-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DmIe6EXcopKIwRZfDAlaU2iuX7+HZrDgM3qpgYPhCZxss/50GrqEt6BhMp12faeL N+dzt8XniNK1bzuOO5da2Q== 0000085388-96-000010.txt : 19961118 0000085388-96-000010.hdr.sgml : 19961118 ACCESSION NUMBER: 0000085388-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROUSE COMPANY CENTRAL INDEX KEY: 0000085388 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 520735512 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11543 FILM NUMBER: 96663478 BUSINESS ADDRESS: STREET 1: 10275 LITTLE PATUXENT PKWY CITY: COLUMBIA STATE: MD ZIP: 21044-3456 BUSINESS PHONE: 4109926000 MAIL ADDRESS: STREET 1: 10275 LITTLE PATUXENT PARKWAY CITY: COLUMBIA STATE: MD ZIP: 21044 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNITY RESEARCH & DEVELOPMENT INC DATE OF NAME CHANGE: 19660913 10-Q 1 Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-1743 The Rouse Company (Exact name of registrant as specified in its charter) Maryland 52-0735512 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10275 Little Patuxent Parkway Columbia, Maryland 21044-3456 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 992-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of the issuer's common stock as of November 12, 1996: Common Stock, $0.01 par value 66,725,919 Title of Class Number of Shares Part I. Financial Information Item 1. Financial Statements: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations Three and Nine Months Ended September 30, 1996 and 1995 (Unaudited, in thousands except per share amounts, note 1) Three months Nine months ended September 30, ended September 30, 1996 1995 1996 1995 Revenues: Operating properties: Retail centers $127,894 $123,202 $369,650 $360,502 Office, mixed-use and other 51,639 36,959 128,086 109,432 179,533 160,161 497,736 469,934 Land sales 47,384 8,519 79,847 23,550 Corporate interest income 758 485 2,290 1,832 227,675 169,165 579,873 495,316 Operating expenses, exclusive of provision for bad debts, depreciation and amortization: Operating properties: Retail centers 65,928 62,456 189,343 183,042 Office, mixed-use and other 24,346 17,160 60,624 52,006 90,274 79,616 249,967 235,048 Land sales 41,054 4,542 62,704 12,573 Development 2,019 605 3,716 4,110 Corporate 1,608 1,452 5,732 5,972 134,955 86,215 322,119 257,703 Interest expense: Operating properties: Retail centers 33,172 32,863 95,716 95,326 Office, mixed-use and other 21,248 17,272 55,514 51,745 54,420 50,135 151,230 147,071 Land sales 508 1,263 995 3,798 Development 95 88 265 271 Corporate 2,646 2,294 9,788 7,837 57,669 53,780 162,278 158,977 Provision for (recovery of) bad debts 362 (236) 1,484 1,229 Depreciation and amortization 23,212 18,026 60,296 54,874 216,198 157,785 546,177 472,783 Gain (loss) on dispositions of assets and other provisions, net (note 6) (6,060) (5,638) (6,355) (14,118) The accompanying notes are an integral part of these statements. 1 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations, continued Three and Nine Months Ended September 30, 1996 and 1995 (Unaudited, in thousands except per share amounts, note 1) Three months Nine months ended September 30, ended September 30, 1996 1995 1996 1995 Earnings before income taxes and extraordinary losses $ 5,417 $ 5,742 $27,341 $ 8,415 Income tax provision: Current - primarily state 155 184 505 429 Deferred 7,718 2,389 16,241 4,047 7,873 2,573 16,746 4,476 Earnings (loss) before extraordinary losses (2,456) 3,169 10,595 3,939 Extraordinary losses from extinguishments of debt, net of related income tax benefits (note 7) (46) (137) (1,361) (7,354) Net earnings (loss) $(2,502) $ 3,032 $ 9,234 $ (3,415) Net earnings (loss) applicable to common shareholders $(5,714) $ (628) $(1,299) $(14,396) EARNINGS (LOSS) PER SHARE OF COMMON STOCK AFTER PROVISION FOR DIVIDENDS ON PREFERRED STOCK: Earnings (loss) before extraordinary losses $ (.10) $ (.01) $ -- $ (.15) Extraordinary losses, net -- -- (.03) (.15) $ (.10) $ (.01) $ (.03) $ (.30) DIVIDENDS PER SHARE: Common stock $ .22 $ .20 $ .66 $ .60 Preferred stock $ .81 $ .81 $ 2.43 $ 2.43 The accompanying notes are an integral part of these statements. 2 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1996 and December 31, 1995 (Unaudited, in thousands, note 1) September 30, December 31, 1996 1995 Assets: Property (note 3): Operating properties: Property and deferred costs of projects $3,427,889 $3,006,356 Less accumulated depreciation and amortization 555,606 519,319 2,872,283 2,487,037 Properties in development 142,530 56,151 Properties held for sale 30,431 22,602 Land held for development and sale 232,692 134,168 Total property 3,277,936 2,699,958 Prepaid expenses, deferred charges and other assets 187,193 151,068 Accounts and notes receivable 89,343 36,751 Investments in marketable securities 3,690 2,910 Cash and cash equivalents 57,763 94,922 Total $3,615,925 $2,985,609 The accompanying notes are an integral part of these statements. 3 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets, continued September 30, 1996 and December 31, 1995 (Unaudited, in thousands, note 1) September 30, December 31, 1996 1995 Liabilities: Debt (note 4): Property debt not carrying a Parent Company guarantee of repayment $2,279,641 $1,990,041 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt 162,361 138,488 Convertible subordinated debentures 130,000 130,000 Other debt 296,500 221,000 588,861 489,488 Total debt 2,868,502 2,479,529 Obligations under capital leases 58,166 58,786 Accounts payable, accrued expenses and other liabilities 240,323 185,561 Deferred income taxes 125,489 81,649 Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 137,500 137,500 Shareholders' equity: Series A Convertible Preferred stock with a liquidation preference of $0 in 1996 and $225,250 in 1995 (note 5) -- 45 Common stock of 1 cent par value per share; 250,000,000 shares authorized; 66,692,721 shares issued in 1996 and 47,922,749 shares issued in 1995 667 479 Additional paid-in capital 490,160 309,943 Accumulated deficit (304,882) (267,883) Total shareholders' equity 185,945 42,584 Total $3,615,925 $2,985,609 The accompanying notes are an integral part of these statements. 4 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1996 and 1995 (Unaudited, in thousands, note 1) 1996 1995 Cash flows from operating activities: Rents and other revenues received $ 490,120 $ 463,544 Proceeds from land sales 77,685 23,715 Interest received 8,556 7,599 Land development expenditures (32,327) (13,248) Operating expenditures: Operating properties (265,727) (229,114) Land sales, development and corporate (19,910) (14,104) Interest paid: Operating properties (154,416) (156,688) Land sales, development and corporate (12,917) (12,179) Net cash provided by operating activities 91,064 69,525 Cash flows from investing activities: Expenditures for acquisition of The Hughes Corporation (net of acquired cash) (35,872) -- Expenditures for properties in development and improvements to existing properties funded by debt (67,024) (52,711) Expenditures for property acquisitions (2,724) (27,767) Expenditures for improvements to existing properties funded by cash provided by operating activities: Tenant leasing and remerchandising (5,482) (6,696) Building and equipment (7,448) (2,711) Proceeds from sales of operating properties 6,299 -- Purchases of marketable securities (7,064) (4,626) Proceeds from redemptions or sales of marketable securities 8,447 29,238 Other 183 1,186 Net cash used in investing activities (110,685) (64,087) Cash flows from financing activities: Proceeds from issuance of property debt 172,476 170,643 Repayments of property debt: Scheduled principal payments (28,885) (27,268) Other payments (182,407) (251,327) Proceeds from issuance of other debt 90,400 124,947 Repayments of other debt (16,303) (8,079) Purchases of treasury stock (5,247) -- Proceeds from exercise of stock options 599 2,138 Dividends paid (46,233) (39,687) Other (1,938) -- Net cash used in financing activities (17,538) (28,633) Net decrease in cash and cash equivalents (37,159) (23,195) Cash and cash equivalents at beginning of period 94,922 49,398 Cash and cash equivalents at end of period $ 57,763 $ 26,203 The accompanying notes are an integral part of these statements. 5 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued Nine Months Ended September 30, 1996 and 1995 (Unaudited, in thousands, note 1) 1996 1995 Reconciliation of net earnings (loss) to net cash provided by operating activities: Net earnings (loss) $ 9,234 $ (3,415) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 60,296 54,874 (Gain) loss on dispositions of assets and other provisions, net 6,355 14,118 Deferred income tax provision 16,241 4,047 Extraordinary losses, net of related income tax benefits 1,361 7,354 Additions to pre-construction reserve 2,200 1,800 Provision for bad debts 1,484 1,229 Increase in operating assets and liabilities, net (6,107) (10,482) Net cash provided by operating activities $ 91,064 $ 69,525 Schedule of Non-Cash Investing and Financing Activities: Debt and other liabilities assumed in acquisition of The Hughes Corporation, net (note 2) $354,577 $ -- Common stock issued in acquisition of The Hughes Corporation (note 2) 178,086 -- Common stock issued pursuant to Contingent Stock Agreement (note 2) 5,025 -- Mortgage debt extinguished on disposition of an interest in an operating property -- (20,779) Mortgage debt assumed by purchasers of land (10,412) -- Mortgage debt assumed on acquisitions of interests in properties 21,090 6,175 Notes received from sales of operating properties 8,440 -- Notes received from sales of land 16,500 -- Value of non-cash consideration given in connection with acquisitions of interests in properties 13,520 79,811 The accompanying notes are an integral part of these statements. 6 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) September 30, 1996 (1) Principles of statement presentation The unaudited consolidated financial statements include all adjustments which are necessary, in the opinion of management, to fairly reflect the Company's financial position and results of operations. All such adjustments are of a normal recurring nature. The statements have been prepared using the accounting policies described in the 1995 Annual Report to Shareholders, except that, effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Statement No. 121 establishes new standards for measurement and recognition of impairment of long-lived assets. Initial adoption had no effect on the financial position or results of operations reported by the Company. In its annual reports, the Company has included certain supplementary current value basis financial statements with the historical cost basis financial statements. The current value basis financial statements are an integral part of the Company's formal, year-end reporting, but they are not included in quarterly reports to shareholders. Therefore, all of the financial information contained herein is based on the historical cost basis as required by generally accepted accounting principles. (2) Acquisition of The Hughes Corporation and Related Matters On June 12, 1996, the Company acquired all of the outstanding equity interests in The Hughes Corporation and its affiliated partnership, Howard Hughes Properties, Limited Partnership (together, "Hughes"). In connection with the acquisition, the Company issued 7,742,884 shares of common stock valued at $178,086,000 and incurred or assumed debt and other liabilities of $354,577,000 (net of certain receivables and other assets acquired). Additional shares of common stock (or, in certain circumstances, Increasing Rate Preferred Stock) may be issued to the former Hughes owners or their successors pursuant to terms of a Contingent Stock Agreement based on the values of certain specified assets at various "termination" dates from 2000 to 2009 and cash flows generated from the development and/or sale of those assets prior to the "termination" dates. The acquisition was accounted for using the purchase method. The total purchase cost approximated the aggregate fair value of the assets acquired which consist primarily of a regional shopping center and a large-scale, master-planned community in Las Vegas, Nevada, and four large-scale, master-planned business parks and various other properties in Nevada and Southern California. 7 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (2) Acquisition of The Hughes Corporation and Related Matters, continued The consolidated statements of operations for the three and nine months ended September 30, 1996 include revenues and costs and expenses from the date of acquisition. The Company's pro forma consolidated results of operations for the nine months ended September 30, 1996 and 1995, assuming the acquisition of Hughes occurred on January 1, 1995, are summarized as follows (in thousands, except per share data): 1996 1995 Revenues $631,642 $688,892 Earnings before extraordinary losses 13,699 20,179 Net earnings 12,338 12,825 Earnings per share of common stock after provision for dividends on Preferred stock: Earnings before extraordinary losses .06 .17 Net earnings $ .03 $ .03 The pro forma revenues and earnings summarized above are not necessarily indicative of the results that would have occurred if the acquisition had been consummated on January 1, 1995 or of future results of operations of the combined companies. (3) Property Properties in development include construction and development in progress and pre-construction costs, net. The construction and development in progress accounts include land and land improvements of $25,483,000 at September 30, 1996. Changes in pre-construction costs, net, for the nine months ended September 30, 1996 are summarized as follows (in thousands): Balance at beginning of period, before pre-construction reserve $ 21,463 Costs incurred 15,579 Costs transferred to construction and development in progress (16,742) Costs transferred to operating properties (435) Costs of unsuccessful projects written off (917) 18,948 Less pre-construction reserve 16,662 Balance at end of period, net $ 2,286 8 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (4) Debt Debt at September 30, 1996 and December 31, 1995 is summarized as follows (in thousands): September 30, 1996 December 31, 1995 Due in Due in Total one year Total one year Mortgages and bonds $2,211,308 $114,966 $1,997,998 $102,428 Convertible subordi- nated debentures 130,000 -- 130,000 -- Medium-term notes 115,300 5,000 100,300 5,000 Other loans 411,894 3,131 251,231 3,001 Total $2,868,502 $123,097 $2,479,529 $110,429 The amounts due in one year reflect the terms of existing loan agreements except where refinancing commitments from outside lenders have been obtained. In those instances, maturities are determined based on the terms of the refinancing commitments. At September 30, 1996, approximately $63,147,000 of debt due in one year relates to balloon payments on three retail center mortgages due in the second quarter of 1997 and $11,934,000 relates to a balloon payment on an office building mortgage due in the third quarter of 1997. The Company expects to refinance these loans on a long-term basis or extend their terms at or prior to their scheduled maturities. (5) Series A Convertible Preferred stock The Company has authorized issuance of 50,000,000 shares of Preferred stock of 1 cent par value per share of which 4,505,168 shares have been classified as Series A Convertible Preferred. On September 30, 1996, 4,497,459 shares of Series A Convertible Preferred stock were converted into 10,582,000 shares of common stock. If the conversion had occurred on January 1, 1995, pro forma earnings (loss) per share of common stock for the nine months ended September 30, 1996 and 1995 would have been $.14 and $(.06), respectively. At September 30, 1996 and December 31, 1995, there were 7,550 and 4,505,009 shares outstanding, respectively. (6) Gain (loss) on dispositions of assets and other provisions, net The loss in 1996 relates to provisions for losses on two retail centers the Company has decided to sell ($15,071,000). These provisions were based on the estimated fair values of the properties less costs to sell. These losses were partially offset by a gain from the reversal of a portion (approximately $9,000,000) of the provision for the litigation matter discussed in note 8. 9 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, (Unaudited), continued (6) Gain (loss) on dispositions of assets and other provisions, net (continued) The loss in 1995 relates primarily to provisions for losses on several retail centers the Company decided to sell ($16,058,000). These provisions were based on the estimated fair values of the properties less costs to sell. These losses were partially offset by a gain on the disposition of a retail center property ($1,940,000). (7) Extraordinary losses, net of related income tax benefits During the nine months ended September 30, 1996 and 1995, the Company incurred extraordinary losses related to extinguishments of debt prior to scheduled maturity of $2,094,000 and $11,314,000, respectively, net of related income tax benefits of $733,000 and $3,960,000, respectively. (8) Contingencies On November 6, 1990, Robert P. Guastella Equities, Inc. ("Plaintiff"), a former tenant at the Riverwalk Shopping Center in New Orleans, Louisiana ("Riverwalk"), which is owned and operated by New Orleans Riverwalk Associates, an affiliate of the Company ("NORA"), filed suit in the Civil District Court of Orleans Parish, Louisiana against NORA, the Company, two Company affiliates and a partner of NORA (collectively, "Defendants"). Plaintiff alleges that Defendants breached Plaintiff's lease agreement with NORA for the operation of a restaurant at Riverwalk and that as a result of these breaches it suffered losses and could not pay the rentals due under the lease agreement, as a result of which the lease and its tenancy were terminated by NORA. Plaintiff sought damages of approximately $600,000 for these alleged breaches. In addition, on September 3, 1992, Plaintiff claimed $33,000,000 for alleged lost future profits which it claimed it would have earned had its lease not been terminated. The defendants filed answers denying the claims of Plaintiff and asserted other defenses. NORA also asserted a counterclaim against Plaintiff and its individual guarantors for past due rentals and other charges in the approximate amount of $300,000 plus interest and attorneys' fees as provided for in the lease agreement. The case was tried before a jury and, on October 28, 1993, the jury returned a verdict against Defendants upon which judgment was entered by the trial court on January 7, 1994, in the total net amount of approximately $9,128,000 (including a net award for lost future profits of approximately $8,640,000) plus interest and attorney's fees. On May 6, 1994, the trial court denied all post-trial motions of both Plaintiff and Defendants. The trial court also entered an amended judgment in which it awarded the Plaintiff $450,000 in attorneys' fees and awarded Defendants $25,000 in attorneys' fees. 10 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements, (Unaudited), continued (8) Contingencies, continued On May 23, 1994, Defendants appealed this judgment to the Louisiana Court of Appeal, Fourth Circuit. On November 16, 1995, the Louisiana Court of Appeal reduced the judgment by $240,000, but otherwise affirmed the damage award to Plaintiff. Defendants subsequently filed a motion for reconsideration with the Louisiana Court of Appeal, which was denied on December 19, 1995. On January 18, 1996, Defendants filed a petition requesting the Louisiana Supreme Court to consider a further appeal of this judgment. On April 8, 1996, the Louisiana Supreme Court granted Defendants' petition. Subsequently, the parties entered into settlement discussions which culminated in a July 25, 1996 Settlement Agreement which dismissed all claims and counterclaims with prejudice. The Company recorded in the fourth quarter of 1995 a pre-tax provision of $12,321,000, representing the full amount of the modified award (including attorneys' fees) plus interest, less pre-tax provisions previously recorded totaling $1,150,000. Additional provisions for interest totaling $295,000 were recorded in the six months ended June 30, 1996. The Company satisfied its financial and other obligations under the Settlement Agreement in July 1996 and reversed approximately $9,000,000 of the previously recorded provision for loss on this matter in the third quarter of 1996. The Company and certain of its subsidiaries are defendants in various other litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Some of these litigation matters are covered by insurance. In the opinion of management, adequate provision has been made for losses with respect to all litigation matters, where appropriate, and the ultimate resolution of all such litigation matters is not likely to have a material effect on the consolidated financial position of the Company. Due to the Company's modest and fluctuating net earnings (loss), it is not possible to predict whether the resolution of these matters is likely to have a material effect on the Company's consolidated net earnings (loss), and it is, therefore, possible that the resolution of these matters could have such a material effect in any future quarter or year. 11 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: THE ROUSE COMPANY AND SUBSIDIARIES The following discussion and analysis covers any material changes in financial condition since December 31, 1995 and any material changes in the results of operations for the three and nine months ended September 30, 1996 as compared to the same periods in 1995. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 1995 Annual Report to Shareholders. General On June 12, 1996, the Company purchased all of the outstanding equity interests in The Hughes Corporation and its affiliated partnership, Howard Hughes Properties, Limited Partnership (together, Hughes). The assets of Hughes consist primarily of a regional shopping center and a large-scale, master-planned community (Summerlin) in Las Vegas, Nevada, and four large-scale, master-planned business parks and various other properties in Nevada and Southern California. Management believes that the acquisition of Hughes will enable the Company to capitalize on its existing strengths in retail and office/mixed-use projects and large scale land development projects in the fast-growing Las Vegas market. For additional information about the acquisition of Hughes, see note 2 to the consolidated financial statements. Management is continually reviewing and evaluating the portfolio of properties to identify expansion, renovation and/or remerchandising opportunities and properties that may not have future prospects consistent with the Company's long-term objectives. The Company will continue to dispose of properties that are not meeting and/or are not considered to have the potential to meet its investment criteria, particularly smaller properties in smaller market areas. While disposition decisions may cause the Company to recognize gains or losses that could have material effects on reported net earnings (loss) in future quarters or fiscal years, they are not anticipated to have a material effect on the overall consolidated financial position of the Company. Operating Results: Operating Properties: Revenues from retail centers increased $4,692,000 and $9,148,000 for the three and nine months ended September 30, 1996, as compared to the same periods in 1995. Total operating and interest expenses increased $6,837,000 and $11,077,000, including increased depreciation and amortization of $2,546,000 and $3,882,000, respectively, for the three and nine months ended September 30, 1996 as compared to the same periods in 1995. The increases in revenues and expenses for these periods are attributable primarily to the net effect of changes in the Company's portfolio of retail centers, including acquisitions of interests in four properties (two in the third quarter of 1995, one in connection with the acquisition of Hughes in the second quarter of 1996 and one in the third quarter of 1996), the opening of an expansion in the first quarter of 12 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Operating Properties (continued): 1995 and sales of two properties in the first quarter of 1996. Increases in effective rents on re-leased space, particularly in the Company's larger centers in larger trade areas, also contributed to the increases in revenues for these periods. The increases in revenues for the periods were partially offset by the effects of slightly lower overall average occupancy levels (88.2% and 88.3%, respectively, for the three and nine months ended September 30, 1996, as compared to 91.0% and 90.6%, respectively, for the same periods in 1995) and decreases in lease cancellation payments. Revenues from office, mixed-use and other properties increased $14,680,000 and $18,654,000 for the three and nine months ended September 30, 1996, as compared to the same periods in 1995. These increases are due primarily to the acquisition of Hughes. Improved occupancy levels at hotel and office properties contributed to the increases in each period; however, the increase for the nine months ended September 30, 1996, was partially offset by a decrease in lease termination payments from tenant restructurings. Total operating and interest expenses increased $13,888,000 and $13,676,000 for the three and nine months ended September 30, 1996, as compared to the same periods in 1995. These increases are also attributable primarily to the acquisition of Hughes and were partially offset by the effects of a sale of an unoccupied industrial building in the second quarter of 1996. Land sales: Revenues from land sales, excluding sales of land acquired in the purchase of Hughes, decreased $3,630,000 and increased $6,627,000, and related costs and expenses decreased $1,697,000 and increased $3,033,000, for the three and nine months ended September 30, 1996 as compared to the same periods in 1995. The decrease in revenues for the three month period is attributable to lower levels of land sales in Columbia, particularly for residential use. The increase in revenues for the nine month period is attributable to higher levels of land sales in Columbia, particularly for commercial use. The changes in related costs and expenses are attributable primarily to changes in the cost of sales. Revenues from sales of land acquired in the purchase of Hughes were $42,495,000 and $49,670,000, and related costs and expenses were $37,454,000 and $44,295,000, for the three and nine months ended September 30, 1996. The cost of sales for land acquired in the purchase of Hughes for the periods is relatively high as a percentage of revenues as the land sold consists primarily of inventory on which development was completed or in progress at the date of acquisition. Cost of sales for land acquired in the purchase of Hughes is expected to be lower as a percentage of revenues in future periods as the inventory of land on which development was completed or in progress at the date of acquisition is depleted. 13 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued): Development: These costs consist primarily of additions to the pre-construction reserve and new business costs. The pre-construction reserve is maintained to provide for costs of projects which may not go forward to completion. New business costs relate primarily to the initial evaluation of acquisition and development opportunities. These costs increased and decreased $1,414,000 and $394,000 for the three and nine months ended September 30, 1996 as compared to the same periods in 1995. The increase in the three month period is attributable primarily to an increase in additions to the pre-construction reserve due to the Company's more active pursuit of retail center development opportunities. The decrease in the nine month period is due primarily to reduced new business costs as the Company's focus on the acquisition of Hughes deferred evaluation of other opportunities, particularly during the first half of 1996. Corporate: Corporate interest costs were $4,380,000 and $3,275,000 for the three months ended September 30, 1996 and 1995, respectively, and $13,620,000 and $10,479,000 for the nine months ended September 30, 1996 and 1995, respectively. Of such amounts, $1,734,000 and $981,000 were capitalized during the three months ended September 30, 1996 and 1995, respectively, and $3,832,000 and $2,642,000 were capitalized during the nine months ended September 30, 1996 and 1995, respectively, on funds invested in development projects. The increases in corporate interest costs are due to higher levels of debt used for corporate purposes. Gain (loss) on dispositions of assets and other provisions, net The loss in 1996 relates to provisions for losses on two retail centers the Company has decided to sell ($15,071,000). These provisions were based on the estimated fair values of the properties less costs to sell. These losses were partially offset by a gain from the reversal of a portion (approximately $9,000,000) of the provision for the litigation matter discussed in note 8 to the consolidated financial statements. The loss in 1995 relates primarily to provisions for losses on several retail centers the Company decided to sell ($16,058,000). These provisions were based on the estimated fair values of the properties less costs to sell. These losses were partially offset by a gain on the disposition of a retail center property ($1,940,000). Extraordinary losses, net of related income tax benefits During the nine months ended September 30, 1996 and 1995, the Company incurred extraordinary losses related to extinguishments of debt prior to scheduled maturity of $2,094,000 and $11,314,000, respectively, net of related income tax benefits of $733,000 and $3,960,000, respectively. 14 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Financial Condition and Liquidity: Shareholders' equity increased by $143,361,000 from $42,584,000 at December 31, 1995 to $185,945,000 at September 30, 1996. The increase was due primarily to the value of shares of common stock issued in the acquisition of Hughes ($178,086,000) and net earnings for the nine months ended September 30, 1996, partially offset by the payment of regular quarterly dividends on the Company's common and Preferred stocks. On September 30, 1996 substantially all of the outstanding shares of Series A Preferred stock were converted into 10,582,000 shares of common stock. The conversion had no effect on shareholders' equity. The Company had cash and cash equivalents and investments in marketable securities totaling $61,453,000 and $97,832,000 at September 30, 1996 and December 31, 1995, respectively, including $3,690,000 and $2,910,000, respectively, held for restricted uses. The Company has lines of credit for up to $148,120,000 of which $77,620,000 was available at September 30, 1996. These lines of credit may be used to provide corporate liquidity, fund property acquisition and development costs and finance other corporate needs, subject to lenders' approvals. They may also be utilized to pay some portion of existing debt, including maturities in 1996 and 1997. Howard Hughes Properties, Limited Partnership (HHPLP), a wholly-owned by the Company, has a line of credit for up to $100,000,000 of which $4,000,000 was available at September 30, 1996. This line can be used to fund certain development costs. In November, 1996, HHPLP refinanced several office properties that had previously been financed on the credit line and used the proceeds to repay the credit line, restoring availability to $55,000,000. As of September 30, 1996, debt due in one year was $123,097,000. Approximately $63,147,000 of this debt relates to three retail center mortgages due in the second quarter of 1997, and $11,934,000 relates to an office building mortgage due in the third quarter of 1997. The Company expects to refinance these loans or extend their terms at or prior to their scheduled maturities. The Company continues to actively evaluate sources of capital and is confident that it will be able to make these payments, arrange to refinance these maturities prior to their scheduled repayment dates or obtain new sources of capital without necessitating property sales. Net cash provided by operating activities was $91,064,000 and $69,525,000 for the nine months ended September 30, 1996 and 1995, respectively. The factors discussed previously under the operating results of the four major business segments, particularly higher land sales revenues, affected the level of net cash provided by operating activities. Net cash used in investing activities was $110,685,000 and $64,087,000 for the nine months ended September 30, 1996 and 1995, respectively. The increase in net cash used of $46,598,000 was due primarily to the acquisition of Hughes and lower net sales or redemptions of marketable securities. 15 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued) Financial Information and Liquidity (continued): Net cash used in financing activities was $17,538,000 and $28,633,000 for the nine months ended September 30, 1996 and 1995, respectively. The decrease in net cash used of $11,095,000 is attributable primarily to the use of lines of credit to fund the acquisition of Hughes and certain project development costs partially offset by increases in dividends, purchases of treasury stock and the use of financing proceeds received in the fourth quarter of 1995 to repay certain higher rate property debt. Information relating to forward-looking statements: This report on Form 10-Q of the Company includes forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements. The following factors could cause actual results to differ materially from historical results or those anticipated: (1) real estate investment risks; (2) development risks; (3) illiquidity of real estate investments; (4) dependence on rental income from real property; (5) effect of uninsured loss; (6) lack of geographical diversification; (7) possible environmental liabilities; (8) difficulties of compliance with the Americans with Disabilities Act; (9) competition; (10) changes in the economic climate; and (11) factors relating to the Hughes acquisition. For a more detailed discussion of these factors, see Exhibit 99.2 of the Company's Form 10-K for the fiscal year ended December 31, 1995. 16 Part II. Other Information Item 1. Legal Proceedings On November 6, 1990, Robert P. Guastella Equities, Inc. ("Plaintiff"), a former tenant at the Riverwalk Shopping Center in New Orleans, Louisiana ("Riverwalk"), which is owned and operated by New Orleans Riverwalk Associates, an affiliate of the Company ("NORA"), filed suit in the Civil District Court of Orleans Parish, Louisiana against NORA, the Company, two Company affiliates - Rouse-New Orleans, Inc. and New Orleans Riverwalk Limited Partnership - and Connecticut General Life Insurance Company, which is a general partner of NORA (collectively, "Defendants"). Plaintiff alleged that Defendants breached Plaintiff's lease agreement with NORA for the operation of a restaurant at Riverwalk by (I) failing to prevent the leased premises from flooding, (ii) refusing to permit entertainment on the leased premises, (iii) interfering with the operation of air conditioning equipment on the leased premises and (iv) failing to provide adequate security. Plaintiff claimed that as a result of these breaches it suffered losses and could not pay the rentals due under the lease agreement, as a result of which the lease and its tenancy were terminated by NORA. Plaintiff sought damages of approximately $600,000 for these alleged breaches. In addition, on September 3, 1992, Plaintiff claimed $33,000,000 for alleged lost future profits which it claimed it would have earned had its lease not been terminated. All Defendants filed answers denying the claims of Plaintiff and asserting other defenses. NORA also asserted a counterclaim against Plaintiff and its guarantors, Robert Guastella and Charles Kovacs, for past due rentals and other charges in the approximate amount of $300,000 plus interest and attorneys' fees as provided for in the lease agreement. The case was tried before a jury and, on October 28, 1993, the jury returned a verdict against Defendants upon which judgment was entered by the trial court on January 7, 1994, in the total net amount of approximately $9,128,000 (which included a net award for lost future profits of approximately $8,640,000) plus interest from the date the suit was filed and attorneys' fees in an amount to be determined. On May 6, 1994, the trial court denied all post-trial motions of both Plaintiff and Defendants. The trial court also entered an amended judgment in which it awarded Plaintiff $450,000 in attorneys' fees and awarded Defendants $25,000 in attorneys' fees. On May 23, 1994, Defendants appealed this judgment to the Louisiana Court of Appeal, Fourth Circuit. On November 16, 1995, the Louisiana Court of Appeal in a 2 to 1 decision reduced the judgment by $240,000, but otherwise affirmed the damage award to Plaintiff. Defendants subsequently filed a motion for reconsideration with the Louisiana Court of Appeal, which was denied on December 19, 1995, again in a 2 to 1 decision. On January 18, 1996, Defendants filed a petition requesting the Louisiana Supreme Court to consider a further appeal of this judgment. On April 8, 1996, the Louisiana Supreme Court granted Defendants' petition. Subsequently, the parties entered into settlement discussions which culminated in a July 25, 1996 Settlement Agreement which dismissed all claims and counterclaims with prejudice. The Company has satisfied its financial and other obligations under the Settlement Agreement. For additional information about this suit, see note 8 - Contingencies - to the consolidated financial statements. 17 Part II. Other Information Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Reference is made to the Exhibit Index. (b) Reports on Form 8-K None 18 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ROUSE COMPANY Principal Financial Officer: Date: November 14, 1996 By /s/Jeffrey H. Donahue Jeffrey H. Donahue Senior Vice President and Chief Financial Officer Principal Accounting Officer: Date: November 14, 1996 By /s/George L. Yungmann George L. Yungmann Senior Vice President and Controller 19 Exhibit Index Exhibit Number Description 11 Statement re Computation of per share earnings (loss) 20 THE ROUSE COMPANY AND SUBSIDIARIES Computation of Fully Diluted Earnings (Loss) Per Share (Unaudited, in thousands except per share amounts) Three months Nine months ended September 30, ended September 30, 1996 1995 1996 1995 Earnings (loss) before extraordinary losses $(2,456) $ 3,169 $10,595 $ 3,939 Add after-tax interest expense applicable to convertible subordinated debentures 1,215 1,215 3,644 3,644 Earnings (loss) before extra- ordinary losses, as adjusted (1,241) 4,384 14,239 7,583 Extraordinary losses (46) (137) (1,361) (7,354) Net earnings (loss), as adjusted $(1,287) $ 4,247 $12,878 $ 229 Shares: Weighted average number of common shares outstanding 57,292 47,868 51,760 47,779 Assuming conversion of convertible Preferred stock 9,395 10,600 10,172 10,600 Assuming conversion of convertible subordinated debentures 4,542 4,542 4,542 4,542 Assuming exercise of options and warrants reduced by the number of shares which could have been purchased with the proceeds from the exercise of such options 800 376 800 376 Weighted average number of shares outstanding, as adjusted 72,029 63,386 67,274 63,297 Earnings (loss) per common share assuming full dilution: Earnings (loss) before extra- ordinary losses, as adjusted $ (.02) $ .07 $ .21 $ .12 Extraordinary losses -- -- (.02) (.12) Net earnings (loss), adjusted $ (.02) $ .07 $ .19 $ -- This calculation is submitted in accordance with Regulation S-K item 601 (b) (11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. 21 EX-27 2
5 This financial data schedule is included to comply with the requirements of Item 601 (c) (2) of Regulations S-K and S-B. This schedule contains summary financial information extracted from Form 10-Q for the quarterly period ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 SEP-30-1996 $ 57,763 $ 3,690 $ 116,221 $ (26,877) 0 $ 188,288 $ 3,427,889 $ (555,606) $ 3,615,925 $ 363,420 $ 2,868,502 $ 667 0 $ 0 $ 185,278 $ 3,615,925 $ 579,873 $ 579,873 0 $ 382,415 $ 6,355 $ 1,484 $ 162,278 $ 27,341 $ 16,746 $ 10,595 0 $ (1,361) 0 $ 9,234 $ (.03) $ .19 Current assets include cash, unrestricted marketable securities, current portion of accounts and notes receivable and prepaid expenses and deposits. Current liabilities include the current portion of long-term debt and accounts payable, accrued expenses and other liabilities.
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