aggregate, are not having and could not be reasonably expected to have
a material adverse effect on the A1 Entities taken as a whole.
3.1.11. Compliance with Agreements; Certain Agreements. Except as
disclosed in the A1 SEC Reports filed prior to the date of this Agreement or in
Section 3.1.11 of the A1 Disclosure Letter, neither any A1 Entity nor, to the
knowledge of A1, any other party thereto is in breach or violation of, or in
default in the performance or observance of any term or provision of, and no
event has occurred which, with notice or lapse of time or both, could be
reasonably expected to result in a default under, (i) the Charter Documents of
any A1 Entity that is a corporation or (ii) any Contract to which any A1 Entity
is a party or by which any A1 Entity or any of its assets or properties is bound
or any Charter Document of any A1 Entity that is not a corporation, except in
the case of this clause (ii) for breaches, violations and defaults which,
individually or in the aggregate, are not having and could not be reasonably
expected to have a material adverse effect on the A1 Entities taken as a whole.
3.1.12. Taxes. (a) Each A1 Entity has timely filed all material tax
returns and reports required to be filed by it, or requests for extensions to
file such returns or reports have been timely filed or granted and have not
expired, and all such tax returns and reports are complete and accurate in all
respects, except to the extent that such failures to timely file or failures to
be complete and accurate in all respects, as applicable, individually or in the
aggregate, would not have a material adverse effect on the A1 Entities taken as
a whole. Each A1 Entity has paid (or A1 has paid on its behalf) all taxes shown
as due on such tax returns and reports and all material taxes otherwise due. The
most recent financial statements contained in the A1 SEC Reports reflect an
adequate reserve for all taxes payable by the A1 Entities for all taxable
periods and portions thereof accrued through the date of such financial
statements, and no deficiencies for any taxes have been proposed, asserted or
assessed against any A1 Entity that are not adequately reserved for, except for
inadequately reserved taxes and inadequately reserved deficiencies that would
not, individually or in the aggregate, have a material adverse effect on the A1
Entities taken as a whole. Except as set forth in Section 3.1.12 of the A1
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Disclosure Letter, as of the date hereof, no requests for waivers of the time to
assess or collect any taxes against any A1 Entity have been granted or are
pending, and no audits or examinations of any A1 Entity are being conducted or,
to the knowledge of any A1 Entity, threatened by any taxing authority.
(b) No A1 Entity has taken any action that would create a material risk
that the Merger would not qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
(c) At all times since December 31, 1993, A1 has qualified as a REIT and
its current method of operation will enable it to continue to qualify as a REIT.
(d) The execution or delivery by A1 of this Agreement and the consummation
by A1 of the transactions contemplated hereby or compliance with or fulfillment
of the terms and provisions hereof by A1, to the knowledge of A1, will not
adversely affect the qualification of A1 as a REIT or adversely affect the
qualification of C1 as a REIT after the Effective Time.
(e) Except as set forth in Section 3.1.12 of the A1 Disclosure Letter, no
A1 Entity is bound by any effective private letter ruling, closing agreement or
similar agreement with any taxing authority (an "A1 Tax Ruling"), no U.S. A1
Entity has any applications or requests outstanding for any such rulings or
agreements and no such A1 Tax Ruling has been revoked or modified in any manner.
(f) A1 is not, and has not at any time been, a member of any consolidated,
combined or unitary group for Federal, state, local and foreign tax purposes.
(g) As used in this Section 3.1.12 and in Sections 4.1.12 and 4.2.12,
"taxes" shall include all Federal, state, local and foreign income, franchise,
property, sales, use, excise and other taxes, including obligations for
withholding taxes from payments due or made to any other person and any
interest, penalties or additions to tax.
3.1.13. Employee Benefit Plans; ERISA. (a) Except as described in the A1
SEC Reports filed prior to the date of this Agreement or as would not have a
material adverse effect on the A1 Entities taken as a whole, as of the date
hereof, (i) all A1 Employee Benefit Plans (as defined below) are in compliance
with all applicable requirements of law, including ERISA and the Code, and (ii)
no A1 Entity has any liabilities or obligations with respect to any such A1
Employee Benefit Plans, whether accrued, contingent or otherwise, nor to the
knowledge of A1 are any such liabilities or obligations expected to be incurred.
(b) As used herein:
(i) "A1 Employee Benefit Plan" means any Plan entered into,
established, maintained, sponsored, contributed to or required to be
contributed to by any A1 Entity for the benefit of the current or former
employees or directors of any A1 Entity and existing on the date of this
Agreement or at any time subsequent thereto and on or prior to the
Effective Time and, in the case of a Plan which is subject to Part 3 of
Title I of the Employee Retirement Income Security Act of 1974, as amended,
and the rules and regulations thereunder ("ERISA"), Section 412 of the Code
or Title IV of ERISA, at any time during the five-year period preceding the
date of this Agreement; and
(ii) "Plan" means any employment, bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock purchase,
stock option, stock ownership, stock appreciation rights, phantom stock,
leave of absence, layoff, vacation, day or dependent care, legal services,
cafeteria, life, health, medical, accident, disability, workmen's
compensation or other insurance, severance, separation, termination, change
of control or other benefit plan, agreement, practice, policy, program or
arrangement of any kind, whether written or oral, including, but not
limited to any "employee benefit plan" within the meaning of Section 3(3)
of ERISA.
(c) No part of the assets of Al or any Al Entity constitute "plan assets"
within the meaning of 29 C.F.R. Section 2510.101.
3.1.14. Labor Matters. Except as disclosed in the A1 SEC Reports filed
prior to the date of this Agreement or in Section 3.1.14 of the A1 Disclosure
Letter, there are no material controversies pending or, to the knowledge of A1,
threatened between any A1 Entity and any representatives of its employees,
except as
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would not, individually or in the aggregate, have a material adverse effect on
the A1 Entities taken as a whole, and, to the knowledge of A1, there are no
material organizational efforts presently being made involving any of the now
unorganized employees of any A1 Entity except as could not, individually or in
the aggregate, have a material adverse effect on the A1 Entities taken as a
whole.
3.1.15. Environmental Matters. (a) Except as disclosed in Section 3.1.15
of the A1 Disclosure Letter, each A1 Entity has obtained or submitted timely
applications for all licenses, permits, authorizations, registrations approvals
and consents from Governmental or Regulatory Authorities which are required
under any applicable Environmental Law (as defined below) in respect of its
business or operations ("Environmental Permits"), except for such failures to
have Environmental Permits and to submit timely applications which, individually
or in the aggregate, could not reasonably be expected to have a material adverse
effect on the A1 Entities taken as a whole. Each of such Environmental Permits
obtained by such A1 Entity is in full force and effect and each A1 Entity is in
compliance with the terms and conditions of all such Environmental Permits and
with all applicable Environmental Laws, except for such failures to be in full
force and effect or in compliance which, individually or in the aggregate, could
not reasonably be expected to have a material adverse effect on the A1 Entities
taken as a whole.
(b) Except as disclosed in the A1 SEC Reports filed prior to the date of
this Agreement or in Section 3.1.15 of the A1 Disclosure Letter, to the
knowledge of A1 as of the date hereof, no site or facility now or previously
owned, operated or leased by any A1 Entity is listed or proposed for listing on
the National Priorities List promulgated pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, and
the rules and regulations thereunder ("CERCLA"), or on any similar state or
local list of sites requiring investigation or cleanup.
(c) Except as disclosed in the A1 SEC Reports filed prior to the date of
this Agreement or in Section 3.1.15 of the A1 Disclosure Letter, no Liens have
arisen under or pursuant to any Environmental Law on any site or facility owned,
operated or leased by any A1 Entity, other than any such Liens not individually
or in the aggregate material to the A1 Entities taken as a whole, and no action
of any Governmental or Regulatory Authority has been taken or, to the knowledge
of A1, is in process which could subject any of such properties to such Liens,
except for such Liens which, individually or in the aggregate, could not
reasonably be expected to have a material adverse effect on the A1 Entities
taken as a whole, and no A1 Entity is required to place any notice or
restriction relating to the presence of Hazardous Materials at any such site or
facility owned by it in any deed to the real property on which such site or
facility is located, except for such notices or restrictions which, individually
or in the aggregate, could not reasonably be expected to have a material adverse
effect on the A1 Entities taken as a whole.
(d) Except as disclosed in Section 3.1.15 of the A1 Disclosure Letter, as
of the date hereof, there have been no written reports, environmental
investigations, studies, audits, tests, reviews or other analyses conducted by,
or which are in the possession of, any A1 Entity in relation to any site or
facility now or previously owned, operated or leased by any A1 Entity that both
(i) conclude that any A1 Entity could have liability under Environmental Laws
that, individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the A1 Entities taken as a whole, and (ii) have not
been delivered to C1 and C2 prior to the execution of this Agreement.
(e) As used herein:
(i) "Environmental Law" means any law, regulation or order of any
Governmental or Regulatory Authority relating to the regulation or
protection of human health, safety or the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals or industrial, toxic or hazardous substances or wastes into the
environment (including, without limitation, ambient air, soil, surface
water, ground water, wetlands, land or subsurface strata), or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants,
chemicals or industrial, toxic or hazardous substances or wastes; and
(ii) "Hazardous Material" means (A) any petroleum or petroleum
products, flammable explosives, radioactive materials, asbestos in any form
that is or could become friable, urea formaldehyde foam
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insulation and transformers or other equipment that contain dielectric
fluid containing levels of polychlorinated biphenyls (PCBs); (B) any
chemicals or other materials or substances which are now or hereafter
become defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances", "toxic pollutants" or
words of similar import under any Environmental Law; and (C) any other
chemical or other material or substance, exposure to which is prohibited,
limited or regulated by any Governmental or Regulatory Authority under any
Environmental Law.
3.1.16. Intellectual Property Rights. Each A1 Entity has all right, title
and interest in, or a valid and binding license to use, all Intellectual
Property (as defined below) individually or in the aggregate material to the
conduct of the businesses of the A1 Entities taken as a whole. No A1 Entity is
in default (or with the giving of notice or lapse of time or both, would be in
default) under any license to use such Intellectual Property, such Intellectual
Property is not, to the knowledge of A1, being infringed by any third party, and
no A1 Entity is infringing any Intellectual Property of any third party, except
for such defaults and infringements which, individually or in the aggregate, are
not having and could not be reasonably expected to have a material adverse
effect on the A1 Entities taken as a whole. For purposes of this Agreement,
"Intellectual Property" means patents and patent rights, trademarks and
trademark rights, trade names and trade name rights, service marks and service
mark rights, service names and service name rights, copyrights and copyright
rights and other proprietary intellectual property rights and all pending
applications for and registrations of any of the foregoing.
3.1.17. Real Property. Section 3.1.17 of the A1 Disclosure Letter sets
forth a list of all principal properties owned or leased (as lessee) by the A1
Entities as of the date hereof.
3.1.18. Vote Required. Assuming the accuracy of the representation and
warranty contained in Sections 4.1.20 and 4.2.19, the affirmative vote of the
holders of record of at least two-thirds of the outstanding shares of A1 Common
Stock with respect to the adoption of this Agreement is the only vote of the
holders of any class or series of the capital stock of A1 required to approve
the Merger and the other transactions contemplated hereby.
3.1.19. Opinion of Financial Advisor. The Board of Directors of A1 has
received the opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), financial advisor to A1, to the effect that, as of the date
hereof, the consideration to be received by the holders of A1 Common Stock
pursuant to this Agreement is fair from a financial point of view to such
holders.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF C1 AND C2
Section 4.1. Representations and Warranties of C1. C1 represents and
warrants to A1 as follows:
4.1.1. Organization and Qualification. Each of C1 and the Consolidated
Non-Corporate Affiliates of C1 is a trust, limited liability company or
partnership duly organized, validly existing and, if applicable, is in good
standing under the laws of its jurisdiction of organization and has all
requisite power and authority to conduct its business as and to the extent
conducted and to own, use and lease its assets and properties, except for such
failures to be so organized, existing or in good standing or to have such power
and authority which, individually or in the aggregate, are not having and could
not reasonably be expected to have a material adverse effect on C1 and the
Subsidiaries and Consolidated Non-Corporate Affiliates of C1 (collectively, the
"C1 Entities") and C2 and the Subsidiaries and Consolidated Non-Corporate
Affiliates of C2 (collectively, the "C2 Entities"; and, together with the C1
Entities, the "C1/C2 Entities") taken as a whole. Each Subsidiary of C1 is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has all requisite power and
authority to conduct its business as and to the extent now conducted and to own,
use and lease its assets and properties, except for such failures to be so
incorporated, existing and in good standing or to have such power and authority
which, individually or in the aggregate, are not having and could not be
reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole. Each C1 Entity is duly qualified, licensed or admitted to do
business and is in good
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standing in each jurisdiction in which the ownership, use or leasing of its
assets and properties, or the conduct or nature of its business, makes such
qualification, licensing or admission necessary, except for such failures to be
so qualified, licensed or admitted and in good standing which, individually or
in the aggregate, are not having and could not be reasonably expected to have a
material adverse effect on the C1/C2 Entities taken as a whole. Section 4.1.1 of
the letter dated the date hereof and delivered by C1 to A1 concurrently with the
execution and delivery of this Agreement (the "C1 Disclosure Letter") sets
forth, as of the date hereof, (i) with respect to each Subsidiary of C1, (A) the
name and jurisdiction of incorporation of such Subsidiary and (B) if such
Subsidiary is not wholly owned, directly or indirectly, by C1, (1) its
authorized capital stock, (2) the number of issued and outstanding shares of its
capital stock and (3) the record and beneficial owners of outstanding shares of
its capital stock and (ii) with respect to each Consolidated Non-Corporate
Affiliate of C1, (A) the name, type of entity and jurisdiction of organization
of such Consolidated Non-Corporate Affiliate, (B) the names of all parties that
own equity interests therein and (C) the method of consolidation employed with
respect to the consolidation of the accounts of such Consolidated Non-Corporate
Affiliate in the financial statements of C1, including the percentage(s)
employed in the case of proportional consolidation. Except for interests in the
C1 Entities and as disclosed in Section 4.1.1 of the C1 Disclosure Letter, as of
the date hereof, neither C1 nor any other C1 Entity directly or indirectly owns
any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity or similar interest in, (i) any
corporation (other than less than 9.8% of any series or class of capital stock
acquired or held for the purpose of meeting C1's obligations under its Trustees'
and Officers' Deferred Remuneration Plan and Supplemental Executive Retirement
Plan (the "C1 Deferral Plans")) or (ii) any trust, limited liability company,
partnership, joint venture or other non-corporate business association or entity
(other than (x) as noncontrolling investments acquired or held for the purpose
of meeting C1's obligations under the C1 Deferral Plans and (y) investments in
such entities that (A) in the aggregate are reflected in the latest C1 Financial
Statements (as defined herein) as having a value not exceeding $20,000,000, (B)
by operation of law (including the interposition of a C1 Entity holding only
such investments) expose no C1 Entity (other than such an interposed C1 Entity)
to any liability with respect to the obligations of such entities, whether as a
controlling person, partner, guarantor, surety or otherwise and (C) do not and
could not reasonably be expected to cause C1 to fail to meet any REIT
Requirement (the exceptions to the general representation set forth in this
sentence, the "C1 Permitted Minority Investments")). C1 has previously delivered
to A1 correct and complete copies of the Second Amended and Restated Declaration
of Trust (C1's "Declaration of Trust") and Trustee's Regulations of C1, each as
amended to the date hereof.
4.1.2. Capital Stock. (a) As of the date of this Agreement, the total
number of preference shares of beneficial interest in C1 ("C1 Preference
Shares") which C1 has the authority to issue is 209,249 and the total number of
common shares of beneficial interest in C1 (the "C1 Common Shares") which C1 has
the authority to issue is as set forth in Exhibit A of C1's Declaration of
Trust, as amended through the date hereof. As of the date hereof, the C1
Preference Shares and the C1 Common Shares represent all the authorized shares
of beneficial interest in C1. As of February 17, 1998, 209,249 C1 Preference
Shares were issued and outstanding, consisting solely of the C1 6.50% Preference
Shares. As of February 17, 1998, 25,326,909 C1 Common Shares were issued and
outstanding 1,092,500, C1 Common Shares were held in the treasury of C1 and
2,600,000 C1 Common Shares were reserved for issuance pursuant to C1 Permissible
Issuance Arrangements (as defined below) other than those described in clause
(i) of the definition thereof. Between such date and the date hereof, except as
set forth in Section 4.1.2 of the C1 Disclosure Letter, there has been no change
in the number of issued and outstanding C1 Common Shares or the number of C1
Common Shares held in treasury or reserved for issuance other than pursuant to
(i) contracts entered into pursuant to C1's 1997 Plan for Shareholder
Contractual Purchases (the "C1 QSPP"), (ii) contracts (the "C1 ESPP Contracts")
styled "Employee Share Purchase Plan Contract", or similarly styled, entered
into before the date hereof, (iii) option agreements entered into in connection
with grants of options under the 1993 Share Option Plan of C1 (the "C1 Option
Plan") made before the date hereof, (iv) the C1 Deferral Plans, (v) the
conversion provisions of the Certificate of Designation for the C1 Preference
Shares and (vi) contracts ("C1 Termination Agreements") with individuals, other
than executive officers, whose employment with C1 has been terminated in the
ordinary course of business of the C1 Entities, which contracts provide for the
repurchase of C1 Common Shares held by such individuals and/or the cancelation
of options issued to such
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individuals under the C1 Option Plan (the contracts and arrangements described
in clauses (i), (iii), (iv) and (v), the "C1 Permissible Issuance Arrangements";
the contracts and arrangements described in clauses (ii), (iii), (iv), (v) and
(vi), the "C1 Permissible Redemption Arrangements"). All of the issued and
outstanding C1 Common Shares and C1 Preference Shares are, and all such shares
reserved for issuance will be, upon issuance in accordance with the terms
specified in the instruments or agreements pursuant to which they are issuable,
duly authorized, validly issued, fully paid and nonassessable and all C1 Common
Shares issuable in exchange for shares of A1 Common Stock at the Effective Time
and the related beneficial interests in shares of C2 Common Stock will be paired
with each other pursuant to the C2 Trust Agreements in the same ratio as all
other C1 Common Shares and related beneficial interests in shares of C2 Common
Stock are paired, as such ratio may be changed from time to time. Except
pursuant to this Agreement and except as set forth in Section 4.1.2 of the C1
Disclosure Letter, as of the date hereof, there are no outstanding Options
obligating any C1/C2 Entity to issue or sell any shares of beneficial interest
or other equity interest in C1 or to grant, extend or enter into any Option with
respect thereto other than pursuant to C1 Permissible Issuance Arrangements.
Except pursuant to this Agreement and except as set forth in Section 4.1.2 of
the C1 Disclosure Letter, as of the date hereof, there are no outstanding
contractual obligations of any C1/C2 Entity to repurchase, redeem or otherwise
acquire any shares of beneficial interest or other equity interest in C1 other
than pursuant to C1 Permissible Redemption Arrangements.
(b) Except as disclosed in Section 4.1.2 of the C1 Disclosure Letter, all
of the outstanding shares of capital stock of each Subsidiary of C1 are duly
authorized, validly issued, fully paid and nonassessable and are owned,
beneficially and of record, by C1 or another C1 Entity wholly owned, directly or
indirectly, by C1, free and clear of any Liens. Except as disclosed in Section
4.1.2 of the C1 Disclosure Letter, all equity interests in the Consolidated
Non-Corporate Affiliates of C1 that are not owned by third parties (as disclosed
in Section 4.1.1 of the C1 Disclosure Letter) are owned by other C1 Entities,
free and clear of any Liens. Except as disclosed in Section 4.1.2 of the C1
Disclosure Letter, as of the date hereof, there are no (i) outstanding Options
(other than Options in favor of C1 or a C1 Entity wholly owned, directly or
indirectly, by C1) obligating any C1 Entity to issue, sell or otherwise transfer
any shares of capital stock of, or other equity interest in, any Subsidiary or
Consolidated Non-Corporate Affiliate of C1 or to grant, extend or enter into any
such Option or (ii) voting trusts, proxies or other commitments, understandings,
restrictions or arrangements in favor of any person other than C1 or another C1
Entity wholly owned, directly or indirectly, by C1 with respect to the voting of
or the right to participate in dividends or other earnings on any capital stock
of any Subsidiary of C1 or any equity interest in any Consolidated Non-Corporate
Affiliate of C1, other than as set forth in such C1 Entity's Charter Documents.
(c) Except as disclosed in Section 4.1.2 of the C1 Disclosure Letter, as of
the date hereof, there are no outstanding contractual obligations (other than
Options in favor of C1 or a C1 Entity wholly owned, directly or indirectly, by
C1) of any C1 Entity to repurchase, redeem or otherwise acquire any shares of
capital stock of, or other equity interest in, any Subsidiary or Consolidated
Non-Corporate Affiliate of C1. Except as disclosed in Section 4.1.2 of the C1
Disclosure Letter, as of the date hereof, there are no outstanding contractual
obligations of any C1 Entity to provide funds to, or to make any investment (in
the form of a loan, capital contribution or otherwise) in, any C1 Entity or
other person (except for C1 and C1 Entities wholly owned, directly or
indirectly, by C1), other than in connection with C1 Permitted Minority
Investments.
4.1.3. Authority Relative to this Agreement. C1 has all requisite power
and authority to enter into this Agreement and, subject, (i) with respect to the
C1 Delaware Reorganization, to obtaining the requisite approval of the
shareholders of C1 and (ii) with respect to the Merger, to obtaining the C1
Stockholders' Approval (as defined in Section 6.3.2), to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement by C1, and the consummation by C1 of
the transactions contemplated hereby, have been duly and validly approved by its
Board of Trustees, the Board of Trustees of C1 has recommended adoption of this
Agreement by the shareholders of C1 and directed that this Agreement, the
conduct of the C1 Delaware Reorganization and the issuance of C1 Common Shares
in connection with the Merger and Section 1.1.2 be submitted to the shareholders
of C1 for their consideration, and no other corporate or trust proceedings on
the part of either of C1 or its shareholders are necessary to authorize the
execution, delivery and performance of this Agreement
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by C1 and the consummation by C1 of the transactions contemplated hereby, other
than obtaining the requisite approval of the shareholders of C1 for the C1
Delaware Reorganization and obtaining the C1 Stockholders' Approval. This
Agreement has been duly and validly executed and delivered by C1 and constitutes
a legal, valid and binding obligation of C1 enforceable against C1 in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
4.1.4. Non-Contravention; Approvals and Consents. (a) The execution and
delivery of this Agreement by C1 do not, and the performance by C1 of its
obligations hereunder and the consummation of the transactions contemplated
hereby will not, (i) conflict with, result in a violation or breach of,
constitute (with or without notice or lapse of time or both) a default under,
result in or give to any person any right of payment or reimbursement,
termination, cancelation, modification or acceleration of, or result in the
creation or imposition of any Lien upon any of the assets or properties of any
C1 Entity under, any of the terms, conditions or provisions of (x) the Charter
Documents of any C1 Entity, or (y) subject to the obtaining of requisite
approval of the shareholders of C1 for the C1 Delaware Reorganization and the C1
Stockholders' Approval and the taking of the actions described in paragraph (b)
of this Section and the obtaining of the consents and approvals, the making of
the filings and the giving of the notices described in Section 4.1.4 of the C1
Disclosure Letter, (1) any laws or orders of any Governmental or Regulatory
Authority applicable to any C1 Entity or any of its assets or properties, or (2)
any Contracts to which any C1 Entity is a party or by which any C1 Entity or any
of its assets or properties is bound, excluding from the foregoing clauses (1)
and (2) conflicts, violations, breaches, defaults, rights of payment or
reimbursement, terminations, cancellations, modifications, accelerations and
creations and impositions of Liens which, individually or in the aggregate,
could not be reasonably expected to have a material adverse effect on the C1/C2
Entities taken as a whole or on the ability of C1 to consummate the transactions
contemplated by this Agreement or (ii) to the knowledge of C1, adversely affect
the qualification of C1 as a REIT.
(b) Except (i) for the filing of the Proxy Statement and the Registration
Statement with the SEC pursuant to the Exchange Act and the Securities Act, the
declaration of the effectiveness of the Registration Statement by the SEC and
filings with various state securities authorities that are required in
connection with the transactions contemplated by this Agreement, (ii) for the
filing by C1 of articles of merger and other appropriate merger documents
required by the Massachusetts Business Corporation Law with the Secretary of the
Commonwealth of Massachusetts and a certificate of merger and other appropriate
merger documents required by the DGCL with the Secretary of State of the State
of Delaware (the "Delaware Secretary of State") and, in each case, with any
local recording office in connection with the C1 Delaware Reorganization, and
the filing of the Articles of Merger and other appropriate merger documents
required by the MGCL with the Maryland Secretary of State and, in each case,
with any local recording office, and appropriate documents with the relevant
authorities of other states in which the Constituent Corporations are qualified
to do business in connection with the Merger, (iii) for such other consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under (A) the laws of any foreign country in which any C1 Entity
conducts any business or owns any property or assets or (B) any federal, state,
local or foreign Environmental Law and (iv) as disclosed in Section 4.1.4 of the
C1 Disclosure Letter, no consent, approval or action of, filing with or notice
to any Governmental or Regulatory Authority or other public or private third
party is necessary or required under any of the terms, conditions or provisions
of any law or order of any Governmental or Regulatory Authority or any Contract
to which any C1 Entity is a party (including, without limitation, any Charter
Documents of any C1 Consolidated Non-Corporate Affiliate) or by which any C1
Entity or any of its assets or properties is bound for the execution and
delivery of this Agreement by C1, the performance by C1 of its obligations
hereunder or the consummation of the transactions contemplated hereby, other
than such consents, approvals, actions, filings and notices which the failure to
make or obtain, as the case may be, individually or in the aggregate, could not
be reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole or on the ability of C1 to consummate the transactions
contemplated by this Agreement.
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4.1.5. C1 Financial Statements and Other Documents. (a) Prior to the
execution of this Agreement, C1 has delivered to A1 true and complete copies of
the audited balance sheets of C1 as of December 31, 1995, 1996 and 1997, and the
related audited statements of income, shareholders' equity and cash flows for
each of the fiscal years then ended, together with the notes thereto and a true
and correct copy of the report on such audited information by Ernst & Young LLP
(such financial statements, including the notes, if any, thereto, being referred
to herein as the "C1 Financial Statements"). The C1 Financial Statements were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto) and fairly present the consolidated financial
position of C1 as at the respective dates thereof and the related results of
operations and cash flows for the respective periods indicated. Except as set
forth in Section 4.1.1 of the C1 Disclosure Letter, each Subsidiary and
Consolidated Non-Corporate Affiliate of C1 in existence on the date hereof is
fully consolidated with C1 in the C1 Financial Statements for all periods
covered thereby.
(b) C1 has delivered to A1 prior to the execution of this Agreement a true
and complete copy of each letter, proxy and other document (together with all
amendments thereof and supplements thereto) provided by C1 to its shareholders
between December 31, 1996 and the date hereof (the "C1 Reports"). As of their
respective dates, the C1 Reports did not contain any untrue statement of a
material fact and did not omit any fact that directly conflicts with any
material statement contained therein.
4.1.6. Absence of Certain Changes or Events. Except as disclosed in
Section 4.1.6 of the C1 Disclosure Letter, (a) between December 31, 1997 and the
date hereof there has not been any change, event or development having, or that
could be reasonably expected to have, individually or in the aggregate, a
material adverse effect on the C1/C2 Entities taken as a whole, (b) between
December 31, 1997 and the date hereof, no party to any Charter Document or
co-tenancy agreement of any C1 Entity has exercised any "buy-sell", right of
first refusal, right or first offer or other comparable right (each, a "Charter
Document Right") pursuant to such Charter Document or co-tenancy agreement and
(c) between December 31, 1997 and the date hereof no C1 Entity has taken any
action which, if taken after the date hereof, would constitute a breach of any
provision of paragraphs (c), (d), (e), (f), (g), (h), (i), (j), (k) or, solely
with respect to the foregoing paragraphs, (l) of Section 5.1.2.
4.1.7. Undisclosed Liabilities. C1 has no liabilities that would be
required to be shown on the financial statements, including the notes thereto,
of C1 prepared in accordance with generally accepted accounting principles
applied on a consistent basis with prior periods and that (a) are not disclosed
in the C1 Financial Statements and (b) would, or would reasonably be expected
to, have a material adverse effect on C1 and C2 taken as a whole.
4.1.8. Legal Proceedings. Except as disclosed in the C1 Financial
Statements or in Section 4.1.8 of the C1 Disclosure Letter, as of the date
hereof, (i) there are no actions, suits, arbitrations or proceedings pending or,
to the knowledge of C1, threatened against, relating to or affecting, nor to the
knowledge of C1 are there any Governmental or Regulatory Authority
investigations or audits pending or threatened against, relating to or affecting
any C1 Entity or any of its assets and properties which, individually or in the
aggregate, could be reasonably expected to have a material adverse effect on the
C1/C2 Entities taken as a whole or on the ability of C1 to consummate the
transactions contemplated by this Agreement, and (ii) no C1 Entity is subject to
any order of any Governmental or Regulatory Authority which, individually or in
the aggregate, is having or could be reasonably expected to have a material
adverse effect on the C1/C2 Entities taken as a whole or on the ability of C1 to
consummate the transactions contemplated by this Agreement.
4.1.9. Information Supplied. The registration statement to be filed with
the SEC by C1 and C2 in connection with the issuance of C1 Common Shares and
beneficial interests in C2 Common Stock pursuant to this Agreement, as amended
or supplemented from time to time (as so amended and supplemented, the
"Registration Statement"), and any other documents to be filed by C1 with the
SEC or any other Governmental or Regulatory Authority in connection with the
Merger and the other transactions contemplated hereby, will (in the case of the
Registration Statement and any such other documents filed with the SEC under the
Securities Act or the Exchange Act) comply as to form in all material respects
with the requirements of the Securities Act and the Exchange Act, as applicable,
and will not, on the date of its filing
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or, in the case of the Registration Statement, at the time it becomes effective
under the Securities Act, at the date the Proxy Statement is first mailed to
stockholders of C1 and C2 and at the times of the Stockholders' Meetings,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading, except that no representation is made by C1 with respect to
information supplied by or on behalf of A1 or any of its Subsidiaries expressly
for inclusion therein and information incorporated by reference therein from
documents filed with the SEC by any A1 Entity.
4.1.10. Compliance with Laws and Orders. The C1 Entities hold all permits,
licenses, variances, exemptions, orders and approvals of all Governmental and
Regulatory Authorities necessary for the lawful conduct of their respective
businesses (the "C1 Permits"), except for failures to hold such permits,
licenses, variances, exemptions, orders and approvals which, individually or in
the aggregate, are not having and could not be reasonably expected to have a
material adverse effect on the C1/C2 Entities taken as a whole. The C1 Entities
are in compliance with the terms of the C1 Permits, except failures so to comply
which, individually or in the aggregate, are not having and could not be
reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole. Except as disclosed in Section 4.1.10 of the C1 Disclosure
Letter, the C1 Entities are not in violation of or default under any law or
order of any Governmental or Regulatory Authority, except for such violations or
defaults which, individually or in the aggregate, are not having and could not
be reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole.
4.1.11. Compliance with Agreements; Certain Agreements. (a) Except as
disclosed in Section 4.1.11 of the C1 Disclosure Letter, neither any C1 Entity
nor, to the knowledge of C1, any other party thereto is in breach or violation
of, or in default in the performance or observance of any term or provision of,
and no event has occurred which, with notice or lapse of time or both, could be
reasonably expected to result in a default under, (i) the Charter Documents of
any C1 Entity that is a corporation, (ii) any Contract to which any C1 Entity is
a party or by which any C1 Entity or any of its assets or properties is bound or
any Charter Document of any C1 Entity that is not a corporation, except in the
case of this clause (ii) for breaches, violations and defaults which,
individually or in the aggregate, are not having and could not be reasonably
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole. Each Charter Document or co-tenancy agreement of each C1 Consolidated
Non-Corporate Affiliate and, to the knowledge of C1, each material Contract to
which any C1 Entity is a party or by which any of its assets or properties is
bound, is in full force and effect, other than invalidities and other defects
(x) due to the actions of other parties to any such Charter Document or material
Contract or (y) that have not had, and would not reasonably be expected to have,
a material adverse effect on C1 and C2 taken as a whole. C1 has made available
to A1 correct and complete copies of all Charter Documents and co-tenancy
agreements of the C1 Entities, except as would not, and would not reasonably be
expected to, have a material adverse effect on the ability of C1, C2 or A1 to
consummate the transactions contemplated hereby.
(b) No C1 Entity other than C1 has employed any individuals, retained any
current or former employees of C1 as consultants or reimbursed any current or
former employees of C1 for any business related or other expenses (provided,
however, that such C1 Entities may have reimbursed C1 for payments of such
nature). No C1 Entity other than C1 has paid any trustees', directors' or
similar fees to current or former trustees or directors of any C1 Entity other
than C1. Except as disclosed in Section 4.1.11 of the C1 Disclosure Letter or as
provided for in this Agreement, as of the date hereof, C1 is not a party to any
oral or written (i) consulting agreement with any current or former employee of
C1 not terminable on 30 days' or less notice involving the payment of more than
$10,000 per annum or $100,000 per annum in the aggregate for all such
agreements, (ii) union or collective bargaining agreement which covers more than
100 employees, (iii) agreement with any executive officer or other employee of
C1 the benefits of which are contingent or vest, or the terms of which are
materially altered, upon the occurrence of the transactions contemplated by this
Agreement, (iv) agreement with respect to any executive officer or other
employee of C1 providing any term of employment or compensation guarantee that
extends for a period longer than one year or (v) agreement or plan, including
any stock option, stock appreciation right, restricted stock or stock purchase
plan, any of the benefits of which will be increased (other than as a result of
any change in market values of the securities of
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any party or the Surviving Corporation), or the vesting of the benefits under
which will be accelerated by the occurrence of the transactions contemplated by
this Agreement.
4.1.12. Taxes. (a) Each C1 Entity has timely filed all material tax
returns and reports required to be filed by it, or requests for extensions to
file such returns or reports have been timely filed or granted and have not
expired, and all such tax returns and reports are complete and accurate in all
respects, except to the extent that such failures to timely file or failures to
be complete and accurate in all respects, as applicable, individually or in the
aggregate, would not have a material adverse effect on the C1/C2 Entities taken
as a whole. Each C1 Entity has paid (or C1 has paid on its behalf) all taxes
shown as due on such tax returns and reports and all material taxes otherwise
due. The most recent C1 Financial Statements reflect an adequate reserve for all
taxes payable by the C1 Entities for all taxable periods and portions thereof
accrued through the date of such financial statements, and no deficiencies for
any taxes have been proposed, asserted or assessed against any C1 Entity that
are not adequately reserved for, except for inadequately reserved taxes and
inadequately reserved deficiencies that would not, individually or in the
aggregate, have a material adverse effect on the C1/C2 Entities taken as a
whole. Except as set forth in Section 4.1.12 of the C1 Disclosure Letter, as of
the date hereof, no requests for waivers of the time to assess or collect any
taxes against any C1 Entity have been granted or are pending, and no audits or
examinations of any C1 Entity are being conducted or, to the knowledge of C1,
threatened by any taxing authority.
(b) No C1 Entity has taken any action that would create a material risk
that the Merger would not qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
(c) At all times since December 31, 1971, C1 has qualified as a REIT and
its current method of operation will enable it to continue to qualify as a REIT.
(d) Except as set forth in Section 4.1.12 of the C1 Disclosure Letter, no
C1 Entity is bound by any effective private letter ruling, closing agreement or
similar agreement with any taxing authority (a "C1 Tax Ruling"), no C1 Entity
has any applications or requests outstanding for any such rulings or agreements
and no C1 Tax Ruling has been revoked or modified in any manner.
4.1.13. Employee Benefit Plans; ERISA. (a) Except as reflected in the C1
Financial Statements or as disclosed in Section 4.1.13 of the C1 Disclosure
Letter or as would not have a material adverse effect on the C1/C2 Entities
taken as a whole, as of the date hereof, (i) all C1 Employee Benefit Plans (as
defined below) are in compliance with all applicable requirements of law,
including ERISA and the Code, and (ii) no C1 Entity has any liabilities or
obligations with respect to any such C1 Employee Benefit Plans, whether accrued,
contingent or otherwise, nor to the knowledge of C1 are any such liabilities or
obligations expected to be incurred. Except as disclosed in Section 4.1.13 of
the C1 Disclosure Letter or as otherwise provided herein, no C1 Employee Benefit
Plan in effect on the date hereof contains any provision that will or may result
in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee of C1 by virtue of the
execution of, and performance of the transactions contemplated in, this
Agreement (either alone or together with the occurrence of any additional of
subsequent events). As of the date hereof, the only severance agreements or
severance policies applicable to the employees, trustees or directors of any C1
Entity are the agreements and policies specifically referred to in Section
4.1.13 of the C1 Disclosure Letter. C1 has furnished to A1 correct and complete
copies of all written C1 Employee Benefit Plans of each C1 Entity (or summary
descriptions thereof) as in effect on the date hereof.
(b) As used herein "C1 Employee Benefit Plan" means any Plan entered into,
established, maintained, sponsored, contributed to or required to be contributed
to by any C1 Entity for the benefit of the current or former employees,
trustees, or directors of any C1 Entity and existing on the date of this
Agreement or at any time subsequent thereto and on or prior to the Effective
Time and, in the case of a Plan which is subject to Part 3 of Title I of ERISA,
Section 412 of the Code or Title IV of ERISA, at any time during the five-year
period preceding the date of this Agreement.
(c) Except as reflected in Section 4.1.13 of the C1 Disclosure Letter, (i)
no C1 Employee Benefit Plan provides retiree medical or retiree life insurance
benefits to any person, (ii) no C1 Employee Benefit Plan is
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subject to Title IV of ERISA or Section 412 of the Code and (iii) no event has
occurred with respect to which any C1 Entity could reasonably be expected to
have liability under Title IV of ERISA or Section 412 of the Code.
(d) Except as disclosed in Section 4.1.13 of the C1 Disclosure Letter, no
C1 entity is a party to or obligated under any agreement, plan, contract or
other arrangement to make payments, nor have any payments been made, that would
be considered "excess parachute payments" under Section 280G of the Code.
(e) Each of C1 and C2 presently qualify, have at all times in the past
qualified, and shall continue to qualify until the Effective Time as a "real
estate operating company" for purposes of ERISA as defined in 29 C.F.R. Section
2510.101.
4.1.14. Labor Matters. Except as disclosed in Section 4.1.14 of the C1
Disclosure Letter, there are no material controversies pending or, to the
knowledge of C1, threatened between any C1 Entity and any representatives of its
employees, except as would not, individually or in the aggregate, have a
material adverse effect on the C1/C2 Entities taken as a whole, and, to the
knowledge of C1, there are no material organizational efforts presently being
made involving any of the now unorganized employees of any C1 Entity, except as
could not, individually or in the aggregate, have a material adverse effect on
the C1/C2 Entities taken as a whole.
4.1.15. Environmental Matters. (a) Each C1 Entity has obtained or
submitted timely applications for all Environmental Permits which are required
under any applicable Environmental Law in respect of its business or operations,
except for such failures to have Environmental Permits and to submit timely
applications which, individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole. Each of such Environmental Permits obtained by such C1 Entity is in full
force and effect and each C1 Entity is in compliance with the terms and
conditions of all such Environmental Permits and with all applicable
Environmental Laws, except for such failures to be in effect or compliance
which, individually or in the aggregate, could not reasonably be expected to
have a material adverse effect on the C1/C2 Entities taken as a whole.
(b) To the knowledge of C1, as of the date hereof, no site or facility now
or previously owned, operated or leased by any C1 Entity is listed or proposed
for listing on the National Priorities List promulgated pursuant to CERCLA or on
any similar state or local list of sites requiring investigation or clean-up.
(c) No Liens have arisen under or pursuant to any Environmental Law on any
site or facility owned, operated or leased by any C1 Entity, other than Liens
not individually or in the aggregate material to the C1/C2 Entities taken as a
whole, and no action of any Governmental or Regulatory Authority has been taken
or, to the knowledge of C1, is in process which could subject any of such
properties to such Liens, except for such Liens which, individually or in the
aggregate, could not reasonably be expected to have a material adverse effect on
the C1/C2 Entities taken as a whole, and no C1 Entity is required to place any
notice or restriction relating to the presence of Hazardous Materials at any
such site or facility owned by it in any deed to the real property on which such
site or facility is located, except for such notices or restrictions which,
individually or in the aggregate, could not reasonably be expected to have a
material adverse effect on the C1/C2 Entities taken as a whole.
(d) As of the date hereof, there have been no written reports,
environmental investigations, studies, audits, tests, reviews or other analyses
conducted by, or which are in the possession of, any C1 Entity in relation to
any site or facility now or previously owned, operated or leased by any C1
Entity that both (i) conclude that any C1 Entity could have liability under
Environmental Laws that, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole, and (ii) have not been delivered to A1 prior to the execution of this
Agreement.
4.1.16. Intellectual Property Rights. Each C1 Entity has all right, title
and interest in, or a valid and binding license to use, all Intellectual
Property individually or in the aggregate material to the conduct of the
businesses of the C1/C2 Entities taken as a whole. No C1 Entity is in default
(or with the giving of notice or lapse of time or both, would be in default)
under any license to use such Intellectual Property, such
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Intellectual Property is not, to the knowledge of C1, being infringed by any
third party, and no C1 Entity is infringing any Intellectual Property of any
third party, except for such defaults and infringements which, individually or
in the aggregate, are not having and could not be reasonably expected to have a
material adverse effect on the C1/C2 Entities taken as a whole.
4.1.17. Real Property. Section 4.1.17 of the C1 Disclosure Letter sets
forth a list of all principal properties owned or leased by the C1 Entities or
the C2 Entities (the "Principal Properties") and the department stores that own
or lease space in such Principal Properties (the "Department Stores"), in each
case, as of the date hereof. As of the date hereof, (i) there are no conditions
or events relating to (x) the ability of C1 or C2 to continue to own, lease or
operate any Principal Property and (y) the value of any Principal Property, in
each case, that is not a result of forces beyond the control of C1 and C2, (ii)
C1 and C2 have made available to A1 (A) the leases and all amendments or
modifications thereto pursuant to which the applicable C1 Entities leases the
land on which the Haywood mall and Highland mall are located, (B) all reciprocal
easement agreements, construction, operating and reciprocal easement agreements,
operating agreements, development agreements, leases with Department Stores and
similar agreements and all amendments and modifications thereto between any C1
Entity and a Department Store operating at the Principal Properties identified
in Section 4.1.17 of the C1 Disclosure Letter (collectively, "REAs") and (C)
Contracts evidencing, securing or guaranteeing or otherwise relating to
indebtedness that is secured by an interest in any of the Principal Properties
identified in Section 4.1.17 of the C1 Disclosure Letter and (iii) no party to
any REA has given written notice that it has ceased, or that it intends to
cease, operating the Department Store that such REA contemplates that it will
operate that, in the case of (i), (ii) or (iii) above, would, or would
reasonably be expected to, have a material adverse effect on (1) the ability of
C1, C2 or A1 to consummate the transactions contemplated hereby or (2) C1 and C2
taken as a whole.
4.1.18. Vote Required. The affirmative vote of the holders of record of at
least a majority of the outstanding C1 Common Shares and the outstanding C1
Preference Shares, voting together as a single class with respect to the
approval of the C1 Delaware Reorganization, the affirmative vote of the holders
of record of at least a majority of the outstanding C1 Common Shares and the
outstanding C1 Preference Shares, voting together as a single class, with
respect to this Agreement and the issuance of C1 Common Shares pursuant to this
Agreement, and the affirmative vote of at least two-thirds of the outstanding C1
6.50% Preference Shares, voting separately as a class, with respect to the
matters set forth in Section 1.1.2(v) of this Agreement are the only votes of
the holders of any class or series of the beneficial interests of C1 or capital
stock of C1 Delaware required to approve the C1 Delaware Reorganization, the
Merger and the other transactions contemplated hereby.
4.1.19. Opinion of Financial Advisor. C1 has received the opinions of J.P.
Morgan Securities Inc. and Lazard Freres & Co. LLC, to the effect that, as of
the date hereof, the consideration to be received by the holders of C1 Common
Stock pursuant to the Merger Agreement is fair from a financial point of view to
such holders.
4.1.20. Ownership of A1 Common Stock. No C1 Entity beneficially owns any
shares of A1 Common Stock.
Section 4.2. Representations and Warranties of C2. C2 represents and
warrants to A1 as follows:
4.2.1. Organization and Qualification. Each of C2 and the Subsidiaries of
C2 is a corporation duly incorporated, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has all requisite power
and authority to conduct its business as and to the extent now conducted and to
own, use and lease its assets and properties, except for such failures to be so
incorporated, existing and in good standing or to have such power and authority
which, individually or in the aggregate, are not having and could not be
reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole. Each Consolidated Non-Corporate Affiliate of C2 is a trust,
limited liability company or partnership duly organized, validly existing and,
if applicable, is in good standing under the laws of its jurisdiction of
organization and has all requisite power and authority to conduct its business
as and to the extent conducted and to own, use and lease its assets and
properties, except for such failures to be so organized, existing or in good
standing or to have such power and authority which, individually or in the
aggregate, are not having and could not reasonably
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be expected to have a material adverse effect on the C1/C2 Entities taken as a
whole. Each C2 Entity is duly qualified, licensed or admitted to do business and
is in good standing in each jurisdiction in which the ownership, use or leasing
of its assets and properties, or the conduct or nature of its business, makes
such qualification, licensing or admission necessary, except for such failures
to be so qualified, licensed or admitted and in good standing which,
individually or in the aggregate, are not having and could not be reasonably
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole. Section 4.2.1 of the letter dated the date hereof and delivered by C2 to
A1 concurrently with the execution and delivery of this Agreement (the "C2
Disclosure Letter") sets forth, as of the date hereof, (i) with respect to each
Subsidiary of C2, (A) the name and jurisdiction of incorporation of such
Subsidiary and (B) if such Subsidiary is not wholly owned, directly or
indirectly, by C2, (1) its authorized capital stock, (2) the number of issued
and outstanding shares of its capital stock and (3) the record and beneficial
owners of outstanding shares of its capital stock and (ii) with respect to each
Consolidated Non-Corporate Affiliate of C2, (A) the name, type of entity and
jurisdiction of organization of such Consolidated Non-Corporate Affiliate, (B)
the names of all parties that own equity interests therein and (C) the method of
consolidation employed with respect to the consolidation of the accounts of such
Consolidated Non-Corporate Affiliate in the financial statements of C2,
including the percentage(s) employed in the case of proportional consolidation.
Except for interests in the C2 Entities and as disclosed in Section 4.2.1 of the
C2 Disclosure Letter, as of the date hereof, neither C2 nor any other C2 Entity
directly or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or similar
interest in, any corporation, trust, limited liability company, partnership,
joint venture or other business association or entity (other than investments in
such entities that as in the aggregate are reflected in the latest C2 Financial
Statements (as defined herein) as having a value not exceeding $20,000,000, (ii)
by operation of law (including the interposition of a C2 Entity holding only
such investments) expose no C2 Entity (other than such an interposed C2 Entity)
to any liability with respect to the obligations of such entities, whether as a
controlling person, partner, guarantor, surety or otherwise and (iii) do not and
could not reasonably be expected to cause C1 to fail to meet any REIT
Requirement (the exceptions to the general representation set forth in this
sentence, the "C2 Permitted Minority Investments")). C2 has previously delivered
to A1 correct and complete copies of the Charter Documents of C2.
4.2.2. Capital Stock. (a) As of the date of this Agreement, the authorized
capital stock of C2 consists solely of 3,542,767.5 shares of common stock, par
value $.10 per share, of C2 ("C2 Common Stock"). As of February 17, 1998,
2,683,888.9 shares of C2 Common Stock were issued and outstanding, no shares
were held in the treasury of C2 and 858,878.6 shares were reserved for issuance.
Since such date, except as set forth in Section 4.2.2 of the C2 Disclosure
Letter, there has been no change in the number of issued and outstanding shares
of C2 Common Stock, or the number of shares of C2 Common Stock held in treasury
or reserved for issuance, other than as a result of the stock dividend described
in Section 1.1.2 and shares issuable in connection with the issuance of C1
Common Shares pursuant to the C1 Permissible Issuance Arrangements. All of the
issued and outstanding shares of C2 Common Stock are, and all shares of C2
Common Stock reserved for issuance will be, upon issuance in accordance with the
terms specified in the instruments or agreements pursuant to which they are
issuable, duly authorized, validly issued, fully paid and nonassessable. Except
pursuant to this Agreement and except as set forth in Section 4.2.2 of the C2
Disclosure Letter, as of the date hereof, there are no outstanding Options
obligating any C1/C2 Entity to issue or sell any equity interest in C2 or to
grant, extend or enter into any Option with respect thereto, other than in
connection with the issuance of C1 Common Shares pursuant to C1 Permissible
Issuance Arrangements. Except pursuant to this Agreement and except as set forth
in Section 4.2.2 of the C2 Disclosure Letter, as of the date hereof, there are
no outstanding contractual obligations of any C1/C2 Entity to repurchase, redeem
or otherwise acquire any equity interest in C2 other than in connection with the
redemption, repurchase or other acquisition of C1 Common Shares pursuant to C1
Permissible Redemption Arrangements.
(b) Except as disclosed in Section 4.2.2 of the C2 Disclosure Letter, all
of the outstanding shares of capital stock of each Subsidiary of C2 are duly
authorized, validly issued, fully paid and nonassessable and are owned,
beneficially and of record, by C2 or another C2 Entity wholly owned, directly or
indirectly, by C2, free and clear of any Liens. Except as disclosed in Section
4.2.2 of the C2 Disclosure Letter, all equity interests in the Consolidated
Non-Corporate Affiliates of C2 that are not owned by third parties (as disclosed
in
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Section 4.2.1 of the C2 Disclosure Letter) are owned by other C2 Entities, free
and clear of any Liens. Except as disclosed in Section 4.2.2 of the C2
Disclosure Letter, as of the date hereof, there are no (i) outstanding Options
(other than Options in favor of C2 or a C2 Entity wholly owned, directly or
indirectly, by C2) obligating any C2 Entity to issue or sell any shares of
capital stock of, or other equity interest in, any Subsidiary or Consolidated
Non-Corporate Affiliate of C2 or to grant, extend or enter into any such Option
or (ii) voting trusts, proxies or other commitments, understandings,
restrictions or arrangements in favor of any person (other than C2 or another C2
Entity wholly owned, directly or indirectly, by C2) with respect to the voting
of or the right to participate in dividends or other earnings on any capital
stock of any Subsidiary of C2 or an any equity interest in any Consolidated
Non-Corporate Affiliate of C2, other than as set forth in such C2 Entity's
Charter Documents.
(c) Except as disclosed in Section 4.2.2 of the C2 Disclosure Letter, as of
the date hereof, there are no outstanding contractual obligations (other than
Options in favor of C2 or a C2 Entity wholly owned, directly or indirectly, by
C2) of any C2 Entity to repurchase, redeem or otherwise acquire any shares of
capital stock of, or other equity interest in, any Subsidiary or Consolidated
Non-Corporate Affiliate of C2. Except as disclosed in Section 4.2.2 of the C2
Disclosure Letter, as of the date hereof, there are no outstanding contractual
obligations of any C2 Entity to provide funds to, or to make any investment (in
the form of a loan, capital contribution or otherwise) in, any C2 Entity or
other person (except for C2 and C2 Entities wholly owned, directly or
indirectly, by C2), other than in connection with C2 Permitted Minority
Investments.
(d) As of the date hereof, substantially all the issued and outstanding
shares of C2 Common Stock are held by a corporate trustee as trustee under two
trust agreements (the "C2 Trust Agreements"), correct and complete copies of
which have been delivered to A1 on or before the date hereof, for the ratable
benefit of the holders of substantially all the issued and outstanding C1 Common
Shares and C1 Preference Shares, respectively. The C2 Trust Agreements have been
duly executed and delivered by C2 and the trustees thereunder, are legal, valid
and binding obligations of C2 and such trustees, enforceable against C2 and such
trustees, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The shares of C2 Common Stock held pursuant to the C2 Trust Agreements are owned
of record by the trustees thereunder free and clear of any Liens (other than
Liens in favor of such trustees related to their performance of their duties
under the C2 Trust Agreements).
4.2.3. Authority Relative to this Agreement. C2 has all requisite power
and authority to enter into this Agreement and, subject to obtaining the C2
Stockholders' Approval (as defined in Section 6.3.2), to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement by C2, and the consummation by C2 of
the transactions contemplated hereby, have been duly and validly approved by its
Board of Directors, the Board of Directors of C2 has recommended adoption of
this Agreement by the stockholders of C2 and directed that this Agreement and
the issuance of C2 Common Stock in connection with the Merger be submitted to
the stockholders of C2 for their consideration, and no other corporate
proceedings on the part of either of C2 or its stockholders are necessary to
authorize the execution, delivery and performance of this Agreement by C2 and
the consummation by C2 of the transactions contemplated hereby, other than the
C2 Stockholders' Approval. This Agreement has been duly and validly executed and
delivered by C2 and constitutes a legal, valid and binding obligation of C2
enforceable against C2 in accordance with its terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally and by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.2.4. Non-Contravention; Approvals and Consents. (a) The execution and
delivery of this Agreement by C2 do not, and the performance by C2 of its
obligations hereunder and the consummation of the transactions contemplated
hereby will not, conflict with, result in a violation or breach of, constitute
(with or without notice or lapse of time or both) a default under, result in or
give to any person any right of payment or reimbursement, termination,
cancelation, modification or acceleration of, or result in the creation or
imposition of any Lien upon any of the assets or properties of any C2 Entity
under, any of the terms,
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conditions or provisions of (x) the Charter Documents of any C2 Entity, or (y)
subject to the obtaining of the C2 Stockholders' Approval and the taking of the
actions described in paragraph (b) of this Section and the obtaining of the
consents and approvals, the making of the filings and the giving of the notices
described in Section 4.2.4 of the C2 Disclosure Letter, (1) any laws or orders
of any Governmental or Regulatory Authority applicable to any C2 Entity or any
of its assets or properties, or (2) any Contracts to which any C2 Entity is a
party (including, without limitation, any Charter Document of any C1
Consolidated Non-Corporate Affiliate) or by which any C2 Entity or any of its
assets or properties is bound, excluding from the foregoing clauses (1) and (2)
conflicts, violations, breaches, defaults, rights of payment or reimbursement,
terminations, cancellations, modifications, accelerations and creations and
impositions of Liens which, individually or in the aggregate, could not be
reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole or on the ability of C2 to consummate the transactions
contemplated by this Agreement.
(b) Except (i) for the filing of the Proxy Statement and the Registration
Statement with the SEC pursuant to the Exchange Act and the Securities Act, the
declaration of the effectiveness of the Registration Statement by the SEC and
filings with various state securities authorities that are required in
connection with the transactions contemplated by this Agreement, (ii) for the
filing by C2 of a Certificate of Merger and other appropriate merger documents
required by the DGCL with the Delaware Secretary of State and any local
recording office in connection with the C2 Merger, (iii) such other consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under (A) the laws of any foreign country in which any C2 Entity
conducts any business or owns any property or assets or (B) any federal, state,
local or foreign Environmental Law and (iv) as disclosed in Section 4.2.4 of the
C2 Disclosure Letter, no consent, approval or action of, filing with or notice
to any Governmental or Regulatory Authority or other public or private third
party is necessary or required under any of the terms, conditions or provisions
of any law or order of any Governmental or Regulatory Authority or any Contract
to which any C2 Entity is a party or by which any C2 Entity or any of its assets
or properties is bound for the execution and delivery of this Agreement by C2,
the performance by C2 of its obligations hereunder or the consummation of the
transactions contemplated hereby, other than such consents, approvals, actions,
filings and notices which the failure to make or obtain, as the case may be,
individually or in the aggregate, could not be reasonably expected to have a
material adverse effect on the C1/C2 Entities taken as a whole or on the ability
of C2 to consummate the transactions contemplated by this Agreement.
4.2.5. C2 Financial Statements and Stockholder Reports. (a) Prior to the
execution of this Agreement, C2 has delivered to A1 true and complete copies of
the condensed balance sheets of C2 and its subsidiaries as of December 31, 1995,
1996 and 1997, and the related condensed consolidated statements of operations
for each of the fiscal years then ended, together with the notes thereto, all
such financial statements being in the form appearing in notes to the C1
Financial Statements (such financial statements, including the notes, if any,
thereto, being referred to herein as the "C2 Financial Statements"). The C2
Financial Statements were condensed from financial statements that were prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods involved. Except as set forth in Section
4.2.1 of the C2 Disclosure Letter, each Subsidiary and Consolidated
Non-Corporate Affiliate of C2 in existence on the date hereof is fully
consolidated with C2 in the C2 Financial Statements for all periods covered
thereby.
(b) C2 has not delivered any letter, proxy or other document to the
beneficiaries under the Trust Agreements between December 31, 1996 and the date
hereof, other than as part of the C1 Reports.
4.2.6. Absence of Certain Changes or Events. Except as disclosed in
Section 4.2.6 of the C2 Disclosure Letter, (a) between December 31, 1997 and the
date hereof there has not been any change, event or development having, or that
could be reasonably expected to have, individually or in the aggregate, a
material adverse effect on the C1/C2 Entities taken as a whole, (b) between
December 31, 1997 and the date hereof, no party to any Charter Document or
co-tenancy agreement of any C2 Entity has exercised any Charter Document Right
pursuant to such Charter Document or co-tenancy agreement and (c) between
December 31, 1997 and the date hereof no C2 Entity has taken any action which,
if taken after the date hereof, would constitute a breach of any provision of
paragraphs (c), (d), (e), (f), (g), (h), (j), (k) or, solely with respect to the
foregoing paragraphs, (l) of Section 5.1.2.
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4.2.7. [Intentionally Omitted].
4.2.8. Legal Proceedings. Except as disclosed in the C1 Financial
Statements or C2 Financial Statements or in Section 4.2.8 of the C2 Disclosure
Letter, as of the date hereof (i) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of C2, threatened against, relating to
or affecting, nor to the knowledge of C2 are there any Governmental or
Regulatory Authority investigations or audits pending or threatened against,
relating to or affecting any C2 Entity or any of its assets and properties
which, individually or in the aggregate, could be reasonably expected to have a
material adverse effect on the C1/C2 Entities taken as a whole or on the ability
of C2 to consummate the transactions contemplated by this Agreement, and (ii) no
C2 Entity is subject to any order of any Governmental or Regulatory Authority
which, individually or in the aggregate, is having or could be reasonably
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole or on the ability of C2 to consummate the transactions contemplated by
this Agreement.
4.2.9. Information Supplied. The Registration Statement, and any other
documents to be filed by C2 with the SEC or any other Governmental or Regulatory
Authority in connection with the Merger and the other transactions contemplated
hereby, will (in the case of the Registration Statement and any such other
documents filed with the SEC under the Securities Act or the Exchange Act)
comply as to form in all material respects with the requirements of the
Securities Act and the Exchange Act, as applicable, and will not, on the date of
its filing or, in the case of the Registration Statement, at the time it becomes
effective under the Securities Act, at the date the Proxy Statement is first
mailed to stockholders of C1 and C2 and at the times of the Stockholders'
Meetings, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, except that no representation is made by C2 with respect to
information supplied by or on behalf of A1 or any of its Subsidiaries expressly
for inclusion therein and information incorporated by reference therein from
documents filed with the SEC by any A1 Entity.
4.2.10. Compliance with Laws and Orders. The C2 Entities hold all permits,
licenses, variances, exemptions, orders and approvals of all Governmental and
Regulatory Authorities necessary for the lawful conduct of their respective
businesses (the "C2 Permits"), except for failures to hold such permits,
licenses, variances, exemptions, orders and approvals which, individually or in
the aggregate, are not having and could not be reasonably expected to have a
material adverse effect on the C1/C2 Entities taken as a whole. The C2 Entities
are in compliance with the terms of the C2 Permits, except failures so to comply
which, individually or in the aggregate, are not having and could not be
reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole. Except as disclosed in Section 4.2.10 of the C2 Disclosure
Letter, the C2 Entities are not in violation of or default under any law or
order of any Governmental or Regulatory Authority, except for such violations or
defaults which, individually or in the aggregate, are not having and could not
be reasonably expected to have a material adverse effect on the C1/C2 Entities
taken as a whole.
4.2.11. Compliance with Agreements; Certain Agreements. (a) Except as
disclosed in Section 4.2.11 of the C2 Disclosure Letter, neither any C2 Entity
nor, to the knowledge of C2, any other party thereto is in breach or violation
of, or in default in the performance or observance of any term or provision of,
and no event has occurred which, with notice or lapse of time or both, could be
reasonably expected to result in a default under, (i) the Charter Documents of
any C2 Entity that is a corporation or (ii) any Contract to which any C2 Entity
is a party or by which any C2 Entity or any of its assets or properties is bound
or any Charter Document of any C1 Entity that is not a corporation, except in
the case of this clause (ii) for breaches, violations and defaults which,
individually or in the aggregate, are not having and could not be reasonably
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole. Each Charter Document of each C2 Consolidated Non-Corporate Affiliate
and, to the knowledge of C2, each material Contract to which any C2 Entity is a
party or by which any of its assets or property is bound, is in full force and
effect, other than invalidities and other defects (x) due to the actions of
other parties to any such Charter Document or Contract or (y) that have not had,
and would not reasonably be expected to have, a material adverse effect on C1
and C2 taken as a whole. C2 has made available to A1 correct and complete copies
of all Charter Documents of the C2 Entities, except as would not, and would not
reasonably be expected to, have a material adverse effect on the ability of C1,
C2 or A1 to consummate the transactions contemplated hereby.
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(b) Since January 1, 1988, neither C2 nor any other C2 Entity has employed
any individual, retained any current or former employees of C1 as consultants or
reimbursed any current or former employees of C1 for any business-related or
other expenses (provided, however, that C2 and the other C2 Entities may have
reimbursed C1 for payments of such nature). No C2 Entity has, since January 1,
1988, paid any directors' or similar fees to any directors of any C2 Entity
other than C2.
4.2.12. Taxes. (a) Each C2 Entity has timely filed all material tax
returns and reports required to be filed by it, or requests for extensions to
file such returns or reports have been timely filed or granted and have not
expired, and all such tax returns and reports are complete and accurate in all
respects, except to the extent that such failures to timely file or failures to
be complete and accurate in all respects, as applicable, individually or in the
aggregate, would not have a material adverse effect on the C1/C2 Entities taken
as a whole. Each C2 Entity has paid (or C2 has paid on its behalf) all taxes
shown as due on such tax returns and reports and all material taxes otherwise
due. The most recent C2 Financial Statements reflect an adequate reserve for all
taxes payable by the C2 Entities for all taxable periods and portions thereof
accrued through the date of such financial statements, and no deficiencies for
any taxes have been proposed, asserted or assessed against any C2 Entity that
are not adequately reserved for, except for inadequately reserved taxes and
inadequately reserved deficiencies that would not, individually or in the
aggregate, have a material adverse effect on the C1/C2 Entities taken as a
whole. Except as set forth in Section 4.2.12 of the C2 Disclosure Letter, as of
the date hereof, no requests for waivers of the time to assess or collect any
taxes against any C2 Entity have been granted or are pending, and no audits or
examinations of any C2 Entity are being conducted or, to the knowledge of C2,
threatened by any taxing authority.
(b) No C2 Entity has taken any action that would create a material risk
that the Merger would not qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
(c) Except as set forth in Section 4.2.12 of the C2 Disclosure Letter, no
C2 Entity is bound by any effective private letter ruling, closing agreement or
similar agreement with any taxing authority (a "C2 Tax Ruling"), no C2 Entity
has any applications or requests outstanding for any such rulings or agreements
and no C2 Tax Ruling has been revoked or modified in any manner.
4.2.13. Employee Benefit Plans; ERISA. (a) No C2 Employee Benefit Plans
are in effect and no C2 Entity has any present or contingent liability with
respect to any Plan.
(b) As used herein "C2 Employee Benefit Plan" means any Plan entered into,
established, maintained, sponsored, contributed to or required to be contributed
to by any C2 Entity for the benefit of the current or former employees or
directors of any C2 Entity and existing on the date of this Agreement or at any
time subsequent thereto and on or prior to the Effective Time and, in the case
of a Plan which is subject to Part 3 of Title I of ERISA, Section 412 of the
Code or Title IV of ERISA, at any time during the five-year period preceding the
date of this Agreement.
4.2.14. [Intentionally Omitted].
4.2.15. Environmental Matters. (a) Each C2 Entity has obtained or submitted
timely applications for all Environmental Permits which are required under any
applicable Environmental Law in respect of its business or operations, except
for such failures to have Environmental Permits and to submit timely
applications which, individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole. Each of such Environmental Permits obtained by such C2 Entity is in full
force and effect and each C2 Entity is in compliance with the terms and
conditions of all such Environmental Permits and with all applicable
Environmental Laws, except for such failures to be in full force and effect or
compliance which, individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole.
(b) To the knowledge of C2, as of the date hereof, no site or facility now
or previously owned, operated or leased by any C2 Entity is listed or proposed
for listing on the National Priorities List promulgated pursuant to CERCLA or on
any similar state or local list of sites requiring investigation or cleanup.
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(c) No Liens have arisen under or pursuant to any Environmental Law on any
site or facility owned, operated or leased by any C2 Entity, other than Liens
not individually or in the aggregate material to the C1/C2 Entities taken as a
whole, and no action of any Governmental or Regulatory Authority has been taken
or, to the knowledge of C2, is in process which could subject any of such
properties to such Liens, except for such Liens which, individually or in the
aggregate, could not reasonably be expected to have a material adverse effect on
the C1/C2 Entities taken as a whole, and no C2 Entity would be required to place
any notice or restriction relating to the presence of Hazardous Materials at any
such site or facility owned by it in any deed to the real property on which such
site or facility is located, except for such notices or restrictions which,
individually or in the aggregate, could not reasonably be expected to have a
material adverse effect on the C1/C2 Entities taken as a whole.
(d) As of the date hereof, there have been no written reports,
environmental investigations, studies, audits, tests, reviews or other analyses
conducted by, or which are in the possession of, any C2 Entity in relation to
any site or facility now or previously owned, operated or leased by any C2
Entity that both (i) conclude that any C2 Entity could have liability under
Environmental Laws that, individually or in the aggregate, would reasonably be
expected to have a material adverse effect on the C1/C2 Entities taken as a
whole, and (ii) have not been delivered to A1 prior to the execution of this
Agreement.
4.2.16. Intellectual Property Rights. Each C2 Entity has all right, title
and interest in, or a valid and binding license to use, all Intellectual
Property individually or in the aggregate material to the conduct of the
businesses of the C1/C2 Entities taken as a whole. No C2 Entity is in default
(or with the giving of notice or lapse of time or both, would be in default)
under any license to use such Intellectual Property, such Intellectual Property
is not, to the knowledge of C2, being infringed by any third party, and no C2
Entity is infringing any Intellectual Property of any third party, except for
such defaults and infringements which, individually or in the aggregate, are not
having and could not be reasonably expected to have a material adverse effect on
the C1/C2 Entities taken as a whole.
4.2.17. [Intentionally Omitted.]
4.2.18. Vote Required. The affirmative vote of the holders of record of at
least a majority of the outstanding shares of C2 Common Stock with respect to
the C2 Merger, this Agreement and the issuance of C2 Common Stock pursuant to
this Agreement is the only vote of the holders of any class or series of the
capital stock of C2 required to approve the Merger and the other transactions
contemplated hereby.
4.2.19. Ownership of A1 Common Stock. No C2 Entity beneficially owns any
shares of A1 Common Stock.
ARTICLE V.
COVENANTS
Section 5.1. Conduct Pending the Closing. At all times from and after the
date hereof until the Effective Time, each party hereto covenants and agrees as
follows:
5.1.1. Preservation of REIT Status. No party hereto shall take any action
or omit to take any action reasonably within its power to take that (i) would
cause A1 to be disqualified as a REIT, (ii) would cause C1 to be disqualified as
a REIT or (iii) would result in a loss of the status of C1 and C2 (prior to the
Merger) or the Surviving Corporation and C2 (from and after the Merger) as
grandfathered from the application of Section 269B(a)(3) of the Code pursuant to
Section 136(c)(3) of the Deficit Reduction Act of 1984.
5.1.2. Conduct of Business by C1 and C2 Pending the Closing. Each of C1
and C2 and its Subsidiaries and Consolidated Non-Corporate Affiliates (such
party's "Entities") shall use all commercially reasonable efforts to preserve
intact in all material respects its present business organizations and
reputation, to keep available the services of its key officers and employees, to
maintain its assets and properties in good working order and condition, ordinary
wear and tear excepted, to maintain insurance on its tangible assets and
businesses in such amounts and against such risks and losses as are currently in
effect, to preserve its relationships with tenants and other occupiers of
properties, customers, suppliers, lenders, partners and others
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having significant business dealings with them and to comply in all material
respects with all laws and orders of all Governmental or Regulatory Authorities
applicable to them, and neither C1 nor C2 shall, except as otherwise expressly
provided for in this Agreement, as contemplated by the "C1/C2 Business Plan,"
which is identified in Section 5.1.2 of the C1 Disclosure Letter, or as
otherwise described in Section 5.1.2 of the C1 Disclosure Letter, as applicable,
or with the prior written consent of A1:
(a) incorporate or organize any new Entity of such party, unless such
Entity shall be wholly owned, directly or indirectly, by C1 or C2 and A1 shall
receive prompt notice of such incorporation or organization, including the
information that would have been disclosed pursuant to Articles III and IV
hereof had such Entity been in existence on the date hereof;
(b) amend or propose to amend its Charter Documents or permit the amendment
of the Charter Documents of the Entities of C1 or C2, except, in the case of
Entities of C1 or C2, for the amendment of the Charter Documents of such
Entities as are wholly owned, directly or indirectly, by C1 or C2, so long as
such action shall be promptly disclosed to A1;
(c) (w) declare, set aside or pay any dividends on or make other
distributions in respect of any of the beneficial interests or capital stock of
such party, except that C1 and C2 each may declare and pay (1) quarterly cash
dividends on C1 Common Stock and C2 Common Stock in an amount not to exceed
$1.95 per C1 Common Share and related beneficial interest in shares of C2 Common
Stock, with usual record and payment dates for such dividends in accordance with
past dividend practice, (2) cash dividends on C1 Common Stock and C2 Common
Stock in amounts proportional to the dividends paid on C1 Common Stock and C2
Common Stock for the last full quarter preceding the Effective Time prorated
over the number of days elapsed in the quarter in which the Effective Time
occurs from the beginning of such quarter to the Effective Time and (3) cash
dividends on C1 Preference Shares in the amounts, and with the record and
payment dates, required in accordance with the terms thereof, (x) split,
combine, reclassify or take similar action with respect to any of its beneficial
interests or capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
beneficial interest or capital stock, or permit any of its Entities (other than
Entities wholly owned, directly or indirectly, by C1 or C2) to split, combine,
reclassify or take similar action with respect to such Entities' capital stock
or equity interests or issue or authorize or propose the issuance of any other
securities or equity interests in respect of, in lieu of, or in substitution for
such capital stock or equity interests, (y) adopt a plan of complete or partial
liquidation or resolutions providing for or authorizing such liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization or permit any of such party's Entities (other than Entities
wholly owned, directly or indirectly, by C1 or C2) to take any such action, or
(z) directly or indirectly redeem, repurchase or otherwise acquire, or permit
any Entity of C1 or C2 to redeem, repurchase or otherwise acquire, directly or
indirectly, any shares of capital stock of, or beneficial or other equity
interests in, C1 or C2 or any of their Entities, or any Option with respect
thereto (other than in transactions solely involving C1 or C2 and their Entities
that are wholly owned, directly or indirectly, by C1 or C2) and other than
pursuant to C1 Permissible Redemption Arrangements;
(d) issue, deliver, sell or otherwise transfer, or authorize or propose the
issuance, delivery, sale or other transfer of, or permit any of its Entities to
issue, deliver, sell, or otherwise transfer or authorize or propose the
issuance, delivery or sale of, any shares of capital stock of, or beneficial or
other equity interests in, it or any of its Entities or any Option with respect
thereto (other than (x) issuances of C1 Common Shares or beneficial interests in
C2 Common Stock in connection with C1 Permissible Issuance Arrangements;
provided that management of C1 shall use its best efforts to suspend sales of C1
Common Shares under the C1 QSPP from the date hereof until the Effective Time or
(y) the issuance, sale or transfer by an Entity that is wholly owned, directly
or indirectly, by C1 or C2 of such Entity's capital stock or other equity
interests, or Options with respect thereto, to C1 or C2 or other Entities wholly
owned, directly or indirectly, by C1 or C2), or modify or amend any right of any
holder of outstanding Options with respect thereto (other than the modification
or amendment of the rights of C1 or C2 or an Entity wholly owned, directly or
indirectly, by C1 or C2 under an Option issued by C1 or C2 or an Entity wholly
owned, directly or indirectly, by C1 or C2);
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(e) except, with respect to loans or capital contributions to any of C1's
or C2's Entities, to the extent required under the express terms of any
applicable Charter Document, provide funds to, or make any investment (in the
form of a loan, capital contribution or otherwise) in (or permit any of C1's or
C2's Entities to take any such action with respect to), any Entity of C1 or C2
or other person (except for such Entities as shall be wholly owned, directly or
indirectly, by C1 or C2), other than C1 Permitted Minority Investments, C2
Permitted Minority Investments and investments of the type described in Section
4.2.1 of the C1 Disclosure Letter or the C2 Disclosure Letter;
(f) in the case of C2, amend, modify or terminate the C2 Trust Agreements
or propose such amendment, modification or termination;
(g) (x) acquire (by merging or consolidating with, or by purchasing a
substantial equity interest in or a substantial portion of the assets of, or by
any other manner) or permitting any of its Entities to acquire any business or
any corporation, partnership, association or other business organization or
division thereof or any significant assets, (y) mortgage or otherwise encumber
or subject to any Lien or sell, lease or otherwise dispose of, or permit any of
its Entities to do any of the foregoing with respect to, any significant portion
of its interest in one or more of the properties or interests identified in
Section 4.1.17 of the C1 Disclosure Letter or assign or encumber the right to
receive income, dividends or distributions with respect thereto or (z) make or
agree to make any new capital expenditures;
(h) (x) incur (which shall not be deemed to include entering into credit
agreements, lines of credit or similar arrangements until borrowings are made or
committed to be borrowed under such arrangements) any indebtedness for borrowed
money or guarantee any such indebtedness, or permit any of its Entities to take
any such action, other than to meet the current cash needs of its and its
Entities' business in an aggregate amount not to exceed that which is
contemplated by the C1/C2 Business Plan, to permit it to perform its obligations
hereunder or to effect a redemption of indebtedness permitted by clause (y), or
(y) voluntarily purchase, cancel, prepay or otherwise provide for a complete or
partial discharge in advance of a scheduled repayment date with respect to, or
waive any right under, or otherwise modify the provisions of, any indebtedness,
or guarantee of indebtedness, for borrowed money, or permit any of its Entities
to take any of such actions;
(i) enter into, adopt, amend in any material respect (except as may be
required by applicable law) or terminate any C1 Employee Benefit Plan or grant
any Options, awards or other benefits or increase compensation, except for
increases in benefits and compensation to employees other than executive
officers having a value in the aggregate of not greater than $250,000 and except
for changes therein contemplated by Section 6.8 and 6.9 of this Agreement;
(j) enter into any Contract, or amend or modify any existing Contract, or
engage in any new transaction outside the ordinary course of business consistent
with past practice or not on an arm's-length basis, or permit any of its
Entities to take such actions, with any affiliate of C1 or C2 other than
transactions among C1 or C2 and Entities that are wholly owned, directly or
indirectly, by C1 or C2;
(k) make any change in the lines of business in which it and its Entities
participate or are engaged; or
(l) enter into any Contract, commitment or arrangement to do or engage in
any action the consummation of which would be prohibited by the foregoing.
5.1.3. Conduct of Business by A1 Pending the Closing. Except as set forth
in Section 5.1.3 of the A1 Disclosure Letter, during the period from the date of
this Agreement to the Effective Time, A1 shall, and shall cause each of the A1
Entities to, use all commercially reasonable efforts to preserve intact in all
material respects its present business organizations and reputation, to keep
available the services of its key officers and employees, to maintain its assets
and properties in good working order and condition, ordinary wear and tear
excepted, to maintain insurance on its tangible assets and businesses in such
amounts and against such risks and losses as are currently in effect, to
preserve its relationships with tenants and other occupiers of properties,
customers, suppliers, lenders, partners and others having significant business
dealings with them and to comply in all material respects with all laws and
orders of all Governmental or Regulatory Authorities applicable to
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them, and A1 shall not, except as otherwise expressly provided for in this
Agreement, as set forth in Section 5.1.3 of the A1 Disclosure Letter or with the
prior written consent of C1:
(a) declare, set aside or pay any dividends on or make other distributions,
except that A1 may declare and pay (1) quarterly cash dividends on A1 Common
Stock in an amount not to exceed $0.505 per share of A1 Common Stock, with usual
record and payment dates for such dividends in accordance with past dividend
practice, (2) cash dividends on A1 Common Stock in amounts proportional to the
dividends paid on A1 Common Stock in the last full quarter preceding the
Effective Time prorated over the number of days elapsed in the quarter in which
the Effective Time occurs from the beginning of such quarter to the Effective
Time and (3) cash dividends on A1 Preferred Stock in the amounts, and with the
record and payment dates, required in accordance with the terms thereof;
(b) enter into any Contract, or amend or modify any existing Contract, or
engage in any new transaction outside the ordinary course of business consistent
with past practice or not on an arm's length basis, or permit any A1 Entity to
take such actions, with any affiliate of such party other than transactions
among A1 and Entities of A1 that are wholly owned, directly or indirectly, by A1
or any A1 Entity;
(c) make any change in the lines of business in which it and its Entities
participate or are engaged; or
(d) enter into any Contract, commitment or arrangement to do or engage in
any action the consummation of which would be prohibited by the foregoing.
5.1.4. Advice of Changes. Each party shall confer on a regular and
frequent basis with the others with respect to its business and operations and
other matters relevant to the Merger, and shall promptly advise the others,
orally and in writing, of any change or event, including, without limitation,
any complaint, investigation or hearing by any Governmental or Regulatory
Authority (or communication indicating the same may be contemplated) or the
institution or threat of litigation, having, or which, insofar as can be
reasonably foreseen, could have, a material adverse effect on the A1 Entities
taken as a whole or on the C1/C2 Entities taken as a whole, as the case may be,
or on the ability of any party to consummate the transactions contemplated
hereby; provided that no party shall be required to make any disclosure to the
extent such disclosure would constitute a violation of any applicable law.
5.1.5. Notice and Cure. Each party will notify the others of, and will use
all commercially reasonable efforts to cure before the Closing, any event,
transaction or circumstance, as soon as practical after it becomes known to such
party, that causes or will cause any covenant or agreement of such party under
this Agreement to be breached or that renders or will render untrue any
representation or warranty of such party contained in this Agreement. Each party
also will notify the others in writing of, and will use all commercially
reasonable efforts to cure, before the Closing, any violation or breach, as soon
as practical after it becomes known to such party, of any representation,
warranty, covenant or agreement made by such party. No notice given pursuant to
this paragraph shall have any effect on the representations, warranties,
covenants or agreements contained in this Agreement for purposes of determining
satisfaction of any condition contained herein.
5.1.6. Fulfillment of Conditions. Subject to the terms and conditions of
this Agreement, each party will take or cause to be taken all commercially
reasonable steps necessary or desirable and proceed diligently and in good faith
to satisfy each condition to the other's obligations contained in this Agreement
and to consummate and make effective the transactions contemplated by this
Agreement.
Section 5.2. No Solicitations by C1 and C2. (a) Prior to the Effective
Time, each of C1 and C2 agree (i) that it shall, and shall direct and use its
best efforts to cause its Entities, controlled affiliates and Representatives
to, immediately cease any discussion or negotiations with any parties that may
be ongoing with respect to an Alternative Proposal for C1 and C2 (as defined
below); (ii) that it shall not, and it shall use its best efforts to cause its
Entities, controlled affiliates and Representatives not to, initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or implementation
of any proposal or offer (including, without limitation, any proposal or offer
to its stockholders or shareholders) with respect to a merger, consolidation or
other business combination transaction involving it or any acquisition or
similar transaction (including, without limitation, a tender or exchange offer)
involving (i) the purchase of all or substantially all of the assets of the
C1/C2 Entities taken as a whole or (ii) the purchase, acquisition or
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issuance of shares of beneficial interest in C1 representing at least a majority
of the voting power of all the outstanding shares of beneficial interest in C1
(for purposes hereof, any such proposal or offer with respect to such merger,
consolidation, other business combination, acquisition or similar transaction is
hereinafter referred to as an "Alternative Proposal for C1 or C2"), or engage in
any negotiations with or provide any confidential information or data to, any
person or group relating to an Alternative Proposal for C1 or C2 (excluding the
transactions contemplated by this Agreement), or otherwise knowingly facilitate
any effort or attempt to make or implement an Alternative Proposal for C1 or C2,
and (b) that it will notify A1 promptly if any such inquiries, proposals or
offers are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with, it or
any of such persons.
ARTICLE VI.
ADDITIONAL AGREEMENTS
Section 6.1. Access to Information; Confidentiality. Each party shall, and
shall cause each of its Entities to, throughout the period from the date hereof
to the Effective Time, (i) provide the other parties and their Representatives
with full access, upon reasonable prior notice and during normal business hours,
to all officers, employees, agents and accountants of such party and its
Entities and their respective assets, properties and material books and records,
but only to the extent that such access does not unreasonably interfere with the
business and operations of such party and its Entities, and (ii) furnish
promptly to such persons (x) a copy of each report, statement, schedule and
other document filed or received by such party or any of its Entities pursuant
to the requirements of Federal or state securities laws and each material
report, statement, schedule and other document filed with any other Governmental
or Regulatory Authority and (y) all other information and data (including,
without limitation, copies of Contracts, A1 Employee Benefit Plans or C1
Employee Benefit Plans, as the case may be, and material other books and records
and environmental assessments, investigations or studies concerning the
properties of such party or the business or operations conducted thereon)
concerning the business and operations of such party and its Entities as the
other party or any of such other persons reasonably may request. No
investigation pursuant to this paragraph or otherwise shall affect any
representation or warranty contained in this Agreement or any condition to the
obligations of the parties hereto. Any such information or material obtained
pursuant to this Section 6.1 that constitutes "Evaluation Material" (as such
term is defined in the letter agreement dated January 21, 1998 between A1 and C1
(the "Confidentiality Agreement")) shall be governed by the terms of the
Confidentiality Agreement.
Section 6.2. Preparation of Registration Statement and Proxy
Statement. A1, C1 and C2 shall prepare and file with the SEC as soon as
reasonably practicable after the date hereof the Proxy Statement and C1 and C2
shall prepare and file with the SEC as soon as reasonably practicable after the
date hereof the Registration Statement, in which the Proxy Statement will be
included as the prospectus. A1, C1 and C2 shall use their best efforts to have
the Registration Statement declared effective by the SEC as promptly as
practicable after such filing. C1 and C2 shall also take any action (other than
qualifying as a foreign corporation or taking any action which would subject it
to service of process in any jurisdiction where A1 is not now so qualified or
subject) required to be taken under applicable state blue sky or securities laws
in connection with the issuance of the C1 Common Shares and C2 Common Stock (or
beneficial interests therein) pursuant to this Agreement. If at any time prior
to the Effective Time any event shall occur that should be set forth in an
amendment of or a supplement to the Registration Statement, C1 and C2 shall
prepare and file with the SEC such amendment or supplement as soon thereafter as
is reasonably practicable. A1, C1 and C2 shall cooperate with each other in the
preparation of the Registration Statement and the Proxy Statement and any
amendment or supplement thereto, and each shall notify the others of the receipt
of any comments of the SEC with respect to the Registration Statement or the
Proxy Statement and of any requests by the SEC for any amendment or supplement
thereto or for additional information, and shall provide to the other promptly
copies of all correspondence between the SEC and A1, C1 or C2, as the case may
be, or any of their Representatives with respect to the Registration Statement
or the Proxy Statement. C1 and C2 shall give A1 and its counsel the opportunity
to review the Registration Statement and all responses to requests for
additional information by and replies to comments of the SEC before such
registration statement is filed with, or sent to, the SEC. Each of A1, C1 and C2
agrees to use its best efforts, after consultation with the other parties
hereto, to
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respond promptly to all such comments of and requests by the SEC and to cause
(x) the Registration Statement to be declared effective by the SEC at the
earliest practicable time and to be kept effective as long as is necessary to
consummate the Merger, and (y) the Proxy Statement to be mailed to the holders
entitled to vote at the Stockholders Meetings at the earliest practicable time.
Section 6.3. Approvals of Stockholders.
6.3.1. A1 Stockholder Approval. Subject to the exercise of fiduciary
obligations under applicable law as advised by outside counsel, A1 shall,
through its Board of Directors, duly call, give notice of, convene and hold a
meeting of its stockholders (the "A1 Stockholders' Meeting") for the purpose of
voting on the adoption of this Agreement (the "A1 Stockholders' Approval").
Subject to the exercise of fiduciary obligations under applicable law as advised
by outside counsel, A1 shall, through its Board of Directors, include in the
Proxy Statement the recommendation of the Board of Directors of A1 that the
stockholders of A1 adopt this Agreement and shall use its best efforts to obtain
such adoption.
6.3.2. C1 and C2 Stockholders' Approvals. Subject to the exercise of
fiduciary obligations under applicable law as advised by outside counsel, each
of C1 and C2 shall, through its Board of Directors, duly call, give notice of,
convene and hold a meeting of its stockholders (collectively, the "C1 and C2
Stockholders' Meeting" and, together with the A1 Stockholders' Meeting, the
"Stockholders' Meetings") for the purpose of voting on the adoption of this
Agreement and the issuance of C1 Common Shares and C2 Common Stock pursuant to
this Agreement and under the C1 Option Plan, as in effect following the Merger
after the Merger in accordance with this Agreement (the "C1 Stockholders'
Approval" and the "C2 Stockholders' Approval", respectively) as soon as
reasonably practicable after the date hereof. Subject to the exercise of
fiduciary obligations under applicable law as advised by outside counsel, each
of C1 and C2 shall, through its Board of Directors, include in the Proxy
Statement the recommendation of its Board of Directors that its stockholders
adopt this Agreement and approve such issuances, as applicable, and shall use
its best efforts to obtain such adoption and approval.
6.3.3. Cooperation for Stockholders' Meetings. A1, C1 and C2 shall
coordinate and cooperate with respect to the timing of the Stockholders'
Meetings and shall use their best efforts to cause the Stockholders' Meetings to
be held on the same day and as soon as practicable after the date hereof.
Section 6.4. Affiliates. At least 30 days prior to the Closing Date, A1
shall deliver a letter to C1 and C2 identifying all persons who, at the time of
the A1 Stockholders' Meetings, may, in A1's reasonable judgment, be deemed to be
"affiliates" (as such term is used in Rule 145 under the Securities Act) of A1
("A1 Affiliates"). A1 shall use its best efforts to cause each A1 Affiliate to
deliver to C1 and C2 on or prior to the Closing Date a written agreement
substantially in the form and to the effect of Exhibit H hereto (an "Affiliate
Agreement"). C1 shall be entitled to place legends as specified in such
Affiliate Agreement on the certificates evidencing C1 Common Shares to be
received by such A1 Affiliates pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for the C1
Common Shares consistent with the terms of such Affiliate Agreements.
Section 6.5. Stock Exchange Listing. C1 and C2 shall use their best
efforts to cause C1 Common Shares and the related beneficial interests in the
shares of C2 Common Stock and the shares of C1 Series A Preferred Stock to be
issued pursuant to this Agreement or retained by C1 shareholders, and the C1
Common Shares and the paired interests in the C2 Common Stock issuable under the
Option Plans or upon conversion of the C1 6.50% First Series Preferred Stock
after the Merger, to be approved for listing on the NYSE, subject to official
notice of issuance, prior to the Closing Date.
Section 6.6. Certain Tax Matters. None of A1, C1 or C2 shall take or fail
to take any action which would cause A1, C1 or C2 or their respective
stockholders to recognize gain or loss for Federal income tax purposes as a
result of the consummation of the Merger, except (i) to the extent that any
stockholder may receive cash, interests in shares of C2 Common Stock or cash in
lieu of fractional shares, (ii) to the extent attributable to any action
described or referred to in Section 6.15 or (iii) to the extent described in
Section 7.1.7.
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Section 6.7. Regulatory and Other Approvals. Subject to the terms and
conditions of this Agreement and without limiting the provisions of Sections 6.2
and 6.3, each of A1, C1 and C2 will proceed diligently and in good faith to, as
promptly as practicable, (a) obtain all consents, approvals or actions of, make
all filings with and give all notices to Governmental or Regulatory Authorities
or any other public or private third parties required of A1, C1 and C2 or any of
their Entities to consummate the Merger and the other matters contemplated
hereby and (b) provide such other information and communications to such
Governmental or Regulatory Authorities or other public or private third parties
as the other party or such Governmental or Regulatory Authorities or other
public or private third parties may reasonably request in connection therewith.
Section 6.8. Employee Benefit Plans. (a) The Surviving Corporation shall
succeed to the rights and obligations of A1 under the A1 Employee Benefit Plans
and C1 shall retain its rights and obligations under the C1 Employee Benefit
Plans in accordance with their respective terms.
(b) The Surviving Corporation and C1 shall honor without modification all
employee severance plans (or policies) and employment and severance agreements
of A1, C1 and C2 and any of their respective Entities in existence on the date
hereof as such agreements shall be in effect in accordance with the terms of
this Agreement at the Effective Time, including, without limitation, the plans
and agreements specified in Section 6.8 of the A1 Disclosure Letter, the C1
Disclosure Letter or the C2 Disclosure Letter.
Section 6.9. Stock Plans.
6.9.1. Treatment of A1 Stock Plans. Effective as of the Effective Time,
each outstanding option to purchase a share of A1 Common Stock and related
interests (an "A1 Stock Option") under any of the A1 Stock Plans, whether
theretofore vested or unvested, shall constitute an option to acquire one C1
Common Share, together with the related beneficial interest in C2 Common Stock
which shall be paired with the C1 Common Share pursuant to the C2 Trust
Agreements, and shall otherwise have the same terms and provisions as such A1
Stock Option (subject to the next sentence). The price per C1 Common Share at
which each such option is exercisable shall be the option exercise price per
share of the A1 Common Stock at which such option is exercisable pursuant to the
applicable A1 Stock Plan immediately prior to the Effective Time; provided,
however, that, in the case of an incentive stock option under Section 422 of the
Code, the option exercise price, the number of shares purchasable pursuant to
such option and the terms and conditions of exercise of such option shall be
determined in order to comply with Section 424(a) of the Code and the
regulations relating thereto. In addition, each outstanding right to earn shares
of A1 Common Stock shall constitute a right to earn C1 Common Shares (together
with the related beneficial interest in C2 Common Stock) determined in
accordance with the terms of the applicable A1 Stock Plans.
6.9.2. Treatment of C1 Stock Plan. (a) Effective as of the Effective Time,
each outstanding option to purchase a C1 Common Share and related interests in
C2 Common Stock (a "C1 Stock Option") under the C1 Option Plan, whether
theretofore vested or unvested, shall become immediately exercisable. The price
per C1 Common Share and the related beneficial interest in C2 Common Stock at
which each such option is exercisable shall be the exercise price per share at
which the C1 Stock Option is exercisable pursuant to the C1 Option Plan
immediately prior to the Effective Time but after adjustment for the
transactions described in Section 1.1.2 pursuant to the terms of the C1 Option
Plan; provided, however, that, in the case of an incentive stock option under
Section 422 of the Code, the option exercise price, the number of shares
purchasable pursuant to such option and the terms and conditions of exercise of
such option shall be determined in order to comply with Section 424(a) of the
Code and the regulations relating thereto.
(b) As soon as practicable after the Effective Time, C1 Delaware shall file
a registration statement on Form S-8 promulgated by the SEC under the Securities
Act (or any successor or other appropriate form) with respect to the Paired
Shares subject to A1 and C1 Stock Options and shall use its best efforts to
maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such Options remain outstanding. C1 shall
comply with the terms of A1 Stock Plans and the C1 Option Plan (collectively,
the "Option Plans") and ensure, to the extent required by, and subject to the
provisions of, the Option Plans, that the A1 Stock Options which qualified as
qualified stock options prior to the Effective Time continue to qualify as
qualified stock options after the Effective Time.
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(c) C1 Delaware shall take all corporate action necessary to reserve for
issuance a sufficient number of Paired Shares for delivery under the Option
Plans as adjusted in accordance with this Section 6.9. With respect to those
individuals who, subsequent to the Merger, will be subject to the reporting
requirements under Section 16(a) of the Exchange Act, where applicable, C1 shall
administer the Option Plans in a manner that complies with Rule 16b-3
promulgated under the Exchange Act so that grants thereunder shall be exempt
acquisitions under Section 16(b) of the Exchange Act.
6.9.3. Restricted Stock. Prior to the Effective Time, (i) C1 shall offer
to the other party under each C1 ESPP Contract, and shall use its reasonable
best efforts (it being understood that such efforts shall not require the
expenditure of cash) to obtain the agreement of such party, to amend such C1
ESPP Contract (x) to release the transfer restrictions on the securities issued
pursuant thereto and remove any associated legends from the certificates
evidencing such securities, (y) to eliminate the right of such party to cause C1
to repurchase such securities and (z) to provide that upon any transfer of such
securities, the transferor shall either pay to C1 the applicable portion of the
"Permanent Restriction" thereunder or obtain an undertaking of the transferee
thereof to pay such amount or obtain a comparable undertaking upon any
subsequent transfer by such transferee and (ii) C1 may pay to such party
(through forgiveness of indebtedness or otherwise) an amount equal to the
principal of the indebtedness initially incurred, and any accrued interest
subsequently added to the principal of such indebtedness, to purchase the
securities purchased thereunder, but only if the per-unit purchase price thereof
exceeded $150 (before deduction for any Permanent Restriction).
Section 6.10. Trustees', Directors' and Officers' Indemnification and
Insurance. (a) From and after the Effective Time and until the sixth
anniversary of the Effective Time and for so long thereafter as any claim for
indemnification asserted on or prior to such date has not been fully
adjudicated, C1 (each, an "Indemnifying Party") shall indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, a trustee, director or
officer of A1, C1 or C2 or any of their respective Entities (the "Indemnified
Parties") against (i) all losses, claims, damages, costs and expenses (including
reasonable attorneys' fees), liabilities, judgments and settlement amounts that
are paid or incurred in connection with any claim, action, suit, proceeding or
investigation (whether civil, criminal, administrative or investigative and
whether asserted or claimed prior to, at or after the Effective Time) that is
based on, or arises out of, the fact that such Indemnified Party is or was a
trustee, director or officer of A1, C1 or C2 or any of their respective Entities
and relates to or arises out of any action or omission occurring at or prior to
the Effective Time ("Indemnified Liabilities"), and (ii) all Indemnified
Liabilities based on, or arising out of, or pertaining to this Agreement or the
transactions contemplated hereby, in each case to the full extent a corporation
is permitted under applicable law to indemnify its own trustees, directors or
officers, as the case may be; provided that no Indemnifying Party shall be
liable for any settlement of any claim effected without its written consent,
which consent shall not be unreasonably withheld; and provided further that no
Indemnifying Party shall be liable to an Indemnified Party for any Indemnified
Liabilities which occur as a result of the gross negligence or wilful misconduct
of such Indemnified Party. If any such action is brought against any of the
Indemnified Parties and such Indemnified Parties notify the Indemnifying Parties
of its commencement, the Indemnifying Parties will be entitled to participate in
and, to the extent that they elect by delivering written notice to such
Indemnified Parties promptly after receiving notice of the commencement of the
action from the Indemnified Parties, to assume the defense of the action and
after notice from the Indemnifying Parties to the Indemnified Parties of their
election to assume the defense, the Indemnifying Parties will not be liable to
the Indemnified Parties for any legal or other expenses except for the
reasonable costs of investigation subsequently incurred by the Indemnified
Parties in connection with the defense. Subject to the foregoing, in the event
that any such claim, action, suit, proceeding or investigation is brought
against any Indemnified Party (whether arising prior to or after the Effective
Time), (w) the Indemnifying Parties will pay expenses in advance of the final
disposition of any such claim, action, suit, proceeding or investigation to each
Indemnified Party to the full extent permitted by applicable law; provided that
the person to whom expenses are advanced provides any undertaking required by
applicable law to repay such advance if it is ultimately determined that such
person is not entitled to indemnification; (x) the Indemnified Parties shall
retain counsel reasonably satisfactory to the Indemnifying Parties; (y) the
Indemnifying Parties shall pay all reasonable fees and expenses of such counsel
for the Indemnified Parties (subject to the final sentence of this paragraph)
promptly as statements therefor are received; and (z) the Indemnifying Parties
shall use all
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commercially reasonable efforts to assist in the defense of any such matter. Any
Indemnified Party wishing to claim indemnification under this Section, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify the applicable Indemnifying Party, but the failure so to notify an
Indemnifying Party shall not relieve such Indemnifying Party from any liability
which it may have under this paragraph except to the extent such failure
materially prejudices such Indemnifying Party. The Indemnified Parties, as a
group, may retain only one law firm to represent them with respect to each such
matter unless there is, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of any two or more
Indemnified Parties, in which case the Indemnified Parties may retain more than
one law firm.
(b) Except to the extent required by law, until the sixth anniversary of
the Effective Time, C1 shall not amend, modify or repeal the provisions for
indemnification of trustees, directors, officers or employees contained in the
certificates or articles of incorporation or by-laws (or other comparable
Charter Documents) of such corporation and its Entities in such a manner as
would adversely affect the rights of any individual who shall have served as a
trustee, director, officer or employee of any of A1, C1 or C2 or any of their
respective Entities prior to the Effective Time to be indemnified by such
corporations in respect of their serving in such capacities prior to the
Effective Time.
(c) C1 shall, until the sixth anniversary of the Effective Time and for so
long thereafter as any claim for insurance coverage asserted on or prior to such
date has not been fully adjudicated, cause to be maintained in effect, to the
extent commercially available, the policies of trustees', directors' and
officers' liability insurance maintained by A1, C1 and C2, respectively, as of
the date hereof (or policies of at least the same coverage and amounts
containing terms that are no less advantageous to the insured parties) with
respect to claims arising from facts or events that occurred on or prior to the
Effective Time; provided that C1 shall not be obligated to expend in order to
maintain or procure insurance coverage pursuant to this paragraph any amount per
annum in excess of 150 percent of the aggregate of the last annual premiums paid
by A1, C1 and C2 for such policies prior to the date hereof, but if the cost of
maintaining such insurance (or providing such new policies) would but for this
proviso exceed such aggregate amount, then C1 shall purchase as much coverage as
possible for such amount.
(d) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and each party entitled to
insurance coverage under paragraph (c) above, respectively, and his or her heirs
and legal representatives, and shall be in addition to any other rights an
Indemnified Party may have under the certificate or articles of incorporation or
bylaws of C1, C2 or either Constituent Corporation or any of its Entities, under
the Massachusetts Business Corporation Law, the DGCL, the MGCL or otherwise.
Section 6.11. Expenses. Whether or not the Merger is consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such cost
or expense, except that expenses incurred in connection with printing and
mailing the Proxy Statement and the Registration Statement, as well as any
filing fees relating thereto, shall be shared equally by A1 and C1.
Section 6.12. Brokers or Finders. Each party represents, as to itself and
its affiliates, that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, except Merrill Lynch, whose fees and expenses
will be paid by A1 in accordance with A1's agreement with such firm (a true and
complete copy of which has been delivered by A1 to C1 prior to the execution of
this Agreement), and Lazard Freres & Co. LLC and J.P. Morgan Securities Inc.,
whose fees and expenses will be paid by C1 in accordance with C1's agreements
with such firms (a true and complete copy of which has been delivered by C1 to
A1 prior to the execution of this Agreement), and each party shall indemnify and
hold the others harmless from and against any and all claims, liabilities or
obligations with respect to any other such fee or commission or expenses related
thereto asserted by any person on the basis of any act or statement alleged to
have been made by such party or its affiliate.
Section 6.13. Takeover Statutes. If any "fair price", "moratorium",
"control share acquisition" or other form of antitakeover statute or regulation
shall become applicable to the transactions contemplated hereby, each party and
the members of the Board of Directors of such party shall grant such approvals
and take such
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actions as are reasonably necessary so that the transactions contemplated hereby
may be consummated as promptly as practicable on the terms contemplated hereby
and otherwise act to eliminate or minimize the effects of such statute or
regulation on the transactions contemplated hereby and thereby.
Section 6.14. Conveyance Taxes. A1, C1 and C2 shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees, and any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time.
Section 6.15. Transfer Tax. Each of A1, C1 and C2 shall pay, without
deduction or withholding from any amount payable to any stockholders of A1, C1
or C2, any New York State Real Estate Transfer Tax, New York City Real Property
Transfer Tax and New York State Stock Transfer Tax (the "Transfer Taxes") and
any similar taxes imposed by any other State of the United States (and any
penalties and interest with respect to such taxes), which become payable in
connection with the transactions contemplated by this Agreement, on behalf of
the stockholders of A1, C1 or C2, respectively. Each of A1, C1 and C2 shall
cooperate in the preparation, execution and filing of any required returns with
respect to such taxes (including returns on behalf of any stockholders) and in
the determination of the portion of the consideration allocable to real property
of A1, C1 or C2 and its Entities in New York State and City (or in any other
jurisdiction, if applicable). The terms of the Proxy Statement shall provide
that the stockholders of A1, C1 or C2 shall be deemed to have agreed to be bound
by the allocation established in this Section in the preparation of any return
with respect to the Transfer Taxes and any similar taxes, if applicable.
Section 6.16. Post-Closing Asset Sales. During the period commencing at
the Effective Time and ending on December 31, 1998, the Surviving Corporation
shall not assign, sell or otherwise transfer to an unaffiliated third party any
asset owned by A1 prior to the Effective Time if, as a result of such
assignment, sale or other transfer, the Surviving Corporation would recognize a
gain, unless directors representing two-thirds of the entire Board of Directors
of the Surviving Corporation have duly adopted a resolution authorizing such
assignment, sale or other transfer.
Section 6.17. Merger Sub. C1 will use commercially reasonable efforts to
ensure that Merger Sub will be formed solely for the purpose of engaging in the
transactions contemplated by this Agreement and that, prior to the Closing Date,
it will not engage in any business activities or conduct any operations other
than in connection with the transactions contemplated by this Agreement.
Section 6.18. Transfer of Assets. (a) At the direction of Al, C1 shall
cause the applicable C1 Entity to enter into an agreement to sell the General
Motors Building, located at 767 Fifth Avenue, New York, New York, and any
property related thereto (collectively the "GM Building") to one or more parties
designated by A1. Under such agreement, the sale of the GM Building will be
scheduled to close (with "time being of the essence" with respect to such
closing) immediately prior to the consummation of the Merger or at such later
date as A1 may agree to in writing. C1 shall, and shall cause the applicable C1
Entities to, use its and their reasonable best efforts to consummate the sale of
the GM Building in accordance with the terms and conditions of such agreement.
C1 shall cooperate with A1 in the negotiation and consummation of any agreement
relating to the sale of the GM Building, including, without limitation, granting
any potential buyer permission to conduct usual and customary due diligence in
connection with such sale. The applicable C1 Entity shall enter into any
agreement relating to the sale of the GM Building as A1 shall in good faith
direct; provided, however, that, at the option of such C1 Entity, such agreement
shall provide that (i) such C1 Entity shall not be obligated to consummate such
sale unless the Merger will be consummated immediately thereafter and (ii) that
in the event this Agreement is terminated such C1 Entity shall have the right to
terminate such agreement without any cost, penalty or liability to the other
parties thereto. Except as contemplated by the preceding sentence, neither C1
nor any C1 Entity shall make any decision it is entitled to make under, or
relating to, any such agreement, or exercise any remedy in connection with any
such agreement, without the prior written consent of A1.
(b) The parties hereto agree to use their best efforts (it being understood
that such efforts shall not require the expenditure of other than a nominal
amount of cash) to obtain all necessary consents of third
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parties to permit the contribution at or, at A1's request, promptly following
the Effective Time of substantially all the assets of C1 and its Subsidiaries to
Simon DeBartolo Group, L.P. ("A1 Operating Partnership") and/or to limited
liability companies and/or limited partnerships, all the beneficial interests of
which will be held by A1 Operating Partnership, or, at A1's request, to
effectuate the transfer, effective as of the Effective Time or promptly
following the Effective Time, of all or substantially all the economic benefits
of such assets to A1 Operating Partnership and/or such limited liability
companies and/or such limited partnerships.
Section 6.19. Existing Agreements. (a) The parties hereto acknowledge and
agree that all contractual rights to registration of C1 Common Shares and
beneficial interests in shares of C2 Common Stock under the Securities Act in
existence at the Effective Time shall continue in effect after the Effective
Time without being affected by the Merger in accordance with their terms;
provided that in the event the Merger is restructured pursuant to Section
1.2(b), shareholders of CPI having such contractual rights shall have
substantially similar rights with respect to the securities received in the
Merger as so restructured. The parties also agree to negotiate in good faith
with the holders of C1 Common Shares and beneficial interests in shares of C2
Common Stock to modify such registration rights to appropriately reflect the
nature of the transactions contemplated hereby.
(b) By approving this Agreement the shareholders of C1 and C2 having
contractual rights to representation on the Board of Trustees of C1 or the Board
of Directors of C2 shall irrevocably waive, effective as of the Effective Time,
all such rights. C1 acknowledges that each shareholder of C1 and C2 having such
contractual representation rights is entering into a Stockholder Agreement.
ARTICLE VII.
CONDITIONS
Section 7.1. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger and the
other transactions contemplated hereby is subject to the fulfillment, at or
prior to the Closing, of each of the following conditions:
7.1.1. Stockholder Approvals. This Agreement shall have been adopted by
the requisite vote of the stockholders of A1 under the MGCL and the Articles of
Incorporation and By-laws of A1. The issuance of C1 Common Shares and the
related beneficial interests in C2 Common Stock pursuant to this Agreement and
under the Option Plans after the Merger in accordance with this Agreement shall
been approved by the requisite vote of the stockholders of C1 and C2 under the
DGCL and the Certificates of Incorporation and By-laws of C1 and C2.
7.1.2. Registration Statement; State Securities Laws. The Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order suspending such effectiveness shall have been
issued and remain in effect and no proceeding seeking such an order shall be
pending or threatened. C1 and C2 shall have received all state securities or
"Blue Sky" permits and other authorizations necessary to issue the C1 Common
Shares and C2 Common Stock pursuant to this Agreement, under the Option Plans
after the Merger and to issue the C1 Common Shares and C2 Common Stock upon
conversion of the C1 6.50% First Series Preferred Stock.
7.1.3. Exchange Listing. The C1 Common Shares, the related beneficial
interests in shares of C2 Common Stock to be paired with the C1 Common Shares
and the C1 Series A Preferred Stock to be issued pursuant to this Agreement, and
the C1 Common Shares and the paired interests in the C2 Common Stock previously
outstanding and issuable under the Option Plans or upon conversion of the C1
6.50% First Series Preferred Stock and the C1 Series A Preferred Stock after the
Merger, shall have been authorized for listing on the New York Stock Exchange
(the "NYSE"), upon official notice of issuance.
7.1.4. No Injunctions or Restraints. No court of competent jurisdiction or
other competent Governmental or Regulatory Authority shall have enacted, issued,
promulgated, enforced or entered any law or order (whether temporary,
preliminary or permanent) which is then in effect and has the effect of making
illegal or
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otherwise restricting, preventing or prohibiting consummation of the Merger or
the other transactions contemplated by this Agreement.
7.1.5. Tax Opinions. (a) A1 shall have received the opinion, based on
appropriate representations of A1, C1 and C2, and applicable to the A1
stockholders referred to therein, of Willkie Farr & Gallagher, special tax
counsel to A1, dated on or about the date on which the Registration Statement
shall have become effective, which opinion shall have been confirmed in writing
on and as of the Closing Date, generally to the effect that:
(i) The Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code;
(ii) A1 will not recognize gain or loss as a result of the Merger;
(iii) the holders of shares of A1 Common Stock will recognize gain,
but not loss, upon the exchange of each share of A1 Common Stock for C1
Common Shares and C2 Common Stock in the Merger, but only to the extent of
the fair market value of the beneficial interest in shares of C2 Common
Stock received;
(iv) a holder's tax basis in each C1 Common Shares received in the
Merger will be the same as the tax basis of the shares of A1 Common Stock
exchanged therefor, decreased by the fair market value of the beneficial
interest in shares of C2 Common Stock also received in part exchange
therefor in the Merger, and increased by the amount of gain recognized by
the holder in respect of the exchanged share of A1 Common Stock;
(v) a holder's tax basis in the beneficial interest in C2 Common Stock
received in exchange for a portion of a share of A1 Common Stock in the
Merger will be the fair market value of such beneficial interest in C2
Common Stock at the Effective Time;
(vi) a holder's holding period for each C1 Common Share received in
exchange for shares of A1 Common Stock in the Merger will include that
holder's holding period of the share exchanged therefor at the Effective
Time; and
(vii) a holder's holding period for the beneficial interest in C2
Common Stock received in exchange for shares of A1 Common Stock in the
Merger will commence at the Effective Time.
(b) C1 and C2 shall have received the opinion, based on appropriate
representations of A1, C1 and C2 and in form and substance reasonably
satisfactory to C1 and C2, of Cravath, Swaine & Moore, special tax counsel to C1
and C2, dated as of the Closing Date, which opinion shall have been confirmed in
writing on and as of the Closing Date, generally to the effect that:
(i) the Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code;
(ii) C1 will not recognize gain or loss as a result of the Merger;
(iii) neither the consummation of the C1 Delaware Reorganization nor
the consummation of the Merger and the other transactions contemplated by
this Agreement (x) will adversely affect the qualification of C1 or the
Surviving Corporation as a REIT or (y) will adversely affect the status of
C1 Delaware and C2 as grandfathered from the application of Section
269B(a)(3) of the Code pursuant to Section 136(c)(3) of the Deficit
Reduction Act of 1984;
(iv) the distribution of stock made to C1 shareholders pursuant to
Section 1.1.2 of this Agreement will be treated as a tax-free distribution
under Section 305(a) of the Code;
(v) the distribution of cash made to C1 shareholders pursuant to
Section 1.1.2 of this Agreement will be treated as a distribution of
property to which Section 301 of the Code applies; and
(vi) as of December 31, 1997, C1 qualified as a REIT, and if C1
continues its operations in the same manner as the operations of C1 since
January 1, 1997, C1 will continue to qualify as a REIT.
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(c) A1, C1 and C2 shall have received the opinion, based on appropriate
representations of A1 and in form and substance reasonably satisfactory to C1
and C2, of Baker & Daniels, special counsel to A1, dated on or about the date on
which the Registration Statement (or the last amendment thereto) shall have
become effective, which opinion shall have been confirmed in writing on and as
of the Closing Date to the effect that:
(i) At all times from and after December 31, 1993, A1 has qualified as
a REIT, and if A1 continues its operations in the same manner as the
operations of A1 since the beginning of such period, A1 will continue to so
qualify; and
(ii) the consummation of the Merger and the other transactions
contemplated by this Agreement will not adversely affect the ability of A1
or the Surviving Corporation to qualify as a REIT.
7.1.6. C1 Delaware Reorganization. The C1 Delaware Reorganization shall
have occurred.
Section 7.2. Conditions to Obligation of C1 and C2 To Effect the
Merger. The obligation of C1 and C2 to effect the Merger and the other
transactions contemplated hereby is further subject to the fulfillment, at or
prior to the Closing, of each of the following additional conditions (all or any
of which may be waived in whole or in part by C1 and C2 in their sole
discretion):
7.2.1. Representations and Warranties. The representations and warranties
made by A1 in this Agreement that are qualified as to materiality shall be true
and correct, and those not so qualified shall be true and correct in all
material respects, as of the Closing Date as though made on and as of the
Closing Date or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier date,
except as affected by the transactions contemplated by this Agreement, and A1
shall have delivered to C1 and C2 a certificate, dated the Closing Date and
executed in the name and on behalf of it by its Chairman of the Board, President
or any Vice President, to such effect.
7.2.2. Performance of Obligations. A1 shall have performed and complied
with, in all material respects, each agreement, covenant and obligation required
by this Agreement to be so performed or complied with by it at or prior to the
Closing, and A1 shall have delivered to C1 and C2 a certificate, dated the
Closing Date and executed in the name and on behalf of it by its Chairman of the
Board, President or any Vice President, to such effect.
7.2.3. Comfort Letters. C1 and C2 shall have received "cold comfort
letters" in customary form from Arthur Andersen LLP, A1's accountants, the first
dated within five days prior to the date the Proxy Statement is mailed to A1
stockholders and the second dated the Effective Date, in substantially the form
and substance as is customarily given in a similar merger transaction.
7.2.4. No Material Adverse Change. Since the date of the Stockholders'
Meetings, there shall not have been any change, event or occurrence which,
individually or in the aggregate, has had or could reasonably be expected to
have a material adverse effect on the A1 Entities taken as a whole.
7.2.5. Proceedings. All proceedings to be taken on the part of A1 in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to C1 and C2, and C1 and C2 shall have received copies of all such
documents and other evidences as C1 or C2 may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
7.2.6. Governmental and Regulatory and Other Consents and Approvals. Other
than the filings provided for by Section 1.4, all consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
or any other public or private third parties required of A1, C1 or C2 or any of
their respective Entities to consummate the Merger and the other matters
contemplated hereby, the failure of which to be obtained or taken could
reasonably be expected to result in personal liability for any Representative of
C1 or C2 or any Representative of their respective Entities shall have been
obtained, all in form and substance reasonably satisfactory to C1.
Section 7.3. Conditions to Obligation of A1 To Effect the Merger. The
obligations of A1 to effect the Merger and the other transactions contemplated
hereby is further subject to the fulfillment, at or prior to the
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Closing, of each of the following additional conditions (all or any of which may
be waived in whole or in part by A1 in their sole discretion):
7.3.1. Representations and Warranties. The representations and warranties
made by C1 and C2 in this Agreement that are qualified as to materiality shall
be true and correct, and those not so qualified shall be true and correct in all
material respects, as of the Closing Date as though made on and as of the
Closing Date or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier date,
except as affected by the transactions contemplated by this Agreement, and C1
and C2 shall each have delivered to A1 a certificate, dated the Closing Date and
executed in the name and on behalf of it by its Chairman of the Board, President
or any Vice President, to such effect.
7.3.2. Performance of Obligations. C1 and C2 shall have performed and
complied with, in all material respects, each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by C1 or C2 at or
prior to the Closing, and C1 and C2 shall each have delivered to A1 a
certificate, dated the Closing Date and executed in the name and on behalf of it
by its Chairman of the Board, President or any Vice President, to such effect.
7.3.3. Comfort Letters. A1 shall have received "cold comfort letters" in
customary form from Ernst & Young LLP, C1's and C2's accountants, the first
dated within five days prior to the date the Proxy Statement is mailed to C1 and
C2 stockholders and the second dated the Effective Date, in substantially the
form and substance as is customarily given in a similar merger transaction.
7.3.4. No Material Adverse Change. Since the date of the Stockholders'
Meetings, there shall not have been any change, event or occurrence which,
individually or in the aggregate, has had or could reasonably be expected to
have a material adverse effect on the C1/C2 Entities taken as a whole.
7.3.5. Proceedings. All proceedings to be taken on the part of C1 or C2 in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to A1, and A1 shall have received copies of all such documents and
other evidences as A1 may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
7.3.6. Related Agreements. Stockholder Agreements shall have been duly
executed by the holders of (i) at least a majority of the total voting power of
all the outstanding C1 Common Shares and C1 Preference Shares and (ii) at least
two thirds of the total voting power of all the outstanding C1 Preference Shares
and each such agreement shall be in full force and effect.
7.3.7. Governmental and Regulatory and Other Consents and Approvals. Other
than the filings provided for by Section 1.4, all consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
or any other public or private third parties required of A1, C1 or C2 or any of
their respective Entities to consummate the Merger and the other matters
contemplated hereby, the failure of which to be obtained or taken could
reasonably be expected to have a material adverse effect on C1, C2 and their
respective Entities, taken as a whole, or on the ability of A1, C1 or C2 to
consummate the transactions contemplated hereby shall have been obtained, all in
form and substance reasonably satisfactory to A1.
ARTICLE VIII.
TERMINATION, AMENDMENT AND WAIVER
Section 8.1. Termination. This Agreement may be terminated, and the
transactions contemplated hereby may be abandoned, at any time prior to the
Effective Time, whether prior to or after the A1 Stockholders' Approval or the
C1 Stockholders' Approval and the C2 Stockholders' Approval:
(a) by mutual written agreement of the parties hereto duly authorized
by action taken by or on behalf of their respective Boards;
(b) by either A1 or C1 upon notification to the nonterminating party
by the terminating party:
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(i) at any time after November 30, 1998, if the Merger shall not
have been consummated on or prior to such date and such failure to
consummate the Merger is not caused by a breach of this Agreement by the
terminating party or any of its Affiliates;
(ii) if the A1 Stockholders' Approval or the C1 Stockholders'
Approval and C2 Stockholders' Approval shall not be obtained by reason
of the failure to obtain the requisite vote upon a vote held at a
meeting of such stockholders, or any adjournment thereof, called
therefor;
(iii) if there has been a material breach of any representation,
warranty, covenant or agreement on the part of the nonterminating party
set forth in this Agreement, which breach is not curable or, if curable,
has not been cured within 30 days following receipt by the
nonterminating party of notice of such breach from the terminating
party; or
(iv) if any court of competent jurisdiction or other competent
Governmental or Regulatory Authority shall have issued an order making
illegal or otherwise restricting, preventing or prohibiting either of
the Merger and such order shall have become final and nonappealable;
Section 8.2. Effect of Termination. (a) If this Agreement is validly
terminated by either A1 or C1 pursuant to Section 8.1, this Agreement will
forthwith become null and void and there will be no liability or obligation on
the part of either A1, C1 or C2 (or any of their respective Representatives or
affiliates), except (i) that the provisions of Sections 6.11, 6.12 and this
Section 8.2 will continue to apply following any such termination, (ii) that
nothing contained herein shall relieve any party hereto from liability for
wilful breach of its representations, warranties, covenants or agreements
contained in this Agreement and (iii) as provided in paragraph (b) or (c) below.
(b) (i) In the event that this Agreement is terminated (x) by C1 pursuant
to Section 8.1(b)(iii) due to a willful breach by A1 or (y) at any time on or
prior to November 30, 1998 by either party pursuant to Section 8.1 b(ii) as a
result of the A1 Stockholders' Approval not being obtained, then C1 shall become
entitled to receive from A1 a termination fee of $50,000,000 (the "C1
Termination Fee"), payable annually in installments over a two-year period. The
portion of the C1 Termination Fee that shall be payable each year shall equal
the amount that C1 may receive in such taxable year without violating the REIT
Requirements minus $1,000,000 (the "C1 Payment Amount"). On December 20 of each
year in such two-year period C1's independent public accountants shall certify
to A1 the C1 Payment Amount for such year, and A1 shall pay such C1 Payment
Amount to C1 by December 31 of such year by wire transfer to an account
specified by C1. Any portion of the C1 Termination Fee that is not paid to C1 by
the end of the second year shall be forfeited and A1 will have no further
obligation to make any C1 Termination Fee payments.
(ii) A1 acknowledges that the agreements contained in the preceding
paragraph are an integral part of the transactions contemplated by this
Agreement and that, without these agreements, C1 and C2 would not enter into
this Agreement; accordingly, if A1 fails promptly to pay the amounts due in
accordance with the terms of such paragraph, and in order to obtain any such
payment, C1 commences a suit which results in a judgment against A1 for any such
payment, A1 shall pay to C1 its cost and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit.
(c) (i) In the event that this Agreement is terminated by A1 pursuant to
Section 8.1(b)(iii) due to a willful breach by C1, then A1 shall become entitled
to receive from C1 a termination fee of $50,000,000 (the "A1 Termination Fee"),
payable annually in installments over a two-year period. The portion of the A1
Termination Fee that shall be payable each year shall equal the amount that A1
may receive in such taxable year without violating the REIT Requirements minus
$1,000,000 (the "A1 Payment Amount"). On December 20 of each year in such
two-year period A1's independent public accountants shall certify to A1 the A1
Payment Amount for such year, and C1 shall pay such A1 Payment Amount to A1 by
December 31 of such year by wire transfer to an account specified by A1. Any
portion of the A1 Termination Fee that is not paid to A1 by the end of the
second year shall be forfeited and C1 will have no further obligation to make
any A1 Termination Fee payments.
(ii) C1 acknowledges that the agreements contained in the preceding
paragraph are an integral part of the transactions contemplated by this
Agreement and that, without these agreements, A1 would not enter into
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this Agreement; accordingly, if C1 fails promptly to pay the amounts due in
accordance with the terms of such paragraph, and in order to obtain any such
payment, A1 commences a suit which results in a judgment against A1 for any such
payment, C1 shall pay to A1 its cost and expenses (including reasonable
attorneys' fees and expenses) in connection with such suit.
Section 8.3. Amendment. This Agreement may be amended, supplemented or
modified by action taken by or on behalf of the respective Boards of Directors
of the parties hereto at any time prior to the Effective Time, whether prior to
or after the A1 Stockholders' Approval or the C1 Stockholders' Approval and C2
Stockholders' Approval shall have been obtained, but after such adoption and
approval only to the extent permitted by applicable law. No such amendment,
supplement or modification shall be effective unless set forth in a written
instrument duly executed by or on behalf of each party hereto.
Section 8.4. Waiver. At any time prior to the Effective Time any party
hereto, by action taken by or on behalf of its Board of Directors, may to the
extent permitted by applicable law (i) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties of the other parties hereto
contained herein or in any document delivered pursuant hereto or (iii) waive
compliance with any of the covenants, agreements or conditions of the other
parties hereto contained herein. No such extension or waiver shall be effective
unless set forth in a written instrument duly executed by or on behalf of the
party extending the time of performance or waiving any such inaccuracy or
noncompliance. No waiver by any party of any term or condition of this
Agreement, in any one or more instances, shall be deemed to be or construed as a
waiver of the same or any other term or condition of this Agreement on any
future occasion.
ARTICLE IX.
GENERAL PROVISIONS
Section 9.1. Non-Survival of Representations, Warranties, Covenants and
Agreements. The representations, warranties, covenants and agreements contained
in this Agreement or in any instrument delivered pursuant to this Agreement
shall not survive the Merger but shall terminate at the Effective Time, except
for the agreements contained in Article I and Article II, in Sections 6.6, 6.8,
6.9, 6.10, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.17 and 6.18, this Article IX
and the agreements of the "affiliates" of A1 delivered pursuant to Section 6.4,
which shall survive the Effective Time.
Section 9.2. Notices. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally, by overnight courier, by facsimile transmission or mailed
(first-class postage prepaid) to the parties at the following addresses or
facsimile numbers:
If to C1 or C2, to:
Corporate Property Investors
Three Dag Hammarskjold Plaza
305 East 47th Street
New York, New York 10017
Facsimile No.: (212) 319-9845
Attn: General Counsel
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Facsimile No.: (212) 474-3700
Attn: Samuel C. Butler
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If to A1, to:
Simon DeBartolo Group, Inc.
115 West Washington Street
Indianapolis, Indiana 46204
Facsimile No.: (317) 685-7377
Attn: General Counsel
with a copy to:
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
Facsimile No.: (212) 821-8111
Attn: Richard L. Posen
All such notices, requests and other communications will (i) if delivered
personally or by reputable overnight courier to the address as provided in this
Section, be deemed given upon delivery, (ii) if delivered by facsimile
transmission to the facsimile number as provided in this Section, be deemed
given when confirmation is received, and (iii) if delivered by mail in the
manner described above to the address as provided in this Section, be deemed
given upon receipt (in each case regardless of whether such notice, request or
other communication is received by any other person to whom a copy of such
notice, request or other communication is to be delivered pursuant to this
Section). Any party from time to time may change its address, facsimile number
or other information for the purpose of notices to that party by giving notice
specifying such change to the other parties hereto.
Section 9.3. Entire Agreement; Incorporation of Exhibits;
Construction. (a) This Agreement supersedes all prior discussions and
agreements among the parties hereto with respect to the subject matter hereof,
other than the Confidentiality Agreement, which shall survive the execution and
delivery of this Agreement, and contains, together with the Confidentiality
Agreement, the sole and entire agreement among the parties hereto with respect
to the subject matter hereof.
(b) The A1 Disclosure Letter, the C1 Disclosure Letter and any Exhibit
attached to this Agreement and referred to herein are hereby incorporated herein
and made a part hereof for all purposes as if fully set forth herein.
(c) The parties hereby acknowledge that this Agreement has been the subject
of active and complete negotiations among the parties and represents the
parties' agreement. The parties agree that the terms and conditions of this
Agreement shall not be construed in favor of or against any party by reason of
the extent to which any party or its professional advisors participated in the
preparation of this Agreement.
Section 9.4. Public Announcements. Except as otherwise required by law or
the rules of any applicable securities exchange or national market system, so
long as this Agreement is in effect, A1, C1 and C2 will not, and will not permit
any of their respective Representatives to, issue or cause the publication of
any press release or make any other public announcement with respect to the
transactions contemplated by this Agreement without the consent of the other
party, which consent shall not be unreasonably withheld. A1, C1 and C2 will
cooperate with each other in the development and distribution of all press
releases and other public announcements with respect to this Agreement and the
transactions contemplated hereby, and will furnish the other with drafts of any
such releases and announcements as far in advance as practicable.
Section 9.5. No Third-Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and except as provided in Sections
6.9 and 6.10 (which are intended to be for the benefit of the persons entitled
to therein, and may be enforced by any of such persons), it is not the intention
of the parties to confer third-party beneficiary rights upon any other person.
Section 9.6. No Assignment; Binding Effect. Neither this Agreement nor any
right, interest or obligation hereunder may be assigned by any party hereto
without the prior written consent of the other parties
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hereto and any attempt to do so will be void. Subject to the preceding sentence,
this Agreement is binding upon, inures to the benefit of and is enforceable by
the parties hereto and their respective successors and assigns.
Section 9.7. Headings. The table of contents and headings used in this
Agreement have been inserted for convenience of reference only and do not
define, modify or limit the provisions hereof.
Section 9.8. Invalid Provisions. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under any present or future law or
order, and if the rights or obligations of any party hereto under this Agreement
will not be materially and adversely affected thereby, (i) such provision will
be fully severable, (ii) this Agreement will be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
hereof, and (iii) the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom.
Section 9.9. Governing Law. Except to the extent that the Massachusetts
Business Corporation Law, the DGCL or the MGCL is mandatorily applicable to the
Merger and the rights of the stockholders of the Constituent Corporations, this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to a contract executed and performed in such State,
without giving effect to the conflicts of laws principles thereof.
Section 9.10. Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specified terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of competent
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
Section 9.11. Certain Definitions. As used in this Agreement:
(a) except as provided in Section 6.4, the term "affiliate", as
applied to any person, shall mean any other person directly or indirectly
controlling, controlled by, or under common control with, that person; for
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling", "controlled by" and "under common
control with"), as applied to any person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of that person, whether through the ownership of voting
securities, by contract or otherwise;
(b) a person will be deemed to "beneficially" own securities if such
person would be the beneficial owner of such securities under Rule 13d-3
under the Exchange Act, including securities which such person has the
right to acquire (whether such right is exercisable immediately or only
after the passage of time);
(c) the term "business day" means a day other than Saturday, Sunday or
any day on which banks located in the States of Maryland or New York are
authorized or obligated to be closed;
(d) the term "Consolidated Non-Corporate Affiliate" means, with
respect to any party, any trust, limited liability company or partnership,
the accounts of which would be consolidated (including through a
proportional consolidation of assets, liabilities, revenues and expenses)
with those of such party in its consolidated financial statements in
accordance with the principles of consolidation employed by C1 and C2 (if
such party is an affiliate of C1 or C2) or A1 (if such party is an
affiliate of A1);
(e) the term "knowledge" or any similar formulation of "knowledge"
shall mean, with respect to A1, the knowledge of its Chairman, President or
Chief Financial Officer, and with respect to C1 or C2, the knowledge of its
Chairman, President or Chief Financial Officer;
(f) any reference to any event, change or effect being "material" or
"materially adverse" or having a "material adverse effect" on or with
respect to an entity (or group of entities taken as a whole) means such
event, change or effect is material or materially adverse, as the case may
be, to the business,
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properties, assets, liabilities, condition financial or otherwise or
results of operations of such entity (or of such group of entities taken as
a whole); provided, however, that a downgrade in the credit rating of C1
shall be deemed materially adverse to the C1/C2 Entities taken as a whole
if, and only if, such downgrade shall be to a level below a rating of Baa3
(or the equivalent) by Moody's Investors Services, Inc. and BBB- (or the
equivalent) by Standard & Poor's Rating Services;
(g) the term "person" shall include individuals, corporations,
partnerships, trusts, other entities and groups (which term shall include a
"group" as such term is defined in Section 13(d)(3) of the Exchange Act);
(h) the "Representatives" of any entity means such entity's trustees,
directors, officers, employees, legal, investment banking and financial
advisors, accountants and any other agents and representatives, in each
case to the extent acting in such capacity;
(i) the term "Significant Entities" means, with respect to A1, the
Entities of A1 which constitute "significant subsidiaries" under Rule 405
promulgated by the SEC under the Securities Act and, in the case of C1 or
C2, the Entities of either C1 or C2 which constitute "significant
subsidiaries" of C1 and C2 taken as a whole under Rule 405 promulgated by
the SEC under the Securities Act;
(j) the term "Subsidiary" means, with respect to any party, any
corporation of which more than 50 percent of either the equity interests
in, or the voting control of, such corporation is, directly or indirectly
through Entities or otherwise, beneficially owned by such party; and
(k) following the C1 Delaware Reorganization, (i) all references to
"Cl" shall be deemed to refer to C1 Delaware, (ii) all references to C1
Common Shares shall be deemed to refer to shares of C1 Delaware Common
Stock, (iii) all references to any other shares of any class of beneficial
interest in or of C1 shall be deemed to refer to shares of capital stock of
equivalent class of C1 Delaware, (iv) all references to shareholders of C1
shall be deemed to refer to stockholders of C1 Delaware and (v) all
references to the Board of Trustees of C1 shall be deemed to refer to the
Board of Directors of C1 Delaware.
Section 9.12. Waiver of Jury Trial. EACH OF THE PARTIES HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, FOR ITSELF AND FOR
THE THIRD- PARTY BENEFICIARIES HEREUNDER, ANY AND ALL RIGHT TO TRIAL BY JURY IN
ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
Section 9.13. Counterparts. This Agreement may be executed in any number
of counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
signed by its officer thereunto duly authorized as of the date first above
written.
Attest: SIMON DEBARTOLO GROUP, INC.,
/s/ JAMES M. BARKLEY By /s/ RICHARD S. SOKOLOV
- ------------------------------------------ -----------------------------------------------------
Secretary Name: Richard S. Sokolov
Title: President and Chief Operating Officer
Attest: CORPORATE PROPERTY INVESTORS,*
By /s/ HANS C. MAUTNER
- ------------------------------------------ -----------------------------------------------------
Secretary Name: Hans C. Mautner
Title: Chairman and Chief Executive Officer
Attest: CORPORATE REALTY CONSULTANTS, INC.,
By /s/ HANS C. MAUTNER
- ------------------------------------------ -----------------------------------------------------
Secretary Name: Hans C. Mautner
Title: Chairman and Chief Executive Officer
- ---------------
* Corporate Property Investors is the designation of the Trustees under a
Declaration of Trust, as amended and restated, on file with the Secretary of
the Commonwealth of Massachusetts, and neither the shareholders nor the
Trustees, officers, employees or agents of the Trust created thereby, nor any
of their personal assets, shall be liable hereunder, and all persons dealing
with the Trust shall look solely to the Trust estate for the payment of any
claims hereunder or for the performance thereof.
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ANNEX B
[MERRILL LYNCH LETTERHEAD]
February 19, 1998
Board of Directors
Simon DeBartolo Group, Inc.
115 West Washington Street
Indianapolis, Indiana 46204
Members of the Board of Directors:
Simon DeBartolo Group, Inc. (the "Company"), Corporate Property Investors
("CPI") and Corporate Realty Consultants, Inc. ("CRCI") have entered into an
Agreement and Plan of Merger, dated as of February 18, 1998 (the "Agreement"),
pursuant to which a newly formed subsidiary of CPI Delaware (as defined below)
will be merged with the Company (the "Merger") and, as a result, the Company
will become a wholly-owned subsidiary of CPI Delaware. The Merger and all of
the other transactions contemplated by the Agreement are referred to herein as
the "Transaction." Pursuant to the Agreement, at the effective time of the
Merger (the "Effective Time"), (i) each outstanding share of common stock, par
value $.0001 per share, of the Company ("Company Class A Common Stock") will be
converted into the right to receive one share of common stock, par value $.0001
per share, of CPI Delaware ("CPI Class A Common Stock"), (ii) each outstanding
share of class B common stock, par value $.0001 per share, of the Company
("Company Class B Common Stock") will be converted into the right to receive
one share of class B common stock, par value $.0001 per share, of CPI Delaware
("CPI Class B Common Stock") and (iii) each outstanding share of class C common
stock, par value $.0001 per share, of the Company ("Company Class C Common
Stock" and together with the Company Class A Common Stock and the Company Class
B Common Stock, the "Company Common Stock") will be converted into the right to
receive one share of class C common stock, par value $.0001 per share, of CPI
Delaware ("CPI Class C Common Stock" and together with the CPI Class A Common
Stock and the CPI Class B Common Stock, the "CPI Common Stock"); in each case,
other than any shares of such stock owned by the Company as treasury stock or
by CPI Delaware, CRCI or certain of their affiliates, all of which shall be
canceled, or held by stockholders who properly exercise their rights under
applicable law to demand payment of the fair value of their stock. Also at the
Effective Time, CPI Delaware and CRCI will take such action as is necessary so
that each and every share of CPI Common Stock outstanding or issued in
connection with the Transaction will be entitled to a beneficial interest in
shares of CRCI common stock, par value $.10 per share, which shares are paired
with, and are transferable only in combination with, CPI Class A Common Stock,
CPI Class B Common Stock and CPI Class C Common Stock, as the case may be (the
"CPI Paired Shares").
As a condition to the respective obligation of each party to effect the
Merger, and prior to the record date for the stockholder meeting of CPI to be
held to vote on the Transaction, CPI will reorganize as a Delaware corporation
(as so reorganized, "CPI Delaware"). Immediately prior to the Effective Time,
and as part of the Transaction, CPI Delaware will declare the following
dividends per share of CPI Class
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A Common Stock, payable to the holders of record of CPI Class A Common Stock
immediately preceding the Effective Time: (i) a cash dividend consisting of an
amount equal to the Cash Amount (as defined below); (ii) a stock dividend
consisting of 1.0818 new shares of CPI Class A Common Stock; and (iii) a stock
dividend consisting of 0.19 of a share of Series A Convertible Preferred Stock,
par value $.01 per share, of CPI Delaware. The "Cash Amount" is equal to $90.00
per share of CPI Class A Common Stock, subject to adjustment as follows: (i) if
the average of the closing prices per share for the Company Class A Common
Stock on the New York Stock Exchange for the 20 consecutive trading days ending
on the fifth trading day prior to the Effective Time (the "Market Price")
exceeds $38.67, then the Cash Amount shall be reduced by an amount equal to
such excess multiplied by 2.0818, and (ii) if the Market Price is less than
$28.58, then the Cash Amount shall be increased by an amount equal to such
deficiency multiplied by 2.0818. The terms and conditions of the Transaction
are more fully set forth in the Agreement. With your consent, we have assumed
that the Company will not exercise its right pursuant to Section 1.2(b) of the
Agreement to change the structure of the Transaction.
You have asked us whether, in our opinion, the consideration to be
received by the holders of Company Common Stock pursuant to the Transaction is
fair from a financial point of view to such holders.
In arriving at the opinion set forth below, we have, among other
things:
(1) Reviewed certain publicly available business and financial
information relating to the Company that we deemed to be
relevant;
(2) Reviewed certain business and financial information relating
to CPI that we deemed to be relevant, including but not
limited to CPI's Annual Report, dated December 31, 1996, CPI's
Quarterly Report to Shareholders, dated September 30, 1997,
and CPI's draft 1997 audited financial statements;
(3) Reviewed certain information, including financial forecasts,
relating to the business, earnings, funds from operations,
cash flow, assets, liabilities and prospects of the Company,
CPI and CRCI, as well as the amount and timing of the cost
savings and related expenses, synergies and revenue
enhancements expected to result from the Transaction (the
"Expected Synergies"), furnished to us by the Company, CPI and
CRCI respectively;
(4) Conducted discussions with members of senior management and
representatives of the Company, CPI and CRCI concerning the
matters described in clauses 1 and 2 above, as well as their
respective businesses and prospects before and after giving
effect to the Transaction and the Expected Synergies;
(5) Reviewed the appraisal dated February 5, 1998 (the
"Appraisal") of the assets of CPI and CRCI as of December 31,
1997, as prepared by Landauer Associates, Inc. (the
"Appraiser");
(6) Reviewed the results of operations of the Company, CPI and
CRCI and compared them with those of certain publicly traded
companies that we deemed to be relevant;
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(7) Compared the proposed financial terms of the Transaction with the
financial terms of certain other transactions that we deemed to be
relevant;
(8) Participated in certain discussions and negotiations among
representatives of the Company, CPI and CRCI and their financial
and legal advisors;
(9) Reviewed the potential pro forma impact of the Transaction;
(10) Reviewed the Agreement; and
(11) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company, CPI or CRCI, or been furnished with any such
evaluation or appraisal other than the Appraisal. In addition, we have not
assumed any obligation to conduct, nor have we conducted, any physical
inspection of the properties or facilities of the Company, CPI or CRCI. With
respect to the financial forecast information and the Expected Synergies
furnished to or discussed with us by the Company, CPI or CRCI, we have assumed
that they have been reasonably prepared and reflect the best currently available
estimates and judgment of the Company's CPI's or CRCI's management as to the
expected future financial performance of the Company, CPI or CRCI as the case
may be, and the Expected Synergies. Additionally, we have assumed that the
Appraisal has been reasonably prepared and reflects the best available estimates
and judgments of the Appraiser as to the fair value of the assets of CPI and
CRCI as of the date thereof. We have further assumed that the Transaction, upon
approval by the stockholders of the Company, will qualify as a tax-free
reorganization for U.S. federal income tax purposes.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Transaction, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Transaction. We have also assumed
that the combined entity will continue to qualify after the Transaction as a
Real Estate Investment Trust for federal income tax purposes. In addition, we
have assumed that the consummation of the Transaction will not adversely affect
the status of CPI Delaware, as successor to CPI, and CRCI as grandfathered from
the application of Section 269B(a)(3) of the Internal Revenue Code pursuant to
Section 136(c)(3) of the Deficit Reduction Act of 1984.
We are acting as financial advisor to the Company in connection with the
Transaction and will receive a fee from the Company for our services, a
significant portion of which is contingent upon the consummation of the
Transaction. In addition, the Company has agreed to indemnify us for certain
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304
liabilities arising out of our engagement. We have, in the past, provided
financial advisory and financing services to the Company and may continue to do
so and have received, and may receive, fees for the rendering of such services.
In addition, in the ordinary course of our business, we may actively trade
Company Common Stock and other securities of the Company, for our own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities. As of the date hereof, Merrill Lynch & Co.
held approximately 8.4% of the outstanding shares of the Company Class A Common
Stock.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Transaction and does not constitute a
recommendation to any shareholder of the Company as to how such shareholder
should vote on the proposed Transaction or any other matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Company Common Stock will trade following the announcement of the Transaction
or as to the prices at which the CPI Paired Shares will trade following the
consummation of the Transaction.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the consideration to be received by the holders of
Company Common Stock pursuant to the Transaction is fair from a financial point
of view to such holders.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4
305
ANNEX C
[LAZARD FRERES & CO. LLC LETTERHEAD]
February 18, 1998
The Board of Trustees
Corporate Property Investors
Three Dag Hammarskjold Plaza
305 East 47th Street
New York, New York 10017
Gentlemen:
We understand that Corporate Property Investors (Corporate Property
Investors and its corporate successor are each referred to herein as "CPI"),
Corporate Realty Consultants, Inc. ("CRC") and Simon DeBartolo Group, Inc.
("Simon") have entered into an Agreement and Plan of Merger dated as of
February 18, 1998 (the "Agreement") pursuant to which, among other things, CPI
will declare a dividend to its shareholders and immediately thereafter a newly
formed wholly owned subsidiary of CPI will merge with and into Simon (the
dividend and merger being collectively referred to as the "Transaction"). In
the Transaction, (i) each CPI common shareholder will retain its CPI common
shares and, in addition, will receive with respect to each common share $90 in
cash (subject to adjustment based on the value of Simon common stock), 1.0818
newly issued CPI common shares and 0.19 of a share of a new series of 6.50%
convertible preferred stock of CPI having $100 liquidation preference per share
and other terms as set forth in the Agreement and (ii) each CPI preferred
shareholder will retain its CPI preference shares, the conversion price of
which shall be adjusted as set forth in the Agreement and in the Certificate of
Designation for such preference shares. We note that each common shareholder of
Simon will receive in exchange for each share of Simon common stock one share
of a substantially similar series of the common stock of CPI. We also note that
each share of common stock of CPI including the new series of CPI common stock
that will be issued in the merger is or will be entitled to an indirect
beneficial interest in the common stock of CRC.
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of CPI of the consideration to be received or
retained by them, including beneficial interests in CRC, in the Transaction. In
connection with this opinion, we have:
(i) Reviewed the financial terms and conditions of the Agreement;
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(ii) Reviewed certain publicly available financial information
concerning CPI, CRC and Simon;
(iii) Reviewed various financial forecasts and other data provided
to us by CPI, CRC and Simon relating to their respective
businesses;
(iv) Held discussions with members of the senior managements of
CPI, CRC and Simon concerning their respective businesses and
prospects of CPI and CRC together on one hand and Simon on the
other, the strategic objectives of each, and possible benefits
which might be realized following the Transaction;
(v) Reviewed public information with respect to certain
publicly-traded real estate investment trusts (REITs) and
other companies in lines of business we believe to be
generally comparable to the businesses of CPI and CRC together
on one hand and Simon on the other;
(vi) Reviewed the financial terms of certain recent business
combinations involving REITs or companies in lines of
businesses we believe to be generally comparable to those of
CPI and CRC together on one hand and Simon on the other;
(vii) Reviewed the historical market prices and trading volume of
the shares of Simon's common stock;
(viii) Analyzed the pro forma financial impact of the Transaction on
CPI and CRC together on one hand and Simon on the other;
(ix) Conferred with and relied upon the counsel to the Board of
Trustees as to all legal matters pertaining to the Agreement
and the Transaction; and
(x) Conducted such other financial studies, analyses and
investigations as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information, and have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of CPI, CRC or Simon. It is expressly
understood that this opinion does not constitute a valuation or appraisal of
the shares of common stock, assets or liabilities of CPI, CRC or Simon. In
addition, we are not expressing any opinion as to the price or range of prices
at which the common stock of Simon or CPI and CRC may trade subsequent to the
announcement of the execution of the Agreement or the consummation of the
Transaction. With respect to financial forecasts, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgements of management of CPI, CRC and Simon as to the future
financial performance of CPI and CRC together on one hand and Simon on the
other. We assume no responsibility for and express no view as to such forecasts
or the assumptions on which they are based. Further, our opinion is necessarily
based on economic, monetary, market and other conditions as in effect on, and
the information made available to us as of, the date hereof. It should be
understood that subsequent developments may affect this opinion and that we do
not have any obligation to update, revise, or reaffirm this opinion.
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In rendering our opinion, we have assumed that the Transaction will be
consummated on the terms described in the Agreement, without any waiver of any
material terms or conditions by CPI or CRC and that obtaining necessary
regulatory approvals for the Transaction will not have an adverse effect on CPI,
CRC or Simon. We have noted that the 6.50% Preference Shares of CPI are
immediately convertible, and we have treated them, for the purpose of this
opinion, as though they had been converted into the shares of common stock of
CPI. As you know, CPI received proposals from other parties with respect to
merger transactions involving CPI. In this regard, we are expressing no opinion
herein as to the fairness, from a financial point of view, to the shareholders
of CPI of the consideration proposed by any such other parties, and no opinion
is expressed as to the relative values to be received by the shareholders of CPI
under the Transaction and under such other proposals.
Lazard Freres & Co. LLC is acting as investment banker to CPI in connection
with the Transaction and will receive a fee for our services, a substantial
portion of which is contingent upon the closing of the Transaction. Our Firm has
provided investment banking services to CPI in the past and has received
customary fees for such services. In the ordinary course of its business, our
Firm may actively trade the debt and equity securities of CPI or Simon for its
own account or for the accounts of customers and, accordingly, we may at any
time hold long or short positions in such securities. In addition, we call to
your attention that a Vice Chairman of our Firm is a Trustee of CPI.
Our engagement has been, and the opinion expressed herein is for the
benefit of the Board of Trustees of CPI. The opinion expressed herein does not
constitute a recommendation to the shareholders of CPI or CRC as to how they
should vote at the shareholders' meeting in connection with the Transaction.
It is understood that this letter may not be disclosed or otherwise
referred to without our prior consent, except as may otherwise be required by
law or by a court of competent jurisdiction, except that it may be reproduced in
its entirety and described in a proxy statement mailed to the shareholders of
CPI and CRC.
Based on and subject to the foregoing, we are of the opinion that the
consideration to be received or retained by the shareholders of CPI, including
beneficial interests in CRC, in the Transaction is fair to them from a financial
point of view.
Very truly yours,
LAZARD FRERES & CO. LLC
By /s/ Matthew J. Lustig
----------------------
Matthew J. Lustig
Managing Director
cc: Corporate Realty Consultants, Inc.
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ANNEX D
[JP MORGAN LETTERHEAD]
February 18, 1998
The Board of Trustees
Corporate Property Investors
Three Dag Hammarskjold Plaza
305 East 47th Street
New York, NY 10017
Attention: Hans C. Mautner
Chairman of the Board and Chief Executive Officer
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Corporate Property Investors (Corporate Property
Investors and its corporate successor are referred to herein as "CPI") of the
consideration proposed to be received or retained by them in connection with the
transactions contemplated by the Agreement and Plan of Merger, dated as of
February 18, 1998 (the "Agreement"), among CPI, Corporate Realty Consultants,
Inc. ("CRC") and Simon DeBartolo Group, Inc. ("Simon"), pursuant to which, among
other things, CPI will declare a dividend to its shareholders and immediately
thereafter a newly formed wholly owned subsidiary of CPI will merge with and
into Simon (the dividend and the merger being referred to collectively as the
"Transaction"). In the Transaction (i) each CPI common shareholder will retain
its CPI common shares and will receive with respect to each common share $90 in
cash (subject to adjustment based on the value of Simon common stock), 1.0818
newly issued CPI common shares and 0.19 shares of a new series of 6.50%
convertible preferred stock of CPI having a $100 liquidation preference per
share and other terms as set forth in the Agreement; (ii) each CPI preferred
shareholder will retain its CPI preference shares, the conversion price of which
shall be adjusted as set forth in the Agreement and in the Certificate of
Designation for such preference shares; and (iii) each common shareholder of
Simon will receive in exchange for each share of Simon common stock one share of
a substantially similar series of the common stock of CPI. We note that each
share of common stock of CPI including the new series of CPI common stock that
will be issued in the merger is or will be entitled to an indirect beneficial
interest in the common stock of CRC.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) certain
information concerning the business of CPI and CRC, together, and certain other
companies engaged in businesses comparable to those of CPI and CRC, together,
and the reported market prices for certain other companies' securities deemed
comparable; (iii) publicly available terms of certain transactions involving
companies comparable to CPI and CRC, together, and the consideration received
for such companies; (iv) current and historical market prices of the common
stock of Simon; (v) the audited financial statements of CPI and Simon for the
fiscal year ended December 31, 1996 and for the nine-month period ended
September 30, 1997;
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(vi) the audited financial statements of CPI for the fiscal year ended December
31, 1997; (vii) certain agreements with respect to outstanding indebtedness or
obligations of CPI and Simon; (viii) certain internal financial analyses and
forecasts prepared by CPI and CRC, together, on the one hand, and Simon, on the
other, and their respective managements; and (ix) the terms of other business
combinations that we deemed relevant.
In addition, we have held discussions with certain members of the management of
CPI, CRC and Simon with respect to certain aspects of the Transaction, the past
and current business operations of CPI and CRC, together, on the one hand, and
Simon, on the other, the financial condition and future prospects and operations
of CPI and CRC, together, on the one hand, and Simon, on the other, the effects
of the Transaction on the financial condition and future prospects of CPI and
CRC, together, on the one hand, and Simon, on the other, and certain other
matters we believed necessary or appropriate to our inquiry.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was
publicly available or was furnished to us by CPI, CRC and Simon or otherwise
reviewed by us, and we have not assumed any responsibility or liability
therefor. Though we have not conducted any valuation or appraisal of any assets
or liabilities, nor have any such valuations or appraisals been provided to us,
we have noted the per share estimates of the net asset value of CPI and CRC,
together, as of December 31, 1996 and December 31, 1997, as determined by
Landauer Associates, Inc. In relying on financial analyses and forecasts
provided to us, we have assumed that they have been reasonably prepared based
on assumptions reflecting the best currently available estimates and judgments
by management as to the expected future results of operations and financial
condition of CPI and CRC, together, on the one hand, and Simon, on the other,
to which such analyses or forecasts relate. We have also assumed that the
Transaction will have the tax consequences described in discussions with, and
materials furnished to us by, representatives of CPI and CRC, and that the
other transactions contemplated by the Agreement will be consummated as
described in the Agreement. We have relied as to all legal matters relevant to
rendering our opinion upon the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We are expressing no opinion herein as to the price of which Simon's stock will
trade at any future time. We have noted that the 6.50% Preference Shares of CPI
are immediately convertible, and we have treated them, for the purpose of this
opinion, as though they had been converted into the shares of common stock of
CPI and a related beneficial interest in CRC. As you know, CPI received
proposals from other parties with respect to possible merger transactions
involving CPI and CRC. In this regard, we are expressing no opinion herein as to
the fairness, from a financial point of view, to CPI's shareholders of the
consideration offered by any such parties, and no opinion is expressed as to the
relative values of any such proposal as compared with the Transaction.
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We have acted as financial advisor to CPI with respect to the proposed
Transaction and will receive a fee from CPI for our services. We will also
receive an additional fee if the proposed Transaction is consummated. We have
in the past provided investment banking services to CPI and Simon for which we
have received customary fees. Certain principals of CPI are and have been
private banking clients of J.P. Morgan & Co. Incorporated and its affiliates.
In addition, our affiliate, Morgan Guaranty Trust Company of New York, is the
co-lead agent on revolving credit facilities for both CPI and Simon. In the
ordinary course of their businesses, our affiliates may actively trade the debt
and equity securities of CPI, CRC or Simon for their own account or for the
accounts of customers and, accordingly, they may at any time hold long or short
positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the consideration to be received or retained by the shareholders of
CPI, including beneficial interests in CRC, in the proposed Transaction is
fair, from a financial point of view, to such shareholders.
This letter is provided to the Board of Trustees of CPI in connection with and
for the purposes of their evaluation of the Transaction. This opinion does not
constitute a recommendation to any shareholder of CPI or CRC as to how such
shareholder should vote with respect to the Transaction. This opinion may be
reproduced in full and described in any proxy or information statement mailed
to shareholders of CPI and CRC.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ Peter E. Baccile
-------------------------------
Name: Peter E. Baccile
Title: Managing Director
cc:
Board of Directors
Corporate Realty Consultants, Inc.
311
ANNEX E
ANNOTATED CODE OF MARYLAND
CORPORATIONS AND ASSOCIATIONS
TITLE 3. CORPORATIONS IN GENERAL -- EXTRAORDINARY ACTIONS
SUBTITLE 2. RIGHTS OF OBJECTING STOCKHOLDERS
MD. CORPORATIONS AND ASSOCIATIONS CODE ANN. SEC. 3-201 (1997)
sec. 3-201. "Successor" defined
(a) Corporation amending charter. -- In this subtitle, except as provided
in subsection (b) of this section, "successor" includes a corporation which
amends its charter in a way which alters the contract rights, as expressly set
forth in the charter, of any outstanding stock, unless the right to do so is
reserved by the charter of the corporation.
(b) Corporation whose stock is acquired. -- When used with reference to a
share exchange, "successor" means the corporation the stock of which was
acquired in the share exchange.
sec. 3-202. Right to fair value of stock
(a) General rule. -- Except as provided in subsection (c) of this section,
a stockholder of a Maryland corporation has the right to demand and receive
payment of the fair value of the stockholder's stock from the successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action
under sec. 3-105 (d) of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of any outstanding
stock and substantially adversely affects the stockholder's rights, unless
the right to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by sec. 3-602 of this title or
exempted by sec. 603 (b) of this title.
(b) Basis of fair value. --
(1) Fair value is determined as of the close of business:
(i) With respect to a merger under sec. 3-106 of this title of a 90
percent or more owned subsidiary into its parent, on the day notice is
given or waived under sec. 3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value
may not include any appreciation or depreciation which directly or
indirectly results from the transaction objected to or from its proposal.
(3) In any transaction governed by sec. 3-602 of this title or
exempted by sec. 3-603 (b) of this title, fair value shall be value
determined in accordance with the requirements of sec. 3-603 (b) of this
title.
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(c) When right to fair value does not apply. -- Unless the transaction is
governed by sec. 3-602 of this title or is exempted by sec. 3-603 (b) of this
title, a stockholder may not demand the fair value of his stock and is bound by
the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc.:
(i) With respect to a merger under sec. 3-106 of this title of a 90
percent or more owned subsidiary into its parent, on the date notice is
given or waived under sec. 3-106; or
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction objected
to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as expressly
set forth in the charter, and the charter does not reserve the right to
do so; or
(ii) The stock is to be changed or converted in whole or in part in
the merger into something other than either stock in the successor or
cash, scrip, or other rights or interests arising out of provisions for
the treatment of fractional shares of stock in the successor; or
(3) The stock is that of an open-end investment company registered
with the Securities and Exchange Commission under the Investment Company
Act of 1940 and the value placed on the stock in the transaction is its net
asset value.
sec. 3-203. Procedure by stockholder
(a) Specific duties. -- A stockholder of a corporation who desires to
receive payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the
proposed transaction:
(i) With respect to a merger under sec. 3-106 of this title of a 90
percent or more owned subsidiary into its parent, within 30 days after
notice is given or waived under sec. 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for
record, shall make a written demand on the successor for payment for his
stock, stating he number and class of shares for which he demands payment.
(b) Failure to comply with section. -- A stockholder who fails to comply
with this section is bound by the terms of the consolidation, merger, share
exchange, transfer of assets, or charter amendment.
sec. 3-204. Effect of demand on dividend and other rights
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of
business on the day as at which fair value is to be determined under
sec. 3-202 of this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that
stock, except the right to receive payment of its fair value.
sec. 3-205. Withdrawal of demand
A demand for payment may be withdrawn only with the consent of the
successor.
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sec. 3-206. Restoration of dividend and other rights
(a) When rights restored. -- The rights of a stockholder who demands
payment are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required
by his subtitle;
(3) A court determines that the stockholder is not entitled to relief;
or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. -- The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration.
sec. 3-207. Notice and offer to stockholders
(a) Duty of successor. --
(1) The successor promptly shall notify each objecting stockholder in
writing of the date the articles are accepted for record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the
corporation which issued the stock:
(i) A balance sheet as of a date not more than six months before
the date of the offer;
(ii) A profit and loss statement for the 12 months ending on the
date of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) Manner of sending notice. -- The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by certified
mail, return receipt requested, bearing a postmark from the United States Postal
Service, at the address he gives the successor in writing, or, if none, at his
address as it appears on the records of the corporation which issued the stock.
sec. 3-208. Petition for appraisal; consolidation of proceedings; joinder of
objectors
(a) Petition for appraisal. -- Within 50 days after the Department accepts
the articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not have a
principal office in this State, where the resident agent of the successor is
located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors. --
(1) If more than one appraisal proceeding is instituted, the court
shall direct the consolidation of all the proceedings on terms and
conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
sec. 3-209. Notation on stock certificate
(a) Submission of certificate. -- At any time after a petition for
appraisal is filed, the court may require the objecting stockholders parties to
the proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation. -- If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name
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314
of the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
sec. 3-210. Appraisal of fair value
(a) Court to appoint appraisers. -- If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers -- Filing. -- Within 60 days after their
appointment, unless the court sets a longer time, the appraisers shall determine
the fair value of the stock as of the appropriate date and file a report stating
the conclusion of the majority as to the fair value of the stock.
(c) Same -- Contents. -- The report shall state the reasons for the
conclusion and shall include a transcript of all testimony and exhibits offered.
(d) Same -- Service; objection. --
(1) On the same day that the report is filed, the appraisers shall
mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to
it and request a hearing.
sec. 3-211. Action by court on appraisers' report
(a) Order of court. -- The court shall consider the report and, on motion
of any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order. --
(1) If the appraisers' report is confirmed or modified by the order,
judgment shall be entered against the successor and in favor of each
objecting stockholder party to the proceeding for the appraised fair value
of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for
the stockholder; or
(ii) Remit the proceedings to the same or other appraisers on terms
and conditions it considers proper.
(c) Judgment includes interest. --
(1) Except as provided in paragraph (2) of this subsection, a judgment
for the stockholder shall award the value of the stock and interest from
the date as at which fair value is to be determined under sec. 3-202 of
this subtitle.
(2) The court may not allow interest if it finds that the failure of
the stockholder to accept an offer for the stock made under sec. 3-207 of
this subtitle was arbitrary and vexatious or not in good faith. In making
this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to
the stockholder; and
(iii) Any other circumstances it considers relevant.
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(d) Costs of proceedings. --
(1) The costs of the proceedings, including reasonable compensation
and expenses of the appraisers, shall be set by the court and assessed
against the successor. However, the court may direct the costs to be
apportioned and assessed against any objecting stockholder if the court
finds that the failure of the stockholder to accept an offer for the stock
made under sec. 3-207 of this subtitle was arbitrary and vexatious or not
in good faith. In making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to
the stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable
fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under sec.
3-207 of this subtitle; or
(ii) The value of the stock determined in the proceeding materially
exceeds the amount offered by the successor.
(e) Effect of judgment. -- The judgment is final and conclusive on all
parties and has the same force and effect as other decrees in equity. The
judgment constitutes a lien on the assets of the successor with priority over
any mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
sec. 3-212. Surrender of stock
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it,
endorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the
certificates and sufficient indemnity bond are furnished.
sec. 3-213. Rights of successor with respect to stock
(a) General rule. -- A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders of
record of that stock on a record date after the close of business on the day as
at which fair value is to be determined under sec. 3-202 of this subtitle.
(b) Successor in transfer of assets. -- After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. -- Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
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ANNEX F
VOTING PREFERRED AMENDMENT
SDG CHARTER AMENDMENTS TO
ARTICLE SIXTH (c-3)(7)(A) AND ARTICLE SIXTH (c-4)(7)(A)
(Filed with the Maryland State Department as Article THIRD (c-3)(7)(A) of
the Articles Supplementary to the SDG Charter, dated September 26, 1996 and
Article THIRD (c-4)(7)(A) of the Articles Supplementary to the SDG Charter,
dated July 8, 1997, respectively.)
The Voting Preferred Amendment will be filed with the Maryland State
Department and become effective immediately thereafter.
8 3/4% Series B Cumulative Redeemable Preferred Stock:
Article SIXTH (c-3)
(7) (A) Each share of Series B Preferred Stock shall have one vote for the
election of directors of the Corporation and as otherwise provided in this
paragraph (c-3) and in paragraph (c) to Article SEVENTH of the Charter. Shares
of the Series B Preferred Stock shall not have cumulative voting rights. The
holders of the shares of Series B Preferred Stock shall vote with the holders of
Common Stock, Class B Common Stock, Class C Common Stock and Series C Preferred
Stock (voting together as a single class) to elect directors (other than the
directors to be elected by the holders of the Class B Common Stock and the Class
C Common Stock voting as separate classes).
7.89% Series C Cumulative Step-Up Premium Rate Preferred Stock:
Article SIXTH (c-4)
(7) (A) Each share of Series C Preferred Stock shall have one vote for the
election of directors of the Corporation and as otherwise provided in this
paragraph (c-3) and in paragraph (c) to Article SEVENTH of the Charter. Shares
of the Series C Preferred Stock shall not have cumulative voting rights. The
holders of the shares of Series C Preferred Stock shall vote with the holders of
Common Stock, Class B Common Stock, Class C Common Stock and Series B Preferred
Stock (voting together as a single class) to elect directors (other than the
directors to be elected by the holders of the Class B Common Stock and the Class
C Common Stock voting as separate classes).
317
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF
SIMON DEBARTOLO GROUP, INC.
FOR USE AT THE
SPECIAL MEETING OF STOCKHOLDERS TO BE
HELD ON SEPTEMBER 23, 1998
The undersigned holder of shares of common stock of Simon DeBartolo Group,
Inc., a Maryland Corporation ("SDG"), hereby appoints Herbert Simon and David
Simon, and each of them, with power of substitution to each, to vote all shares
of common stock which the undersigned is entitled to vote at the special meeting
(the "SDG Special Meeting") of stockholders of SDG to be held at The
Indianapolis Hyatt Regency, One South Capitol Avenue, Indianapolis, Indiana on
September 23, 1998 at 10:00 a.m. (Indianapolis time) and at every adjournment or
postponement thereof and otherwise to represent the undersigned at this meeting
with all powers possessed by the undersigned if present at the SDG Special
Meeting, hereby revoking all prior proxies on the matters set below, as
indicated below. The undersigned hereby acknowledges receipt of the Notice of
Special Meeting of Stockholders and of the accompanying Proxy
Statement/Prospectus.
SDG SPECIAL MEETING
1. [ ] VOTE FOR or [ ] VOTE AGAINST or [ ] ABSTAIN ON the approval and
adoption of an amendment to SDG's Amended and Restated Articles of
Incorporation to provide certain voting rights to holders of SDG
preferred stock;
2. [ ] VOTE FOR or [ ] VOTE AGAINST or [ ] ABSTAIN ON the approval and
adoption of an Agreement and Plan of Merger, dated as of February 18,
1998, by and among SDG, Corporate Property Investors, Inc. and Corporate
Realty Consultants, Inc.; and
3. In their discretion with respect to such other business as may properly
come before the SDG Special Meeting or any adjournment or postponement
thereof.
THE SDG BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2 AND 3 AT
THE SDG SPECIAL MEETING.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1, 2 AND 3.
The signer hereby revokes all
proxies heretofore given by the
signer to vote at the SDG Special
Meeting or any adjournments or
postponements thereof. Please sign
exactly as your name appears hereon.
Joint owners should each sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
------------------------------------
Signature(s)
------------------------------------
Date
318
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF
SIMON DEBARTOLO GROUP, INC.
FOR USE AT THE
ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD ON SEPTEMBER 23, 1998
The undersigned holder of shares of common stock of Simon DeBartolo Group,
Inc., a Maryland Corporation ("SDG"), hereby appoints Herbert Simon and David
Simon, and each of them, with power of substitution to each, to vote all shares
of common stock which the undersigned is entitled to vote at the annual meeting
(the "SDG Annual Meeting") of stockholders of SDG to be held at The Indianapolis
Hyatt Regency, One South Capitol Avenue, Indianapolis, Indiana on September 23,
1998 at 10:00 a.m. (Indianapolis time) and at every adjournment or postponement
thereof and otherwise to represent the undersigned at this meeting with all
powers possessed by the undersigned if present at the SDG Annual Meeting, hereby
revoking all prior proxies on the matters set below, as indicated below. The
undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and of the accompanying Proxy Statement/Prospectus.
SDG ANNUAL MEETING
1. [ ] VOTE FOR or [ ] WITHHOLD VOTE for all of the following nominees for
election to the SDG Board of Directors: Robert E. Angelica, Birch Bayh,
Hans C. Mautner, G. William Miller and Pieter S. van den Berg;
[ ] VOTE FOR, except withhold from the following nominee(s):
------------------------------------------- ;
2. [ ] VOTE FOR or [ ] VOTE AGAINST or [ ] ABSTAIN ON approval of the 1998
Stock Incentive Plan;
3. [ ] VOTE FOR or [ ] VOTE AGAINST or [ ] ABSTAIN ON ratification of the
appointment of Arthur Andersen LLP as independent accountants for the
fiscal year ending December 31, 1998; and
4. In their discretion with respect to other such other business as may
properly come before the SDG Annual Meeting or any adjournment or
postponement thereof.
THE SDG BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES IN
PROPOSAL 1 AND A VOTE FOR PROPOSALS 2, 3 AND 4 AT THE SDG ANNUAL MEETING.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF THE NOMINEES IN PROPOSAL 1 AND FOR PROPOSALS 2, 3 AND 4.
The signer hereby revokes all
proxies heretofore given by the
signer to vote at the SDG Annual
Meeting or any adjournments or
postponements thereof. Please sign
exactly as your name appears hereon.
Joint owners should each sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
------------------------------------
Signature(s)
------------------------------------
Date
319
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF
SIMON DEBARTOLO GROUP, INC.
FOR USE AT THE
ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD ON SEPTEMBER 23, 1998
The undersigned holder of all of the shares of Class B Common Stock of
Simon DeBartolo Group, Inc., a Maryland Corporation ("SDG"), hereby appoints
Herbert Simon and David Simon, and each of them, with power of substitution to
each, to vote all shares of Class B Common Stock which the undersigned is
entitled to vote at the annual meeting (the "SDG Annual Meeting") of
stockholders of SDG to be held at The Indianapolis Hyatt Regency, One South
Capitol Avenue, Indianapolis, Indiana on September 23, 1998 at 10:00 a.m.
(Indianapolis time) and at every adjournment or postponement thereof and
otherwise to represent the undersigned at this meeting with all powers possessed
by the undersigned if present at the SDG Annual Meeting, hereby revoking all
prior proxies on the matters set below, as indicated below. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
of the accompanying Proxy Statement/Prospectus.
SDG ANNUAL MEETING
1. [ ] VOTE FOR or [ ] WITHHOLD VOTE for all of the following nominees for
election to the SDG Board of Directors: David Simon, Herbert Simon,
Melvin Simon and Richard S. Sokolov;
[ ] VOTE FOR, except withhold from the following nominee(s):
------------------------------------------- .
THE SDG BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES IN
PROPOSAL 1 AT THE SDG ANNUAL MEETING.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF THE NOMINEES IN PROPOSAL 1.
The signer hereby revokes all
proxies heretofore given by the
signer to vote at the SDG Annual
Meeting or any adjournments or
postponements thereof. Please sign
exactly as your name appears hereon.
Joint owners should each sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
------------------------------------
Signature(s)
------------------------------------
Date
320
PROXY SOLICITED BY THE BOARD OF DIRECTORS OF
SIMON DEBARTOLO GROUP, INC.
FOR USE AT THE
ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD ON SEPTEMBER 23, 1998
The undersigned holder of all of the shares of Class C Common Stock of
Simon DeBartolo Group, Inc., a Maryland Corporation ("SDG"), hereby appoints
Herbert Simon and David Simon, and each of them, with power of substitution to
each, to vote all shares of Class C Common Stock which the undersigned is
entitled to vote at the annual meeting (the "SDG Annual Meeting") of
stockholders of SDG to be held at The Indianapolis Hyatt Regency, One South
Capitol Avenue, Indianapolis, Indiana on September 23, 1998 at 10:00 a.m.
(Indianapolis time) and at every adjournment or postponement thereof and
otherwise to represent the undersigned at this meeting with all powers possessed
by the undersigned if present at the SDG Annual Meeting, hereby revoking all
prior proxies on the matters set below, as indicated below. The undersigned
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders and
of the accompanying Proxy Statement/Prospectus.
SDG ANNUAL MEETING
1. [ ] VOTE FOR or [ ] WITHHOLD VOTE for all of the following nominees for
election to the SDG Board of Directors: Frederick W. Petri and M. Denise
DeBartolo York;
[ ] VOTE FOR, except withhold from the following nominee(s):
------------------------------------------- .
THE SDG BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES IN
PROPOSAL 1 AT THE SDG ANNUAL MEETING.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE ELECTION OF THE NOMINEES IN PROPOSAL 1.
The signer hereby revokes all
proxies heretofore given by the
signer to vote at the SDG Annual
Meeting or any adjournments or
postponements thereof. Please sign
exactly as your name appears hereon.
Joint owners should each sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such.
------------------------------------
Signature(s)
------------------------------------
Date
321
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may, in advance of the final action of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending such action, provided that the director or officer undertakes to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him or
her against the expenses (including attorneys' fees) which he or she actually
and reasonably incurred in connection therewith. The indemnification provided is
not deemed to be exclusive of any other rights to which an officer or director
may be entitled under any corporation's by-law, agreement, vote or otherwise.
In accordance with Section 145 of the DGCL, Article VII of the Certificate
of Incorporation of Corporate Property Investors, Inc. ("CPI", to be renamed
Simon Property Group, Inc. ("Simon Group")) ("CPI's Charter"), Section 6.07(a)
of the By-laws of CPI ("CPI's By-laws") and Article VII of the By-laws of
Corporate Realty Consultants, Inc. ("CRC") ("CRC's By-laws") provide, and
Article Sixth, Paragraph 4(a) of the Restated Certificate of Incorporation of
CPI ("Simon Group's Charter"), the Restated Certificate of Incorporation of SPG
Realty Consultants, Inc. ("SRC") ("SRC's Charter") and Article VIII of the
By-laws of SRC ("SRC's By-laws") will provide, that CPI, CRC, Simon Group or
SRC, as applicable, shall indemnify to the fullest extent permitted under and in
accordance with the laws of the State of Delaware any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he is or was a director or officer of
CPI, CRC, Simon Group or SRC, as applicable, or is or was serving at the request
of CPI, CRC, Simon Group or SRC, as applicable, as a director, officer, trustee
or in any other capacity with another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of CPI, CRC, Simon Group or SRC, as applicable, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The indemnification provided by CPI's Charter and CPI's
By-laws, and to be provided by Simon Group's Charter, the By-laws of Simon Group
("Simon Group's By-laws"), SRC's Charter and SRC's By-laws, shall not be deemed
exclusive of any other rights to which any of those seeking indemnification or
advancement of expenses may be entitled under any other contract or agreement
between CPI, Simon Group or SRC, as applicable, and any officer, director,
employee or agent of CPI, Simon Group or SRC, as applicable. Expenses incurred
in defending a civil or criminal action, suit or proceeding shall (in the case
of any action, suit or proceeding against a director or officer of CPI, Simon
Group or SRC, as applicable) or may
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(in the case of any action, suit or proceeding against an employee or agent) be
paid by CPI, Simon Group or SRC, as applicable, in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors of CPI, Simon Group or SRC, as applicable, upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by CPI
or Simon Group, as applicable. Article VII of CPI's Charter and Section 6.07(b)
of CPI's By-laws provide, Article Sixth, Paragraph 4(d) of Simon Group's
Charter, Section 8.02 of Simon Group's By-laws, Article Sixth, Paragraph 4(d) of
SRC's Charter and Section 8.02 of SRC's By-laws will provide, that neither the
amendment or repeal of, nor the adoption of any provision inconsistent with, the
above-referenced provisions of CPI's Charter or CPI's By-laws, Simon Group's
Charter or Simon Group's By-laws, and SRC's Charter or SRC's By-laws,
respectively, and shall eliminate or reduce the effect of such provisions in
respect of any matter occurring before such amendment, repeal or adoption of an
inconsistent provision or in respect of any cause of action, suit or claim
relating to any such matter which would have given rise to a right of
indemnification or right to receive expenses pursuant to such provisions if any
such provision had not been so amended or repealed or if a provision
inconsistent therewith had not been so adopted. Article Sixth, Paragraph (4)(e)
of Simon Group's Charter and Article Sixth, Paragraph (4)(e) of SRC's Charter
will provide that a director of Simon Group or SRC shall not be personally
liable to Simon Group, SRC or their stockholders, as applicable, for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to Simon Group, SRC or their
stockholders, as applicable, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or any amendment thereto or successor provision thereto,
or (iv) for any transaction from which the director derived an improper personal
benefit. If the DGCL is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of CPI, Simon Group or SRC, as applicable, shall be eliminated or
limited to the fullest extent permitted by the DGCL as so amended.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
2.1 Purchase and Sale Agreement, dated December 12, 1997,
between The Equitable Life Assurance Society of the United
States and SM Portfolio Partners. (Incorporated by reference
to the 1997 Form 10-K filed by SDG for the fiscal year ended
December 31, 1997 Exhibit 2.4).
2.2 Agreement and Plan of Merger, dated February 18, 1998, among
SDG and CPI and CRC. (Incorporated by reference to the Form
8-K filed by SDG on February 24, 1998 Exhibit 10.1).
3.1 Certificate of Incorporation of CPI.
3.2 Form of Restated Certificate of Incorporation of Simon
Group.
3.3 By-laws of CPI.
3.4 Form of Restated By-laws of Simon Group.
3.5 Certificate of Incorporation of CRC.
3.6 Form of Restated Certificate of Incorporation of SPG Realty
Consultants, Inc.
3.7 By-laws of CRC.
3.8 Form of Restated By-laws of SPG Realty Consultants, Inc.
4.1 Secured Promissory Note and Open-End Mortgage and Security
Agreement from Simon Property Group, L.P. in favor of
Principal Mutual Life Insurance Company (Pool 2)
(Incorporated by reference to the 1993 Form 10-K filed by
SDG for the fiscal year ended December 31, 1993 Exhibit
4.2).
4.2 Second Amended and Restated Credit Agreement, dated as of
December 22, 1997, among the SDG Operating Partnership and
Morgan Guaranty Trust Company of New York, Union Bank of
Switzerland and Chase Manhattan Bank, as Lead Agents.
(Incorporated by reference to the 1997 Form 10-K filed by
SDG for the fiscal year ended December 31, 1997 Exhibit
4.3).
4.3 Form of Simon Group Common Stock Certificate.
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4.4 Form of Simon Group Class B Common Stock Certificate.
4.5 Form of Simon Group Class C Common Stock Certificate.
4.6 Form of SPG Realty Consultants, Inc. Common Stock
Certificate.
4.7 Trust Agreement, dated as of October 30, 1979, among
shareholders of CPI, CRC and First Jersey National Bank, as
Trustee.
4.8 Trust Agreement, dated as of August 26, 1994, among the
holders of the 6.50% First Series Preference Shares of CPI,
CRC and Bank of Montreal Trust Company, as Trustee.
4.9 Indenture, dated March 15, 1992, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $250,000,000 9% Notes Due 2002.
4.10 Indenture, dated August 15, 1992, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $150,000,000 7 3/4% Notes Due 2004.
4.11 Indenture, dated April 1, 1993, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $100,000,000 7.05% Notes Due 2003.
4.12 Indenture, dated September 1, 1993, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $75,000,000 7.18% Notes Due 2013.
4.13 Indenture, dated March 15, 1996 between CPI and The Chase
Manhattan Bank (as successor to Chemical Bank), as Trustee,
with respect to $250,000,000 7.875% Notes Due 2016.
4.14 $21,000,000 Mortgage Note dated January 1, 1994 of 303-313
East 47th Street Associates Payable to CPI.
5.1 Opinion of Cravath, Swaine & Moore.
8.1 Opinion of Willkie Farr & Gallagher.
8.2 Opinion of Cravath, Swaine & Moore.
8.3 Opinion of Baker & Daniels.
9.1 Voting Trust Agreement, Voting Agreement and Proxy between
MSA, on the one hand, and Melvin Simon, Herbert Simon and
David Simon, on the other hand. (Incorporated by reference
to the 1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 9.1).
10.1 Fifth Amended and Restated Limited Partnership Agreement of
the SDG Operating Partnership. (Incorporated by reference to
of the Form S-4 filed by SDG (Registration No. 333-06933)
Exhibit 10.1).
10.2 Noncompetition Agreement, dated as of December 1, 1993,
between SDG and each of Melvin Simon and Herbert Simon.
(Incorporated by reference to the 1993 Form 10-K filed by
SDG for the fiscal year ended December 31, 1993 Exhibit
10.3).
10.3 Noncompetition Agreement, dated as of December 1, 1993,
between SDG and David Simon. (Incorporated by reference to
the 1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 10.4).
10.4 Restriction and Noncompetition Agreement, dated as of
December 1, 1993 among SDG and DRC Management Company and
M.S. Management Associates, Inc. (Incorporated by reference
to the 1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 10.5).
10.5 Simon Property Group, L.P. 1998 Stock Incentive Plan.
10.6 Restated Indemnity Agreement, dated as of August 9, 1996,
between SDG and its directors and officers. (Incorporated by
reference to the 1996 Form 10-K filed by SDG for the fiscal
year ended December 31, 1996 Exhibit 10.8).
10.7 Form of Simon Group Indemnity Agreement between Simon Group
and its directors and officers.
10.8 Option Agreement to acquire the retail properties in which
the Simons or the DeBartolos own an interest that are not
included in the SDG Portfolio Properties and that are
subject of options in favor of Simon Property Group, Inc. or
DeBartolo Realty Corporation. (Incorporated by reference the
1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 10.10).
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10.9 Option Agreement to acquire the properties in which the
Simons own an interest that were not transferred to Simon
Property Group, Inc. or M.S. Management Associates, Inc. in
connection with the initial public offering of SDG Common
Stock consummated in December 1993. (Incorporated by
reference to the 1993 Form 10-K filed by SDG for the fiscal
year ended December 31, 1993 Exhibit 10.11).
10.10 Option Agreement, dated as of December 1, 1993, between the
M.S. Management Associates, Inc. and Simon Property Group,
L.P. (Incorporated by reference to the 1993 Form 10-K filed
by SDG for the fiscal year ended December 31, 1993 Exhibit
10.20).
10.11 Option Agreement, dated as of December 1, 1993, to acquire
Development Land. (Incorporated by reference to the 1993
Form 10-K filed by SDG for the fiscal year ended December
31, 1993 Exhibit 10.22).
10.12 Option Agreement, dated December 1, 1993, between the M.S.
Management Associates, Inc. and Simon Property Group, L.P.
(Incorporated by reference to the 1993 Form 10-K filed by
SDG for the fiscal year ended December 31, 1993 Exhibit
10.25).
10.13 First Amendment to the Corporate Services Agreement between
DeBartolo Realty Corporation and DeBartolo Properties
Management, Inc. (Incorporated by reference to the 1995 Form
10-K filed by DeBartolo Realty Corporation for the fiscal
year ended December 31, 1995 Exhibit 10.17).
10.14 Service Agreement between The Edward J. DeBartolo
Corporation and DeBartolo Properties Management, Inc.
(Incorporated by reference to the 1994 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1994 Exhibit 10(f)).
10.15 Master Services Agreement between DeBartolo Realty
Partnership, L.P. and DeBartolo Properties Management, Inc.
(Incorporated by reference to the 1994 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1994 Exhibit 10(g)).
10.16 First Amendment to Master Services Agreement between
DeBartolo Realty Partnership, L.P. and DeBartolo Properties
Management, Inc. (Incorporated by reference to the 1995 Form
10-K filed by DeBartolo Realty Corporation for the fiscal
year ended December 31, 1995 Exhibit 10.20).
10.17 DeBartolo Realty Corporation 1994 Stock Incentive Plan.
(Incorporated by reference to the 1994 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1994 Exhibit 10(k)).
10.18 Office Lease between DeBartolo Realty Partnership, L.P. and
an affiliate of EJDC (Southwoods Executive Center).
(Incorporated by reference to the 1995 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1995 Exhibit 10.69).
10.19 Representative Form of Lease with respect to The Limited
Stores, Inc.
10.20 Sublease between DeBartolo Realty Partnership, L.P. and
DeBartolo Properties Management, Inc. (Incorporated by
reference to the 1995 Form 10-K filed by DeBartolo Realty
Corporation for the fiscal year ended December 31, 1995
Exhibit 10.70).
10.21 Purchase Option and Right of First Refusal Agreement between
DeBartolo Realty Partnership, L.P. and EJDC (for SouthPark
Center Development Site). (Incorporated by reference to the
1994 Form 10-K filed by DeBartolo Realty Corporation for the
fiscal year ended December 31, 1994 Exhibit 10(p)(2)).
10.22 Purchase Option and Right of First Offer Agreement between
DeBartolo Realty Partnership, L.P. and Cutler Ridge Mall,
Inc. (for Cutler Ridge Mall). (Incorporated by reference to
the 1994 Form 10-K filed by DeBartolo Realty Corporation for
the fiscal year ended December 31, 1994 Exhibit 10(q)(1)).
10.23 Amended and Restated Articles of Incorporation of SD
Property Group, Inc. (Incorporated by reference to the 1996
Form 10-K filed by SDG for the fiscal year ended December
31, 1996 Exhibit 10.53).
10.24 Amended and Restated Regulations of SD Property Group, Inc.
(Incorporated by reference to the 1996 Form 10-K filed by
SDG for the fiscal year ended December 31, 1996 Exhibit
10.54).
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10.25 Contribution Agreement, dated as of June 25, 1996, by and
among DeBartolo Realty Corporation and the former limited
partners of Simon Property Group, L.P., excluding JCP
Realty, Inc. and Brandywine Realty, Inc. (Incorporated by
reference to the 1996 Form 10-K filed by SDG for the fiscal
year ended December 31, 1996 Exhibit 10.56).
10.26 JCP Contribution Agreement, dated as of August 8, 1996, by
and among DeBartolo Realty Corporation and JCP Realty, Inc.,
and Brandywine Realty, Inc. (Incorporated by reference to
the 1996 Form 10-K filed by SDG for the fiscal year ended
December 31, 1996 Exhibit 10.57).
10.27 Registration Rights Agreement, dated as of August 9, 1996,
by and among the Simon Family Members (as defined therein),
Simon Property Group, Inc., JCP Realty, Inc., Brandywine
Realty, Inc., and the Estate of Edward J. DeBartolo Sr.,
Edward J. DeBartolo, Jr., Marie Denise DeBartolo York, and
the Trusts and other entities listed on Schedule 2 therein,
and any of their respective successors-in-interest and
permitted assigns. (Incorporated by reference to the 1996
Form 10-K filed by SDG for the fiscal year ended December
31, 1996 Exhibit 10.60).
10.28 Form of Simon Group Registration Rights Agreement.
10.29 Fourth Amendment to Purchase Option Agreement, dated as of
July 15, 1996, between JCP Realty, Inc., and DeBartolo
Realty Partnership, L.P. (Incorporated by reference to the
1996 Form 10-K filed by SDG for the fiscal year ended
December 31, 1996 Exhibit 10.61).
10.30 Partnership Agreement of SM Portfolio Limited Partnership.
(Incorporated by reference to the 1997 Form 10-K filed by
SDG for the fiscal year ended December 31, 1997 Exhibit
10.62).
10.31 Limited Partnership Agreement of SDG Macerich Properties,
L.P. (Incorporated by reference to the 1997 Form 10-K filed
by SDG for the fiscal year ended December 31, 1997 Exhibit
10.63).
10.32 Agreement of Limited Partnership of Simon Capital Limited
Partnership. (Incorporated by reference to the 1997 Form
10-K filed by SDG for the fiscal year ended December 31,
1997 Exhibit 10.64).
10.33 Form of Sixth Amended and Restated Partnership Agreement of
Simon Property Group, L.P.
10.34 Form of SPG Realty Consultants, L.P. Partnership Agreement.
10.35 Form of Agreement Between Operating Partnerships.
10.36 The Revolving Credit Agreement, dated June 26, 1996, among
CPI, The Chase Manhattan Bank and Morgan Guaranty Trust
Company of New York and the lenders party thereto.
10.37 Purchase and Sale Agreement, dated November 26, 1997,
between The Equitable Life Assurance Society of the United
States and CPI-Phipps Limited Liability Company.
10.38 Agreement of Purchase and Sale, dated December 31, 1997,
between CPI and Development Options, Inc.
10.39 Purchase and Exchange Agreement, dated November 15, 1996,
among CPI, CRC and State Street Bank and Trust Company, not
individually, but solely in its capacity as Trustee of the
Telephone Real Estate Equity Trust.
10.40 Redemption Agreement, dated as of December 31, 1996, between
CPI and Rodamco North America B.V.
10.41 Stock Purchase Agreement, dated as of December 13, 1996,
between CPI and Fifth and 59th Street Investors Corporation.
10.42 Amended and Restated Supplemental Executive Retirement Plan
of CPI, effective as of August 1, 1997, as amended pursuant
to a Statement of Amendments effective as of July 1, 1998.
10.43 Trustees' and Executives' Deferred Remuneration Plan of CPI,
as amended and restated effective August 1, 1997, as amended
pursuant to a Statement of Amendments effective as of July
1, 1998.
10.44 CPI Simplified Employee Pension Plan, as amended and
restated effective January 1, 1993.
10.45 1993 Share Option Plan of CPI, as amended effective March
13, 1998.
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10.46 Executive Agreement, dated August 7, 1997, between CPI and
Hans C. Mautner, as amended February 18, 1998.
10.47 Executive Agreement, dated August 7, 1997, between CPI and
Mark S. Ticotin, as amended February 18, 1998.
10.48 Executive Agreement, dated August 7, 1997, between CPI and
Michael L. Johnson, as amended February 18, 1998.
10.49 Executive Agreement, dated August 7, 1997, between CPI and
J. Michael Maloney, as amended February 18, 1998.
10.50 Executive Agreement, dated August 7, 1997, between CPI and
G. Martin Fell, as amended February 18, 1998.
10.51 Merrill Lynch Special Prototype Defined Contribution Plan.
10.52 Merrill Lynch Special Prototype Defined Contribution Plan
Adoption Agreement.
10.53 Form of Employee Share Purchase Plan Contract.
10.54 Form of Issuance Agreement between CPI and CRC.
10.55 Lease Agreement dated June 22, 1982 between CPI and 305-313
East 47th Street Associates, as amended December 31, 1982
and January 1, 1984.
10.56 Limited Liability Company Agreement dated April 4, 1997 of
Mill Creek Land, L.L.C. between Buford Acquisition Company,
L.L.C. and CRC, as amended May 5, 1997 and June 16, 1997.
10.57 Guarantee, dated April 4, 1997, made by Gwinett Prado, L.P.,
in favor of Mill Creek Land, L.L.C. and CRC.
10.58 Guarantee, dated April 4, 1997, made by Ben Carter Companies
L.L.C., in favor of Mill Creek Land L.L.C. and CRC.
10.59 Form of Incentive Stock Option Agreement between Simon Group
and Hans C. Mautner pursuant to the Simon Property Group,
L.P. 1998 Stock Incentive Plan.
10.60 Form of Incentive Stock Option Agreement between Simon Group
and Mark S. Ticotin pursuant to the Simon Property Group,
L.P. 1998 Stock Incentive Plan.
10.61 Form of Nonqualified Stock Option Agreement between Simon
Group and Hans C. Mautner pursuant to the Simon Property
Group, L.P. 1998 Stock Incentive Plan.
10.62 Form of Nonqualified Stock Option Agreement between Simon
Group and Mark S. Ticotin pursuant to the Simon Property
Group, L.P. 1998 Stock Incentive Plan.
10.63 Form of Employment Agreement between Hans C. Mautner and
Simon Group.
10.64 Form of Employment Agreement between Mark S. Ticotin and
Simon Group.
10.65 CPI Executive Severance Policy, as amended and restated
effective as of August 11, 1998.
11.1 Statement Regarding Computation of Per Share Earnings of
SDG.
11.2 Statement Regarding Computation of Per Share Earnings of
CPI.
11.3 Statement Regarding Computation of Per Share Earnings of
CRC.
21.1 List of Subsidiaries of CPI.
21.2 List of Subsidiaries of CRC.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.4 Consents of Cravath, Swaine & Moore (Contained in the
Opinions of Cravath, Swaine & Moore filed as Exhibit 5.1 and
Exhibit 8.2).
23.5 Consent of Willkie Farr & Gallagher (Contained in the
Opinion of Willkie Farr & Gallagher filed as Exhibit 8.1).
23.6 Consent of Baker & Daniels (Contained in the Opinion of
Baker & Daniels filed as Exhibit 8.3).
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23.7 Consent of J. P. Morgan Securities Inc.
23.8 Consent of Lazard Freres & Co. LLC.
23.9 Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
24.1 Power of Attorney.
27.1 Financial Data Schedule of CPI.
27.2 Financial Data Schedule of CRC.
99.1 Agreement dated November 13, 1996 between SDG and the SDG
Operating Partnership (Incorporated by reference to
Amendment No. 3 of Form S-3 filed by SDG and the SDG
Operating Partnership on November 20, 1996 (Registration No.
333-11491) Exhibit 99.1).
99.2 Form of Letter of Transmittal.
99.3 Consent of Robert E. Angelica.
99.4 Consent of Birch Bayh.
99.5 Consent of G. William Miller.
99.6 Consent of J. Albert Smith, Jr.
99.7 Consent of David Simon.
99.8 Consent of Herbert Simon.
99.9 Consent of Melvin Simon.
99.10 Consent of Richard S. Sokolov.
99.11 Consent of Frederick W. Petri.
99.12 Consent of Pieter S. van den Berg.
99.13 Consent of Phillip J. Ward.
99.14 Consent of M. Denise DeBartolo York.
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the Registration
Statement.
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328
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrants' annual reports pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrants hereby undertake to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(d) The undersigned Registrants hereby undertake as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuers undertake that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form; and
(2) That every prospectus (i) that is filed pursuant to the paragraph
(e)(1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the Registration Statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(e) The undersigned Registrants hereby undertake that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrants
pursuant to the foregoing provisions, or otherwise, the Registrants have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the Registrants of expenses incurred or
paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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329
(f) The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(g) The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(h) The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
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330
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this Registration Statement to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, August 13, 1998.
CORPORATE PROPERTY INVESTORS, INC.
By: /s/ HANS C. MAUTNER
------------------------------------
Hans C. Mautner
Chief Executive Officer
CORPORATE REALTY CONSULTANTS, INC.
By: /s/ HANS C. MAUTNER
------------------------------------
Hans C. Mautner
Chief Executive Officer
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331
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons, in their
capacities at Corporate Property Investors, Inc. and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ HANS C. MAUTNER Chairman of the Board, Chief August 13, 1998
- --------------------------------------------- Executive Officer and Director
Hans C. Mautner (Principal Executive Officer)
/s/ MICHAEL L. JOHNSON Chief Financial Officer and Senior August 13, 1998
- --------------------------------------------- Vice President (Principal Financial
Michael L. Johnson Officer)
/s/ DANIEL J. COHEN Vice President and Controller August 13, 1998
- --------------------------------------------- (Principal Accounting Officer)
Daniel J. Cohen
* Director August 13, 1998
- ---------------------------------------------
Abdlatif Y. Al-Hamad
* Director August 13, 1998
- ---------------------------------------------
Saleh F. Alzouman
* Director August 13, 1998
- ---------------------------------------------
Robert E. Angelica
* Director August 13, 1998
- ---------------------------------------------
Gilbert Butler
* Director August 13, 1998
- ---------------------------------------------
David P. Feldman
* Director August 13, 1998
- ---------------------------------------------
Andrea Geisser
* Director August 13, 1998
- ---------------------------------------------
Damon Mezzacappa
* Director August 13, 1998
- ---------------------------------------------
S. Lawrence Prendergast
* Director August 13, 1998
- ---------------------------------------------
Daniel Rose
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332
NAME TITLE DATE
---- ----- ----
* Director August 13, 1998
- ---------------------------------------------
Dirk van den Bos
* Director August 13, 1998
- ---------------------------------------------
Jan H.W.R. van der Vlist
* By /s/ HANS C. MAUTNER
- ---------------------------------------------
Attorney-in-fact pursuant to a power of
attorney filed herewith as part of this
Registration Statement
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Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons, in their
capacities at Corporate Realty Consultants, Inc. and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ HANS C. MAUTNER Chairman of the Board, Chief August 13, 1998
- --------------------------------------------- Executive Officer and Director
Hans C. Mautner (Principal Executive Officer)
/s/ MICHAEL L. JOHNSON Chief Financial Officer and Senior August 13, 1998
- --------------------------------------------- Vice President (Principal Financial
Michael L. Johnson Officer)
/s/ DANIEL J. COHEN Vice President and Controller August 13, 1998
- --------------------------------------------- (Principal Accounting Officer)
Daniel J. Cohen
* Director August 13, 1998
- ---------------------------------------------
David P. Feldman
* Director August 13, 1998
- ---------------------------------------------
Andrea Geisser
* By /s/ HANS C. MAUTNER
- ---------------------------------------------
Attorney-in-fact pursuant to a power of
attorney filed herewith as part of this
Registration Statement
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334
EXHIBIT INDEX
2.1 Purchase and Sale Agreement, dated December 12, 1997,
between The Equitable Life Assurance Society of the United
States and SM Portfolio Partners. (Incorporated by reference
to the 1997 Form 10-K filed by SDG for the fiscal year ended
December 31, 1997 Exhibit 2.4).
2.2 Agreement and Plan of Merger, dated February 18, 1998, among
SDG and CPI and CRC. (Incorporated by reference to the Form
8-K filed by SDG on February 24, 1998 Exhibit 10.1).
3.1 Certificate of Incorporation of CPI.
3.2 Form of Restated Certificate of Incorporation of Simon
Group.
3.3 By-laws of CPI.
3.4 Form of Restated By-laws of Simon Group.
3.5 Certificate of Incorporation of CRC.
3.6 Form of Restated Certificate of Incorporation of SPG Realty
Consultants, Inc.
3.7 By-laws of CRC.
3.8 Form of Restated By-laws of SPG Realty Consultants, Inc.
4.1 Secured Promissory Note and Open-End Mortgage and Security
Agreement from Simon Property Group, L.P. in favor of
Principal Mutual Life Insurance Company (Pool 2)
(Incorporated by reference to the 1993 Form 10-K filed by
SDG for the fiscal year ended December 31, 1993 Exhibit
4.2).
4.2 Second Amended and Restated Credit Agreement, dated as of
December 22, 1997, among the SDG Operating Partnership and
Morgan Guaranty Trust Company of New York, Union Bank of
Switzerland and Chase Manhattan Bank, as Lead Agents.
(Incorporated by reference to the 1997 Form 10-K filed by
SDG for the fiscal year ended December 31, 1997 Exhibit
4.3).
4.3 Form of Simon Group Common Stock Certificate.
4.4 Form of Simon Group Class B Common Stock Certificate.
4.5 Form of Simon Group Class C Common Stock Certificate.
4.6 Form of SPG Realty Consultants, Inc. Common Stock
Certificate.
4.7 Trust Agreement, dated as of October 30, 1979, among
shareholders of CPI, CRC and First Jersey National Bank, as
Trustee.
4.8 Trust Agreement, dated as of August 26, 1994, among the
holders of the 6.50% First Series Preference Shares of CPI,
CRC and Bank of Montreal Trust Company, as Trustee.
4.9 Indenture, dated March 15, 1992, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $250,000,000 9% Notes Due 2002.
4.10 Indenture, dated August 15, 1992, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $150,000,000 7 3/4% Notes Due 2004.
4.11 Indenture, dated April 1, 1993, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $100,000,000 7.05% Notes Due 2003.
4.12 Indenture, dated September 1, 1993, between CPI and Morgan
Guaranty Trust Company of New York, as Trustee, with respect
to $75,000,000 7.18% Notes Due 2013.
4.13 Indenture, dated March 15, 1996 between CPI and The Chase
Manhattan Bank (as successor to Chemical Bank), as Trustee,
with respect to $250,000,000 7.875% Notes Due 2016.
4.14 $21,000,000 Mortgage Note dated January 1, 1994 of 303-313
East 47th Street Associates Payable to CPI.
5.1 Opinion of Cravath, Swaine & Moore.
8.1 Opinion of Willkie Farr & Gallagher.
8.2 Opinion of Cravath, Swaine & Moore.
8.3 Opinion of Baker & Daniels.
9.1 Voting Trust Agreement, Voting Agreement and Proxy between
MSA, on the one hand, and Melvin Simon, Herbert Simon and
David Simon, on the other hand. (Incorporated by reference
to the 1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 9.1).
10.1 Fifth Amended and Restated Limited Partnership Agreement of
the SDG Operating Partnership. (Incorporated by reference to
of the Form S-4 filed by SDG (Registration No. 333-06933)
Exhibit 10.1).
335
10.2 Noncompetition Agreement, dated as of December 1, 1993,
between SDG and each of Melvin Simon and Herbert Simon.
(Incorporated by reference to the 1993 Form 10-K filed by
SDG for the fiscal year ended December 31, 1993 Exhibit
10.3).
10.3 Noncompetition Agreement, dated as of December 1, 1993,
between SDG and David Simon. (Incorporated by reference to
the 1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 10.4).
10.4 Restriction and Noncompetition Agreement, dated as of
December 1, 1993, among SDG and DRC Management Company and
M.S. Management Associates, Inc. (Incorporated by reference
to the 1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 10.5).
10.5 Simon Property Group, L.P. 1998 Stock Incentive Plan.
10.6 Restated Indemnity Agreement, dated as of August 9, 1996,
between SDG and its directors and officers. (Incorporated by
reference to the 1996 Form 10-K filed by SDG for the fiscal
year ended December 31, 1996 Exhibit 10.8).
10.7 Form of Simon Group Indemnity Agreement between Simon Group
and its directors and officers.
10.8 Option Agreement to acquire the retail properties in which
the Simons or the DeBartolos own an interest that are not
included in the SDG Portfolio Properties and that are
subject of options in favor of Simon Property Group, Inc. or
DeBartolo Realty Corporation. (Incorporated by reference to
the 1993 Form 10-K filed by SDG for the fiscal year ended
December 31, 1993 Exhibit 10.10).
10.9 Option Agreement to acquire the properties in which the
Simons own an interest that were not transferred to Simon
Property Group, Inc. or M.S. Management Associates, Inc. in
connection with the initial public offering of SDG Common
Stock consummated in December 1993. (Incorporated by
reference to the 1993 Form 10-K filed by SDG for the fiscal
year ended December 31, 1993 Exhibit 10.11).
10.10 Option Agreement, dated as of December 1, 1993, between the
M.S. Management Associates, Inc. and Simon Property Group,
L.P. (Incorporated by reference to the 1993 Form 10-K filed
by SDG for the fiscal year ended December 31, 1993 Exhibit
10.20).
10.11 Option Agreement, dated as of December 1, 1993, to acquire
Development Land. (Incorporated by reference to the 1993
Form 10-K filed by SDG for the fiscal year ended December
31, 1993 Exhibit 10.22).
10.12 Option Agreement, dated December 1, 1993, between the M.S.
Management Associates, Inc. and Simon Property Group, L.P.
(Incorporated by reference to the 1993 Form 10-K filed by
SDG for the fiscal year ended December 31, 1993 Exhibit
10.25).
10.13 First Amendment to the Corporate Services Agreement between
DeBartolo Realty Corporation and DeBartolo Properties
Management, Inc. (Incorporated by reference to the 1995 Form
10-K filed by DeBartolo Realty Corporation for the fiscal
year ended December 31, 1995 Exhibit 10.17).
10.14 Service Agreement between The Edward J. DeBartolo
Corporation and DeBartolo Properties Management, Inc.
(Incorporated by reference to the 1994 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1994 Exhibit 10(f)).
10.15 Master Services Agreement between DeBartolo Realty
Partnership, L.P. and DeBartolo Properties Management, Inc.
(Incorporated by reference to the 1994 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1994 Exhibit 10(g)).
10.16 First Amendment to Master Services Agreement between
DeBartolo Realty Partnership, L.P. and DeBartolo Properties
Management, Inc. (Incorporated by reference to the 1995 Form
10-K filed by DeBartolo Realty Corporation for the fiscal
year ended December 31, 1995 Exhibit 10.20).
10.17 DeBartolo Realty Corporation 1994 Stock Incentive Plan.
(Incorporated by reference to the 1994 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1994 Exhibit 10(k)).
10.18 Office Lease between DeBartolo Realty Partnership, L.P. and
an affiliate of EJDC (Southwoods Executive Center).
(Incorporated by reference to the 1995 Form 10-K filed by
DeBartolo Realty Corporation for the fiscal year ended
December 31, 1995 Exhibit 10.69).
10.19 Representative Form of Lease with respect to The Limited
Stores, Inc.
10.20 Sublease between DeBartolo Realty Partnership, L.P. and
DeBartolo Properties Management, Inc. (Incorporated by
reference to the 1995 Form 10-K filed by DeBartolo Realty
Corporation for the fiscal year ended December 31, 1995
Exhibit 10.70).
336
10.21 Purchase Option and Right of First Refusal Agreement between
DeBartolo Realty Partnership, L.P. and EJDC (for SouthPark
Center Development Site). (Incorporated by reference to the
1994 Form 10-K filed by DeBartolo Realty Corporation for the
fiscal year ended December 31, 1994 Exhibit 10(p)(2)).
10.22 Purchase Option and Right of First Offer Agreement between
DeBartolo Realty Partnership, L.P. and Cutler Ridge Mall,
Inc. (for Cutler Ridge Mall). (Incorporated by reference to
the 1994 Form 10-K filed by DeBartolo Realty Corporation for
the fiscal year ended December 31, 1994 Exhibit 10(q)(1)).
10.23 Amended and Restated Articles of Incorporation of SD
Property Group, Inc. (Incorporated by reference to the 1996
Form 10-K filed by SDG for the fiscal year ended December
31, 1996 Exhibit 10.53).
10.24 Amended and Restated Regulations of SD Property Group, Inc.
(Incorporated by reference to the 1996 Form 10-K filed by
SDG for the fiscal year ended December 31, 1996 Exhibit
10.54).
10.25 Contribution Agreement, dated as of June 25, 1996, by and
among DeBartolo Realty Corporation and the former limited
partners of Simon Property Group, L.P., excluding JCP
Realty, Inc. and Brandywine Realty, Inc. (Incorporated by
reference to the 1996 Form 10-K filed by SDG for the fiscal
year ended December 31, 1996 Exhibit 10.56).
10.26 JCP Contribution Agreement, dated as of August 8, 1996, by
and among DeBartolo Realty Corporation and JCP Realty, Inc.,
and Brandywine Realty, Inc. (Incorporated by reference to
the 1996 Form 10-K filed by SDG for the fiscal year ended
December 31, 1996 Exhibit 10.57).
10.27 Registration Rights Agreement, dated as of August 9, 1996,
by and among the Simon Family Members (as defined therein),
Simon Property Group, Inc., JCP Realty, Inc., Brandywine
Realty, Inc., and the Estate of Edward J. DeBartolo Sr.,
Edward J. DeBartolo, Jr., Marie Denise DeBartolo York, and
the Trusts and other entities listed on Schedule 2 therein,
and any of their respective successors-in-interest and
permitted assigns. (Incorporated by reference to the 1996
Form 10-K filed by SDG for the fiscal year ended December
31, 1996 Exhibit 10.60).
10.28 Form of Simon Group Registration Rights Agreement.
10.29 Fourth Amendment to Purchase Option Agreement, dated as of
July 15, 1996, between JCP Realty, Inc., and DeBartolo
Realty Partnership, L.P. (Incorporated by reference to the
1996 Form 10-K filed by SDG for the fiscal year ended
December 31, 1996 Exhibit 10.61).
10.30 Partnership Agreement of SM Portfolio Limited Partnership.
(Incorporated by reference to the 1997 Form 10-K filed by
SDG for the fiscal year ended December 31, 1997 Exhibit
10.62).
10.31 Limited Partnership Agreement of SDG Macerich Properties,
L.P. (Incorporated by reference to the 1997 Form 10-K filed
by SDG for the fiscal year ended December 31, 1997 Exhibit
10.63).
10.32 Agreement of Limited Partnership of Simon Capital Limited
Partnership. (Incorporated by reference to the 1997 Form
10-K filed by SDG for the fiscal year ended December 31,
1997 Exhibit 10.64).
10.33 Form of Sixth Amended and Restated Partnership Agreement of
Simon Property Group, L.P.
10.34 Form of SPG Realty Consultants, L.P. Partnership Agreement.
10.35 Form of Agreement Between Operating Partnerships.
10.36 The Revolving Credit Agreement, dated June 26, 1996, among
CPI, The Chase Manhattan Bank and Morgan Guaranty Trust
Company of New York and the lenders party thereto.
10.37 Purchase and Sale Agreement, dated November 26, 1997,
between The Equitable Life Assurance Society of the United
States and CPI-Phipps Limited Liability Company.
10.38 Agreement of Purchase and Sale, dated December 31, 1997,
between CPI and Development Options, Inc.
10.39 Purchase and Exchange Agreement, dated November 15, 1996,
among CPI, CRC and State Street Bank and Trust Company, not
individually, but solely in its capacity as Trustee of the
Telephone Real Estate Equity Trust.
10.40 Redemption Agreement, dated as of December 31, 1996, between
CPI and Rodamco North America B.V.
10.41 Stock Purchase Agreement, dated as of December 13, 1996.
between CPI and Fifth and 59th Street Investors Corporation.
10.42 Amended and Restated Supplemental Executive Retirement Plan
of CPI, effective as of August 1, 1997, as amended pursuant
to a Statement of Amendments effective as of July 1, 1998.
10.43 Trustees' and Executives' Deferred Remuneration Plan of CPI,
as amended and restated effective August 1, 1997, as amended
pursuant to a Statement of Amendments effective as of July
1, 1998.
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10.44 CPI Simplified Employee Pension Plan, as amended and
restated effective January 1, 1993.
10.45 1993 Share Option Plan of CPI, as amended effective March
13, 1998.
10.46 Executive Agreement, dated August 7, 1997, between CPI and
Hans C. Mautner, as amended February 18, 1998.
10.47 Executive Agreement, dated August 7, 1997, between CPI and
Mark S. Ticotin, as amended February 18, 1998.
10.48 Executive Agreement, dated August 7, 1997, between CPI and
Michael L. Johnson, as amended February 18, 1998.
10.49 Executive Agreement, dated August 7, 1997, between CPI and
J. Michael Maloney, as amended February 18, 1998.
10.50 Executive Agreement, dated August 7, 1997, between CPI and
G. Martin Fell, as amended February 18, 1998.
10.51 Merrill Lynch Special Prototype Defined Contribution Plan.
10.52 Merrill Lynch Special Prototype Defined Contribution Plan
Adoption Agreement.
10.53 Form of Employee Share Purchase Plan Contract.
10.54 Form of Issuance Agreement between CPI and CRC.
10.55 Lease Agreement dated June 22, 1982 between CPI and 305-313
East 47th Street Associates, as amended December 31, 1982
and January 1, 1984.
10.56 Limited Liability Company Agreement dated April 4, 1997 of
Mill Creek Land, L.L.C. between Buford Acquisition Company,
L.L.C. and CRC, as amended May 5, 1997 and June 16, 1997.
10.57 Guarantee, dated April 4, 1997, made by Gwinett Prado, L.P.,
in favor of Mill Creek Land, L.L.C. and CRC.
10.58 Guarantee, dated April 4, 1997, made by Ben Carter Companies
L.L.C., in favor of Mill Creek Land L.L.C. and CRC.
10.59 Form of Incentive Stock Option Agreement between Simon Group
and Hans C. Mautner pursuant to the Simon Property Group,
L.P. 1998 Stock Incentive Plan.
10.60 Form of Incentive Stock Option Agreement between Simon Group
and Mark S. Ticotin pursuant to the Simon Property Group,
L.P. 1998 Stock Incentive Plan.
10.61 Form of Nonqualified Stock Option Agreement between Simon
Group and Hans C. Mautner pursuant to the Simon Property
Group, L.P. 1998 Stock Incentive Plan.
10.62 Form of Nonqualified Stock Option Agreement between Simon
Group and Mark S. Ticotin pursuant to the Simon Property
Group, L.P. 1998 Stock Incentive Plan.
10.63 Form of Employment Agreement between Hans C. Mautner and
Simon Group.
10.64 Form of Employment Agreement between Mark S. Ticotin and
Simon Group.
10.65 CPI Executive Severance Policy, as amended and restated
effective as of August 11, 1998.
11.1 Statement Regarding Computation of Per Share Earnings of
SDG.
11.2 Statement Regarding Computation of Per Share Earnings of
CPI.
11.3 Statement Regarding Computation of Per Share Earnings of
CRC.
21.1 List of Subsidiaries of CPI.
21.2 List of Subsidiaries of CRC.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.4 Consents of Cravath, Swaine & Moore (Contained in the
Opinions of Cravath, Swaine & Moore filed as Exhibit 5.1 and
Exhibit 8.2).
23.5 Consent of Willkie Farr & Gallagher (Contained in the
Opinion of Willkie Farr & Gallagher filed as Exhibit 8.1).
23.6 Consent of Baker & Daniels (Contained in the Opinion of
Baker & Daniels filed as Exhibit 8.3).
23.7 Consent of J. P. Morgan Securities Inc.
23.8 Consent of Lazard Freres & Co. LLC.
23.9 Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
24.1 Power of Attorney.
27.1 Financial Data Schedule of CPI.
338
27.2 Financial Data Schedule of CRC.
99.1 Agreement dated November 13, 1996 between SDG and the SDG
Operating Partnership (Incorporated by reference to
Amendment No. 3 of Form S-3 filed by SDG and the SDG
Operating Partnership on November 20, 1996 (Registration No.
333-11491) Exhibit 99.1).
99.2 Form of Letter of Transmittal.
99.3 Consent of Robert E. Angelica.
99.4 Consent of Birch Bayh.
99.5 Consent of G. William Miller.
99.6 Consent of J. Albert Smith, Jr.
99.7 Consent of David Simon.
99.8 Consent of Herbert Simon.
99.9 Consent of Melvin Simon.
99.10 Consent of Richard S. Sokolov.
99.11 Consent of Frederick W. Petri.
99.12 Consent of Pieter S. van den Berg.
99.13 Consent of Phillip J. Ward.
99.14 Consent of M. Denise DeBartolo York.