1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from____________to__________ Commission file number 1-11690 ------------------ DEVELOPERS DIVERSIFIED REALTY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1723097 ----------------------------------- ------------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 34555 Chagrin Boulevard Moreland Hills, Ohio 44022 ----------------------------------------------------------- (Address of principal executive offices - zip code) (440) 247-4700 ----------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered --------------------------------------------------------------------------- Common Shares, Without Par Value New York Stock Exchange -------------------------------- ----------------------- Depositary Shares Representing Class A Cumulative Redeemable Preferred Shares New York Stock Exchange ------------------------------------------------------------------------- Depositary Shares Representing Class B Cumulative Redeemable Preferred Shares New York Stock Exchange ------------------------------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None ------------------------------------------------------------------------- (Title of class)
2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------------- -------------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant at March 16, 1998 was $991,953,728. APPLICABLE ONLY TO CORPORATE REGISTRANTS Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 27,819,716 common shares outstanding as of March 16, 1998 DOCUMENTS INCORPORATED BY REFERENCE. The registrant incorporates by reference in Part III hereof portions of its definitive Proxy Statement for its 1998 Annual Meeting of Shareholders. -2-
3 TABLE OF CONTENTS <TABLE> <CAPTION> Item No. Report Page - ------------- -------------- PART I <S> <C> <C> 1. Business ....................................................... 4 2. Properties...................................................... 10 3. Legal Proceedings............................................... 19 4. Submission of Matters to a Vote of Security Holders............. 19 PART II 5. Market for the Registrant's Common Equity and Related Shareholder Matters ................................. 22 6. Selected Financial Data......................................... 23 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 25 8. Financial Statements and Supplementary Data..................... 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 33 PART III 10. Directors and Executive Officers of the Registrant.............. 34 11. Executive Compensation.......................................... 34 12. Security Ownership of Certain Beneficial Owners and Management ............................................... 34 13. Certain Relationships and Related Transactions.................. 34 PART IV 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K........................................... 35 </TABLE> -3-
4 PART I Item 1. BUSINESS General Development of Business Developers Diversified Realty Corporation (the "Company"), a self-administered and self-managed real estate investment trust (a "REIT"), is in the business of acquiring, developing, redeveloping, owning, leasing and managing shopping centers and business centers. Unless otherwise provided, references herein to the Company include Developers Diversified Realty Corporation, its wholly owned and majority owned subsidiaries and its joint ventures. From January 1, 1995 to March 16, 1998, the Company has acquired 35 shopping center properties, including those owned through joint ventures, two of which were acquired in 1998, eight of which were acquired in 1997, five of which were acquired in 1996, 20 of which were acquired in 1995. The Company's executive offices are located at 34555 Chagrin Boulevard, Moreland Hills, Ohio 44022, and its telephone number is (440) 247-4700. Financial Information about Industry Segments The Company is in the business of managing, operating, leasing, acquiring, developing and investing in shopping centers and business centers. See the consolidated financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K for certain information required by Item 1. Narrative Description of Business Since 1965, the Company and Developers Diversified Group ("DDG"), its predecessor, have owned and managed approximately 239 shopping centers. The Company's portfolio as of March 16, 1998 consisted of 125 shopping centers (including 15 properties which are owned through joint ventures, 14 of which the Company owns a 50% interest, and one of which the Company owns a 35% interest), five business centers and 70 undeveloped parcels (5 of which are owned through joint ventures) aggregating approximately 175 acres (the "Portfolio Properties"). In addition, the Company owns a 42.5% ownership interest in a shopping center located in Princeton, New Jersey and a 75% interest in a joint venture which acquired 33 retail sites, formerly occupied by Best Products. From January 1, 1995 to March 16, 1998, the Company has acquired 35 shopping centers containing an aggregate of 10.4 million square feet of GLA owned by the Company for an aggregate purchase price of approximately $1.0 billion. During 1995, 1996 and 1997, the Company completed expansions at 32 of its shopping centers. As of March 16, 1998, the Company was expanding seven shopping centers and expects to commence expansions at additional shopping centers in 1998. The Company has also substantially completed the development of 11 additional shopping centers since December 31, 1994, at an aggregate cost of approximately $231.4 million aggregating approximately 3.9 million square feet. As of March 16, 1998, the Company had five shopping centers under development. The Company's shopping centers were approximately 96.1% leased as of December 31, 1997, and the business centers were 98.6% leased as of that date. At December 31, 1997, the Company had entered into additional leases with anchor tenants aggregating in excess of 158,000 square feet of vacant space, scheduled to commence in 1998, which brings the leased rate at the shopping centers to 96.7%. On December 31, 1997, the average annualized base rent per square foot of Company-owned GLA of the shopping centers was $8.49 and the business centers was $4.04. -4-
5 The Company is self-administered and self-managed and, therefore, does not engage or pay for a REIT advisor. The Company manages all of the Portfolio Properties. At December 31, 1997, the Company owned and/or managed approximately 35.3 million total square feet of GLA, which included all of the Portfolio Properties and 23 properties owned by third parties. Strategy and Philosophy The Company's investment objective is to increase cash flow and the value of its portfolio of properties and to seek continued growth through the selective acquisition, development, redevelopment, renovation and expansion of income-producing real estate properties, primarily shopping centers. In pursuing its investment objective, the Company will continue to seek to acquire and develop high quality, well-located shopping centers and business centers with attractive initial yields and strong prospects for future cash flow growth and capital appreciation where the Company's financial strength and management and leasing capabilities can enhance value. Management believes that opportunities to acquire existing shopping centers have been and will continue to be available to buyers with access to capital markets, such as the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company's real estate strategy and philosophy is to grow its business through a combination of leasing, expansion, acquisition and development. The Company seeks to: - increase cash flows and property values through strategic leasing, re-tenanting, renovation and expansion of the Company's portfolio; - continue to selectively acquire well-located, quality shopping centers (individually or in portfolio transactions) which have leases at rental rates below market rates or other cash flow growth or capital appreciation potential where the Company's financial strength, relationships with retailers and management capabilities can enhance value; - increase cash flows and property values by continuing to take advantage of attractive financing and refinancing opportunities (see "Recent Developments - Financings"); - selectively develop the Company's undeveloped parcels or new sites in areas with attractive demographics; - hold properties for long-term investment and place a strong emphasis on regular maintenance, periodic renovation and capital improvements; and - continue to manage and develop the properties of others to generate fee income, subject to restrictions imposed by federal income tax laws, and create opportunities for acquisitions. As part of its ongoing business the Company may periodically engage in discussions with public and private real estate entities regarding possible portfolio or asset acquisitions or business combinations. -5-
6 In addition, the Company intends to maintain a conservative debt capitalization with a ratio of debt to total market capitalization (the sum of the aggregate market value of the Company's common shares, the liquidation value of preferred shares and the Company's total indebtedness) of less than .50 to 1.0. At December 31, 1997, the Company's debt to total market capitalization ratio, excluding the Company's proportionate share of indebtedness of its unconsolidated joint ventures, was approximately 0.36 to 1.0; and at March 16, 1998 this ratio was approximately 0.36 to 1.0 At December 31, 1997, the Company's capitalization consisted of $668.5 million of debt (excluding the Company's proportionate share of joint venture mortgage debt aggregating $190.3 million), $149.8 million of preferred stock and $1,059.0 million of market equity. At December 31, 1997, the Company's total debt consisted of $526.0 million of fixed-rate debt and $142.5 million of variable rate debt. Fluctuations in the market price of the Company's common shares may cause this ratio to vary from time to time. The strategy, philosophy, investment and financing policies of the Company, and its policies with respect to certain other activities, including its growth, debt capitalization, distributions, status as a REIT and operating policies, are determined by the Board of Directors. Although it has no present intention to do so, the Board of Directors may amend or revise these policies from time to time without a vote of the shareholders of the Company. Recent Developments Financings In January 1997, the Company completed a 3,350,000 common share offering and received net proceeds of approximately $115.8 million. In June 1997, the Company completed a 1,300,000 common share offering and received net proceeds of approximately $49.4 million. In September 1997, the Company completed a 507,960 common share offering through a registered unit investment trust and received net proceeds of approximately $18.8 million. In December 1997, the Company completed a 316,800 common share offering through a registered unit investment trust and received net proceeds of approximately $11.3 million. The proceeds from the four common share offerings mentioned above were primarily used to retire variable rate debt. The common share offerings significantly strengthened the Company's balance sheet and positioned the Company to continue to take advantage of attractive acquisition, development and expansion opportunities. In March 1997, the Company issued, through a grantor trust, $75 million of Pass-Through Asset Trust Securities (PATS), due March 2002, at a discount to 99.53%. These certificates are secured by fifteen year notes ("Notes") maturing March 2012, issued by the Company to the trust. The trust sold an option which enables the option holder to remarket the Notes upon maturity of the certificates in March 2002. Simultaneously with the sale of the certificates, the trust purchased the Notes from the Company for a premium in the amount of the option payment. In March 1997, the Company extended its $150 million unsecured revolving credit facility, agented by the First National Bank of Chicago and Bank of America NT&SA, for an additional year, through May 2000, and reduced the interest rate 15 basis points. The amendment also introduced a competitive bid feature for up to $75 million of borrowings. In April 1997, the Company extended its $10 million unsecured revolving credit facility with National City Bank through November 2000, and reduced the interest rate 15 basis points. -6-
7 In March 1997, the Company sold two business centers in Highland Heights, Ohio aggregating approximately 113,000 square feet for approximately $5.7 million and recognized a gain of approximately $3.5 million. The net proceeds of approximately $5.4 million were used to repay revolving credit debt. In November 1995, the Company commenced a medium-term note program (the "Medium Term Note Program"). The Medium Term Note Program enables the Company (i) to issue on an ongoing basis discrete amounts of unsecured debt that will closely match, both as to timing and amount, the Company's specific liquidity requirements, including property acquisition, development and redevelopment costs, and (ii) to better manage the Company's debt maturities, including its mortgage debt maturities. As of March 16, 1998, the Company had issued Medium Term Notes in the aggregate amount of $317.7 million ($100 million in 1998, $102 million in 1997, and $115.7 million in 1996 and 1995). The net proceeds from each issuance were used to repay line of credit borrowings and mortgage debt. The Medium Term Note Program remains available for the Company to issue additional Medium Term Notes when the Company considers market conditions advantageous. Equity Investments in Joint Venture In January 1997, the Company formed a joint venture with certain institutional investors, which are advised by DRA Advisors, Inc., to acquire a 0.3 million square foot shopping center located in San Antonio, Texas. The aggregate cost of the shopping center was approximately $38.3 million of which the Company's proportionate ownership share was 35%. The Company contributed approximately $3.5 million of equity and manages the shopping center pursuant to a management agreement. Property Acquisitions, Developments and Expansions During 1997, the Company acquired seven shopping centers aggregating 2.4 million square feet of Company-owned GLA (Gross Leasable Area) for an aggregate investment of approximately $267.9 million. In addition, in January 1997, the Company entered into a joint venture with certain institutional investors which are advised by DRA Advisors, Inc. to acquire a 0.3 million square foot shopping center located in San Antonio, Texas. The aggregate cost of the shopping center was approximately $38.3 million of which the Company's proportionate ownership share is 35%. The Company also contributed approximately $0.5 million of additional assets to the OSTRS Joint Venture during 1997. During 1997, the Company and its joint ventures completed expansions and redevelopments at 13 of its shopping centers aggregating approximately 0.8 million square feet at an aggregate cost of approximately $39.0 million. The Company is currently expanding seven shopping centers and will continue to pursue additional expansion opportunities. The Company and its joint ventures currently have approximately 175 acres of undeveloped land consisting of 70 parcels, primarily adjacent to its existing shopping centers, available for development, expansion or sale. During 1997, the Company substantially completed the construction of four shopping centers which include: (i) a 235,000 square foot Phase II development of the Canton, Ohio shopping center; (ii) a 500,000 square foot shopping center in Boardman, Ohio; (iii) a 475,000 square foot shopping center in Stow, Ohio and (iv) an 84,000 square foot community center in Aurora, Ohio. Development activity was also completed at two of the Company's joint venture shopping centers located in Atlanta, Georgia and Framingham, Massachusetts which were acquired in connection with the Community Center Joint Ventures in November 1995. -7-
8 During 1997, the Company commenced construction on two additional shopping centers which include a 200,000 square foot Phase II development of the Erie, Pennsylvania center, and a 445,000 square foot shopping center in Merriam, Kansas which is being developed through a joint venture formed in October 1996, 50% of which is owned by the Company. These shopping centers are scheduled for completion during the last half of 1998. The Company has also commenced the initial development of three additional shopping centers which include: (i) a 240,000 square foot shopping center in Toledo, Ohio; (ii) a 170,000 square foot shopping center in Solon, Ohio and (iii) a 230,000 square foot shopping center in Oviedo, Florida (a suburb of Orlando). All three centers are scheduled for completion during the fourth quarter of 1998. The Company is also involved with, or pursuing, joint venture development opportunities on eight additional projects with various developers throughout the country at a projected cost aggregating approximately $300 million. The majority of projects should commence development in 1998 and are currently scheduled for completion in 1999. In December 1997, the Company and Hendon Associates formed a joint venture to acquire 33 retail sites, formerly occupied by Best Products, from Metropolitan Life. Under the terms of the joint venture with Hendon Associates, the Company advanced the capital to fund the purchase price of the assets and it is expected that the Company will receive (i) a priority return of its capital; (ii) a 15% compound annual return thereon and (iii) 75% of additional available cash flow. The 33 retail sites, are located in 13 states with concentrations in Ohio, California and New Jersey. These sites were acquired at an initial cost of approximately $54.5 million. It is expected that a majority of the 33 sites will be redeveloped and retenanted with a few sites being sold. At the date of acquisition, it was anticipated that the Company's ownership interest would be transferred to the "Retail Value Fund" ("Fund") with Prudential Real Estate Investors upon finalization of the joint venture documents which occurred on February 11, 1998. The Company contributed its ownership interest in the joint venture formed with Hendon Associates to the Fund, and in exchange for a 75% ownership interest in this joint venture, was reimbursed approximately $41.5 million from Prudential Real Estate Investors. The proceeds of $41.5 million were used to repay variable rate borrowings on the Company's revolving credit facilities. The Fund will invest in retail properties within the United States that are in need of substantial retenanting and market repositioning. This Fund may also make equity or debt investments in companies owning or managing retail properties as well as in third party development projects that provide significant growth opportunities. The retail property investments may include enclosed malls, neighborhood centers or other potential commercial redevelopment opportunities. The Company is expected to maintain an ownership interest of approximately 25% in the Fund. The Company will also own a majority of the stock of the general partner of the Fund. The general partner will own a 1% interest in the Fund and will receive an incentive participation equal to 33% of cash flow, after the limited partners receive a return of invested capital plus a cumulative return of 10% thereon. The Fund will have its own employees and the Company will assume retail management and operating responsibilities including leasing, redevelopment and accounting and will be paid fees in consideration of the foregoing services. -8-
9 In late December 1997, the Company acquired a 42.5% ownership interest in a 584,000 square foot shopping center located in Princeton, New Jersey at an initial cost of approximately $7.7 million. During the first half of 1998, the Company anticipates acquiring the balance of the ownership interest in the property through the issuance of approximately 11,850 Operating Partnership Units, which will be convertible to the Company's common shares, and the assumption of debt. Upon completion of the transaction, the Company's aggregate investment will be approximately $36.4 million, including assumption of debt of approximately $27.7 million. The Company also acquired a 45.1% ownership interest in an adjacent development site at an initial cost of approximately $9.9 million. Upon completion of construction, the Company anticipates acquiring the balance of the ownership interest in exchange for cash and Operating Partnership Units. Retail Environment During 1997, certain national and regional retailers experienced financial difficulties and several have filed for protection under bankruptcy laws. No significant bankruptcies have occurred during the period January 1 through March 16, 1998 with regard to the Company's portfolio of tenants. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 and the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for further information on certain of the recent developments described above. Competition As one of the nation's largest owners and developers of neighborhood and community shopping centers, the Company has established close relationships with a large number of major national and regional retailers. Management is associated with and/or actively participates in many shopping center and REIT industry organizations. Notwithstanding these relationships, there are numerous developers and real estate companies that compete with the Company in seeking properties for acquisition and tenants who will lease space in these properties. -9-
10 Employees As of March 16, 1998, the Company employed 198 full-time individuals, including executive, administrative and field personnel. The Company considers its relations with its personnel to be good. Qualification as a Real Estate Investment Trust The Company presently meets the qualification requirements of a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company generally will not be subject to federal income tax to the extent it meets certain requirements of the Code. Item 2. PROPERTIES At December 31, 1997 the Portfolio Properties included 123 shopping centers (13 of which are owned through joint ventures in which the Company and a party otherwise unaffiliated with the Company owns a 50% interest and one of which the Company owns a 35% interest), consisting of 106 community shopping centers and power centers, 12 enclosed mini-malls, and five neighborhood shopping centers. The Portfolio Properties also include five business centers containing office and light industrial, warehouse and research space and 70 undeveloped parcels (aggregating approximately 175 acres) primarily located adjacent to certain of the shopping centers. The shopping centers and business centers aggregate approximately 25.2 million square feet of Company-owned GLA (approximately 33.1 million square feet of total GLA) and are located in 30 states, principally in the East and Midwest, with significant concentrations in Ohio, Florida, South Carolina, North Carolina, Michigan and Minnesota. Neighborhood and community shopping centers and power centers make up the largest portion of the Company's portfolio, comprising 21.8 million (86.6%) square feet of Company-owned GLA. Enclosed mini-malls account for 2.9 million (11.6%) square feet of Company-owned GLA, and business center space consists of approximately 0.5 million (0.9%) square feet of Company-owned GLA. On December 31, 1997, the average annualized base rent per square foot of Company-owned GLA of the shopping centers, including those owned through joint ventures, was $8.49 and of the business centers was $4.04. The Company's shopping centers are designed to attract local area customers and are typically anchored by one or more discount department stores and often include a supermarket, drug store, junior department store and/or other major "category-killer" discount retailer as additional anchors. Substantially all of the shopping centers are anchored by a Wal-Mart, Kmart or Target, and the power centers are anchored by two or more national or regional tenants. The tenants of the shopping centers typically offer day-to-day necessities rather than high-priced luxury items. As one of the nation's largest owners and operators of shopping centers, the Company has established close relationships with a large number of major national and regional retailers, many of which occupy space in the shopping centers. -10-
11 The following table sets forth, as of December 31, 1997, information as to anchor and/or national retail tenants which individually accounted for at least 1.0% of total annualized base rent of the properties, including those owned though joint ventures: <TABLE> <CAPTION> % of Shopping Center % of Company-owned Base Rental Revenues Shopping Center GLA -------------------- ------------------- <S> <C> <C> Wal-Mart 7.2% 11.4% Kmart 5.2 9.7 T. J. Maxx/Marshall's 2.8 2.6 Homeplace 2.6 1.9 Kohl's Dept. Store 2.4 2.6 Barnes & Noble/B. Dalton 2.2 1.1 Lowes Home Centers 2.1 2.8 Office Max 1.9 1.5 Best Buy 1.6 1.0 Fashion Bug 1.3 1.3 Kroger 1.2 1.3 JC Penny 1.2 2.5 Publix Supermarkets 1.1 1.3 General Cinema 1.1 0.3 AMC Theaters 1.0 0.6 </TABLE> In addition, as of December 31, 1997 unless otherwise indicated, with respect to the 123 shopping centers: - 49 of these properties were developed by DDG and seven were developed by the Company; - 90 of these properties are anchored by Wal-Mart, Kmart or Target store; - these properties range in size from just under 100,000 square feet to approximately 900,000 square feet of GLA (with 32 properties exceeding 325,000 square feet of GLA); - approximately 58.1% of the Company-owned GLA of these properties is leased to national chains, including subsidiaries, with approximately 32.2% of the Company-owned GLA leased to regional chains and approximately 6.4% of the Company-owned GLA leased to local tenants; - approximately 96.1% of the aggregate Company-owned GLA of these properties was leased as of December 31, 1997. The Company has entered into additional leases with anchor tenants aggregating in excess of 158,000 square feet of vacant space, scheduled to commence in 1998, which brings the December 31, 1997 leased rate to 96.7% (and, with respect to the properties owned by the Company at December 31, for each of the five years beginning with 1993, between 94.8% and 97.1% of aggregate Company-owned GLA of these properties was leased); - Seven of the properties are currently being expanded by the Company, and the Company is pursuing the expansion of additional properties. -11-
12 TENANT LEASE EXPITATIONS AND RENEWALS The following table show tenant lease expirations for the next ten years at the Comany's shopping centers and business centers, including joint ventures, assuming that none of the tenants exercise any of their renewal options: <TABLE> <CAPTION> Percentage of Percentage of Total Leased Total Base Annualized Average Base Sq. Footage Rental Revenues No. of Approximate Base Rent Rent Per Sq. Foot Represented Represented Expiration Leases Lease Area in Under Expiring Under Expiring by Expiring By Expiring Year Expiring Square Feet Leases Leases Leases Leases - ---------- -------- ------------- -------------- ---------------- ------------- --------------- <S> <C> <C> <C> <C> <C> <C> 1998...... 257 926,994 $ 7,133,437 $ 7.40 3.8% 3.5% 1999...... 289 989,966 $ 9,230,495 $ 9.32 4.1% 4.5% 2000...... 242 817,474 $ 8,368,004 $ 10.24 3.4% 4.1% 2001...... 220 874,478 $ 8,863,940 $ 10.14 3.6% 4.3% 2002...... 192 1,344,136 $ 9,492,605 $ 7.06 5.6% 4.6% 2003...... 77 906,135 $ 5,189,351 $ 5.73 3.7% 2.5% 2004...... 57 635,993 $ 5,207,037 $ 8.19 2.6% 2.5% 2005...... 65 964,253 $ 6,917,645 $ 7.17 4.0% 3.4% 2006...... 46 564,647 $ 6,621,302 $ 11.73 2.3% 3.2% 2007...... 49 596,702 $ 6,596,269 $ 11.05 2.5% 3.2% ----- --------- ----------- --------- ---- ---- 1,494 8,620,778 $73,620,085 $ 8.54 35.6% 36.0% </TABLE> The five business centers are located in Ohio and range in size from approximately 36,000 to 236,000 square feet of Company-owned GLA. The business centers contain office and light industrial, warehouse and research space. As of December 31, 1997, the business centers were 98.6% leased. All of the five business centers are triple net leased, four are leased to single tenants, and one is leased to multiple users. Pursuant to the triple net leases, the tenants are obligated to pay all maintenance and insurance expenses and real estate taxes, and all or substantially all operating expenses, relating to the applicable business centers. The leases for the business centers have terms which are scheduled to expire between October 1998 and November 2003. These leases generally have fixed or cost-of-living rental increases in their option, but not in their base terms. Accordingly, the rental payments under these leases will remain constant until the expiration of their base terms, regardless of inflationary increases. There can be no assurance that any of these leases will be renewed or that any new tenants for the Company's business centers can be obtained if not renewed. The Company's 70 undeveloped parcels primarily consist of outlots, retail pads and expansion pads which are primarily located adjacent to certain of the shopping centers. The Company is pursuing an active marketing program to lease or develop its undeveloped parcels. -12-
13 <TABLE> DEVELOPERS DIVERSIFIED REALTY CORPORATION PROPERTY LIST DECEMBER 31, 1997 - ------------------------------- <CAPTION> Interest (ground Company lease Gross termination/ Land Leaseable Type of option Date Developed Area Area Center/Property Location Property (1) termination) or Acquired (2) (Acres) (sq.ft.) - --------------------- ---------------------- ------------ ----------- ----------------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Alabama - ------- Birmingham (Brk), AL 5291 Highway 280 South PC Fee 12/01/94, 12/29/94(a) 64.46 479,859 Birmingham (East), AL 7001 Crestwood Blvd. PC Fee 03/01/89, 11/15/95(a) 45.49 284,475 Huntsville, AL 6140-A University Drive PC Fee 12/28/95, 12/28/95(a) 5.29 41,000 Arizona - ------- Ahwatukee, AZ 4711 East Ray Road PC 07/10/96, 02/21/97(a) 59.28 491,689 Phoenix, AZ 7553 West Bell Road PC Fee 10/01/95, 07/02/96(a) 24.12 346,680 Arkansas - -------- Fayetteville, AR PC Fee 04/01/97, 11/20/97(a) 139,277 North Little Rock, AR 4124 East McCain Blvd PC Fee 07/01/91, 03/21/94(a) 27.76 294,357 Russellville, AR 3093 East Main Street PC Fee 02/01/92, 04/18/94(a) 31.20 272,245 California - ---------- San Diego, CA 11610 Carmel Mntn. Rd. PC Fee(6) 04/01/93, 11/17/95(a) 50.00 439,939 Colorado - -------- Alamosa, CO 145 Craft Avenue PC Fee 01/01/86 13.10 19,875 Denver, CO 505 South Broadway PC Fee(6) 11/01/93, 11/17/95(a) 38.59 369,386 Denver, CO 9555 E. County Line Road PC Fee 09/01/97, 10/01/97(a) 46.07 336,944 Trinidad, CO Hwy 239 @ I25 Frontage PC Fee 05/01/86 17.88 63,836 Connecticut - ---------- Waterbury, CT 899 Wolcott Street PC GL1 11/01/73 15.60 124,310 Florida - ------- Bayonet Point, FL U.S. 19 & S.R. 52 PC Fee 09/01/85 58.67 203,760 Brandon, FL 1602 Brandon Blvd PC GL2 06/01/72 17.33 139,522 Cape Coral, FL 1420 Del Prado Blvd NC Fee 09/01/85 9.61 73,240 Crystal River, FL 420 Sun Coast Hwy PC Fee 10/01/86 21.18 146,954 Fern Park, FL 6735 U.S. #17-92 PC Fee 10/01/70 3.04 16,000 Jacksonville, FL 3000 Dunn Avenue PC Fee 12/01/88, 03/31/95(a) 30.82 219,073 Marianna, FL 2820 Highway 71 PC Fee 08/01/90 17.34 63,894 Melbourne, FL 750-850 Apollo Blvd PC GL3 11/01/78 15.52 121,913 Naples, FL 5010 Airport Road North PC Fee(6) 03/01/94, 11/17/95(a) 30.60 266,438 Ocala, FL 3711 Silver Sprgs, NE PC Fee 06/01/74 2.23 19,280 </TABLE> <TABLE> <CAPTION> Mortgage Obligation Average as of Total Base December 31, Annualized Rent per Percent Center/Property 1997 Base Rent(3) sq.ft.(4) Leased(6) Anchor Tenants (Lease Expiration/Option Expiration) -------------------- ----------- ------------ --------- -------- --------------------------------------------------- <C> <S> <S> <C> <C> <C> Alabama ------- Birmingham (Brk), AL $3,788,250 $7.96 99.2% Wal-Mart (2004/2024), Winn-Dixie (2014/2044), Goody's (2004/2019), Stein Mart (2011/2021), OfficeMax (2011/2026) Birmingham (East), AL 1,949,251 8.75 78.3% Home Depot (not owned) Western Supermarkets (not owned), Office Depot (1999/2014), Goody's (2004/2019), Stein Mart (2003/2018), Cobb Theaters (2006/2016) Huntsville, AL 459,850 11.22 100.0% Wal-Mart (not owned) Arizona ------- Ahwatukee, AZ 6,351,820 13.07 98.9% HomePlace (2012/2027), Smith's (2021/2046), Stein Mart (2011/2026) Phoenix, AZ 3,637,795 10.49 100.0% Lil' Things (2009/2024), Barnes & Noble(2011/2026) TJMaxx (2005/2020), Circuit City (2016/2036), Oshman's (2017/2037), Linens 'N Things(2011/2026), Fry's (not owned) Arkansas -------- Fayetteville, AR 1,304,437 9.37 100.0% T.J. Maxx (2005/2020) Service Merchandise (2016/2031) North Little Rock, AR 1,755,364 6.55 91.1% Kmart (2016/2066), Wards (2014/2034), TJMaxx (2001/2011), Cinemark (2011/2031) Russellville, AR 1,659,354 6.15 99.1% Wal-Mart (2011/2041), JCPenney (2012/2032), Beall-Ladymon (2007/2022) California ---------- San Diego, CA 6,018,390 13.68 100.0% Mervyn's (not owned), Kmart (2018/2048), Pacific Theaters (2013/2023), Sportmart (2008/2023), Circuit City (2009/2024), Marshall's (2009/2029), Ross Dress for Less (2004/2019), Michael's (2004/2014), Barnes & Noble (2003/2013), Blockbuster Music (1999/2014) Colorado -------- Alamosa, CO 155,158 7.81 100.0% Wal-Mart (not owned) Denver, CO 3,559,127 9.64 100.0% Kmart (2019/2069), Albertson's (2019/2049), Sam's (2018/2058), Office Max (2010/2035), Pep Boys (2014/2035) Denver, CO 4,394,117 13.04 100.0% Border's (2017/2027), Golfsmith (2007/2022), HomePlace (2017/2037), Ross Dress For Less (2008/2028), Toys R Us (2011/2046), Soundtrack (2017/2028), Office Max (2013/2033), Michael's (2007/2027) Trinidad, CO 250,088 4.29 91.3% Wal-Mart (not owned), Super Save (1998) Connecticut Waterbury, CT 416,900 3.35 100.0% Kmart (1998/2048), Grand Union (1999/2024) Florida ------- Bayonet Point, FL 5,327,208 1,071,535 5.67 92.7% Publix (2005/2025), Beall's (2002/2017), TJMaxx (2010/2030)*, Eckerd (2005/2025), Kmart (1997/2047) Brandon, FL 298,308 2.64 81.1% Kmart (1997/2047) Cape Coral, FL 460,256 6.76 93.0% TJMaxx (2007/2017), Office Max (2012/2027) Crystal River, FL 423,851 3.21 89.7% Beall's (2001/2016), Scotty's (2008/2038) Fern Park, FL 80,363 7.18 70.0% Kmart (not owned) Jacksonville, FL 7,904,705 1,357,080 6.42 96.5% Wal-Mart (not owned), J.C.Penney (2002/2022), Winn Dixie (2009/2034), Walgreen's (2029/2029) Marianna, FL 434,515 7.18 94.7% Wal-Mart (not owned), Beall's (2005/2020), Eckerd (2010/2030) Melbourne, FL 366,168 3.14 95.7% Kmart (2003/2048), Beall's (1997/2007) Naples, FL 2,797,044 10.55 99.5% Winn Dixie (2014/2038), TJMaxx (2009/2024), Service Merchandise (2015/2035), Ross Dress For Less (2005/2025), Circuit City (2015/2035), Office Max(2010/2025) Ocala, FL 54,060 4.07 68.9% Kmart (not owned), Eckerd (1998/2018) </TABLE> 13
14 <TABLE> DEVELOPERS DIVERSIFIED REALTY CORPORATION PROPERTY LIST DECEMBER 31, 1997 - ------------------------------- <CAPTION> Interest (ground Company lease Gross termination/ Land Leaseable Type of option Date Developed Area Area Center/Property Location Property (1) termination) or Acquired (2) (Acres) (sq.ft.) - --------------------- ---------------------- ------------ ----------- ----------------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Orlando, FL 5250 W.Colonial Dr PC Fee 08/01/89 30.57 177,215 Ormond Beach, FL 1458 West Granada Blvd PC Fee 07/01/93, 05/02/94(a) 32.09 234,045 Palm Harbor, FL 300 East Lake Road PC Fee 05/01/90, 05/12/95(a) 5.80 52,395 Pensacola, FL 8934 Pensacola Blvd PC Fee 12/01/88 21.00 75,736 Spring Hill, FL 13050 Cortez Blvd PC Fee 09/01/88 21.60 196,073 Tampa (NPt), FL 15233 No.Dale Mabry PC Fee 12/01/90 23.70 104,473 Tampa (T'nC), FL 7039 West Waters Ave PC Fee 07/01/90 30.61 134,166 Tarpon Springs, FL 41232 U.S. 19, North PC Fee 11/01/74 23.30 192,964 West Pasco, FL 7201 County Rd 54 PC Fee 09/01/86 24.40 135,421 Georgia - ------- Atlanta, GA 1155 Mt. Vernon Highway PC Fee(6) 11/01/95, 11/17/95(a) 30.67 288,045 Duluth, GA 1630 Pleasant Hill Road PC Fee 04/01/90, 02/24/94(a) 8.70 99,025 Marietta, GA 2609 Bells Ferry Road PC Fee(6) 08/01/95, 11/17/95(a) 48.28 319,908 Stone Mountain, GA 5615 Memorial Drive PC Fee 11/01/73 16.60 143,860 Illinois - -------- Harrisburg, IL 701 North Commercial PC Fee 01/01/91, 02/17/94(a) 24.46 168,424 Mount Vernon, IL 42nd and Broadway MM Fee 08/01/74, 08/13/93(a) 39.25 265,717 Schaumburg, IL 1430 East Golf Road PC Fee 11/01/93, 11/17/95(a) 62.80 501,092 Indiana - ------- Bedford, IN 1320 James Avenue PC Fee 07/01/93, 10/21/93(a) 20.56 223,135 Connersville, IN 2100 Park Road PC Fee 01/01/91, 12/10/93(a) 21.99 141,791 Highland, IN Highway 41 & Main Street PC Fee 11/01/95, 07/02/96(a) 16.08 294,115 Iowa - ---- Ottumwa, IA 1110 Quincy Avenue MM Fee 04/01/90 34.00 161,060 Kentucky - -------- Hazard, KY Kentucky Highway 80 PC Fee 08/01/78 11.74 111,492 Maine - ----- Brunswick, ME 172 Bath Road PC Fee(6) 05/01/65, 07/15/97(a) 28.46 290,784 Massachusetts - ------------ Framingham, MA 1 Worcester Road PC Fee(6) 08/01/94, 11/17/95(a) 177.00 768,046 Michigan - -------- Bad Axe, MI 850 No.Van Dyke Rd PC Fee 01/01/91, 08/12/93(a) 18.58 63,415 Cheboygan, MI 1109 East State PC Fee 01/01/88, 12/14/93(a) 16.75 95,094 </TABLE> <TABLE> <CAPTION> Mortgage Obligation Average as of Total Base December 31, Annualized Rent per Percent Center/Property 1997 Base Rent(3) sq.ft.(4) Leased(6) Anchor Tenants (Lease Expiration/Option Expiration) -------------------- ----------- ------------ --------- -------- --------------------------------------------------- <S> <C> <C> <C> <C> <C> Orlando, FL 1,412,407 8.12 98.2% Wal-Mart (not owned), Publix (2009/2019), Walgreens (2029/2029) Ormond Beach, FL 1,776,321 7.74 98.0% Kmart (2018/2064), Publix (2013/2033), Bealls (2004/2024) Palm Harbor, FL 729,966 14.62 95.3% Target (not owned), Albertson's (not owned), Eckerd (2010/2025) Pensacola, FL 336,311 8.08 54.9% Wal-Mart (not owned), City Drug (1998/2003) Spring Hill, FL 6,134,476 1,279,419 6.78 96.2% Wal-Mart (not owned), Publix (2008/2028), Walgreens (2028/2028), Beall's (2006/2046) Tampa (NPt), FL 1,157,564 11.08 100.0% Wal-Mart (not owned), Publix (2010/2030) Tampa (T'nC), FL 1,046,996 8.34 93.6% Wal-Mart (not owned), Beall's (2005/2029), Kash N Karry (2010/2040) Tarpon Springs, FL 787,385 4.92 83.0% Kmart (1999/2049) West Pasco, FL 4,783,894 1,017,079 7.79 96.4% Wal-Mart (not owned), Publix (2006/2026), Bealls (2001/2016), Walgreens (2026/2026) Georgia ------- Atlanta, GA 4,163,570 14.63 98.8% SteinMart (2010/2025), HomePlace (2011/2026), United Artists (2015/2035) Duluth, GA 1,202,177 12.48 97.3% Wal-Mart (not owned), Office Depot (2000/2020), Ethan Allen (2000/2010) Marietta, GA 3,505,751 11.19 97.9% Publix (2015/2035), HomePlace (2011/2026), PetsMart (2011/2021), Barnes & Noble (2011/2026) Stone Mountain, GA 445,278 3.15 98.4% Kmart (1998/2048) Illinois -------- Harrisburg, IL 890,733 5.52 95.9% Wal-Mart (2011/2041), Roundy's Grocery (2011/2031) Mount Vernon, IL 1,221,671 4.88 94.2% Wal-Mart (2008/2028),J.C.Penney (1997/2022), Martin's(1999/2014), Stage (1999/2014) Schaumburg, IL 7,225,919 14.49 99.5% Builder's Square (2019/2049), Service Merchandise (2014/2049), OfficeMax (2010/2020), Sports Authority (2013/2033), Marshall's (2009/2024), Nordstrom Rack (2009/2024), Border's Books (2009/2029), Circuit City (2010/2025), Off 5th Saks Fifth Avenue (2011/2026) Indiana ------- Bedford, IN 1,280,755 5.81 98.7% Kmart (2018/2068), J.C.Penney (2008/2028), Goody's (2003/2018), Buehler's (2010/2025) Connersville, IN 806,151 5.69 100.0% Wal-Mart (2011/2041), Cox Supermarket (2011/2026) Highland, IN 2,688,252 9.76 93.6% Marshall's (2011/2021), Circuit City (2016/2036), Kohl's (2016/2036), OfficeMax (2012/2032), Jewel (not owned), Target (not owned) Iowa ---- Ottumwa, IA 1,110,173 7.13 96.6% Wal-Mart (not owned), J.C. Penney (2005/2035), Herberger (2004/2019) Kentucky -------- Hazard, KY 414,959 3.72 100.0% Kmart (2003/2053)*, A&P (1998/2038) Maine ----- Brunswick, ME 1,933,341 6.67 99.7% Hoyt's Cinemas (2010/2025), TJMaxx (2004/2019), Sears (2002/2027) Massachusets ------------ Framingham, MA 12,008,557 15.86 98.6% General Cinema (2014/2034), TJMaxx (2010/2020), Sears Homelife (2004/2024), Marshall's (2011/2026), Bob's (2011/2026), Linens 'N Things (2011/2026) Sports Authority (2015/2035), Barnes & Noble (2011/2026), Ofice Max (2011/2026), Toys R Us (2020/2070), Kids R Us (2020/2070), Bradlee's (2005/2020) Michigan -------- Bad Axe, MI 524,530 8.27 100.0% Wal-Mart (not owned), Farmer Jack's (2012/2037) Cheboygan, MI 397,950 4.60 91.1% Kmart (2005/2055), Carters Food Center (1999/2024) </TABLE> 14
15 <TABLE> DEVELOPERS DIVERSIFIED REALTY CORPORATION PROPERTY LIST DECEMBER 31, 1997 - ------------------------------- <CAPTION> Interest (ground Company lease Gross termination/ Land Leaseable Type of option Date Developed Area Area Center/Property Location Property (1) termination) or Acquired (2) (Acres) (sq.ft.) - --------------------- ---------------------- ------------ ----------- ----------------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Gaylord, MI 1401 West Main Street PC Fee 02/01/91, 08/12/93(a) 19.49 190,482 Houghton, MI Highway M26 MM Fee 12/01/81 21.48 234,338 Howell, MI 3599 East Grand River PC Fee 11/01/91, 09/23/93(a) 26.52 215,137 Mt Pleasant, MI 4208 E.Blue Grass Rd PC Fee 07/01/90, 09/24/93(a) 51.13 248,963 Sault Ste Marie, MI 4516 I-75 Business Spur PC Fee 08/01/93, 09/02/94(a) 40.08 262,267 Walker, MI 3390-B Alpine Ave., N.W. PC Fee 09/01/89, 12/29/95(a) 16.40 133,981 Minnesota - --------- Bemidji, MN 1201 Paul Bunyan Dr MM Fee 11/01/77 31.55 295,611 Brainerd, MN 1200 Hwy 210 West MM Fee 08/01/85 17.19 256,722 Eagan, MN I299 Promenade Place PC Fee 04/01/97, 07/01/97(a) 45.70 243,282 Hutchinson, MN 1060 S.R. 15 MM Fee 12/01/81 36.88 121,001 Maple Grove, MN Weaver Lake Road & I-94 PC Fee 10/01/95, 07/02/96(a) 25.61 250,436 St. Paul, MN 1450 University Avenue PC Fee 10/01/95, 07/11/97(a) 20.27 313,781 Worthington, MN 1635 Oxford Street MM Fee 11/01/77 38.02 185,658 Mississippi - ----------- Starkville, MS 882 Highway 12 West PC Fee 08/01/90, 11/16/94(a) 28.81 234,652 Tupelo, MS 3850 North Gloster PC Fee 08/01/92, 12/15/94(a) 41.91 348,236 Missouri - -------- Fenton, MO Gravois Rd-Hwy 141 NC Fee 07/01/70 11.07 93,548 Independence, MO 900 East 39th Street PC Fee(6) 09/01/95, 11/17/95(a) 46.95 365,062 New Jersey - ---------- Princeton, NJ Route 1 and Quaker Bridge Road PC Fee 06/06/95, 12/30/97(a) 202,104 New Mexico - ---------- Los Alamos, NM 800 Trinity Drive NC Fee 07/01/78 8.72 98,050 North Carolina - -------------- Ahoskie, NC 1400 East Memorial Drive PC Fee 12/01/92, 02/25/94(a) 26.95 187,257 Durham (Oxf), NC 3500 Oxford Road PC Fee 12/01/90 41.70 206,827 Durham (NHp), NC 5428-B New Hope Commons PC Fee(6) 07/01/95, 11/17/95(a) 39.53 408,292 Jacksonville, NC US Hwy 17-Western Ave PC Fee 08/01/89 27.51 79,200 New Bern, NC 3003 Claredon Blvd PC Fee 05/01/89 28.18 238,388 Washington, NC 536 Pamlico Plaza NC Fee 11/01/90 22.17 85,000 Waynesville, NC 201 Paragon Parkway PC Fee 06/01/90, 04/28/93(a) 28.40 181,894 Wilmington, NC S.College-New Centre Dr PC Fee 09/01/89 57.78 442,583 </TABLE> <TABLE> <CAPTION> Mortgage Obligation Average as of Total Base December 31, Annualized Rent per Percent Center/Property 1997 Base Rent(3) sq.ft.(4) Leased(6) Anchor Tenants (Lease Expiration/Option Expiration) -------------------- ----------- ------------ --------- -------- --------------------------------------------------- <S> <C> <C> <C> <C> <C> Gaylord, MI 1,095,147 5.82 98.7% Wal-Mart (2010/2040), Buy-Low (2011/2031) Houghton, MI 2,798,376 1,033,054 4.74 93.1% Kmart (2005/2055), J.C. Penney (2000/2020) Howell, MI 7,462,728 1,294,826 6.10 98.7% Wal-Mart (2011/2041), Kroger (2012/2042) Mt Pleasant, MI 1,485,846 5.97 100.0% Wal-Mart (2009/2039), Kroger (2011/2041), Odd Lots (1998/2008) Sault Ste Marie, MI 7,519,794 1,585,229 6.41 94.3% Wal-Mart (2012/2042), J.C. Penney (2008/2033), Glen's Supermarket (2013/2033) Walker, MI 1,325,120 9.89 100.0% Circuit City (not owned), Target (not owned), Toys R Us (not owned), TJMaxx (2005/2020), Office Depot (2005/2019) Minnesota --------- Bemidji, MN 1,156,005 4.26 91.8% Kmart (2002/2052), J.C. Penney (1998/2018), Herberger's (2005/2030) Brainerd, MN 935,000 1,631,482 6.91 92.0% Kmart (2004/2054), Herberger's (2008/2023) Eagan, MN 2,834,289 11.65 100.0% HomePlace (2017/2037), Office Max (2013/2033), TJMaxx (2007/2022), Byerly's (2016/2046) Hutchinson, MN 5,134,849 769,702 7.00 90.8% Kmart (not owned), J.C. Penney (2001/2021) Maple Grove, MN 2,437,102 9.73 100.0% Kohl's (2016/2036), Barnes & Noble (2011/2026), Holiday Sports (2011/2027), HomePlace (2016/2036), Cub Foods (not owned) St. Paul, MN 2,474,380 7.89 100.0% Kmart (2022/2057), Cub Foods (2015/2045), PetsMart (2011/2036),Mervyn's (2016/2046) Worthington, MN 1,057,405 5.86 97.2% Kmart (2001/2051), J.C. Penney (2007/2032), Sterling (2001/2021), Hy-Vee (2011/2031) Mississippi ----------- Starkville, MS 2,417,963 1,217,711 5.36 96.7% Wal-Mart (2015/2045), J.C. Penney (2010/2040), Kroger (2012/2042) Tupelo, MS 1,874,722 5.42 99.3% Wal-Mart (2012/2042), Sam's (2012/2042), Goody's (2002/2017) Missouri -------- Fenton, MO 754,923 8.76 92.1% Independence, MO 3,669,243 10.24 98.1% Kohl's (2016/2036), Bed Bath & Beyond (2012/2027), Marshall's (2012/2027), Rhodes Furniture (2016/2026), Barnes & Noble (2011/2026), American Multi-Cinema (2015/2034) New Jersey ---------- Princeton, NJ 3,618,551 17.90 100.0% Wal-Mart (not owned), Sam's (not owned), Home Depot (not owned), Border's Books and Music (2011/2026), Best Buy (2012/2027), Linens N Things (2011/2026), PetsMart (2011/2026) New Mexico ---------- Los Alamos, NM 412,557 6.28 67.0% Furrs(1997/1997), Furrs Pharmacy (1998/2013), TG&Y(2018/2033) North Carolina -------------- Ahoskie, NC 924,444 5.01 98.5% Wal-Mart (2013/2043), Belk (2008/2033), Food Lion (2012/2032) Durham (Oxf), NC 1,099,547 6.59 80.7% Wal-Mart (not owned), Food Lion (2010/2030), Lowes (2011/2031) Durham (NHp), NC 4,530,910 11.10 100.0% Wal-Mart (2015/2035), Upton's (not owned), Michael's (2005/2020), Marshall's (2011/2026), Linens 'N Things (2011/2026), Best Buy (2011/2026), OfficeMax (2010/2025), Barnes & Noble (2010/2025) Jacksonville, NC 2,664,141 550,995 6.96 100.0% Wal-Mart (not owned), Wilson's (2009/2024) New Bern, NC 5,392,642 1,399,143 6.08 96.6% Wal-Mart (2009/2034) Washington, NC 391,019 4.65 98.8% Wal-Mart (2009/2034) Waynesville, NC 1,101,277 6.05 100.0% Wal-Mart (2011/2041), Food Lion (2011/2031) Wilmington, NC 10,075,323 3,086,032 7.00 99.6% Wal-Mart (2009/2034), Sam's (not owned), Lowes (2009/2029), Hamrick's (2002/2007), Goody's (2005/2015) </TABLE> 15
16 <TABLE> DEVELOPERS DIVERSIFIED REALTY CORPORATION PROPERTY LIST DECEMBER 31, 1997 <CAPTION> Interest (ground Company lease Gross termination/ Date Land Leaseable Type of option Developed or Area Area Center/Property Location Property (1) termination) Acquired (2) (Acres) (sq.ft.) - --------------------- ---------------------- ------------ ----------- ----------------- ------ -------- <S> <C> <C> <C> <C> <C> <C> North Dakota - ------------ Dickinson, ND 1681 Third Avenue MM Fee 05/01/78 27.10 267,506 Ohio - ---- Ashland, OH U.S. Route 42 PC Fee 11/01/77 6.26 110,656 Aurora (Barrgtn), OH 70-130 Barrington Town Square Drive NC 04/01/96 37,876 Aurora, OH 180 Lena Drive BC Fee 09/01/88 20.00 236,225 Boardman, OH I-680 & US-224 PC Fee 02/01/97 57.04 385,355 Canton, OH 5496 Dressler Road PC Fee(6) 10/01/95 20.00 229,920 Canton (II), OH Dressler Road PC Fee 10/01/97 180,582 Chillicothe, OH 867 North Bridge Street PC Fee 09/01/74 16.70 236,105 Cincinnati, OH 5100 Glencrossing Way PC Fee 11/01/90 24.47 231,224 05/26/93 (a) Clev.W.65th, OH 3250 West 65th Street PC Fee 10/01/77 4.18 49,420 Eastlake, OH 33752 Vine Street PC Fee 09/01/71 0.99 4,000 Elyria, OH 825 Cleveland PC Fee 09/01/77 16.30 150,200 Highland Hts., OH 6235 Wilson Mills Rd PC Fee 11/01/95 11.63 247,146 Hillsboro, OH 1100 North High St PC Fee 03/01/79 11.02 58,583 Huber Hts., OH 8280 Old Troy Pike PC Fee 06/01/90 17.39 163,741 08/12/93 (a) Lebanon, OH 1879 Deerfield Road PC Fee 01/01/90 (a) 14.40 26,500 08/12/93 (a) Macedonia, OH 8210 Macedonia Commons PC Fee(6) 05/01/94 19.94 234,789 07/05/94 (a) Mentor, OH Pine Needle BC Fee 11/01/87 3.10 40,200 N.Olmsted, OH 5140-25877 Great Northern Blvd. PC 06/01/58 43.14 619,327 02/21/97 (a) Solon, OH 6211 S.O.M. Center Rd PC Fee 05/01/78 0.64 2,560 Stow, OH Kent Road PC Fee 08/01/97 170,222 Stow (Kmart), OH 4332 Kent Road PC Fee 07/01/69 20.14 116,806 Streetsboro, OH 3000 Crane Drive BC Fee 03/01/89 5.00 66,200 Tiffin, OH 870 West Market St MM Fee 09/01/80 27.62 230,278 Toledo, OH 5245 Airport Highway PC Fee 10/01/93 22.87 187,674 02/24/95 (a) Twinsburg (Her), OH 9177 Dutton Drive BC Fee 11/01/89 3.90 35,555 Twinsburg (VSA), OH 9300 Dutton Drive BC Fee 11/01/89 6.80 85,800 Westlake, OH 30100 Detroit Road PC Fee 10/01/74 12.71 162,420 Wilmington, OH 1025 S. South Street PC Fee 11/01/77 7.38 55,130 Xenia, OH 1700 West Park Square PC Fee 11/01/94 7.38 104,873 Zanesville, OH 3431 North Maple Ave PC Fee 04/01/90 3.28 13,283 Oregon - ------ Portland, OR NW Evergreen Pkwy.& NW Ring Road PC Fee 11/01/95 18.29 151,970 08/22/96 (a) Pennsylvania - ------------ Erie, PA 2301 West 38th Street PC GL8 08/01/73 13.27 95,000 </TABLE> <TABLE> <CAPTION> Mortgage Obligation Average as of Total Base December 31, Annualized Rent per Percent Center / Property 1997 Base Rent(3) sq.ft.(4) Leased(6) Anchor Tenants (Lease Expiration/Option Expiration) -------------------- ----------- ------------ --------- -------- --------------------------------------------------- <S> <C> <C> <C> <C> <C> North Dakota ------------ Dickinson, ND 1,066,298 4.17 95.6% Kmart (2003/2053), J.C. Penney (1998/2018), Herberger (2000/2020), Thrifty Drug (2001/2001) Ohio ---- Ashland, OH 233,382 2.11 100.0% Kmart (2002/2052), N.J. Supermarkets (1997/2022) Aurora (Barrgtn), OH 555,330 16.21 90.4% Heinens (not owned) Aurora, OH 744,109 3.15 100.0% Hardline Services (2003/2013) Boardman, OH 3,116,352 8.09 100.0% Lowe's (2016/2046), Staples (2012/2032), Dick's Clothing & Sporting Goods (2012/2027), Wal-Mart (2017/2047), PetsMart (2013/2038) Canton, OH 2,519,104 11.10 98.7% Kohl's (2016/2046), Target (not owned), Media Play (2011/2026), Dick's Clothing & Sporting Goods (2010/2025) Canton (II), OH 1,816,097 10.06 100.0% Service Merchandise, Homeplace, Jo-Ann ETC. Chillicothe, OH 1,808,382 7.66 100.0% Lowes, (2015/2035), Kroger (2001/2031), Super X (2001/2031) Cincinnati, OH 2,208,518 9.56 99.9% Thriftway (2009/2029), Service Merchandise (2006/2031) Clev.W.65th, OH 229,630 4.91 94.6% Kmart (not owned), A&P (1997/2027), Revco (1997/2007) Eastlake, OH 68,400 17.10 100.0% Kmart (not owned), Elyria, OH 761,970 5.07 100.0% Hill's (2003/2028), Finast (2010/2045) Highland Hts., OH 2,563,263 10.37 100.0% Builders Square (2020/2070), Kohl's (2007/2047), Dick's Clothing and Sporting Goods (2016/2036) Hillsboro, OH 254,872 4.35 100.0% Kmart (2004/2054) *, Rite Aid (1999/2004), Bob & Carls (not owned) Huber Hts., OH 1,568,028 9.58 100.0% Wal-Mart (not owned), Cub Foods (2011/2031), Sears (2002/2012) Lebanon, OH 227,200 8.57 100.0% Wal-Mart (not owned), PK Lumber (not owned) Macedonia, OH 2,230,843 9.50 100.0% Wal-Mart (not owned), Finast (2018/2049), Kohl's (2016/2041) Mentor, OH 227,130 5.65 100.0% Steris Corp (1999/2004) N.Olmsted, OH 4,770,220 8.85 87.0% Regal Cinemas (2001/2001), Marc's (2002/2007), CompUSA (2008/2023), Finast (not owned) Solon, OH 64,792 25.31 100.0% Kmart (not owned) Stow, OH 1,344,954 7.83 100.9% Target (NO), Giant Eagle, Stein Mart, OfficeMax Stow (Kmart), OH 189,344 1.62 100.0% Kmart (1996/2006) Streetsboro, OH 297,366 4.49 100.0% Alumax Alum (1997/2006) Tiffin, OH 816,272 3.68 96.3% Kmart (2005/2055), J.C. Penney (2000/2010), Heileg-Myers (2004/2014) Toledo, OH 1,438,062 7.66 100.0% Best Buy (2009/2024),Office Depot (2009/2024), Michaels (2004/2014) Sears (2002/2012) Twinsburg (Her), OH 202,230 6.94 81.9% Twinsburg (VSA), OH 377,424 4.40 100.0% VSA (1998) Westlake, OH 937,483 6.04 95.5% Kmart (1999/2049), Marc's (2004/2019) Wilmington, OH 181,854 3.99 82.6% Kmart (not owned), Super Valu (1998/2018) Xenia, OH 790,484 7.54 100.0% Wal-Mart (not owned), Kroger (2019/2049) Zanesville, OH 129,847 9.78 100.0% Kmart (not owned) Oregon ------ Portland, OR 2,255,273 14.84 100.0% Office Depot (2010/2025), Haggan Supermarket (2021/2046), Mervyn's (not owned), Target (not owned) Pennsylvania ------------ Erie, PA 209,655 2.37 93.3% Hill's (1998/2023) </TABLE> 16
17 <TABLE> DEVELOPERS DIVERSIFIED REALTY CORPORATION PROPERTY LIST DECEMBER 31, 1997 <CAPTION> Interest (ground Company lease Gross termination/ Land Leaseable Type of option Date Developed Area Area Center/Property Location Property (1) termination) or Acquired (2) (Acres) (sq.ft.) - --------------------- ---------------------- ------------ ----------- ----------------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Erie, PA 1902 Keystone Drive PC Fee 07/31/95 65.69 483,305 East Norriton, PA 2700 DeKalb Pike PC Fee 11/01/75 24.22 174,109 South Carolina - -------------- Anderson, SC 406 Highway 28 By-Pass PC Fee 06/01/90, 03/08/94(a) 20.90 163,809 Anderson, SC 3812 Liberty Highway PC Fee 10/01/93, 03/22/95(a) 2.13 14,250 Camden, SC 1671 Springdale Drive PC Fee 03/01/90, 06/24/93(a) 22.97 166,197 Columbia, SC 5420 Forest Drive PC Fee 08/01/95, 11/13/95(a) 7.04 46,700 Mt.Pleasant, SC 1500 Highway 17 North PC Fee 03/01/92, 03/30/95(a) 22.70 205,032 No Charleston, SC 7400 Rivers Avenue PC Fee 08/01/89, 11/07/93(a) 28.10 251,007 Orangeburg, SC 2795 North Road PC Fee 07/01/94, 03/22/95(a) 2.65 22,200 Simpsonville, SC 621 Fairview Road PC Fee 10/01/90, 01/03/94(a) 17.23 142,133 Union, SC Highway 176 By-Pass #1 PC Fee 06/01/90, 06/24/93(a) 45.65 184,331 South Dakota - ------------ Watertown, SD 1300 9th Avenue, S.E. MM Fee 11/01/77 29.30 285,495 Texas - ----- Ft. Worth, TX SWC Eastchase Pkwy. and I-30 PC Fee 12/01/95, 07/02/96(a) 17.00 205,027 San Antonio, TX 125 NE Loop 410 PC Fee(6) 12/30/96, 01/23/97(a) 26.45 286,394 Vermont - ------- Berlin, VT Route 4 MM Fee 09/01/86 50.25 174,646 Virginia - -------- Fairfax, VA 12210 Fairfax Towne Center PC Fee(6) 10/01/94, 11/17/95(a) 22.79 253,941 Martinsville, VA 240 Commonwealth Blvd MM Fee(6) 07/01/89 43.73 435,401 Pulaski, VA 1000 Memorial Dr PC Fee 09/01/90, 04/28/93(a) 21.93 143,299 Winchester, VA 2190 So Pleasant Valley PC Fee 01/01/90, 12/10/93(a) 26.42 230,940 - --------------------- ---------------------- ------------ ----------- ----------------- ------ ---------- 25,189,531 </TABLE> <TABLE> <CAPTION> Mortgage Obligation Average as of Total Base December 31, Annualized Rent per Percent Center / Property 1997 Base Rent(3) sq.ft.(4) Leased(6) Anchor Tenants (Lease Expiration/Option Expiration) -------------------- ----------- ------------ --------- -------- --------------------------------------------------- <S> <C> <C> <C> <C> <C> Erie, PA 3,936,534 8.15 100.0% Wal-Mart (2015/2045), Lowe's (2015/2045), Media Play (2010/2025), Kohl's (2016/2046) East Norriton, PA 1,115,547 6.41 100.0% Kmart (2000/2050), Acme (2002/2027), Thrift Drug (2002/2022) South Carolina -------------- Anderson, SC 858,356 5.58 93.8% Wal-Mart (2010/2040), Ingles (2011/2066) Anderson, SC 143,316 10.06 100.0% Wal-Mart (not owned), Sam's (not owned) Camden, SC 988,097 5.95 100.0% Wal-Mart (2009/2039), Winn-Dixie (2011/2036), Goody's (2001/2016) Columbia, SC 487,750 10.44 100.0% Wal-Mart (not owned) Mt.Pleasant, SC 6,889,913 1,478,295 7.28 99.1% Wal-Mart (not owned), Lowe's (2012/2032), Piggly Wiggly (2012/2022), TJMaxx (2002/2012) No Charleston, SC 1,792,159 7.38 96.8% Wal-Mart (2009/2039), Office Warehouse (2002/2012), Service Merchandise (not owned) Orangeburg, SC 227,175 10.23 100.0% Wal-Mart (not owned) Simpsonville, SC 837,111 5.89 100.0% Kmart (2015/2065), Ingles (2011/2065) Union, SC 1,006,394 5.46 100.0% Wal-Mart (2009/2039), Belk's (2010/2030), Winn-Dixie (2010/2035) South Dakota ------------ Watertown, SD 1,376,125 4.96 97.2% Kmart (2002/2052), J.C. Penney (1998/2018), Herberger's (1999/2019), Osco (1998/2003) Texas ----- Ft. Worth, TX 2,280,923 11.12 100.0% PetsMart (2011/2036), MJ Designs (2011/2031), Ross Dress For Less (2006/2026), Toys R Us (not owned), Target (not owned) San Antonio, TX 3,971,782 14.27 97.2% Ross Dress For Less (2007/2027), DSW Warehouse (2007/2027) , Best Buy (2011/2026), Oshman's (2017/2037), HomePlace (2012/2027) Vermont ------- Berlin, VT 4,940,000 816,547 4.90 95.5% J.C. Penney (2009/2034) Virginia -------- Fairfax, VA 4,012,280 16.05 98.4% United Artists (2014/2034), Safeway (2019/2054), TJMaxx (2009/2024), Bed, Bath & Beyond (2010/2020), Tower Records (2009/2019) Martinsville, VA 2,907,527 7.16 93.2% J.C. Penney (2009/2034), Leggett (2009/2024), Sears (2009/2029), Kroger (2017/2062), Goody's (2006/2016) Pulaski, VA 837,449 6.10 95.8% Wal-Mart (2011/2041), Food Lion (2011/2031) Winchester, VA 9,294,686 2,012,148 8.90 97.9% Office Max (2012/2027), Kohl's (2018/2048), Giant Foods (2010/2040), Books-A-Million (2007/2017) -------------------- ----------- ------------ --------- -------- --------------------------------------------------- $89,675,698 $204,506,635 $8.48 96.8% </TABLE> ================== Footnotes: (1) "PC" indicates a power center or a community shopping center, "NC" indicates a neighborhood shopping center, "MM" indicates an enclosed mini-mall and "BC" indicates a business center. 17
18 (2) Indicates the date the center was developed. Dates denoted with (a), indicate the date on which the property was acquired by the company following completion of the IPO. (3) Includes space leased as of December 31, 1997,for which rent was being paid but which was not then occupied; also includes tenant leases signed as of said date relating to approximately $800,000 in base revenue which has not yet been fully billed. (4) Calculated as total annualized base rentals divided by Company-owned GLA actually leased as of December 31, 1997 (5) Includes space leased as of December 31, 1997,for which rent was being paid but which was not then occupied; also includes tenant leases signed as of said date relating to approximately 158,000 square feet which have not yet been fully occupied. (6) One of fourteen (14) properties owned through joint ventures which serve as collateral for joint venture mortgage debt aggregating approximately $389.2 million (of which the Company's proportionate share is $190.3 million) which is not reflected in the consolidated indebtedness. * This anchor tenant has closed and sublet the space. ** This tenant-owned anchor store has closed. *** This tenant-owned anchor store has closed and the space has been sublet. **** This anchor tenant continues to pay rent to the Company but does not occupy or sublet the space. 18
19 Item 3. LEGAL PROCEEDINGS Other than routine litigation and administrative proceedings arising in the ordinary course of business, the Company is not presently involved in any litigation nor, to its knowledge, is any litigation threatened against the Company or its properties, which is reasonably likely to have a material adverse effect on the liquidity or results of operations of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following information is reported below. (a) The executive officers of the Company are as follows: <TABLE> <CAPTION> Name Age Position and Office with the Company - -------------------- --------- --------------------------------------- <S> <C> <C> Scott A. Wolstein 45 Chairman of the Board of Directors and Chief Executive Officer James A. Schoff 52 Executive Vice President, Chief Operating Officer and a Director John R. McGill 43 Vice President and Director of Development Joan U. Allgood 45 Vice President and General Counsel Loren F. Henry 50 Vice President and Director of Management William H. Schafer 40 Vice President and Chief Financial Officer Alan Bobman 37 Regional Vice President of Leasing Steven M. Dorsky 40 Regional Vice President of Leasing Robin R. Walker 41 Regional Vice President of Leasing </TABLE> -19-
20 Scott A. Wolstein has been the President, Chief Executive Officer and a Director of the Company since its organization and assumed the responsibilities of Chairman of the Board of Directors in February 1997. Prior to the organization of the Company, Mr. Wolstein was a principal and executive officer of its predecessor entities since before 1992. Mr. Wolstein is a graduate of the Wharton School at the University of Pennsylvania and of the University of Michigan Law School. Following his graduation from the University of Michigan Law School, Mr. Wolstein was associated with the Cleveland law firm of Thompson, Hine & Flory. He has served as President of the Board of Trustees of the United Cerebral Palsy Association of Greater Cleveland and as a member of the Board of The Great Lakes Theater Festival, Neighborhood Progress, Inc., The Park Synagogue, Cleveland's Convention and Visitors Bureau of Greater Cleveland and Bellefaire. He is currently a member of the Executive Committee of the Board of Trustees of the National Association of Real Estate Investment Trusts and a member of the Board of Trustees of the International Council of Shopping Centers and serves as the General Co-Chairman of the Cleveland Campaign for the State of Israel Bonds. He is also a member of the Young Presidents Organization, the Urban Land Institute, the National Realty Committee, and the Wharton Real Estate Center. Mr. Wolstein is the son of Bert L. Wolstein, Chairman Emeritus James A. Schoff has been Executive Vice President, Chief Operating Officer and a Director of the Company since its organization. After graduating from Hamilton College and Cornell University Law School, Mr. Schoff practiced law with the firm of Thompson, Hine and Flory where he specialized in the acquisition and syndication of real estate properties. Mr. Schoff serves as a member of the Board of Trustees of the Western Reserve Historical Society, the Children's Aid Society and the Cleveland Ballet. John R. McGill has been affiliated with the Company and its predecessor entities since 1969. During his tenure with the Company he has been involved with the coordination and development of in excess of 85 properties, including land acquisition, major tenant lease negotiations, and the overall development program. Mr. McGill has been a Vice President and Director of Development of the Company since April 1993. Joan U. Allgood has been a Vice President and General Counsel of the Company since its organization as a public company and General Counsel of its predecessor entities since 1987. Mrs. Allgood practiced law with the firm of Thompson, Hine and Flory from 1983 to 1987, and is a graduate of Denison University and Case Western Reserve University School of Law. Loren F. Henry has been a Vice President, Director of Management of the Company since its organization as a public Company and served as President of one of its predecessor entities from 1984-1993. Mr. Henry earned a Bachelor of Arts degree in Business Administration and Mathematics from Winona State College. William H. Schafer has been a Vice President and Chief Financial Officer of the Company since its organization as a public company and the Chief Financial Officer of its predecessor entities since April 1992. Mr. Schafer joined the Cleveland, Ohio office of the Price Waterhouse LLP accounting firm in 1983 and served there as a Senior Manager from July 1990 until he joined the organization in 1992. Mr. Schafer graduated from the University of Michigan with a Bachelor of Arts degree in Business Administration. -20-
21 Alan Bobman joined the Company in October 1995 as Regional Vice President of Leasing. Mr. Bobman was previously Divisional Director of Real Estate at Charming Shoppes, Inc. which operates the Fashion Bug and Fashion Bug Plus stores nationwide. He was employed at Charming Shoppes since 1985, and is an Insurance and Real Estate graduate of Penn State University. Steven M. Dorsky has been a Regional Vice President of Leasing since November 1995. Prior to joining the Company, he was an Assistant Vice President and Senior Leasing Associate for the Cleveland based retail brokerage and management firm, The Hausman Companies. Mr. Dorsky earned a Bachelor of Arts degree in business from Macalester College and a Masters degree in Social Administration from Case Western Reserve University - School of Applied Social Science. Robin R. Walker joined the Company in April 1995 and was appointed Regional Vice President of leasing in November 1995. Prior to joining the Company, Ms. Walker was president of Aroco, Inc., a retail brokerage and tenant representation firm based in Alabama. Ms. Walker attended the University of Alabama where she earned her degree in elementary education. -21-
22 Part II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The following table shows the high and low sales price of the Company's common shares on the New York Stock Exchange (the "NYSE") for each quarter in 1997 and 1996 and the dividends paid per common share with respect to each such quarter: <TABLE> <CAPTION> Dividends Paid per 1997 High Low Common Share - ----------- -------- ------- ------------ <S> <C> <C> <C> 1st quarter $ 38-5/8 $34-1/4 $ .63 2nd quarter 40 35-7/8 .63 3rd quarter 40-1/4 38-1/4 .63 4th quarter 41-1/4 37-5/16 .63 -------- $ 2.52 </TABLE> <TABLE> <CAPTION> Dividends Paid per 1996 High Low Common Share - ----------- -------- ------- ------------- <S> <C> <C> <C> 1st quarter $ 31-3/4 $28-1/8 $ .60 2nd quarter 32 28-1/8 .60 3rd quarter 33-1/8 30-1/2 .60 4th quarter 37-1/4 32-1/8 .60 -------- $ 2.40 </TABLE> The approximate number of record holders of the Company's common shares, (the only class of common equity) at March 16, 1998 was 425, and the approximate number of beneficial owners of such shares was 20,000. In January 1998, the Company declared its 1998 first quarter dividend to shareholders of record on February 13, 1998 of $.655 per share, a 4.0% increase over the quarterly dividend rate of $.63 per share in 1997. The Company intends to continue to declare quarterly dividends on its common shares. However, no assurances can be made as to the amounts of future dividends, since such dividends are subject to the Company's cash flow from operations, earnings, financial condition, capital requirements and such other factors as the Board of Directors considers relevant. The Company is required by the Internal Revenue Code of 1986, as amended, to distribute at least 95% of its REIT taxable income. The amount of cash available for dividends is impacted by capital expenditures and debt service requirements to the extent that the Company were to fund such items out of cash flow from operations. In June 1995, the Company implemented a dividend reinvestment plan under which shareholders may elect to reinvest their dividends automatically in common shares. Under the plan, the Company may, from time to time, elect to purchase common shares in the open market on behalf of participating shareholders or may issue new common shares to such shareholders. -22-
23 Item 6. SELECTED FINANCIAL DATA The financial data included in the following table has been selected by the Company and has been derived from the financial statements for the last five years and include the information required by Item 301 of Regulation S-K. COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA (Amounts in thousands, except per share data) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------- OPERATING DATA: Pro forma 1997(1) 1996(1) 1995(1) 1994(1) 1993(2) 1993(1) --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Revenues (primary real estate rentals) $ 169,040 $ 130,905 $ 107,805 $ 81,974 $ 54,606 $ 54,531 --------- --------- --------- --------- --------- --------- Expenses: Rental operation 47,017 35,123 28,069 22,802 16,963 16,863 Depreciation & amortization 32,313 25,062 21,865 16,211 10,393 10,393 Interest 35,558 29,888 29,595 21,423 13,407 15,060 --------- --------- --------- --------- --------- --------- 114,888 90,073 79,529 60,436 40,763 42,316 --------- --------- --------- --------- --------- --------- Income before equity in net income (loss) from joint ventures, minority equity interests, gains on sales of real estate, non-recurring charges and extraordinary items 54,152 40,832 28,276 21,538 13,843 12,215 Equity in net income (loss) of joint ventures 10,893 8,710 486 (186) (347) (347) Minority equity interests (1,049) - - - - Gain on sales of real estate 3,526 - 300 - 122 122 Non-recurring charges (3) - - - - - (2,641) --------- --------- --------- --------- --------- --------- Income before extraordinary item 67,522 49,542 29,062 21,352 13,618 9,349 Extraordinary item (3) - - (3,557) (216) - (731) --------- --------- --------- --------- --------- --------- Net income $ 67,522 $ 49,542 $ 25,505 $ 21,136 $ 13,618 $ 8,618 ========= ========= ========= ========= ========= ========= Net income applicable to common shareholders $ 53,322 $ 35,342 $ 24,250 $ 21,136 $ 13,618 $ 8,618 ========= ========= ========= ========= ========= ========= Earnings per share data - Basic: (4) Income before extraordinary item $ 2.06 $ 1.67 $ 1.48 $ 1.35 $ 1.10 $ 0.82 Net income $ 2.06 $ 1.67 $ 1.29 $ 1.34 $ 1.10 $ 0.76 Weighted average number of common shares 25,880 21,147 18,780 15,806 12,391 11,383 Earnings per share data- Diluted: (4) Income before extraordinary item $ 2.05 $ 1.67 $ 1.47 $ 1.34 $ 1.10 $ 0.82 Net income $ 2.05 $ 1.67 $ 1.28 $ 1.33 $ 1.10 $ 0.76 Weighted average number of common shares 26,062 21,186 18,909 15,916 12,402 11,394 Annual cash dividend $ 2.52 $ 2.40 $ 2.16 $ 1.92 $ 1.60(5) $ 1.42 </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA: Real estate (at cost) $1,325,742 $ 991,647 $ 848,373 $ 686,890 $ 459,049 Real estate, net of accumulated depreciation 1,154,005 849,608 728,333 586,839 375,183 Advances to and investments in joint ventures 136,267 106,796 83,190 8,710 9,078 Total assets 1,391,918 975,126 830,060 611,116 395,942 Total debt 668,521 478,432 405,726 394,435 184,534 Shareholders' equity 669,050 469,336 404,161 203,508 197,118 </TABLE> -23-
24 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------- Proforma 1997(1) 1996(1) 1995(1) 1994(1) 1993(2) 1993(1) --------- --------- --------- --------- --------- --------- OTHER DATA: <S> <C> <C> <C> <C> <C> <C> Cash flow provided from (used in) Operating activities $ 94,383 $ 75,820 $ 49,039 $ 39,112 (6) $ 19,151 Investing activities (416,220) (199,670) (217,198) (191,810) (6) (137,232) Financing activities 321,842 123,851 167,252 150,373 (6) 120,417 Funds from operations (7): Net income applicable to common shareholders $ 53,322 $ 35,342 $ 24,250 $ 21,136 $ 13,618 $ 8,618 Depreciation and amortization 31,955 24,832 21,706 16,211 10,393 10,393 Equity in net (income) loss of joint ventures (10,893) (8,710) (486) 186 347 347 Joint venture funds from operations 16,077 13,172 1,364 217 105 105 Minority interest expense (OP Units) 10 - - - - - Gain on sales of real estate (3,526) - (300) - (122) (122) Non-recurring and extraordinary items (3) - - 3,557 216 - 3,372 --------- --------- --------- --------- --------- --------- $ 86,945 $ 64,636 $ 50,091 $ 37,966 $ 24,341 $ 22,713 ========= ========= ========= ========= ========= ========= Weighted average number of common shares outstanding 25,880 21,147 18,780 15,806 12,391 11,383 </TABLE> (1) As described in the consolidated financial statements, the Company acquired eight properties in 1997 (one of which is owned through a joint venture), five properties in 1996, 20 properties in 1995 (10 of which are owned through joint ventures), 14 properties in 1994 and 17 properties in 1993. (2) Pro forma adjustments reflect only those adjustments associated with the Company's IPO and do not include the pro forma adjustments associated with the secondary offerings and acquisitions in 1994 and 1993. (3) The non-recurring charges in 1993 relate to costs incurred in connection with the transfer of the initial properties (primarily transfer taxes and title insurance costs) and the 1993 extraordinary item relates to debt prepayment fees and write-off of deferred finance costs. In 1995 and 1994, the extraordinary charges relate primarily to the write-off of deferred finance costs. (4) Earnings per share data is reflected for all the years utilizing SFAS 128. (5) Represents annualized dividend rate as declared by the Board of Directors. (6) Pro forma information has not been presented. (7) Industry analysts generally consider funds from operations ("FFO") to be an appropriate measure of the performance of an equity REIT. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. FFO is defined generally as net income applicable to common shareholder excluding gains (losses) on sale of property, non-recurring charges and extraordinary items, adjusting for certain noncash items, principally real property depreciation and equity income (loss) from its joint ventures and adding the Company's proportionate share of FFO of its unconsolidated joint ventures, determined on a consistent basis. The Company calculates FFO in accordance with the foregoing definition, which is currently used by NAREIT. Certain other real estate companies may calculate FFO in a different manner. -24-
25 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements, the notes thereto and the comparative summary of selected financial data appearing elsewhere in this report. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as indicative of future operations. The Company considers portions of this information to be forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company's expectations for future periods. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including, among other factors, local conditions such as an oversupply of space or a reduction in demand for real estate in the area, competition from other available space, dependence on rental income from real property or the loss of a major tenant. COMPARISON OF 1997 TO 1996 RESULTS OF OPERATIONS REVENUES FROM OPERATIONS Total revenues increased $38.1 million, or 29.1%, to $169.0 million for the year ended December 31, 1997 as compared to $130.9 million in 1996. Base and percentage rents for 1997 increased $28.2 million, or 28.7%, to $126.3 million as compared to $98.1 million in 1996. Approximately $3.5 million of the increase in base and percentage rental income was the result of new leasing, retenanting and expansion of the Core Portfolio Properties (shopping center properties owned as of January 1, 1996), an increase of 4.0% over 1996 revenues from Core Portfolio Properties. The 12 shopping centers acquired by the Company in 1997 and 1996 contributed $24.1 million of additional revenue and the four new shopping center developments contributed $4.0 million. The above increases were offset by the contribution of two properties to a joint venture in September 1996 which reduced base and percentage rental revenue by $3.0 million. At December 31, 1997, the occupancy rate of the Company's shopping centers aggregated 96.1% as compared to 94.8% at December 31, 1996. At December 31, 1997, the Company's portfolio was actually 96.7% leased, including leases signed where occupancy had not occurred as of that date. The average annualized base rent per leased square foot, including those properties owned through joint ventures, was $8.49 at December 31, 1997 as compared to $7.85 at December 31, 1996. During 1997, same store sales, for those tenants required to report sales (approximately 12.6 million square feet), increased 4.17% to $230.59 per square foot as compared to $221.35 per square foot in 1996. The increase in recoveries from tenants of $8.2 million was directly related to the increase in operating and maintenance expenses and real estate taxes associated with the 1997 and 1996 shopping center acquisitions and developments. Recoveries were approximately 90.0% of operating and maintenance expenses and real estate taxes in 1997 as compared to 89.4% in 1996. Management fee income and other income increased by approximately $1.7 million which generally related to an increase in interest income of approximately $0.9 million, management fee income of approximately $0.3 million, development fee income of approximately $0.3 million and kiosk income (temporary tenants) of approximately $0.2 million. EXPENSES FROM OPERATIONS Rental operating and maintenance expenses for the year ended December 31, 1997 increased $3.6 million, or 28.7%, to $16.0 million as compared to $12.4 million in 1996. An increase of $2.6 million was attributable to the 16 shopping centers acquired and developed in 1997 and 1996 and an increase of $1.0 million was related to the Core Portfolio Properties generally associated with increased maintenance activities at a majority of the Company's shopping centers. Real estate taxes increased $5.4 million, or 37.1%, to $20.0 million for the year ended December 31, 1997 as compared to $14.6 million in 1996. This increase was primarily attributable to the growth related to the 16 shopping centers acquired and developed in 1997 and 1996 which contributed $5.1 million of the increase and $0.3 million generally related to expansions associated with the Core Portfolio Properties. General and administrative expenses increased $2.9 million, or 35.9%, to $11.0 million for the year ended December 31, 1997 as compared to $8.1 million in 1996. The increase was primarily attributable to the growth of the Company associated with the 1997 and 1996 acquisitions, expansions and developments and increases in various incentive and deferred compensation costs. The Company continues to maintain a conservative policy with regard to the expensing of all internal leasing salaries, legal salaries and related expenses associated with the leasing and re-leasing of existing space. In addition, the Company continues to expense all internal costs associated with acquisitions. Total general and administrative expenses were approximately 4.4% and 4.2% of total revenues, including revenues of joint ventures, for the years ended December 31, 1997 and 1996, respectively. Depreciation and amortization expense increased $7.2 million, or 28.9%, to $32.3 million for the year ended December 31, 1997 as compared to $25.1 million in 1996. The increase was primarily attributable to the growth related to the 16 shopping centers acquired and developed in 1997 and 1996 which contributed $6.7 million of the increase and $1.1 million primarily related to the expansions and improvements associated with the Core Portfolio Properties. The above increases were offset by the contribution of two properties to a joint venture in September 1996 which reduced depreciation expense by $0.6 million. Interest expense, net of amounts capitalized, increased $5.7 million, or 19.0%, to $35.6 million for the year ended December 31, -25-
26 1997 as compared to $29.9 million in 1996. The overall increase in interest expense was primarily related to the acquisition and development of shopping centers during 1997 and 1996. The weighted average debt outstanding and related weighted average interest rate during 1997 was $510.5 million and 7.7%, respectively, as compared to $426.5 million and 7.8%, respectively, during 1996. Interest capitalized, in conjunction with development and expansion projects, was $4.0 million for the year ended December 31, 1997 as compared to $3.3 million in 1996. OTHER Equity in net income of joint ventures increased $2.2 million, or 25.1%, to $10.9 million in 1997 as compared to $8.7 million in 1996. An increase of $0.8 million was attributable to the Community Center Joint Ventures primarily associated with the completion of construction at three of the ten shopping centers which were under construction at the date of acquisition and a gain on sale of land. The aforementioned increases were offset by an increase in interest costs associated with the refinancing of variable rate bridge financing to long term fixed rate financing in May 1997. An increase of $0.8 million was related to the formation of a joint venture with Ohio State Teachers Retirement Systems ("OSTRS") in September 1996. An increase of $0.4 million was related to the formation of a joint venture in January 1997 which acquired a shopping center in San Antonio, Texas. An increase of $0.2 million was related to the expansion and redevelopment of Liberty Fair Mall in the Martinsville, Virginia joint venture. The minority equity interest expense of $1.0 million for the year ended December 31, 1997 related to the minority equity in three shopping center properties acquired by the Company during 1997. The charge to income represents the priority distributions associated with the minority equity interests. Gain on sales of real estate aggregated $3.5 million for the year ended December 31, 1997. In March 1997, the Company sold two business centers in Highland Heights, Ohio aggregating approximately 113,000 square feet for approximately $5.7 million. The two business centers had been vacant for approximately 18 months. NET INCOME Net income increased $18.0 million to $67.5 million for the year ended December 31, 1997 as compared to $49.5 million in 1996. The increase in net income was attributable to increased net operating revenues (total revenues less operating and maintenance expenses, real estate taxes and general and administrative expense) aggregating $26.2 million, resulting from new leasing, retenanting and expansion of Core Portfolio Properties, and the 16 shopping centers acquired and developed in 1997 and 1996. An additional increase of $2.2 million related to increased equity income of joint ventures and an increase of $3.5 million related to the gain on sale of real estate. The increase in net operating revenues, equity income from joint ventures and gain on sale of real estate was offset by increases in depreciation, interest expense and minority equity interest of $7.2 million, $5.7 million and $1.0 million, respectively. COMPARISON OF 1996 TO 1995 RESULTS OF OPERATIONS REVENUES FROM OPERATIONS Total revenues increased $23.1 million, or 21.4%, to $130.9 million for the year ended December 31, 1996 as compared to $107.8 million in 1995. Base and percentage rents for 1996 increased $13.7 million, or 16.3%, to $98.1 million as compared to $84.4 million in 1995. Approximately $2.4 million of the increase in base and percentage rental income was the result of new leasing, retenanting and expansion of the Core Portfolio Properties (shopping center properties owned as of January 1, 1995) an increase of 3.3% over 1995 revenues from Core Portfolio Properties. The 15 shopping centers acquired by the Company in 1996 and 1995 contributed $10.5 million of additional revenue and the three new shopping center developments contributed $2.3 million. The above increases were offset by the contribution of two properties to a joint venture in September 1996, which reduced base and percentage rental revenue by $0.8 million and a decrease in business center base rents of $0.7 million. At December 31, 1996, the occupancy rate of the Company's shopping centers aggregated 94.8% as compared to 96.3% at December 31, 1995. Contributing to the decrease in occupancy was the Company's decision to terminate the leases of two Wal-Mart stores in Winchester and Martinsville, Virginia at the end of June 1996. The former Wal-Mart space in each center was leased to a variety of tenants at higher rents commencing in the fourth quarter of 1996 and first half of 1997. At December 31, 1996, the Company had entered into additional leases with anchor tenants aggregating in excess of 240,000 square feet of vacant space, including the above mentioned Wal-Mart space, which effectively adjusts the December 31, 1996 occupancy rate to 96.0%. The average annualized base rent per leased square foot, including those properties owned through joint ventures, was $7.85 at December 31, 1996 as compared to $7.61 at December 31, 1995. During 1996, same store sales, for those tenants required to report sales, increased 3.9% to $225.18 per square foot as compared to $216.70 per square foot in 1995. The increase in recoveries from tenants of $4.9 million was directly related to the increase in operating and maintenance expenses and real estate taxes and was primarily associated with the 1996 and 1995 shopping center acquisitions and developments. Recoveries were approximately 89.4% of operating and maintenance expenses and real estate taxes as compared to 88.1% in 1995. Management fee income and other income increased by approximately $4.5 million which generally related to an increase in management fee income of approximately $2.1 million associated with the formation of the Community Center Joint Ventures in November 1995, and the OSTRS Joint Venture in September 1996, and an increase in lease termination income of approximately $2.4 million. -26-
27 EXPENSES FROM OPERATIONS Rental operating and maintenance expenses for the year ended December 31, 1996 increased $3.1 million, or 34.0%, to $12.4 million as compared to $9.3 million in 1995. An increase of $2.3 million was attributable to the 18 shopping centers acquired and developed in 1996 and 1995 and an increase of $0.8 million in the Core Portfolio Properties, primarily attributed to higher repair and maintenance costs and snow removal costs in 1996 as compared to 1995. Real estate taxes increased $2.0 million, or 16.0%, to $14.6 million for the year ended December 31, 1996 as compared to $12.6 million in 1995. This increase was related to the 18 shopping centers acquired and developed in 1996 and 1995. General and administrative expenses increased $1.9 million, or 30.7%, to $8.1 million for the year ended December 31, 1996 as compared to $6.2 million in 1995. The increase was attributable to the growth of the Company related to the 1996 and 1995 acquisitions, joint ventures, expansions and developments. During the fourth quarter of 1995, the Company expanded its leasing staff and added three regional vice presidents of leasing, and throughout 1996, opened seven new regional leasing and operations offices in various cities throughout the country. Total general and administrative expenses were approximately 4.2% and 5.3% of total revenues, including revenues of joint ventures, for the years ended December 31, 1996 and 1995, respectively. Depreciation and amortization expense increased $3.2 million, or 14.6%, to $25.1 million for the year ended December 31, 1996 as compared to $21.9 million in 1995. The increase was primarily attributable to the growth related to the 18 shopping centers acquired and developed in 1996 and 1995 which contributed $2.9 million of the increase. The remaining $0.3 million related to the expansions and improvements associated with the Core Portfolio Properties. Interest expense increased $0.3 million, or 1.0%, to $29.9 million for the year ended December 31, 1996 as compared to $29.6 million for the year ended December 31, 1995. The overall increase in interest expense was primarily related to the acquisition and development of shopping centers during 1996. The weighted average debt outstanding and related weighted average interest rate during 1996 was $426.5 million and 7.8%, respectively, as compared to $394.8 million and 8.1%, respectively, during 1995. Interest capitalized, in conjunction with development and expansion projects, was $3.3 million for the year ended December 31, 1996 as compared to $2.5 million in 1995. OTHER Equity in net income of joint ventures increased $8.2 million to $8.7 million in 1996 as compared to $0.5 million in 1995. The increase was attributable to the formation of the Community Center Joint Ventures during the fourth quarter of 1995 and the OSTRS Joint Venture in the third quarter of 1996 which contributed $8.1 million and $0.3 million of equity in net income of joint ventures, respectively. This increase was offset by a $0.2 million increase in the equity in net loss from the Martinsville, Virginia joint venture. The increase in this joint venture's net loss was the result of the election to terminate its Wal-Mart lease. The former Wal-Mart space was released to two major tenants at higher rents commencing during the fourth quarter of 1996 and the first half of 1997. The extraordinary item, which aggregated $3.6 million for the year ended December 31, 1995, was primarily related to the write-off of unamortized deferred finance costs. NET INCOME Net income increased $24.0 million to $49.5 million for the year ended December 31, 1996 as compared to net income of $25.5 million in 1995. The increase in net income was attributable to increased net operating revenues (total revenues less operating and maintenance expenses, real estate taxes and general and administrative expense) aggregating $16.0 million, resulting from new leasing, retenanting and expansion of Core Portfolio Properties, and the 18 shopping centers acquired and developed in 1995 and 1996. An additional increase of $8.2 million related to the formation of the Community Center Joint Ventures and the OSTRS joint venture and an increase of $3.6 million related to a decrease in extraordinary charges. The increase in net operating revenues and equity income from joint ventures and reduction in extraordinary charges was offset by increases in depreciation and interest expense of $3.2 million and $0.3 million, respectively, and a decrease in gain on sales of land of $0.3 million. FUNDS FROM OPERATIONS Management believes that Funds From Operations ("FFO") provides an additional indicator of the financial performance of a Real Estate Investment Trust. FFO is defined generally as net income applicable to common shareholders excluding gains (losses) on sales of real estate, non-recurring charges and extraordinary items, adjusted for certain non-cash items, principally real property depreciation and equity income (loss) from its joint ventures and adding the Company's proportionate share of FFO of its unconsolidated joint ventures, determined on a consistent basis. The Company calculates FFO in accordance with the foregoing definition, which is currently used by the National Association of Real Estate Investment Trusts ("NAREIT"). Certain other real estate companies may calculate Funds From Operations in a different manner. -27-
28 In 1997, FFO increased $22.3 million, or 34.5%, to $86.9 million as compared to $64.6 million and $50.1 million in 1996 and 1995, respectively. The increases in each year were attributable to the continuing increases in revenues from Core Portfolio Properties, acquisitions and developments. The Company's calculation of FFO is as follows (in thousands): <TABLE> <CAPTION> Year ended December 31, 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Net income applicable to common shareholders(1) $53,322 $35,342 $24,250 Depreciation of real property 31,955 24,832 21,706 Equity in net income of joint ventures (10,893) (8,710) (486) Joint ventures' FFO(2) 16,077 13,172 1,364 Minority interest expense (OP Units) 10 - - Gain on sales of real estate (3,526) - (300) Extraordinary item - - 3,557 ------- ------- ------- $86,945 $64,636 $50,091 ======= ======= ======= </TABLE> (1) Includes straight line rental revenues of approximately $2.0 million, $0.7 million and $0.1 million in 1997, 1996 and 1995, respectively, primarily related to recent acquisitions and new developments. (2)Joint ventures funds from operations are summarized as follows (in thousands): <TABLE> <CAPTION> Year ended December 31, 1997 1996 1995 ------- ------- ------- <S> <C> <C> <C> Net income(a) $22,132 $17,419 $ 972 Depreciation of real property 11,658 8,924 1,756 Gain on sale of land (1,085) - - ------- ------- ------- $32,705 $26,343 $ 2,728 ======= ======= ======= DDRC ownership interests(b) $16,077 $13,172 $ 1,364 ======= ======= ======= </TABLE> (a) Includes straight-line rental revenue of approximately $2.9 million, $2.3 million and $0.4 million in 1997, 1996 and 1995, respectively. The Company's proportionate share of straight-line rental revenues was $1.4 million, $1.1 million and $0.2 million in 1997, 1996 and 1995, respectively. (b) At December 31, 1997, the Company owned a 50% joint venture interest relating to 13 operating shopping center properties and a 35% joint venture interest in one shopping center property. At December 31, 1996, the Company owned a 50% joint venture interest in 13 operating shopping center properties. At December 31, 1995, the Company owned a 50% joint venture interest in 11 shopping center properties, ten of which were acquired during the fourth quarter of 1995. LIQUIDITY AND CAPITAL RESOURCES The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all principal payments, recurring tenant improvements, as well as dividend payments in accordance with REIT requirements and that cash on hand, borrowings under its existing revolving credit facilities, as well as other debt and equity alternatives will provide the necessary capital to achieve continued growth. Cash flow from operating activities for 1997 increased to $94.4 million as compared to $75.8 million in 1996. The increase was attributable to the 16 shopping center acquisitions and developments completed in 1997 and 1996, new leasing, expansion and retenanting of the Core Portfolio Properties and the equity offerings completed in 1997 and 1996. The Company satisfied its REIT requirement of distributing at least 95% of ordinary taxable income with declared common and preferred share dividends of $79.7 million in 1997 as compared to $66.0 million and $41.8 million in 1996 and 1995, respectively. Accordingly, federal income taxes were not incurred at the corporate level. The Company's common share dividend payout ratio for the year approximated 75.3% of its 1997 FFO as compared to 80.3% and 81.5% in 1996 and 1995, respectively. An increase in the 1998 quarterly dividend per common share to $0.655 from $0.63 was approved in December 1997 by the Company's Board of Directors. It is anticipated that the new dividend level will result in a more conservative payout ratio as compared to prior years. A lower payout ratio will enable the Company to retain more capital which will be utilized towards attractive investment opportunities in the development, acquisition and expansion of portfolio properties. -28-
29 ACQUISITIONS, DEVELOPMENTS AND EXPANSIONS During the three year period ended December 31, 1997, the Company and its joint ventures expended $1.3 billion, net, to acquire, develop, expand, improve and retenant its properties as follows (in millions): <TABLE> <CAPTION> 1997 1996 1995 ------ ------ ------ <S> <C> <C> <C> COMPANY: Acquisitions $267.9 $113.9 $ 81.6 Completed expansions 29.8 24.6 25.8 Developments and construction in progress 41.1 48.2 58.6 Tenant improvements, building renovations and furniture and fixtures 4.2 1.1 1.1 Other real estate investments 72.1 - - ------ ------ ------ 415.1 187.8 167.1 Less real estate sales and property contributed to joint ventures (8.9) (44.5) (5.6) ------ ------ ------ Company Total 406.2 143.3 161.5 ------ ------ ------ JOINT VENTURES: Acquisitions / Contributions 38.8 42.8 450.5 Completed expansions 9.2 - - Developments and construction in progress 31.9 47.1 4.5 Tenant improvements and building renovations 0.2 - - 80.1 89.9 455.0 Less real estate sales (6.1) - - ------ ------ ------ Joint Ventures Total 74.0 89.9 455.0 ------ ------ ------ $480.2 $233.2 $616.5 ====== ====== ====== </TABLE> During 1997, the Company acquired seven shopping centers aggregating 2.4 million square feet of Company owned gross leasable area (GLA) for an aggregate investment of approximately $267.9 million. In addition, in January 1997, the Company entered into a joint venture with certain institutional investors which are advised by DRA Advisors, Inc. to acquire a 0.3 million square foot shopping center located in San Antonio, Texas. The aggregate cost of the shopping center was approximately $38.3 million of which the Company's proportionate ownership share is 35%. The Company also contributed approximately $0.5 million of additional assets to the OSTRS Joint Venture during 1997. During 1997, the Company and its joint ventures completed expansions and redevelopments aggregating approximately 0.8 million square feet at an aggregate cost of approximately $39.0 million at 13 of its shopping centers. The Company is currently expanding seven shopping centers and will continue to pursue additional expansion opportunities. The Company and its joint ventures currently have approximately 175 acres of undeveloped land consisting of 70 parcels, primarily adjacent to its existing shopping centers, available for development, expansion or sale. During 1997, the Company substantially completed the construction of four shopping centers which included: (i) a 235,000 square foot Phase II development of the Canton, Ohio shopping center; (ii) a 500,000 square foot shopping center in Boardman, Ohio; (iii) a 475,000 square foot shopping center in Stow, Ohio and (iv) an 84,000 square foot shopping center in Aurora, Ohio. Development activity was completed at two of the Company's joint venture shopping centers located in Atlanta, Georgia and Framingham, Massachusetts which were acquired in connection with the Community Center Joint Ventures in November 1995. The Company has commenced construction on two additional shopping centers which include a 200,000 square foot Phase II development of the Erie, Pennsylvania center, and a 445,000 square foot shopping center in Merriam, Kansas which is being developed through a joint venture formed in October 1996, 50% of which is owned by the Company. These shopping centers are scheduled for completion during the last half of 1998. The Company has also commenced the initial development of three additional shopping centers which include: (i) a 240,000 square foot shopping center in Toledo, Ohio; (ii) a 170,000 square foot shopping center in Solon, Ohio and (iii) a 230,000 square foot shopping center in Oviedo, Florida (a suburb of Orlando). All three centers are scheduled for completion during the fourth quarter of 1998. The Company is also involved with, or pursuing, joint venture development opportunities on eight additional projects with various developers throughout the country at an aggregate projected cost of approximately $300 million. The majority of projects should commence development in 1998 and are currently scheduled for completion in 1999. In December 1997, the Company acquired 33 retail redevelopment sites, formerly occupied by Best Products, at a cost of approximately $54.5 million. In February 1998, these assets were contributed to the Retail Value Fund, a joint venture with Prudential Real Estate Investors. See discussion under "Financing Activities" below regarding the Retail Value Fund. In December 1997, the Company acquired a 42.5% ownership interest in a 584,000 square foot shopping center located in Princeton, New Jersey at an initial cost of approximately $7.7 million. During the first quarter of 1998, the Company anticipates acquiring the balance of the ownership interest in the property through the issuance of approximately 11,850 Operating Partnership Units which will be convertible into equivalent shares of the Company's common stock and the assumption of debt. Upon completion of the transaction, the Company's aggregate investment will be approximately $36.4 million, including assumption of debt of approximately $27.7 million. The Company also acquired a 45.1% ownership interest in an adjacent development site at an initial cost of approximately $9.9 million. Upon completion of construction the Company anticipates acquiring the balance of the ownership interest in exchange for cash and Operating Partnership Units. -29-
30 During 1996, the Company acquired five shopping centers aggregating 1.1 million square feet of Company owned GLA (Gross Leasable Area) for an aggregate purchase price of approximately $113.9 million. In September 1996, the Company entered into a joint venture with OSTRS. In conjunction with the formation of the joint venture, the Company contributed to the joint venture two recently developed shopping centers with a net book value of $41.6 million and non-recourse mortgage debt aggregating $36.4 million. OSTRS funded initial cash contributions of $11.6 million, which was used to repay a portion of the non-recourse mortgage debt. In addition to owning a 50% interest in the joint venture, the Company continues to manage the two properties pursuant to a management agreement. During 1996, the Company completed expansions at seven of its shopping centers aggregating approximately 375,000 square feet for an aggregate cost of approximately $24.6 million. During 1996, the Company completed the first phase of a 520,000 square foot shopping center development in Canton, Ohio for an aggregate cost of $21.2 million. This property was contributed into the joint venture with OSTRS as discussed above. The Company also completed the development of the initial phase of a shopping center in Aurora, Ohio aggregating approximately 84,000 square feet at a total cost of $4.9 million. Construction had also commenced on the development of four additional shopping centers aggregating approximately 1.7 million square feet for an aggregate projected cost of approximately $117 million. In addition, the Company completed the development of the Independence, Missouri shopping center, which is one of the three Community Center Joint Venture properties acquired while under development in 1995 through the Homart transactions as described below. The remaining two shopping centers under development, located in Framingham, Massachusetts and Atlanta, Georgia, were in the final stages of construction. As of December 31, 1996, the majority of tenants had opened at each of these centers. During 1995, the Company acquired ten shopping centers aggregating 1.2 million square feet of Company owned GLA at an aggregate purchase price of approximately $81.6 million. On November 17, 1995, the Company formed a joint venture to acquire the Homart Community Center Division of Sears, Roebuck and Co. ("Sears"). The Homart Community Center Division included ten power centers, which aggregated in excess of four million square feet of GLA, and are located in major metropolitan areas throughout the United States and several outlots and pad sites adjacent to the ten power centers and certain other power centers previously sold by Sears (the "Community Center Properties"). Construction of seven of the ten power centers was complete or substantially complete at the time of acquisition and three of the power centers were under construction. The Company, or a wholly owned subsidiary of the Company, and its joint venture partners each purchased a 50% interest in each Community Center Joint Venture. The total purchase price for the Community Center Properties aggregated $449.2 million and was funded through $300.1 million of secured indebtedness at the joint venture level, $3.1 million of assumed net liabilities and $146.0 million of cash of which one-half each was provided by the Company and its joint venture partners. In addition, the Company paid cash of approximately $1.3 million relating to the purchase of certain rights to various development sites. During 1995, the Company completed over 400,000 square feet of expansions at 12 shopping centers for a total cost of approximately $25.8 million. During 1995, the Company completed the first phase of a 480,000 square foot shopping center development in Erie, Pennsylvania; and the first phase of a 245,000 square foot redevelopment in Highland Heights, Ohio. The Company also completed the development of a 195,000 square foot shopping center in Xenia, Ohio. FINANCING ACTIVITIES The above acquisitions, developments and expansions were financed through cash provided from operating activities, revolving credit facilities, mortgages assumed, construction loans and debt and equity offerings. Total debt outstanding at December 31, 1997 was $668.5 million as compared to $478.4 million and $405.7 million at December 31, 1996 and 1995, respectively. In 1997, the Company increased total debt by $190.1 million primarily to fund acquisitions, developments, expansions and other real estate investments. In January 1997, the Company completed a 3,350,000 common share offering and received net proceeds of approximately $115.8 million. In June 1997, the Company completed a 1,300,000 common share offering and received net proceeds of approximately $49.4 million. In September 1997, the Company completed a 507,960 common share offering with a registered unit investment trust and received net proceeds of approximately $18.8 million. In December 1997, the Company completed a 316,800 common share offering with a registered unit investment trust and received net proceeds of approximately $11.3 million. The proceeds from the four common share offerings mentioned above were primarily used to retire variable rate debt. The common share offerings significantly strengthened the Company's balance sheet and positioned the Company to continue to take advantage of attractive acquisition, development and expansion opportunities. In March 1997, the Company issued, through a grantor trust, $75 million of senior unsecured Pass-Through Asset Trust Securities (PATS). The PATS were issued at a discount to 99.53%, have a coupon rate of 7.125%, mature on March 15, 2012 and have a put date of March 15, 2002. The effective yield to the put date, after adjusting for the call premium and debt issue costs, is approximately 6.9%. In March 1997, the Company extended its $150 million unsecured revolving credit facility, agented by the First National Bank of Chicago and Bank of America NT&SA, for an additional year, through May 2000, and reduced the interest rate 15 basis points. The amendment also introduced a competitive bid feature for up to $75 million of borrowings. In April 1997, the Company extended its $10 million unsecured revolving credit facility with National City Bank through November 2000, and reduced the interest rate 15 basis points. -30-
31 In March 1997, the Company sold two business centers in Highland Heights, Ohio aggregating approximately 113,000 square feet for approximately $5.7 million and recognized a gain of approximately $3.5 million. The net proceeds of approximately $5.4 million were used to repay revolving credit debt. In 1997, the Company issued $102 million of senior unsecured fixed rate notes through its Medium Term Note program with maturities ranging from five to ten years and coupon interest rates ranging from 6.80% to 7.02%. The proceeds were used to repay variable rate borrowings on the Company's revolving credit facilities primarily associated with shopping center acquisitions. A summary of the aggregate gross proceeds raised of $828.4 million through the issuance of common shares, preferred shares and senior unsecured notes during the three year period ended December 31, is as follows (in millions): <TABLE> <CAPTION> 1997 1996 1995 EQUITY: ------ ------ ------- <S> <C> <C> <C> Common shares $204.1 $ 75.6 $ 81.2 Class A preferred shares - - 105.4 Class B preferred shares - 4.4 40.0 ------ ------ ------- Total Equity 204.1 80.0 226.6 DEBT: Senior fixed rate notes 102.0 111.7 104.0 ------ ------ ------ $306.1 $191.7 $330.6 ====== ====== ====== </TABLE> In addition, in May 1997, the Company refinanced $322.5 million of non-recourse joint venture indebtedness relating to the Community Centers Joint Ventures. This indebtedness bears interest at a fixed coupon rate of 7.378% and matures in May 2002. At December 31, 1997, 1996 and 1995, outstanding borrowings associated with the Community Center Joint Ventures aggregated $322.5 million, $319.5 million and $303.3 million, respectively. During 1997, Convertible Debentures in the aggregate amount of $13.1 million had converted into 392,754 common shares. At December 31, 1997, the Company had $46.9 million of its 7% convertible debentures outstanding with a maturity date of August 1999 and a conversion price of $33.375 per common share. In January 1998, the Company issued $100 million of senior unsecured fixed rate notes through its Medium Term Note program with a ten year maturity and a 6.625% coupon rate. The proceeds were used to repay variable rate borrowings on the Company's revolving credit facilities. In December 1997, the Company and Hendon Associates formed a joint venture to acquire 33 retail sites, formerly occupied by Best Products, from Metropolitan Life. Under the terms of the joint venture with Hendon Associates, the Company advanced the capital to fund the purchase price of the assets and it is expected that the Company will receive (i) a priority return of its capital; (ii) a 15% compound annual return thereon and (iii) 75% of additional available cash flow. The 33 retail sites, are located in 13 states with concentrations in Ohio, California and New Jersey. These sites were acquired at an initial cost of approximately $54.5 million. It is expected that a majority of the 33 sites will be redeveloped and retenanted with a few sites being sold. At the date of acquisition, it was anticipated that the Company's ownership interest would be transferred to the "Retail Value Fund" ("Fund") with Prudential Real Estate Investors upon finalization of the joint venture documents which occurred on February 11, 1998. The Company contributed its ownership interest in the joint venture formed with Hendon Associates to the Fund, and in exchange for a 75% ownership interest in this joint venture, was reimbursed approximately $41.5 million from Prudential Real Estate Investors. The proceeds of $41.5 million were used to repay variable rate borrowings on the Company's revolving credit facilities. The Fund will invest in retail properties within the United States that are in need of substantial retenanting and market repositioning. This Fund may also make equity or debt investments in companies owning or managing retail properties as well as in third party development projects that provide significant growth opportunities. The retail property investments may include enclosed malls, neighborhood centers or other potential commercial redevelopment opportunities. The Company is expected to maintain an ownership interest of approximately 25% in the Fund. The Company will also own a majority of the stock of the general partner of the Fund. The general partner will own a 1% interest in the Fund and will receive an incentive participation equal to 33% of cash flow, after the limited partners receive a return of invested capital plus a cumulative return of 10% thereon. The Fund will have its own employees and the Company will assume retail management and operating responsibilities including leasing, redevelopment and accounting and will be paid fees in consideration of the foregoing services. CAPITALIZATION At December 31, 1997, the Company's capitalization consisted of $668.5 million of debt (excluding the Company's proportionate share of joint venture mortgage debt aggregating $190.3 million), $149.8 million of preferred stock and $1,059.0 million of market equity (market equity is defined as common shares outstanding multiplied by the closing price of the common shares on the New York Stock Exchange at December 31, 1997 of $38.25) resulting in a debt to total market capitalization ratio of .36 to 1.0 as compared to the ratios of .33 to 1.0 and .36 to 1.0 at December 31, 1996 and 1995, respectively. At December 31, 1997, the Company's total debt consisted of $526.0 million of fixed rate debt and $142.5 million of variable rate debt. It is management's intention that the Company have access to the capital resources necessary to expand and develop its business. Accordingly, the Company may seek to obtain funds through additional equity offerings or debt financing in a manner consistent with its intention to operate with a conservative debt capitalization policy and maintain its investment grade ratings with Moody's Investor Services and Standard and Poor's. In October 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission under which $500 million of debt securities, preferred shares or common shares may be issued. As of December 31, 1997, the Company had $436.0 million available under its shelf registration statement ($336.0 million as of January 12, 1998). In addition, as of December 31, 1997, the Company had $20.3 million available under its $160.0 million of -31-
32 unsecured revolving credit facilities ($140.0 million as of February, 1998). On December 31, 1997, the Company also had 100 operating properties with $138.7 million, or 77.7%, of the total revenue for the year ended December 31, 1997 which were unencumbered thereby providing a potential collateral base for future borrowings. INFLATION Substantially all of the Company's long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indices. In addition, many of the Company's leases are for terms of less than ten years, which permits the Company to seek to increase rents upon rerental at market rates. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. At December 31, 1997, approximately 78.7% of the Company's debt (excluding joint venture debt) bore interest at fixed rates with a weighted average maturity of approximately 4.6 years and a weighted average interest rate of approximately 7.6%. The remainder of the Company's debt bears interest at variable rates with a weighted average maturity of approximately 2.6 years and a weighted average interest rate of approximately 7.8% at December 31, 1997. At December 31, 1997, the Company's Community Center Joint Ventures had fixed rate debt aggregating approximately $322.5 million; the OSTRS joint venture had variable rate debt aggregating $24.2 million; the Company's joint venture in San Antonio, Texas had fixed rate debt aggregating $28.6 million and the Liberty Fair joint venture had fixed rate debt aggregating $13.8 million. The Company intends to utilize variable rate indebtedness available under its revolving credit facilities in order to initially fund future acquisitions, developments and expansions of shopping centers. Thus, to the extent that the Company incurs additional variable rate indebtedness, its exposure to increases in interest rates in an inflationary period would increase. The Company believes, however, that in no event would increases in interest expense as a result of inflation significantly impact the Company's distributable cash flow. The Company intends to continuously monitor and actively manage interest costs on its variable rate debt portfolio and may enter into swap positions based on market fluctuations. In addition, the Company believes that it has the ability to obtain funds through additional equity and/or debt offerings, including the issuance of medium term notes. Accordingly, the cost of obtaining such protection agreements in relation to the Company's access to capital markets will continue to be evaluated. ECONOMIC CONDITIONS Historically, real estate has been subject to a wide range of cyclical economic conditions which affect various real estate sectors and geographic regions with differing intensities and at different times. Adverse changes in general or local economic conditions could result in the inability of some existing tenants of the Company to meet their lease obligations and could otherwise adversely affect the Company's ability to attract or retain tenants. The shopping centers are typically anchored by discount department stores (usually Wal-Mart, Kmart, Target, or JCPenney), supermarkets and drug stores which usually offer day-to-day necessities, rather than high-priced luxury items. Since these merchants typically perform better in an economic recession than those who market high priced luxury items, the percentage rents received by the Company have remained relatively stable. In addition, the Company seeks to reduce its operating and leasing risks through ownership of a portfolio of properties with a diverse geographic and tenant base. During 1997 and 1996, certain national and regional retailers have experienced financial difficulties and several have filed for protection under bankruptcy laws. Although the Company has experienced an increase in the number of tenants filing for protection under bankruptcy laws, no significant bankruptcies have occurred through February 24, 1998 with regard to the Company's portfolio of tenants. The Company has assessed the Year 2000 Issue and does not believe that it will have a material affect on future financial results, or cause reported financial information not to be necessarily indicative of future operating results or future financial condition. The Company will continue to review, on an ongoing basis, the need for disclosures concerning this issue. -32-
33 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is included in a separate section at the end of this report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -33-
34 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is incorporated by reference to the information under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's Proxy Statement in connection with its annual meeting of shareholders to be held on May 11, 1998, and the information under the heading "Executive Officers" in Part I of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION Incorporated herein by reference to the "Executive Compensation" section of the Company's Proxy Statement in connection with its annual meeting of shareholders to be held on May 11, 1998. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the "Security Ownership of Certain Beneficial Owners and Management" section of the Company's Proxy Statement in connection with its annual meeting of shareholders to be held on May 11, 1998. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to the "Certain Transactions" section of the Company's Proxy Statement in connection with its annual meeting of shareholders to be held on May 11, 1998. -34-
35 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K a) Financial Statements The following documents are filed as part of this report: Report of Independent Accountants - Developers Diversified Realty Corporation Consolidated Balance Sheets as of December 31, 1997 and 1996. Consolidated Statements of Operations for the three years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Shareholders Equity for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. Notes to Financial Statements b) Reports on Form 8-K were filed on January 13, June 18, June 19 and November 7, 1997 in which information regarding Items 5 and 7 of Form 8-K was reported. c) Exhibits The following exhibits are filed as part of, or incorporated by reference into, this Report: -35-
36 <TABLE> <CAPTION> Exhibit No. Filed Herewith or Under Reg. S-K Form 10-K Incorporated Herein by Item 601 Exhibit No. Description Reference ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> 2 2.1 Agreement of Purchase and Current Report on Form 8-K Sale, dated July 2, 1996, (Filed with the SEC on January between the Company and 14, 1997) Opus Corporation for Maple Grove Crossing Shopping Center 2 2.2 Agreement of Purchase and Current Report on Form 8-K Sale, dated July 2, 1996, (Filed with the SEC on January between the Company and 14, 1997) Opus North Corporation for Highland Grove Shopping Center 2 2.3 Agreement of Purchase and Current Report on Form 8-K Sale, dated July 2, 1996, (Filed with the SEC on January between the Company and 14, 1997) Opus South Corporation for Eastchase Market Shopping Center 2 2.4 Agreement of Purchase and Current Report on Form 8-K Sale, dated July 2, 1996, (Filed with the SEC on January between the Company and 14, 1997) Opus Northwest, L.L.C. for Tanasbourne Town Center Phase I Shopping Center 2 2.5 Agreement of Purchase and Current Report on Form 8-K Sale, dated July 2, 1996, (Filed with the SEC on January between the Company and 14, 1997) Opus Southwest Corporation for Arrowhead Crossing Shopping Center 3 3.1 Amended and Restated Form S-11 Registration No. Articles of Incorporation 33-54930 (Filed with SEC on of the Company November 23, 1992; see Exhibit 3.1 therein) </TABLE> -36-
37 <TABLE> <CAPTION> Exhibit No. Filed Herewith or Under Reg. S-K Form 10-K Incorporated Herein by Item 601 Exhibit No. Description Reference ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> 3 3.2 Amendments to Amended and Annual Report on Form 10-K Restated Articles of (Filed with the SEC on March Incorporation of the Company 30, 1996) 3 3.3 Amendment to Amended and Current Report on Form 8-K Restated Articles of (Filed with the SEC on January Incorporation 14, 1997) 3 3.4 Amendment to Amended and Current Report on Form 8-K Restated Articles of (Filed with the SEC on June Incorporation of the Company 18, 1997) 3 3.5 Code of Regulations of the Form S-11 Registration No. Company 33-54930 (Filed with the SEC on November 23, 1992; see Exhibit 3.2 therein) 3 3.6 Amendment to Code of Annual Report on Form 10-K Regulations of the Company (Filed with the SEC on March 30, 1996) 3 3.7 Amendment to Code of Current Report on Form 8-K Regulations of the Company (Filed with the SEC on January 14, 1997) 4 4.1 Specimen Certificate for Form S-11 Registration No. Common Shares 33-54930 (Filed with the SEC on November 23, 1992; see Exhibit 4.1 therein) 4 4.2 Specimen Certificate for Annual Report on Form 10-K Depositary Shares Relating (Filed with the SEC on March to 9.5% Class A Cumulative 30, 1996) Redeemable Preferred Shares 4 4.3 Specimen Certificate for Annual Report on Form 10-K 9.5% Class A Cumulative (Filed with the SEC on March Redeemable Preferred Shares 30, 1996) 4 4.4 Specimen Certificate for Annual Report on Form 10-K Depositary Shares Relating (Filed with the SEC on March to 9.44% Class B Cumulative 30, 1996) Redeemable Preferred Shares </TABLE> -37-
38 <TABLE> <CAPTION> Exhibit No. Filed Herewith or Under Reg. S-K Form 10-K Incorporated Herein by Item 601 Exhibit No. Description Reference ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> 4 4.5 Specimen Certificate for Annual Report on Form 10-K 9.44% Class B Cumulative (Filed with the SEC on March Redeemable Preferred Shares 30, 1996) 4 4.6 Credit Agreement dated as Form 10-QA (Filed with the SEC of May 1, 1995 among the on May 16, 1995; See Exhibit Company, the First National 4.2 therein) Bank of Chicago and the First National Bank of Boston. 4 4.7 Form of Indemnification Form S-11 Registration Agreement No. 33-54930 (Filed with the SEC on November 23, 1992; see Exhibit 4.2 therein) 4 4.8 Indenture dated as of May Current Report on Form 8-K 1, 1994 by and between the (Filed with the SEC on May Company and Chemical 27, 1994) Bank, as Trustee 4 4.9 Indenture dated as of May Current Report on Form 8-K 1, 1994 by and between the (Filed with the SEC on Company and National City December 5, 1994) Bank, as Trustee (the "NCB Indenture") 4 4.10 First Supplement to NCB Annual Report on Form 10-K Indenture (Filed with the SEC on March 30, 1996) 4 4.11 Specimen 7% Convertible Annual Report on Form 10-K Subordinated Debentures due (Filed with the SEC on April 1999 1, 1995) 4 4.12 Specimen Senior Note due Annual Report on Form 10-K 2000 (Filed with the SEC on March 30, 1996) 4 4.13 Building and Loan Agreement Annual Report on Form 10-K dated as of November 17, (Filed with the SEC on March 1995 among Community Center 30, 1996) Two L.L.C. and certain other parties named therein </TABLE> -38-
39 <TABLE> <CAPTION> Exhibit No. Filed Herewith or Under Reg. S-K Form 10-K Incorporated Herein by Item 601 Exhibit No. Description Reference ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> 4 4.14 Loan Agreement dated as of Annual Report on Form 10-K November 17, 1995 among (Filed with the SEC on March Community Center One L.L.C. 30, 1996) and certain other parties named therein 4 4.15 Amendment dated June 18, Current Report on Form 8-K 1996, to the Credit (Filed with the SEC on January Agreement, dated as of May 14, 1997) 1, 1995, among the Company, the First National Bank of Chicago and the First National Bank of Boston 4 4.16 Revolving Credit Facility, Annual Report on Form 10-K dated as of November 13, (Filed with the SEC on March 1996, among the Company and 31, 1997 National City Bank 4 4.17 Loan Agreement dated as of Current Report on Form 8-K May 15, 1997, between (Filed with the SEC on June Community Centers One 18, 1997 L.L.C., Community Centers Two L.L.C., Shoppers World Community Center, L.P. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc. 4 4.18 Amended and Restated Current Report on Form 8-K Promissory Note, dated as (Filed with the SEC on June of May 15, 1997, between 18, 1997 Community Centers Two L.L.C. and Shoppers World Community Center L.P. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc. </TABLE> -39-
40 <TABLE> <CAPTION> Exhibit No. Filed Herewith or Under Reg. S-K Form 10-K Incorporated Herein by Item 601 Exhibit No. Description Reference ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> 4 4.19 Amended and Restated Current Report on Form 8-K Promissory Note, dated as (Filed with the SEC on June of May 15, 1997, between 18, 1997 Community Centers One L.L.C. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc. 4 4.20 Amended and Restated Current Report on Form 8-K Promissory Note, dated as (Filed with the SEC on June of May 15, 1997, between 18, 1997 Community Centers One L.L.C. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc. 4 4.21 Second Amendment, dated Quarterly Report on March 31, 1997, to the Form 10-Q (Filed with the Credit Agreement, dated SEC on May 15, 1997) as of May 1, 1995, among the Company, the First National Bank of Chicago and the First National Bank of Boston 4 4.22 Amended and Restated Credit Exhibit 4.22 filed herewith Agreement, dated as of February 24, 1998, among the Company and The First National Bank of Chicago 4 4.23 Form of Fixed Rate Senior Current Report on Form 8-K Medium-Term Note (Filed with the SEC on November 7, 1997) 4 4.24 Form of Floating Rate Current Report on Form 8-K Senior Medium-Term Note (Filed with the SEC on November 7, 1997) 4 4.25 Form of Fixed Rate Current Report on Form 8-K Subordinated Medium-Term (Filed with the SEC on Note November 7, 1997) 4 4.26 Form of Floating Rate Current Report on Form 8-K Subordinated Medium-Term (Filed with the SEC on Note November 7, 1997) 10 10.1 Registration Rights Form S-11 Registration No. Agreement 33-54930 (Filed with the SEC on November 23, 1992; see Exhibit 10.1 therein) 10 10.2 Stock Option Plan Form S-8 Registration No. 33-74562 (Filed with the SEC on January 28, 1994; see Exhibit 4(a) therein) 10 10.3 Employment Agreement Form S-11 Registration between the Company and No. 33-54930 (Filed with the Scott A. Wolstein SEC on November 23, 1992; see Exhibit 10.3 therein) </TABLE> -40-
41 <TABLE> <CAPTION> Exhibit No. Filed Herewith or Under Reg. S-K Form 10-K Incorporated Herein by Item 601 Exhibit No. Description Reference ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> 10 10.4 Employment Agreement Form S-11 Registration No. between the Company and 33-54930 (Filed with the SEC James A. Schoff on November 23, 1992; see Exhibit 10.4 therein) 10 10.5 Limited Partnership Annual Report on Form 10-K Agreement dated as of (Filed with the SEC on March November 16, 1995 among DD 30, 1996) Community Centers Three, Inc. and certain other parties named therein 10 10.6 Amended and Restated Annual Report on Form 10-K Limited Liability Company (Filed with the SEC on March Agreement dated as of 30, 1996) November 17, 1995 among DD Community Centers One, Inc. and certain other parties named therein 10 10.7 Amended and Restated Annual Report on Form 10-K Limited Liability Company (Filed with the SEC on March Agreement dated as of 30, 1996) November 17, 1995 among DD Community Centers Two, Inc. and certain other parties named therein 10 10.8 Limited Liability Company Annual Report on Form 10-K Agreement dated as of (Filed with the SEC on March November 17, 1995 among the 30, 1996) Company and certain other parties named therein 10 10.9 Purchase and Sale Agreement Annual Report on Form 10-K dated as of October 16, (Filed with the SEC on March 1995 among the Company and 30, 1996) certain other parties named therein </TABLE> -41-
42 <TABLE> <CAPTION> Exhibit No. Filed Herewith or Under Reg. S-K Form 10-K Incorporated Herein by Item 601 Exhibit No. Description Reference ---------- ----------- ----------- --------- <S> <C> <C> <C> <C> 10 10.10 Directors' Deferred Annual Report on Form 10-K Compensation Plan (Filed with the SEC on April 1, 1995) 10 10.11 Elective Deferred Annual Report on Form 10-K Compensation Plan (Filed with the SEC on April 1, 1995) 10 10.12 Developers Diversified Current Report on Form 8-K Realty Corporation (Filed with the SEC on January Equity-Based Award Plan 14, 1997) 10 10.13 Restricted Shares Current Report on Form 8-K Agreement, dated July 17, (Filed with the SEC on June 1996, between the Company 18, 1997) and Scott A. Wolstein. 10 10.14 Performance Units Current Report on Form 8-K Agreement, dated July 17, (Filed with the SEC on June 1996, between the Company 18, 1997) and Scott A. Wolstein. 10 10.15 Program Agreement for Exhibit 10.15 filed herewith Retail Value Investment Program, dated as of February 11, 1998, among Retail Value Management, Ltd., the Company and The Prudential Insurance Company of America 10 10.16 Share Option Agreement, Exhibit 10.16 filed herewith dated April 15, 1997, between the Company and Scott A. Wolstein 10 10.17 Share Option Agreement, Exhibit 10.17 filed herewith dated May 12, 1997, between the Company and Scott A. Wolstein 12 12.1 Computation of Ratio of Form S-3 Registration No. Earnings to Fixed Charges 33-94182 (Filed with the SEC on June 30, 1995; see Exhibit 12 therein) 22 22.1 List of subsidiaries Exhibit 21.1 filed herewith 23 23.1 Consent of Price Waterhouse Exhibit 23.1 filed herewith </TABLE> -42-
43 SIGNATURES --------------------------------------------------------- Pursuant to the requirements of Section 13 or 15(d) 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. DEVELOPERS DIVERSIFIED REALTY CORPORATION By: /s/ Scott A. Wolstein --------------------------------------- Scott A. Wolstein, Chairman, President and Chief Executive Officer Date: March 31, 1998 --------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on the 31st day of March, 1998. /s/ Scott A. Wolstein Chairman, President, Chief Executive Officer - --------------------------- and Director Scott A. Wolstein (principal executive officer) /s/ James A. Schoff Executive Vice President, Chief Operating - --------------------------- Officer and Director James A. Schoff /s/ William H. Schafer Vice President and Chief Financial Officer - --------------------------- (principal financial and accounting officer) William H. Schafer /s/ William N. Hulett III Director - --------------------------- William N. Hulett III /s/ Walter H. Teninga Director - ---------------------------- Walter H. Teninga /s/ Albert T. Adams Director - ---------------------------- Albert T. Adams /s/ Ethan Penner Director - ----------------------------- Ethan Penner /s/ Dean S. Adler Director - ------------------------------ Dean S. Adler -43-
44 INDEX TO FINANCIAL STATEMENTS DEVELOPERS DIVERSIFIED REALTY CORPORATION <TABLE> <CAPTION> Page Financial Statements: ------ <S> <C> Report of Independent Accountants ..................................... F-2 Consolidated Balance Sheets at December 31, 1997 and 1996 ............. F-3 Consolidated Statements of Operations for the three years ended December 31, 1997 .................................................. F-4 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1997 ...................................... F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 1997 .................................................. F-6 Notes to Consolidated Financial Statements ............................ F-7 Financial Statement Schedules: II - Valuation and Qualifying Accounts and reserves for the three years ended December 31, 1997 ...................... F-21 III - Real Estate and Accumulated Depreciation at December 31, 1997 ........................................ F-22 </TABLE> All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. F-1
45 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Developers Diversified Realty Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Developers Diversified Realty Corporation ("Company") and its subsidiaries at Decembers 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Cleveland, Ohio February 12, 1998 F-2
46 <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) December 31, ASSETS 1997 1996 Real estate rental property: ------------ -------------- <S> <C> <C> Land $ 183,809 $ 122,696 Land under development 23,668 27,305 Construction in progress 28,130 28,364 Buildings 1,071,717 798,477 Fixtures and tenant improvements 18,418 14,805 ------------ -------------- 1,325,742 991,647 Less accumulated depreciation (171,737) (142,039) ------------ -------------- Real estate, net 1,154,005 849,608 Other real estate investments 72,149 -- Cash and cash equivalents 18 13 Accounts receivable, net 16,282 11,439 Notes receivable 4,081 -- Advances to and investments in joint ventures 136,267 106,796 Deferred charges, net 4,668 4,296 Other assets 4,448 2,974 ------------ -------------- $ 1,391,918 $ 975,126 ============ ============== LIABILITIES AND SHAREHOLDERS' EQUITY Unsecured indebtedness: Fixed rate senior notes $ 392,254 $ 215,493 Revolving credit facilities 139,700 95,500 Subordinated convertible debentures 46,891 60,000 ------------ -------------- 578,845 370,993 Mortgage indebtedness 89,676 107,439 ------------ -------------- Total indebtedness 668,521 478,432 Accounts payable and accrued expenses 28,601 20,921 Other liabilities 9,100 6,437 Minority equity interest 16,293 -- Operating partnership minority interests 353 -- ------------ -------------- Total liabilities and minority interests 722,868 505,790 ------------ -------------- Commitments and contingencies (Note 14) Shareholders' equity: Class A 9.5% cumulative redeemable preferred shares, without par value, $250 liquidation value; 1,500,000 shares authorized; 421,500 shares issued and outstanding at December 31, 1997 and 1996 105,375 105,375 Class B 9.44% cumulative redeemable preferred shares, without par value, $250 liquidation value; 1,500,000 shares authorized; 177,500 shares issued and outstanding at December 31, 1997 and 1996 44,375 44,375 Common shares, without par value, $.10 stated value; 50,000,000 shares authorized; 27,687,576 and 21,682,917 shares issued and outstanding at December 31, 1997 and 1996, respectively 2,769 2,168 Paid-in-capital 580,509 369,417 Accumulated dividends in excess of net income (63,517) (51,384) ------------ -------------- 669,511 469,951 Less: Unearned compensation - restricted stock (461) (615) ------------ -------------- 669,050 469,336 ------------ -------------- $ 1,391,918 $ 975,126 ============ ============== </TABLE> The accompanying notes are an integral part of these financial statements F-3
47 CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Year Ended December 31, 1997 1996 1995 -------- --------- --------- Revenues from operations: <S> <C> <C> <C> Minimum rents $123,998 $ 96,285 $ 82,722 Percentage and overage rents 2,343 1,862 1,663 Recoveries from tenants 32,377 24,128 19,255 Management fee income 2,914 2,632 556 Other 7,408 5,998 3,609 -------- --------- --------- 169,040 130,905 107,805 -------- --------- --------- Rental operation expenses: Operating and maintenance 15,961 12,399 9,253 Real estate taxes 20,001 14,589 12,593 General and administrative 11,055 8,135 6,223 Interest 35,558 29,888 29,595 Depreciation and amortization 32,313 25,062 21,865 -------- --------- --------- 114,888 90,073 79,529 -------- --------- --------- Income before equity in net income of joint ventures, gain on sales of real estate, allocation to minority interests and extraordinary item 54,152 40,832 28,276 Equity in net income of joint ventures 10,893 8,710 486 Gain on sales of real estate 3,526 - 300 -------- --------- --------- Income before allocation to minority interests and extraordinary item 68,571 49,542 29,062 Income allocated to minority interests (1,049) - - Extraordinary item - extinguishment of debt-deferred finance costs written off - - (3,557) -------- --------- --------- Net income $ 67,522 $ 49,542 $ 25,505 -------- --------- --------- Net income applicable to common shareholders $ 53,322 $ 35,342 $ 24,250 ======== ========= ========= Per share data: Earnings per common share - basic: Income before extraordinary item $2.06 $1.67 $1.48 Extraordinary item - - (0.19) -------- --------- --------- Net income $2.06 $1.67 $1.29 ======== ========= ========= Earnings per common share - diluted: Income before extraordinary item $2.05 $1.67 $1.47 Extraordinary item - - (0.19) -------- --------- --------- Net income $2.05 $1.67 $1.28 ======== ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements F-4
48 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands, except per share amounts) Class A Class B Common Preferred Preferred Shares Accumulated Unearned Shares ($250 Shares (250 ($.10 Dividends in Compensation- stated stated stated Paid-in Excess of Restricted value) value) value) Capital Net Income Stock Total -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 1994 $ -- $ -- $ 1,608 $ 220,608 $ (18,708) $ -- $ 203,508 Issuance of 15,850 common shares for cash related to exercise of stock options, employee 401(k) plan and dividend reinvestment plan -- -- 1 367 -- -- 368 Issuance of 2,875,000 common shares for cash - underwritten offering -- -- 288 76,219 -- -- 76,507 Issuance of 421,500 Class A preferred shares for cash - underwritten offering 105,375 -- -- (3,884) -- -- 101,491 Issuance of 160,000 Class B preferred shares for cash - underwritten offering -- 40,000 -- (1,467) -- -- 38,533 Net income -- -- -- -- 25,505 -- 25,505 Dividends declared - common shares -- -- -- -- (40,959) -- (40,959) Dividends declared - preferred shares -- -- -- -- (792) -- (792) ------------------------------------------------------------------------------------ Balance, December 31, 1995 105,375 40,000 1,897 291,843 (34,954) -- 404,161 Issuance of 77,474 common shares for cash related to exercise of stock options, employee 401(k) plan and dividend reinvestment plan -- -- 7 1,873 -- -- 1,880 Issuance of 25,000 common shares related to restricted stock plan (5,000 vested in 1996) -- -- 3 766 -- (615) 154 Issuance of 2,611,500 common shares for cash - underwritten offering -- -- 261 75,128 -- -- 75,389 Issuance of 17,500 Class B preferred shares for cash - underwritten offering -- 4,375 -- (193) -- -- 4,182 Net income -- -- -- -- 49,542 -- 49,542 Dividends declared - common shares -- -- -- -- (51,889) -- (51,889) Dividends declared - preferred shares -- -- -- -- (14,083) -- (14,083) ------------------------------------------------------------------------------------ Balance, December 31, 1996 105,375 44,375 2,168 369,417 (51,384) (615) 469,336 Issuance of 137,145 common shares for cash related to exercise of stock options, employee 401(k) plan and dividend reinvestment plan -- -- 14 3,495 -- -- 3,509 Issuance of 5,474,760 common shares for cash - underwritten offerings -- -- 548 194,713 -- -- 195,261 Vesting of restricted stock -- -- -- -- -- 154 154 Conversion of debentures into 392,754 common shares -- -- 39 12,884 -- -- 12,923 Net income -- -- -- -- 67,522 -- 67,522 Dividends declared - common shares -- -- -- -- (65,455) -- (65,455) Dividends declared - preferred shares -- -- -- -- (14,200) -- (14,200) ------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1997 $ 105,375 $ 44,375 $ 2,769 $ 580,509 $ (63,517) $ (461) $ 669,050 ========= ========= ========= ========= ========= =========== ========= </TABLE> The accompanying notes are an integral part of these financial statements F-5
49 <TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Year Ended December 31, 1997 1996 1995 ----------------------------------- Cash flow operating activities: <S> <C> <C> <C> Net income $ 67,522 $ 49,542 $ 25,505 Adjustments to reconcile net income to net cash flow provided by operating activities: Depreciation and amortization 32,313 25,062 21,865 Amortization of deferred finance costs 1,399 1,686 1,749 Write-off of deferred finance costs -- -- 3,513 Equity in net income of joint ventures (10,893) (8,710) (486) Cash distributions from joint ventures 10,185 8,646 -- Gain on sales of real estate (3,526) -- (300) Net change in accounts receivable (4,907) (4,478) (2,835) Net change in accounts payable and accrued expenses 1,369 1,061 2,699 Net change in other operating assets and liabilities 921 3,011 (2,671) --------- --------- --------- Total adjustments 26,861 26,278 23,534 --------- --------- --------- Net cash flow provided by operating activities 94,383 75,820 49,039 --------- --------- --------- Cash flow from investing activities: Real estate developed or acquired (391,798) (185,667) (149,096) Equity contributions to joint ventures (8,093) (14,870) (74,277) Repayments from (advances to) joint ventures, net (22,085) (855) 283 Issuance of notes receivable (4,081) -- -- Proceeds from sale of real estate 9,837 1,722 5,892 --------- --------- --------- Net cash flow used for investing activities (416,220) (199,670) (217,198) --------- --------- --------- Cash flow from financing activities: Proceeds from (repayment of) revolving credit facilities, net 44,200 26,600 (2,138) Repayment of Floating Rate Senior Notes -- -- (100,000) Repayment of construction loans -- -- (14,682) Principal payments on rental property debt (17,764) (32,204) (9,291) Proceeds from construction loans -- 2,924 17,938 Proceeds from issuance of Medium Term Notes, net of underwriting commissions and $200, $300 and $30 of offering expenses paid in 1997, 1996 and 1995, respectively 101,234 110,898 3,968 Proceeds from issuance of Fixed Rate Senior Notes, net of underwriting commissions and discounts and $500 and $400 of offering expenses paid in 1997 and 1995, respectively 74,147 -- 98,543 Proceeds from call premium of Fixed Rate Senior Notes 1,430 -- -- Payment of deferred finance costs (bank borrowings) (674) -- (2,233) Proceeds from issuance of common shares, net of underwriting commissions and $900, $300 and $400 of offering expenses paid in 1997, 1996 and 1995, respectively 195,261 75,389 76,506 Proceeds from issuance of Class A preferred shares, net of underwriting commissions and $500 of offering expenses paid -- -- 101,491 Proceeds from issuance of Class B preferred shares, net of underwriting commissions and $200 of offering expenses paid in 1996 and 1995 -- 4,182 38,533 Proceeds from issuance of common shares in conjunction with exercise of stock options, 401(k) plan and dividend reinvestment plan 3,663 2,034 368 Dividends paid (79,655) (65,972) (41,751) --------- --------- --------- Net cash provided by financing activities 321,842 123,851 167,252 --------- --------- --------- Increase (decrease) in cash and cash equivalents 5 1 (907) Cash and cash equivalents, beginning of year 13 12 919 --------- --------- --------- Cash and cash equivalents, end of year $ 18 $ 13 $ 12 ========= ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements F-6
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------- NATURE OF BUSINESS Developers Diversified Realty Corporation, subsidiaries and related real estate joint ventures (the "Company" or "DDR") are engaged in the business of acquiring, expanding, owning, developing, managing and operating neighborhood and community shopping centers, enclosed malls and business centers. The Company's centers are typically anchored by discount department stores (usually Wal-Mart, Kmart, Target or JCPenney), supermarkets and drug stores which usually offer day-to-day necessities. The tenant base includes primarily national and regional retail chains and local retailers, consequently, the Company's credit risk is concentrated in the retail industry. Revenues derived from the Company's two largest tenants, Wal-Mart and Kmart, aggregated 12.3%, 15.6% and 19.7% of total revenues, including joint venture revenues, for the years ended December 31, 1997, 1996 and 1995, respectively, as follows: <TABLE> <CAPTION> Year Wal-Mart Kmart ---- -------- ----- <S> <C> <C> 1997 7.1% 5.2% 1996 9.3% 6.3% 1995 12.3% 7.4% </TABLE> The total percentage of Company owned gross leasable area, including joint venture gross leasable area, attributed to Wal-Mart and Kmart was 11.4% and 9.7%, respectively, at December 31, 1997. The Company's ten largest tenants comprised 25.6%, 32.2% and 34.0% of total revenues for the years ended December 31, 1997, 1996 and 1995, respectively. Management believes the Company's portfolio is diversified in terms of location of its shopping centers and its tenant profile. Adverse changes, in general or local economic conditions, could result in the inability of some existing tenants to meet their lease obligations and could otherwise adversely affect the Company's ability to attract or retain tenants. During 1997 and 1996, certain national and regional retailers experienced financial difficulties and several filed for protection under bankruptcy laws. Although the Company has experienced an increase in the number of tenants filing for protection under bankruptcy laws, no significant bankruptcies have occurred affecting the Company's portfolio of tenants. PRINCIPLES OF CONSOLIDATION All majority owned subsidiaries are included in the consolidated financial statements and all significant intercompany balances and transactions have been eliminated in consolidation. At December 31, 1997, the Company owned, through various joint ventures and limited liability corporations, a 50% interest in 13 operating shopping centers (13 in 1996 and 11 in 1995) and a 35% interest in one shopping center which was acquired in 1997. These investments are presented using the equity method of accounting and are discussed in Note 2. STATEMENT OF CASH FLOWS AND SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING INFORMATION The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Non-cash investing and financing activities are summarized as follows (in millions): <TABLE> <CAPTION> For the year ended December 31, 1997 1996 1995 ------ ----- ----- Conversion of debentures and related <S> <C> <C> <C> deferred finance costs $ 12.9 $ -- $ -- Issuance of minority interest and operating partnership units relating to shopping center acquisitions 16.6 -- -- Contribution of net assets to joint ventures 0.5 5.2 -- Mortgages assumed, shopping center acquisitions -- -- 15.7 Other liabilities assumed, shopping center acquisitions 6.2 1.1 0.8 Accounts payable related to construction in progress 0.2 5.3 2.8 Note receivable exchanged in partial consideration of property acquisition -- -- 1.9 </TABLE> The foregoing transactions did not provide or use cash and, accordingly, they are not reflected in the statements of cash flows. REAL ESTATE Real estate assets are stated at cost less accumulated depreciation, which, in the opinion of management, is not in excess of the individual property's estimated undiscounted future cash flows, including estimated proceeds from disposition. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets as follows: - ---------------------------------------------------------------- Buildings 18 to 31 years - --------------------------- ---------------------------------- Furniture / Fixtures and Useful lives, which approximate Tenant Improvements lease terms, where applicable - -------------------------- ---------------------------------- Depreciation expense was $32.3 million, $25.1 million and $21.9 million for the years ended December 31, 1997, 1996 and 1995, respectively. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations which improve or extend the life of the asset are capitalized. Included in land at December 31, 1997 was undeveloped real estate, generally outlots or expansion pads adjacent to the shopping centers and enclosed malls owned by the Company (excluding shopping centers owned through joint ventures)which aggregated approximately 167 acres at 65 sites. F-7
51 Construction in progress includes shopping center developments and significant expansions and re-developments. The Company capitalizes interest on funds used for the construction or expansion of shopping centers. Capitalization of interest ceases when construction activities are completed and the property is available for occupancy by tenants. For the years ended December 31, 1997, 1996 and 1995, the Company capitalized interest of $4.0 million, $3.3 million, and $2.5 million, respectively. In addition, the Company capitalized certain construction administration costs of $1.3 million, $1.1 million and $0.6 million in 1997, 1996 and 1995, respectively. DEFERRED FINANCING COSTS Costs incurred in obtaining long-term financing are included in deferred charges in the accompanying balance sheets and are amortized over the terms of the related debt agreements; such amortization is reflected as interest expense in the consolidated statements of operations. REVENUE RECOGNITION Minimum rents from tenants are recognized monthly using the straight-line method. Percentage and overage rents are recognized after the tenants reported sales have exceeded the applicable sales breakpoint. Revenues associated with tenant reimbursements are recognized in the period in which the expenses are incurred based upon the provision of tenant leases. Lease termination fees are included in other income and recognized upon termination of a tenant's lease, which generally coincides with the receipt of cash. ACCOUNTS RECEIVABLE Accounts receivable, other than straight-line rents receivable, are expected to be collected within one year and are net of estimated unrecoverable amounts of approximately $2.4 million and $1.8 million at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996 straight-line rent receivables, net of a provision for uncollectible amounts, aggregated $2.8 million and $0.8 million, respectively. GAIN ON SALES OF REAL ESTATE Gain on sales of real estate generally relates to the sale of outlots and land adjacent to existing shopping centers and are recognized at closing when the earnings process is deemed to be complete. During 1997, the Company sold two business centers and a shopping center and recognized an aggregate gain of $3.5 million. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses include internal leasing and legal salaries and related expenses which are charged to operations as incurred. All internal personnel costs associated with the acquisition of real estate are expensed as incurred. INTEREST AND REAL ESTATE TAXES Interest and real estate taxes incurred during the construction period are capitalized and depreciated over the life of the building. Interest paid during the years ended December 31, 1997, 1996 and 1995 aggregated $36.2 million, $31.2 million and $29.6 million, respectively. FEDERAL INCOME TAXES The Company has elected to be taxed as a qualified Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended. As a REIT, the Company is entitled to a tax deduction for the amount of dividends paid its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only, provided it distributes at least 95% of its taxable income and meets certain other REIT qualification requirements. As the Company distributed sufficient taxable income for the years ended December 31, 1997, 1996 and 1995, no U.S. Federal income or excise taxes were incurred. The tax basis of assets and liabilities exceeds the amounts reported in the accompanying financial statements by approximately $111 million, $108 million and $104 million at December 31, 1997, 1996 and 1995, respectively. NEW ACCOUNTING STANDARDS Effective December 31, 1997, the Company implemented Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per Share (See Note 17). RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. F-8
52 2. EQUITY INVESTMENTS IN JOINT VENTURES - --------------------------------------- The Company's equity investments in joint ventures at December 31, 1997 was comprised of (i) a 50% joint venture interest in each of four joint ventures (collectively, the "Community Center Joint Ventures") comprised of ten shopping center properties (aggregating approximately 4.0 million square feet) and several outparcels, formed in November 1995; (ii) a 50% joint venture interest, formed in September 1996, with the Ohio State Teachers Retirement System (OSTRS) relating to two shopping center properties aggregating approximately 0.5 million square feet; (iii) a 50% joint venture interest, formed in October 1996, in conjunction with the development of a shopping center in Merriam, KS, aggregating approximately 0.4 million square feet; (iv) a 50% joint venture interest in a partnership that owns a 0.4 million square foot shopping center located in Martinsville, VA, which was formed in January 1993 and (v) a 35% joint venture interest in a limited partnership that owns a 0.3 million square foot shopping center located in San Antonio, TX, which was formed in January 1997. Combined condensed financial information of the Company's joint venture investments is summarized as follows (in thousands): <TABLE> <CAPTION> COMBINED BALANCE SHEETS December 31, 1997 1996 -------- -------- <S> <C> <C> Real estate, net $623,993 $561,625 Other assets 25,817 16,012 -------- -------- $649,810 $577,637 ======== ======== Mortgage debt $389,160 $360,114 Amounts payable to DDR 32,667 10,747 Other liabilities 9,549 7,782 -------- -------- 431,376 378,643 Accumulated equity 218,434 198,994 -------- -------- $649,810 $577,637 ======== ======== </TABLE> <TABLE> <CAPTION> COMBINED STATEMENTS OF OPERATIONS For the years ended December 31, 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> Revenues from operations $ 82,434 $ 63,681 $ 9,356 -------- -------- -------- Rental operation expenses 20,189 16,192 2,377 Depreciation and amortization expense 11,658 8,924 1,755 Interest expense 29,540 21,146 4,252 -------- -------- -------- 61,387 46,262 8,384 -------- -------- -------- Income before gain on sale of land 21,047 17,419 972 Gain on sale of land 1,085 -- -- -------- -------- -------- Net income $ 22,132 $ 17,419 $ 972 ======== ======== ======== </TABLE> At December 31, 1997 and 1996, advances to and investments in joint ventures include acquisition, transaction and other capitalizable costs, including interest, related to the Community Center Joint Ventures of approximately $1.5 million and $2.7 million, respectively, and the Merriam joint venture of approximately $1.4 million and $0.7 million, respectively. At December 31, 1997 and 1996, deferred development fees of approximately $1.0 million and a deferred gain of approximately $5.9 million related to the contribution of property upon formation of the OSTRS joint venture. In addition, the Company capitalized interest of $0.5 million in 1997 and none in 1996 associated with its investment in the Merriam joint venture which has been under construction since its formation. The Company provides property management services to the joint ventures. Included in management fee income is $2.7 million, $2.1 million and $0.2 million for the years ended December 31, 1997, 1996 and 1995, respectively, related to these services. Other income includes development fee income from the joint ventures of $0.6 million, $0.7 million and $0.5 million in 1997, 1996 and 1995, respectively. Cash distributions are made from the joint ventures to the extent that "net cash flows", as defined in the joint venture agreements, are generated. During 1997, 1996 and 1995, the joint ventures distributed an aggregate of $10.2 million, $8.6 million and $0.2 million, respectively, to its joint venture partners. On November 17, 1995, the Company, in conjunction with certain joint venture partners described below, acquired the Homart Community Center Division of Sears from an affiliate of General Growth Properties, Inc. General Growth Properties, Inc. had contracted to purchase the Homart Community Center Division as part of its acquisition of Homart Development Co., a subsidiary of Sears. The Homart Community Center Division included ten power centers, aggregating in excess of four million square feet of Gross Leaseable Area ("GLA"), located in major metropolitan areas throughout the United States and several outlots and pad sites adjacent to the ten power centers and certain F-9
53 other power centers previously sold by Sears (the "Community Center Properties"). At the date of acquisition, construction of seven of the ten power centers was complete or substantially complete and three of the power centers were under construction. Construction of the three centers was substantially completed during 1997 and 1996. The Community Center Properties are owned by the Community Center Joint Ventures. The Company, or a wholly owned subsidiary of the Company, and its joint venture partners each purchased a 50% interest in each Community Center Joint Venture. The Company's joint venture partners are a consortium of third party investors, including a private REIT, owned by institutional investors advised by DRA Advisors, Inc. ("DRA"), three limited partnerships whose respective limited partners are pension funds and whose general partners are affiliates of DRA and one corporation whose owners are affiliates of DRA. In addition to owning a 50% interest in each Community Center Joint Venture, the Company manages the Community Center Properties and related developments pursuant to management and development agreements with each of the Community Center Joint Ventures. The joint venture agreements with DRA include provisions whereby each partner has the right to trigger a purchase or sale of its interest in the joint ventures (Reciprocal Purchase Rights) or to initiate a purchase and sale of the properties (Property Purchase Rights). These rights become effective after November 17, 1999 or if either party is in default of the joint venture agreements. In addition, at any time after November 17, 1998, the Company's joint venture partners may convert all, or a portion of, their respective interests in such joint ventures into common shares of the Company. The terms of the conversion are set forth in the governing documents of such joint ventures. However, if the joint venture partners elect to convert their respective interest into common shares, the Company will have the sole option to pay cash instead of issuing common shares. If the Company agrees to the issuance of common shares, the agreement provides that the converting joint venture partner will execute a lock-up arrangement acceptable to the Company. In October 1997, the Company advanced $12.5 million to the Community Centers Joint Ventures. The Company's advance is evidenced by a note requiring monthly payments of interest calculated at LIBOR plus 1.1%. Principal is due from capital proceeds, as defined in the joint venture agreement. All outstanding principal and interest is due on the tenth anniversary of the joint venture agreement. The Company recorded interest income of $0.2 million in 1997 relating to this advance. In September 1996, the Company entered into a joint venture with OSTRS. In conjunction with the formation of the joint venture, the Company transferred two shopping centers with a net book value of $41.6 million and non-recourse mortgage debt aggregating $36.4 million in exchange for a 50% interest in the joint venture. At the date of transfer, the contribution made by the Company had a net fair value of $11.6 million and OSTRS funded an initial cash contribution of $11.6 million for its 50% interest. The cash contribution was used to repay a portion of the non-recourse mortgage debt. The Company continues to manage the two properties pursuant to a management agreement. In 1993, the Company advanced $9.0 million to the Martinsville, Virginia joint venture which utilized these funds to repay a portion of its first mortgage debt. The Company's advance is evidenced by a note requiring monthly payments of principal and interest at the rate of 9.25% per annum with a final maturity of 1999. In addition, in 1997 and 1996, the Company had advanced a total of $6.1 million and $1.1 million, respectively, to the joint venture for the construction and re-tenanting of vacant space. The Company's advances are evidenced by notes with interest calculated at prime plus 1% (9.5% at December 31, 1997). In accordance with the joint venture agreement, construction or operating advances must be repaid before any capital distributions can be made. The Company recorded interest income of $1.0 million in 1997 and $0.8 million for each of the years ended December 31, 1996 and 1995, relating to these advances. In October 1996, the Company formed a joint venture with DD Merriam, L.P., which is advised by DRA Advisors, Inc., to develop and manage a shopping center in Merriam, Kansas. This project was one of the development sites acquired in conjunction with the acquisition of the Homart Community Center Division. The joint venture is 50% owned by the Company and 50% owned by DD Merriam, L.P. The Company manages the shopping center and related development pursuant to management and development agreements. At December 31, 1997 and 1996, the Company had advanced $5.8 million and $1.1 million, respectively, to pay for certain construction related costs. The advances accrue interest at 8% per annum and are to be repaid from the proceeds of construction financing, scheduled to close in 1998. Total interest earned by the Company relating to these advances aggregated $0.3 million in 1997 (none in 1996). In January 1997, the Company formed a joint venture with certain institutional investors, which are advised by DRA Advisors, Inc., to acquire a 0.3 million square foot shopping center located in San Antonio, Texas. The aggregate cost of the shopping center, including the assumption of approximately $26.7 million of debt, was approximately $38.3 million of which the Company's proportionate ownership share is 35%. The Company contributed approximately $3.5 million of equity and manages the shopping center pursuant to a management agreement. DRA and the Company each have the right (Reciprocal Purchase Rights) to trigger a purchase or sale of its interest in the Merriam and San Antonio joint ventures after one and three years, respectively, subsequent to the acquisition of each respective property. The Reciprocal Purchase Rights give both Managers the rights, under certain circumstances, to establish a price, following which the other party has the right to purchase the interest of the other party, or sell its interest to the other party, at that price. In addition, any time after two and three years from the date of the San Antonio and Merriam agreements, respectively, DRA may convert all or a portion of its respective interest in each joint venture into common shares of the Company. If DRA elects to convert its respective interest into common shares of the Company, the Company will have the sole option to pay cash instead of issuing common shares. F-10
54 3. Acquisitions and Pro Forma Financial Information - --------------------------------------------------- During the years ended December 31, 1997, 1996 and 1995, the Company completed the acquisition of 22 shopping centers, excluding those acquired through joint ventures as discussed in Note 2, (7 in 1997, 5 in 1996 and 10 in 1995) with an aggregate of 4.9 million Company owned gross leasable square feet (GLA) at a total purchase price of $463.4 million. These acquisitions were accounted for using the purchase method of accounting. These properties are summarized as follows: <TABLE> <CAPTION> Acquisition Effective Date Year Company Center Location of Acquisition Built GLA - --------------------------------- -------------------------------- -------------- ----- --------- 1997 Acquisitions: <S> <C> <C> <C> <C> GREAT NORTHERN PLAZA NORTH &SOUTH CLEVELAND, (NORTH OLMSTED) OH JANUARY, 1997 1958 619,327 FOOTHILLS TOWNE CENTER AHWATUKEE, AZ MARCH, 1997 1996 491,689 EAGAN PROMENADE EAGAN, MN JULY, 1997 1997 243,282 MIDWAY MARKETPLACE ST. PAUL, MN JULY, 1997 1997 313,781 COOKS CORNER BRUNSWICK, ME AUGUST, 1997 1965 290,784 CENTENNIAL PROMENADE DENVER, CO OCTOBER, 1997 1997 336,944 SPRING CREEK CENTRE FAYETTEVILLE, AR NOVEMBER, 1997 1997 139,277 --------- TOTAL 1997 ACQUISITIONS 2,435,084 1996 Acquisitions: ========= Arrowhead Crossing Phoenix (Peoria), AZ July, 1996 1995 346,680 Maple Grove Crossing Minneapolis (Maple Grove), MN July, 1996 1995 250,436 Highland Grove Highland, IN July, 1996 1995 294,115 Eastchase Market Fort Worth, TX July, 1996 1995 205,027 Tanasbourne Town Center Portland, OR August, 1996 1995 151,970 --------- Total 1996 Acquisitions 1,248,228 ========= 1995 ACQUISITIONS: Airport Square Shopping Center Toledo, OH February, 1995 1993 187,674 North Road Plaza Orangeburg, SC March, 1995 1994 22,200 Northtowne Shopping Center Anderson, SC March, 1995 1993 14,250 Wando Crossing Shopping Center Mt. Pleasant, SC March, 1995 1992 205,032 Jacksonville Regional Shopping Center Jacksonville, FL March, 1995 1988 219,073 The Shoppes of Boot Ranch Palm Harbor, FL May, 1995 1990 52,395 East Forest Plaza Columbia, SC November, 1995 1995 46,700 Eastwood Festival Centre Birmingham, AL November, 1995 1989 284,475 Enterprise Plaza Huntsville, AL December, 1995 1995 41,000 Green Ridge Square Shopping Center Walker, MI December, 1995 1989 133,981 --------- Total 1995 Acquisitions 1,206,780 --------- Total Acquisitions 4,890,092 ========= </TABLE> The operating results of the acquired shopping centers are included in the results of operations of the Company from the date of purchase, including the acquisition of properties owned through joint ventures, discussed in Note 2. The properties owned through joint ventures are included in equity in net income of joint ventures in the statements of operations for the years ended December 31, 1997, 1996 and 1995. F-11
55 The following unaudited supplemental proforma information is presented to reflect the effects of the common share offerings, preferred share offerings, debt offerings and the property acquisitions consummated through December 31, 1997, including the joint venture acquisitions (Note 2), as if all such transactions had occurred on January 1, 1996 with regard to the 1997 and 1996 acquisitions and as if all such transactions relating to the 1995 and 1996 acquisitions had occurred on January 1, 1995. The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisitions occurred as indicated nor does it purport to represent the results of the operations for future periods (in thousands, except per share data): <TABLE> <CAPTION> For the years ended December 31, (Unaudited) 1997(a) 1996(b) 1995(c) -------- -------- -------- <S> <C> <C> <C> Pro forma revenues $172,113 $140,544 $114,016 ======== ======== ======== Pro forma income before extraordinary item $ 69,521 $ 53,273 $ 47,106 ======== ======== ======== Pro forma net income applicable to common shareholders $ 55,321 $ 39,074 $ 29,349 ======== ======== ======== Pro forma net income applicable to common shareholders: Basic $ 2.12 $ 1.70 $ 1.37 ======== ======== ======== Diluted $ 2.10 $ 1.70 $ 1.36 ======== ======== ======== <FN> (a) Reflects revenues and expenses of the properties acquired in 1997 for the period January 1, 1997 through the effective date of acquisition. Operating results for the Company's acquired properties located in San Antonio, TX; Ahwatukee, AZ; Eagan, MN; St. Paul, MN and Denver, CO are not reflected in the 1997 pro forma information prior to their respective acquisition dates because these shopping centers were either under development or in the lease-up phase and, accordingly, the related operating information for such centers either does not exist or would not be meaningful. (b) Reflects revenues and expenses of the properties acquired in 1997 and 1996 for the period January 1, 1996 through the effective date of acquisition. Operating results for the Company's acquired properties located in Phoenix, AZ; Maple Grove, MN; Highland, IN; Fort Worth, TX; Portland, OR; San Antonio, TX; Ahwatukee, AZ; Eagan, MN; St. Paul, MN and Denver, CO are not reflected in the 1996 pro forma information prior to their respective acquisition dates because these shopping centers were either under development or in the lease-up phase and, accordingly, the related operating information for such centers either does not exist or would not be meaningful. (c) Reflects revenues and expenses of the properties acquired in 1996 and 1995 for the period January 1, 1995 through the dates of acquisition. Operating results for all five of the Company's 1996 acquired properties and 1995 acquired properties located in Orangeburg, SC; Anderson, SC; Columbia, SC and Huntsville, AL and with regard to the acquisition of the Community Center Properties the shopping centers located in Durham, NC; Marietta, GA; Independence, MO; Atlanta, GA and Phase II of Framingham, MA are not reflected in the 1995 pro forma information prior to their respective acquisition dates because these shopping centers were either under development or in the lease-up phase and, accordingly, the related operating information for such centers either does not exist or would not be meaningful. </TABLE> 4. OTHER REAL ESTATE INVESTMENTS In December 1997, the Company and Hendon Associates formed a joint venture to acquire 33 retail sites, formerly occupied by Best Products, from Metropolitan Life. Under the terms of the joint venture with Hendon Associates, the Company advanced the capital to fund the purchase price of the assets. The 33 retail sites, are located in 13 states with concentrations in Ohio, California and New Jersey. These sites were acquired at an initial cost of approximately $54.5 million. In February 1998, the Company's joint venture interest was contributed to the Retail Value Fund, a joint venture with Prudential Real Estate Investors (Note 18). Additionally, in December 1997, the Company acquired a 42.5% ownership interest in a 584,000 square foot shopping center, located in Princeton, NJ for an initial cost of approximately $7.7 million. During the first quarter of 1998, the Company anticipates acquiring the balance of the ownership interest in the property through the issuance of approximately 11,850 operating partnership units and the assumption of approximately $27.7 million of debt. The total purchase price of the shopping center, including liabilities assumed, is expected to be approximately $36.4 million. The Company also acquired a 45.1% ownership interest in an adjacent development site at an initial cost of approximately $9.9 million. Upon completion of construction, the Company anticipates acquiring the remaining ownership interest for cash and operating partnership units. The Company is awaiting the mortgagor's final consent prior to acquiring the remaining interest. In the event that final approval is not received, the purchase can be rescinded. 5. NOTES RECEIVABLE At December 31, 1997, notes receivable aggregated $4.1 million and was comprised of two notes. The Company acquired a 50% participating interest together with Bank of America National Trust in a construction loan receivable secured by a first mortgage on certain real estate relating to a 0.5 million square foot shopping center development in Phoenix, AZ. The note, aggregating approximately $3.1 million at December 31, 1997, bears interest at the rate of 8.5% per annum and is due in July 1999. The Company has committed to fund up to $10.5 million, or 50%, of the aggregate construction loan and has received a first right of refusal on the purchase of the property upon completion of construction. In addition, the Company provided an advance of $1.0 million to a west coast developer in accordance with a master partnership agreement. The note is secured by certain rights in future development projects and a personal guaranty. The note bears interest at 10.5% and is due in March 1999. The Company is committed to advance a total of $1.2 million. F-12
56 6. DEFERRED CHARGES Deferred charges consist of the following (in thousands): <TABLE> <CAPTION> December 31, 1997 1996 ------- ------- <S> <C> <C> Deferred financing costs $ 9,056 $ 7,301 Organization costs 146 144 ------- ------- 9,202 7,445 Less-accumulated amortization (4,534) (3,149) ------- ------- $ 4,668 $ 4,296 ======= ======= </TABLE> The Company incurred deferred finance costs aggregating $1.9 million and $1.0 million in 1997 and 1996, respectively, primarily relating to the Company's issuance of Senior Notes (Note 8) and unsecured revolving credit agreements (Note 7). Amortization of deferred charges was $1.4 million, $1.5 million and $1.7 million for the years ended December 1997, 1996 and 1995, respectively. During 1995, the Company wrote off $3.6 million (none in 1996 and 1997) of unamortized deferred finance costs in conjunction with the repayment of certain secured indebtedness. 7. REVOLVING CREDIT FACILITIES In May 1995, the Company obtained a three year $150 million unsecured revolving credit facility from a syndicate of financial institutions for which the First National Bank of Chicago serves as agent (the "Unsecured Credit Facility"). In June 1996, the Company renegotiated the terms of this facility to extend the agreement one year, to May 1999, reduce the specified spread over LIBOR and reduced the unused commitment fees. In March 1997, the Company again renegotiated the terms for this facility to extend the agreement an additional year, through May 2000, and reduced the interest rate 15 basis points. The amendment also introduced a competitive bid feature for up to $75 million of borrowings. Borrowings under this facility bear interest at variable rates based on LIBOR plus a specified spread, (1.10% at December 31, 1997). The spread is dependent on the Company's long term senior unsecured debt rating from Standard and Poor's and Moody's Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, net worth, maintenance of unencumbered real estate assets and debt service coverage. The facility also provides for commitment fees of 0.20% on the unused credit amount. The Unsecured Credit Facility is used to finance the acquisition of real estate, to provide working capital and for general corporate purposes. At December 31, 1997 and 1996, total borrowings under this facility aggregated $138.2 million and $88.5 million, respectively, with a weighted average interest rate of 7.9% and 6.9%, respectively. In September 1996, the Company entered into a three year, $10 million unsecured revolving credit facility with National City Bank. In April 1997, the Company renegotiated the terms of this facility to extend the agreement through November 2000 and reduce the interest rate 15 basis points. Borrowings under this facility bear interest at variable rates based on the prime rate or LIBOR plus a specified spread (1.10% at December 31, 1997). The spread is dependent on the Company's long term senior unsecured debt rating from Standard and Poor's and Moody's Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, net worth, maintenance of unencumbered real estate assets and debt service coverage. The facility also provides for commitment fees of 0.20% on the unused credit amount. At December 31, 1997 and 1996, total borrowings under this facility aggregated $1.5 million and $7.0 million, respectively, with a weighted average interest rate of 7.1% and 6.8%, respectively. In January 1995, the Company terminated a $25 million secured revolving credit facility in conjunction with the successful completion of a 2,875,000 common share offering and recognized an extraordinary charge of $0.3 million in the first quarter of 1995 primarily relating to the write-off of unamortized deferred finance costs. In the second quarter of 1995, the Company terminated a $150 million secured revolving credit facility with Nomura Asset Capital Corporation. As a result, the Company recognized a non-cash extraordinary charge of $3.3 million relating to the unamortized deferred finance costs written off. Total commitment fees paid by the Company on its revolving credit facilities in 1997, 1996 and 1995 aggregated approximately $0.3 million, $0.3 million and $0.4 million, respectively. 8. FIXED RATE SENIOR NOTES In May 1995, the Company issued, through an underwritten offering, $100 million of unsecured Fixed Rate Senior Notes at a discount to 99.693% which mature on May 15, 2000. The Fixed Rate Senior Notes bear a coupon interest rate of 7.625% per annum. Interest is paid semi-annually in arrears on May 15 and November 15. In 1995, through its Medium Term Note (MTN) program, the Company issued $4 million of unsecured Fixed Rate Senior Notes at interest rates of 7.15% and 7.28% and maturities of seven and ten years, respectively. In 1996, the Company issued $111.7 million of MTN's at interest rates ranging from 6.58% to 7.42% and maturities of five to seven years. In 1997, the Company issued $102 million of MTN's at interest rates ranging from 6.80% to 7.02% and maturities of five to ten years. Interest is paid semi-annually in arrears on May 15 and November 15. The above Fixed Rate Senior Notes may not be redeemed by the Company prior to maturity and will not be subject to any sinking fund. The Fixed Rate Senior Notes were issued pursuant to an indenture dated May 1, 1994 which contains certain covenants including limitation on incurrence of debt, maintenance of unencumbered real estate assets and debt service coverage. In March 1997, the Company issued, through a grantor trust, $75 million of Pass-Through Asset Trust Securities (PATS), due March 2002, at a discount to 99.53%. These certificates are secured by fifteen year notes ("Notes") maturing March 2012, issued by the Company to the trust. The trust sold an option which enables the option holder to remarket the Notes upon maturity of the certificates in March 2002. Simultaneously with the sale of the certificates, the trust purchased the Notes from the Company for a premium in the amount of the option payment. F-13
57 This premium, $1.4 million at December 31, 1997, is being amortized over the fifteen year life of the notes and is included in other liabilities. If the option holder does not elect to remarket the notes, then they become due and payable in March 2002. These notes are Fixed Rate Senior Notes with a coupon interest rate of 7.13% per annum. Interest is paid semi-annually in arrears on March 15 and September 15. 9. SUBORDINATED CONVERTIBLE DEBENTURES In August 1994, the Company issued, through an underwritten offering, $60 million of unsecured subordinated convertible debentures ("Debentures") which mature on August 15, 1999. The Debentures bear interest at 7% per annum. Interest is paid semi-annually in arrears on February 15 and August 15. The Debentures were issued pursuant to an indenture dated May 1, 1994. The Debentures are non-callable by the Company and are convertible at anytime prior to maturity into common shares at a conversion price of $33-3/8 per share, subject to adjustment under certain conditions. The Debentures are unsecured and subordinate to present and future senior indebtedness, as defined in the indenture. During 1997, Debentures in the principal amount of $13.1 million were converted into 392,754 common shares. In accordance with the indenture, the related accrued but unpaid interest was forfeited by the holders. In addition, upon conversion of the debentures, approximately $0.2 million of unamortized debenture issue costs were charged to additional paid-in-capital. 10. MORTGAGES PAYABLE AND SCHEDULED PRINCIPAL REPAYMENTS At December 31, 1997, mortgages payable, collateralized by real estate with a net book value of approximately $143.6 million and related tenants leases, are generally due in monthly installments of principal and/or interest and mature at various dates through 2019. Interest rates ranged from approximately 5.3% to 10.9% (averaging 8.6% at December 31, 1997 and 1996). Variable rate debt obligations, reflected in mortgages payable at December 31, 1997 and 1996, totaled approximately $2.8 million and $3.1 million, respectively. Interest rates on the variable rate debt averaged 5.3% and 6.1% at December 31, 1997 and 1996, respectively. As of December 31, 1997, the scheduled principal payments of mortgages payable, senior notes, revolving credit facilities and Debentures for the next five years and thereafter are as follows: <TABLE> <CAPTION> Year Amount ---- ------ <S> <C> 1998 $ 4,580 1999 81,673 2000 141,443 2001 88,725 2002 104,874 Thereafter 247,226 -------- $668,521 ======== </TABLE> Principal payments in the year 2000 include $39.7 million maturing on the revolving credit facilities. Principal payments in the year 2002 assume that the option holder (Note 8)will not exercise the option to remarket the Notes and the trust will therefore put the Notes to the Company to finance the reacquisition of the PATS at their maturity. The maturities have been adjusted to reflect the issuance of a $100 million, ten-year MTN issued in January 1998. The proceeds were used to reduce amounts outstanding on the revolving credit facilities at December 31, 1997. 11. FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating fair value disclosures of financial instruments: Cash and cash equivalents, accounts receivable, accounts payable, accruals and other liabilities: The carrying amounts reported in the balance sheet for these financial instruments approximated fair value because of their short maturities. The carrying amount of straight-line rents receivable does not materially differ from their fair market value. Notes receivable and advances to affiliates: The fair value is estimated by discounting the current rates at which similar loans would be made. At December 31, 1997 and 1996, the carrying amounts reported in the balance sheet approximate fair value. Debt: The carrying amounts of the Company's borrowings under its revolving credit facilities approximate fair value because such borrowings are at variable rates. The fair value of Fixed Rate Senior Notes was based on the Company's estimated interest rate spread over the applicable treasury rate with a similar remaining maturity. Fair value of the mortgage debt was estimated using a discounted cash flow analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturities. Fair value of the Debentures was determined based on their closing price as of December 31, 1997 and 1996, as reported by the New York Stock Exchange. Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instrument. F-14
58 Financial instruments at December 31, 1997 and 1996, with carrying values that are different than estimated fair values are summarized as follows (in thousands): <TABLE> <CAPTION> 1997 1996 ---------------------------------- --------------------------------- Carrying Amount Fair Value Carrying Amount Fair Value --------------- ---------- --------------- ---------- <S> <C> <C> <C> <C> Debentures $ 46,891 $ 52,049 $ 60,000 $ 63,000 Fixed Rate Senior Notes 392,254 400,862 215,493 218,828 Mortgage debt 89,676 93,943 107,440 112,085 -------- -------- -------- -------- $528,821 $546,854 $382,933 $393,913 ======== ======== ======== ======== </TABLE> The Company intends to continuously monitor and actively manage interest costs on its variable rate debt portfolio. The Company may, from time to time, enter into interest rate hedge agreements to manage interest costs and risks associated with changing interest rates. In addition, the Company believes that it has the ability to obtain funds through additional equity and/or debt offerings and the cost of obtaining such protection agreements in relation to the Company's access to capital markets will continue to be evaluated. 12. MINORITY EQUITY INTEREST, OPERATING PARTNERSHIP MINORITY INTERESTS, PREFERRED SHARES AND COMMON SHARES: MINORITY EQUITY INTEREST In 1997, the Company acquired, through a subsidiary partnership, a majority ownership interest in two adjacent shopping centers located in North Olmsted, Ohio. At the date of acquisition the shopping centers were valued at $56.7 million. The Company contributed cash and assumed liabilities aggregating $40.4 million and the balance of $16.3 million was retained by the seller as a minority equity interest. The minority equity interest is convertible by the minority equity interest owner, after February 28, 1998, into approximately 397,000 non-registered and non-transferrable common shares of the Company or for cash at the fair market value of the common shares on the date of conversion, not to aggregate less than $16.3 million. The minority equity interest owners are entitled to a priority cash return of 6.5% per annum on its partnership capital account balance, as defined in the partnership agreement. The priority cash return during 1997 aggregated $1.0 million and has been reflected as a charge to minority equity interest in the consolidated statements of operations. The Company also has the right to acquire the minority equity interest, any time after December 31, 1998, based upon the fair value of the shopping center, as defined in the partnership agreement. OPERATING PARTNERSHIP MINORITY INTERESTS During 1997, the Company acquired, through subsidiary partnerships, a majority ownership interest in two shopping centers. In conjunction with these acquisitions, the Company issued 8,942 operating partnership units which are convertible into common shares of the Company on a one for one basis. The unitholders are entitled to receive distributions per operating partnership unit equal to the per share distributions on the Company's common shares. During 1997, the unitholders received distributions aggregating approximately $.01 million which has been reflected as a charge to operating partnership minority interest in the consolidated statements of operations. PREFERRED SHARES In November and December 1995, the Company sold 4,215,000 depositary shares of 9.5% Class A Cumulative Redeemable Preferred Stock at $25 per depositary share. In December 1995, the Company sold 1,600,000 depositary shares of 9.44% Class B Cumulative Redeemable Preferred Stock at $25 per share. An additional 175,000 of Class B depositary shares were sold in January 1996, in conjunction with the underwriters' over allotment option. Both the Class A and B depositary shares represent 1/10 of a share of their respective preferred class of shares. The Class A and Class B depositary shares are not redeemable by the Company prior to November 15, 2000 and December 26, 2000, respectively, except in certain circumstances relating to the preservation of the Company's status as a REIT. The aggregate net proceeds of approximately $144 million were used in part to fund the Company's equity investment relating to the acquisition of the Community Center Properties (Note 2) and to retire variable rate indebtedness, primarily Floating Rate Senior Notes. On April 29, 1996, the Company's shareholders authorized (i) 1,500,000 Class C Cumulative Preferred Shares, without par value, (ii) 1,500,000 Class D Cumulative Preferred Shares, without par value; (iii) 1,500,000 Class E Cumulative Preferred Shares, without par value and (iv) the reduction of the number of authorized Class A Cumulative Preferred Shares, without par value, Class B Cumulative Preferred Shares, without par value and Noncumulative Preferred Shares, without par value from 3,000,000 to 1,500,000 each. All of the aforementioned Class C, Class D, Class E and Noncumulative Preferred Shares are unissued at December 31, 1997. The Company has issued 421,500 and 177,500 of Class A and Class B Cumulative Preferred Shares, respectively, at December 31, 1997 and 1996. F-15
59 COMMON SHARES Common share issuances over the three year period ended December 31, 1997 are as follows: <TABLE> <CAPTION> Net Issuance Number of Price Per Proceeds Date Shares Share (in millions) - ------------- --------- -------- ------------ <S> <C> <C> <C> January 1995 2,875,000 $28.25 $ 76.5 March 1996 2,611,500 $28.95 75.4 January 1997 3,350,000 $36.625 115.8 June 1997 1,300,000 $38.145 49.4 September 1997 507,960 $39.1875 18.8 December 1997 316,800 $37.75 11.3 </TABLE> The aggregate net proceeds of $347.2 million from the above offerings were primarily used to repay amounts outstanding on revolving credit facilities and for general corporate purposes. 13. TRANSACTIONS WITH RELATED PARTIES In April 1995, the Company acquired from a partnership owned by the former chairman of the board of directors and an officer of the Company, two outparcels and approximately eight acres of land adjacent to a shopping center purchased by the Company in 1994 at a purchase price of approximately $3 million. The two out parcels were pre-leased and an 81,000 square foot Kohl's Department store was constructed on the eight acres of land. During 1996, this shopping center was contributed into a joint venture with OSTRS (Note 2) at a fair market value of approximately $24.6 million. At the date of transfer, the net book value of the transferred property was approximately $20.3 million. The Company has agreed to acquire, from the affiliates previously referred to, additional land parcels and expansion areas which are located adjacent to the properties previously acquired. The Company's purchase price has not yet been determined since it is subject to the leasing and/or construction of vacant space and resolution of various other contingencies. The Company entered into a lease for office space owned by one of its principal partners/shareholders. General and administrative rental expense associated with this office space, for the years ended December 31, 1997, 1996 and 1995 aggregated $0.6 million, $0.5 million, and $0.3 million, respectively. The increase in rental expense was primarily related to the leasing of additional space to accommodate the Company's growth. The Company also entered into a management agreement in 1993 with a partnership, owned in part by a related party, in which management fee and leasing fee income of $0.1 million was earned in 1997, 1996 and 1995. Transactions with the Company's equity affiliates have been described in Note 2. 14. COMMITMENTS AND CONTINGENCIES The Company is engaged in the operation of shopping centers/ malls and business centers which are either owned or, with respect to seven shopping centers, operated under long-term ground leases which expire at various dates through 2097. Space in the shopping centers is leased to tenants pursuant to agreements which provide for terms ranging generally from one to 30 years and, in some cases, for annual rentals which are subject to upward adjustments based on operating expense levels, sales volume, or contractual increases as defined in the lease agreements. The scheduled future minimum revenues from rental properties under the terms of all noncancelable tenant leases, assuming no new or renegotiated leases or option extensions for such premises, for the subsequent five years ending December 31, are as follows (in thousands): <TABLE> <C> <C> 1998 $ 133,748 1999 125,670 2000 115,945 2001 107,209 2002 98,602 Thereafter 827,943 ---------- $1,409,117 ========== </TABLE> Scheduled minimum rental payments under the terms of all non-cancelable operating leases in which the Company is the lessee, principally for office space and ground leases, for the subsequent five years ending December 31, are as follows (in thousands): <TABLE> <S> <C> 1998 $ 1,465 1999 1,547 2000 1,577 2001 1,577 2002 1,577 Thereafter 65,882 ---------- $ 73,625 ========== </TABLE> In conjunction with the development and expansion of various shopping centers as of December 31, 1997, the Company has entered into agreements for the construction of the shopping centers and acquisition of land aggregating approximately $4.7 million. 15. OTHER INCOME Other income was comprised of the following (in thousands): <TABLE> <CAPTION> For the years ended December 31, 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> Interest $2,083 $1,213 $1,227 Temporary tenant rentals (kiosks) 830 689 636 Lease termination fees 2,830 3,007 624 Development fees 1,003 672 804 Other 662 417 318 ------ ------ ------ $7,408 $5,998 $3,609 ====== ====== ====== </TABLE> F-16
60 16. BENEFIT PLANS STOCK OPTION AND OTHER EQUITY BASED PLANS Effective January 31, 1993, the Company established an incentive and non-qualified stock option plan under which 2,056,903 of the Company's common shares at December 31, 1997 were reserved for issuance to eligible employees. Options may be granted at per share prices not less than fair market value at the date of grant, and in the case of incentive options, must be exercisable within ten years thereof (or, with respect to options granted to certain shareholders, within five years thereof). Options granted under the plan generally become exercisable on the year after the date of grant as to one third of the optioned shares, with the remaining options being exercisable over the following two-year period. As of December 31, 1997, 1996 and 1995, 742,540, 555,057 and 381,193 options, respectively, were exercisable. Option prices range from $22 to $46.5625 per share. In addition to the stock option plan described above, the Company granted options for a total of 470,000 shares to its directors and certain officers who are not employees of the Company. Such options were granted at the fair market value on the date of grant. Options with respect to 25,000 shares were exercisable one year from the date of grant, and options with respect to the remaining 445,000 shares become exercisable one year after the date of grant as to one third of the 445,000 shares with the remaining options being exercisable over the following two-year period. As of December 31, 1997, 1996 and 1995, options aggregating 355,000, 253,333 and 158,334, respectively, were exercisable, of which, 5,000 were exercised during each of 1997 and 1996. Option prices range from $22 to $37.125 per share. The following table reflects the stock option activity described above (in thousands): <TABLE> <CAPTION> Number of Options Price Employees Directors Range --------- --------- ----- <S> <C> <C> <C> <C> Balance December 31, 1994 700 325 $22.00 - $31.75 Granted 179 - 26.75 - 31.75 Exercised (11) - 22.00 - 29.25 Canceled (41) - 22.00 - 31.75 ------ ----- --------------- Balance December 31, 1995 827 325 22.00 - 31.75 Granted 533 120 28.88 - 34.00 Exercised (66) (5) 22.00 - 30.75 Canceled (29) - 22.00 - 31.75 ------ ----- --------------- Balance December 31, 1996 1,265 440 22.00 - 34.00 Granted 501 25 35.63 - 46.56 Exercised (127) (5) 22.00 - 31.50 Canceled (31) - 27.75 - 39.44 ------ ----- --------------- Balance December 31, 1997 1,608 460 $22.00 - $46.56 ====== ===== =============== </TABLE> In April 1996, the shareholders approved an equity-based award plan which provides for the grant, to key employees of the Company, of options to purchase common shares of the Company, rights to receive the appreciation in value of common shares, awards of common shares subject to restrictions on transfer, awards of common shares issuable in the future upon satisfaction of certain conditions, rights to purchase common shares and other awards based on common shares. Under the terms of the Award Plan, awards may be granted with respect to an aggregate of not more than 600,000 common shares. In 1997, the Board of Directors approved the issuance of 450,000 stock options at option prices ranging from $36.50 to $40.25 to the Company's Chief Executive Officer which vested upon issuance. Of the options granted, 350,000 were issued outside of a qualified plan. In 1996, the Board of Directors approved a grant of 25,000 restricted shares of common stock and 15,000 Participation Units to the Company's Chief Executive Officer. The 25,000 shares of restricted stock vest in equal annual amounts of 5,000 shares per year through the year 2000. The 15,000 Participation Units will be converted into common shares, ranging from 15,000 common shares to 100,000 common shares at the end of five years depending upon achievement of performance objectives. The actual number of shares issued will be based upon the average annual total shareholder return during the five year period. During 1997 and 1996, approximately $1.3 million and $0.5 million, respectively, was charged to expense associated with awards under the equity based award plan relating to restricted stock and participation units. The Company applies APB 25, "Accounting for Stock Issued to Employees" in accounting for its plans. Accordingly, the Company does not recognize compensation cost for stock options when the option exercise price equals or exceeds the market value on the date of the grant. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair values of the options granted at the grant dates, consistent with the method set forth in the Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", the Company's net income and earnings per share would have been as follows (dollars in thousands, except per share data): <TABLE> <CAPTION> 1997 1996 1995 ---- ---- ---- <S> <C> <C> <C> <C> Net income applicable to As reported $53,322 $35,342 $24,250 common shareholders Pro forma $47,515 $33,905 $22,640 Basic earnings As reported $2.06 $1.67 $1.29 per share Pro forma $1.84 $1.60 $1.21 Diluted earnings As reported $2.05 $1.67 $1.28 per share Pro forma $1.82 $1.60 $1.20 </TABLE> The fair value of each option grant was estimated on the date of grant using the Black-Sholes options pricing model using the following assumptions: <TABLE> <CAPTION> For the years ended December 31, 1997 1996 1995 ---------- ---------- ---------- <S> <C> <C> <C> Risk free interest rate (range) 5.8%-7.9% 6.5%-6.8% 5.6%-7.4% Dividend yield 6.8%-7.1% 7.8% 7.7%-7.8% Expected life (range) 8.1-10 years 8.3-10 years 8.3-10 years Expected volatility (range) 22.5%-31.7% 17.1%-24.4% 15.4%-24.4% </TABLE> F-17
61 401(k) PLAN Effective July 1, 1994, the Company adopted a 401(k) defined contribution plan covering substantially all of the officers and employees of the Company which permits participants to defer up to a maximum of 15%of their compensation. The Company will match 25%of the employee's contributions up to a maximum of 6% of an employee's annual compensation. The Company may also make additional discretionary contributions. Employees' contributions are fully vested and the Company's matching contributions vest 20%per year, including service prior to the plan's effective date. Once an employee has been with the Company five years, all matching contributions are fully vested. The Company's contributions to the plan for the years ended December 31, 1997, 1996 and 1995 were made by the issuance of Company stock with a market value of $.04 million, $.03 million and $.02 million, respectively. The 401(k)plan is fully funded at December 31, 1997. ELECTIVE DEFERRED COMPENSATION PLAN Effective October 15, 1994, the Company adopted a non-qualified elective deferred compensation plan for certain key executives which permits eligible employees to defer up to 25% of their compensation. The Company will match 25% of an employee's contributions up to a maximum of 6% of an employee's annual compensation, after deducting contributions, if any, made in conjunction with the Company's 401(k) plan. Both the deferred and matching contributions are made in Company performance units with the gains and losses being related to the Company's quoted share price. Deferred compensation charged to expense related to an employee's contribution is fully vested and the Company's matching contribution vests 20% per year, including service prior to the plan's effective date. Once an employee has been with the Company five years, all matching contributions are fully vested. The Company's contribution, including plan earnings for the years ended December 31, 1997, 1996 and 1995 was $.04 million, $.05 million and $.02 million, respectively. At December 31, 1997, 1996 and 1995, deferred compensation under this plan aggregated $0.3 million, $0.2 million and $0.1 million, respectively. The plan is not funded. 17. EARNINGS AND DIVIDENDS PER SHARE Earnings per Share (EPS) have been computed pursuant to the provisions of Statement of Financial Accounting Standards No. 128 which became effective for all financial statements issued after December 15, 1997. All periods prior thereto have been restated to conform with the provisions of this Statement. The following table provides a reconciliation of both income before extraordinary item and the number of common shares used in the computations of "basic" EPS, which utilized the weighted average number of common shares outstanding without regard to dilutive potential common shares, and "diluted" EPS, which includes all such shares. For the year ended December 31, (In thousands, except per share amounts) <TABLE> <CAPTION> 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> Income before extraordinary item $ 67,522 $ 49,542 $ 29,062 Less: Preferred stock dividend (14,200) (14,200) (1,255) -------- -------- -------- Basic EPS - Income before extraordinary item applicable to common shareholders 53,322 35,342 27,807 Effect of dilutive securities: Operating partnership minority interests 10 -- -- -------- -------- -------- Diluted EPS - Income before extraordinary item applicable to common shareholders plus assumed conversions $ 53,332 $ 35,342 $ 27,807 ======== ======== ======== NUMBER OF SHARES: Basic - average shares outstanding 25,880 21,147 18,780 Effect of dilutive securities: Operating partnership minority interests 3 -- -- Stock options 176 36 129 Restricted stock 3 3 -- -------- -------- -------- Diluted - average shares outstanding 26,062 21,186 18,909 ======== ======== ======== PER SHARE AMOUNT: Income before extraordinary item Basic $ 2.06 $ 1.67 $ 1.48 Diluted $ 2.05 $ 1.67 $ 1.47 </TABLE> Options to purchase 2,067,706, 1,704,634, and 1,151,923 shares of common stock were outstanding at December 31, 1997, 1996 and 1995, respectively (Note 16), a portion of which has been reflected above using the treasury stock method. Restricted shares totaling 15,000 and 20,000, respectively, were not vested at December 31, 1997 and 1996 (none in 1995) and consequently, were not included in the computation of basic EPS (Note 16). Performance Units issued in 1996, convertible into 15,000 to 100,000 common shares of the Company, were not included in the computation of diluted EPS in 1997 and 1996 because the effect was antidilutive (Note 16). Debentures which are convertible into common shares of the Company at a price of $33-3/8, were not included in the computation of diluted EPS in 1997, 1996 and 1995 because the effect was antidilutive (Note 9). The conversion of DRA's interest in the Merriam, San Antonio and Community Center Joint Ventures were not included in the computation of diluted EPS because the effect was antidilutive, for all years presented, where applicable (Note 2). The conversion into common stock of the Minority Equity Interest were not included in the computation of diluted EPS in 1997 because the effect of assuming conversion was antidilutive (Note 12). F-18
62 Dividends declared per share for the years ended December 31, 1997, 1996 and 1995 are summarized as follows: <TABLE> <CAPTION> GROSS ORDINARY NON-TAXABLE CAPITAL GAIN TOTAL 1997 DIVIDENDS DATE PAID INCOME RETURN OF CAPITAL DISTRIBUTIONS DIVIDENDS - -------------------------------------------------------------------------------------------------------------------------------- <C> <C> <C> <C> <C> <C> 1st quarter 03/31/97 $0.50 $0.11 $0.02 $ .63 2nd quarter 06/30/97 0.52 0.11 - .63 3rd quarter 09/30/97 0.52 0.11 - .63 4th quarter 12/30/97 0.50 0.11 0.02 .63 ----- ----- ----- ----- $2.04 $0.44 $0.04 $2.52 ===== ===== ===== ===== <CAPTION> GROSS ORDINARY NON-TAXABLE CAPITAL GAIN TOTAL 1996 DIVIDENDS DATE PAID INCOME RETURN OF CAPITAL DISTRIBUTIONS DIVIDENDS - -------------------------------------------------------------------------------------------------------------------------------- <C> <C> <C> <C> <C> <C> 1st quarter 04/01/96 $0.475 $0.12 $.005 $ .60 2nd quarter 07/01/96 0.475 0.12 .005 .60 3rd quarter 09/30/96 0.475 0.12 .005 .60 4th quarter 12/30/96 0.475 0.12 .005 .60 ------ ----- ----- ----- $1.90 $0.48 $.02 $2.40 ====== ===== ===== ===== <CAPTION> GROSS ORDINARY NON-TAXABLE CAPITAL GAIN TOTAL 1995 DIVIDENDS DATE PAID INCOME RETURN OF CAPITAL DISTRIBUTIONS DIVIDENDS - -------------------------------------------------------------------------------------------------------------------------------- <C> <C> <C> <C> <C> <C> 1st quarter 03/31/95 $0.43 $0.11 $ - $ .54 2nd quarter 06/30/95 0.43 0.11 - .54 3rd quarter 09/29/95 0.43 0.11 - .54 4th quarter 12/29/95 0.43 0.11 - .54 ----- ----- ----- ----- $1.72 $0.44 $ - $2.16 ===== ===== ===== ===== </TABLE> 18. SUBSEQUENT EVENTS In January 1998, the Company issued $100 million of senior unsecured fixed rate notes through its Medium Term Note program with a ten year maturity and a 6.625% coupon rate. The proceeds were used to repay variable rate borrowings on the Company's revolving credit facilities. On February 11, 1998, the Company entered into a joint venture with Prudential Real Estate investors and established the Retail Value Fund ("Fund"). The Fund will invest in retail properties within the United States that are in need of substantial retenanting and market repositioning. This Fund may also provide equity or debt investments in companies owning or managing retail properties as well as in third party development projects that provide significant growth opportunities. The retail property investments may include enclosed malls, neighborhood centers or other potential commercial redevelopment opportunities. The Company is expected to maintain an ownership interest of approximately 25% in the Fund. The Fund will have its own employees and the Company will assume retail management and operating responsibilities including leasing, redevelopment and accounting and will be paid fees in consideration of the foregoing services. On February 11, 1998, the Company contributed its ownership interest in the joint venture formed with Hendon Associates to the Fund and, in exchange for a 75% ownership interest, the Company was reimbursed approximately $41.5 million from Prudential Real Estate Investors, representing 75%of its invested capital. The proceeds of $41.5 million were used to repay variable rate borrowings on the Company's revolving credit facilities. F-19
63 19. PRICE RANGE OF COMMON SHARES (UNAUDITED) The high and low sale prices per share of the Company's common shares, as reported on the New York Stock Exchange Composite tape, and declared dividends per share for the quarterly periods indicated were as follows: <TABLE> <CAPTION> High Low Dividends ------------------------------------------------------------------------------------ <S> <C> <C> <C> 1997: First $38-5/8 $34-1/4 $ .63 Second 40 35-7/8 .63 Third 40-1/4 38-1/4 .63 Fourth 41-1/4 37-5/16 .63 -------- -------- ------ <CAPTION> <S> <C> <C> <C> 1996: First $ 31-3/4 $ 28-1/8 $ .60 Second 32 28-1/8 .60 Third 33-1/8 30-1/2 .60 Fourth 37-1/4 32-1/8 .60 -------- -------- ------ </TABLE> 20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth the quarterly results of operations for the years ended December 31, 1997 and 1996 (in thousands, except per share amounts): <TABLE> <CAPTION> First Second Third Fourth Total ----- ------ ----- ------ ----- 1997: <S> <C> <C> <C> <C> <C> Revenues $37,453 $40,866 $42,673 $48,048 $169,040 Income before equity in net income of joint ventures, minority interests and gain on sales of real estate 11,576 13,585 13,807 15,184 54,152 Income before extraordinary item 17,554 15,941 16,747 17,280 67,522 Net income 17,554 15,941 16,747 17,280 67,522 Net income applicable to common shareholders 14,004 12,391 13,197 13,730 53,322 Basic: Income before extraordinary item per common share $ .57 $ .49 $ .50 $ .50 $ 2.06 Net income per common share $ .57 $ .49 $ .50 $ .50 $ 2.06 Weighted average number of shares 24,515 25,164 26,556 27,297 25,880 Diluted: Income before extraordinary item per common share $ .56 $ .48 $ .49 $ .49 $ 2.05 Net income per common share $ .56 $ .48 $ .49 $ .49 $ 2.05 Weighted average number of shares 24,937 25,613 27,074 27,802 26,062 <CAPTION> First Second Third Fourth Total ----- ------ ----- ------ ----- 1996: <S> <C> <C> <C> <C> <C> Revenues $30,635 $31,904 $34,534 $33,832 $130,905 Income before equity in net income of joint ventures 9,204 11,242 10,788 9,599 40,833 Income before extraordinary item 11,216 13,104 12,926 12,296 49,542 Net income 11,216 13,104 12,926 12,296 49,542 Net income applicable to common shareholders 7,666 9,554 9,376 8,746 35,342 Basic: Income before extraordinary item per common share $ .39 $ .44 $ .43 $ .40 $ 1.67 Net income per common share $ .39 $ .44 $ .43 $ .40 $ 1.67 Weighted average number of shares 19,705 21,591 21,618 21,637 21,147 Diluted: Income before extraordinary item per common share $ .39 $ .44 $ .43 $ .40 $ 1.67 Net income per common share $ .39 $ .44 $ .43 $ .40 $ 1.67 Weighted average number of shares 19,849 21,765 21,863 21,958 21,186 </TABLE> F-20
64 SCHEDULE II DEVELOPERS DIVERSIFIED REALTY CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) <TABLE> <CAPTION> Balance at Balance at beginning of Charged end of year to expense Deductions year --------------- ----------- ------------- ------------ <S> <C> <C> <C> <C> Year ended December 31, 1997 Allowance for uncollectible accounts..... $1,770 $ 749 $ 136 $2,383 ====== ====== ====== ====== Year ended December 31, 1996 Allowance for uncollectible accounts..... $ 990 $1,292 $ 512 $1,770 ====== ====== ====== ====== Year ended December 31, 1995 Allowance for uncollectible accounts..... $ 310 $ 721 $ 41 $ 990 ====== ====== ====== ====== </TABLE> F-21
65 <TABLE> <CAPTION> SCHEDULE III DEVELOPERS DIVERSIFIED REALTY CORPORATION REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 1997 Initial Cost Total Cost (A) --------------------------------------- ----------------------------------------- Buildings & Buildings & Land Improvements Improvements Land Improvements Total --------------------------------------- ---------------------------------------- <S> <C> <C> <C> <C> <C> <C> BRANDON, FL ............ $0 $4,111,281 $0 $0 $4,111,281 $4,111,281 STOW, OH ............... 1,035,856 9,028,257 0 992,520 14,138,737 15,131,257 FERN PARK, FL(ORLANDO) . 445,852 302,755 97,300 445,852 403,228 849,080 EASTLAKE, OH ........... 40,000 141,000 0 40,000 144,188 184,188 HIGHLAND HTS., OH (DEV). 3,987,052 7,895,991 0 3,987,052 13,302,042 17,289,094 WESTLAKE, OH ........... 424,225 3,802,863 203,235 424,225 4,055,160 4,479,385 WATERBURY, CT .......... 0 3,048,300 0 0 3,048,300 3,048,300 ZANESVILLE, OH ......... 0 619,023 0 0 619,023 619,023 E. NORRITON, PA ........ 80,408 4,697,718 233,380 80,408 6,998,264 7,078,672 PALM HARBOR, FL ........ 1,136,915 4,089,138 0 1,136,915 4,139,699 5,276,614 TARPON SPRINGS, FL ..... 248,067 7,381,640 80,859 248,067 8,292,015 8,540,082 BAYONET PT., FL ........ 2,112,566 8,180,960 127,530 2,124,621 8,318,603 10,443,224 STARKVILLE, MS ......... 819,323 5,253,897 0 1,269,081 9,648,182 10,917,263 STARKVILLE (KROGER) .... 451,758 2,955,317 0 0 0 0 TUPELO, MS ............. 2,282,000 14,978,722 0 2,282,000 15,679,372 17,961,372 JACKSONVILLE, FL ....... 3,005,420 9,425,063 0 3,005,420 9,451,229 12,456,649 STONE MOUNTAIN, GA ..... 460,471 3,018,074 21,890 460,471 3,043,151 3,503,622 BRUNSWICK, MA .......... 3,836,358 15,459,460 0 3,836,358 15,459,460 19,295,818 ATLANTA, GA ............ 475,360 9,373,552 0 475,360 9,549,569 10,024,929 ERIE, PA ............... 7,030,162 19,200,609 0 6,830,163 32,141,922 38,972,085 ERIE, PA ............... 3,850,317 0 0 548,930 0 548,930 ERIE, PA ............... 1 2,563,770 12,990 1 3,081,715 3,081,716 CHILLICOTHE, OH ........ 42,857 2,549,287 2,200 1,266,066 10,183,227 11,449,293 OCALA, FL .............. 26,800 351,065 25,028 26,800 376,093 402,893 TAMPA, FL (WATERS) ..... 4,105,230 6,640,240 324,071 3,905,230 7,264,437 11,169,667 WINCHESTER, VA ......... 618,075 13,903,078 0 618,075 18,694,206 19,312,281 HUBER HEIGHTS, OH ...... 757,422 14,468,512 1,000 757,422 14,499,966 15,257,388 LEBANON, OH ............ 651,025 911,178 30,993 651,025 1,026,666 1,677,691 WILMINGTON, OH ......... 156,975 1,615,646 50,575 156,975 1,676,221 1,833,196 HILLSBORO, OH .......... 79,579 1,984,831 0 79,579 1,984,831 2,064,410 CANTON, OH PHASE II .... 5,672,187 0 0 6,393,685 8,252,702 14,646,387 XENIA, OH .............. 948,202 3,938,138 0 948,202 5,995,219 6,943,421 BOARDMAN, OH ........... 9,025,281 0 0 8,777,281 20,977,237 29,754,518 CINCINNATI, OH ......... 2,399,250 11,238,105 172,198 2,399,250 12,103,901 14,503,151 BEDFORD, IN ............ 706,282 8,424,532 5,750 1,066,655 10,006,816 11,073,471 WATERTOWN, SD .......... 62,712 6,442,712 441,927 62,712 8,037,730 8,100,442 <CAPTION> Total Cost, Net of Depreciable Date of Accumulated Accumulated Lives Construction (C) Depreciation Depreciation Encumbrances (Years) (1) Acquisition (A) ------------ ------------ ------------ ----------- ---------------- <S> <C> <C> <C> <C> <C> BRANDON, FL ............ $3,498,512 $612,769 $0 S/L 30 1972 (C) STOW, OH ............... 1,793,399 13,337,858 0 S/L 30 1969 (C) FERN PARK, FL(ORLANDO) . 257,783 591,297 0 S/L 30 1970 (C) EASTLAKE, OH ........... 114,385 69,803 0 S/L 30 1971 (C) HIGHLAND HTS., OH (DEV). 795,224 16,493,870 0 S/L 31.5 1995 (C) WESTLAKE, OH ........... 3,002,990 1,476,395 0 S/L 30 1974 (C) WATERBURY, CT .......... 2,497,483 550,817 0 S/L 30 1973 (C) ZANESVILLE, OH ......... 147,397 471,626 0 S/L 31.5 1990 (C) E. NORRITON, PA ........ 3,433,481 3,645,191 0 S/L 30 1975 (C) PALM HARBOR, FL ........ 357,114 4,919,500 0 S/L 31.5 1995 (A) TARPON SPRINGS, FL ..... 5,656,260 2,883,822 0 S/L 30 1974 (C) BAYONET PT., FL ........ 3,463,985 6,979,239 5,327,208 S/L 30 1985 (C) STARKVILLE, MS ......... 899,237 10,018,026 0 S/L 31.5 1994 (A) STARKVILLE (KROGER) .... 0 0 2,417,963 S/L 31.5 1994 (A) TUPELO, MS ............. 1,505,016 16,456,356 0 S/L 31.5 1994 (A) JACKSONVILLE, FL ....... 824,093 11,632,556 7,904,705 S/L 31.5 1995 (A) STONE MOUNTAIN, GA ..... 2,509,684 993,938 0 S/L 30 1973 (C) BRUNSWICK, MA .......... 244,221 19,051,597 0 S/L 30 1973 (C) ATLANTA, GA ............ 1,173,161 8,851,768 0 S/L 31.5 1994 (A) ERIE, PA ............... 2,248,850 36,723,235 0 S/L 31.5 1995 (C) ERIE, PA ............... 0 548,930 0 S/L 31.5 1995 (C) ERIE, PA ............... 2,041,151 1,040,565 0 S/L 30 1973 (C) CHILLICOTHE, OH ........ 1,722,760 9,726,533 0 S/L 30 1974 (C) OCALA, FL .............. 300,935 101,958 0 S/L 30 1974 (C) TAMPA, FL (WATERS) ..... 1,672,310 9,497,357 0 S/L 31.5 1990 (C) WINCHESTER, VA ......... 1,877,679 17,434,602 9,294,686 S/L 31.5 1993 (A) HUBER HEIGHTS, OH ...... 2,030,072 13,227,316 0 S/L 31.5 1993 (A) LEBANON, OH ............ 190,180 1,487,511 0 S/L 31.5 1993 (A) WILMINGTON, OH ......... 1,114,365 718,831 0 S/L 30 1977 (C) HILLSBORO, OH .......... 1,223,927 840,483 0 S/L 30 1979 (C) CANTON, OH PHASE II .... 113,482 14,532,905 0 S/L 31.5 1995 (A) XENIA, OH .............. 524,122 6,419,299 0 S/L 31.5 1994 (A) BOARDMAN, OH ........... 491,120 29,263,398 0 S/L 31.5 1997 (A) CINCINNATI, OH ......... 1,798,535 12,704,616 0 S/L 31.5 1993 (A) BEDFORD, IN ............ 1,149,938 9,923,533 0 S/L 31.5 1993 (A) WATERTOWN, SD .......... 4,450,561 3,649,881 0 S/L 30 1977 (C) </TABLE> F-22
66 <TABLE> <S> <C> <C> <C> <C> <C> <C> CONNERSVILLE, IN ........ 539,720 6,457,710 0 539,720 6,560,191 7,099,911 ASHLAND, OH ............. 209,500 2,272,624 0 209,500 2,375,424 2,584,924 PENSACOLA, FL ........... 1,804,641 4,010,290 273,372 1,804,641 4,334,862 6,139,503 W.65TH CLEVELAND, OH .... 90,120 1,463,076 15,000 90,120 1,538,563 1,628,683 LOS ALAMOS, NM .......... 725,000 3,499,950 30,336 725,000 3,535,058 4,260,058 NORTH OLMSTED, OH ....... 9,499,018 34,186,667 13,971 9,499,018 34,200,638 43,699,656 NORTH OLMSTED, OH ....... 2,710,188 10,821,949 0 2,710,188 10,821,949 13,532,137 TAMPA, FL (DALE) ........ 4,268,673 5,368,147 204,666 4,268,672 6,075,156 10,343,828 WAYNESVILLE, NC ......... 431,910 8,088,668 131,096 431,910 8,238,844 8,670,754 AHOSKIE, NC ............. 269,530 7,775,856 3,168 269,530 7,804,724 8,074,254 PULASKI, VA ............. 528,075 6,395,809 2,000 528,075 6,405,435 6,933,510 TWINSBURG, OH (VSA) ..... 341,025 2,108,098 0 341,025 1,916,716 2,257,741 AURORA, OH .............. 832,436 0 0 832,436 5,439,980 6,272,416 WORTHINGTON, MN ......... 373,943 6,404,291 440,740 373,943 7,644,203 8,018,146 HARRISBURG, IL .......... 550,100 7,619,281 0 550,100 7,815,528 8,365,628 MT. VERNON, IL .......... 1,789,009 9,398,696 111,000 1,789,009 9,755,535 11,544,544 FENTON, MO .............. 413,993 4,243,854 475,714 413,993 6,448,947 6,862,940 MELBOURNE, FL ........... 1 3,084,819 116,638 1 3,204,645 3,204,646 SIMPSONVILLE, SC ........ 430,800 6,563,154 0 430,800 6,567,154 6,997,954 CAMDEN, SC .............. 627,100 7,519,161 6,500 627,100 7,874,094 8,501,194 UNION, SC ............... 684,750 7,629,275 500 684,750 7,648,975 8,333,725 N. CHARLESTON, SC ....... 910,840 11,346,348 1,000 1,081,462 14,911,220 15,992,682 S. ANDERSON, SC ......... 1,365,600 6,117,482 13,170 1,365,600 6,150,152 7,515,752 ANDERSON, SC ............ 204,094 939,733 0 204,094 939,733 1,143,827 ORANGEBURG, SC .......... 317,934 1,692,836 0 317,934 1,717,836 2,035,770 MT. PLEASANT, SC ........ 2,583,887 10,469,891 0 2,583,887 10,469,891 13,053,778 COLUMBIA, SC ............ 600,000 3,262,624 0 600,000 3,262,624 3,862,624 SAULT STE. MARIE, MI .... 1,826,454 13,709,705 0 1,826,454 13,768,735 15,595,189 CHEBOYGAN, MI ........... 126,670 3,612,242 0 126,670 3,612,242 3,738,912 GRAND RAPIDS, MI ........ 1,926,389 8,039,411 0 1,926,389 8,053,836 9,980,225 HOUGHTON, MI ............ 439,589 7,300,952 1,820,772 439,589 9,325,011 9,764,600 BAD AXE, MI ............. 183,850 3,647,330 0 183,850 4,038,246 4,222,096 GAYLORD, MI ............. 269,900 8,727,812 2,250 269,900 9,069,932 9,339,832 HOWELL, MI .............. 331,500 11,938,263 750 331,500 12,083,413 12,414,913 MT. PLEASANT, MI ........ 766,950 7,768,538 20,340 766,950 11,486,554 12,253,504 ELYRIA, OH .............. 352,295 5,692,642 0 352,295 5,692,642 6,044,937 BEMIDJI, MN ............. 442,031 8,228,731 500,161 442,031 8,841,761 9,283,792 CAPE CORAL, FL .......... 1,286,628 2,548,149 149,507 1,286,628 4,692,355 5,978,983 TRINDAD, CO ............. 411,329 2,578,930 197,546 411,329 2,787,426 3,198,755 HAZARD, KY .............. 402,563 3,271,343 296,745 402,563 3,571,954 3,974,517 BIRMINGHAM, AL .......... 3,726,122 13,973,590 0 3,726,122 14,026,891 17,753,013 BIRMINGHAM, AL .......... 10,572,916 26,002,258 0 11,434,040 31,933,621 43,367,661 HUNTSVILLE, AL .......... 600,000 3,058,100 0 600,000 3,069,100 3,669,100 JACKSONVILLE, NC ........ 521,111 3,998,798 172,993 521,111 4,171,791 4,692,902 ORMOND BEACH, FL ........ 1,048,380 15,812,069 3,875 1,048,380 16,158,617 17,206,997 <S> <C> <C> <C> <C> <C> CONNERSVILLE, IN ........ 842,182 6,257,729 0 S/L 31.5 1993 (A) ASHLAND, OH ............. 1,567,512 1,017,412 0 S/L 30 1977 (C) PENSACOLA, FL ........... 1,276,899 4,862,604 0 S/L 30 1988 (C) W.65TH CLEVELAND, OH .... 1,016,896 611,787 0 S/L 30 1977 (C) LOS ALAMOS, NM .......... 1,261,325 2,998,733 0 S/L 30 1978 (C) NORTH OLMSTED, OH ....... 1,144,967 42,554,689 0 S/L 31.5 1997 (A) NORTH OLMSTED, OH ....... 343,954 13,188,183 0 S/L 31.5 1997 (A) TAMPA, FL (DALE) ........ 1,303,466 9,040,362 0 S/L 31.5 1990 (C) WAYNESVILLE, NC ......... 1,320,755 7,349,999 0 S/L 31.5 1993 (A) AHOSKIE, NC ............. 957,081 7,117,173 0 S/L 31.5 1994 (A) PULASKI, VA ............. 951,758 5,981,752 0 S/L 31.5 1993 (A) TWINSBURG, OH (VSA) ..... 485,477 1,772,264 0 S/L 31.5 1989 (C) AURORA, OH .............. 221,721 6,050,695 0 S/L 31.5 1995 (C) WORTHINGTON, MN ......... 4,034,575 3,983,571 0 S/L 30 1977 (C) HARRISBURG, IL .......... 928,534 7,437,094 0 S/L 31.5 1994 (A) MT. VERNON, IL .......... 1,407,261 10,137,283 0 S/L 31.5 1993 (A) FENTON, MO .............. 2,282,132 4,580,808 0 S/L 30 1983 (A) MELBOURNE, FL ........... 1,994,706 1,209,940 0 S/L 30 1978 (C) SIMPSONVILLE, SC ........ 834,675 6,163,279 0 S/L 31.5 1994 (A) CAMDEN, SC .............. 1,110,915 7,390,279 0 S/L 31.5 1993 (A) UNION, SC ............... 1,099,771 7,233,954 0 S/L 31.5 1993 (A) N. CHARLESTON, SC ....... 1,615,622 14,377,060 0 S/L 31.5 1993 (A) S. ANDERSON, SC ......... 758,275 6,757,477 0 S/L 31.5 1994 (A) ANDERSON, SC ............ 82,041 1,061,786 0 S/L 31.5 1995 (A) ORANGEBURG, SC .......... 147,787 1,887,983 0 S/L 31.5 1995 (A) MT. PLEASANT, SC ........ 913,884 12,139,894 6,889,913 S/L 31.5 1995 (A) COLUMBIA, SC ............ 224,413 3,638,211 0 S/L 31.5 1995 (A) SAULT STE. MARIE, MI .... 1,456,597 14,138,592 7,519,794 S/L 31.5 1994 (A) CHEBOYGAN, MI ........... 467,425 3,271,487 0 S/L 31.5 1993 (A) GRAND RAPIDS, MI ........ 512,265 9,467,960 0 S/L 31.5 1995 (A) HOUGHTON, MI ............ 5,839,310 3,925,290 2,798,376 S/L 30 1980 (C) BAD AXE, MI ............. 545,149 3,676,947 0 S/L 31.5 1993 (A) GAYLORD, MI ............. 1,254,464 8,085,368 0 S/L 31.5 1993 (A) HOWELL, MI .............. 1,594,211 10,820,702 7,462,728 S/L 31.5 1993 (A) MT. PLEASANT, MI ........ 1,328,492 10,925,012 0 S/L 31.5 1993 (A) ELYRIA, OH .............. 2,228,398 3,816,539 0 S/L 30 1977 (C) BEMIDJI, MN ............. 4,393,503 4,890,289 0 S/L 30 1977 (C) CAPE CORAL, FL .......... 1,184,263 4,794,720 0 S/L 30 1985 (C) TRINDAD, CO ............. 1,078,167 2,120,588 0 S/L 30 1986 (C) HAZARD, KY .............. 2,116,466 1,858,051 0 S/L 30 1978 (C) BIRMINGHAM, AL .......... 971,862 16,781,151 0 S/L 31.5 1994 (A) BIRMINGHAM, AL .......... 2,626,538 40,741,123 0 S/L 31.5 1995 (A) HUNTSVILLE, AL .......... 246,864 3,422,236 0 S/L 31.5 1995 (A) JACKSONVILLE, NC ........ 1,122,014 3,570,888 2,664,141 S/L 31.5 1989 (C) ORMOND BEACH, FL ........ 1,844,727 15,362,270 0 S/L 31.5 1994 (A) </TABLE> F-23
67 <TABLE> <S> <S> <S> <S> <S> <S> <S> ALAMOSA, CO ............ 161,479 1,034,465 210,958 161,479 1,253,273 1,414,752 WILMINGTON, NC ......... 4,785,052 16,851,571 1,182,775 4,227,212 24,124,566 28,351,778 BERLIN, VT ............. 858,667 10,948,064 23,935 866,217 11,080,244 11,946,461 BRAINERD, MN ........... 703,410 9,104,117 271,802 1,182,018 11,908,835 13,090,853 SPRING HILL, FL ........ 1,083,851 4,816,166 265,762 2,095,973 7,872,052 9,968,025 TIFFIN, OH ............. 432,292 5,907,856 434,761 432,292 6,547,704 6,979,996 TOLEDO, OH ............. 2,490,543 10,582,588 0 2,490,543 10,583,789 13,074,332 TOLEDO, OHIO ........... 5,556,887 0 0 5,556,887 5,556,887 DENVER, CO ............. 7,833,069 35,550,405 0 7,833,069 35,550,405 43,383,474 DICKINSON, ND .......... 57,470 6,864,237 354,820 51,148 7,427,717 7,478,865 WEST PASCO, FL ......... 1,422,383 6,552,470 8,500 1,121,383 6,560,970 7,682,353 MARIANNA, FL ........... 1,496,347 3,499,835 129,855 1,496,347 3,637,290 5,133,637 HUTCHINSON, MN ......... 401,502 5,510,326 656,937 426,502 6,244,921 6,671,423 NEW BERN, NC ........... 780,029 8,204,036 71,587 780,029 11,266,277 12,046,306 MENTOR, OH ............. 184,420 1,148,523 0 184,420 1,148,523 1,332,943 STREETSBORO, OH ........ 50,000 1,298,398 0 50,000 1,560,258 1,610,258 AURORA, OH ............. 100,000 2,909,005 0 100,000 2,937,911 3,037,911 HIGHLAND, IN ........... 4,003,400 20,101,245 0 4,003,400 22,891,664 26,895,064 AHWATUKEE, AZ PHASE I .. 5,302,089 21,521,302 0 5,302,089 21,539,594 26,841,683 AHWATUKEE, AZ PHASE II . 7,762,645 3,443,005 3,188 7,762,645 34,433,193 42,195,838 PHOENIX, AR ............ 1,733,400 6,979,713 0 1,733,400 8,356,783 10,090,183 ARROWHEAD CROSSING ..... 0 2,535 0 0 2,535 2,535 PHOENIX, AR ............ 4,686,600 21,569,807 0 4,686,600 21,569,307 26,255,907 MAPLE GROVE, MN ........ 4,564,278 18,379,324 0 4,564,277 18,410,333 22,974,610 ST. PAUL, MN ........... 4,467,901 18,084,446 0 4,467,901 18,093,315 22,561,216 TANASBOURNE TWN CTR .... 3,780,000 15,991,872 0 3,780,000 18,222,355 22,002,355 EAGAN, MN .............. 4,107,557 22,882,932 0 4,107,557 22,891,801 26,999,358 FORT WORTH, TX ......... 2,325,000 10,275,719 0 2,325,000 21,406,261 23,731,261 RUSSELLVILLE, AR ....... 624,100 13,391,122 0 624,100 13,400,969 14,025,069 N. LITTLE ROCK, AR ..... 907,083 17,159,794 0 907,083 17,187,763 18,094,846 FAYETTEVILLE, AK ....... 2,365,974 9,503,285 0 2,365,974 9,503,285 11,869,259 OTTUMWA, IA ............ 338,125 8,564,280 102,680 321,628 8,757,528 9,079,156 WASHINGTON, NC ......... 990,780 3,118,121 33,690 2,435,459 3,182,676 5,618,135 OVIDEO, FL ............. 6,010,173 0 0 6,010,173 0 6,010,173 ORLANDO, FL ............ 4,792,146 11,673,702 84,343 4,792,146 11,833,171 16,625,317 DURHAM, NC ............. 2,210,222 11,671,268 277,631 2,210,222 11,964,587 14,174,809 CRYSTAL RIVER, FL ...... 1,216,709 5,795,643 364,531 1,219,142 6,182,077 7,401,219 TWINSBURG, OH (HBC) .... 138,204 833,311 692,706 138,204 1,523,792 1,661,996 Portfolio Balance (DDR). 0 20,485,201 1,272,842 0 30,461,155 30,461,155 ------------------------------------------------------------------------------------- $206,034,339 $928,853,555 $13,278,039 $207,477,229 $1,118,265,475 $1,325,742,705 ============ ============ =========== ============ ============== ============== <S> <C> <C> <C> <C> <C> ALAMOSA, CO ............ 578,482 836,270 0 S/L 30 1986 (C) WILMINGTON, NC ......... 4,500,214 23,851,564 10,075,323 S/L 31.5 1989 (C) BERLIN, VT ............. 3,861,093 8,085,368 4,940,000 S/L 30 1986 (C) BRAINERD, MN ........... 1,790,888 11,299,965 935,000 S/L 31.5 1991 (A) SPRING HILL, FL ........ 1,561,272 8,406,753 6,134,476 S/L 30 1988 (C) TIFFIN, OH ............. 3,634,980 3,345,016 0 S/L 30 1980 (C) TOLEDO, OH ............. 951,927 12,122,405 0 S/L 31.5 1995 (A) TOLEDO, OHIO ........... 0 5,556,887 0 S/L 31.5 1997 (C) DENVER, CO ............. 206,292 43,177,182 0 S/L 31.5 1997 (C) DICKINSON, ND .......... 4,819,716 2,659,149 0 S/L 30 1978 (C) WEST PASCO, FL ......... 2,560,416 5,121,937 4,783,894 S/L 30 1986 (C) MARIANNA, FL ........... 852,017 4,281,620 0 S/L 31.5 1990 (C) HUTCHINSON, MN ......... 3,414,210 3,257,213 5,134,849 S/L 30 1981 (C) NEW BERN, NC ........... 2,523,962 9,522,344 5,392,642 S/L 31.5 1989 (C) MENTOR, OH ............. 486,148 846,795 0 S/L 31.5 1987 (C) STREETSBORO, OH ........ 469,108 1,141,150 0 S/L 25 1989 (C) AURORA, OH ............. 489,487 2,548,424 0 S/L 31.5 1988 (C) HIGHLAND, IN ........... 855,085 26,039,979 0 S/L 31.5 1997 (A) AHWATUKEE, AZ PHASE I .. 569,471 26,272,212 0 S/L 31.5 1997 (A) AHWATUKEE, AZ PHASE II . 873,505 41,322,333 0 S/L 31.5 1997 (A) PHOENIX, AR ............ 353,204 9,736,979 0 S/L 31.5 1997 (A) ARROWHEAD CROSSING ..... 34 2,501 0 S/L 31.5 1997 (A) PHOENIX, AR ............ 1,005,394 25,250,513 0 S/L 31.5 1997 (A) MAPLE GROVE, MN ........ 876,229 22,098,381 0 S/L 31.5 1997 (A) ST. PAUL, MN ........... 284,410 22,276,806 0 S/L 31.5 1997 (A) TANASBOURNE TWN CTR .... 696,291 21,306,064 0 S/L 31.5 1997 (A) EAGAN, MN .............. 302,088 26,697,270 0 S/L 31.5 1997 (A) FORT WORTH, TX ......... 551,985 23,179,276 0 S/L 31.5 1997 (A) RUSSELLVILLE, AR ....... 1,560,024 12,465,045 0 S/L 31.5 1994 (A) N. LITTLE ROCK, AR ..... 2,038,924 16,055,922 0 S/L 31.5 1994 (A) FAYETTEVILLE, AK ....... 25,098 11,844,161 0 S/L 31.5 1997 (A) OTTUMWA, IA ............ 2,412,145 6,667,011 0 S/L 31.5 1990 (C) WASHINGTON, NC ......... 864,177 4,753,958 0 S/L 31.5 1990 (C) OVIDEO, FL ............. 0 6,010,173 0 S/L 31.5 1997 (C) ORLANDO, FL ............ 3,348,143 13,277,174 0 S/L 31.5 1989 (C) DURHAM, NC ............. 2,704,828 11,469,981 0 S/L 31.5 1990 (C) CRYSTAL RIVER, FL ...... 2,454,996 4,946,223 0 S/L 30 1986 (C) TWINSBURG, OH (HBC) .... 425,221 1,236,775 0 S/L 31.5 1989 (C) Portfolio Balance (DDR). 773,184 29,687,971 0 ---------------------------------------- $171,737,359 $1,154,005,346 $89,675,698 ============ ============== =========== </TABLE> (1) S/L refers to straight-line depreciation. F-24
68 (A) The Aggregate Cost for Federal Income Tax purposes was approximately $ 1,344.1 million at December 31, 1997 The changes in Total Real Estate Assets for the three years ended December 31, 1997 are as follows: <TABLE> <CAPTION> 1997 1996 1995 ------------- ------------- ------------- <S> <C> <C> <C> BALANCE, BEGINNING OF YEAR $991,646,960 $848,373,336 $686,890,098 ACQUISITIONS 267,868,208 114,390,359 81,634,342 IMPROVEMENTS AND EXPANSIONS 78,701,065 64,199,411 84,884,431 CHANGES IN LAND UNDER DEVELOPMENT AND CONSTRUCTION IN PROGRESS (3,871,141) 9,557,168 2,405,064 SALES AND RETIREMENTS (8,602,387) (44,873,314) (7,440,599) ------------- ------------- ------------- BALANCE, END OF YEAR $1,325,742,705 $991,646,960 $848,373,336 ============== ============= ============= </TABLE> The changes in Accumulated Depreciation and Amortization for the three years ended December 31, 1997 are as follows: <TABLE> <CAPTION> 1997 1996 1995 ------------- ------------- ------------- <S> <C> <C> <C> BALANCE, BEGINNING OF YEAR $142,039,284 $120,040,503 $100,051,018 DEPRECIATION FOR YEAR 32,208,290 24,872,181 21,838,209 SALES AND RETIREMENTS (2,510,215) (2,873,400) (1,848,724) ------------- ------------- ------------- BALANCE, END OF YEAR $171,737,359 $142,039,284 $120,040,503 ============= ============= ============= </TABLE> F-25