**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

 

**FORM 10-Q**

 

 

**QUARTERLY REPORT PURSUANT TO SECTION13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

 

**Forthe quarterly period ended September 30, 2001**

 

| **SIMON PROPERTY GROUP, INC.**                         |   | **SPG REALTY CONSULTANTS, INC.**                       |
|--------------------------------------------------------|--------|--------------------------------------------------------|
| (Exact name of registrant as specified in its charter) |   | (Exact name of registrant as specified in its charter) |

 

| **Delaware**                             |   | **Delaware**                             |
|------------------------------------------|--------|------------------------------------------|
| (State of incorporation or organization) |   | (State of incorporation or organization) |

 

| **001-14469**         |   | **001-14469-01**      |
|-----------------------|--------|-----------------------|
| (Commission File No.) |   | (Commission File No.) |

 

| **046268599**                        |   | **13-2838638**                       |
|--------------------------------------|--------|--------------------------------------|
| (I.R.S. Employer Identification No.) |   | (I.R.S. Employer Identification No.) |

 

| **National City Center**                      |   | **National City Center**                      |
|-----------------------------------------------|--------|-----------------------------------------------|
| **115 West Washington Street, Suite 15 East** |   | **115 West Washington Street, Suite 15 East** |
| **Indianapolis, Indiana  46204**         |   | **Indianapolis, Indiana  46204**         |
| (Address of principal executive offices)      |   | (Address of principal executive offices)      |

 

| **(317) 636-1600**                                   |   | **(317) 636-1600**                                   |
|------------------------------------------------------|--------|------------------------------------------------------|
| (Registrant's telephone number, including area code) |   | (Registrant's telephone number, including area code) |

 

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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       **ý**            NO         **o

 

As of November 1, 2001,172,248,245 shares of common stock, par value $0.0001 per share, 3,200,000shares of Class B common stock, par value $0.0001 per share, and 4,000 sharesof Class C common stock, par value $0.0001 per share of Simon Property Group,Inc. were outstanding, and were paired with 1,754,522  shares of common stock, par value $0.0001 per share, of SPGRealty Consultants, Inc.

 

 

**SIMON PROPERTY GROUP,INC. AND**

**SPG REALTYCONSULTANTS, INC.**

 

**FORM 10-Q**

 

**INDEX**

 
| **Part I - Financial Information** |
|------------------------------------|
|                               |   |
|                               | Item 1:  Financial Statements |
|                               |   |
|                               | Simon  Property Group, Inc. and SPG Realty Consultants, Inc.: |
|                               |   |
|                               | Condensed Combined Balance Sheets as of  September 30, 2001 and December 31, 2000 |
|                               |   |
|                               | Condensed Combined Statements of Operations  for the three-month  and nine-month  periods ended September 30, 2001 and 2000 |
|                               |   |
|                               | Condensed Combined Statements of Cash Flows  for the nine-month periods ended September 30, 2001 and 2000 |
|                               |   |
|                               | Simon  Property Group, Inc.: |
|                               |   |
|                               | Condensed Consolidated Balance Sheets as of  September 30, 2001 and December 31, 2000 |
|                               |   |
|                               | Condensed Consolidated Statements of  Operations for the three-month  and  nine-month periods ended September 30, 2001 and 2000 |
|                               |   |
|                               | Condensed Consolidated Statements of Cash  Flows for the nine-month periods ended September 30, 2001 and 2000 |
|                               |   |
|                               | SPG Realty  Consultants, Inc.: |
|                               |   |
|                               | Condensed Consolidated Balance Sheets as of  September 30, 2001 and December 31, 2000 |
|                               |   |
|                               | Condensed Consolidated Statements of  Operations for the three-month and nine-month periods ended September 30,  2001 and 2000 |
|                               |   |
|                               | Condensed Consolidated Statements of Cash Flows  for the nine-month periods ended September 30, 2001 and 2000 |
|                               |   |
|                               | Notes to Unaudited Condensed Financial  Statements |
|                               |   |
|                               | Item 2:   Management's Discussion and Analysis of Financial Condition and  Results of Operations |
|                               |   |
|                               | Item 3: Qualitative and Quantitative  Disclosure About Market Risk |
|                               |   |
| **Part II - Other Information**    |
|                               |   |
|                               | Items 1 through 6 |
|                               |   |
| **Signature**                      |

 

**Simon Property Group, Inc. and SPG RealtyConsultants, Inc.**

*Condensed Combined Balance Sheets*

 

(Dollars in thousands, except per shareamounts)

 
|                                                                                                                                                                                          |   | **September 30,** |       | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|------------------|--------|
|                                                                                                                                                                                          |   | **2001**          |       | **2000**         |   |
| ASSETS:                                                                                                                                                                                       |   |              |       |             |   |
| Investment properties,  at cost                                                                                                                                                               |   | $                 | 13,222,912 |             | $      | 13,045,133 |   |
| Less — accumulated  depreciation                                                                                                                                                         |   | 1,775,558         |       | 1,480,719        |   |
|                                                                                                                                                                                          |   | 11,447,354        |       | 11,564,414       |   |
| Cash and cash  equivalents                                                                                                                                                                    |   | 161,733           |       | 223,111          |   |
| Tenant receivables and  accrued revenue, net                                                                                                                                                  |   | 271,924           |       | 302,198          |   |
| Notes and advances  receivable from Management Company and affiliates                                                                                                                         |   | 94,685            |       | 182,401          |   |
| Investment in  unconsolidated entities, at equity                                                                                                                                             |   | 1,369,321         |       | 1,315,836        |   |
| Goodwill, net                                                                                                                                                                                 |   | 37,505            |       | 38,384           |   |
| Deferred costs and other  assets, net                                                                                                                                                         |   | 274,057           |       | 269,867          |   |
| Minority interest, net                                                                                                                                                                        |   | 44,667            |       | 41,734           |   |
|                                                                                                                                                                                          |   | $                 | 13,701,246 |             | $      | 13,937,945 |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| LIABILITIES:                                                                                                                                                                                  |   |              |       |             |   |
| Mortgages and other  indebtedness                                                                                                                                                             |   | $                 | 8,792,090  |             | $      | 8,728,582 |   |
| Accounts payable and  accrued expenses                                                                                                                                                        |   | 487,685           |       | 451,207          |   |
| Cash distributions and  losses in partnerships and joint ventures, at equity                                                                                                                  |   | 43,706            |       | 44,634           |   |
| Accrued dividends                                                                                                                                                                             |   | 19,321            |       | 18,266           |   |
| Other liabilities                                                                                                                                                                             |   | 111,582           |       | 227,552          |   |
| Total liabilities                                                                                                                                                                             |   | 9,454,384         |       | 9,470,241        |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| COMMITMENTS AND  CONTINGENCIES (Note 9)                                                                                                                                                       |   |              |       |             |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| LIMITED PARTNERS'  INTEREST IN THE OPERATING PARTNERSHIPS                                                                                                                                     |   | 850,245           |       | 913,482          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| LIMITED PARTNERS'  PREFERRED INTEREST IN THE SPG OPERATING PARTNERSHIP                                                                                                                        |   | 150,852           |       | 149,885          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| PREFERRED STOCK OF  SUBSIDIARY (Liquidation values $0 and $350,000, respectively)                                                                                                             |   | --                |       | 339,866          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| SHAREHOLDERS' EQUITY:                                                                                                                                                                         |   |              |       |             |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| CAPITAL STOCK OF SIMON  PROPERTY GROUP, INC. (750,000,000 total                                                                                                                               |   |              |       |             |   |
| shares authorized,  $.0001 par value, 237,996,000 shares of excess common stock):                                                                                                        |   |              |       |             |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| All series of preferred  stock, 100,000,000 shares authorized, 16,879,896 and 5,881,116 issued and outstanding,  respectively.  Liquidation values  $907,845 and $559,065, respectively. |   | 877,348           |       | 538,684          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Common stock, $.0001 par  value, 400,000,000 shares authorized, 171,713,816 and 170,840,315 issued and  outstanding, respectively                                                             |   | 17                |       | 17               |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Class B common stock,  $.0001 par value, 12,000,000 shares authorized, 3,200,000 issued and  outstanding                                                                                      |   | 1                 |       | 1                |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Class C common stock,  $.0001 par value, 4,000 shares authorized, issued and outstanding                                                                                                      |   | --                |       | --               |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| CAPITAL STOCK OF SPG  REALTY CONSULTANTS, INC.:                                                                                                                                               |   |              |       |             |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Common stock, $.0001 par  value,  7,500,000 shares authorized,  1,749,178 and 1,740,443 issued and outstanding, respectively                                                             |   | --                |       | --               |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Capital in excess of par  value                                                                                                                                                               |   | 3,334,624         |       | 3,313,557        |   |
| Accumulated deficit                                                                                                                                                                           |   | (880,231          | )          | (715,288         | )      |
| Accumulated other  comprehensive income                                                                                                                                                       |   | (10,264           | )          | --               |   |
| Unamortized restricted  stock award                                                                                                                                                           |   | (23,212           | )          | (19,982          | )      |
| Common stock held in  treasury at cost, 2,098,555 shares                                                                                                                                      |   | (52,518           | )          | (52,518          | )      |
| Total shareholders'  equity                                                                                                                                                                   |   | 3,245,765         |       | 3,064,471        |   |
|                                                                                                                                                                                          |   | $                 | 13,701,246 |             | $      | 13,937,945 |   |

 

*The accompanying notes are an integral part of these statements.*

 

**Simon Property Group, Inc. and SPG RealtyConsultants, Inc. **

*Condensed Combined Statements of Operations*

 

(Dollars in thousands, except per shareamounts)

 
|                                                                                                                  |   | **For the Three Months Ended September 30,** |    | **For the Nine Months Ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|---------------------------------------------|--------|
|                                                                                                                  |   | **2001**                                     |    | **2000**                                    |   | **2001** |   | **2000** |   |
| REVENUE:                                                                                                              |   |                                         |    |                                        |   |   |   |   |   |
| Minimum rent                                                                                                          |   | $                                            | 312,328 |                                        | $      | 299,708 |   | $ | 926,845 |   | $ | 890,435 |   |
| Overage rent                                                                                                          |   | 8,568                                        |    | 9,700                                       |   | 25,581 |   | 28,456 |   |
| Tenant reimbursements                                                                                                 |   | 146,308                                      |    | 145,237                                     |   | 441,271 |   | 444,384 |   |
| Other income                                                                                                          |   | 33,443                                       |    | 39,281                                      |   | 85,896 |   | 96,161 |   |
| Total revenue                                                                                                         |   | 500,647                                      |    | 493,926                                     |   | 1,479,593 |   | 1,459,436 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| EXPENSES:                                                                                                             |   |                                         |    |                                        |   |   |   |   |   |
| Property operating                                                                                                    |   | 81,620                                       |    | 78,779                                      |   | 243,060 |   | 235,220 |   |
| Depreciation and amortization                                                                                         |   | 111,196                                      |    | 106,983                                     |   | 324,459 |   | 304,611 |   |
| Real estate taxes                                                                                                     |   | 45,807                                       |    | 49,032                                      |   | 147,320 |   | 147,183 |   |
| Repairs and maintenance                                                                                               |   | 17,287                                       |    | 15,930                                      |   | 56,347 |   | 51,690 |   |
| Advertising and promotion                                                                                             |   | 14,049                                       |    | 11,473                                      |   | 40,473 |   | 42,728 |   |
| Provision for credit losses                                                                                           |   | 2,677                                        |    | 3,326                                       |   | 7,824 |   | 7,671 |   |
| Other                                                                                                                 |   | 13,552                                       |    | 8,990                                       |   | 27,098 |   | 27,474 |   |
| Total operating expenses                                                                                              |   | 286,188                                      |    | 274,513                                     |   | 846,581 |   | 816,577 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| OPERATING INCOME                                                                                                      |   | 214,459                                      |    | 219,413                                     |   | 633,012 |   | 642,859 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| INTEREST EXPENSE                                                                                                      |   | 149,044                                      |    | 160,668                                     |   | 456,938 |   | 474,534 |   |
| INCOME BEFORE MINORITY INTEREST                                                                                       |   | 65,415                                       |    | 58,745                                      |   | 176,074 |   | 168,325 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| MINORITY INTEREST                                                                                                     |   | (2,486                                       | )       | (2,382                                      | )      | (7,717 | ) | (7,099 | ) |
| GAIN (LOSS)  ON SALES OF ASSETS, NET OF ASSET WRITE DOWNS OF $0, $0, $0, AND  $10,572, RESPECTIVELY              |   | (131                                         | )       | 151                                         |   | 2,552 |   | 8,809 |   |
| INCOME BEFORE UNCONSOLIDATED ENTITIES                                                                                 |   | 62,798                                       |    | 56,514                                      |   | 170,909 |   | 170,035 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| INCOME FROM UNCONSOLIDATED ENTITIES                                                                                   |   | 6,787                                        |    | 20,920                                      |   | 32,421 |   | 54,447 |   |
| INCOME BEFORE EXTRAORDINARY ITEMS AND  CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                         |   | 69,585                                       |    | 77,434                                      |   | 203,330 |   | 224,482 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| EXTRAORDINARY ITEMS - DEBT RELATED  TRANSACTIONS                                                                      |   | (220                                         | )       | --                                          |   | (245 | ) | (440 | ) |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE  (Note 5)                                                                      |   | --                                           |    | --                                          |   | (1,638 | ) | (12,342 | ) |
| INCOME BEFORE ALLOCATION TO LIMITED  PARTNERS                                                                         |   | 69,365                                       |    | 77,434                                      |   | 201,447 |   | 211,700 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| LESS:                                                                                                                 |   |                                         |    |                                        |   |   |   |   |   |
| LIMITED PARTNERS' INTEREST IN THE  OPERATING PARTNERSHIPS                                                             |   | 13,780                                       |    | 16,075                                      |   | 39,400 |   | 42,346 |   |
| PREFERRED DISTRIBUTIONS OF THE SPG  OPERATING PARTNERSHIP                                                             |   | 2,835                                        |    | 2,816                                       |   | 8,582 |   | 8,450 |   |
| PREFERRED DIVIDENDS OF SUBSIDIARY                                                                                     |   | --                                           |    | 7,333                                       |   | 14,668 |   | 22,001 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| NET INCOME                                                                                                            |   | 52,750                                       |    | 51,210                                      |   | 138,797 |   | 138,903 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| PREFERRED DIVIDENDS                                                                                                   |   | (16,499                                      | )       | (9,185                                      | )      | (34,861 | ) | (27,623 | ) |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| NET INCOME AVAILABLE TO COMMON  SHAREHOLDERS                                                                          |   | $                                            | 36,251  |                                        | $      | 42,025 |   | $ | 103,936 |   | $ | 111,280 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| BASIC AND DILUTED EARNINGS PER COMMON  PAIRED SHARE:                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| Income before extraordinary items and  cumulative effect of acccounting change                                        |   | $                                            | 0.21    |                                        | $      | 0.24 |   | $ | 0.61 |   | $ | 0.69 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| Net income                                                                                                            |   | $                                            | 0.21    |                                        | $      | 0.24 |   | $ | 0.60 |   | $ | 0.64 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| Net Income                                                                                                            |   | $                                            | 52,750  |                                        | $      | 51,210 |   | $ | 138,797 |   | $ | 138,903 |   |
| Cumulative effect of accounting change                                                                                |   | --                                           |    | --                                          |   | (1,995 | ) | -- |   |
| Unrealized losses on interest rate  hedge agreements                                                                  |   | (4,978                                       | )       | --                                          |   | (11,071 | ) | -- |   |
| Net losses on derivative instruments  reclassified from accumulated other comprehensive income into interest  expense |   | 1,183                                        |    | --                                          |   | 2,846 |   | -- |   |
| Other                                                                                                                 |   | (44                                          | )       | --                                          |   | (44 | ) | -- |   |
| Unrealized gains on investments                                                                                       |   | 1,980                                        |    | 973                                         |   | -- |   | 5,852 |   |
| Comprehensive Income                                                                                                  |   | $                                            | 50,891  |                                        | $      | 52,183 |   | $ | 128,533 |   | $ | 144,755 |   |

* *

*The accompanying notes are an integral part of these statements.*

 

**Simon Property Group, Inc. and SPG RealtyConsultants, Inc. **

*Condensed Combined Statements of Cash Flows*

 

(Dollars in thousands)

 
|                                                                                    |   | **For the Nine Months Ended September 30,** |    |
|-----------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                                    |   | **2001**                                    |    | **2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                  |   |                                        |    |   |   |
| Net income                                                                              |   | $                                           | 138,797 |   | $ | 138,903 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities— |   |                                        |    |   |   |
| Depreciation and  amortization                                                          |   | 329,972                                     |    | 312,211 |   |
| Extraordinary items                                                                     |   | 245                                         |    | 440 |   |
| Cumulative effect of  accounting change                                                 |   | 1,638                                       |    | 12,342 |   |
| Gain on sales of assets,  net of asset write downs of $0 and $10,572, respectively      |   | (2,552                                      | )       | (8,809 | ) |
| Limited partners'  interest in Operating Partnerships                                   |   | 39,400                                      |    | 42,346 |   |
| Preferred dividends of  Subsidiary                                                      |   | 14,668                                      |    | 22,001 |   |
| Preferred distributions  of the SPG Operating Partnership                               |   | 8,582                                       |    | 8,450 |   |
| Straight-line rent                                                                      |   | (7,267                                      | )       | (12,207 | ) |
| Minority interest                                                                       |   | 7,717                                       |    | 7,099 |   |
| Equity in income of  unconsolidated entities                                            |   | (32,421                                     | )       | (54,447 | ) |
| Changes in assets and  liabilities—                                                |   |                                        |    |   |   |
| Tenant receivables and  accrued revenue                                                 |   | 43,507                                      |    | 52,460 |   |
| Deferred costs and other  assets                                                        |   | (29,864                                     | )       | (8,183 | ) |
| Accounts payable,  accrued expenses and other liabilities                               |   | (40,348                                     | )       | (87,960 | ) |
| Net cash provided by  operating activities                                              |   | 472,074                                     |    | 424,646 |   |
|                                                                                    |   |                                        |    |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                  |   |                                        |    |   |   |
| Capital expenditures                                                                    |   | (217,819                                    | )       | (312,189 | ) |
| Cash from consolidation  of ASP                                                         |   | 8,156                                       |    | -- |   |
| Net proceeds from sale  of assets and investment                                        |   | 19,550                                      |    | 164,282 |   |
| Investments in  unconsolidated entities                                                 |   | (112,856                                    | )       | (105,751 | ) |
| Distributions from unconsolidated  entities                                             |   | 145,325                                     |    | 235,075 |   |
| Investments in and  advances (to)/from Management Company and affiliate                 |   | (3,792                                      | )       | (5,784 | ) |
| Net cash used in  investing activities                                                  |   | (161,436                                    | )       | (24,367 | ) |
|                                                                                    |   |                                        |    |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                  |   |                                        |    |   |   |
| Proceeds from sales of  common and preferred stock, net                                 |   | 7,250                                       |    | 406 |   |
| Purchase of treasury  stock and limited partner units                                   |   | --                                          |    | (50,972 | ) |
| Minority interest  distributions, net                                                   |   | (10,129                                     | )       | (13,287 | ) |
| Preferred dividends of  Subsidiary                                                      |   | (14,668                                     | )       | (22,001 | ) |
| Preferred distributions  of the SPG Operating Partnership                               |   | (8,582                                      | )       | (8,450 | ) |
| Preferred dividends and  distributions to shareholders                                  |   | (302,686                                    | )       | (272,925 | ) |
| Distributions to limited  partners                                                      |   | (100,926                                    | )       | (99,115 | ) |
| Mortgage and other note  proceeds, net of transaction costs                             |   | 1,452,241                                   |    | 1,341,735 |   |
| Mortgage and other note  principal payments                                             |   | (1,394,516                                  | )       | (1,318,882 | ) |
| Net cash used in  financing activities                                                  |   | (372,016                                    | )       | (443,491 | ) |
|                                                                                    |   |                                        |    |   |   |
| DECREASE IN CASH AND  CASH EQUIVALENTS                                                  |   | (61,378                                     | )       | (43,212 | ) |
|                                                                                    |   |                                        |    |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                         |   | 223,111                                     |    | 157,632 |   |
|                                                                                    |   |                                        |    |   |   |
| CASH AND CASH  EQUIVALENTS, end of period                                               |   | $                                           | 161,733 |   | $ | 114,420 |   |

 

*Theaccompanying notes are an integral part of these statements.*

 

**Simon Property Group, Inc.**

*Condensed Consolidated Balance Sheets*

 

(Dollars in thousands, except per shareamounts)

 
|                                                                                                                                                                                          |   | **September 30,** |       | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|------------------|--------|
|                                                                                                                                                                                          |   | **2001**          |       | **2000**         |   |
| ASSETS:                                                                                                                                                                                       |   |              |       |             |   |
| Investment properties,  at cost                                                                                                                                                               |   | $                 | 13,215,751 |             | $      | 13,037,506 |   |
| Less — accumulated  depreciation                                                                                                                                                         |   | 1,774,155         |       | 1,479,378        |   |
|                                                                                                                                                                                          |   | 11,441,596        |       | 11,558,128       |   |
| Cash and cash  equivalents                                                                                                                                                                    |   | 152,824           |       | 214,404          |   |
| Tenant receivables and  accrued revenue, net                                                                                                                                                  |   | 269,271           |       | 296,785          |   |
| Notes and advances  receivable from Management Company and affiliates                                                                                                                         |   | 101,557           |       | 182,401          |   |
| Note receivable from the  SRC Operating Partnership (Interest at 8%, due 2009)                                                                                                                |   | --                |       | 29,425           |   |
| Investment in  unconsolidated entities, at equity                                                                                                                                             |   | 1,361,750         |       | 1,308,838        |   |
| Goodwill, net                                                                                                                                                                                 |   | 37,505            |       | 38,384           |   |
| Deferred costs and other  assets, net                                                                                                                                                         |   | 273,703           |       | 240,665          |   |
| Minority interest, net                                                                                                                                                                        |   | 44,667            |       | 42,377           |   |
|                                                                                                                                                                                          |   | $                 | 13,682,873 |             | $      | 13,911,407 |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| LIABILITIES:                                                                                                                                                                                  |   |              |       |             |   |
| Mortgages and other  indebtedness                                                                                                                                                             |   | $                 | 8,792,090  |             | $      | 8,728,582 |   |
| Accounts payable and  accrued expenses                                                                                                                                                        |   | 483,239           |       | 439,190          |   |
| Cash distributions and  losses in partnerships and joint ventures, at equity                                                                                                                  |   | 43,706            |       | 44,634           |   |
| Accrued dividends                                                                                                                                                                             |   | 19,321            |       | 18,266           |   |
| Other liabilities                                                                                                                                                                             |   | 111,961           |       | 227,481          |   |
| Total liabilities                                                                                                                                                                             |   | 9,450,317         |       | 9,458,153        |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| COMMITMENTS AND  CONTINGENCIES (Note 9)                                                                                                                                                       |   |              |       |             |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| LIMITED PARTNERS'  INTEREST IN THE SPG OPERATING PARTNERSHIP                                                                                                                                  |   | 846,310           |       | 909,491          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| LIMITED PARTNERS'  PREFERRED INTEREST IN THE SPG OPERATING PARTNERSHIP                                                                                                                        |   | 150,852           |       | 149,885          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| PREFERRED STOCK OF  SUBSIDIARY (Liquidation values $0 and $350,000, respectively)                                                                                                             |   | --                |       | 339,866          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| SHAREHOLDERS' EQUITY  (750,000,000 total shares authorized, $.0001 par value, 237,996,000 shares of  excess common stock):                                                                    |   |              |       |             |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| All series of preferred  stock, 100,000,000 shares authorized, 16,879,896 and 5,881,116 issued and  outstanding, respectively.   Liquidation values $907,845 and $559,065, respectively. |   | 877,348           |       | 538,684          |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Common stock, $.0001 par  value, 400,000,000 shares authorized, 171,713,816 and 170,840,315 issued and  outstanding, respectively                                                             |   | 17                |       | 17               |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Class B common stock,  $.0001 par value, 12,000,000 shares authorized, 3,200,000 issued and  outstanding                                                                                      |   | 1                 |       | 1                |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Class C common stock,  $.0001 par value, 4,000 shares authorized, issued and outstanding                                                                                                      |   | --                |       | --               |   |
|                                                                                                                                                                                          |   |              |       |             |   |
| Capital in excess of par  value                                                                                                                                                               |   | 3,320,622         |       | 3,299,016        |   |
| Accumulated deficit                                                                                                                                                                           |   | (876,789          | )          | (711,395         | )      |
| Accumulated other comprehensive  income                                                                                                                                                       |   | (10,264           | )          | --               |   |
| Unamortized restricted  stock award                                                                                                                                                           |   | (23,212           | )          | (19,982          | )      |
| Common stock held in  treasury at cost, 2,098,555 shares                                                                                                                                      |   | (52,329           | )          | (52,329          | )      |
| Total shareholders'  equity                                                                                                                                                                   |   | 3,235,394         |       | 3,054,012        |   |
|                                                                                                                                                                                          |   | $                 | 13,682,873 |             | $      | 13,911,407 |   |

 

*Theaccompanying notes are an integral part of these statements.*

 

**Simon Property Group, Inc.**

*Condensed Consolidated Statements of Operations*

 

(Dollars in thousands, except per shareamounts)

 
|                                                                                                                  |   | **For the Three Months Ended September 30,** |    | **For the Nine Months Ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|---------------------------------------------|--------|
|                                                                                                                  |   | **2001**                                     |    | **2000**                                    |   | **2001** |   | **2000** |   |
| REVENUE:                                                                                                              |   |                                         |    |                                        |   |   |   |   |   |
| Minimum rent                                                                                                          |   | $                                            | 312,349 |                                        | $      | 299,728 |   | $ | 926,906 |   | $ | 890,491 |   |
| Overage rent                                                                                                          |   | 8,568                                        |    | 9,700                                       |   | 25,581 |   | 28,456 |   |
| Tenant reimbursements                                                                                                 |   | 146,307                                      |    | 145,237                                     |   | 441,271 |   | 444,384 |   |
| Other income                                                                                                          |   | 32,016                                       |    | 38,243                                      |   | 82,937 |   | 93,168 |   |
| Total revenue                                                                                                         |   | 499,240                                      |    | 492,908                                     |   | 1,476,695 |   | 1,456,499 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| EXPENSES:                                                                                                             |   |                                         |    |                                        |   |   |   |   |   |
| Property operating                                                                                                    |   | 80,990                                       |    | 77,771                                      |   | 241,840 |   | 231,864 |   |
| Depreciation and amortization                                                                                         |   | 111,173                                      |    | 106,958                                     |   | 324,391 |   | 304,537 |   |
| Real estate taxes                                                                                                     |   | 45,819                                       |    | 49,061                                      |   | 147,320 |   | 147,182 |   |
| Repairs and maintenance                                                                                               |   | 17,286                                       |    | 15,931                                      |   | 56,345 |   | 51,689 |   |
| Advertising and promotion                                                                                             |   | 14,049                                       |    | 11,271                                      |   | 40,473 |   | 42,531 |   |
| Provision for credit losses                                                                                           |   | 2,676                                        |    | 3,326                                       |   | 7,828 |   | 7,671 |   |
| Other                                                                                                                 |   | 12,621                                       |    | 7,106                                       |   | 26,125 |   | 22,094 |   |
| Total operating expenses                                                                                              |   | 284,614                                      |    | 271,424                                     |   | 844,322 |   | 807,568 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| OPERATING INCOME                                                                                                      |   | 214,626                                      |    | 221,484                                     |   | 632,373 |   | 648,931 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| INTEREST EXPENSE                                                                                                      |   | 149,030                                      |    | 161,049                                     |   | 456,924 |   | 475,563 |   |
| INCOME BEFORE MINORITY INTEREST                                                                                       |   | 65,596                                       |    | 60,435                                      |   | 175,449 |   | 173,368 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| MINORITY INTEREST                                                                                                     |   | (2,486                                       | )       | (2,659                                      | )      | (7,839 | ) | (7,446 | ) |
| GAIN (LOSS) ON SALES OF ASSETS, NET OF  ASSET WRITE DOWNS OF $0, $0, AND $10,572, RESPECTIVELY                        |   | (131                                         | )       | 151                                         |   | 2,552 |   | 8,809 |   |
| INCOME BEFORE UNCONSOLIDATED ENTITIES                                                                                 |   | 62,979                                       |    | 57,927                                      |   | 170,162 |   | 174,731 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| INCOME FROM UNCONSOLIDATED ENTITIES                                                                                   |   | 6,833                                        |    | 20,400                                      |   | 32,545 |   | 53,613 |   |
| INCOME BEFORE EXTRAORDINARY ITEMS AND  CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                         |   | 69,812                                       |    | 78,327                                      |   | 202,707 |   | 228,344 |   |
| EXTRAORDINARY ITEMS - DEBT RELATED  TRANSACTIONS                                                                      |   | (220                                         | )       | --                                          |   | (245 | ) | (440 | ) |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE  (Note 5)                                                                      |   | --                                           |    | --                                          |   | (1,638 | ) | (12,342 | ) |
| INCOME BEFORE ALLOCATION TO LIMITED  PARTNERS                                                                         |   | 69,592                                       |    | 78,327                                      |   | 200,824 |   | 215,562 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| LESS:                                                                                                                 |   |                                         |    |                                        |   |   |   |   |   |
| LIMITED PARTNERS' INTEREST IN THE SPG  OPERATING PARTNERSHIP                                                          |   | 13,842                                       |    | 16,322                                      |   | 39,228 |   | 43,412 |   |
| PREFERRED DISTRIBUTIONS OF THE SPG  OPERATING PARTNERSHIP                                                             |   | 2,835                                        |    | 2,816                                       |   | 8,582 |   | 8,450 |   |
| PREFERRED DIVIDENDS OF SUBSIDIARY                                                                                     |   | --                                           |    | 7,333                                       |   | 14,668 |   | 22,001 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| NET INCOME                                                                                                            |   | 52,915                                       |    | 51,856                                      |   | 138,346 |   | 141,699 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| PREFERRED DIVIDENDS                                                                                                   |   | (16,499                                      | )       | (9,185                                      | )      | (34,861 | ) | (27,623 | ) |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| NET INCOME AVAILABLE TO COMMON  SHAREHOLDERS                                                                          |   | $                                            | 36,416  |                                        | $      | 42,671 |   | $ | 103,485 |   | $ | 114,076 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| BASIC AND DILUTED EARNINGS PER COMMON  SHARE:                                                                         |   |                                         |    |                                        |   |   |   |   |   |
| Income before extraordinary items and  cumulative effect of accounting change                                         |   | $                                            | 0.21    |                                        | $      | 0.25 |   | $ | 0.61 |   | $ | 0.71 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| Net income                                                                                                            |   | $                                            | 0.21    |                                        | $      | 0.25 |   | $ | 0.60 |   | $ | 0.66 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| BASIC WEIGHTED AVERAGE SHARES  OUTSTANDING                                                                            |   | 172,746                                      |    | 172,759                                     |   | 172,413 |   | 173,216 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| DILUTED WEIGHTED AVERAGE SHARES  OUTSTANDING                                                                          |   | 173,031                                      |    | 172,862                                     |   | 172,745 |   | 173,313 |   |
|                                                                                                                  |   |                                         |    |                                        |   |   |   |   |   |
| Net Income                                                                                                            |   | $                                            | 52,915  |                                        | $      | 51,856 |   | $ | 138,346 |   | $ | 141,699 |   |
| Cumulative effect of accounting change                                                                                |   | --                                           |    | --                                          |   | (1,995 | ) | - |   |
| Unrealized losses on interest rate  hedge agreements                                                                  |   | (4,978                                       | )       | --                                          |   | (11,071 | ) | - |   |
| Net losses on derivative instruments  reclassified from accumulated other comprehensive income into interest  expense |   | 1,183                                        |    | --                                          |   | 2,846 |   | - |   |
| Other                                                                                                                 |   | (44                                          | )       | --                                          |   | (44 | ) | - |   |
| Unrealized gains on investments                                                                                       |   | 1,980                                        |    | 973                                         |   | - |   | 5,852 |   |
| Comprehensive Income                                                                                                  |   | $                                            | 51,056  |                                        | $      | 52,829 |   | $ | 128,082 |   | $ | 147,551 |   |

 

*The accompanying notes are an integral part of these statements.*

 

**Simon Property Group, Inc.**

*Condensed Consolidated Statements of Cash Flows*

 

 (Dollars in thousands) 

 
|                                                                                    |   | **For the Nine Months Ended September 30,** |    |
|-----------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                                    |   | **2001**                                    |    | **2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                  |   |                                        |    |   |   |
| Net income                                                                              |   | $                                           | 138,346 |   | $ | 141,699 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities— |   |                                        |    |   |   |
| Depreciation and  amortization                                                          |   | 329,904                                     |    | 312,137 |   |
| Extraordinary items                                                                     |   | 245                                         |    | 440 |   |
| Cumulative effect of  accounting change                                                 |   | 1,638                                       |    | 12,342 |   |
| Gain on sales of assets,  net of asset write downs of $0 and $10,572, respectively      |   | (2,552                                      | )       | (8,809 | ) |
| Limited partners'  interest in Operating Partnership                                    |   | 39,228                                      |    | 43,412 |   |
| Preferred dividends of  Subsidiary                                                      |   | 14,668                                      |    | 22,001 |   |
| Preferred distributions  of the SPG Operating Partnership                               |   | 8,582                                       |    | 8,450 |   |
| Straight-line rent                                                                      |   | (7,267                                      | )       | (12,207 | ) |
| Minority interest                                                                       |   | 7,839                                       |    | 7,446 |   |
| Equity in income of  unconsolidated entities                                            |   | (32,545                                     | )       | (53,613 | ) |
| Changes in assets and  liabilities—                                                |   |                                        |    |   |   |
| Tenant receivables and  accrued revenue                                                 |   | 45,079                                      |    | 54,933 |   |
| Deferred costs and other  assets                                                        |   | (32,538                                     | )       | (7,210 | ) |
| Accounts payable,  accrued expenses and other liabilities                               |   | (42,660                                     | )       | (95,354 | ) |
| Net cash provided by  operating activities                                              |   | 467,967                                     |    | 425,667 |   |
|                                                                                    |   |                                        |    |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                  |   |                                        |    |   |   |
| Capital expenditures                                                                    |   | (217,958                                    | )       | (301,499 | ) |
| Cash from consolidation  of ASP                                                         |   | 8,156                                       |    | -- |   |
| Proceeds from sale of  assets and investment                                            |   | 19,550                                      |    | 164,282 |   |
| Investments in unconsolidated  entities                                                 |   | (112,856                                    | )       | (105,751 | ) |
| Distributions from  unconsolidated entities                                             |   | 145,325                                     |    | 233,276 |   |
| Investments in and  advances (to)/from Management Company and affiliate                 |   | (5,266                                      | )       | (5,784 | ) |
| Loan to the SRC  Operating Partnership                                                  |   | 5,597                                       |    | (14,650 | ) |
| Net cash used in  investing activities                                                  |   | (157,452                                    | )       | (30,126 | ) |
|                                                                                    |   |                                        |    |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                  |   |                                        |    |   |   |
| Proceeds from sales of  common and preferred stock, net                                 |   | 7,171                                       |    | 375 |   |
| Purchase of treasury  stock and limited partner units                                   |   | --                                          |    | (50,828 | ) |
| Minority interest  distributions, net                                                   |   | (10,129                                     | )       | (13,287 | ) |
| Preferred dividends of  Subsidiary                                                      |   | (14,668                                     | )       | (22,001 | ) |
| Preferred distributions  of the SPG Operating Partnership                               |   | (8,582                                      | )       | (8,450 | ) |
| Preferred dividends and  distributions to shareholders                                  |   | (302,686                                    | )       | (272,925 | ) |
| Distributions to limited  partners                                                      |   | (100,926                                    | )       | (99,115 | ) |
| Mortgage and other note  proceeds, net of transaction costs                             |   | 1,452,241                                   |    | 1,341,735 |   |
| Mortgage and other note  principal payments                                             |   | (1,394,516                                  | )       | (1,318,771 | ) |
| Net cash used in  financing activities                                                  |   | (372,095                                    | )       | (443,267 | ) |
|                                                                                    |   |                                        |    |   |   |
| DECREASE IN CASH AND  CASH EQUIVALENTS                                                  |   | (61,580                                     | )       | (47,726 | ) |
|                                                                                    |   |                                        |    |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                         |   | 214,404                                     |    | 154,924 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                               |   | $                                           | 152,824 |   | $ | 107,198 |   |

 

*Theaccompanying notes are an integral part of these statements.*

* *

 

**SPG Realty Consultants, Inc.**

*Condensed Consolidated Balance Sheets*

 

(Dollars in thousands, except per shareamounts)

 
|                                                                                                                              |   | **September 30,** |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|------------------|--------|
|                                                                                                                              |   | **2001**          |   | **2000**         |   |
| ASSETS:                                                                                                                           |   |              |   |             |   |
| Cash and cash  equivalents                                                                                                        |   | $                 | 8,909  |             | $      | 8,707 |   |
| Accounts receivable  (including $2,389 and $2,984 from related parties)                                                           |   | 2,652             |   | 8,394            |   |
| Total current assets                                                                                                              |   | 11,561            |   | 17,101           |   |
| Investment properties,  at cost, less accumulated depreciation of $1,403 and $1,341, respectively                                 |   | 5,758             |   | 6,286            |   |
| Investment in  unconsolidated entities, at equity                                                                                 |   | 7,571             |   | 6,998            |   |
| Investment in technology  initiatives                                                                                             |   | --                |   | 23,583           |   |
| Other noncurrent assets                                                                                                           |   | 612               |   | 2,896            |   |
|                                                                                                                              |   | $                 | 25,502 |             | $      | 56,864 |   |
|                                                                                                                              |   |              |   |             |   |
| LIABILITIES:                                                                                                                      |   |              |   |             |   |
| Accounts payable and  accrued expenses (including $72 and $4,855 to related parties)                                              |   | $                 | 4,326  |             | $      | 12,346 |   |
| Total current  liabilities                                                                                                        |   | 4,326             |   | 12,346           |   |
| Note payable to the SPG  Operating Partnership (Interest at 8%, due 2009)                                                         |   | --                |   | 29,425           |   |
| Note payable to the  Management Company (Interest at 8%, due 2009)                                                                |   | 6,871             |   | --               |   |
| Minority interest                                                                                                                 |   | --                |   | 643              |   |
| Total liabilities                                                                                                                 |   | 11,197            |   | 42,414           |   |
|                                                                                                                              |   |              |   |             |   |
| COMMITMENTS AND  CONTINGENCIES (Note 9)                                                                                           |   |              |   |             |   |
|                                                                                                                              |   |              |   |             |   |
| LIMITED PARTNERS'  INTEREST IN THE SRC OPERATING PARTNERSHIP                                                                      |   | 3,935             |   | 3,991            |   |
|                                                                                                                              |   |              |   |             |   |
| SHAREHOLDERS' EQUITY:                                                                                                             |   |              |   |             |   |
|                                                                                                                              |   |              |   |             |   |
| Common stock, $.0001 par  value,  7,500,000 shares authorized,  1,749,178 and 1,740,443 issued and outstanding, respectively |   | --                |   | --               |   |
|                                                                                                                              |   |              |   |             |   |
| Capital in excess of par  value                                                                                                   |   | 29,107            |   | 29,647           |   |
| Accumulated deficit                                                                                                               |   | (18,548           | )      | (18,999          | )      |
| Less common stock held  in treasury at cost, 20,986 shares.                                                                       |   | (189              | )      | (189             | )      |
| Total shareholders'  equity                                                                                                       |   | 10,370            |   | 10,459           |   |
|                                                                                                                              |   | $                 | 25,502 |             | $      | 56,864 |   |

 

*Theaccompanying notes are an integral part of these statements.*

 

**SPG Realty Consultants, Inc.**

*Condensed Consolidated Statements of Operations*

 

(In thousands, except per share amounts)

 
|                                                             |   | **For the Three Months Ended September 30,** |   | **For the Nine Months Ended September 30,** |   |
|------------------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                                             |   | **2001**                                     |   | **2000**                                    |   | **2001** |   | **2000** |   |
| REVENUE:                                                         |   |                                         |   |                                        |   |   |   |   |   |
| Rental income                                                    |   | $                                            | 76     |                                        | $      | 77 |   | $ | 229 |   | $ | 234 |   |
| Marketing and fee income                                         |   | --                                           |   | 2,604                                       |   | -- |   | 6,842 |   |
| Insurance premiums                                               |   | 677                                          |   | --                                          |   | 1,738 |   | -- |   |
| Other income                                                     |   | 74                                           |   | 171                                         |   | 295 |   | 247 |   |
| Total revenue                                                    |   | 827                                          |   | 2,852                                       |   | 2,262 |   | 7,323 |   |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| EXPENSES:                                                        |   |                                         |   |                                        |   |   |   |   |   |
| Depreciation and amortization                                    |   | 22                                           |   | 25                                          |   | 68 |   | 74 |   |
| Technology initiatives startup costs                             |   | --                                           |   | 1,886                                       |   | 90 |   | 5,024 |   |
| Insurance losses                                                 |   | 566                                          |   | --                                          |   | 1,693 |   | -- |   |
| General and administrative expenses                              |   | 386                                          |   | 2,581                                       |   | 422 |   | 6,978 |   |
| Total operating expenses                                         |   | 974                                          |   | 4,492                                       |   | 2,273 |   | 12,076 |   |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| OPERATING LOSS                                                   |   | (147                                         | )      | (1,640                                      | )      | (11 | ) | (4,753 | ) |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| INTEREST EXPENSE                                                 |   | 34                                           |   | 10                                          |   | 615 |   | 290 |   |
| PLUS:                                                            |   |                                         |   |                                        |   |   |   |   |   |
| MINORITY INTEREST                                                |   | --                                           |   | 277                                         |   | 122 |   | 347 |   |
| GAIN ON LAND SALES, NET                                          |   | --                                           |   | --                                          |   | 1,251 |   | -- |   |
| INCOME (LOSS) BEFORE UNCONSOLIDATED  ENTITIES                    |   | (181                                         | )      | (1,373                                      | )      | 747 |   | (4,696 | ) |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| INCOME (LOSS) FROM UNCONSOLIDATED  ENTITIES                      |   | (46                                          | )      | 520                                         |   | (124 | ) | 834 |   |
| INCOME (LOSS) BEFORE ALLOCATION TO  LIMITED PARTNERS             |   | (227                                         | )      | (853                                        | )      | 623 |   | (3,862 | ) |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| LESS--LIMITED PARTNERS' INTEREST INTHE SRC OPERATING PARTNERSHIP |   | (62                                          | )      | (247                                        | )      | 172 |   | (1,066 | ) |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| NET INCOME (LOSS)                                                |   | $                                            | (165   | )                                           | $      | (606 | ) | $ | 451 |   | $ | (2,796 | ) |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| BASIC AND DILUTED EARNINGS PER COMMON  SHARE:                    |   |                                         |   |                                        |   |   |   |   |   |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| Net income (loss)                                                |   | $                                            | (0.10  | )                                           | $      | (0.35 | ) | $ | 0.26 |   | $ | (1.61 | ) |
|                                                             |   |                                         |   |                                        |   |   |   |   |   |
| BASIC WEIGHTED AVERAGE SHARES  OUTSTANDING                       |   | 1,727                                        |   | 1,728                                       |   | 1,724 |   | 1,732 |   |
| DILUTED WEIGHTED AVERAGE SHARES  OUTSTANDING                     |   | 1,727                                        |   | 1,728                                       |   | 1,727 |   | 1,732 |   |

 

*The accompanying notes are an integral part of these statements.*

 

**SPG Realty Consultants, Inc.**

 

*Condensed Consolidated Statements of Cash Flows*

** **

(Dollars in thousands)

 
|                                                                                                     |   | **For the Nine Months Ended September 30,** |   |
|----------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                     |   | **2001**                                    |   | **2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                   |   |                                        |   |   |   |
| Net income (loss)                                                                                        |   | $                                           | 451    |   | $ | (2,796 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities— |   |                                        |   |   |   |
| Depreciation and  amortization                                                                           |   | 68                                          |   | 74 |   |
| Gain on sales of assets,  net                                                                            |   | (1,251                                      | )      | -- |   |
| Limited partners'  interest in SRC Operating Partnership                                                 |   | 172                                         |   | (1,066 | ) |
| Minority interest                                                                                        |   | (122                                        | )      | (347 | ) |
| Equity in income of  unconsolidated entities                                                             |   | 124                                         |   | (834 | ) |
| Changes in assets and  liabilities—                                                                 |   |                                        |   |   |   |
| Accounts receivable                                                                                      |   | (1,572                                      | )      | (3,446 | ) |
| Other non-current assets                                                                                 |   | 2,674                                       |   | -- |   |
| Accounts payable and  accrued expenses                                                                   |   | 2,312                                       |   | 7,393 |   |
| Net cash provided (used  in) by operating activities                                                     |   | 2,856                                       |   | (1,022 | ) |
|                                                                                                     |   |                                        |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                   |   |                                        |   |   |   |
| Investment in technology  initiatives and other capital expenditures                                     |   | (115                                        | )      | (10,690 | ) |
| Cash included in  transfer of assets to SPG Operating Partnership                                        |   | (152                                        | )      | -- |   |
| Net proceeds from sales  of assets                                                                       |   | 1,658                                       |   | -- |   |
| Distributions from  unconsolidated entities                                                              |   | --                                          |   | 1,799 |   |
| Net cash provided by  (used in) investing activities                                                     |   | 1,391                                       |   | (8,891 | ) |
|                                                                                                     |   |                                        |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                   |   |                                        |   |   |   |
| Proceeds from sales of  common stock, net                                                                |   | 79                                          |   | 31 |   |
| Purchase of treasury  stock                                                                              |   | --                                          |   | (144 | ) |
| Loan from the SPG  Operating Partnership                                                                 |   | (5,597                                      | )      | 14,650 |   |
| Loan from the Management  Company                                                                        |   | 1,473                                       |   | -- |   |
| Mortgage and other note  proceeds, net of transaction costs                                              |   | --                                          |   | (110 | ) |
| Net cash (used in)  provided by financing activities                                                     |   | (4,045                                      | )      | 14,427 |   |
|                                                                                                     |   |                                        |   |   |   |
| CHANGE IN CASH AND CASH  EQUIVALENTS                                                                     |   | 202                                         |   | 4,514 |   |
|                                                                                                     |   |                                        |   |   |   |
| CASH AND CASH  EQUIVALENTS, beginning of period                                                          |   | 8,707                                       |   | 2,708 |   |
| CASH AND CASH  EQUIVALENTS, end of period                                                                |   | $                                           | 8,909  |   | $ | 7,222 |   |

 

*The accompanying notes are an integral part of these statements*

* *

 

**SIMON PROPERTY GROUP, INC. AND**

**SPG REALTY CONSULTANTS, INC.**

 

**Notes to Unaudited CondensedFinancial Statements**

 

(Dollars in thousands,except per share amounts and where indicated as in billions)

 

 

**Note 1 – Organization**

 

                Simon Property Group, Inc. ("SPG"),a Delaware corporation, is a self-administered and self-managed real estateinvestment trust ("REIT") under the Internal Revenue Code of 1986, asamended (the “Code”). Each share of common stock of SPG is paired (“PairedShares”) with a beneficial interest in 1/100th of a share of commonstock of SPG Realty Consultants, Inc., also a Delaware corporation (“SRC” andtogether with SPG, the “Companies”).

 

                Simon Property Group, L.P. (the “SPGOperating Partnership” or “SPG, LP”) is the primary subsidiary of SPG. Units ofownership interest (“Units”) in the SPG Operating Partnership are paired with aUnit in SPG Realty Consultants, L.P. (“Paired Units”) (the “SRC OperatingPartnership” and together with the SPG Operating Partnership, the “OperatingPartnerships”). The SRC Operating Partnership is the primary subsidiary of SRC.The Companies together with the Operating Partnerships are hereafter referredto as “Simon Group”.

 

                SPG, primarily through the SPG OperatingPartnership, is engaged in the ownership, operation, management, leasing,acquisition, expansion and development of real estate properties, primarilyregional malls and community shopping centers. As of September 30, 2001, SPGand the SPG Operating Partnership owned or held an interest in 250income-producing properties in the United States, which consisted of 164regional malls, 72 community shopping centers, five specialty retail centers,four office and mixed-use properties and five value-oriented super-regionalmalls in 36 states (the “Properties”). In addition, the SPG OperatingPartnership owned an interest in six additional retail real estate propertiesoperating in Europe and Canada. SPG and the SPG Operating Partnership alsoowned an interest in one property currently under construction and 11 parcelsof land held for future development, which together with the Properties arehereafter referred to as the “Portfolio Properties”.  At September 30, 2001 and December 31, 2000, the Companies’direct and indirect ownership interests in the Operating Partnerships were72.5% and 72.4% respectively.  The SPGOperating Partnership also holds substantially all of the economic interest inM.S. Management Associates, Inc. (the “Management Company”).  Effective January 1, 2001, the ManagementCompany elected to become a taxable REIT subsidiary (“TRS”).

 

SRC, primarilythrough the SRC Operating Partnership, engages primarily in activities thatcapitalize on the resources, customer base and operating activities of SPG,which could not be engaged in by SPG without potentially impacting its statusas a REIT.  These activities included atechnology subsidiary, clixnmortar. Minority interest on the SRC balance sheet as of December 31, 2000represents an 8.3% outside ownership interest in clixnmortar. Effective March31, 2001, the SPG Operating Partnership purchased clixnmortar from the SRCOperating Partnership at its carrying value utilizing the inter-company note.The SPG Operating Partnership subsequently contributed clixnmortar to theManagement Company in exchange for preferred stock of the Management Company.  SRC also has non-controlling interests in twojoint ventures which each own land held for sale, which are located adjacent toProperties.  During 2000, SRC’swholly-owned insurance subsidiary, Marigold Indemnity, Ltd (“Marigold”), beganproviding general liability insurance coverage to a third party that providesoutsourcing services at certain properties. Marigold reinsures the majority of the risk through a third partyindemnity company.

 

                Simon Brand Ventures, LLC (“SBV”) and SimonBusiness Network (“SBN”) continue to expand upon certain mall marketinginitiatives to take advantage of Simon Group’s size and tenant relationships,primarily through strategic corporate alliances. SBV is focused on leveragingSimon Group’s 100 million unique shoppers and their 2 billion annual shoppingvisits to contribute to Simon Group’s second-curve revenue strategy.  The SBV concept and initiatives were startedin 1997 to create a new medium for connecting consumers with retailers andsponsors by developing a combination of shopping, entertainment andcommunity.  SBN is focused on leveragingSimon Group’s assets to create new businesses which will drive greater value toits Portfolio Properties, retailers and other developers and generate newsources of revenue for Simon Group. SBN’s strategy is to provide a competitively valued, broad-basedoffering of products and services via a unique and dominant marketplace andservice network focused on the real estate industry and their tenants.  SBV has also entered into cost sharingarrangements with the Management Company similar to those of the SPG OperatingPartnership.  Effective January 1, 2001,the SPG Operating Partnership purchased SBV from SRC at approximately itscarrying value utilizing the intercompany note.

 

On April 1, 2001, SPG, LP becamethe managing general partner of SPG Administrative Services PartnershipL.P.  (“ASP”). In addition, SPG, LPacquired an additional 24% partnership interest in ASP from the ManagementCompany.  As a result, SPG, LP gainedcontrol of ASP consistent with the Simon Group’s consolidation principles. ASPwas previously consolidated as part of the Management Company.  The change in control and consolidation ofASP will not have a material impact on the results of operations of Simon Groupand the other aspects of the transaction were not material.   ASP was organized to provide for theallocation of the salaries and other costs associated with employees whoperform services for the Management Company and its affiliates as well asmultiple entities controlled by SPG, LP.

 

In order to simplify the organizationalstructure of Simon Group’s investment in European Retail Enterprises, B.V.(“ERE”), the Management Company transferred its ownership interest in ERE tothe SPG Operating Partnership at its carrying value in exchange for a reductionin the note receivable from the Management Company.

 

The SPG Operating Partnership transferred itsnote receivable from the SRC Operating Partnership to the Management Company inexchange for an increase in the note receivable from the Management Company tothe SPG Operating Partnership.

 

 

**Note 2 - Basis ofPresentation**

 

                The accompanying condensed financialstatements are unaudited; however, they have been prepared in accordance withgenerally accepted accounting principles for interim financial information andin conjunction with the rules and regulations of the Securities and ExchangeCommission. Accordingly, they do not include all of the disclosures required bygenerally accepted accounting principles for complete financial statements. Inthe opinion of management, all adjustments necessary for fair presentation,consisting of only normal recurring adjustments, have been included. Theresults for the interim period ended September 30, 2001 are not necessarilyindicative of the results to be obtained for the full fiscal year. Theseunaudited financial statements have been prepared in accordance with theaccounting policies described in the Companies’ combined annual report on Form10-K for the year ended December 31, 2000, except for the change in accountingpolicy discussed in Note 5, and should be read in conjunction therewith.

 

The accompanyingcondensed combined financial statements include SPG and SRC and theirsubsidiaries. The accompanying condensed consolidated financial statements forSPG and SRC include SPG and its subsidiaries and SRC and its subsidiaries,respectively. All significant intercompany amounts have been eliminated.

 

                Net operating results of the OperatingPartnerships are allocated to the Companies based first on the Companies'preferred unit preference, if applicable, and then on their remaining ownershipinterests in the Operating Partnerships during the period. The Companies’remaining weighted average ownership interests in the Operating Partnershipsfor the nine-month periods ended September 30, 2001 and September 30, 2000 was72.5% and 72.4%, respectively.

 

                Certain reclassifications of prior periodamounts have been made in the financial statements to conform to the 2001presentation. These reclassifications have no impact on the net operatingresults previously reported.

 

 

**Note 3 -  Per Share Data**

 

Basic earnings per share is based on theweighted average number of shares of common stock outstanding during the periodand diluted earnings per share is based on the weighted average number ofshares of common stock outstanding combined with the incremental weightedaverage shares that would have been outstanding if all dilutive potentialcommon shares would have been converted into shares at the earliest datepossible. The following table sets forth the computation for the Companies’basic and diluted earnings per share. The extraordinary items and cumulative effect of accounting changeamounts presented in the reconciliation below represent the commonshareholders’ pro rata share of these items.

 
|                                                                                                              |   | **For the Three Months Ended** |   | **For the Nine Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                                                                                                              |   | **September 30,**              |   | **September 30,**             |   |
|                                                                                                              |   | **2001**                       |   | **2000**                      |   | **2001** |   | **2000** |   |
| Common Shareholders’  share of income before extraordinary items and cumulative effect of  accounting change |   | $                              | 36,411 |                          | $      | 42,025 |   | $ | 105,301 |   | $ | 120,533 |   |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Common Shareholders’  share of extraordinary items                                                           |   | (160                           | )      | --                            |   | (178 | ) | (319 | ) |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Common Shareholders’  share of cumulative effect of accounting change                                        |   | --                             |   | --                            |   | (1,187 | ) | (8,934 | ) |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Net Income available to  Common Shareholders                                                                      |   | $                              | 36,251 |                          | $      | 42,025 |   | $ | 103,936 |   | $ | 111,280 |   |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Weighted Average Shares  Outstanding – Basic                                                                 |   | 172,746,242                    |   | 172,759,374                   |   | 172,413,474 |   | 173,216,460 |   |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Effect of stock options                                                                                           |   | 285,158                        |   | 102,704                       |   | 331,085 |   | 96,441 |   |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Weighted Average Shares  Outstanding  - Diluted                                                              |   | 173,031,400                    |   | 172,862,078                   |   | 172,744,559 |   | 173,312,901 |   |

 

                
|                                                                                                              |   | **For the Three Months Ended** |   | **For the Nine Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
|                                                                                                              |   | **September 30,**              |   | **September 30,**             |   |
|                                                                                                              |   | **2001**                       |   | **2000**                      |   | **2001** |   | **2000** |   |
| Basic  and Diluted Per Share:                                                                                     |   |                           |   |                          |   |   |   |   |   |
| Common Shareholders’  share of income before extraordinary items and cumulative effect of  accounting change |   | $                              | 0.21   |                          | $      | 0.24 |   | $ | 0.61 |   | $ | 0.69 |   |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Common Shareholders’  share of extraordinary items                                                           |   | --                             |   | --                            |   | -- |   | -- |   |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Common Shareholders’  share of cumulative effect of accounting change                                        |   | --                             |   | --                            |   | (0.01 | ) | (0.05 | ) |
|                                                                                                              |   |                           |   |                          |   |   |   |   |   |
| Net Income available to  Common Shareholders                                                                      |   | $                              | 0.21   |                          | $      | 0.24 |   | $ | 0.60 |   | $ | 0.64 |   |

 

None of the series of convertible preferredstock issued and outstanding during the comparative periods had a dilutiveeffect on earnings per share, nor did any of the convertible preferred Units ofthe SPG Operating Partnership outstanding, which are convertible into PairedShares on or after August 27, 2004 if certain conditions are met. Paired Unitsheld by limited partners in the Operating Partnerships may be exchanged forPaired Shares, on a one-for-one basis in certain circumstances. If exchanged,the paired Units would not have a dilutive effect.

 

**Note 4 - Cash FlowInformation**

 

                Cash paid for interest, net of amountscapitalized, during the nine months ended September 30, 2001 was $450,884 ascompared to $480,819 for the same period in 2000. See Notes 1 and 8 forinformation about non-cash transactions during the nine months ended September30, 2001.

 

**Note 5 - CumulativeEffect of Accounting Change**

 

On January 1, 2001 Simon Group adopted SFAS133  “Accounting for DerivativeInstruments and Hedging Activities,” as amended in June of 2000 by SFAS 138,“Accounting for Derivative Instruments and Hedging Activities.”  SFAS 133, as amended, establishes accountingand reporting standards for derivative instruments and requires Simon Group torecord on the balance sheet all derivative instruments at fair value and torecognize certain non-cash changes in these fair values either in the incomestatement or other comprehensive income, as appropriate under SFAS 133.  SFAS 133 currently impacts the accountingfor Simon Group’s interest rate and foreign currency rate risk protectionagreements.

 

On adoption of SFAS 133, Simon Group recordedthe difference between the fair value of the derivative instruments and theprevious carrying amount of those derivatives on its condensed consolidatedcombined balance sheets in net income or other comprehensive income, asappropriate, as the cumulative effect of a change in accounting principle inaccordance with APB 20 “Accounting Changes.”  On adoption, Simon Group’s net fair value of derivatives was ($2.0)million, of which $3.1 million was recorded in other liabilities and $1.1million was recorded in other assets. In addition, $2.0 million of unrecognizedloss was recorded in other comprehensive income as a cumulative effect ofaccounting change and an expense of $1.6 million was recorded as a cumulativeeffect of accounting change in the statement of operations, which includesSimon Group’s $1.4 million share of joint venture cumulative effect ofaccounting change.  The joint venturecumulative effect of accounting change was recorded in investment inunconsolidated entities.  Within thenext twelve months, Simon Group expects to reclassify to earnings approximately$3.6 million of expense of the current balance held in accumulated othercomprehensive income.

 

As of September 30, 2001, Simon Group hasrecorded derivatives at their fair values of $0.5 million included in otherassets and $11.1 million included in other liabilities.  These derivatives consist of LIBOR and EURIBORbased swaps, caps, collars, and cross-currency investment rate swaps with atotal notional amount of $390.2 million, with maturity dates ranging fromDecember 2001 to January 2005.  Jointventure derivatives with a total asset fair value of $0.2 million consist ofinterest rate caps and swaps with a total notional amount of $1,001.4 million,with maturity dates ranging from January 2002 to May 2006.  Simon Group’s exposure to market risk due tochanges in interest rates primarily relates to Simon Group’s long-term debtobligations. Through its risk management strategy, Simon Group manages exposureto interest rate market risk by a combination of interest rate protectionagreements to effectively fix or cap a portion of variable rate debt, or in thecase of a fair value hedge, effectively convert fixed rate debt to variablerate debt and by refinancing fixed rate debt at times when rates and terms areappropriate,.  Simon Group is alsoexposed to foreign currency risk on financings of certain foreign operations.  To manage foreign currency exchange raterisk as part of its risk management strategy, Simon Group has also entered intoa foreign currency forward contract. Simon Group’s intent is to offset gainsand losses that occur on the underlying exposures, with gains and losses on thederivative contracts hedging these exposures. Simon Group does not enter into either interest rate protection orforeign currency rate protection agreements for speculative purposes.

 

***Accounting Policies for Derivatives***

 

In the normal course of business, Simon Groupuses a variety of derivative financial instruments to manage, or hedge,interest rate and foreign currency risk and records all derivatives on thebalance sheets at fair value.  SimonGroup may enter into derivative contracts relating to either wholly owned orjoint venture properties.  Simon Grouprequires that hedging derivative instruments are effective in reducing the riskexposure that they are designated to hedge. For derivative instrumentsassociated with the hedge of an anticipated transaction, hedge effectivenesscriteria also require that it be probable that the underlying transactionoccurs.  Simon Group may hedge itsexposure to the variability in future cash flows for anticipated transactionsover a maximum period of 12 months.  Anyinstrument that meets these hedging criteria is formally designated as a hedgeat the inception of the derivative contract. When the terms of an underlying transaction are modified resulting insome ineffectiveness, the portion of the change in the derivative fair valuerelated to ineffectiveness from period to period will be included in netincome. If any derivative instrument used for risk management does not meet thehedging criteria then it is marked-to-market each period, however, Simon Groupintends for all derivative transactions to meet all the hedge criteria andqualify as hedges.

 

On an ongoing quarterly basis, Simon Groupadjusts its balance sheets to reflect current fair market value of itsderivatives.  Changes in the fair valueof derivatives are to be recorded each period in earnings or comprehensiveincome, depending on whether the derivative is designated and effective as partof a hedged transaction, and on the type of hedge transaction.  To the extent that the change in value of aderivative does not perfectly offset the change in value of the instrumentbeing hedged, the ineffective portion of the hedge is immediately recognized inearnings. Over time, the unrealized gains and losses held in accumulated othercomprehensive income will be reclassified to earnings.  This reclassification occurs when the hedgeditems are also recognized in earnings. Interest rate differentials that arise under interest rate swapcontracts are settled periodically based upon the terms of the contract and arerecognized in interest expense over the life of the contracts.  Simon Group has a policy of only enteringinto contracts with major financial institutions based upon their creditratings and other factors.

To determine the fair values of derivative instruments, Simon Groupuses standard market conventions and techniques such as discounted cash flowanalysis, option pricing models, and termination cost are used to determinefair value at each balance sheet date. All methods of assessing fair valueresult in a general approximation of value, and such value may never actuallybe realized.

 

**Note 6 - Investment in UnconsolidatedEntities**

 

                Summary financial information of SimonGroup’s investment in partnerships and joint ventures accounted for using theequity method of accounting and a summary of Simon Group’s investment in andshare of income from such partnerships and joint ventures follow:
|                                                      |   | **September  30,** |      | **December  31,** |   |
|-----------------------------------------------------------|--------|--------------------|-----------|-------------------|--------|
| **BALANCE SHEETS**                                        |   | **2001**           |      | **2000**          |   |
| **Assets:**                                               |   |               |      |              |   |
| Investment properties at  cost, net                       |   | $                  | 6,502,436 |              | $      | 6,573,412 |   |
| Cash and cash  equivalents                                |   | 188,539            |      | 192,138           |   |
| Tenant receivables                                        |   | 165,025            |      | 165,918           |   |
| Other assets                                              |   | 325,414            |      | 276,975           |   |
| Total assets                                              |   | $                  | 7,181,414 |              | $      | 7,208,443 |   |
|                                                      |   |               |      |              |   |
| **Liabilities and Partners'  Equity:**                    |   |               |      |              |   |
| Mortgages and other  notes payable                        |   | $                  | 5,452,131 |              | $      | 5,135,488 |   |
| Accounts payable,  accrued expenses and other liabilities |   | 367,290            |      | 347,733           |   |
| Total liabilities                                         |   | 5,819,421          |      | 5,483,221         |   |
| Partners' equity                                          |   | 1,361,993          |      | 1,725,222         |   |
| Total liabilities and  partners' equity                   |   | $                  | 7,181,414 |              | $      | 7,208,443 |   |
|                                                      |   |               |      |              |   |
| **Simon Group’s Share of:**                          |   |               |      |              |   |
| Total assets                                              |   | $                  | 2,986,387 |              | $      | 2,929,647 |   |
| Partners’ equity                                     |   | $                  | 706,487   |              | $      | 679,591 |   |
| Add: Excess Investment                                    |   | 563,190            |      | 558,675           |   |
| Simon Group’s net  Investment in Joint Ventures      |   | $                  | 1,269,677 |              | $      | 1,238,266 |   |

 

 
|                                                                                                 |   | **For  the Three Months Ended** |    | **For  The Nine Months Ended** |   |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|--------------------------------|--------|
|                                                                                                 |   | **September  30,**              |    | **September  30,**             |   |
| **STATEMENTS OF OPERATIONS**                                                                         |   | **2001**                        |    | **2000**                       |   | **2001** |   | **2000** |   |
| **Revenue:**                                                                                         |   |                            |    |                           |   |   |   |   |   |
| Minimum rent                                                                                         |   | $                               | 200,714 |                           | $      | 191,268 |   | $ | 600,157 |   | $ | 555,719 |   |
| Overage rent                                                                                         |   | 5,452                           |    | 5,476                          |   | 14,977 |   | 14,504 |   |
| Tenant reimbursements                                                                                |   | 93,788                          |    | 94,082                         |   | 290,187 |   | 278,192 |   |
| Other income                                                                                         |   | 16,142                          |    | 22,218                         |   | 43,786 |   | 44,477 |   |
| Total revenue                                                                                        |   | 316,096                         |    | 313,044                        |   | 949,107 |   | 892,892 |   |
|                                                                                                 |   |                            |    |                           |   |   |   |   |   |
| **Operating Expenses:**                                                                              |   |                            |    |                           |   |   |   |   |   |
| Operating expenses and  other                                                                        |   | 118,088                         |    | 112,790                        |   | 358,107 |   | 334,248 |   |
| Depreciation and  amortization                                                                       |   | 66,942                          |    | 62,487                         |   | 194,734 |   | 174,258 |   |
| Total operating expenses                                                                             |   | 185,030                         |    | 175,277                        |   | 552,841 |   | 508,506 |   |
|                                                                                                 |   |                            |    |                           |   |   |   |   |   |
| **Operating Income**                                                                                 |   | 131,066                         |    | 137,767                        |   | 396,266 |   | 384,386 |   |
| **Interest Expense**                                                                                 |   | 88,874                          |    | 91,170                         |   | 275,714 |   | 262,282 |   |
| **Income Before Extraordinary  Items and Cumulative Effect of Accounting Change (“IBEC”)** |   | 42,192                          |    | 46,597                         |   | 120,552 |   | 122,104 |   |
| **Extraordinary Items**                                                                              |   | (220                            | )       | --                             |   | (295 | ) | -- |   |
| **Cumulative Effect of Accounting  Change**                                                          |   | --                              |    | --                             |   | (2,883 | ) | (3,948 | ) |
| **Net Income**                                                                                       |   | $                               | 41,972  |                           | $      | 46,597 |   | $ | 117,374 |   | $ | 118,156 |   |
| **Third-Party Investors' Share of  IBEC**                                                            |   | 27,554                          |    | 27,301                         |   | 77,629 |   | 71,981 |   |
| **Simon Group’s Share of IBEC**                                                                 |   | $                               | 14,638  |                           | $      | 19,296 |   | $ | 42,923 |   | $ | 50,123 |   |
| **Amortization of Excess  Investment**                                                               |   | 5,101                           |    | 5,467                          |   | 16,049 |   | 16,050 |   |
| **Income from Unconsolidated  Entities**                                                             |   | $                               | 9,537   |                           | $      | 13,829 |   | $ | 26,874 |   | $ | 34,073 |   |

 

                Simon Group’s share of consolidated net income (loss) of the ManagementCompany, excluded from the tables above, after intercompany profiteliminations, was ($2,750) and $7,091 for the three-month periods endedSeptember 30, 2001 and 2000, respectively, and $5,547 and $20,374 for the ninemonth periods ended September 30, 2001 and 2000, respectively.  Simon Group’s net investment in theManagement Company, excluded from the tables above, was $55,938 and $32,936 asof September 30, 2001 and December 31, 2000, respectively.

 

                In addition, Simon Group has guaranteed its pro rata share of a jointventure’s lease obligations up to $55.4 million.

 

**Note 7 -Debt**

 

                At September 30, 2001, of Simon Group’s combined consolidated debt$6,833,415 was fixed-rate debt and $1,958,675 was variable-rate debt.  Simon Group’s pro rata share of indebtednessof the unconsolidated joint venture Properties as of September 30, 2001 was$2,281,283.

 

                On January 11, 2001, Simon Group issued $500.0 million of unsecureddebt to institutional investors pursuant to Rule 144A in two tranches.  The first tranche is $300.0 million bearingan interest rate of 7 3/8% due January 20, 2006 and the second tranche is$200.0 million bearing an interest rate of 7 3/4% due January 20, 2011.  The net proceeds of the offering were usedto repay the remaining portion of the indebtedness under the CPI MergerFacility due March 24, 2001 and to repay a portion of the CPI Merger Facilitydue September 24, 2001.

 

                On August 6, 2001, Simon Group retired the third and final tranche ofthe CPI merger facility totaling $435.0 million.  Funds used to retire this debt were generated primarily from a$277.0 million financing of four mall properties at a fixed rate of 6.99% and a$110.0 million financing of one office complex at LIBOR plus 115 basis points.

 

                Subsequent to September 30, 2001, Simon Group completed the sale of$750.0 million of 6.375% senior unsecured notes due November 15, 2007.  Net proceeds from the offering were used toreduce the outstanding balance of the Credit Facility.

** **

**Note 8 – Shareholders’ Equity**

 

**               **On March 26, 2001, 474,625 Paired Sharesof restricted stock were deemed earned and awarded under The Simon PropertyGroup 1998 Stock Incentive Plan (the “1998 Plan”) at a value of $25.85 perPaired Share.  The cost of restrictedstock grants is based upon the stock’s fair market value at the time such stockis earned, awarded and issued and is charged to shareholders’ equity andsubsequently amortized against earnings of Simon Group over the vestingperiod.  In addition, 1,032,583 stockoptions to purchase Paired Shares were granted under the 1998 Plan on the sameday.

 

                On May 22, 2001, 1,220 shares of SPG’s Series A Convertible PreferredStock were converted into 46,355 Paired Shares.  In addition, another 442 Paired Shares were issued to the holdersof the convertible shares in lieu of the cash dividends allocable to thosepreferred shares.

 

                Due to the conversion of SPG Properties, Inc.preferred stock into shares of SPG preferred stock as a result of the mergerdescribed in Note 11, the entire amount of preferred stock of subsidiary wasreclassified to preferred stock within shareholders’ equity during the period.

 

**Note 9 - Commitments andContingencies**

 

***                                Litigation***

 

*                Triple Five of Minnesota, Inc., a Minnesotacorporation, v. Melvin Simon, et. al.*On or about November 9, 1999, Triple Fiveof Minnesota, Inc. (“Triple Five”) commenced an action in the District Courtfor the State of Minnesota, Fourth Judicial District, against, among others,Mall of America, certain members of the Simon family and entities allegedlycontrolled by such individuals, and Simon Group. Two transactions form thebasis of the complaint: (i) the sale by Teachers Insurance and AnnuityAssociation of America of one-half of its partnership interest in Mall ofAmerica Company and Minntertainment Company to the SPG Operating Partnershipand related entities (the “Teachers Sale”); and (ii) a financing transactioninvolving a loan in the amount of $312,000 obtained from The Chase ManhattanBank (“Chase”) that is secured by a mortgage placed on Mall of America’s assets(the “Chase Mortgage”).

 

The complaint, which contains twelve counts,seeks remedies of damages, rescission, constructive trust, accounting, andspecific performance. Although the complaint names all defendants in severalcounts, Simon Group is specifically identified as a defendant in connectionwith the Teachers Sale.  The litigationis currently in the discovery stage.

 

Simon Group believes that the Triple Fivelitigation is without merit and intends to defend the action vigorously. SimonGroup believes that the Triple Five litigation will not have a material adverseeffect on Simon Group. Given the early stage of the litigation it is notpossible to provide an assurance of the ultimate outcome of the litigation oran estimate of the amount or range of potential loss, if any.

 

*Carlo Angostinelli et al. v. DeBartolo Realty Corp. et al.*OnOctober 16, 1996, a complaint was filed in the Court of Common Pleas ofMahoning County, Ohio, captioned Carlo Angostinelli et al. v. DeBartoloRealty Corp. et al. The named defendants are SD Property Group, Inc., anindirect 99%-owned subsidiary of SPG, and DeBartolo Properties Management, Inc.,a subsidiary of the Management Company, and the plaintiffs are 27 formeremployees of the defendants. In the complaint, the plaintiffs alleged that theywere recipients of deferred stock grants under the DeBartolo Realty Corporation(“DRC”) Stock Incentive Plan (the “DRC Plan”) and that these grants immediatelyvested under the DRC Plan’s “change in control” provision as a result of theDRC Merger. Plaintiffs asserted that the defendants’ refusal to issue themapproximately 542,000 shares of DRC common stock, which is equivalent toapproximately 370,000 Paired Shares computed at the 0.68 exchange ratio used inthe DRC Merger, constituted a breach of contract and a breach of the impliedcovenant of good faith and fair dealing under Ohio law. Plaintiffs soughtdamages equal to such number of shares of DRC common stock, or cash in lieuthereof, equal to all deferred stock ever granted to them under the DRC Plan,dividends on such stock from the time of the grants, compensatory damages forbreach of the implied covenant of good faith and fair dealing, and punitivedamages. The plaintiffs and the defendants each filed motions for summaryjudgment. On October 31, 1997, the Court of Common Pleas entered a judgment infavor of the defendants granting their motion for summary judgment. Theplaintiffs appealed this judgment to the Seventh District Court of Appeals inOhio. On August 18, 1999, the District Court of Appeals reversed the summaryjudgment order in favor of the defendants entered by the Common Pleas Court andgranted plaintiffs’ cross motion for summary judgment, remanding the matter tothe Common Pleas Court for the determination of plaintiffs’ damages. Thedefendants petitioned the Ohio Supreme Court asking that they exercise theirdiscretion to review and reverse the Appellate Court decision, but the OhioSupreme Court did not grant the petition for review. The case was remanded tothe Court of Common Pleas of Mahoning County, Ohio, to conduct discoveryrelevant to each plaintiff’s damages and the counterclaims asserted by SimonGroup. The Trial Court referred these matters to a Magistrate. Plaintiffs fileda Supplemental Motion for Summary Judgment on the question of damages.  The Magistrate ruled on the counterclaimsand found in Defendants’ favor on one of them. On December 27, 2000, the TrialCourt rendered judgment for the plaintiffs in the combined total amount ofapproximately $12,000, which includes a set-off of approximately $2,000 withimpact to two of the plaintiffs. Defendants have appealed this judgment andplaintiffs have cross-appealed.  Thejudgment has accrued interest at 10% per annum from and after December 27,2000.  Those appeals are pending beforethe District Court of Appeals and there can be no execution upon the judgmentwhile the appeals are pending.  SimonGroup recorded a $12,000 loss in the third quarter of 1999 related to thislitigation as an unusual item.

 

*Roel Vento et al v. Tom Taylor et al.* An affiliate of Simon Group is adefendant in litigation entitled Roel Vento et al v. Tom Taylor et al.,in the District Court of Cameron County, Texas, in which a judgment in theamount of $7,800 was entered against all defendants. This judgment includesapproximately $6,500 of punitive damages and is based upon a jury’s findings onfour separate theories of liability including fraud, intentional infliction ofemotional distress, tortious interference with contract and civil conspiracyarising out of the sale of a business operating under a temporary licenseagreement at Valle Vista Mall in Harlingen, Texas. Simon Group appealed theverdict and on May 6, 1999, the Thirteenth Judicial District (Corpus Christi)of the Texas Court of Appeals issued an opinion reducing the trial courtverdict to $3,364 plus interest. Simon Group filed a petition for a writ ofcertiorari to the Texas Supreme Court requesting that they review and reversethe determination of the Appellate Court. The Texas Supreme Court grantedcertiorari and on April 26, 2001 rendered a unanimous 9-0 opinion against thePlaintiffs and ordered that they take nothing from the Simon Group defendants.Plaintiffs subsequently filed a motion for reconsideration with the TexasSupreme Court which was denied. Accordingly, this litigation has concluded and Simon Group has noliability to plaintiffs.

 

Simon Group currently is not subject to anyother material litigation other than routine litigation, claims andadministrative proceedings arising in the ordinary course of business. On thebasis of consultation with counsel, management believes that such routinelitigation, claims and administrative proceedings will not have a materialadverse impact on Simon Group's financial position or its results ofoperations.

 

### **Note 10 - Real Estate Disposals and Other**

 

                During the first nine months of 2001, SimonGroup sold its ownership interest in one regional mall, one community center,and one office building for a combined gross sales price of $20.3 million.  These sales resulted in a net combined gainof $2.6 million.

 

                On December 28, 2000, Montgomery Ward LLC andcertain of its related entities (“Ward”) filed a voluntary petition for reliefunder Chapter 11 of the Bankruptcy Code. On March 1, 2001, a limited liability company, Kimsward LLC(“Kimsward”), was formed to designate persons or entities to whom the Ward realestate assets will be sold.  Thesetransactions are subject to Bankruptcy Court approval.  The Management Company’s interest inKimsward is 18.5% and its remaining investment in Kimsward was $1.4 million asof September 30, 2001.  During the firstnine months of 2001 the Management Company recorded $16.5 million of equity inincome from Kimsward.  During the firstnine months, SPG, L.P. charged the Management Company a $5.7 million fee forservices rendered to the Management Company in connection with the Kimswardtransactions, which is included in other income in the accompanying condensedcombined statements of operations.

 

                During the quarter, Simon Group wrote-off its investment in clixnmortarand miscellaneous technology investments resulting in a decrease in resultsfrom operations of $16.6 million, of which $2.7 million is included in otherexpenses and a net $13.9 million is included in income from unconsolidatedentities.

 

**Note 11 –Merger**

 

In order to simplify the organizationalstructure of Simon Group, the Boards of Directors of SPG and SPG Properties,Inc. (“Properties, Inc.”), on May 8, 2001 approved an agreement for the mergerof Properties, Inc. into SPG.  Themerger was completed and became effective on July 1, 2001.  SPG previously owned  99.999% of the common stock of Properties,Inc.  In the  merger, shares of Properties, Inc.’s common stock (other thanthose held by SPG) were converted into the right to receive approximately $98in total and outstanding shares of Properties, Inc.’s preferred stock wereconverted into shares of SPG preferred stock having substantially identicalterms.

 

The merger was accounted for under thepurchase method of accounting during the third quarter.  The pro forma effect of the merger on SPG’sbalance sheet is to reclassify the entire carrying amount of SPG’s preferredstock of subsidiary included in the caption all series of preferred stockwithin shareholders' equity.  Inaddition, the pro forma effect on the statement of operations is thereclassification of preferred dividends of subsidiary to preferreddividends.  All other pro forma effectsassociated with this transaction are immaterial.

 

### **Note 12 – New Accounting Pronouncements**

 

On July 20, 2001, the FASB issued SFAS No.141, “Business Combinations” and SFAS No. 142 “Goodwill and Other IntangibleAssets”.  SFAS 141 further clarifies thecriteria to recognize intangible assets separately from goodwill.  SFAS 141 is effective for Simon Group forany business combination accounted for under the purchase method that iscompleted after June 30, 2001.  SFAS No.142 requires that goodwill and indefinite lived intangible assets are no longeramortized but are reviewed annually, or more frequently if impairmentindicators arise, for impairment. Separable intangible assets that are not deemed to have an indefinitelife will continue to be amortized over their useful lives but with no maximumlife.  The amortization provisions ofSFAS 142 apply to goodwill and intangible assets acquired by Simon Group afterJune 30, 2001.  With respect to goodwilland intangible assets acquired prior to July 1, 2001, Simon Group is requiredto adopt SFAS 142 on January 1, 2002 at which time amortization of theremaining book value of goodwill will cease and the new impairment-onlyapproach will apply and may not be applied retroactively.  Excluding the impact of impairment, if any,the impact of SFAS 142 will be to eliminate the amortization of goodwillthereby increasing Simon Group’s income before allocation to limited partnersby approximately $1.2 million annually.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” thatsupersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed of.”  In addition, SFAS No. 144 supersedes the accounting and reportingprovisions of APB Opinion No. 30, “Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions”forthe disposal of a segment of a business.* * SFAS No. 144 is a broad statement thatprovides framework for the evaluation of impairment of long-lived assets, thetreatment for assets held for sale or to be otherwise disposed of, and thereporting of discontinued operations. The effective date for adoption of SFAS No. 144 is January 1, 2002.  Simon Group is currently evaluating theimpact of SFAS No. 144.

#  

# **Item 2. Management's Discussion andAnalysis of Financial Condition and Results of Operations**

# ** **

# **SIMON PROPERTY GROUP, INC. AND SPGREALTY CONSULTANTS, INC. COMBINED**

## ** **

*               *You should read the following discussionin conjunction with the financial statements and notes thereto that areincluded in this Form 10-Q. Certain statements made in this report may bedeemed “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Although we believe the expectationsreflected in any forward-looking statements are based on reasonableassumptions, we can give no assurance that our expectations will be attained,and it is possible that our actual results may differ materially from thoseindicated by these forward-looking statements due to a variety of risks and uncertainties.Those risks and uncertainties include, but are not limited to, the national,regional and local economic climate, competitive market forces, changes inmarket rental rates, trends in the retail industry, the inability to collectrent due to the bankruptcy or insolvency of tenants or otherwise, and changesin market rates of interest.  Weundertake no duty or obligation to update or revise these forward-lookingstatements, whether as a result of new information, future developments, orotherwise.

 

***                Overview***

 

Who we are - Simon Property Group, Inc.("SPG"), a Delaware corporation, is a self-administered andself-managed real estate investment trust ("REIT"). Each share ofcommon stock of SPG is paired (“Paired Shares”) with 1/100th of ashare of common stock of SPG Realty Consultants, Inc. (“SRC” and together withSPG, the “Companies”). Simon Property Group, L.P. (the “SPG OperatingPartnership”) is the primary subsidiary of SPG. Units of ownership interest(“Units”) in the SPG Operating Partnership are paired (“Paired Units”) with aUnit in SPG Realty Consultants, L.P. (the “SRC Operating Partnership” andtogether with the SPG Operating Partnership, the “Operating Partnerships”). TheSRC Operating Partnership is the primary subsidiary of SRC. In this QuarterlyReport on Form 10-Q, the terms “we”, “us” and “our” refer to the Companies andthe Operating Partnerships.

 

The following Property acquisitions andopenings impacted our consolidated results of operations in the comparativeperiods.  We opened Orlando PremiumOutlots in May 2000, Arundel Mills in November 2000, and Montreal Forum in May2001.  In addition, we sold interests inseveral Properties throughout the comparative periods (collectively with the acquisitionsand openings, the “Property Transactions”). See “Liquidity and Capital Resources” and Note 10 to the financialstatements for additional information about acquisitions, openings anddisposals during the comparative period.

 

***Results ofOperations***

 

*Three Months Ended September 30, 2001 vs. Three Months Ended September30, 2000*

 

                Operating income decreased $5.0 million or2.3% in 2001 as compared to 2000.  Thisdecrease included a $12.0 million increase in minimum rents, excluding ourSimon Brand Venture (“SBV”) and Simon Business Network (“SBN”) initiatives, anda $1.9 million increase in miscellaneous income.  These increases were offset by a $4.8 million increase indepreciation and amortization, a $3.2 million decrease in net tenantreimbursements, a $3.9 million decrease in consolidated revenues realized fromour SBV and SBN initiatives, a $1.1 million decrease in overage rents, and a$6.4 million increase in other expenses. The increase in minimum rent primarily results from increased occupancylevels and the replacement of expiring tenant leases with renewal leases athigher minimum base rents. The decrease in net tenant reimbursements isprimarily the result of true-up billings and lower spending levels onrecoverable expenditures.  The increasein other expenses is the result of a non-recurring $3.0 million write-down ofan investment and $2.7 million due to the write-off of miscellaneous technologyinvestments. The impact of Property Transactions is an increase in operatingincome of $1.2 million for the comparative periods.

 

                Income from unconsolidated entities decreased $14.1 million in 2001,resulting from a $4.3 million decrease in income from unconsolidatedpartnerships and joint ventures and a $9.8 million decrease in income from theManagement Company.  The decrease injoint venture income is primarily related to our pro rata share of theincreased losses in the technology start up activities of MerchantWired, LLC of$5.1 million, partially offset by lower interest rates and the full periodimpact of two properties which opened in 2000. Included in income from the Management Company is $6.0 million of incomefrom the Kimsward transaction, offset by our net $13.9 million share of thewrite-off of technology investments, primarily clixnmortar, and a decrease infee revenues.

 

                Interest expense during the three monthsended September 30, 2001 decreased $11.6 million, or 7.2% compared to the sameperiod in 2000.  This decrease isprimarily due to lower interest rates during 2001 and reductions in thecorporate credit facilities offset by the issuance of $500.0 million ofunsecured notes on January 11, 2001.

 

                Income before allocation to limited partners was $69.4 million for thethree months ended September 30, 2001, which reflects a $8.1 million, or 10.4%decrease over 2000, primarily for the reasons discussed above.  Income before allocation to limited partnerswas allocated to the Companies based on SPG’s direct ownership of Ocean CountyMall and certain net lease assets, and the Companies’ preferred Unitpreferences and weighted average ownership interests in the OperatingPartnerships during the period.

 

                The comparability between SRC’s balance sheet as of September 30, 2001and December 31, 2000 and results of operations for the three-months endedSeptember 30, 2001 and September 30, 2000 have been affected by the following:

 
| • |   | Effective  March 31, 2001, ownership of clixnmortar was transferred from SRC to the  Management Company.  See Note 1 of the  Notes to Unaudited Condensed Financial Statements included in Item 1 of this  Form 10-Q for a discussion of the transfer. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • |   | Effective January 1,  2001, ownership of SBV was transferred from SRC to the SPG Operating  Partnership.                                                                                                                                                    |

 

                Preferred distributions of the SPG OperatingPartnership represent distributions on preferred Units issued in connectionwith the NED Acquisition. Preferred dividends of subsidiary representdistributions on preferred stock of SPG Properties, Inc., a 99.999% ownedsubsidiary of SPG, which was merged into SPG effective July 1, 2001.

 

*Nine Months Ended September 30, 2001 vs. NineMonths Ended September 30, 2000*

 

                Operating income decreased $9.8 million or1.5% in 2001 as compared to 2000. This decrease included a $35.9 millionincrease in minimum rents, excluding our SBV and SBN initiatives, a $5.2million increase in consolidated revenues realized from our SBV and SBNinitiatives and a $0.7 million increase in miscellaneous income.  These increases were offset by a $22.2million increase in depreciation and amortization, a $16.7 million decrease innet tenant reimbursements, a $5.6 million decrease in outlot land sales, a $2.8million decrease in overage rents, and a $3.9 million increase in otherexpenses.  The increase in minimum rentprimarily results from increased occupancy levels and the replacement of expiringtenant leases with renewal leases at higher minimum base rents.  The increase in SBV and SBN initiativerevenues includes $5.6 million from a contract termination payment. Theincrease in miscellaneous income includes $5.7 million in fees associated withthe Kimsward transaction offset by a decrease in various miscellaneous incomeitems in the prior year. The increase in depreciation and amortization isprimarily due to an increase in depreciable real estate realized throughrenovation and expansion activities. The decrease in net tenant reimbursements is primarily the result oftrue-up billings and lower spending levels on recoverable expenditures.  The increase in other expenses is the resultof a non-recurring $3.0 million write-down of an investment and $2.7 milliondue to the write-off of miscellaneous technology investments partially offsetby decreases in various other expenses. The impact of Property Transactions isa decrease in operating income of $0.5 million for the comparative periods.

 

                Income from unconsolidated entities decreased $22.0 million in 2001,resulting from a $14.8 million decrease in income from the Management Companyand a $7.2 million decrease in income from unconsolidated partnerships andjoint ventures.  Included in the ManagementCompany decrease is our net $13.9 million share of the write-off of technologyinvestments, primarily clixnmortar,, as well as a decrease in feerevenues.  These amounts are partiallyoffset by $10.0 million of income from Kimsward, LLC net of fees charged bySPG, L.P.  The decrease in joint ventureincome is primarily related to our pro rata share of the increased losses inthe technology start up activities of MerchantWired, LLC of $11.3 million,partially offset by lower interest rates and the full year impact of openingtwo properties in 2000.

 

                Interest expense during the first nine monthsof 2001 decreased $17.6 million, or 3.7% compared to the same period in2000.  This decrease is primarily due tolower interest rates during 2001 and reductions in the corporate creditfacilities offset by the issuance of $500.0 million of unsecured notes onJanuary 11, 2001.

 

                During the first quarter of 2001 we recorded a $1.6 million expense asa cumulative effect of an accounting change, which includes our $1.4 millionshare from unconsolidated entities, due to the adoption of  SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” asamended.  See Note 5 of the Notes toUnaudited Condensed Financial Statements included in Item 1 of this Form 10-Qfor a discussion of the cumulative effect of accounting change.  During the first quarter of 2000 we recordeda $12.3 million expense as a cumulative effect of an accounting change, whichincludes our $1.8 million share from unconsolidated entities, due to theadoption of Staff Accounting Bulletin No. 101 (“SAB 101”).  SAB 101 addressed certain revenuerecognition policies, including the accounting for overage rent by a landlord.

 

                The $2.6 million net gain on the sales of assets in 2001 results fromthe sale of our interests in one regional mall, one community center, and anoffice building for a gross sales price of approximately $20.3 million. In2000, we recognized a net gain of $8.8 million on the sale of two regionalmalls, four community centers, and one office building, partially offset by a$10.6 million asset write-down on two Properties.

 

                Income before allocation to limited partners was $201.4 million for thenine months ended September 30, 2001, which reflects a decrease of $10.3million, or 4.8% over 2000, primarily for the reasons discussed above.  Income before allocation to limited partnerswas allocated to the Companies based on SPG’s direct ownership of Ocean CountyMall and certain net lease assets, and the Companies’ preferred Unitpreferences and weighted average ownership interests in the OperatingPartnerships during the period.

 

                The comparability between SRC’s balance sheet as of September 30, 2001and December 31, 2000 and results of operations for the nine months ended September30, 2001 and September 30, 2000 have been affected by the following:

 
| • | Effective  March 31, 2001, ownership of clixnmortar transferred from SRC to the  Management Company.  See Note 1 of the  Notes to Unaudited Condensed Financial Statements included in Item 1 of this  Form 10-Q for a discussion of the transfer. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | Effective  January 1, 2001, ownership of SBV transferred from SRC to the SPG Operating  Partnership.                                                                                                                                                    |

 

                Preferred distributions of the SPG OperatingPartnership represent distributions on preferred Units issued in connectionwith the NED Acquisition. Preferred dividends of subsidiary representdistributions on preferred stock of SPG Properties, Inc.

 

                ***Liquidity and Capital Resources***

 

                As of September 30, 2001, our balance of unrestricted cash and cashequivalents was $161.7 million, including $44.8 million related to our giftcertificate program, which we do not consider available for general workingcapital purposes.  We have a $1.25billion unsecured revolving credit facility (the “Credit Facility”) which hadavailable credit of $522.5 million as of September 30, 2001. The CreditFacility bears interest at LIBOR plus 65 basis points and has an initialmaturity of August 2002, with an additional one-year extension available at ouroption. SPG and the SPG Operating Partnership also have access to public equityand debt markets.  Our current corporatebond ratings are Baa1 by Moody’s Investors Service and BBB+ by Standard &Poor’s.

 

                We anticipate that cash generated fromoperating performance will provide the funds we need on a short- and long-termbasis for operating expenses, interest expense on outstanding indebtedness,recurring capital expenditures, and distributions to shareholders in accordancewith REIT requirements. Sources of capital for nonrecurring capitalexpenditures, such as major building renovations and expansions, as well as forscheduled principal payments, including balloon payments, on outstandingindebtedness are expected to be obtained from:

 

•       excess cash generated from operating performance

•       working capital reserves

•       additional debt financing and

•       additional equity raised in the public markets.

 

*Financingand Debt*

 

*               *As of September 30, 2001, we had combinedconsolidated debt of $8.8 billion, of which $6.8 billion was fixed-rate debtbearing interest at a weighted average rate of 7.3% and $2.0 billion wasvariable-rate debt bearing interest at a weighted average rate of 3.9%.  As of September 30, 2001, we had interestrate protection agreements related to combined consolidated variable-rate debtwith a total carrying amount of $390.2 million. Our interest rate protectionagreements did not materially impact interest expense or weighted averageborrowing rates for the nine months ended September 30, 2001 or 2000.

 

Our share of total scheduled principalpayments of mortgage and other indebtedness, including unconsolidated jointventure indebtedness over the next five years is $6.0 billion, with $4.9billion thereafter. Our ratio of consolidated debt-to-market capitalization was54.5% and 57.0% at September 30, 2001 and December 31, 2000, respectively.

 

                On August 6, 2001, we retired the third and final tranche of the CPImerger facility totaling $435.0 million. We generated the funds used to retirethis debt primarily from our $277.0 million financing of four mall propertiesat fixed rate of 6.99%, our $110.0 million financing of one office complex atLIBOR plus 115 basis points, and excess cash flow.

 

                Subsequent to September 30, 2001, we completed the sale of $750.0million of 6.375% senior unsecured notes due November 15, 2007.  Net proceeds from the offering wereinitially used to reduce the outstanding balance of the Credit Facility.  Ultimately, we plan to retire mortgageindebtedness on six wholly-owned properties and to retire $250.0 million of 9%bonds that mature in early 2002.

 

                See Note 7 of the Notes to Unaudited Condensed Financial Statementsincluded in Item 1 of this Form 10-Q for a discussion of the unsecured debtissued on January 11, 2001.

 

*Acquisitionsand Disposals*

 

Subsequent to September 30, 2001, wepurchased a 50% interest in Fashion Valley Mall located in San Diego,California for a purchase price of $165.0 million which includes our share of a$200.0 million, seven year mortgage at a fixed rate of 6.5% issued by thepartnership owning the property concurrent with the acquisition.  We will also assume managementresponsibilities for this 1.7 million square foot open-air, super-regionalmall..

 

We continue to review and evaluate a limitednumber of acquisition opportunities and will continue our focus on acquiringhighly productive, market dominant malls. We believe that acquisition activityin the near term will be a less significant component of our growth strategyand amounts available under the Credit Facility, together with the ability toissue shares of common stock and/or Units, provide adequate means to financecertain acquisitions. We cannot assure you that we will not be required to, orwill not elect to, even if not required to, obtain funds from outside sources,including through the sale of debt or equity securities, to finance significantacquisitions, if any.

 

*                Dispositions*

 

During the first nine months of2001, we sold our interests in one regional mall, one community center, and oneoffice building for a combined gross sales price of $20.3 million, resulting ina net combined gain of $2.6 million. The net proceeds of approximately $19.6million were used for general working capital purposes.

 

*               *In addition to the Property salesdescribed above, as a continuing part of our long-term strategic plan, wecontinue to pursue the sale of our remaining non-retail holdings and a numberof retail assets that are no longer aligned with our strategic criteria,including four Properties currently under contract for sale. We expect the saleprices of our non-core assets, if sold, will not differ materially from thecarrying value of the related assets.

 

                *DevelopmentActivity*

 

*                New Developments.* Development activities arean ongoing part of our business. During 2000, we opened two new Propertiesaggregating approximately 1.7 million square feet of GLA. In total, we investedapproximately $179.6 million on new developments in 2000. With fewer newdevelopments currently under construction, we expect 2001 development costs tobe approximately $65.6 million.

 

*StrategicExpansions and Renovations.*One of our key objectives is to increase the profitabilityand market share of the Properties through the completion of strategicrenovations and expansions. During 2000, we invested approximately $201.6million on redevelopment projects and completed five major redevelopmentprojects, which added approximately 1.2 million square feet of GLA to thePortfolio. We have a number of renovation and/or expansion projects currentlyunder construction, or in pre-construction development and expect to investapproximately $129.0 million on redevelopment in 2001.

 

*International Expansion*.  The SPG Operating Partnership has a 32.3%ownership interest in European Retail Enterprises, B.V. (“ERE”), which isaccounted for using the equity method of accounting. Prior to January 2001, theManagement Company had a 29% ownership interest in Groupe BEG, S.A. (“BEG”)which was accounted for using the equity method of accounting.  In January 2001, BEG merged with ERE andbecame a wholly-owned subsidiary of ERE. During the third quarter of 2001 the Management Company transferred itsinterest in ERE to the SPG Operating Partnership through the intercompany noteto simplify the organizational structure. BEG and ERE are fully integrated European retail real estate developers,lessors and managers. Our current total cash investment in ERE and BEG,including subordinated debt, is approximately $69.9 million. The currentestimated additional commitment, including subordinated debt, is approximately$34.7 million.  However, since ourfuture commitments are subject to certain performance and other criteria,including our approval of development projects, these additional commitmentsmay vary. The agreements with BEG and ERE are structured to allow us to acquirean additional 29.4% ownership interest over time. As of September 30, 2001, BEGand ERE had three Properties open in Poland and two in France.

 

                *Technology Initiatives*. We continue withour technology initiatives through two investments including MerchantWired LLC,and Constellation Real Technologies including its investment in FacilityPro.comas described in our annual report. The SPG Operating Partnership owns anapproximately 53% indirect non-controlling interest in MerchantWired LLC andaccounts for it using the equity method of accounting.  MerchantWired LLC is currently consideringdiscussions with third parties, primarily telecommunications companies, to actas further partners in the venture.  Thefuture operations of MerchantWired LLC may be impacted by the outcome of thesediscussions.

 

These activities may generate losses in theinitial years of operation, while programs are being developed and customerbases are being established. The investments have a total carrying amount ofapproximately $33.5 million through September 30, 2001.  We expect to continue to invest in theseprograms and together with the other members of MerchantWired, LLC haveguaranteed our pro rata share of certain equipment lease payments.  We cannot assure you that our technologyprograms will succeed.

 

*Distributions.*TheCompanies declared a common stock dividend of $0.525 per share in the thirdquarter of 2001. The current combined annual distribution rate is $2.10 perPaired Share.  Dividends during 2000aggregated $2.02 per share. Future distributions will be determined based onactual results of operations and cash available for distribution.

 

**                *Investingand Financing Activities***

 

                Cash used in investing activities of $161.4 millionfor the nine months ended September 30, 2001 includes capital expenditures of$217.8 million, investments in unconsolidated joint ventures of $112.9 million,and advances to the Management Company of $3.8 million.  Capital expenditures include developmentcosts of $54.4 million, renovation and expansion costs of $111.6 million andtenant costs and other operational capital expenditures of $51.8 million.  These cash uses are partially offset bydistributions from unconsolidated entities of $145.3 million, cash from theconsolidation of ASP of $8.2 million and net proceeds of $19.6 million from thesale of three properties previously mentioned.

 

                Cash used in financing activities for thenine months ended September 30, 2001 was $372.0 million and includes netdistributions of $429.7 million, offset by net borrowings of $57.7 million.

 

***                EBITDA—Earningsfrom Operating Results before Interest, Taxes, Depreciation and Amortization***

 

                We believe that there are several importantfactors that contribute to our ability to increase rent and improveprofitability of our shopping centers, including aggregate tenant sales volume,sales per square foot, occupancy levels and tenant costs. Each of these factorshas a significant effect on EBITDA. We believe that EBITDA is an effectivemeasure of shopping center operating performance because:

 

•     it is industry practice to evaluate real estate properties basedon operating income before interest, taxes, depreciation and

 amortization, which is generally equivalent to EBITDA

•     EBITDA is unaffected by the debt and equity structure of theproperty owner.

 

However, you shouldunderstand that EBITDA:

 

•     does not represent cash flow from operations as defined byaccounting principles generally accepted in the United States

•     should not be considered as an alternative to net income as ameasure of operating performance

•     is not indicative of cash flows from operating, investing andfinancing activities

•     is not an alternative to cash flows as a measure of liquidity.

 

                Total EBITDA for the Properties increasedfrom $1,506.1 million for the nine months ended September 30, 2000 to $1,570.0million, excluding technology startup costs, for the same period in 2001,representing a 4.2% increase.  Thisgrowth is primarily the result of increased rental rates, sustained tenantsales, improved occupancy levels, effective control of operating costs and theaddition of GLA to the Portfolio through strategic expansions andrenovations.  During this period, theoperating profit margin decreased from 64.0% to 63.8%. There were no majoracquisitions during 2001.

 

***                FFO-Fundsfrom Operations***

 

                FFO is an important and widely used measureof the operating performance of REITs, which provides a relevant basis forcomparison among REITs. FFO, as defined by NAREIT, means consolidated netincome without giving effect to real estate related depreciation andamortization, gains or losses from extraordinary items, cumulative effect ofaccounting change, and gains or losses on sales of real estate, plus the allocableportion, based on economic ownership interest, of funds from operations ofunconsolidated joint ventures, all determined on a consistent basis inaccordance with accounting principles generally accepted in the United States.Further, we have added back our write-off of technology investments.  However, FFO:

 

•     does not represent cash flow from operations as defined byaccounting principles generally accepted in the United States

•     should not be considered as an alternative to net income as ameasure of operating performance

•     is not an alternative to cash flows as a measure of liquidity.

 

                The following summarizes our FFO and that ofthe Companies and reconciles our combined income before extraordinary items andcumulative effect of accounting change to our FFO for the periods presented:

 

 
|                                                                                                       |   | **For the Three Months Ended** |    | **For the Nine Months Ended ** |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|-------------------------------------|--------|
|                                                                                                       |   | **September 30,**              |    | **September 30,**                   |   |
|                                                                                                       |   | **2001**                       |    | **2000**                            |   | **2001** |   | **2000** |   |
| (In thousands)                                                                                             |   |                           |    |                                |   |   |   |   |   |
| Our FFO                                                                                                    |   | $                              | 210,241 |                                | $      | 192,453 |   | $ | 577,005 |   | $ | 543,146 |   |
|                                                                                                       |   |                           |    |                                |   |   |   |   |   |
| Reconciliation:                                                                                            |   |                           |    |                                |   |   |   |   |   |
| Income Before  Extraordinary Items and Cumulative                                                          |   |                           |    |                                |   |   |   |   |   |
| Effect of Accounting  Change (1) (2)                                                                       |   | $                              | 69,585  |                                | $      | 77,434 |   | $ | 203,330 |   | $ | 224,482 |   |
| Plus:                                                                                                      |   |                           |    |                                |   |   |   |   |   |
| Depreciation and  amortization from combined consolidated Properties                                       |   | 110,799                        |    | 105,600                             |   | 323,545 |   | 302,742 |   |
| Our share of  depreciation and amortization from unconsolidated affiliates                                 |   | 33,955                         |    | 30,395                              |   | 98,675 |   | 87,251 |   |
| Write-off of technology  investments                                                                       |   | 16,645                         |    | --                                  |   | 16,645 |   | -- |   |
| Less:                                                                                                      |   |                           |    |                                |   |   |   |   |   |
| (Gain) loss on sale of  asset, net of asset write downs of $0, $0, $0, and $10,572, respectively           |   | 131                            |    | (151                                | )      | (2,552 | ) | (8,809 | ) |
| Minority interest  portion of depreciation and amortization                                                |   | (1,540                         | )       | (1,491                              | )      | (4,527 | ) | (4,446 | ) |
| Preferred distributions  (including preferred distributions of a subsidiary and to preferred  unitholders) |   | (19,334                        | )       | (19,334                             | )      | (58,111 | ) | (58,074 | ) |
|                                                                                                       |   |                           |    |                                |   |   |   |   |   |
| Our FFO                                                                                                    |   | $                              | 210,241 |                                | $      | 192,453 |   | $ | 577,005 |   | $ | 543,146 |   |
|                                                                                                       |   |                           |    |                                |   |   |   |   |   |
| FFO Allocable to the  Companies                                                                            |   | $                              | 152,683 |                                | $      | 139,472 |   | $ | 418,965 |   | $ | 394,021 |   |

----

Notes:

(1)   Includes gains on land sales of $5.0 million and $6.3 million forthe three months ended September 30, 2001 and 2000, respectively, and $8.3million and $10.8 million for the nine months ended September 30, 2001 and2000, respectively

(2)   Includes straight-line rent adjustments to minimum rent of $3.3million and $4.6 million for the three months ended     September 30, 2001 and 2000, respectively, and $9.4 millionand $14.9 million for the nine months ended September 30, 2001 and 2000,respectively.

 

**                *PortfolioData***

 

                The following operating statistics do notinclude Properties located outside of the United States.

 

*                Aggregate Tenant Sales Volume*. For the nine months ended September 30,2001 compared to the same period in 2000, total reported retail sales at malland freestanding GLA we own (“Owned GLA”) in the regional malls increased$318.7 million or 2.9% from $10.8 billion to $11.2 billion, primarily as aresult of  increased productivity of ourexisting tenant base and an overall increase in occupancy. Retail sales at OwnedGLA affect revenue and profitability levels because they determine the amountof minimum rent that can be charged, the percentage rent realized, and therecoverable expenses (common area maintenance, real estate taxes, etc.) thetenants can afford to pay.

* *

*                Occupancy Levels*. Occupancy levels for Owned GLA at malland freestanding stores in the regional malls increased from 90.5% at September30, 2000, to 90.6% at September 30, 2001. Owned GLA has decreased 0.2 millionsquare feet from September 30, 2000, to September 30, 2001, primarily as aresult of dispositions.

 

*                Average Base Rents.*Average base rents per square foot ofmall and freestanding Owned GLA at regional malls increased 3.8%, from $27.97at September 30, 2000 to $29.03 at September 30, 2001.

 

***                Inflation***

 

                Inflation remains relatively low and has hada minimal impact on the operating performance of the Properties. Nonetheless,substantially all of the tenants’ leases contain provisions designed to lessenthe impact of inflation. These provisions include clauses enabling us toreceive percentage rentals based on tenants’ gross sales, which generallyincrease as prices rise, and/or escalation clauses, which generally increaserental rates during the terms of the leases. In addition, many of the leasesare for terms of less than ten years, which may enable us to replace existingleases with new leases at higher base and/or percentage rentals if rents of theexisting leases are below the then-existing market rate. Substantially all ofthe leases, other than those for anchors, require the tenants to pay aproportionate share of operating expenses, including common area maintenance,real estate taxes and insurance, thereby reducing our exposure to increases incosts and operating expenses resulting from inflation.

 

                However, inflation may have a negative impacton some of our other operating items. Interest and general and administrativeexpenses may be adversely affected by inflation as these specified costs couldincrease at a rate higher than rents. Also, for tenant leases with stated rentincreases, inflation may have a negative effect as the stated rent increases inthese leases could be lower than the increase in inflation at any given time.

 

***                Seasonality***

 

                The shopping center industry is seasonal innature, particularly in the fourth quarter during the holiday season, whentenant occupancy and retail sales are typically at their highest levels. Inaddition, shopping malls achieve most of their temporary tenant rents duringthe holiday season. As a result of the above, our earnings are generallyhighest in the fourth quarter of each year.

 

***                RetailClimate and Tenant Bankruptcies***

 

The recent events of September11, 2001 have negatively impacted the overall economy in which we operate.  These pressures may further affect, amongstother factors, consumer confidence and job growth.  A significant portion of our overage and percent rent revenue istypically recognized during the fourth quarter of our fiscal year.  We are unable to determine what effect theseworld events may have on consumer spending for the fourth quarter 2001 andbeyond.  If the impact of these eventson consumer spending result in weak retail sales, they could negatively impactour ability to recognize overage and percent rent revenue.

 

A number of local, regional, and nationalretailers, including both in-line and anchor tenants, have recently announcedstore closings or filed for bankruptcy. Some changeover in tenants is normal in our business.  We lost 800,000 square feet of tenants in2000 and 1,600,000 square feet in the first nine months of 2001 tobankruptcies.  Pressures which affectconsumer confidence, job growth, energy costs and income gains, however, canaffect retail sales growth and a continuing soft economic cycle may impact ourability to retenant property vacancies resulting from these store closings orbankruptcies.

 

The geographicaldiversity of our portfolio mitigates some of our risk in the event of aneconomic downturn.  In addition, thediversity of our tenant mix also is a factor because no single retailerrepresents neither more than 2.0% of total GLA nor more than 3.5% of ourannualized base minimum rent. Bankruptcies and store closings may, in some circumstances, create opportunitiesfor us to release spaces at higher rents to tenants with enhanced salesperformance.  Our previouslydemonstrated ability to successfully retenant anchor and in line storelocations reflects our resilience to fluctuations in economic cycles.  While these factors reflect some of the inherentstrengths of our portfolio in a difficult retail environment, successfulexecution of a releasing strategy is not assured.

 

# **Item 3. Qualitative and QuantitativeDisclosure About Market Risk**

 

*SensitivityAnalysis.*Our combined future earnings, cash flows and fair values relating to financialinstruments are dependent upon prevalent market rates of interest, primarilyLIBOR. Based upon consolidated indebtedness and interest rates at September 30,2001, a 0.50% increase in the market rates of interest would decrease annualfuture earnings and cash flows by approximately $9.0 million, and woulddecrease the fair value of debt by approximately $462.9 million. A 0.50%decrease in the market rates of interest would increase annual future earningsand cash flows by approximately $9.0 million, and would increase the fair valueof debt by approximately $532.3 million. We manage our exposure to interest rate risk by a combination ofinterest rate protection agreements to effectively fix or cap a portion of ourvariable rate debt or in the case of a fair value hedge, to effectively convertfixed rate debt to variable rate debt and by refinancing fixed rate debt attimes when rates and terms are appropriate.

 

**Part II - Other Information**

 

                Item 1:  Legal Proceedings

 

                Please refer to Note 9 of the combinedfinancial statements for a summary of material pending litigation.

 

                Item 6: Exhibits and Reports on Form 8-K

 

                                (a) Exhibits

 

2.1 Agreement of Mergerdated May 9, 2001 between Simon Property Group, Inc. and SPG Properties, Inc.(the copy of this exhibit filed as Exhibit 1.1 to SPG’s Registration Statementon Form S-4 (No. 333-60526) is incorporated herein by reference).

 

 

                                (b) Reports on Form 8-K

 

Two reports on Form 8-K were filed during thecurrent period.

 

                On July 2, 2001 under Item 2 – Acquisition or Disposition of Assets,SPG reported the completion of the previously announced merger (the “Merger”)of SPG Properties, Inc. with and into Simon Property Group, Inc., with SimonProperty Group, Inc. being the surviving entity.

 

On August 10, 2001 under Item 5 - OtherEvents, SPG reported that it made available additional ownership andoperational information concerning the Companies, the Operating Partnerships,and the properties owned or managed as of June 30, 2001, in the form of aSupplemental Information Package. A copy of the package was included as anexhibit to the 8-K filing. In addition, SPG reported that, on August 8, 2001,it issued a press release containing information on earnings as of June 30, 2001and other matters. A copy of the press release was included as an exhibit tothe filing.

 

**SIGNATURE**

 

 

                Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | **SIMON PROPERTY  GROUP, INC. AND**                   |
|--------|-------------------------------------------------------|
|   | **SPG REALTY  CONSULTANTS, INC.**                     |
|   |                                                  |
|   | /s/  Stephen E. Sterrett                              |   |
|   | Stephen  E. Sterrett,                                 |
|   | Executive  Vice President and Chief Financial Officer |
|   |                                                  |
|   |                                                  |
|   | Date:  November 14, 2001                              |