Securities Exchange Act of 1934 -- Form 8-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report:
September 19, 2003
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CBL & ASSOCIATES PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-12494 62-1545718
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification Number)
incorporation)
2030 Hamilton Place Boulevard, Chattanooga, TN 37421
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(Address of principal executive offices)
Registrant's telephone number, including area code:
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(423) 855-0001
1
ITEM 5. Other Events
CBL & Associates Properties, Inc. (the "Company") is updating its
consolidated financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 2002 to reflect (i) the application of the
requirements of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" and (ii) the
adoption of SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of
SFAS No. 13, and Technical Corrections."
During February 2003, the Company sold a community center and, in
accordance with SFAS No. 144, has reported revenue, expenses and gain on sale
from the community center as discontinued operations for each period presented
in its quarterly reports filed since the date of the sale, including any
comparable periods of the prior year that are presented. The same
reclassification as discontinued operations required by SFAS No. 144 following
the sale of the community center is required for previously issued annual
financial statements for each of the three years shown in the Company's last
annual report on Form 10-K, if those financial statements are incorporated by
reference in subsequent filings with the SEC made under the Securities Act of
1933, as amended, even though those financial statements relate to periods prior
to the date of the sale.
In accordance with SFAS No. 145, the Company has reclassified losses from
the extinguishment of debt from extraordinary items to unusual items within
continuing operations in its consolidated statements of operations for each of
the three years shown in the Company's Form 10-K.
These reclassifications have no effect on the Company's reported net income
available to common shareholders. This Form 8-K updates Items 6, 7, 8 and 15 of
the Company's Form 10-K to reflect the community center sold in February 2003 as
discontinued operations and to reflect losses from extinguishments of debt as
unusual items within continuing operations. All other items of the Form 10-K
remain unchanged. No attempt has been made to update matters in the Form 10-K,
except to the extent expressly provided above.
Page
Index to Exhibit 99.1 Number
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Selected Financial Data 5
Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Financial Statements 23
ITEM 7. Exhibits
Exhibit
Number Description
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23.1 Consent of Deloitte & Touche LLP
99.1 Items 6, 7, 8 and 15 of the Company's Annual Report on Form 10-K for
the Year Ended December 31, 2002 as revised for the adoption of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" and SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections"
2
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CBL & ASSOCIATES PROPERTIES, INC.
/s/ John N. Foy
-----------------------------------------
John N. Foy
Vice Chairman,
Chief Financial Officer and Treasurer
(Authorized Officer of the Registrant,
Principal Financial Officer and
Principal Accounting Officer)
Date: September 19, 2003
3
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 333-73376, 333-04295, 333-41768, and 333-88914 on Form S-8 and Registration
Statements Nos. 033-92218, 333-47041, 333-90395, 333-62830, 333-97831 and
333-104882 on Form S-3 of CBL & Associates Properties, Inc. of our report dated
February 21, 2003, except for Notes 2, 3, 4, 7, 12 and 13 as to which the date
is September 18, 2003, (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the impact of the adoption of
Statements of Financial Accounting Standard No. 144 and No. 145), appearing in
this Current Report on Form 8-K of CBL & Associates Properties, Inc.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
September 19, 2003
4
Exhibit 99.1
Item 6. Selected Financial Data:
The following table sets forth selected financial and operating information
for CBL & Associates Properties, Inc. (the "Company") for each of the five years
in the period ended December 31, 2002, which has been updated to reflect the (i)
the application of the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to the sale of a community center in February 2003 that
requires the results of operations of this community center be retroactively
reclassified as discontinued operations in all periods presented; and (ii) the
adoption of SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of
SFAS No. 13, and Technical Corrections," in the first quarter of 2003 that
results in the reclassification of the losses from the extinguishment of debt
from extraordinary items to unusual items within continuing operations in the
Company's consolidated statements of operations. These reclassifications have no
effect on the reported net income available to common shareholders in any prior
period. Refer to Notes 2 and 4 to the Company's consolidated financial
statements. The following information should be read in conjunction with the
Company's consolidated financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this report.
5
CBL & Associates Properties, Inc.
Selected Financial Data
(In thousands, except per share data)
Year Ended December 31,
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2002 2001 2000 1999 1998
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Total revenues $ 598,332 $ 548,137 $ 355,186 $ 313,393 $ 250,624
Total expenses 454,849 442,992 281,155 248,260 201,141
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Income from operations 143,483 105,145 74,031 65,133 49,983
Loss on extinguishment of debt (3,930) (13,558) (367) - (799)
Gain on sales of real estate assets 2,804 10,649 15,989 6,248 4,183
Equity in earnings of unconsolidated affiliates 8,215 7,155 3,684 3,263 2,379
Minority interest in earnings:
Operating Partnership (64,251) (49,643) (28,507) (23,264) (16,258)
Shopping center properties (3,303) (1,682) (1,525) (1,214) (634)
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Income before discontinued operations 83,018 58,066 63,305 50,166 38,354
Discontinued operations 1,888 2,842 2,417 4,429 2,145
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Net income 84,906 60,908 65,722 54,595 40,499
Preferred dividends (10,919) (6,468) (6,468) (6,468) (3,234)
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Net income available to common shareholders $ 73,987 $ 54,440 $ 59,254 $ 48,127 $ 37,265
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BASIC EARNINGS PER COMMON SHARE:
Income before discontinued operations, net of preferred
dividends $ 2.51 $ 2.04 $ 2.28 $ 1.77 $ 1.46
Net income available to common shareholders $ 2.58 $ 2.15 $ 2.38 $ 1.95 $ 1.55
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Weighted average shares outstanding 28,690 25,358 24,881 24,647 24,079
DILUTED EARNINGS PER COMMON SHARE:
Income before discontinued operations, net of preferred
dividends $ 2.43 $ 2.00 $ 2.27 $ 1.76 $ 1.44
Net income available to common shareholders $ 2.49 $ 2.11 $ 2.37 $ 1.94 $ 1.53
=========================================================================
Weighted average shares and potential dilutive
common shares outstanding 29,668 25,833 25,021 24,834 24,340
Dividends declared per common share $ 2.32 $ 2.13 $ 2.04 $ 1.95 $ 1.86
December 31,
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2002 2001 2000 1999 1998
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BALANCE SHEET DATA:
Net investment in real estate assets $3,611,485 $3,201,622 $2,040,614 $1,960,554 $1,805,788
Mortgage and other notes payable 3,795,114 3,372,851 2,115,565 2,018,838 1,855,347
Total debt 2,402,079 2,315,955 1,424,337 1,360,753 1,208,204
Minority interests 500,513 431,101 174,665 170,750 168,040
Shareholders' equity 741,190 522,088 434,825 419,887 415,782
OTHER DATA:
Cash flow provided by (used in):
Operating activities $ 273,923 $ 213,075 $ 139,118 $ 130,557 $ 106,183
Investing activities (274,625) (201,245) (122,215) (204,856) (569,849)
Financing activities 3,920 (6,877) (18,793) 75,546 466,369
Funds From Operations (FFO) (1) of the Operating
Partnership 232,670 180,443 131,667 116,273 92,693
FFO applicable to the Company 124,546 93,730 88,908 78,304 64,386
(1) Please refer to Managements Discussion and Analysis of Financial Condition
and Results of Operations for the definition of FFO. FFO does not represent
cash flow from operations as defined by accounting principals generally
accepted in the United States and is not necessarily indicative of the cash
available to fund all cash requirements.
6
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes that are included in this Annual Report.
Certain statements made in this section or elsewhere in this report may be
deemed "forward looking statements" within the meaning of the federal securities
laws. Although the Company believes the expectations reflected in any
forward-looking statements are based on reasonable assumptions, the Company can
give no assurance that these expectations will be attained, and it is possible
that actual results may differ materially from those indicated by these
forward-looking statements due to a variety of risks and uncertainties. Such
risks and uncertainties include, without limitation, general industry, economic
and business conditions, interest rate fluctuations, costs of capital and
capital requirements, availability of real estate properties, inability to
consummate acquisition opportunities, competition from other companies and
retail formats, changes in retail rental rates in the Company's markets, shifts
in customer demands, tenant bankruptcies or store closings, changes in vacancy
rates at the Company's properties, changes in operating expenses, changes in
applicable laws, rules and regulations, the ability to obtain suitable equity
and/or debt financing and the continued availability of financing in the amounts
and on the terms necessary to support the Company's future business. The Company
disclaims any obligation to update or revise any forward-looking statements to
reflect actual results or changes in the factors affecting the forward-looking
information.
GENERAL BACKGROUND
CBL & Associates Properties, Inc.'s consolidated financial statements and
accompanying notes reflect the consolidated financial results of CBL &
Associates Limited Partnership (the "Operating Partnership") and CBL &
Associates Management, Inc. (the "Management Company"). CBL & Associates
Properties, Inc., the Operating Partnership and the Management Company are
referred to collectively as the "Company." At December 31, 2002, the Company's
portfolio of properties consisted of 51 regional malls, 18 associated centers,
61 community centers, an office building, joint venture investments in four
regional malls, two associated centers and two community centers, plus 11
mortgages (the "Properties"). The Operating Partnership currently has under
construction one mall, which is owned in a joint venture, one associated center
and three community centers, and options to acquire certain shopping center
development sites.
The Company has reclassified certain financial information in the 2001 and
2000 consolidated financial statements to conform to the 2002 presentation. A
portion of the results of operations of the Company's taxable REIT subsidiary
was reported on a net basis in prior years' financial information. However, due
to growth of those operations, the Company has presented the taxable REIT
subsidiary's results of operations on a gross basis, with revenues included in
interest and other revenues and the related expenses included in the other
expenses caption.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002, TO
THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
The following significant transactions impact the comparison of the results
of operations for the year ended December 31, 2002, to the year ended December
31, 2001:
x The Company acquired ownership interests in 21 malls and two associated
centers from The Richard E. Jacobs Group ("Jacobs") on January 31, 2001;
therefore, the results of operations for 2002 include an additional month
of operations for these properties as compared to 2001. In March 2002, the
Company completed the second and final stage of the Jacobs acquisition by
acquiring additional interests in four malls and one associated center.
7
x The Company opened or acquired nine additional properties since February 1,
2001. The new properties opened or acquired are as follows:
Opening/
Project Name Location Type of Addition Acquisition Date
------------------------------ ------------------------------- ------------------------------- ---------------------
Willowbrook Plaza Houston, TX Acquisition February 2001
Creekwood Crossing Bradenton, FL New Development April 2001
The Lakes Mall Muskegon, MI New Development August 2001
CBL Center Chattanooga, TN New Development January 2002
Richland Mall Waco, TX Acquisition May 2002
Panama City Mall Panama City, FL Acquisition May 2002
Parkdale Crossing Beaumont, TX New Development November 2002
Westmoreland Mall Greensburg, PA Acquisition December 2002
Westmoreland Crossing Greensburg, PA Acquisition December 2002
x Several properties were sold during 2001 and their results of operations
are included in the consolidated statement of operations in 2001 through
each property's respective disposal date. The results of operations for
properties sold during 2002 are included in discontinued operations for all
periods presented as a result of the adoption of a new accounting
pronouncement (see Note 4 to the consolidated financial statements).
Therefore, when comparing results for the year ended December 31, 2002, to
the year ended December 31, 2001, the variances will include a reduction
related to the dispositions that occurred in 2001, which are listed below:
Project Name Location Disposal Date
-------------------------- ---------------------------- ---------------------
Jean Ribaut Square Beaufort, SC February 2001
Bennington Place Roanoke, VA March 2001
Sand Lake Corners Orlando, FL May 2001
Park Village Lakeland, FL August 2001
Sutton Plaza Mt. Olive, NJ November 2001
Creekwood Crossing Bradenton, FL November 2001
Rhett at Remount Charleston, SC January 2002
LaGrange Commons LaGrange, NY April 2002
One Park Place Chattanooga, TN April 2002
Chesterfield Crossing Richmond, VA June 2002
Salem Crossing Virginia Beach, VA October 2002
Girvin Plaza Jacksonville, FL December 2002
x During the first quarter of 2002, the Company began to include Columbia
Place in Columbia, SC, in its consolidated financial statements after
acquiring an additional 31% interest in the property, which resulted in the
Company owning a 79% controlling interest. The Company's interest in
Columbia Place was previously accounted for using the equity method of
accounting. In August 2002, the Company acquired the remaining 21% interest
in Columbia Place.
x In February 2002, the Company contributed 90% of its interests in Pemberton
Plaza, an associated center in Vicksburg, MS, and Massard Crossing and
Willowbrook Plaza, community centers located in Ft. Smith, AR, and Houston,
TX, respectively, to a joint venture that is accounted for using the equity
method of accounting. Prior to the date of contribution, the results of
operations of these properties were included in the Company's consolidated
statements of operations.
8
The following is a comparison of the consolidated results of operations for
2002 to the results of 2001:
(Dollars in Thousands)
2002 2001 $ Variance % Variance
---------- ---------- ---------- ----------
Total revenues $598,332 $548,137 $ 50,195 9.2%
---------- ---------- ---------- ----------
Expenses:
Property operating, real estate taxes and
maintenance and repairs 183,673 172,112 11,561 6.7%
Depreciation and amortization 94,373 83,877 10,496 12.5%
General and administrative 23,332 18,807 4,525 24.1%
Interest 143,164 156,707 (13,543) (8.6)%
Other 10,307 11,489 (1,182) (10.3)%
---------- ---------- ---------- ----------
Total expenses 454,849 442,992 11,857 2.7%
---------- ---------- ---------- ----------
Income from operations 143,483 105,145 38,338 36.5%
Loss on extinguishment of debt (3,930) (13,558) 9,628 71.0%
Gain on sales of real estate assets 2,804 10,649 (7,845) (73.7)%
Equity in earnings of unconsolidated affiliates 8,215 7,155 1,060 14.8%
Minority interest in earnings:
Operating Partnership (64,251) (49,643) (14,608) (29.4)%
Shopping center properties (3,303) (1,682) (1,621) (96.4)%
---------- ---------- ---------- ----------
Income before discontinued operations 83,018 58,066 24,952 43.0%
Income from discontinued operations 1,888 2,842 (954) (33.6)%
---------- ---------- ---------- ----------
Net income 84,906 60,908 23,998 39.4%
Preferred dividends (10,919) (6,468) (4,451) 68.8%
---------- ---------- ---------- ----------
Net income available to common shareholders $ 73,987 $ 54,440 $ 19,547 35.9%
========== ========== ========== ==========
Revenues
The increase in revenues was primarily attributable to three factors.
First, an additional month of operations in 2002 related to the Jacobs
properties combined with improvements in leasing and occupancy at the Jacobs
properties, contributed $21.9 million to the increase. Second, the additional
nine properties opened or acquired during 2002 and 2001 contributed $30.1
million to the increase. Third, continued improvement in leasing and occupancy
at existing properties contributed $6.0 million to the increase. The above
increases include an increase in lease termination fees of $1.4 million to $5.5
million in 2002 compared to 4.1 million in 2001. These increases were offset by
reductions in revenues of $5.0 million related to the properties sold during
2001 and $6.4 million related to the three properties that were contributed to a
joint venture early in 2002.
Management, leasing and development fees increased $2.0 million in 2002
compared to 2001 primarily due to growth in management and leasing fees from
unconsolidated affiliates that were acquired in the Jacobs transaction and from
an unconsolidated affiliate that began operations during 2002.
Interest and other revenues increased $1.6 million due to growth in certain
operations of the Company's taxable REIT subsidiaries.
Expenses
Property operating expenses increased by $4.6 million, including real
estate taxes and maintenance and repairs, due to the additional month this year
related to the Jacobs properties and $11.4 million related to the other nine
properties opened or acquired during 2002 and 2001. These increases were offset
by a total of $2.3 million related to both the properties sold during 2001 and
the three properties contributed to a joint venture in 2002. The remainder of
the increase was due to increases in general operating costs.
9
Depreciation and amortization expense increased by $2.0 million due to the
additional month related to the Jacobs properties and $3.5 million related to
the other nine properties opened or acquired during 2002 and 2001. These
increases were offset by a total of $1.9 million related to both the properties
sold during 2001 and the three properties contributed to a joint venture. The
increase is also attributable to depreciation on the capital expenditures made
during 2002 and 2001 in connection with the Company's ongoing renovations and
expansions of existing properties to maintain their competitive positions in
their respective trade areas.
General and administrative expenses increased $4.5 million, primarily due
to additional salaries and benefits for the personnel added to manage the
properties acquired during 2001 and 2002. Increased professional fees and the
costs to move the Company to its new corporate headquarters also contributed to
the increase.
Interest expense decreased $13.5 million due primarily to reductions of
debt with net proceeds of $114.7 million from the March 2002 common stock
offering and net proceeds of $96.4 million from the June 2002 preferred stock
offering.
Loss on Extinguishment of Debt
The loss on extinguishment of debt decreased from $13.6 million in 2001 to
$3.9 million in 2002 since the Company retired less debt subject to prepayment
penalties in 2002 than it did in 2001. The loss in 2002 consisted of prepayment
penalties of $2.3 million and the write-off of unamortized deferred financing
costs of $1.6 million.
Gain on Sales of Real Estate Assets
The net gain on sales of $2.8 million in 2002 was related to total gains of
$3.3 million on seven outparcel sales and total losses of $0.5 million on three
outparcel sales. The decrease from the net gain on sales of $10.6 million in
2001 results primarily because the 2001 amount includes a net gain on sales of
operating properties of $8.4 million. The net gain on sales of operating
properties in 2002 is included in discontinued operations due to the adoption of
a new accounting pronouncement in 2002 (see Note 4 to the consolidated financial
statements).
Equity in Earnings of Unconsolidated Affiliates
The increase in equity in earnings of unconsolidated affiliates resulted
from the Company's acquisition of additional partnership interests in East Towne
Mall, West Towne Mall and West Towne Crossing in Madison, WI, and Kentucky Oaks
Mall in Paducah, KY, in March 2002. The increase was offset by the effect of
accounting for Columbia Place as a consolidated property in 2002 as compared to
an unconsolidated affiliate in 2001.
Discontinued Operations
The Company sold five community centers and an office building during 2002
and one community center in the first quarter of 2003. The Company recognized a
net gain of $0.4 million related to the properties sold in 2002. Three community
centers and the office building were sold for a gain and two community centers
were sold at a loss. Operating income from discontinued operations decreased to
$1.5 million in 2002 from $2.8 million in 2001 because the prior year included a
full year of operations, while the current year only included the results of
operations through the date each property was sold.
10
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001, TO
THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
The following significant transactions impact the comparison of the results
of operations for the year ended December 31, 2001 to the year ended December
31, 2000.
The Company acquired or opened 26 properties during 2001 as compared to
four properties during 2000. Eighteen of the properties acquired from Jacobs are
included in the consolidated results of operations of the Company and five are
accounted for as unconsolidated affiliates. Therefore, the results of operations
for 2001 reflect a significant increase when compared to the results of
operations for 2000.
The Company disposed of six properties during 2001 and 13 properties during
2000, which offsets the increases from the acquisitions and openings discussed
above.
The following is a comparison of the consolidated results of operations for
2001 to the results for 2000:
(Dollars in Thousands)
2001 2000 $ Variance % Variance
---------- ---------- ---------- ----------
Total revenues $548,137 $355,186 $192,951 54.3%
---------- ---------- ---------- ----------
Expenses:
Property operating, real estate taxes and
maintenance and repairs 172,112 105,769 66,343 62.7%
Depreciation and amortization 83,877 58,268 25,609 44.0%
General and administrative 18,807 17,766 1,041 5.9%
Interest 156,707 95,989 60,718 63.3%
Other 11,489 3,363 8,126 241.6%
---------- ---------- ---------- ----------
Total expenses 442,992 281,155 161,837 57.6%
---------- ---------- ---------- ----------
Income from operations 105,145 74,031 31,114 42.0%
Loss on extinguishment of debt (13,558) (367) (13,191) NM
Gain on sales of real estate assets 10,649 15,989 (5,340) (33.4)%
Equity in earnings of unconsolidated affiliates 7,155 3,684 3,471 94.2%
Minority interest in earnings:
Operating Partnership (49,643) (28,507) (21,136) (74.1)%
Shopping center properties (1,682) (1,525) (157) (10.3)%
---------- ---------- ---------- ----------
Income before discontinued operations 58,066 63,305 (5,239) (8.3)%
Income from discontinued operations 2,842 2,417 425 17.6%
---------- ---------- ---------- ----------
Net income 60,908 65,722 (4,814) (7.3)%
Preferred dividends (6,468) (6,468) - -%
---------- ---------- ---------- ----------
Net income available to common shareholders $ 54,440 $ 59,254 $ (4,814) (8.1)%
========== ========== ========== ==========
NM - Not meaningful.
Revenues
Approximately $161.5 million of the increase was attributable to the 18
properties acquired from Jacobs that are accounted for on a consolidated basis.
Approximately $25.6 million of the increase resulted from the other eight new
properties opened or acquired during 2001 and 2000. These increases were offset
by a decrease in revenues of $5.5 million related to the 19 properties sold
during 2001 and 2000.
Improved occupancies, improved operations and increased rents in the
Company's operating portfolio generated approximately $0.9 million of the
increase in revenues. Additionally, lease termination fees increased by $3.3
million to $4.1 million in 2001 from $0.7 million in 2000.
11
Interest and other revenues increased primarily due to growth in certain
operations of the Company's taxable REIT subsidiary, which contributed $5.9
million to the increase.
Expenses
Property operating expenses, including real estate taxes and maintenance
and repairs, increased in 2001 as a result of the 26 new properties opened or
acquired during 2001 and 2000. The Company's cost recovery ratio, not including
bad debt expense of $5.9 million, was 96.6% in 2001 compared with 99.9% in 2000
due to decreases in occupancy and the bankruptcy of tenants who were replaced on
a short-term basis with tenants whose recovery clauses are more restrictive.
Depreciation and amortization increased in 2001 primarily from additional
depreciation and amortization on the 26 new properties opened or acquired during
2001 and 2000 and the Company's capital investment in operating properties for
renovations and expansions. This was offset by a reduction related to the 19
properties that were sold during 2001 and 2000.
Interest expense increased in 2001 primarily due to additional debt related
to the 26 new properties opened or acquired during 2001 and 2000, offset by
reductions in interest expense related to debt retired with proceeds from the
sales of properties.
General and administrative expenses increased in 2001 due to increases in
general overhead to manage the properties that were acquired in January 2001.
The amount of the increase in general and administrative expense was offset by a
$1.0 million reduction in reserves for state taxes.
Loss on Extinguishment of Debt
The loss on extinguishment of debt increased since the Company retired more
higher interest rate debt subject to prepayment penalties in 2001 than it did in
2000. The loss in 2001 consisted of prepayment penalties of $13.0 million and
the write-off of unamortized deferred financing costs of $0.5 million.
Gain on Sales of Real Estate Assets
Gain on sales includes $8.4 million of gains related to six community
centers that were sold in 2001. Additional gains were generated by sales of
outparcels including sales at The Lakes Mall in Muskegon, MI, which opened in
August 2001.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity in earnings was the result of acquiring a
non-controlling interest in four malls and one associated center in three
partnerships from Jacobs. All of these are accounted for using the equity method
of accounting. The increase was offset by decreases resulting from the cessation
of operations at Parkway Place in Huntsville, AL, while it was redeveloped, and
by the acquisition of the remaining ownership interest in Madison Square Mall in
Huntsville, AL. Since the Company now owns a 100% interest in Madison Square
Mall, its results have been included in the consolidated financial statements
since the date the remaining interest was acquired.
PERFORMANCE MEASUREMENTS
The shopping center business is, to some extent, seasonal in nature with
tenants achieving the highest levels of sales during the fourth quarter because
of the holiday season. The malls earn most of their "temporary" rents (rents
from short-term tenants), during the holiday period. Thus, occupancy levels and
12
revenue production are generally the highest in the fourth quarter of each year.
Results of operations realized in any one quarter may not be indicative of the
results likely to be experienced over the course of the fiscal year.
The Company classifies its regional malls into two categories - malls that
have completed their initial lease-up ("Stabilized Malls") and malls that are in
their initial lease-up phase ("Non-Stabilized Malls"). The Non-Stabilized Mall
category currently includes Springdale Mall, a redevelopment project in Mobile,
AL; Arbor Place Mall in Atlanta (Douglasville), GA, which opened in October
1999; The Lakes Mall in Muskegon, MI, which opened in August 2001; and Parkway
Place in Huntsville, AL, which opened in October 2002 and is owned in a joint
venture with a third party.
The Company's revenues, including the Company's share of revenues from
unconsolidated affiliates and excluding minority interests' share of revenues,
were derived from the Company's three property types as follows:
Year Ended December 31,
------------------------------------
2002 2001
------------------ -----------------
Malls 85.0% 84.7%
Associated centers 2.7% 2.6%
Community centers 9.3% 11.7%
Mortgages, office building and other 3.0% 1.0%
Sales and Occupancy Costs
For those tenants who occupy 10,000 square feet or less and have reported
sales, mall shop sales in the 50 Stabilized Malls decreased by 1.6% on a
comparable per square foot basis to $293.10 per square foot for the year ended
December 31, 2002, from $297.84 per square foot for the year ended December 31,
2001.
Total sales volume in the mall portfolio, including Non-Stabilized Malls,
increased 0.4% to $3.017 billion for the year ended December 31, 2002, from
$3.004 billion for the year ended December 31, 2001.
Occupancy costs as a percentage of sales for the years ended December 31,
2002 and 2001, for the Stabilized Malls were 12.0% and 11.3%, respectively.
Occupancy
Occupancy for the Company's portfolio was as follows:
At December 31,
---------------------------------
2002 2001
----------------- ---------------
Total portfolio occupancy 93.8% 93.8%
Total mall portfolio: 93.3% 92.2%
Stabilized Malls (50) 94.1% 92.4%
Non-Stabilized Malls (4) 83.5% 89.1%
Associated centers 95.2% 95.8%
Community centers 94.7% 97.0%
13
Occupancy for Non-Stabilized Malls declined primarily due to the addition
of Parkway Place to the category when it opened in October 2002. Excluding
Parkway Place, occupancy was 88.2% for the Non-Stabilized Malls at December 31,
2002.
Occupancy for the community centers declined because of the vacancies
resulting from the bankruptcies of Home Place at Kingston Overlook in Knoxville,
TN, and Quality Stores at Sattler Square in Big Rapids, MI. The spaces at
Kingston Overlook and Sattler Square have been re-leased, and the new tenants
are scheduled to open during the first half of 2003.
Average Base Rents
Average base rents per square foot for the portfolio were as follows:
At December 31,
------------------------------------
2002 2001
------------------ -----------------
Stabilized Malls $23.54 $23.02
Non-Stabilized Malls 22.78 21.14
Associated centers 9.87 9.42
Community centers 9.72 9.43
Renewal/Replacement Leasing
The Company achieved the following results from renewal and replacement
leasing for the year ended December 31, 2002, compared to the base rent at the
end of the lease term for the same spaces previously occupied:
Base Rent Base Rent
Per Square Per Square
Foot Foot Percentage
Prior Lease New Lease (1) Increase
------------- --------------- ------------
Stabilized Malls $ 23.85 $ 24.79 3.9%
Associated centers 12.01 12.91 7.5%
Community centers 10.01 10.44 4.3%
(1) Average base rent over the term of the lease.
CASH FLOWS
Cash provided by operating activities increased $60.8 million due to (i)
one additional month of operations for the properties acquired from Jacobs on
January 31, 2001, (ii) the addition of the nine new properties opened or
acquired since February 2001 and (iii) the acquisitions of additional interests
in Columbia Place during 2002. These increases were offset by reductions in
results of operations related to the properties that have been sold since
February 2001 and the three properties in which the Company contributed 90% of
its interest to a joint venture.
Cash used in investing activities increased $73.4 million because more cash
was used to acquire real estate assets in 2002 compared to 2001. The purchase
prices of Richland Mall, Westmoreland Mall and Westmoreland Crossing were all
cash and totaled $155.7 million. The Company also paid $38.3 million more for
capital expenditures in 2002 than it paid in 2001.
Cash provided by financing activities was $3.9 million in 2002 compared to
cash used in financing activities of $6.9 million in 2001. The change of $10.8
million was due to proceeds from the issuance of common and preferred stock,
increased borrowings and a reduction in the amount of prepayment penalties
incurred in 2002 as compared to 2001. This was offset by a significant increase
in the amount of loan repayments, the purchase of preferred stock, and an
increase in the amount of dividends and distributions paid.
14
LIQUIDITY AND CAPITAL RESOURCES
The principal uses of the Company's liquidity and capital resources
historically have been for property development, expansions, renovations,
acquisitions, debt repayment and distributions to shareholders. In order to
maintain its qualification as a real estate investment trust for federal income
tax purposes, the Company is required to distribute at least 90% of its taxable
income, computed without regard to net capital gains or the dividends-paid
deduction, to its shareholders.
The Company's current capital structure includes property-specific
mortgages (which are generally non-recourse), construction and term loans,
revolving lines of credit, common stock, preferred stock, joint venture
investments and a minority interest in the Operating Partnership.
The Company anticipates that the combination of its equity and debt sources
will, for the foreseeable future, provide adequate liquidity to continue its
capital programs substantially as in the past and make distributions to its
shareholders in accordance with the requirements applicable to real estate
investment trusts.
The Company's policy is to maintain a conservative debt-to-total-market
capitalization ratio in order to enhance its access to the broadest range of
capital markets, both public and private. Based on the Company's share of total
consolidated and unconsolidated debt and the market value of equity described
below, the Company's debt-to-total-market capitalization (debt plus market-value
equity) ratio was 50.6% at December 31, 2002.
Equity
As a publicly traded company, the Company has access to capital through
both the public equity and debt markets. The Company has an effective shelf
registration statement authorizing it to publicly issue shares of preferred
stock, common stock and warrants to purchase shares of common stock with an
aggregate public offering price of up to $350 million, of which approximately
$62.3 million remains after the preferred stock offering on June 14, 2002.
As of December 31, 2002, the minority interest in the Operating Partnership
includes the 16.0% ownership interest in the Operating Partnership held by the
Company's executive and senior officers, which may be exchanged for
approximately 8.9 million shares of common stock. Additionally, executive and
senior officers and directors own approximately 2.1 million shares of the
Company's outstanding common stock, for a combined total interest in the
Operating Partnership of approximately 19.9%.
Limited partnership interests issued to acquire Jacobs' interests in
shopping center properties in January 2001 and March 2002 may be exchanged for
approximately 12.0 million shares of common stock, which represents a 21.5%
interest in the Operating Partnership. Other third-party interests may be
exchanged for approximately 4.8 million shares of common stock, which represents
an 8.8% interest in the Operating Partnership.
Assuming the exchange of all limited partnership interests in the Operating
Partnership for common stock, there would be approximately 55.5 million shares
of common stock outstanding with a market value of approximately $2.222 billion
at December 31, 2002 (based on the closing price of $40.05 per share on December
31, 2002). The Company's total market equity is $2.389 billion, which includes
2.675 million shares of Series A preferred stock ($66.9 million based on a
liquidation preference of $25.00 per share) and 2.0 million shares of Series B
preferred stock ($100.0 million based on a liquidation preference of $50.00 per
share). The Company's executive and senior officers' and directors' ownership
interests had a market value of approximately $439.8 million at December 31,
2002.
15
Debt
The Company's share of mortgage debt on consolidated properties, adjusted
for minority investors' interests in six properties and its pro rata share of
mortgage debt on seven unconsolidated properties, consisted of the following at
December 31, 2002 and 2001 (in thousands):
December 31, 2002 December 31, 2001
--------------------------------- --------------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate (1) Amount Rate(1)
--------------- ----------------- --------------- ----------------
Fixed-rate debt:
Non-recourse loans on operating properties $ 1,886,057 7.18% $ 1,509,992 7.54%
--------------- ----------------- --------------- ----------------
Variable-rate debt:
Recourse term loans on operating properties 319,182 3.89% 626,863 3.45%
Construction loans 20,140 3.08% 39,365 3.25%
Lines of credit 221,275 2.69% 216,384 3.20%
--------------- ----------------- --------------- ----------------
Total variable-rate debt 560,597 3.39% 882,612 3.38%
--------------- ----------------- --------------- ----------------
Total $ 2,446,654 6.31% $ 2,392,604 6.01%
=============== ================= =============== ================
(1) Weighted average interest rate before amortization of deferred financing costs.
The Company's lines of credit total $345.3 million, of which $124.0 million
was available at December 31, 2002.
On February 28, 2003, the Company announced that it replaced a $130.0
million secured line of credit and a $105.3 million unsecured line of credit
with a new $255.0 million secured lines of credit with a group of banks. The new
line of credit matures in 2006, has a one-year extension option and bears
interest at a rate of 100 basis points over the London Interbank Offered Rate.
This line of credit does not require any scheduled principal payments.
As of December 31, 2002, total commitments under construction loans were
$61.0 million, of which $39.1 million was available to be used for completion of
construction and redevelopment projects and replenishment of working capital
previously used for construction.
The Company had additional lines of credit totaling $14.6 million that are
used only for issuances of letters of credit, of which $8.5 million was
outstanding at December 31, 2002.
The Company has fixed the interest rate on $80.0 million of an operating
property's debt at a rate of 6.95% using an interest rate swap agreement that
expires in August 2003. The Company did not incur any fees for the swap
agreement.
During 2002, the Company closed five variable rate loans totaling $115.4
million to be used for construction and acquisition purposes, of which $47.6
million was outstanding at December 31, 2002.
The Company also closed 12 non-recourse mortgage loans totaling $522.9
million that bear interest at fixed-rates ranging from 6.25% to 6.85%, with a
weighted average of 6.56%. Nine malls, two associated centers and the office
building secure these fixed-rate mortgages.
On February 28, 2003, the Company announced that it closed an $85.0 million
non-recourse loan that bears interest at 5.05% for a term of 10 years. The loan
is secured by Westmoreland Mall and its associated center, Westmoreland
Crossing, which the Company acquired in December 2002 with borrowings from the
lines of credit.
16
The Company expects to refinance the majority of mortgage and other notes
payable maturing over the next five years with replacement loans. Taking into
consideration extension options that are available to the Company, there are no
debt maturities through December 31, 2003, other than normal principal
amortization.
DEVELOPMENTS, EXPANSIONS, ACQUISITIONS AND DISPOSITIONS
The Company expects to continue to have access to the capital resources
necessary to expand and develop its business. Future development and acquisition
activities will be undertaken as suitable opportunities arise. The Company does
not expect to pursue these activities unless adequate sources of financing are
available and a satisfactory budget with targeted returns on investment has been
internally approved.
The Company intends to fund major development, expansion and acquisition
activities with traditional sources of construction and permanent debt financing
as well as other debt and equity financings, including public financings and the
lines of credit, in a manner consistent with its intention to operate with a
conservative debt-to-total-market capitalization ratio.
Developments and Expansions
The following development projects are under construction:
Gross Projected
Property Location Leasable Area Opening Date
------------------------------------------- --------------------------- -------------- -----------------
Malls
-----
Coastal Grand Myrtle Beach, SC 1,500,000* March 2004
(50/50 Joint Venture)
Associated centers
------------------
The Shoppes at Hamilton Place Chattanooga, TN 109,937 April 2003
Community centers
-----------------
Cobblestone Village St. Augustine, FL 306,000 May 2003
Waterford Commons (75/25 Joint Venture)** Waterford, CT 353,900 September 2003
Wilkes-Barre Township Marketplace Wilkes-Barre Township, PA 312,317 May 2004
* The initial project will encompass 1.2 million square feet.
** The Company will own at least 75% of the joint venture.
The following renovation projects are under construction:
Property Location Projected Completion Date
----------------------------- ------------------------------- ----------------------------
Parkdale Mall Beaumont, TX August 2003
St. Clair Square Fairview Heights, IL November 2003
Jefferson Mall Louisville, KY October 2003
Eastgate Mall Cincinnati, OH November 2003
East Towne Mall Madison, WI November 2003
West Towne Mall Madison, WI November 2003
The Company has entered into a number of option agreements for the
development of future regional malls and community centers. Except for the
projects discussed under Developments and Expansions above and Acquisitions
below, the Company does not have any other material capital commitments.
Acquisitions
The Company's acquisitions are discussed in Note 3 to the consolidated
financial statements.
17
Dispositions
During 2002, five community centers and an office building were sold for an
aggregate sales price of $36.8 million, resulting in a net gain of $0.4 million.
Three community centers and the office building were sold for a gain and two
community centers were sold at a loss. The Company sold one community center for
a gain of $2.9 million in February 2003.
In addition, the Company sold seven outparcels for gains and two outparcels
and a department store building for losses, which resulted in a net gain of $2.8
million in 2002.
OTHER CAPITAL EXPENDITURES
The Company prepares an annual capital expenditure budget for each property
that is intended to provide for all necessary recurring and non-recurring
capital improvements. The Company believes that its operating cash flows, which
include reimbursements from tenants, will provide the necessary funding for such
capital improvements. These cash flows will be sufficient to cover tenant finish
costs associated with renewing or replacing current tenant leases as their
leases expire and capital expenditures that will not be reimbursed by tenants.
Including its share of unconsolidated affiliates' capital expenditures, the
Company spent $31.6 million in 2002 for tenant allowances, which generate
increased rents from these tenants over the terms of their leases. Deferred
maintenance expenditures, a majority of which are recovered from the tenants,
were $19.3 million for 2002. Deferred maintenance expenditures included $10.2
million for resurfacing and improved lighting of parking lots, $8.1 million for
roof repairs and replacements and $1.0 million for various other expenditures.
Renovation expenditures were $57.4 million in 2002, a portion of which is
recovered from tenants.
Deferred maintenance expenditures are billed to tenants as common area
maintenance expense, and most are recovered over a 5- to 15-year period.
Renovation expenditures are primarily for remodeling and upgrades of malls, of
which approximately 30% is recovered from tenants over a 5- to 15-year period.
OTHER
The Company believes the Properties are in compliance, in all material
respects, with federal, state and local ordinances and regulations regarding the
handling, discharge and emission of hazardous or toxic substances. The Company
has not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of its present or former properties.
Therefore, the Company has not recorded any material liability in connection
with environmental matters.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the
presentation of a company's financial condition and results of operations and
requires significant judgment or complex estimation processes. The Company
believes that its most significant accounting policies are those related to its
accounting for the development of real estate assets and evaluating long-lived
assets for impairment.
The Company capitalizes predevelopment project costs paid to third parties.
All previously capitalized predevelopment costs are expensed when it is no
longer probable that the project will be completed. Once development of a
project commences, all direct costs incurred to construct the project, including
interest and real estate taxes are capitalized. Additionally, certain general
18
and administrative expenses are allocated to the projects and capitalized based
on the personnel assigned to the development project, and the investment in the
project relative to all development projects. Once a project is completed and
placed in service, it is depreciated over its estimated useful life. Buildings
and improvements are depreciated generally over 40 years and leasehold
improvements are amortized over the lives of the applicable leases or the
estimated useful life of the assets, whichever is shorter. Ordinary repairs and
maintenance are expensed as incurred. Major replacements and improvements are
capitalized and depreciated over their estimated useful lives.
The Company periodically evaluates its real estate assets to determine if
there has been any impairment in their carrying values and records impairment
losses if the undiscounted cash flows estimated to be generated by those assets
are less than the assets' carrying amounts or if there are other indicators of
impairment. At December 31, 2002, the Company did not own any real estate assets
that were impaired.
RECENT ACCOUNTING PRONOUNCEMENTS
As described in Note 2 to the consolidated financial statements, the
Financial Accounting Standards Board has issued certain statements, which are
effective beginning in 2003.
IMPACT OF INFLATION
In the last three years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate. Substantially all tenant
leases do, however, contain provisions designed to protect the Company from the
impact of inflation. These provisions include clauses enabling the Company to
receive percentage rent based on tenants' gross sales, which generally increase
as prices rise, and/or escalation clauses, which generally increase rental rates
during the terms of the leases. In addition, many of the leases are for terms of
less than 10 years which may enable the Company to replace existing leases with
new leases at higher base and/or percentage rent if rents of the existing leases
are below the then existing market rate. Most of the leases require the tenants
to pay their share of operating expenses, including common area maintenance,
real estate taxes and insurance, which reduces the Company's exposure to
increases in costs and operating expenses resulting from inflation.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO") is defined by the National Association of
Real Estate Investment Trusts ("NAREIT") as net income (computed in accordance
with accounting principles generally accepted in the United States) excluding
gains (or losses) on sales of operating properties, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for FFO from unconsolidated partnerships and joint
ventures are calculated on the same basis. The Company defines FFO available for
distribution to common shareholders as defined above by NAREIT less preferred
dividends and gains or losses on outparcel sales. The Company computes FFO in
accordance with the NAREIT recommendation concerning finance costs and
non-real-estate depreciation. The Company's method of calculating FFO may be
different from methods used by other REITs and, accordingly, may not be
comparable to such other REITs.
The Company believes that FFO provides an additional indicator of the
financial performance of the Properties. The use of FFO as an indicator of
financial performance is influenced not only by the operations of the Properties
and interest rates, but also by the capital structures of the Company and the
Operating Partnership. Accordingly, FFO will be one of the significant factors
considered by the Board of Directors in determining the amount of cash
distributions the Operating Partnership will make to its partners, including the
REIT.
19
FFO does not represent cash flow from operations as defined by accounting
principles generally accepted in the United States, is not necessarily
indicative of cash available to fund all cash flow needs and should not be
considered as an alternative to net income for purposes of evaluating the
Company's operating performance or to cash flow as a measure of liquidity.
Effective January 1, 2003, the Company adopted SFAS No. 145, which requires
that gains and losses from the extinguishment of debt be classified as
extraordinary items only if they meet the criteria of Accounting Principles
Board Opinion No. 30. As a result of the adoption of SFAS No. 145, the Company
has reclassified losses on the extinguishment of debt from extraordinary items
to unusual items within continuing operations for all periods presented. In
accordance with NAREIT's definition of FFO, net income is adjusted for
extraordinary items, but not for unusual items. Therefore, previously reported
FFO for 2002, 2001 and 2000 has been reduced by the amount of the loss on
extinguishment of debt in each of those years.
FFO increased in 2002 by $52.2 million, or 28.9%, to $232.7 million
compared to $180.4 million in 2001. The increase in FFO is primarily
attributable to reduced interest expense, the results of operations of the
properties added to the portfolio, a full twelve months of operations for the
properties acquired from Jacobs compared to eleven months in 2001 and the
reduction in loss on extinguishment of debt. These increases were offset by
reductions related to operating properties that were sold or contributed to a
joint venture. Additionally, lease termination fees were $1.4 million more in
2002 as compared to 2001. FFO would have increased by $2.8 million and $10.6
million in 2002 and 2001, respectively, if the Company included outparcel sales
in its computation of FFO.
The Company's calculation of FFO is as follows (in thousands):
Year Ended
December 31,
----------------------------
2002 2001
------------- --------------
Net income available to common shareholders $ 73,987 $ 54,440
ADD:
Depreciation and amortization from consolidated properties 94,373 83,877
Depreciation and amortization from unconsolidated affiliates 4,490 3,765
Depreciation and amortization from discontinued operations 586 1,066
Minority interest in earnings of operating partnership 64,251 49,643
LESS:
Minority investors' share of depreciation and amortization in
shopping center properties (1,348) (1,096)
Gain on disposal of discontinued operations (372) -
Depreciation and amortization of non-real estate assets (493) (603)
Gain on sales of real estate assets (2,804) (10,649)
------------- --------------
FUNDS FROM OPERATIONS $ 232,670 $ 180,443
============= ==============
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Index to Financial statements contained in Item 15(1).
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(1) Financial Statements Page Number
Independent Auditors' Report 22
CBL & Associates Properties, Inc. Consolidated
Balance Sheets as of December 31, 2002 and 2001 23
CBL & Associates Properties, Inc. Consolidated
Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 24
CBL & Associates Properties, Inc. Consolidated
Statements of Shareholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000 25
CBL & Associates Properties, Inc. Consolidated
Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 26
Notes to Financial Statements 27
21
INDEPENDENT AUDITORS' REPORT
To CBL & Associates Properties, Inc.:
We have audited the accompanying consolidated balance sheets of CBL & Associates
Properties, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2002 and 2001, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements referred to above present fairly, in
all material respects, the financial position of CBL & Associates Properties,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 4 to the financial statements, in 2002, the Company changed
its method of accounting for discontinued operations to conform to Statement of
Financial Accounting Standards No. 144. Also, as discussed in Note 2 to the
financial statements, on January 1, 2003, the Company changed its method of
accounting for extraordinary items to conform to Statement of Financial
Accounting Standard No. 145.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 21, 2003, except for Notes 2, 3, 4, 7, 12 and 13
as to which the date is September 18, 2003
22
CBL & Associates Properties, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
-------------------------------
2002 2001
------------- -------------
ASSETS
Real estate assets:
Land $ 570,818 $ 520,334
Buildings and improvements 3,394,787 2,961,185
------------- -------------
3,965,605 3,481,519
Less: accumulated depreciation (434,840) (346,940)
------------- -------------
3,530,765 3,134,579
Developments in progress 80,720 67,043
------------- -------------
Net investment in real estate assets 3,611,485 3,201,622
Cash and cash equivalents 13,355 10,137
Receivables:
Tenant, net of allowance for doubtful accounts of $2,861 in 2002
and $2,865 in 2001 37,994 38,353
Other 3,692 2,833
Mortgage notes receivable 23,074 10,634
Investment in and advances to unconsolidated affiliates 68,232 77,673
Other assets 37,282 31,599
------------- -------------
$ 3,795,114 $ 3,372,851
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable $ 2,402,079 $ 2,315,955
Accounts payable and accrued liabilities 151,332 103,707
------------- -------------
Total liabilities 2,553,411 2,419,662
------------- -------------
Commitments and contingencies (Notes 3, 5 and 16)
Minority interests 500,513 431,101
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized:
9.0% Series A Cumulative Redeemable Preferred Stock, 2,675,000 and
2,875,000 shares outstanding in 2002 and 2001, respectively 27 29
8.75% Series B Cumulative Redeemable Preferred Stock, 2,000,000
shares outstanding in 2002 and none in 2001 20 --
Common stock, $.01 par value, 95,000,000 shares authorized,
29,797,469 and 25,616,917 shares issued and outstanding in 2002
and 2001, respectively 298 256
Additional paid-in capital 765,686 556,383
Accumulated other comprehensive loss (2,397) (6,784)
Accumulated deficit (22,444) (27,796)
------------- -------------
Total shareholders' equity 741,190 522,088
------------- -------------
$ 3,795,114 $ 3,372,851
============= =============
The accompanying notes are an integral part of these balance sheets.
23
CBL & Associates Properties, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
------------------------------------------
2002 2001 2000
---------- ---------- ---------
REVENUES:
Rentals:
Minimum $382,492 $348,058 $221,996
Percentage 13,365 9,670 8,758
Other 11,015 10,605 6,245
Tenant reimbursements 168,456 160,394 105,697
Management, development and leasing fees 7,146 5,148 4,170
Interest and other 15,858 14,262 8,320
---------- ---------- ---------
Total revenues 598,332 548,137 355,186
---------- ---------- ---------
EXPENSES:
Property operating 101,080 96,768 57,018
Depreciation and amortization 94,373 83,877 58,268
Real estate taxes 47,368 43,913 29,895
Maintenance and repairs 35,225 31,431 18,856
General and administrative 23,332 18,807 17,766
Interest 143,164 156,707 95,989
Other 10,307 11,489 3,363
---------- ---------- ---------
Total expenses 454,849 442,992 281,155
---------- ---------- ---------
Income from operations 143,483 105,145 74,031
Loss on extinguishment of debt (3,930) (13,558) (367)
Gain on sales of real estate assets 2,804 10,649 15,989
Equity in earnings of unconsolidated affiliates 8,215 7,155 3,684
Minority interest in earnings:
Operating Partnership (64,251) (49,643) (28,507)
Shopping center properties (3,303) (1,682) (1,525)
---------- ---------- ---------
Income before discontinued operations 83,018 58,066 63,305
Operating income of discontinued operations 1,516 2,842 2,417
Gain on discontinued operations 372 - -
---------- ---------- ---------
Net income 84,906 60,908 65,722
Preferred dividends (10,919) (6,468) (6,468)
---------- ---------- ---------
Net income available to common shareholders $73,987 $ 54,440 $ 59,254
========== ========== =========
BASIC EARNINGS PER SHARE:
Income before discontinued operations, net of preferred dividends $ 2.51 $ 2.04 $ 2.28
Discontinued operations 0.07 0.11 0.10
---------- ---------- ---------
Net income available to common shareholders $ 2.58 $ 2.15 $ 2.38
========== ========== =========
Weighted average common shares outstanding 28,690 25,358 24,881
DILUTED EARNINGS PER SHARE:
Income before discontinued operations, net of preferred
dividends $ 2.43 $ 2.00 $ 2.27
Discontinued operations 0.06 0.11 0.10
---------- ---------- ---------
Net income available to common shareholders $ 2.49 $ 2.11 $ 2.37
========== ========== =========
Weighted average common shares and potential dilutive common
shares outstanding 29,668 25,833 25,021
The accompanying notes are an integral part of these statements.
24
CBL & Associates Properties, Inc.
Consolidated Statement Of Shareholders Equity
(In thousands, except share data)
Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Accumulated
Stock Stock Capital Loss Deficit Total
---------- --------- ----------- ------------- ------------ ----------
Balance December 31, 1999 $ 29 $ 248 $ 455,875 $ - $ (36,265) $ 419,887
Net income - - - - 65,722 65,722
Dividends declared - common shares - - - - (50,924) (50,924)
Dividends declared - preferred shares - - - - (6,468) (6,468)
Issuance of 152,311 shares of common stock - 2 3,343 - - 3,345
Exercise of stock options - 1 3,262 - - 3,263
---------- --------- ----------- ------------- ------------ ----------
Balance December 31, 2000 29 251 462,480 - (27,935) 434,825
Net income - - - - 60,908 60,908
Loss on current period cash flow hedges - - - (6,784) - (6,784)
Total comprehensive income 54,124
Dividends declared - common shares - - - - (54,301) (54,301)
Dividends declared - preferred shares - - - - (6,468) (6,468)
Issuance of 174,280 shares of common stock - 2 4,756 - - 4,758
Adjustment for minority interest in Operating
Partnership - - 80,827 - - 80,827
Exercise of stock options - 3 8,320 - - 8,323
---------- --------- ----------- ------------- ------------ ----------
Balance December 31, 2001 29 256 556,383 (6,784) (27,796) 522,088
Net income - - - - 84,906 84,906
Gain on current period cash flow hedges - - - 4,387 - 4,387
Total comprehensive income 89,293
Dividends declared - common shares - - - - (68,635) (68,635)
Dividends declared - preferred shares - - - - (10,919) (10,919)
Issuance of 2,000,000 shares of Series B preferred
stock 20 - 96,350 - - 96,370
Purchase of 200,000 shares of Series A preferred
stock (2) - (5,091) - - (5,093)
Issuance of 3,524,299 shares of common stock - 36 120,589 - - 120,625
Exercise of stock options - 2 5,005 - - 5,007
Deferred compensation - - 2,194 - - 2,194
Conversion of Operating Partnership units into
446,652 shares of common stock - 4 7,159 - - 7,163
Adjustment for minority interest in Operating
Partnership - - (16,903) - - (16,903)
---------- --------- ----------- ------------- ------------ ----------
Balance December 31, 2002 $ 47 $ 298 $ 765,686 $ (2,397) $ (22,444) $ 741,190
==========================================================================
25
CBL & Associates Properties, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
--------------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 84,906 $ 60,908 $ 65,722
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in earnings 67,554 51,341 30,045
Depreciation 74,501 75,905 47,329
Amortization 25,242 13,539 14,581
Loss on extinguishment of debt 3,930 13,558 367
Gain on sales of real estate assets (2,804) (10,649) (15,989)
Gain on discontinued operations (372) - -
Issuance of stock under incentive plan 2,578 1,926 1,634
Deferred compensation 2,194 - -
Write-off of development projects 236 2,032 127
Changes in assets and liabilities:
Tenant and other receivables (1,110) (8,586) (10,020)
Other assets (6,089) (5,107) (607)
Accounts payable and accrued liabilities 23,157 18,208 5,929
--------- --------- ---------
Net cash provided by operating activities 273,923 213,075 139,118
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate assets (70,325) (73,816) (139,645)
Acquisitions of real estate assets (166,489) (115,755) (11,103)
Capitalized interest (5,109) (5,860) (6,288)
Other capital expenditures (101,365) (63,115) (24,654)
Proceeds from sales of real estate assets 84,885 79,572 67,865
Additions to mortgage notes receivable (5,965) (1,604) (825)
Payments received on mortgage notes receivable 2,135 996 1,454
Distributions in excess of equity in earnings of
unconsolidated affiliates 5,751 5,855 7,106
Additional investments in and advances to unconsolidated
affiliates (15,394) (23,506) (6,782)
Additions to other assets (2,731) (4,012) (9,343)
--------- --------- ---------
Net cash used in investing activities (274,607) (201,245) (122,215)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage and other notes payable 751,881 763,235 262,320
Principal payments on mortgage and other notes payable (815,444) (650,584) (198,736)
Additions to deferred financing costs (5,589) (7,904) (4,403)
Proceeds from issuance of common stock 118,047 2,832 1,711
Proceeds from issuance of preferred stock 96,370 - -
Purchase of preferred stock (5,093) - -
Purchase of minority interest - - (761)
Proceeds from exercise of stock options 5,007 8,323 3,263
Prepayment penalties on extinguishment of debt (2,290) (13,038) (184)
Distributions to minority interests (65,310) (49,827) (25,327)
Dividends paid (73,677) (59,914) (56,676)
--------- --------- ---------
Net cash provided by financing activities 3,902 (6,877) (18,793)
--------- --------- ---------
Net change in cash and cash equivalents 3,218 4,953 (1,890)
Cash and cash equivalents, beginning of period 10,137 5,184 7,074
--------- --------- ---------
Cash and cash equivalents, end of period $ 13,355 $ 10,137 $ 5,184
========= ========= =========
Supplemental information
Cash paid during the period for interest, net of amounts
capitalized $141,425 $151,397 $ 94,789
========= ========= =========
Debt assumed in acquisition of property interests $149,687 $875,425 $ -
========= ========= =========
Issuance of minority interests in acquisition of property
interests $ 60,788 $339,976 $ -
========= ========= =========
The accompanying notes are an integral part of these statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE 1. ORGANIZATION
CBL & Associates Properties, Inc. (the "Company"), a Delaware corporation,
is a self-managed, self-administered, fully integrated real estate investment
trust ("REIT") that is engaged in the development, acquisition and operation of
regional shopping malls and community centers. The Company's shopping center
properties are located primarily in the Southeast, as well as in select markets
in the Northeast and Midwest regions of the United States.
The Company conducts substantially all of its business through CBL &
Associates Limited Partnership (the "Operating Partnership"). The Company is the
100% owner of two qualified REIT subsidiaries, CBL Holdings I, Inc. and CBL
Holdings II, Inc. CBL Holdings I, Inc. is the sole general partner of the
Operating Partnership. At December 31, 2002, CBL Holdings I, Inc. owned a 1.7%
general partnership interest and CBL Holdings II, Inc. owned a 52.0% limited
partnership interest in the Operating Partnership for a combined interest held
by the Company of 53.7%.
At December 31, 2002, the Operating Partnership owns controlling interests
in 51 regional malls, 18 associated centers (each adjacent to a regional
shopping mall), 61 community centers and an office building. Additionally, the
Operating Partnership owns non-controlling interests in four regional malls, two
associated centers and two community centers. The Operating Partnership
currently has under construction one mall, which is owned in a joint venture,
one associated center, and three community centers and has options to acquire
certain development properties owned by third parties.
The minority interest in the Operating Partnership is held primarily by CBL
& Associates, Inc. and its affiliates (collectively "CBL's Predecessor") and by
affiliates of The Richard E. Jacobs Group, Inc. ("Jacobs"). CBL's Predecessor
contributed their interests in certain real estate properties and joint ventures
to the Operating Partnership in exchange for a limited partnership interest when
the Operating Partnership was formed in November 1993. Jacobs contributed their
interests in certain real estate properties and joint ventures to the Operating
Partnership in exchange for a limited partnership interest when the Operating
Partnership acquired Jacobs' interests in 23 properties as discussed in Note 3.
At December 31, 2002, CBL's Predecessor owned a 16.0% limited partnership
interest, Jacobs owned a 21.5% limited partnership interest and third parties
owned an 8.8% limited partnership interest in the Operating Partnership (Note
9). CBL's Predecessor also owned 2,135,249 shares of the Company's common stock
at December 31, 2002, for a combined total interest of 19.9% in the Operating
Partnership.
The Operating Partnership conducts the Company's property management and
development activities through CBL & Associates Management, Inc. (the
"Management Company") to comply with certain requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). The Operating Partnership holds
100% of the preferred stock and owns 6% of the common stock of the Management
Company. CBL's Predecessor holds the remaining 94% of the Management Company's
common stock. Through its ownership of the preferred stock, the Operating
Partnership receives substantially all of the cash flow and enjoys substantially
all of the economic benefits of the Management Company's operations.
As sole general partner, the Company controls the Operating Partnership and
the Operating Partnership's rights to substantially all of the economic benefits
of the Management Company. As a result, the accounts of each entity are included
in the accompanying consolidated financial statements. The Company, the
Operating Partnership, and the Management Company are referred to collectively
as the "Company."
27
All significant intercompany balances and transactions have been eliminated
in the consolidated presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets
------------------
Real estate assets, including acquired assets, are stated at cost. Costs
incurred for the development, construction and improvement of real estate assets
are capitalized, including overhead costs directly attributable to property
development. Interest costs and real estate taxes incurred during the
development and construction period are capitalized and depreciated on the same
basis as the related asset. Ordinary repairs and maintenance are expensed as
incurred.
Depreciation is computed on a straight-line basis over estimated lives of
40 years for buildings, 10 to 20 years for certain improvements and 7 to 10
years for equipment and fixtures. Tenant improvements are capitalized and
depreciated on a straight-line basis over the term of the related lease.
Lease-related intangibles from acquisitions of real estate assets are amortized
over the remaining terms of the related leases.
Total interest expense capitalized was $5,109, $5,860 and $6,288 in 2002,
2001 and 2000, respectively.
Long-Lived Assets
-----------------
The Company evaluates the carrying value of long-lived assets to be held
and used when events or changes in circumstances warrant such a review. The
carrying value of a long-lived asset is considered impaired when its estimated
future undiscounted cash flows are less than its carrying value. If it is
determined that an impairment has occurred, the excess of the asset's carrying
value over its estimated fair value will be charged to operations. There were no
impairment charges in 2002, 2001 and 2000.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with original
maturities of three months or less as cash equivalents.
Deferred Financing Costs
------------------------
Net deferred financing costs of $9,767 and $9,396 were included in other
assets at December 31, 2002 and 2001, respectively. Deferred financing costs
include fees and costs incurred to obtain long-term financing and are amortized
to interest expense over the terms of the related notes payable. Amortization
expense was $4,114, $4,766, and $2,072 in 2002, 2001 and 2000, respectively.
Accumulated amortization was $4,631 and $3,700 as of December 2002 and 2001,
respectively.
Revenue Recognition
-------------------
Minimum rental revenue from operating leases is recognized on a
straight-line basis over the initial terms of the related leases. Certain
tenants are required to pay percentage rent if their sales volumes exceed
thresholds specified in their lease agreements. Percentage rent is recognized as
revenue when the thresholds are achieved and the amounts become determinable.
28
The Company receives reimbursements from tenants for real estate taxes,
insurance, common area maintenance, and other recoverable operating expenses as
provided in the lease agreements. Tenant reimbursements are recognized as
revenue in the period the related operating expenses are incurred. Tenant
reimbursements related to certain capital expenditures are billed to tenants
over periods of 5 to 15 years and are recognized as revenue when billed.
The Company receives management, leasing and development fees from third
parties and unconsolidated affiliates. Management fees are charged as a
percentage of minimum and percentage rents and are recognized as revenue when
earned. Development fees are recognized as revenue on a pro rata basis over the
development period. Leasing fees are charged for newly executed leases and
recognized as revenue when earned.
Gain on Sales of Real Estate Assets
-----------------------------------
Gain on sales of real estate assets is recognized when title to the asset is
transferred to the buyer, if the buyer's initial and continuing investment is
adequate and the buyer assumes all future ownership risks of the asset.
Income Taxes
------------
The Company is qualified as a REIT under the provisions of the Code. To
maintain qualification as a REIT, the Company is required to distribute at least
90% of its taxable income to shareholders and meet certain other requirements.
As a REIT, the Company is generally not liable for federal corporate income
taxes. If the Company fails to qualify as a REIT in any taxable year, the
Company will be subject to federal and state income taxes on its taxable income
at regular corporate tax rates. Even if the Company maintains its qualification
as a REIT, the Company may be subject to certain state and local taxes on its
income and property, and to federal income and excise taxes on its undistributed
income. State income taxes were not material in 2002, 2001 and 2000.
The Company had a net deferred tax asset at December 31, 2002 and 2001,
which consisted primarily of net operating loss carryforwards, that was reduced
to zero by a valuation allowance because of uncertainty about the realization of
the net deferred tax asset considering all available evidence.
Derivative Financial Instruments
--------------------------------
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which established accounting and reporting standards
for derivative instruments.
SFAS No. 133 requires an entity to recognize every derivative instrument as
either an asset or liability measured at its fair value. The fair value
adjustments affect either shareholders' equity or net income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity. See Note 14 for more
information.
Concentration of Credit Risk
----------------------------
The Company's tenants include national, regional and local retailers.
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of tenant receivables. The Company generally does not obtain
collateral or other security to support financial instruments subject to credit
risk, but monitors the credit standing of tenants.
29
The Company derives a substantial portion of its rental income from various
national and regional retail companies; however, no single tenant collectively
accounts for more than 7.0% of the Company's total revenues.
Earnings Per Share
------------------
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders by the weighted average number of unrestricted
common shares outstanding for the period. Diluted EPS assumes the issuance of
common stock for all potential dilutive common shares outstanding. The limited
partners' rights to convert their minority interest in the Operating Partnership
into shares of common stock are not dilutive (Note 9). The following summarizes
the impact of potential dilutive common shares on the denominator used to
compute earnings per share:
Year Ended December 31,
------------------------------------------------------
2002 2001 2000
------------------ ------------------ ----------------
Weighted average shares 28,793 25,436 24,936
Effect of nonvested stock awards (103) (78) (53)
------------------ ------------------ ----------------
Denominator - basic earnings per share 28,690 25,358 24,881
Dilutive effect of stock options, nonvested stock awards
and deemed shares related to deferred compensation
arrangements 978 475 140
------------------ ------------------ ----------------
Denominator - diluted earnings per share 29,668 25,833 25,021
================== ================== ================
Stock-Based Compensation
------------------------
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
Interpretations. No stock-based compensation expense related to stock options
has been reflected in net income since all options granted had an exercise price
equal to the fair value of the Company's common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to employee stock options:
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
------------------ ---------------- ----------------
Net income available to common shareholders, as reported $73,987 $54,440 $59,254
Compensation expense determined under fair value method (651) (615) (669)
------------------ ---------------- ----------------
Pro forma net income available to common shareholders $73,336 $53,825 $58,585
================== ================ ================
Earnings per share:
Basic, as reported $ 2.58 $ 2.15 $ 2.38
================== ================ ================
Basic, pro forma $ 2.56 $ 2.12 $ 2.35
================== ================ ================
Diluted, as reported $ 2.49 $ 2.11 $ 2.37
================== ================ ================
Diluted, pro forma $ 2.34 $ 2.08 $ 2.34
================== ================ ================
The fair value of each employee stock option grant was estimated as of the
date of grant using the Black-Scholes option pricing model and the following
weighted average assumptions:
Year Ended December 31,
--------------------------------------------
2002 2001 2000
----------- ----------- -----------
Risk-free interest rate 4.84% 5.07% 6.65%
Dividend yield 6.83% 8.34% 8.98%
Expected volatility 19.69% 18.00% 17.00%
Expected life 7.0 years 5.9 years 6.0 years
30
The per share weighted average fair value of stock options granted during
2002, 2001 and 2000 was $3.50, $1.75 and $1.54, respectively.
Comprehensive Income
--------------------
Comprehensive income includes all changes in shareholders' equity during
the period, except those resulting from investments by shareholders and
distributions to shareholders.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations." SFAS No. 141 modified existing rules for
allocating purchase price and requires that all business combinations initiated
after June 30, 2001, be accounted for under the purchase method. The Company
allocated a portion of the purchase price of acquired properties to leases that
were in place at the date of the acquisition for properties acquired during
2002.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which rescinds SFAS No. 4. As a result, gains and losses from
extinguishments of debt should be classified as extraordinary items only if they
meet the criteria of Accounting Principles Board Opinion No. 30 ("APB 30"). The
Company adopted SFAS No. 145 on January 1, 2003. Any gain or loss on
extinguishment of debt that was previously reported as an extraordinary item in
2002, 2001 or 2000 that does not meet the criteria of APB 30 has been
reclassified as an unusual item within continuing operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that the costs
associated with exit or disposal activity be recognized and measured at fair
value when the liability is incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after December 31, 2002.
Since the Company typically does not engage in significant disposal activities,
the implementation of SFAS No. 146 in 2003 is not expected to have a significant
impact on the Company's reported financial results.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5, 57, and
107, and rescission of FASB Interpretation No. 34." The interpretation
elaborates on the disclosures to be made by a guarantor in its financial
statements. It also requires a guarantor to recognize a liability for the fair
value of the obligation undertaken in issuing the guarantee at the inception of
a guarantee. The Company adopted the disclosure provisions of FASB
Interpretation No. 45 in the fourth quarter 2002. In accordance with the
interpretation, the Company will adopt the remaining provisions of FASB
Interpretation No. 45 effective January 1, 2003, and does not anticipate that
they will have a material effect on the financial position and results of
operations of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." SFAS No. 148 provides alternative transition methods for companies that
voluntarily change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation.
31
Effective January 1, 2003, the Company will begin recording the expense
associated with stock options in accordance with the fair value provisions of
SFAS No. 123. In accordance with the provisions of SFAS No. 148, the Company
will apply the fair value provisions on a prospective basis for all stock
options granted after January 1, 2003.
Reclassifications
-----------------
Certain amounts in the 2001 and 2000 consolidated financial statements have
been reclassified to conform with the current year presentation.
NOTE 3. ACQUISITIONS
The Company includes the results of operations of real estate assets
acquired in the consolidated statement of operations from the date of the
related acquisition.
The Company acquired Richland Mall, located in Waco, TX, in May 2002, for a
cash purchase price of $43,250. In May 2002, the Company acquired Panama City
Mall, located in Panama City, FL, for a purchase price of $45,700. The purchase
price of Panama City Mall consisted of (i) the assumption of $40,700 of
non-recourse mortgage debt with an interest rate of 7.30%, (ii) the issuance of
118,695 common units of the Operating Partnership with a fair value of $4,487
($37.80 per unit) and (iii) $458 in cash closing costs.
The Company also entered into a ground lease in May 2002, for land adjacent
to Panama City Mall. The ground lease gives the lessor the option to require the
Company to purchase the land for $4,148 between August 1, 2003, and February 1,
2004.
The Company acquired the remaining 21% ownership interest in Columbia Place
in Columbia, SC in August 2002. The total consideration of $9,875 consisted of
the issuance of 61,662 common units with a fair value of $2,280 ($36.97 per
unit) and the assumption of $7,595 of debt.
In December 2002, the Company acquired the remaining 35% interest in East
Towne Mall, West Towne Mall and West Towne Crossing, which are all located in
Madison, WI. The purchase price consisted of the issuance of 932,669 common
units with a fair value of $36,411 ($39.04 per unit) and the assumption of
$25,618 of debt.
In December 2002, the Company acquired Westmoreland Mall and its associated
center, Westmoreland Crossing, located in Greensburg, PA, for a cash purchase
price of $112,416.
On January 31, 2001, the Company completed the first stage of its
acquisition of Jacobs' interests in 21 malls and two associated centers for
total consideration of approximately $1,204,249, including the acquisition of
minority interests in certain properties. The purchase price consisted of (i)
$125,460 in cash, including closing costs of approximately $12,872, (ii) the
assumption of $750,244 in non-recourse mortgage debt, and (iii) the issuance of
12,056,692 special common units of the Operating Partnership with a fair value
of $328,545 ($27.25 per unit).
32
The Company closed on the second and final stage of the Jacobs' acquisition
in March 2002, by acquiring additional interests in the joint ventures that own
the following properties:
x West Towne Mall, East Towne Mall and West Towne Crossing in Madison,
WI (17% interest)
x Columbia Place in Columbia, SC (31% interest)
x Kentucky Oaks Mall in Paducah, KY (2% interest)
The purchase price of $42,519 for the additional interests consisted of
$422 in cash, the assumption of $24,487 of debt and the issuance of 499,730
special common units with a fair value of $17,610 (weighted average of $35.24
per unit).
The following unaudited pro forma financial information is for the years
ended December 31, 2001 and 2000. It presents results for the Company as if the
acquisition of the interests acquired on January 31, 2001, had occurred on
January 1, 2000. The unaudited pro forma financial information does not
represent what the consolidated results of operations or financial condition
actually would have been if the acquisition and related transactions had
occurred on January 1, 2000. The pro forma financial information also does not
project the consolidated results of operations for any future period. The pro
forma results are as follows:
Year Ended December 31,
----------------------------------
2001 2000
------------- -------------
Total revenues $ 554,405 $ 520,515
Total expenses 448,854 436,967
------------- -------------
Income from operations 105,551 83,548
============= =============
Net income before discontinued operations 57,772 59,501
============= =============
Net income available to common shareholders $ 53,465 $ 54,906
============= =============
Basic per share data:
Net income before discontinued operations $ 2.02 $ 2.13
============= =============
Net income available to common shareholders $ 2.11 $ 2.21
============= =============
Diluted per share data:
Net income before discontinued operations $ 1.99 $ 2.12
============= =============
Net income available to common shareholders $ 2.07 $ 2.19
============= =============
The pro forma adjustments include additional (i) depreciation expense of
$1,871 and $22,455, (ii) interest expense of $835 and $10,516, (iii) management
fees from unconsolidated affiliates of $129 and $1,483 and (iv) minority
interest in earnings in the Operating Partnership of $1,965 and $22,242 for the
years ended December 31, 2001 and 2000, respectively.
In separate transactions during 2001, the Company issued an additional
602,980 special common units of the Operating Partnership valued at $16,431 and
31,008 common units of the Operating Partnership valued at $949 to purchase the
remaining 50% and 25% interests in Madison Square Mall and Madison Plaza in
Huntsville, AL, respectively.
NOTE 4. DISCONTINUED OPERATIONS
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121 and requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less costs to sell. SFAS No.
33
144 retains the fundamental provisions of SFAS No. 121 for (i) recognition and
measurement of the impairment of long-lived assets to be held and used and (ii)
measurement of long-lived assets to be disposed by sale. SFAS No. 144 broadens
the definition of what constitutes a discontinued operation and how the results
of a discontinued operation are to be measured and presented.
The provisions of SFAS No. 144 have been applied prospectively to
dispositions that occurred after January 1, 2002. Additionally, the disposed
assets' results of operations for 2001 and 2000 have been reclassified to
discontinued operations to conform to the current year presentation.
During 2002, the Company sold five community centers and an office building
for a total sales price of $36,800 and recognized a net gain of $372. During the
first quarter of 2003, the Company sold one community center for a sales price
of $7,760 and recognized a gain of $2,935. In accordance with SFAS No. 144, the
net gain attributable to the properties sold in 2002 is reported as a component
of discontinued operations in the accompanying consolidated statement of
operations. The results of operations for all six community centers and the
office building are reflected as discontinued operations for 2002, 2001 and
2000. Total revenues for these properties were $3,093, $5,696 and $4,538 in
2002, 2001 and 2000, respectively.
NOTE 5. UNCONSOLIDATED AFFILIATES
At December 31, 2002, the Company has investments in the following nine
partnerships and joint ventures, which are accounted for using the equity method
of accounting:
Company's
Joint Venture Property Name Interest
-----------------------------------------------------------------------------------------
Governor's Square IB Governor's Plaza 50.0%
Governor's Square Company Governor's Square 47.5%
Imperial Valley Mall L.P. Imperial Valley Mall 60.0%
Kentucky Oaks Mall Company Kentucky Oaks Mall 50.0%
Mall of South Carolina L.P. Coastal Grand 50.0%
Mall of South Outparcel L.P. Coastal Grand 50.0%
Mall Shopping Center Company Plaza del Sol 50.6%
Parkway Place L.P. Parkway Place 45.0%
PPG Venture I L.P. Willowbrook Plaza, Pemberton Plaza 10.0%
and Massard Crossing
In January 2001, the Company acquired a 48% interest in Kentucky Oaks Mall
Company, Columbia Joint Venture and Madison Joint Venture in connection with the
first stage of the Jacobs' transaction discussed in Note 3.
As discussed in Note 3, the Company discontinued the equity method of
accounting for the partnership that owns Madison Square Mall after the Company
acquired the remaining ownership interest in that partnership on January 31,
2001.
In February 2002, the Company contributed its interests in two community
centers and one associated center to PPG Venture I Limited Partnership, a joint
venture with a third party, and retained a 10% interest. The total consideration
of $63,030 consisted of cash of $46,000 and the Company's retained interest. The
Company deferred the gain of $10,983 from the transaction since certain
restrictions included in the joint venture agreement related to the subsequent
sale of the properties demonstrate the Company's continuing involvement. The
deferred gain is included in accounts payable and accrued liabilities.
In March 2002, the Company acquired an additional 2% interest in Kentucky
Oaks Mall Company, an additional 17% interest in Madison Joint Venture and an
additional 31% interest in Columbia Mall Company as discussed in Note 3. Since
the additional interest in Columbia Mall Company resulted in the Company having
a 79% controlling interest in that joint venture, the Company stopped accounting
for it using the equity method and began consolidating it as of the date the
additional 31% interest was acquired.
34
During 2002, the Company entered into three joint ventures with third
parties to develop two malls, Imperial Valley Mall and Coastal Grand.
Condensed combined financial statement information of the partnerships and
joint ventures is presented as follows:
December 31,
---------------------------
2002 2001
------------ ------------
ASSETS:
Net investment in real estate assets $ 280,610 $ 359,361
Other assets 10,593 11,077
------------ ------------
Total assets $ 291,203 $ 370,438
============ ============
LIABILITIES :
Mortgage notes payable $ 191,512 $ 229,687
Other liabilities 5,491 11,264
------------ ------------
Total liabilities $ 197,003 $ 240,951
============ ============
OWNERS' EQUITY:
The Company $ 68,313 $ 77,673
Other investors 25,887 51,814
------------ ------------
Total owners' equity 94,200 129,487
------------ ------------
Total liabilities and owners' equity $ 291,203 $ 370,438
============ ============
Year Ended December 31,
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
Revenues $ 57,084 $ 55,779 $ 27,294
Depreciation and amortization (7,603) (7,633) (3,080)
Other operating expenses (17,634) (18,326) (8,255)
Interest expense (14,827) (14,693) (8,397)
---------- ---------- ----------
Income from operations 17,020 15,127 7,562
Gain on sales of real estate assets - 213 186
---------- ---------- ----------
Net income $ 17,020 $ 15,340 $ 7,748
========== ========== ==========
Company's share of net income $ 8,215 $ 7,155 $ 3,684
========== ========== ==========
In general, contributions and distributions of capital or cash flows and
allocations of income and expense are made on a pro rata basis in proportion to
the equity interest held by each general or limited partner. All debt on these
properties is non-recourse.
35
NOTE 6. MORTGAGE AND OTHER NOTES PAYABLE
Mortgage and other notes payable consisted of the following at December 31,
2002 and 2001:
December 31, 2002 December 31, 2001
------------------------ -------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Rate (1) Amount Rate(1)
---------- ---------- ---------- ----------
Fixed-rate debt:
Non-recourse loans on operating properties $1,867,915 7.16% $1,463,351 7.50%
---------- ----------
Variable-rate debt:
Recourse term loans on operating properties 290,954 3.98% 595,785 3.38%
Lines of credit 221,275 2.69% 216,266 3.20%
Construction loans 21,935 3.08% 40,553 3.26%
---------- ----------
Total variable-rate debt 534,164 3.41% 852,604 4.19%
---------- ----------
Total $2,402,079 6.32% $2,315,955 6.30%
========== ==========
(1) Weighted average interest rate before amortization of deferred financing
costs.
Non-recourse and recourse loans include loans that are secured by
properties owned by the Company that have a net carrying value of $2,897,526 at
December 31, 2002. At December 31, 2002, the Company had $34,734 available and
unfunded under recourse term loan commitments on four properties.
Non-Recourse Loans
------------------
At December 31, 2002, non-recourse loans totaling $1,867,915 bear interest
at fixed rates ranging from 6.25% to 10.625%. Non-recourse loans generally
provide for monthly payments of principal and/or interest and mature at various
dates from May 2003 through August 2018.
Variable-Rate Loans
-------------------
Recourse loans totaling $290,954 bear interest at variable interest rates
indexed to the prime lending rate or London Interbank Offered Rate ("LIBOR"). At
December 31, 2002, interest rates on variable-rate debt varied from 2.55% to
6.95%.
At December 31, 2002, the Company had construction loans on two properties.
The total commitment under the construction loans is $61,025 of which $21,935 is
outstanding at December 31, 2002. The construction loans mature in 2004 and
2005, and bear interest at variable interest rates indexed to the prime lending
rate or LIBOR. Interest rates on the construction loans were 3.07% and 3.09%,
respectively, at December 31, 2002.
Unsecured Line of Credit
------------------------
The Company has an unsecured line of credit that is used for construction,
acquisition, and working capital purposes. The total available amount on the
unsecured line of credit of $105,275 was outstanding at December 31, 2002. The
unsecured line of credit expires January 31, 2004, and bears interest at a rate
indexed to the prime lending rate or LIBOR. Borrowings under the unsecured line
of credit had a weighted average interest rate of 2.99% at December 31, 2002.
Quarterly principal payments of $6,250 are due beginning February 1, 2003.
The unsecured line of credit contains three one-year extension options.
During the first and second extension years, the Company is required to make
quarterly principal payments of $6,250 beginning on February 1 of each extension
year. If the third extension option is exercised, then quarterly payments of
$18,750 are required beginning on February 1 of that extension year.
36
Secured Lines of Credit
-----------------------
The Company has four secured lines of credit that are used for
construction, acquisition, and working capital purposes. Each of these lines is
secured by mortgages on certain of the Company's operating properties. The
following summarizes certain information about the secured lines of credit as of
December 31, 2002:
Total Total Maturity
Available Outstanding Date
----------------------------------------------------
$130,000 $ 75,000 September 2003
80,000 31,000 June 2003
10,000 10,000 April 2004
20,000 - March 2004
-----------------------------------
$240,000 $116,000
===================================
Borrowings under the secured lines of credit had a weighted average
interest rate of 2.43% at December 31, 2002. Additionally, the secured lines of
credit are secured by 26 of the Company's properties, which had a net carrying
value of $299,660 at December 31, 2002.
LETTERS OF CREDIT
At December 31, 2002, the Company had additional lines of credit with a
total commitment of $14,585 that can only be used for issuing letters of credit.
The total outstanding under these lines of credit was $8,474 at December 31,
2002.
Covenants and Restrictions
--------------------------
The secured and unsecured line of credit agreements contain, among other
restrictions, certain restrictive covenants including the maintenance of certain
coverage ratios, minimum net worth requirements, and limitations on cash flow
distributions. The Company was in compliance with all covenants and restrictions
on its lines of credit at December 31, 2002.
Thirteen malls, three associated centers and the office building are owned
by special purpose entities that are included in the Company's consolidated
financial statements. The sole business purpose of the special purpose entities
is the ownership and operation of these properties. The mortgaged real estate
and other assets owned by these special purpose entities are restricted under
the loan agreements in that they are not available to settle other debts of the
Company. However, so long as the loans are not under an event of default, as
defined in the loan agreements, the cash flows from these properties, after
payments of debt service, operating expenses and reserves, are available for
distribution to the Company.
37
Debt Maturities
---------------
As of December 31, 2002, the scheduled principal payments on all mortgage
and other notes payable, including construction loans and lines of credit, are
as follows:
2003 $ 433,944
2004 119,737
2005 122,612
2006 162,135
2007 202,634
Thereafter 1,361,017
-----------
Total $ 2,402,079
===========
Of the $433,944 of scheduled principal payments in 2003, $390,080 is
related to loans that are scheduled to mature in 2003. The Company has extension
options in place for each of these loans that will extend their scheduled
maturities to 2004.
NOTE 7. LOSS ON EXTINGUISHMENT OF DEBT
As discussed in Note 2, the Company adopted SFAS No. 145 on January 1,
2003. As a result, the losses on extinguishment of debt that were previously
reported as extraordinary items have been reclassified as unusual items within
continuing operations in the accompanying consolidated statements of operations.
The loss on extinguishment of debt resulted from prepayment penalties and
the write-off of unamortized deferred financing costs when notes payable were
retired before their scheduled maturity dates. The following are the components
of the loss:
Year Ended December 31,
------------------------------------
2002 2001 2000
------------------------------------
Prepayment penalties $ 2,290 $13,038 $ 184
Unamortized deferred financing costs 1,640 520 183
------------------------------------
$ 3,930 $13,558 $ 367
====================================
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock
------------
In March 2002, the Company completed a follow-on offering of 3,352,770
shares of its $0.01 par value common stock at $34.55 per share. The net proceeds
of $114,705 were used to repay outstanding borrowings under the Company's lines
of credit and to retire debt on certain operating properties.
Preferred Stock
---------------
In June 1998, the Company issued 2,875,000 shares of 9.0% Series A
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") with a
face value of $25.00 per share in a public offering. The dividends on the Series
A Preferred Stock are cumulative and accrue from the date of issue and are
payable quarterly in arrears at a rate of $2.25 per share per annum. The Series
A Preferred Stock has no stated maturity, is not subject to any sinking fund or
mandatory redemption and is not redeemable prior to July 1, 2003. On or after
July 1, 2003, the Company may redeem the Series A Preferred Stock, in whole or
in part, for a cash redemption price of $25.00 per share, plus accrued and
unpaid dividends.
38
In June 2002, the Company purchased 200,000 shares of the Series A
Preferred Stock for $5,093.
In June 2002, the Company completed an offering of 2,000,000 shares of
8.75% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred
Stock"), having a par value of $.01 per share, at $50.00 per share. The net
proceeds of $96,370 were used to reduce outstanding balances under the Company's
lines of credit and to retire term loans on several properties.
The dividends on the Series B Preferred Stock are cumulative and accrue
from the date of issue and are payable quarterly in arrears at a rate of $4.375
per share per annum. The Series B Preferred Stock has no stated maturity, is not
subject to any sinking fund or mandatory redemption, and is not convertible into
any other securities of the Company. The Series B Preferred Stock cannot be
redeemed by the Company prior to June 14, 2007. After that date, the Company may
redeem shares, in whole or in part, at any time for a cash redemption price of
$50.00 per share plus accrued and unpaid dividends.
NOTE 9. MINORITY INTERESTS
Minority interests represent (i) the aggregate partnership interest in the
Operating Partnership that is not owned by the Company and (ii) the aggregate
ownership interest in 11 of the Company's shopping center properties that is
held by third parties.
Minority Interest in Operating Partnership
------------------------------------------
The minority interest in the Operating Partnership is represented by common
units and special common units of limited partnership interest in the Operating
Partnership (the "Operating Partnership Units") that the Company does not own.
The assets and liabilities allocated to the Operating Partnership's
minority interest are based on their ownership percentage of the Operating
Partnership at December 31, 2002 and 2001. The ownership percentage is
determined by dividing the number of Operating Partnership Units held by the
minority interest at December 31, 2002 and 2001 by the total Operating
Partnership Units outstanding at December 31, 2002 and 2001. The minority
interest ownership percentage in assets and liabilities of the Operating
Partnership was 46.3% and 49.9% at December 31, 2002 and 2001, respectively.
Income is allocated to the Operating Partnership's minority interest based
on their weighted average ownership during the year. The ownership percentage is
determined by dividing the weighted average number of Operating Partnership
Units held by the minority interest by the total weighted average number of
Operating Partnership Units outstanding during the year.
A change in the number of shares of common stock or Operating Partnership
Units changes the percentage ownership of both the Operating Partnership's
minority interest and the Company. An Operating Partnership Unit is considered
to be equivalent to a share of common stock since it generally is redeemable for
cash or shares of the Company's common stock. As a result, an allocation is made
between shareholders' equity and minority interest in the Operating Partnership
in the accompanying balance sheet to reflect the change in ownership of the
Operating Partnership's underlying equity when there is a change in the number
of shares and/or Operating Partnership Units outstanding.
The total liability related to the minority interest in the Operating
Partnership was $497,832 and $428,888 at December 31, 2002 and 2001,
respectively.
39
Minority Interest in Operating Partnership-Conversion Rights
------------------------------------------------------------
The Operating Partnership agreement gives the limited partners the right to
convert their partnership interests in the Operating Partnership into shares of
common stock, subject to certain limits. It also gives them the right to sell
part or all of their partnership interest in the Operating Partnership to the
Company in exchange for shares of common stock or their cash equivalent. The
Company can elect to pay in shares of common stock or their cash equivalent,
subject to the terms of the Operating Partnership agreement.
The Operating Partnership issued 13,159,407 special common units in
connection with the acquisitions discussed in Notes 3 and 5. After January 31,
2004, holders of the special common units may exchange them for shares of common
stock or cash. The Company has the right to elect the form of payment. The
special common units receive a minimum distribution of $2.9025 per unit per
year. When the distribution on the common units exceeds $2.9025 per unit per
year, the special common units will receive a distribution equal to that paid on
the common units.
The Operating Partnership issued 1,144,034 common units in connection with
the acquisitions discussed in Notes 3 and 5. The common units issued in
connection with the acquisition of Panama City Mall, which is discussed in Note
3, will receive a minimum annual dividend of $3.375 per unit until May 2012.
When the distribution on the common units exceeds $3.375 per unit, these common
units will receive a distribution equal to that paid on the common units.
Additionally, if the annual distribution on the common units should ever be less
than $2.22 per unit, the $3.375 per unit dividend will be reduced by the amount
the per unit distribution is less than $2.22 per unit.
During 2002, third parties converted 446,652 common units to shares of the
Company's common stock.
The Operating Partnership acquired properties from CBL's Predecessor in
exchange for 1,336 common units valued at $27,000 during 2000.
Outstanding rights to convert minority interests in the Operating
Partnership to common stock were held by the following parties at December 31,
2002 and 2001:
December 31,
--------------------------------
2002 2001
--------------- ----------------
Common shares outstanding 29,797,469 25,616,917
Outstanding rights:
Jacobs 11,953,903 11,454,173
CBL's Predecessor 8,883,928 8,884,728
Third parties 4,845,164 4,177,990
--------------- ----------------
Total Operating Partnership Units 55,480,464 50,133,808
=============== ================
Minority Interest in Shopping Center Properties
-----------------------------------------------
The Company's consolidated financial statements include the assets,
liabilities and results of operations of eleven properties that the Company does
not wholly own. The minority interest in shopping center properties represents
the aggregate ownership interest of third parties in these properties. The total
liability related to the minority interests in shopping center properties was
$2,681 and $2,213 at December 31, 2002 and 2001, respectively.
The assets and liabilities allocated to the minority interest in shopping
center properties are based on the third parties' ownership percentages in each
shopping center property at December 31, 2002 and 2001. Income is allocated to
the minority interest in shopping center properties based on the third parties'
weighted average ownership in each shopping center property during the year.
40
NOTE 10. MINIMUM RENTS
The Company receives rental income by leasing retail shopping center space
under operating leases. Future minimum rents are scheduled to be received under
noncancellable tenant leases at December 31, 2002, as follows:
2003 $367,191
2004 331,926
2005 290,280
2006 252,001
2007 214,485
Thereafter 818,495
Future minimum rents do not include percentage rents or tenant
reimbursements that may become due.
NOTE 11. MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable are collateralized by first mortgages or
wrap-around mortgages on the underlying real estate and related improvements.
Interest rates on notes receivable range from 2.63% to 9.5% at December 31,
2002. Maturities of notes receivable range from 2003 to 2022.
NOTE 12. SEGMENT INFORMATION
The Company measures performance and allocates resources according to
property type, which is determined based on differences such as nature of
tenants, capital requirements, economic risks and leasing terms. Rental income
and tenant reimbursements from tenant leases provide the majority of revenues
from all segments. The accounting policies of the reportable segments are the
same as those described in Note 2. Information on the Company's reportable
segments is presented as follows:
Associated Community
Year Ended December 31, 2002 Malls Centers Centers All Other Total
----------------------------------------------- ------------ ------------ ----------- ---------- ------------
Revenues $ 507,003 $ 16,747 $ 54,303 $ 20,279 $ 598,332
Property operating expenses (1) (174,108) (3,851) (13,843) 8,129 (183,673)
Interest expense (124,696) (3,256) (9,236) (5,976) (143,164)
Other expense - - - (10,071) (10,071)
Gain on sales of real estate assets (311) - 2,576 539 2,804
------------ ------------ ----------- ---------- ------------
Segment profit and loss $ 207,888 $ 9,640 $ 33,800 $ 12,900 264,228
Depreciation and amortization (94,373)
General, administrative and other (23,568)
Loss on extinguishment of debt (3,930)
Equity in earnings and minority interest (59,339)
------------
Income before discontinued operations $ 83,018
============
Total assets (2) $3,124,220 $143,446 $ 381,861 $145,587 $3,795,114
Capital expenditures (2) $ 458,362 $ 25,045 $ 22,626 $ 50,831 $ 556,864
41
Associated Community
Year Ended December 31, 2001 Malls Centers Centers All Other Total
----------------------------------------------- ------------ ------------ ----------- ---------- ------------
Revenues $ 448,247 $ 14,799 $ 62,478 $ 22,613 $ 548,137
Property operating expenses (1) (150,953) (3,520) (14,418) (3,221) (172,112)
Interest expense (126,388) (4,599) (13,910) (11,810) (156,707)
Other expense - - - (9,458) (9,458)
Gain on sales of real estate assets 132 - 8,381 2,136 10,649
------------ ------------ ----------- ---------- ------------
Segment profit and loss $ 171,038 $ 6,680 $ 42,531 $ 260 220,509
Depreciation and amortization (83,877)
General, administrative and other (20,838)
Loss on extinguishment of debt (13,558)
Equity in earnings and minority interest (44,170)
------------
Income before discontinued operations $ 58,066
============
Total assets (2) $2,731,310 $124,897 $ 445,335 $ 71,309 $3,372,851
Capital expenditures (2) $1,291,829 $ 5,245 $ 53,746 $ 17,400 $1,368,220
Associated Community
Year Ended December 31, 2000 Malls Centers Centers All Other Total
----------------------------------------------- ------------ ------------ ----------- ---------- ------------
Revenues $ 267,150 $ 14,831 $ 61,303 $ 11,902 $ 355,186
Property operating expenses (1) (90,889) (2,675) (13,186) 981 (105,769)
Interest expense (75,455) (3,821) (13,240) (3,473) (95,989)
Other expense - - - (3,236) (3,236)
Gain on sales of real estate assets (400) - 2,576 13,813 15,989
------------ ------------ ----------- ---------- ------------
Segment profit and loss $ 100,406 $ 8,335 $ 37,453 $ 19,987 166,181
Depreciation and amortization (58,268)
General, administrative and other (17,893)
Loss on extinguishment of debt (367)
Equity in earnings and minority interest (26,348)
------------
Income before discontinued operations $ 63,305
============
Total assets (2) $1,450,948 $120,178 $ 453,749 $ 90,690 $2,115,565
Capital expenditures (2) $ 83,411 $ 13,053 $ 64,223 $ 13,240 $ 173,927
(1) Property operating expenses include property operating, real estate taxes
and maintenance and repairs.
(2) Developments in progress are included in the All Other category.
NOTE 13. OPERATING PARTNERSHIP
Condensed consolidated financial statement information for the Operating
Partnership is presented as follows:
December 31,
--------------------------------
2002 2001
-------------- --------------
ASSETS:
Net investment in real estate assets $ 3,611,485 $ 3,201,622
Investment in unconsolidated affiliates 68,770 78,211
Other assets 115,022 80,700
-------------- --------------
Total assets $ 3,795,277 $ 3,360,533
============== ==============
LIABILITIES:
Mortgage and other notes payable $ 2,402,079 $ 2,315,955
Other liabilities 131,815 90,066
-------------- --------------
Total liabilities 2,533,894 2,406,021
Minority interests 2,681 2,213
OWNERS' EQUITY 1,258,702 952,299
-------------- --------------
Total liabilities and owner's equity $ 3,795,277 $ 3,360,533
============== ==============
42
Year Ended December 31,
-------------------------------------------------
2002 2001 2000
------------ ----------- -----------
Revenues $ 598,329 $ 548,133 $ 355,186
Depreciation and amortization (94,373) ( 83,877) (58,268)
Other operating expenses (359,283) (358,685) (222,051)
------------ ----------- -----------
Income from operations 144,673 105,571 74,867
Loss on extinguishment of debt (3,930) (13,558) (367)
Gain on sales of real estate assets 2,804 10,649 15,989
Equity in earnings of unconsolidated
affiliates 8,215 7,155 3,684
Minority interest in shopping center
properties (3,303) (1,682) (1,525)
------------ ----------- -----------
Income before discontinued operations 148,459 108,135 92,648
Operating income of discontinued operations 1,516 2,842 2,417
Gain on discontinued operations 372 - -
------------ ----------- -----------
Net income $ 150,347 $ 110,977 $ 95,065
============ =========== ===========
NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to manage its exposure to
changes in interest rates. The Company does not use derivative financial
instruments for speculative purposes. The Company's interest rate risk
management policy requires that derivative instruments be used for hedging
purposes only and that they be entered into only with major financial
institutions based upon their credit ratings and other factors.
The Company's objective in using derivatives is to manage its exposure to
changes in interest rates. To accomplish this objective, the Company primarily
uses interest rate swaps and caps as part of its cash flow hedging strategy.
Interest rate swaps designated as cash flow hedges involve the receipt of
variable-rate amounts in exchange for fixed-rate payments over the life of the
agreements without the exchange of the underlying principal amount. During 2002,
such derivatives were used to hedge the variable cash flows associated with
variable-rate debt. Under an interest rate swap in place at December 31, 2002,
the Company receives interest payments at a rate equal to LIBOR (1.44% at
December 31, 2002) and pays interest at a fixed rate of 5.83%. The interest rate
swap has a notional amount of $80,000 and expires August 30, 2003.
Effective January 1, 2001, the Company determined that, with the exception
of two swap agreements that expired during the first quarter of 2001, the
Company's derivative instruments were effective and qualified for hedge
accounting in accordance with SFAS No. 133. At December 31, 2002, the interest
rate swap's fair value of $2,412 was recorded in accounts payable and accrued
liabilities.
The unrealized gains/losses recorded in accumulated other comprehensive
loss will be reclassified to earnings as interest expense when interest payments
are made. This reclassification correlates with the timing of when hedged items
are recognized in earnings. The change in net unrealized gains/losses on cash
flow hedges in 2002 reflects a reclassification of net unrealized gains/losses
from accumulated other comprehensive loss to interest expense in the amount of
$4,387. The remaining unrealized gains/losses of $2,397 will be reclassified
during 2003.
The Company is exposed to credit losses if the counterparty is unable to
perform under the interest rate swap agreement. However, the Company anticipates
that the counterparty will be able to fully satisfy its obligations under the
contract. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
counterparties.
43
NOTE 15. RELATED PARTY TRANSACTIONS
CBL's Predecessor and certain officers of the Company have a significant
minority interest in the construction company that the Company engaged to build
substantially all of the Company's properties. The Company paid approximately
$96,185, $94,300 and $123,000 to the construction company in 2002, 2001, and
2000, respectively, for construction and development services. The Company had
accounts payable to the construction company of $16,963 and $3,109 at December
31, 2002 and 2001, respectively.
The Management Company provides management and leasing services to the
Company's unconsolidated affiliates and other affiliated partnerships. Revenues
recognized for these services amounted to $2,502, $1,450 and $1,166 in 2002,
2001 and 2000, respectively.
NOTE 16. CONTINGENCIES
The Company is currently involved in certain litigation that arises in the
ordinary course of business. It is management's opinion that the pending
litigation will not materially affect the financial position or results of
operations of the Company. Additionally, management believes that, based on
environmental studies completed to date, any exposure to environmental cleanup
will not materially affect the financial position and results of operations of
the Company.
The Company has guaranteed all of the construction debt related to
Waterford Commons, which is owned in a joint venture with a third party that
owns a minority interest. The total amount of the commitment for this
construction loan is $30,000, of which $7,182 was outstanding at December 31,
2002. The Company will receive a fee from the third party partner in exchange
for the guaranty, which will be recognized as revenue pro rata over the term of
the guaranty. The fee had not been received as of December 31, 2002.
The Company has guaranteed 50% of the debt of Parkway Place L.P., an
unconsolidated affiliate in which the Company owns a 45% interest. The total
amount outstanding at December 31, 2002, was $56,458, of which the Company has
guaranteed $28,229.
Under the terms of the partnership agreement of Mall of South Carolina
L.P., an unconsolidated affiliate in which the Company owns a 50% interest, the
Company will guarantee 100% of the construction debt incurred to develop Coastal
Grand. There was no construction debt outstanding at December 31, 2002. The
Company will receive a fee for this guarantee.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued liabilities are reasonable estimates of their fair values
because of the short maturity of these financial instruments. Based on the
interest rates for similar financial instruments, the carrying value of mortgage
notes receivable is a reasonable estimation of fair value. The fair value of
mortgage and other notes payable was $2,637,219 and $2,315,472 at December 31,
2002 and 2001, respectively. The fair value was calculated by discounting future
cash flows for the notes payable using estimated rates at which similar loans
would be made currently.
NOTE 18. STOCK INCENTIVE PLAN
The Company maintains the CBL & Associates Properties, Inc. 1993 Stock
Incentive Plan, as amended, which permits the Company to issue stock options and
common stock to selected officers, employees and directors of the Company. The
shares available under the plan were increased from 4,000,000 to 5,200,000
during 2002. The Compensation Committee of the Board of Directors (the
"Committee") administers the plan.
44
Stock Options
-------------
Stock options issued under the plan allow for the purchase of common stock
at the fair market value of the stock on the date of grant. Stock options
granted to officers and employees vest and become exercisable in installments on
each of the first five anniversaries of the date of grant and expire 10 years
after the date of grant. Stock options granted to independent directors are
fully vested upon grant. However, the independent directors may not sell, pledge
or otherwise transfer their stock options during their board term or for one
year thereafter.
The Company's stock option activity for 2002, 2001 and 2000 is summarized
as follows:
Weighted Average
Shares Option Price Exercise Price
------------- ------------------- ------------------
Outstanding at December 31, 1999 2,207,050 $19.5625 - $25.6250 $22.15
Granted 377,000 $23.7190 - $25.5625 23.73
Exercised (159,183) $19.5625 - $23.6250 20.50
Lapsed (60,050) $19.5625 - $23.7190 22.25
-------------
Outstanding at December 31, 2000 2,364,817 $19.5625 - $25.5625 22.51
Granted 378,500 $27.6750 - $31.3100 27.70
Exercised (375,350) $19.5625 - $24.5000 22.18
Lapsed (16,000) $23.7190 - $27.6750 24.57
-------------
Outstanding at December 31, 2001 2,351,967 $19.5625 - $31.3100 23.39
Granted 429,750 $36.5350 - $39.8000 36.56
Exercised (209,600) $19.6250 - $31.3100 23.90
Lapsed (38,700) $23.7190 - $36.5350 28.25
-------------
Outstanding at December 31, 2002 2,533,417 $19.5625 - $39.8000 25.51
=============
The following is a summary of the stock options outstanding at December 31,
2002:
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Price Exercise Price
Options Contractual of Options Options of Options
Exercise Price Range Outstanding Life in Years Outstanding Exercisable Exercisable
------------------------ -------------- ----------------- ----------------- --------------- -----------------
$19.5625 - $21.6250 669,217 2.5 $19.95 669,217 $19.95
23.6250 - 25.6250 1,102,550 5.9 23.98 696,800 23.94
27.6750 - 39.8000 761,650 8.9 32.60 59,800 28.44
-------------- ----------------- ----------------- --------------- -----------------
Totals 2,533,417 5.9 $25.51 1,425,817 $22.26
============== ================= ================= =============== =================
Stock Awards
-------------
Under the plan, common stock may be awarded either alone, in addition to,
or in tandem with other stock awards granted under the plan. The Committee has
the authority to determine eligible persons to whom common stock will be
awarded, the number of shares to be awarded, and the duration of the vesting
period, as defined. The Committee may also provide for the issuance of common
stock under the plan on a deferred basis pursuant to deferred compensation
arrangements, as described in Note 19.
During 2002, the Company issued 73,228 shares of common stock with a
weighted average grant-date fair value of $35.21 per share. There were 41,516
shares that vested immediately. The remaining 31,712 shares vest at various
dates from 2003 to 2007.
During 2001, the Company issued 69,735 shares of common stock with a
weighted average grant-date fair value of $27.62 per share. There were 44,537
shares of common stock that vested immediately. The remaining 25,198 shares of
common stock vest at various dates from 2002 to 2006.
45
During 2000, the Company issued 72,329 shares of common stock with a
weighted average grant-date fair value of $22.59 per share. There was 36,606
shares of common stock that vested immediately. The remaining 35,723 shares of
common stock vest at various dates from 2001 to 2005.
NOTE 19. EMPLOYEE BENEFIT PLANS
401 (k) Plan
------------
The Management Company maintains a 401(k) profit sharing plan, which is
qualified under Section 401(a) and Section 401(k) of the Code to cover employees
of the Management Company. All employees who have attained the age of 21 and
have completed at least one year of service are eligible to participate in the
plan. The plan provides for employer matching contributions on behalf of each
participant equal to 50% of the portion of such participant's contribution that
does not exceed 2.5% of such participant's compensation for the plan year.
Additionally, the Management Company has the discretion to make additional
profit-sharing-type contributions not related to participant elective
contributions. Total contributions by the Management Company were $439, $391 and
$323 in 2002, 2001 and 2000, respectively.
Employee Stock Purchase Plan
----------------------------
The Company maintains an employee stock purchase plan that allows eligible
employees to acquire shares of the Company's common stock in the open market
without incurring brokerage or transaction fees. Under the plan, eligible
employees make payroll deductions that are used to purchase shares of the
Company's common stock. The shares are purchased by the fifth business day of
the month following the month when the deductions were withheld. The shares are
purchased at the prevailing market price of the stock at the time of purchase.
Deferred Compensation Arrangements
----------------------------------
The Company has entered into agreements with certain of its officers that
allow the officers to defer receipt of selected salary increases and/or bonus
compensation for periods ranging from 5 to 10 years.
For certain officers, the deferred compensation arrangements provide that
when the salary increase or bonus compensation is earned and deferred, shares of
the Company's common stock issuable under the 1993 Stock Incentive Plan are
deemed set aside for the amount deferred. The number of shares deemed set aside
is determined by dividing the amount of compensation deferred by the fair value
of the Company's common stock on the deferral date, as defined in the
arrangements. The shares set aside are deemed to receive dividends equivalent to
those paid on the Company's common stock, which are then deemed to be reinvested
in the Company's common stock in accordance with the Company's dividend
reinvestment plan. When an arrangement terminates, the Company will issue shares
of the Company's common stock to the officer equivalent to the number of shares
deemed to have accumulated under the officer's arrangement. At December 31, 2002
and 2001, respectively, there were 80,532 and 65,200 shares that were deemed set
aside in accordance with these arrangements.
For other officers, the deferred compensation arrangements provide that
their bonus compensation is deferred in the form of a note payable to the
officer. Interest accumulates on these notes at 7.0%. When an arrangement
terminates, the note payable plus accrued interest is paid to the officer in
cash. At December 31, 2002 and 2001, respectively, the Company had notes
payable, including accrued interest, of $319 and $168 related to these
arrangements.
46
NOTE 20. DIVIDENDS
On October 29, 2002, the Company declared a cash dividend of $0.655 per
share for the quarter ended December 31, 2002. The dividend was paid on January
15, 2003, to shareholders of record as of December 27, 2002. The total dividend
of $19,517 is included in accounts payable and accrued liabilities at December
31, 2002.
On January 15, 2002, the Operating Partnership paid a distribution of
$17,336 to the Operating Partnership's limited partners. This distribution
represented a distribution of $0.655 per unit for each common unit and $0.726
per unit for each special common unit in the Operating Partnership. The total
distribution is included in accounts payable and accrued liabilities at December
31, 2002.
The allocations of dividends declared and paid for income tax purposes are
as follows:
Year Ended December 31,
------------------------------------
2002 2001 2000
---------- ---------- -----------
Dividends declared per common share $ 2.32 $ 2.13 $ 2.04
Allocations:
Ordinary income 98.83% 95.63% 92.16%
Capital gains 20% rate 0.00% 0.13% 3.80%
Capital gains 25% rate 1.17% 4.24% 4.04%
Return of capital 0.00% 0.00% 0.00%
---------- ---------- -----------
Total 100.00% 100.00% 100.00%
========== ========== ===========
NOTE 21. QUARTERLY INFORMATION (UNAUDITED)
The following quarterly information differs from previously reported
results since the results of operations of long-lived assets disposed of
subsequent to each quarter end in 2002 have been reclassified to discontinued
operations for all periods presented. Additionally, total revenues differs from
previously reported amounts due to a reclassification made to conform to the
fourth quarter and year-end presentations.
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter Total (1)
--------- -------- -------- -------- ----------
Total revenues $144,916 $147,948 $147,354 $158,114 $598,332
Income from operations 33,753 35,391 32,959 41,380 143,483
Income before discontinued operations 17,175 20,405 20,613 24,825 83,018
Discontinued operations 1,825 516 549 (1,002) 1,888
Net income available to common shareholders 17,383 18,910 17,467 20,227 73,987
Basic income before discontinued operations
per share $ 0.59 $ 0.63 $ 0.57 $ 0.72 $ 2.51
Diluted income before discontinued
operations per share $ 0.57 $ 0.61 $ 0.56 $ 0.69 $ 2.43
Basic net income available to common
shareholders per share $ 0.66 $ 0.65 $ 0.59 $ 0.68 $ 2.58
Diluted net income available to common
shareholders per share $ 0.64 $ 0.63 $ 0.57 $ 0.66 $ 2.50
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter Total (1)
--------- -------- -------- -------- ----------
Total revenues $121,956 $135,534 $139,784 $150,863 $548,137
Income from operations 23,316 24,810 26,170 30,849 105,145
Income before discontinued operations 16,376 12,912 9,179 19,599 58,066
Discontinued operations 421 830 680 911 2,842
Net income available to common shareholders 15,182 12,125 8,242 18,891 54,440
Basic income before discontinued operations
per share $ 0.59 $ 0.45 $ 0.30 $ 0.70 $ 2.04
Diluted income before discontinued
operations per share $ 0.58 $ 0.44 $ 0.29 $ 0.69 $ 2.00
Basic net income available to common
shareholders per share $ 0.60 $ 0.48 $ 0.32 $ 0.74 $ 2.14
Diluted net income available to common
shareholders per share $ 0.60 $ 0.47 $ 0.32 $ 0.72 $ 2.11
(1) The sum of quarterly earnings per share may differ from annual earnings per
share due to rounding.