-----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, LML9G9IUUatpXPJZD/M7WX/Ekx8MVtJAUUrXAN6lgg0q0tyUHcFJAYUlrBuRC0uo mQ0cRx3IuayXiAqYx6jh3Q== /in/edgar/work/20000814/0000928385-00-002230/0000928385-00-002230.txt : 20000921 0000928385-00-002230.hdr.sgml : 20000921 ACCESSION NUMBER: 0000928385-00-002230 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROUSE COMPANY CENTRAL INDEX KEY: 0000085388 STANDARD INDUSTRIAL CLASSIFICATION: [6512 ] IRS NUMBER: 520735512 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11543 FILM NUMBER: 697657 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 0001.txt FORM 10-Q 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 June 30, 2000 ------------------- 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 August 1, 2000: Common Stock, $0.01 par value 69,860,274 - ----------------------------- --------------- Title of Class Number of Shares Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income Three and Six Months Ended June 30, 2000 and 1999 (Unaudited, in thousands except per share amounts)
Three months Six months ended June 30, ended June 30, ------------------------------- -------------------------- 2000 1999 2000 1999 ----------- ------------ ------------ ---------- Revenues $ 167,823 $ 173,737 $ 336,690 $ 349,696 Operating expenses, exclusive of provision for bad debts, depreciation and amortization 76,660 85,928 153,839 165,205 Interest expense 62,538 60,267 122,656 124,192 Provision for bad debts 1,106 3,064 3,341 4,376 Depreciation and amortization 23,291 21,973 43,986 49,345 Equity in earnings of unconsolidated real estate ventures 31,576 20,682 55,142 44,015 Current income taxes 71 83 153 157 ----------- ------------ ----------- ---------- Earnings before gain (loss)on dispositions of operating property assets, net and extraordinary items 35,733 23,104 67,857 50,436 Gain (loss) on dispositions of operating property assets, net (1,224) 6,858 (1,980) 7,452 ----------- ------------ ----------- ---------- Earnings before extraordinary items 34,509 29,962 65,877 57,888 Extraordinary loss, net (722) (910) (722) (910) ----------- ------------ ----------- ---------- Net earnings 33,787 29,052 65,155 56,978 Other items of comprehensive income (loss) - minimum pension liability adjustment (117) (334) (236) (668) ----------- ------------ ------------ ---------- Comprehensive income $ 33,670 $ 28,718 $ 64,919 $ 56,310 =========== ============ ============ ========== Net earnings applicable to common shareholders $ 30,749 $ 26,014 $ 59,079 $ 50,902 =========== ============ ============ ==========
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 Statements of Operations and Comprehensive Income, continued Three and Six Months Ended June 30, 2000 and 1999 (Unaudited, in thousands except per share amounts)
Three months Six months ended June 30, ended June 30, --------------------------------- -------------------------------- 2000 1999 2000 1999 ---------------- ------------- ---------------- ------------- EARNINGS PER SHARE OF COMMON STOCK: Basic: Earnings before extraordinary items $ .45 $ .37 $ .85 $ .72 Extraordinary loss (.01) (.01) (.01 ) (.01) ------------ ----------- ----------- ------------ Total $ .44 $ .36 $ .84 $ .71 =========== =========== =========== =========== Diluted: Earnings before extraordinary items $ .45 $ .37 $ .84 $ .71 Extraordinary loss (.01) (.01) (.01) (.01) ----------- ----------- ----------- ----------- Total $ .44 $ .36 $ .83 $ .70 =========== =========== =========== =========== DIVIDENDS PER SHARE: Common stock $ .33 $ .30 $ .66 $ .60 =========== =========== =========== =========== Preferred stock $ .75 $ .75 $ 1.50 $ 1.50 =========== =========== =========== ===========
3 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2000 and December 31, 1999 (in thousands except share data)
June 30, 2000 December 31, (Unaudited) 1999 ------------------ ------------------ Assets: Property: Operating properties: Property and deferred costs of projects $ 3,599,901 $ 3,811,956 Less accumulated depreciation and amortization 591,254 574,837 ----------------- ----------------- 3,008,647 3,237,119 Properties in development 174,250 288,058 Properties held for sale 453,720 10,984 ----------------- ----------------- Total property 3,636,617 3,536,161 Investments in and advances to unconsolidated real estate ventures 504,281 533,341 Prepaid expenses, receivables under finance leases and other assets 236,136 247,279 Accounts and notes receivable 58,607 61,224 Investments in marketable securities 21,663 23,321 Cash and cash equivalents 16,655 25,890 ----------------- ----------------- Total $ 4,473,959 $ 4,427,216 ================= =================
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 Balance Sheets, continued June 30, 2000 and December 31, 1999 (in thousands except share data)
June 30, 2000 December 31, (Unaudited) 1999 ----------------- ---------------- Liabilities: Debt: Property debt not carrying a Parent Company guarantee of repayment $ 2,578,532 $ 2,529,334 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt 101,567 161,585 Other debt 721,439 643,500 ---------------- ---------------- 823,006 805,085 ---------------- ---------------- Total debt 3,401,538 3,334,419 ---------------- ---------------- Accounts payable, accrued expenses and other liabilities 301,826 317,252 Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 136,965 136,965 Shareholders' equity: Series B Convertible Preferred stock with a liquidation preference of $202,500 41 41 Common stock of 1 cent par value per share; 250,000,000 shares authorized; 69,942,163 shares issued in 2000 and 70,693,789 shares issued in 1999 699 707 Additional paid-in capital 790,510 808,277 Accumulated deficit (156,913) (169,974) Accumulated other comprehensive income (loss) (707) (471) ---------------- ---------------- Net shareholders' equity 633,630 638,580 ---------------- ---------------- Total $ 4,473,959 $ 4,427,216 ================ =================
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 Six Months Ended June 30, 2000 and 1999 (Unaudited, in thousands)
2000 1999 --------- --------- Cash flows from operating activities: Rents and other revenues received $ 336,862 $ 337,398 Proceeds from land sales and notes receivable from land sales --- 21,682 Interest received 3,615 4,907 Operating expenditures (149,312) (160,160) Interest paid (123,489) (125,874) Dividends, interest and other operating distributions received from unconsolidated majority financial interest ventures 26,926 26,717 --------- --------- Net cash provided by operating activities 94,602 104,670 --------- --------- Cash flows from investing activities: Expenditures for properties in development and improvements to existing properties funded by debt (119,024) (110,904) Expenditures for property acquisitions (19,029) --- Expenditures for improvements to existing properties funded by cash provided by operating activities (11,874) (11,732) Payments received on loans (advances made) to unconsolidated majority financial interest ventures 65,154 (34,850) Proceeds from sales of operating properties and other investments 980 126,860 Other 1,658 (7,513) --------- --------- Net cash used by investing activities (82,135) (38,139) --------- --------- Cash flows from financing activities: Proceeds from issuance of property debt 139,667 111,438 Repayments of property debt: Scheduled principal payments (29,168) (24,014) Other payments (121,613) --- Proceeds from issuance of other debt 93,750 198,368 Repayments of other debt (15,367) (296,919) Proceeds from exercise of stock options 7,132 32 Purchases of Company common stock (41,479) (12,810) Dividends paid (52,094) (49,370) Other (2,530) (6,397) --------- --------- Net cash used by financing activities (21,702) (79,672) --------- --------- Net decrease in cash and cash equivalents (9,235) (13,141) Cash and cash equivalents at beginning of period 25,890 28,688 --------- --------- Cash and cash equivalents at end of period $ 16,655 $ 15,547 ========= =========
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 Consolidated Statements of Cash Flows, continued Six Months Ended June 30, 2000 and 1999 (Unaudited, in thousands)
2000 1999 -------- -------- Reconciliation of net earnings to net cash provided by operating activities: Net earnings $ 65,155 $ 56,978 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 43,986 49,345 Undistributed earnings of majority financial interest ventures (35,926) (21,078) Loss (gain) on dispositions of operating property assets, net 1,980 (7,452) Extraordinary loss, net 722 910 Participation expense pursuant to Contingent Stock Agreement 13,118 12,487 Provision for bad debts 3,341 4,376 Other, net 2,226 9,104 -------- -------- Net cash provided by operating activities $ 94,602 $104,670 ======== ======== Schedule of Noncash Investing and Financing Activities: Common stock issued pursuant to Contingent Stock Agreement $ 14,208 $ 16,207 Property and other assets contributed to an unconsolidated real estate venture --- 701,105 Mortgage debt, other debt and other liabilities related to property and other assets contributed to an unconsolidated real estate venture --- 432,525 Other debt repaid in the formation of an unconsolidated real estate venture --- 271,233 Mortgage debt assumed by purchaser of a property --- 40,000 Capital lease obligations incurred 1,168 1,278 ======== ========
7 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (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 1999 Annual Report to Shareholders. Certain amounts have been reclassified to conform to the current presentation. (2) Tax status ---------- The Company determined that it would elect to be taxed as a real estate investment trust (REIT) effective January 1, 1998 pursuant to the Internal Revenue Code of 1986, as amended. Management believes the Company met the qualifications for REIT status as of June 30, 2000, and intends for it to continue to meet the qualifications in the future. In connection with its election to be taxed as a REIT, the Company also elected to be subject to the "built-in gain" rules. In February 2000, temporary and proposed regulations were issued providing guidance regarding the application of the "built-in gain" rules to REITs and are effective retroactive to June 10, 1987. The regulations require a REIT to refile its election to be subject to the "built-in gain" rules. The Company intends to refile its election with respect to assets owned by the Company on the date of conversion to REIT status. Under these rules, taxes will be payable at the time and to the extent that the net unrealized gains on the Company's assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten-year period following conversion. At June 30, 2000, net unrealized gains were approximately $2,465,000,000. Management believes that the Company will not be required to make significant payments of taxes on built-in gains throughout the ten-year period due to the availability of its net operating loss carryforward to offset certain built-in 8 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (2) Tax status, continued --------------------- gains which might be recognized and the potential for the Company to enter into alternative structures, if necessary. At June 30, 2000, the regular tax net operating loss carryforward is sufficient to offset built-in gains on assets the Company intends to sell and no net deferred tax liability for built-in gains taxes has been recognized. However, it may be necessary to recognize a liability for such taxes in the future if management's plans and intentions with respect to asset dispositions, or the related tax laws, change. (3) Unconsolidated real estate ventures ----------------------------------- Investments in and advances to unconsolidated real estate ventures are summarized, based on the level of the Company's financial interest, as follows (in thousands):
June 30, December 31, 2000 1999 ---------- ------------ Majority financial interest ventures $319,633 $349,991 Minority interest ventures 184,648 183,350 ---------- ------------ Total $504,281 $533,341 ========== ============
The equity in earnings of unconsolidated real estate ventures is summarized, based on the level of the Company's financial interest, as follows (in thousands):
Three months Six months ended June 30, ended June 30, ----------------- ----------------- 2000 1999 2000 1999 -------- ------- -------- ------- Majority financial interest ventures $25,787 $15,613 $49,737 $36,390 Minority interest ventures 5,789 5,069 5,405 7,625 -------- ------- -------- ------- Total $31,576 $20,682 $55,142 $44,015 ======== ======= ======== =======
9 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (3) Unconsolidated real estate ventures, continued ---------------------------------------------- The condensed, combined balance sheets of the ventures in which the Company holds majority financial interests are summarized as follows (in thousands):
June 30, December 31, 2000 1999 ---------------- --------------- Assets: Operating properties, net $ 387,937 $ 378,789 Properties in development 11,795 26,924 Properties held for sale 15,015 --- Land held for development and sale 249,947 257,773 Investments in and advances to unconsolidated real estate ventures 105,161 107,813 Prepaid expenses, receivables under finance leases and other assets 78,279 95,090 Accounts and notes receivable 67,092 88,765 Cash and cash equivalents 1,942 8,194 --------------- -------------- Total $ 917,168 $ 963,348 =============== ============== Liabilities and shareholders' deficit: Loans and advances from the Company $ 445,516 $ 514,792 Mortgages payable and other long-term debt 347,422 350,646 Other liabilities 118,816 118,525 Redeemable Series A Preferred stock 50,000 50,000 Shareholders' deficit (44,586) (70,615) --------------- -------------- Total $ 917,168 $ 963,348 =============== ==============
10 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (3) Unconsolidated real estate ventures, continued ---------------------------------------------- The condensed combined statements of operations of the ventures in which the Company holds a majority financial interest are summarized as follows (in thousands):
Three months Six months ended June 30, ended June 30, ------------------------------ -------------------------------- 2000 1999 2000 1999 ------------ ------------- ------------ -------------- Revenues, excluding interest on loans to the Company $ 82,031 $ 64,580 $ 166,440 $ 147,695 Interest income on loans to the Company --- --- --- 2,577 Operating expenses (42,461) (37,084) (84,909) (83,326) Interest expense, excluding interest on borrowings from the Company (2,957) (2,668) (6,388) (5,467) Interest expense on borrowings from the Company (13,003) (14,717) (26,693) (29,294) Depreciation and amortization (4,413) (3,047) (8,642) (5,933) Equity in earnings (loss) of unconsolidated real estate ventures (626) 622 (698) 807 Gain on dispositions of operating property assets, net --- 175 --- 882 Income taxes, primarily deferred (4,892) (3,768) (13,081) (11,841) ------------ ------------ ------------- ------------ Net earnings $ 13,679 $ 4,093 $ 26,029 $ 16,100 ============ =========== ============ ============
11 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (3) Unconsolidated real estate ventures, continued ---------------------------------------------- The Company's share of the earnings before extraordinary items of the ventures is summarized as follows (in thousands):
Three months Six months ended June 30, ended June 30, ------------------------------ ----------------------- 2000 1999 2000 1999 ------------ ------------- --------- ---------- Share of net earnings based on ownership interest $ 13,542 $ 4,052 $ 25,769 $ 15,939 Participation by others in the Company's share of earnings (4,616) (5,046) (13,115) (11,405) Interest on loans to and advances from the ventures, net 13,003 14,717 26,693 26,717 Eliminations, basis adjustments and ot 3,858 1,890 10,390 5,139 --------- --------- --------- --------- $ 25,787 $ 15,613 $ 49,737 $ 36,390 ========= ========= ========= =========
(4) Debt ---- Debt is summarized as follows (in thousands):
June 30, 2000 December 31, 1999 --------------------------- -------------------------- Due in Due in Total one year Total one year ----------- ---------- ---------- ---------- Mortgages and bonds $ 2,591,761 $ 56,417 $ 2,572,496 $ 55,126 Medium-term notes 81,500 30,000 91,500 10,000 Credit line borrowings 237,000 --- 174,000 --- Other loans 491,277 6,757 496,423 6,467 ----------- ---------- ----------- ----------- Total $ 3,401,538 $ 93,174 $ 3,334,419 $ 71,593 =========== ========== =========== ===========
The amounts due in one year reflect the terms of existing loan agree- ments except where refinancing commitments from outside lenders have been obtained. In these instances, maturities are determined based on the terms of the refinancing commitments. 12 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment information ------------------- The Company has five reportable segments: retail centers, office and other properties, land sales operations, development and corporate. In 2000, the Company reclassified the segment operating results and assets of the retail components of its five mixed-use projects to retail centers. In connection therewith, the office, mixed-use and other properties segment has been renamed office and other properties. Segment information for the prior periods has been restated to reflect this change. Segment operating results are measured and assessed based on a performance measure referred to as Funds From Operations (FFO) computed using the revised definition developed by the National Association of Real Estate Investment Trusts (NAREIT), which definition is effective January 1, 2000. NAREIT defines FFO as net earnings (computed in accordance with generally accepted accounting principles), excluding cumulative effects of changes in accounting principles, extraordinary items and gain (loss) on dispositions of operating property assets, plus depreciation and amortization. Additionally, equity in earnings of unconsolidated real estate ventures and minority interests have been adjusted to reflect FFO on the same basis. FFO for prior periods has been presented in conformity with the new definition. The method used by the Company to compute FFO may differ from methods used by other REITs. FFO is not a measure of operating results or cash flows from operating activities as measured by generally accepted accounting principles. It is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. The accounting policies of the segments are the same as those of the Company, except that real estate ventures in which the Company holds substantially all (at least 98%) of the financial interest but does not own a majority voting interest (majority financial interest ventures) are accounted for on a consolidated basis, rather than using the equity method. Additionally, the Company's share of FFO of unconsolidated real estate ventures in which it holds a minority interest is included in revenues. 13 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment Information, continued ------------------------------ Funds From Operations for the segments are summarized as follows (in thousands):
Office Land Retail and Other Sales Centers Properties Operations Development Corporate Total ------- -------------------- ---------- ----------- --------- -------- Three months ended June 30, 2000 - ------------- Revenues $ 145,404 $ 55,435 $ 54,234 $ --- $ 278 $ 255,351 Operating expenses* 65,716 20,832 33,118 949 6,158 126,773 Interest expense 42,940 21,428 718 --- 409 65,495 ----------- ------------- ------------ ----------- ------------ ----------- FFO $ 36,748 $ 13,175 $ 20,398 $ (949) $ (6,289) $ 63,083 =========== ============= ============ =========== ============ =========== Three months ended June 30, 1999 - ------------- Revenues $ 147,051 $ 51,416 $ 44,197 $ --- $ 1,089 $ 243,753 Operating expenses* 68,704 19,035 32,731 (172) 12,247 132,545 Interest expense 43,330 20,541 813 --- (1,749) 62,935 ----------- ------------- ------------ ----------- ------------ ----------- FFO $ 35,017 $ 11,840 $ 10,653 $ 172 $ (9,409) $ 48,273 =========== ============= ============ =========== ============ =========== Six months ended June 30, 2000 - ------------- Revenues $ 291,935 $ 108,758 $ 113,027 $ --- $ 501 $ 514,221 Operating expenses* 133,556 41,225 70,600 1,648 12,095 259,124 Interest expense 84,813 41,747 1,517 --- 967 129,044 ----------- ------------- ------------ ----------- ------------ ----------- FFO $ 73,566 $ 25,786 $ 40,910 $ (1,648) $ (12,561) $ 126,053 =========== ============= ============ =========== ============ =========== Six months ended June 30, 1999 - ------------- Revenues $ 298,450 $ 102,462 $ 104,778 $ --- $ 1,284 $ 506,974 Operating expenses* 137,735 38,300 73,448 1,301 19,837 270,621 Interest expense 89,857 41,125 1,739 --- (3,062) 129,659 ----------- ------------- ------------ ----------- ------------ ----------- FFO $ 70,858 $ 23,037 $ 29,591 $ (1,301) $ (15,491) $ 106,694 =========== ============= ============ =========== ============ ===========
* Operating expenses in this table exclude depreciation and amortization. 14 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment Information, continued ------------------------------ Reconciliations of total revenues and expenses reported above to the related amounts in the consolidated financial statements and of FFO reported above to earnings before extraordinary items in the consolidated financial statements are summarized as follows (in thousands):
Three months ended June 30, --------------------------------------- 2000 1999 ---------------- --------------- Revenues: Total reported above $ 255,351 $ 243,753 Revenues of majority financial interest ventures excluding interest on advances to the Company (82,031) (64,580) Revenues representing the Company's share of FFO of minority financial interest ventures (5,497) (5,436) ------------ ------------ Total in consolidated financial statements $ 167,823 $ 173,737 ============ ============ Operating expenses, exclusive of depreciation and amortization: Total reported above $ 126,773 $ 132,545 Operating expenses of majority financial interest ventures (42,461) (37,084) Provision for bad debts (1,106) (3,064) Participation by others in the Company's share of earnings of majority financial interest ventures (4,616) (5,046) Income taxes and other (1,930) (1,423) ------------ ------------ Total in consolidated financial statements $ 76,660 $ 85,928 ============ ============ Interest expense: Total reported above $ 65,495 $ 62,935 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company (2,957) (2,668) ------------ ------------ Total in consolidated financial statements $ 62,538 $ 60,267 ============ ============ Operating results: FFO reported above $ 63,083 $ 48,273 Depreciation and amortization (23,291) (21,973) Gain (loss) on dispositions of operating property assets, net (1,224) 6,858 Share of depreciation and amortization, and gain (loss) on dispositions of operating property assets of unconsolidated real estate ventures, net (4,059) (3,196) ------------ ------------ Earnings before extraordinary items in consolidated financial statements $ 34,509 $ 29,962 ============ ============
15 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment Information, continued ------------------------------ Reconciliations of total revenues and expenses reported above to the related amounts in the consolidated financial statements and of FFO reported above to earnings before extraordinary items in the consolidated financial statements are summarized as follows (in thousands):
Six months ended June 30, ---------------------- 2000 1999 --------- --------- Revenues: Total reported above $ 514,221 $ 506,974 Revenues of majority financial interest ventures excluding interest on advances to the Company (166,440) (147,695) Revenues representing the Company's share of FFO of minority financial interest ventures (11,091) (9,583) --------- --------- Total in consolidated financial statements $ 336,690 $ 349,696 ========= ========= Operating expenses, exclusive of depreciation and amortization: Total reported above $ 259,124 $ 270,621 Operating expenses of majority financial interest ventures (84,909) (83,326) Provision for bad debts (3,341) (4,376) Participation by others in the Company's share of earnings of majority financial interest ventures (13,115) (11,405) Income taxes and other (3,920) (6,309) --------- --------- Total in consolidated financial statements $ 153,839 $ 165,205 ========= ========= Interest expense: Total reported above $ 129,044 $ 129,659 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company (6,388) (5,467) --------- --------- Total in consolidated financial statements $ 122,656 $ 124,192 ========= ========= Operating results: FFO reported above $ 126,053 $ 106,694 Depreciation and amortization (43,986) (49,345) Gain (loss) on dispositions of operating property assets, net (1,980) 7,452 Share of depreciation and amortization, and gain (loss) on dispositions of operating property assets of unconsolidated real estate ventures, net (14,210) (6,913) --------- --------- Earnings before extraordinary items in consolidated financial statements $ 65,877 $ 57,888 ========= =========
16 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment Information, continued ------------------------------ The assets by segment are as follows (in thousands): June 30, December 31, 2000 1999 ---------- ---------- Retail centers $3,165,209 $3,125,395 Office and other properties 1,233,128 1,211,222 Land sales operations 377,204 434,195 Development 79,651 34,680 Corporate 102,367 105,605 ---------- ---------- Total $4,957,559 $4,911,097 ========== ========== Total segment assets exceeds total assets reported in the financial statements primarily because of the consolidation of the majority financial interest ventures for segment reporting purposes. (6) Gain (loss) on dispositions of operating property assets, net ------------------------------------------------------------- The net loss on dispositions of operating property assets for the three months ended June 30, 2000 related to a provision for loss on a leasehold interest in a retail center the Company decided to dispose. The net loss on operating properties for the six months ended June 30, 2000 related primarily to the provision discussed above and a provision for loss on an interest in a retail center property that the Company and its venture partner decided to sell. The net gain on dispositions of operating property assets in the three and six months ended June 30, 1999 related primarily to the sale of an operating property. (7) Extraordinary loss, net ----------------------- The extraordinary loss, net for the three and six months ended June 30, 2000 and 1999 related to the extinguishment of debt prior to scheduled maturity. The sources of funds used to pay the debt and fund the prepayment penalties, where applicable, were the refinancing of property debt and 8% Senior Debt issued in 1999. 17 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (8) Earnings per share ------------------ Information relating to the calculations of earnings per share (EPS) of common stock for the three months ended June 30, 2000 and 1999 is summarized as follows (in thousands):
2000 1999 --------------------- -------------------- Basic Diluted Basic Diluted -------- -------- -------- -------- Earnings before extra- ordinary items $ 34,509 $ 34,509 $ 29,962 $ 29,962 Dividends on Preferred stock (3,038) (3,038) (3,038) (3,038) Dividends on unvested common stock awards and other (111) (84) (115) (84) Interest on convertible property debt --- 769 --- --- -------- -------- -------- -------- Adjusted earnings before extraordinary items used in EPS computation $ 31,360 $ 32,156 $ 26,809 $ 26,840 ======== ======== ======== ======== Weighted-average shares outstanding 69,637 69,637 71,760 71,760 Dilutive securities: Convertible property debt --- 1,941 --- --- Options, warrants, unvested common stock awards and other --- 676 --- 590 -------- -------- -------- -------- Adjusted weighted-average shares used in EPS computation 69,637 72,254 71,760 72,350 ======== ======== ======== ========
18 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (8) Earnings per share ------------------ Information relating to the calculations of earnings per share (EPS) of common stock for the six months ended June 30, 2000 and 1999 is summarized as follows (in thousands):
2000 1999 -------------------- -------------------- Basic Diluted Basic Diluted -------- -------- -------- -------- Earnings before extra- ordinary items $ 65,877 $ 65,877 $ 57,888 $ 57,888 Dividends on Preferred stock (6,076) (6,076) (6,076) (6,076) Dividends on unvested common stock awards and other (221) (185) (238) (322) Interest on convertible property debt --- 1,538 --- --- -------- -------- -------- -------- Adjusted earnings before extraordinary items used in EPS computation $ 59,580 $ 61,154 $ 51,574 $ 51,490 ======== ======== ======== ======== Weighted-average shares outstanding 70,027 70,027 71,813 71,813 Dilutive securities: Convertible property debt --- 1,930 --- --- Options, warrants, unvested common stock awards and other --- 454 --- 588 -------- -------- -------- -------- Adjusted weighted-average shares used in EPS computation 70,027 72,411 71,813 72,401 ======== ======== ======== ========
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. 19 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (9) Contingencies ------------- The Company and certain of its subsidiaries are defendants in various 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 fluctuating net earnings, 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, and it is, therefore, possible that resolution of these matters could have such an effect in any future quarter or year. (10) Property dispositions and related matters ----------------------------------------- In June 1999, the Company sold its interest in Valley Fair Mall to Westfield America, Inc. for approximately $147 million. The Company acquired the property in July 1998 from TrizecHahn Centers Inc. for approximately the same cost with the intention to sell it and, accordingly, recognized no gain or loss on the sale. In June 1999, the Company also disposed of its ownership interest in an operating property located in Los Angeles, California. In September 1999, the Company announced that it was considering selling interests in certain operating properties and land parcels and using the proceeds to repay debt and repurchase (subject to certain price restrictions) up to $250 million of the Company's common stock. In January 2000, management authorized specific disposition plans and began actively marketing interests in the properties. Accordingly, the net book values of the properties were reclassified to properties held for sale. In June 2000, the Company sold one of the properties and recognized a gain of $345,000 on the sale. 20 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (11) Shelf registration statement ---------------------------- At June 30, 2000, the Company had a shelf registration statement for future sale of up to an aggregate of $1.9 billion (based on the public offering price) of common stock, Preferred stock and debt securities. (12) Subsequent event ---------------- In July 2000, the Company sold substantially all of its ownership interest in North Star, a retail center in San Antonio, Texas, for cash proceeds of approximately $84 million. 21 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES The following discussion and analysis covers any material changes in financial condition since December 31, 1999 and any material changes in the results of operations for the three and six months ended June 30, 2000 as compared to the same periods in 1999. 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 1999 Annual Report to Shareholders. General: - ------- Through its subsidiaries and affiliates, the Company acquires, develops and manages a diversified portfolio of retail centers and office, industrial, mixed-use and other properties (office and other properties) located throughout the United States and develops and sells land for residential, commercial and other uses, primarily in Columbia, Maryland and Summerlin, Nevada. One of the Company's primary objectives is to own and operate premier shopping centers, major mixed-use projects and geographically concentrated groups of office and industrial buildings (principally complementing community development activities) in major markets across the United States. In order to achieve this objective, management is actively evaluating opportunities to acquire properties owned by others that may have future prospects consistent with the Company's long-term investment criteria and is continually evaluating the future outlook for properties in the Company's portfolio. This includes considering opportunities to expand and/or renovate the properties and assessing whether particular properties are meeting or have the potential to meet the Company's investment criteria. The Company plans to continue making substantial investments to expand and/or renovate leasable mall space and/or add new department stores and/or other anchor tenants to its existing properties to meet its objective. The Company is also continually evaluating opportunities for new operating properties and/or land development projects it believes have future prospects consistent with its objectives. The Company has sold a number of properties over the last several years and intends to continue to dispose of properties that are not meeting and/or are not considered to have the potential to continue to meet its investment criteria. In September 1999, the Company announced that it would pursue developing a strategy to dispose of interests in certain office and industrial properties and land parcels and use the proceeds to repay debt and repurchase (subject to certain price restrictions) up to $250 million of the Company's common stock. In January 2000, management authorized specific disposition plans and began actively marketing interests in the properties. In June 2000, the Company completed a sale of one of these properties. 22 Part I. Financial Information, continued Item 1. Financial Statements, continued: General, continued: - ------------------ The Company may also selectively dispose of properties for other reasons. These disposition decisions may cause the Company to recognize gains or losses that could have material effects on reported net earnings in future quarters or fiscal years and taken together with the use of sales proceeds, may have a material effect on the overall consolidated financial position of the Company. Portfolio changes: - ----------------- In February 1999, the Company contributed its ownership interests in four retail centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and Towson Town Center) to a joint venture in which it retained a 35% ownership interest. In June 1999, the Company sold Lucky's Center, an other property in Los Angeles, California. In October 1999, the Company sold Santa Monica Place, a retail center in Santa Monica, California. In June 2000, the Company sold an industrial building in Baltimore, Maryland. In 2000 and 1999, the Company and its affiliates completed a number of development projects to enhance the quality of its portfolio. This development activity is summarized as follows: Retail Centers Date Opened -------------- ----------- Oakwood Center Expansion March 1999 The Mall in Columbia Expansion-Phase II September 1999 Exton Square Expansion - Phase I November 1999 Moorestown Mall Expansion-Phase I November 1999 Moorestown Mall Expansion-Phase II March 2000 Pioneer Place Expansion March 2000 Exton Square Expansion - Phase II May 2000 Perimeter Mall Expansion - Phase II June 2000 Office and Other Date Opened ---------------- ----------- Park Square, Columbia Office January 1999 Hughes Airport Center (4 buildings) May 1999 Summerlin Commercial (1 building) September 1999 Hughes Center (1 building) October 1999 23 Part I. Financial Information, continued Item 1. Financial Statements, continued: Operating results: - ----------------- As indicated in the 1999 Annual Report to Shareholders, the discussion of operating results covers each of the Company's business segments as management believes that a segment analysis provides the most effective means of understanding the business. Note 5 to the consolidated financial statements included in this Form 10-Q should be referred to when reading this discussion and analysis. As discussed in note 5, segment operating data are reported using the accounting policies followed by the Company for internal reporting to management. These policies are the same as those followed for external reporting except that majority financial interest ventures (real estate ventures in which the Company holds substantially all (at least 98%) of the financial interest, but does not own a majority voting interest) are reported on a consolidated basis rather than using the equity method and the Company's share of FFO of unconsolidated real estate ventures in which it holds a minority interest is included in revenues. These differences affect only the reported revenues and operating and interest expenses of the segments and have no effect on the reported net earnings or FFO of the Company. Revenues and operating and interest expenses reported for the segments are reconciled to the related amounts reported in the consolidated financial statements in note 5. Operating Properties - Retail Centers: - ------------------------------------- Operating results of retail centers are summarized as follows (in millions):
Three Six months ended months ended June 30, June 30, --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------- ------------ ---------- Revenues $ 145.4 $ 147.0 $ 292.0 $ 298.5 Operating expenses, exclusive of depreciation and amortization 65.7 68.7 133.6 137.7 Interest expense 42.9 43.3 84.8 89.9 ---------- ---------- ---------- ---------- 36.8 35.0 73.6 70.9 Depreciation and amortization 19.0 16.2 38.3 38.9 ---------- ---------- ---------- ---------- Operating income $ 17.8 $ 18.8 $ 35.3 $ 32.0 ========== =========== ========== ==========
24 Part I. Financial Information, continued Item 1. Financial Statements, continued: Operating Properties - Retail Centers, continued: - ------------------------------------------------ Revenues decreased $1.6 million and $6.5 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The decreases were attributable primarily to effects of the contribution of properties to a joint venture and the disposition of Santa Monica Place (approximately $4.8 million and $15.8 million for the three and six months ended June 30, 2000, respectively) and lower average occupancy levels at comparable properties (92.4% for the six months in 2000 compared to 93.6% for the six months in 1999). These decreases were partially offset by the project expansions (approximately $6.1 million and $7.4 million for the three and six months ended June 30, 2000, respectively) and higher rents on released space. Total operating and interest expenses decreased $3.4 million and $9.2 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The decreases were attributable primarily to the contribution of properties to a joint venture and the disposition of Santa Monica Place (approximately $3.5 million and $13.7 million for the three and six months ended June 30, 2000, respectively) and lower bad debt expenses at comparable properties, partially offset by project expansions (approximately $3.4 million and $5.8 million for the three and six months ended June 30, 2000, respectively). Depreciation and amortization expense increased $2.8 million and decreased $.6 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. These changes were attributable primarily to the changes in the portfolio referred to above. Operating Properties - Office and Other Properties: - -------------------------------------------------- Operating results of office and other properties are summarized as follows (in millions):
Three Six months ended months ended June 30, June 30, ---------------------------- ------------------------- 2000 1999 2000 1999 ------------ ----------- ---------- ---------- Revenues $ 55.4 $ 51.4 $ 108.7 $ 102.5 Operating expenses, exclusive of depreciation and amortization 20.8 19.0 41.2 38.4 Interest expense 21.4 20.6 41.7 41.1 -------- -------- -------- -------- 13.2 11.8 25.8 23.0 Depreciation and amortization 8.4 9.3 16.0 18.4 -------- -------- -------- -------- Operating income $ 4.8 $ 2.5 $ 9.8 $ 4.6 ======== ======== ======== ========
25 Part I. Financial Information, continued Item 1. Financial Statements, continued: Operating Properties - Office and Other Properties, continued: - ------------------------------------------------------------- Revenues increased $4.0 million and $6.2 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The increases were attributable primarily increases in operating expenses at comparable properties to the project openings in 1999 (approximately $1.4 million and $2.6 million for the three and six months ended June 30, 2000, respectively) and higher rents on released space. These increases were partially offset by the aforementioned dispositions in 1999 and 2000 (approximately $.4 million and $.9 million for the three and six months ended June 30, 2000, respectively). Total operating and interest expenses increased $2.6 million and $3.4 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The increases in operating and interest expenses were attributable in part to project openings in 1999 (approximately $.9 million and $1.9 million for the three and six months ended June 30, 2000, respectively). This increase was partially offset by the aforementioned dispositions (approximately $.2 million and $.4 million for the three and six months ended June 30, 2000, respectively). Depreciation and amortization expense decreased $.9 million and $2.4 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The decreases were attributable primarily to cessation of depreciation of properties the Company classified as held for sale in the first quarter of 2000, partially offset by project openings in 1999. Land Sales Operations: - --------------------- Landsales operations relate primarily to the communities of Columbia, Maryland and Summerlin, Nevada. Generally, revenues and operating income from land sales are affected by such factors as the availability to purchasers of construction and permanent mortgage financing at acceptable interest rates, consumer and business confidence, availability of saleable land for particular uses and management's decisions to sell, develop or retain land. 26 Part I. Financial Information, continued Item 1. Financial Statements, continued: Land Sales Operations, continued: - -------------------------------- Operating results of land sales operations are summarized as follows (in millions): Three months Six months ended June 30, ended June 30, ---------------------------- -------------------------------- 2000 1999 2000 1999 ----------- ---------- ----------- ------------- Nevada Land Operations: Revenues: Summerlin $ 22.8 $ 27.1 $ 54.7 $ 53.2 Other .7 2.8 6.2 7.0 Operating costs and expenses: Summerlin 18.2 21.6 42.7 42.1 Other .6 3.2 4.9 6.8 Interest expense --- --- .1 --- ----------- ---------- ----------- ------------ Operating income $ 4.7 $ 5.1 $ 13.2 $ 11.3 =========== ========== =========== ============ Columbia and Other: Revenues $ 30.7 $ 14.3 $ 52.1 $ 44.5 Operating costs and expenses 14.3 7.9 23.0 24.5 Interest expense .7 .8 1.4 1.7 ----------- ---------- ----------- ------------ Operating income $ 15.7 $ 5.6 $ 27.7 $ 18.3 =========== ========== =========== ============ Total: Revenues $ 54.2 $ 44.2 $ 113.0 $ 104.7 Operating costs and expenses 33.1 32.7 70.6 73.4 Interest expense .7 .8 1.5 1.7 ----------- ---------- ----------- ------------ Operating income $ 20.4 $ 10.7 $ 40.9 $ 29.6 =========== ========== =========== ============
27 Part I. Financial Information, continued Item 1. Financial Statements, continued: Land Sales Operations, continued: - -------------------------------- Revenues from Summerlin land sales operations decreased $4.3 million and increased $1.5 million for the three months and six months ended June 30, 2000, respectively, while related costs and expenses decreased $3.4 million and increased $.6 million, respectively, compared to the same periods in 1999. The decreases in land sales and related costs and expenses for the three months were due primarily to lower levels of sales for residential purposes partially offset by higher levels of sales for commercial uses. Revenues from Columbia and other land sales operations increased $16.4 million and $7.6 million for the three and six months ended June 30, 2000, respectively, while related costs and expenses increased $6.3 million and decreased $1.8 million, respectively, compared to the same periods in 1999. Revenues and related costs and expenses from sales of land in New Jersey were $14.0 million and $6.5 million, respectively, for the three months ended June 30, 2000. Revenues and related costs and expenses from sales of land in New Jersey were $4.0 million and $3.8 million, respectively, for the three months ended March 31, 1999. There is no remaining saleable land at the New Jersey site. Development: - ----------- Development expenses consist primarily of preconstruction expenses and new business costs. Preconstruction expenses relate to costs of projects which may not go forward to completion. New business costs relate to the evaluation of potential regional retail center sites, acquisition and disposition opportunities and alternative revenue sources and investment opportunities. Corporate: - --------- Corporate expenses consist of certain interest and operating expenses reduced by costs capitalized or allocated to other segments. Interest is capitalized on corporate funds invested in projects under development, and interest on the proceeds of corporate borrowings and distributions on the Company-obligated mandatorily redeemable preferred securities which are used for other segments are allocated to those segments. Accordingly, net corporate interest expense consists primarily of interest on the convertible subordinated debentures which were retired in the second quarter 1999, the unsecured 8% notes issued in the second quarter 1999, the unsecured 8.5% notes, the medium-term notes, credit 28 Part I. Financial Information, continued Item 1. Financial Statements, continued: Corporate, continued: - -------------------- facility borrowings, and unallocated proceeds from refinancings of certain properties, net of interest capitalized on development projects or allocated to other segments. Corporate operating expenses consist primarily of general and administrative costs, federal income taxes and distributions on the redeemable preferred securities, net of distributions allocated to other segments. Corporate operating expenses decreased $6.0 million and $7.7 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. In the second quarter of 1999, the Company announced and initiated the consolidation of the management and administration of its Retail Operations and Office and Mixed-Use divisions into a single Property Operations Division and the integration of certain operating, administrative and support functions of the Hughes Division into other divisions. The costs relating to these organizational changes, primarily severance and other benefits to terminated employees of the Company and its affiliates aggregated approximately $6.2 million in the three months ended June 30, 1999. There was no similar event in 2000. Corporate interest expense, net, increased $2.1 million and $4.0 million for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The increases were attributable primarily to interest expense incurred on the 8% Senior Debt issued in May 1999, partially offset by lower interest expense on the convertible subordinated debentures that were repaid using a portion of the proceeds from the issuance of the 8% Senior Debt. Gain (loss) on dispositions of operating property assets, net: Gain(loss) on dispositions of operating property assets, net, including the Company's share of those recorded by unconsolidated real estate ventures, is summarized as follows (in millions): Three months Six months ended June 30, ended June 30, ---------------------------- --------------------------- 2000 1999 2000 1999 ----------- ---------- ----------- -------- Net gain (loss) on operating properties $ (1.2) $ 7.3 $ (5.9) $ 8.6 ========= ========= ========= =========
29 Part I. Financial Information, continued Item 1. Financial Statements, continued: Gain (loss) on dispositions of operating property assets, net, continued: - ------------------------------------------------------------------------ The net loss on dispositions of operating property assets for the three months ended June 30, 2000 related to a provision for loss on a leasehold interest in a retail center the Company decided to dispose. The net loss on operating properties for the six months ended June 30, 2000 related primarily to the provision discussed above and a provision for loss on an interest in a retail center property that the Company and its venture partner decided to sell. The net gain on dispositions of operating property assets in the three and six months ended June 30, 1999 related primarily to the sale of an operating property by the Company and the sale of a service station by a majority financial interest venture. Extraordinary loss, net: - ----------------------- The extraordinary loss, net for the three and six months ended June 30, 2000 and 1999 related to the extinguishment of debt prior to scheduled maturity. The sources of funds used to pay the debt and fund the prepayment penalties, where applicable, were the refinancing of property debt and 8% Senior Debt issued in 1999. Net earnings: - ------------ The increases in net earnings for the three and six months ended June 30, 2000 as compared to the same periods in 1999 were attributable to the factors discussed above in the analyses of the segments, the analysis of gain (loss) on dispositions of operating property assets, net and the analysis of extraordinary loss, net. Financial condition and liquidity: - --------------------------------- Shareholders' equity decreased by $5.0 million from December 31, 1999 to June 30, 2000. The decrease was primarily attributable to payment of regular quarterly dividends on the Company's common and Preferred stocks and purchases of common stock, partially offset by net earnings for the six months ended June 30, 2000 and issuance of common stock pursuant to the Contingent Stock Agreement. The Company had cash and cash equivalents and investments in marketable securities totaling $38.3 million at June 30, 2000, including $3.9 million of investments held for restricted uses. 30 Part I. Financial Information, continued Item 1. Financial Statements, continued: Financial condition and liquidity, continued: - -------------------------------------------- In 1998, the Company obtained a $450 million unsecured revolving credit facility from a group of lenders. The facility is available until July 2001, and is subject to a one-year renewal option. The group of lenders also provided a bridge loan facility that was available for specific property acquisitions completed in 1998. Related borrowings under the bridge loan facility were repaid on or before July 30, 1999. The revolving credit facility may be used for various purposes, including project development costs, property acquisitions, liquidity and other corporate needs. It may also be used to pay some portion of existing debt. Availability under the facility was $213 million at June 30, 2000. As of June 30, 2000, debt due in one year was $93.2 million, including balloon payments on mortgages of $7.4 million and repayments of medium-term notes of $30 million. These payments are expected to be made from the proceeds of property refinancings, credit facility borrowings, proceeds of the sales of property interests held for sale, proceeds from the sales of other property interests or other available corporate funds. The Company is continually evaluating sources of capital, and management believes there are satisfactory sources available for all requirements. Dispositions of properties are expected to provide capital resources in 2000 and 2001 and may also provide them in subsequent years. The Company began actively marketing interests in certain office and industrial properties in the first quarter of 2000. The Company expects that proceeds from sales will be used to repay debt, repurchase common stock and/or fund project development costs. The Company sold one of these properties in June 2000 for approximately $1.2 million cash. In July 2000, the Company sold substantially all of its ownership interest in North Star, a regional retail center in San Antonio, Texas, for approximately $84 million cash. The Company may also sell interests in other operating properties. The Company and its affiliates also consider certain investment and other land assets as significant sources of cash flows and may decide to accelerate sales in order to provide additional liquidity for other purposes, including the funding of development activities. Also as discussed above, the Company has approval to repurchase, subject to certain pricing restrictions, up to $250 million of common stock. As of June 30, 2000, the Company had repurchased approximately 2.7 million shares under this program for approximately $61 million. 31 Part I. Financial Information, continued Item 1. Financial Statements, continued: Financial condition and liquidity, continued: - -------------------------------------------- The Company has a shelf registration statement for the sale of up to an aggregate of approximately $2.25 billion (based on the public offering price) of common stock, Preferred stock and debt securities. At June 30, 2000, the Company had issued approximately $358 million of common stock and debt securities under the shelf registration statement, with a remaining availability of approximately $1.9 billion. Also, under an effective registration statement the Company may issue additional medium-term notes of up to $29.7 million. In connection with the acquisition of the Hughes Corporation (Hughes) in 1996, the Company entered into a Contingent Stock Agreement (Agreement) for the benefit of the former Hughes owners or their successors (the beneficiaries). Under terms of the agreement, additional shares of common stock (or in certain circumstances, Increasing Rate Cumulative Preferred stock) are issuable to the beneficiaries based on the appraised values of four defined groups of acquired assets at specified "termination dates" from 2000 to 2009 and/or cash flows generated from the development and/or sale of those assets prior to the termination dates. To date, the Company has repurchased shares of its common stock for issuance to the beneficiaries. The Company believes that a substantial portion of the assets (primarily certain land in Las Vegas and Summerlin, Nevada) subject to the 2000 termination date (December 31, 2000) will not be sold in 2000. The Company has entered into discussions with the beneficiaries to extend the termination date with respect to these assets, but there can be no assurance that the termination date will be extended. Preliminary estimates of the values of the related assets indicate that a distribution of approximately $30-40 million may be required under terms of the Agreement. If an extension of the termination date is not obtained, the Company currently expects to use corporate funds or borrowings under its credit facility to repurchase shares of its common stock for issuance to the beneficiaries. Net cash provided by operating activities was $94.6 million and $104.7 million for the six months ended June 30, 2000 and 1999, respectively. The level of cash flows provided by operating activities is affected by the timing of receipts of rents and other revenues and payment of operating and interest expenses. The decrease in net cash provided of $10.1 million was due primarily to lower receipts from notes receivable on land sales made before 1998, offset by a decrease in operating expenditures. The decrease in operating expenditures was primarily attributable to benefit and other payments made due to the 32 Part I. Financial Information, continued Item 1. Financial Statements, continued: Financial condition and liquidity, continued: - -------------------------------------------- organizational changes in 1999 described in the analysis of the corporate segment. Cash provided by operating distributions from unconsolidated majority financial interest ventures relates primarily to net interest and dividend payments made by the ventures to the Company and is affected by the timing of receipt of their land sales revenues, payment of operating and interest expenses and other sources and uses of cash. Other changes in net cash provided by operating activities were due to the factors discussed previously under the operating results of the business segments. Net cash used in investing activities was $82.1 million and $38.1 million for the six months ended June 30, 2000 and 1999, respectively. The increase in net cash used of $44.0 million was due primarily to lower proceeds from sales of operating properties (1999 included the sale of the Company's interest in Valley Fair Mall) and higher expenditures for property acquisitions in 2000 (primarily certain commercial properties adjacent to a development project and a department store site) partially offset by higher net payments received on loans to unconsolidated majority financial interest ventures. Net cash used in financing activities was $21.7 million and $79.7 million for the six months ended June 30, 2000 and 1999, respectively. The decrease in net cash used of $58.0 million was due primarily to higher net proceeds from the issuance of other debt (primarily higher net credit line draws) partially offset by higher repurchases of Company common stock. New accounting standards not yet adopted: - ---------------------------------------- In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 137 (Statement 137), an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133), issued in June 1998. Statement 137 defers the required adoption date of Statement 133 for the Company to no later than January 1, 2001. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, which provides additional guidance and amendments to Statement 133. The Company's use of derivative instruments has consisted primarily of interest rate swap and cap agreements related to specific debt financings. The Company will adopt Statement 133, as amended, effective January 1, 2001. While the Company has not completed its analysis of Statement 133, it does not believe that adoption will have a material effect on its financial position and results of operations based on its current limited use of derivative instruments. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" (FIN 44). The provisions of FIN 44 are effective July 1, 2000, and generally are to be applied prospectively. Based on the current price of the Company's common stock, the Company does not believe adoption of FIN 44 will have a material effect on the Company's results of operations. 33 Part I. Financial Information, continued Item 1. Financial Statements, continued: 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. The following are among the factors that could cause actual results to differ materially from historical results or those anticipated: (1) real estate investment trust rules; (2) real estate development and investment 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) changes in tax laws or regulations. 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, 1999. Market risk information: - ----------------------- The market risk associated with financial instruments and derivative financial and commodity instruments is the risk of loss from adverse changes in market prices or rates. The Company's market risk arises primarily from interest rate risk relating to variable rate borrowings used to maintain liquidity (e.g., credit facility advances) or finance project acquisition or development costs (e.g., construction loan advances). The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows. In order to achieve this objective, the Company relies primarily on long-term, fixed rate, nonrecourse loans from institutional lenders to finance its operating properties. In addition, long- term, fixed rate financing is typically arranged concurrently with or shortly after a variable rate project acquisition or construction loan is negotiated. The Company also makes limited use of interest rate exchange agreements, including interest rate swaps and caps, to mitigate its interest rate risk on variable rate debt. The Company does not enter into interest rate exchange agreements for speculative purposes and the fair value of these and other derivative financial instruments is insignificant at June 30, 2000. 34 Part I. Financial Information, continued Item 1. Financial Statements, continued: Market risk information, continued: - ---------------------------------- The Company's interest rate risk is monitored closely by management. The table below presents the principal amounts due and weighted-average interest rates applicable to principal amounts outstanding at the end of each year. This information may be used to evaluate the expected cash flows of the Company under debt and related agreements and its sensitivity to interest rate changes. The information relating to debt maturities (in millions) is based on expected maturity dates which consider anticipated refinancing or other transactions. Remaining 2000 2001 2002 2003 2004 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Fixed rate debt $25 $130 $129 $331 $289 $ 1,822 $2,726 Average interest rate 7.8% 7.9% 7.9% 7.8% 7.9% 7.9% 7.8% Variable rate LIBOR debt $ 7 $334 $198 $ 6 $ 4 $ 127 $ 676 Average interest rate 7.8% 8.0% 8.3% 8.3% 8.3% 8.3% 7.8%
At June 30, 2000, approximately $101.5 million of the Company's variable rate debt relates to borrowings under project construction loans. The borrowings under project construction loans are expected to be repaid from proceeds of long-term, fixed rate loans at dates from 2000 to 2001 when construction of the related projects is scheduled to be completed. At June 30, 2000, the Company had interest rate cap agreements which effectively limit the average interest rate on $100 million of the variable rate LIBOR debt maturing in 2002 to 9.1%, and the average rate on $6 million of the variable rate LIBOR debt maturing in 2010 to 8.7%. As the table incorporates only those exposures that exist as of June 30, 2000, it does not consider exposures or positions which could arise after that date. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise after June 30, 2000, the Company's hedging strategies during that period and interest rates. 35 Part I. Financial Information, continued Item 1. Financial Statements, continued: Part II. Other Information. Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. 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 36 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. on behalf of THE ROUSE COMPANY and as Principal Financial Officer: Date: August 14, 2000 By /s/ Jeffrey H. Donahue ----------------------------- --------------------------------- Jeffrey H. Donahue Executive Vice President and Chief Financial Officer Principal Accounting Officer: Date: August 14, 2000 By /s/ Melanie M. Lundquist ----------------------------- --------------------------------- Melanie M. Lundquist Vice President and Corporate Controller 37 Exhibit Index Exhibit Number Description - -------------- ----------- 27 Financial Data Schedule 38 EX-27 2 0002.txt EXHIBIT 27
5 This financial data schedule is submitted in accordance with Regulation S-K item 601(c)(2). This schedule contains summary financial information extracted from Form 10-Q for the six month period ended June 30, 2000 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 16,655 21,663 84,466 25,859 0 104,387 4,227,871 591,254 4,473,959 383,992 3,401,538 0 41 699 632,890 4,473,959 336,690 336,690 0 197,825 0 3,341 122,656 65,308 153 66,030 0 722 0 65,155 .84 .83 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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