-----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, WqWcUadm3pYIKRKNizW4H+0M0LcX/+Buh/4tq8XzWzUGxen8G+mqQgG3ybXlk3ZT jXvD5m01HQZSC0Ts2IVqRg== /in/edgar/work/0000928385-00-003117/0000928385-00-003117.txt : 20001115 0000928385-00-003117.hdr.sgml : 20001115 ACCESSION NUMBER: 0000928385-00-003117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 765671 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 September 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 November 6, 2000: Common Stock, $0.01 par value 68,730,793 - ----------------------------- ------------------ 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 Nine Months Ended September 30, 2000 and 1999 (Unaudited, in thousands except per share amounts)
Three months Nine months ended September 30, ended September 30, -------------------------- ------------------------ 2000 1999 2000 1999 --------- --------- --------- --------- Revenues $ 178,761 $ 172,419 $ 515,451 $ 522,115 Operating expenses, excluding provision for bad debts, depreciation and amortization 78,941 80,027 232,780 242,964 Interest expense 63,327 60,408 185,983 184,600 Provision for bad debts 1,871 1,974 5,212 6,350 Depreciation and amortization 23,184 23,548 67,170 72,893 Equity in earnings of unconsolidated real estate ventures 21,254 20,281 76,396 62,028 Current income taxes 74 108 227 265 --------- --------- --------- --------- Earnings before gains on dispositions of operating property assets, net and extraordinary items 32,618 26,635 100,475 77,071 Gains on dispositions of operating property assets, net 37,562 22 35,582 7,474 --------- --------- --------- --------- Earnings before extraordinary items 70,180 26,657 136,057 84,545 Extraordinary gain (loss), net 3,920 (3) 3,198 (913) --------- --------- --------- --------- Net earnings 74,100 26,654 139,255 83,632 Other items of comprehensive income (loss) - minimum pension liability adjustment (119) (334) (355) (1,002) --------- --------- --------- --------- Comprehensive income $ 73,981 $ 26,320 $ 138,900 $ 82,630 ========= ========= ========= ========= Net earnings applicable to common shareholders $ 71,062 $ 23,616 $ 130,141 $ 74,518 ========= ========= ========= =========
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 Nine Months Ended September 30, 2000 and 1999 (Unaudited, in thousands except per share amounts)
Three months Nine months ended September 30, ended September 30, ------------------------------ ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- EARNINGS PER SHARE OF COMMON STOCK: Basic: Earnings before extraordinary items $ .96 $ .33 $ 1.81 $ 1.04 Extraordinary gain (loss) .06 -- .05 (.01) ----------- ----------- ----------- ----------- Total $ 1.02 $ .33 $ 1.86 $ 1.03 =========== =========== =========== =========== Diluted: Earnings before extraordinary items $ .91 $ .32 $ 1.78 $ 1.03 Extraordinary gain (loss) .05 -- .04 (.01) ----------- ----------- ----------- ----------- Total $ .96 $ .32 $ 1.82 $ 1.02 =========== =========== =========== =========== DIVIDENDS PER SHARE: Common stock $ .33 $ .30 $ .99 $ .90 =========== =========== =========== =========== Preferred stock $ .75 $ .75 $ 2.25 $ 2.25 =========== =========== =========== ===========
3 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2000 and December 31, 1999 (in thousands except share data)
September 30, December 31, 2000 1999 (Unaudited) ------------- ------------ Assets: Property: Operating properties: Property and deferred costs of projects $ 3,716,107 $ 3,790,364 Less accumulated depreciation and amortization 611,981 564,632 ------------- ------------ 3,104,126 3,225,732 Properties in development 178,388 288,058 Properties held for sale 355,812 10,984 ------------- ------------ Total property 3,638,326 3,524,774 Investments in and advances to unconsolidated real estate ventures 529,865 533,341 Prepaid expenses, receivables under finance leases and other assets 258,717 258,666 Accounts and notes receivable 59,577 61,224 Investments in marketable securities 22,882 23,321 Cash and cash equivalents 9,387 25,890 ------------- ------------ Total $ 4,518,754 $ 4,427,216 ============= ============
The accompanying notes are 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 September 30, 2000 and December 31, 1999 (in thousands except share data)
September 30, December 31, 2000 1999 (Unaudited) ------------- ------------ Liabilities: Debt: Property debt not carrying a Parent Company guarantee of repayment $ 2,555,425 $ 2,529,334 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt 104,064 161,585 Other debt 743,439 643,500 ------------- ------------ 847,503 805,085 ------------- ------------ Total debt 3,402,928 3,334,419 ------------- ------------ Accounts payable, accrued expenses and other liabilities 318,407 317,252 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; 69,167,888 shares issued in 2000 and 70,693,789 shares issued in 1999 692 707 Additional paid-in capital 769,347 808,277 Accumulated deficit (108,800) (169,974) Accumulated other comprehensive income (loss) (826) (471) ------------- ------------ Net shareholders' equity 660,454 638,580 ------------- ------------ Total $ 4,518,754 $ 4,427,216 ============= ============
5 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, 2000 and 1999 (Unaudited, in thousands)
2000 1999 ----------- ----------- Cash flows from operating activities: Rents and other revenues received $ 506,060 $ 505,108 Proceeds from land sales and on notes receivable from land sales 6,787 24,016 Interest received 7,536 12,563 Operating expenditures (218,184) (237,322) Interest paid (181,967) (184,977) Dividends, interest and other operating distributions received from unconsolidated majority financial interest ventures 39,472 35,975 ----------- ----------- Net cash provided by operating activities 159,704 155,363 ----------- ----------- Cash flows from investing activities: Expenditures for properties in development and improvements to existing properties funded by debt (156,846) (155,371) Expenditures for property acquisitions (21,903) --- Expenditures for improvements to existing properties funded by cash provided by operating activities (13,379) (15,454) Payments received on loans (advances made) to unconsolidated majority financial interest ventures 53,315 (44,133) Proceeds from sales of operating properties and other investments 84,322 126,875 Other 439 (13,857) ----------- ----------- Net cash used by investing activities (54,052) (101,940) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of property debt 150,954 233,062 Repayments of property debt: Scheduled principal payments (44,404) (36,717) Other payments (161,732) (80,853) Proceeds from issuance of other debt 115,750 200,248 Repayments of other debt (15,727) (268,323) Purchases of Company common stock (91,665) (31,016) Dividends paid (78,081) (74,053) Other 2,750 (6,369) ----------- ----------- Net cash used by financing activities (122,155) (64,021) ----------- ----------- Net decrease in cash and cash equivalents (16,503) (10,598) Cash and cash equivalents at beginning of period 25,890 28,688 ----------- ----------- Cash and cash equivalents at end of period $ 9,387 $ 18,090 =========== ===========
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 Nine Months Ended September 30, 2000 and 1999 (Unaudited, in thousands)
2000 1999 -------- -------- Reconciliation of net earnings to net cash provided by operating activities: Net earnings $139,255 $ 83,632 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 67,170 72,893 Undistributed earnings of majority financial interest ventures (46,885) (33,236) Gains on dispositions of operating property assets, net (35,582) (7,474) Extraordinary loss (gain), net (3,198) 913 Participation expense pursuant to Contingent Stock Agreement 19,415 20,984 Provision for bad debts 5,212 6,350 Other, net 14,317 11,301 -------- -------- Net cash provided by operating activities $159,704 $155,363 ======== ======== Schedule of Noncash Investing and Financing Activities: Common stock issued pursuant to Contingent Stock Agreement $ 42,630 $ 34,491 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 1,589 ======== ========
7 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) September 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 September 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. In September 2000, the Company refiled 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 September 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 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 --------------------- built-in gains which might be recognized and the potential for the Company to enter into alternative structures, if necessary. At September 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):
September 30, December 31, 2000 1999 ------------- ------------ Majority financial interest ventures $ 342,430 $ 349,991 Minority interest ventures 187,435 183,350 ---------- ---------- Total $ 529,865 $ 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 Nine months ended September 30, ended September 30, ---------------------- ----------------------- 2000 1999 2000 1999 --------- ---------- --------- ---------- Majority financial interest ventures $ 17,202 $ 15,187 $ 66,939 $ 49,309 Minority interest ventures 4,052 5,094 9,457 12,719 --------- ---------- --------- ---------- Total $ 21,254 $ 20,281 $ 76,396 $ 62,028 ========= ========== ========= ==========
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):
September 30, December 31, 2000 1999 ------------- ------------ Assets: Operating properties, net $ 381,819 $ 375,651 Properties in development 17,172 26,924 Properties held for sale 15,242 --- Land held for development and sale 256,388 257,773 Investments in and advances to unconsolidated real estate ventures 85,000 107,813 Prepaid expenses, receivables under finance leases and other assets 84,803 98,228 Accounts and notes receivable 70,737 88,765 Cash and cash equivalents 3,366 8,194 ---------- ---------- Total $ 914,527 $ 963,348 ========== ========== Liabilities and shareholders' deficit: Loans and advances from the Company $ 434,540 $ 514,792 Mortgages payable and other long-term debt 354,720 350,646 Other liabilities 112,491 118,525 Redeemable Series A Preferred stock 50,000 50,000 Shareholders' deficit (37,224) (70,615) ---------- ---------- Total $ 914,527 $ 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 Nine months ended September 30, ended September 30, -------------------------- --------------------------- 2000 1999 2000 1999 --------- ---------- ----------- ----------- Revenues, excluding interest on loans to the Company $ 70,458 $ 71,157 $ 236,898 $ 218,852 Interest income on loans to the Company --- --- --- 2,577 Operating expenses (37,343) (40,385) (122,252) (125,979) Interest expense, excluding interest on borrowings from the Company (4,451) (2,080) (10,839) (7,547) Interest expense on borrowings from the Company (12,779) (10,881) (39,472) (40,175) Depreciation and amortization (4,309) (2,944) (12,951) (8,877) Equity in earnings of unconsolidated real estate ventures 1,661 768 963 1,575 Gains on dispositions of operating property assets, net --- 1,633 --- 2,515 Income taxes, primarily deferred (5,875) (6,840) (18,956) (18,681) --------- ---------- ----------- ----------- Net earnings $ 7,362 $ 10,428 $ 33,391 $ 24,260 ========= ========== =========== ===========
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 net earnings of the ventures is summarized as follows (in thousands):
Three months Nine months ended September 30, ended September 30, -------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- Share of net earnings based on ownership interest $ 7,288 $ 10,324 $ 33,057 $ 24,018 Participation by others in the Company's share of earnings (6,303) (8,497) (19,418) (19,902) Interest on loans to and advances from the ventures, net 12,779 10,881 39,472 37,598 Eliminations, basis adjustments and other, net 3,438 2,479 13,828 7,595 --------- --------- ---------- ---------- $ 17,202 $ 15,187 $ 66,939 $ 49,309 ========= ========= ========== ==========
(4) Debt ---- Debt is summarized as follows (in thousands):
September 30, 2000 December 31, 1999 -------------------------- ----------------------- Due in Due in Total one year Total one year ----------- ---------- ----------- --------- Mortgages and bonds $ 2,571,206 $ 248,702 $ 2,572,496 $ 55,126 Medium-term notes 81,500 30,000 91,500 10,000 Credit line borrowings 259,000 --- 174,000 --- Other loans 491,222 6,631 496,423 6,467 ----------- ---------- ----------- --------- Total $ 3,402,928 $ 285,333 $ 3,334,419 $ 71,593 =========== ========== =========== =========
The amounts due in one year reflect the terms of existing loan agreements 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. In the third quarter of 2000, the Company adjusted its method of computing FFO to exclude deferred income taxes. Segment information for all periods has been restated to reflect these changes. Segment operating results are measured and assessed based on a performance measure referred to as Funds From Operations (FFO). The Company defines FFO as net earnings (computed in accordance with generally accepted accounting principles), excluding cumulative effects of changes in accounting principles, extraordinary items, gains (losses) on dispositions of operating property assets, depreciation and amortization and deferred income taxes. Additionally, equity in earnings of unconsolidated real estate ventures and minority interests has been adjusted to reflect FFO on the same basis. FFO for prior periods has been presented in conformity with the above definition. The exclusion of deferred income taxes results in the Company's definition of FFO differing from the definition used by the National Association of Real Estate Investment Trusts. Also, the Company's definition of FFO may differ from those 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. Effective in the third quarter of 2000, the Company's proportionate share of assets, revenues and expenses of unconsolidated real estate ventures accounted for on the equity method of accounting and in which it holds at least a 30% interest are included in segment assets and operating results. Accordingly, certain segment revenue, expense and asset information has been reclassified to conform to this presentation. The Company's share of FFO of other minority interest ventures 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 September 30, 2000 - ------------------ Revenues $ 159,709 $ 56,225 $ 44,254 $ --- $ 220 $ 260,408 Operating expenses* 72,350 21,739 29,815 1,760 3,477 129,141 Interest expense 47,982 21,623 771 --- 228 70,604 --------- --------- --------- --------- ---------- --------- FFO $ 39,377 $ 12,863 $ 13,668 $ (1,760) $ (3,485) $ 60,663 ========= ========= ========= ========= ========== ========= Three months ended September 30, 1999 - ------------------ Revenues $ 155,457 $ 52,340 $ 47,796 $ --- $ (185) $ 255,408 Operating expenses* 72,474 21,925 35,793 648 3,466 134,306 Interest expense 46,014 20,614 880 --- (2,127) 65,381 --------- --------- --------- --------- ---------- --------- FFO $ 36,969 $ 9,801 $ 11,123 $ (648) $ (1,524) $ 55,721 ========= ========= ========= ========= ========== ========= Nine months ended September 30, 2000 - ------------------ Revenues $ 463,561 $ 164,983 $ 157,282 $ --- $ 721 $ 786,547 Operating expenses* 212,066 62,964 102,489 3,408 12,034 392,961 Interest expense 138,552 63,370 2,288 --- 1,195 205,405 --------- --------- --------- --------- ---------- --------- FFO $ 112,943 $ 38,649 $ 52,505 $ (3,408) $ (12,508) $ 188,181 ========= ========= ========= ========= ========== ========= Nine months ended September 30, 1999 - ------------------ Revenues $ 464,228 $ 154,803 $ 152,610 $ --- $ 1,099 $ 772,740 Operating expenses* 215,680 60,226 111,759 1,949 17,161 406,775 Interest expense 140,721 61,739 2,619 --- (5,189) 199,890 --------- --------- --------- --------- ---------- --------- FFO $ 107,827 $ 32,838 $ 38,232 $ (1,949) $ (10,873) $ 166,075 ========= ========= ========= ========= ========== =========
* Operating expenses in this table exclude deferred income taxes and 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 September 30, ---------------------------------- 2000 1999 ------------ ------------ Revenues: Total reported above $ 260,408 $ 255,408 Revenues of majority financial interest ventures excluding interest on advances to the Company (70,458) (71,157) Company's share of revenues of 30% or more owned minority interest ventures (9,740) (9,768) Company's share of FFO of other minority interest ventures (1,449) (2,064) ------------ ------------ Total in consolidated financial statements $ 178,761 $ 172,419 ============ ============ Operating expenses, exclusive of depreciation and amortization: Total reported above $ 129,141 $ 134,306 Operating expenses of majority financial interest ventures (37,343) (40,385) Company's share of operating expenses of 30% or more owned minority interest ventures (3,573) (3,286) Provision for bad debts (1,871) (1,974) Participation by others in the Company's share of earnings of majority financial interest ventures (6,303) (8,497) Income taxes and other (1,110) (137) ------------ ------------ Total in consolidated financial statements $ 78,941 $ 80,027 ============ ============ Interest expense: Total reported above $ 70,604 $ 65,381 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company (4,451) (2,080) Company's share of interest expense of 30% or more owned minority interest ventures (2,826) (2,893) ------------ ------------ Total in consolidated financial statements $ 63,327 $ 60,408 ============ ============ Operating results: FFO reported above $ 60,663 $ 55,721 Depreciation and amortization (23,184) (23,548) Gains on dispositions of operating property assets, net 37,562 22 Share of depreciation and amortization, deferred taxes and gains on dispositions of operating property assets of unconsolidated real estate ventures, net (4,861) (5,538) ------------ ------------ Earnings before extraordinary items in consolidated financial statements $ 70,180 $ 26,657 ============ ============
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):
Nine months ended September 30, ------------------------------ 2000 1999 ------------ ------------ Revenues: Total reported above $ 786,547 $ 772,740 Revenues of majority financial interest ventures excluding interest on advances to the Company (236,898) (218,852) Company's share of revenues of 30% or more owned minority interest ventures (28,370) (25,702) Company's share of FFO of other minority interest ventures (5,828) (6,071) ------------ ------------ Total in consolidated financial statements $ 515,451 $ 522,115 ============ ============ Operating expenses, exclusive of depreciation and amortization: Total reported above $ 392,961 $ 406,775 Operating expenses of majority financial interest ventures (122,252) (125,979) Company's share of operating expenses of 30% or more owned minority interest ventures (9,730) (8,792) Provision for bad debts (5,212) (6,350) Participation by others in the Company's share of earnings of majority financial interest ventures (19,418) (19,902) Income taxes and other (3,569) (2,788) ------------ ------------ Total in consolidated financial statements $ 232,780 $ 242,964 ============ ============ Interest expense: Total reported above $ 205,405 $ 199,890 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company (10,839) (7,547) Company's share of interest expense of 30% or more owned minority interest ventures (8,583) (7,743) ------------ ------------ Total in consolidated financial statements $ 185,983 $ 184,600 ============ ============ Operating results: FFO reported above $ 188,181 $ 166,075 Depreciation and amortization (67,170) (72,893) Gains on dispositions of operating property assets, net 35,582 7,474 Share of depreciation and amortization, deferred taxes, and gains (losses) on dispositions of operating property assets of unconsolidated real estate ventures, net (20,536) (16,111) ------------ ------------ Earnings before extraordinary items in consolidated financial statements $ 136,057 $ 84,545 ============ ============
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):
September 30, December 31, 2000 1999 -------------- ------------ Retail centers $ 3,367,343 $ 3,289,819 Office and other properties 1,234,205 1,215,993 Land sales operations 401,065 435,279 Development 87,885 33,371 Corporate 84,324 106,537 -------------- ------------ Total $ 5,174,822 $ 5,080,999 ============== ============
Total segment assets exceeds total assets reported in the consolidated financial statements primarily because of the consolidation of the majority financial interest ventures and the Company's proportionate share of assets of certain minority interest ventures for segment reporting purposes. (6) Gains on dispositions of operating property assets, net ---------------------------------------------------------------- The net gains on dispositions of operating property assets for the three months ended September 30, 2000 related primarily to the sale in July 2000, of substantially all of the Company's ownership interest in North Star, a retail center in San Antonio, Texas for approximately $84 million. In connection with the sale of the ownership interest, the Company deferred approximately $25 million of gain due to the continuing involvement of the Company. The net gains on operating properties for the nine months ended September 30, 2000 related primarily to the sale discussed above, partially offset by a provision for loss on a leasehold interest in a retail center the Company decided to dispose 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 gains on dispositions of operating property assets for the nine months ended September 30, 1999 related primarily to the sale in June 1999 of an operating property in Los Angeles, California. 17 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (7) Extraordinary gain (loss), net ------------------------------ The extraordinary gain (loss), net for the three and nine months ended September 30, 2000 related primarily to the substantial modification of terms of certain property debt and to the extinguishment of other debt. The extraordinary gain (loss), net for the three and nine months ended September 30, 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 credit facility borrowings, refinancing of property debt and 8% Senior Debt issued in 1999. (8) Earnings per share ------------------ Information relating to the calculations of earnings per share of common stock (EPS) for the three months ended September 30, 2000 and 1999 is summarized as follows (in thousands):
2000 1999 --------------------- --------------------- Basic Diluted Basic Diluted --------- -------- --------- --------- Earnings before extra- ordinary items $ 70,180 $ 70,180 $ 26,657 $ 26,657 Dividends on Preferred stock (3,038) --- (3,038) (3,038) Dividends on unvested common stock awards and other (111) (4) (115) (305) Interest on convertible property debt --- 769 --- --- --------- -------- --------- --------- Adjusted earnings before extraordinary items used in EPS computation $ 67,031 $ 70,945 $ 23,504 $ 23,314 ========= ======== ========= ========= Weighted-average shares outstanding 69,751 69,751 71,979 71,979 Dilutive securities: Convertible property debt --- 1,657 --- --- Convertible preferred stock --- 5,310 --- --- Options, warrants, unvested common stock awards and other --- 1,049 --- 608 --------- -------- --------- --------- Adjusted weighted-average shares used in EPS computation 69,751 77,767 71,979 72,587 ========= ======== ========= =========
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 of common stock (EPS) for the nine months ended September 30, 2000 and 1999 is summarized as follows (in thousands):
2000 1999 ----------------------------- ------------------------------- Basic Diluted Basic Diluted ------- ------- ------- ------- Earnings before extra- ordinary items $ 136,057 $ 136,057 $ 84,545 $ 84,545 Dividends on Preferred stock (9,114) --- (9,114) (9,114) Dividends on unvested common stock awards and other (332) (256) (353) (627) Interest on convertible property debt --- 2,307 --- --- ------------ ------------ ------------- -------------- Adjusted earnings before extraordinary items used in EPS computation $ 126,611 $ 138,108 $ 75,078 $ 74,804 ============ ============ ============= ============== Weighted-average shares outstanding 69,939 69,939 71,868 71,868 Dilutive securities: Convertible property debt --- 1,930 --- --- Convertible preferred stock --- 5,310 --- --- Options, warrants, unvested common stock awards and other --- 610 --- 594 ------------ ------------ ------------- -------------- Adjusted weighted-average shares used in EPS computation 69,939 77,789 71,868 72,462 ============ ============ ============= ==============
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) Properties held for sale ------------------------ 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 operating properties. Accordingly, the net book values of the operating properties were reclassified to properties held for sale. In June 2000, the Company sold one of the properties for an amount approximating its net book value. 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 September 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 events ----------------- In October 2000, the Company sold Midtown Square, a retail center in Charlotte, North Carolina for approximately $9.5 million. The Company will record a net gain on the sale of this property of approximately $4.7 million in the fourth quarter of 2000. Additionally, in November 2000, the Company disposed of its leasehold interest in The Grand Avenue, a retail center in Milwaukee, Wisconsin for approximately $3.0 million. No significant gain or loss will be recorded relating to this transaction. 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 nine months ended September 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 (collectively, 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 and expand and/or renovate existing properties that may have future prospects consistent with the Company's long-term investment criteria. The Company plans to continue to make 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 this 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 meet the Company's 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 expand or develop properties, to repay debt and to 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. The Company expects to close the sale of a majority 22 Part I. Financial Information, continued Item 1. Financial Statements, continued: General, continued: - ------------------ of its interests in two office/industrial business parks in Las Vegas in December 2000. 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 July 2000, the Company sold substantially all of its ownership interest in North Star, a retail center in San Antonio, Texas. In August 2000, the Company purchased an additional interest in Westdale, a retail center in Cedar Rapids, Iowa. 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. Additionally, the Company's proportionate share of revenues and expenses of unconsolidated real estate ventures accounted for on the equity method of accounting and in which it holds at least a 30% interest are included in segment operating results. The Company's share of FFO of other unconsolidated real estate ventures 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 Nine months ended months ended September 30, September 30, ---------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ---------- ----------- Revenues $ 159.7 $ 155.5 $ 463.6 $ 464.2 Operating expenses, exclusive of depreciation and amortization 72.3 72.5 212.1 215.7 Interest expense 48.0 46.0 138.6 140.7 ----------- ----------- ---------- ----------- 39.4 37.0 112.9 107.8 Depreciation and amortization 20.1 17.2 58.4 56.1 ----------- ----------- ---------- ----------- Operating income $ 19.3 $ 19.8 $ 54.5 $ 51.7 =========== =========== ========== ===========
24 Part I. Financial Information, continued Item 1. Financial Statements, continued: Operating Properties - Retail Centers, continued: - ------------------------------------------------ Revenues increased $4.2 million and decreased $.6 million for the three and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. The increase for the three months ended September 30, 2000 was attributable primarily to project expansions (approximately $5.6 million), the acquisition of an additional interest in Westdale (approximately $1.3 million) and higher rents on released space. These increases were partially offset by the dispositions of Santa Monica Place and North Star (approximately $6.7 million). The decrease for the nine months ended September 30, 2000 was attributable primarily to the aforementioned dispositions and contribution of properties to a joint venture (approximately $21.0 million). These decreases were substantially offset by project expansions (approximately $12.7 million), the aforementioned acquisition (approximately $1.3 million) and higher rents on released space. Total operating and interest expenses increased $1.8 million and decreased $5.7 million for the three and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. The increase for the three months ended September 30, 2000 was attributable primarily to project expansions (approximately $6.5 million) and the acquisition of an additional interest in Westdale (approximately $1.1 million). These increases were partially offset by the dispositions of Santa Monica Place and North Star (approximately $3.9 million) and lower interest expenses due to debt repayments. The decrease for the nine months ended September 30, 2000 was attributable primarily to the aforementioned dispositions and contribution of properties to a joint venture (approximately $16.9 million) and lower interest expenses due to debt repayments. These decreases were partially offset by project expansions (approximately $12.8 million) and the aforementioned acquisition (approximately $1.1 million). Depreciation and amortization expense increased $2.9 million and $2.3 million for the three and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. These changes were attributable primarily to the changes in the portfolio referred to above. 25 Part I. Financial Information, continued Item 1. Financial Statements, continued: Operating Properties - Office and Other Properties: - -------------------------------------------------- Operating results of office and other properties are summarized as follows (in millions):
Three Nine months ended months ended September 30, September 30, --------------------------- ----------------------------- 2000 1999 2000 1999 ---------- ----------- ---------- ----------- Revenues $ 56.2 $ 52.3 $ 165.0 $ 154.8 Operating expenses, exclusive of depreciation and amortization 21.7 21.9 63.0 60.2 Interest expense 21.6 20.6 63.4 61.7 ---------- ----------- ---------- ----------- 12.9 9.8 38.6 32.9 Depreciation and amortization 7.8 9.8 23.8 28.2 ---------- ----------- ---------- ----------- Operating income $ 5.1 $ --- $ 14.8 $ 4.7 ========== =========== ========== ===========
Revenues increased $3.9 million and $10.2 million for the three and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. The increases were attributable primarily to higher average occupancy levels (92.9% in 2000 compared to 90.5% in 1999), project openings in 1999 (approximately $1.4 million and $3.8 million for the three and nine months ended September 30, 2000, respectively) and higher rents on released space. These increases were partially offset by the aforementioned dispositions in 1999 and 2000. Total operating and interest expenses increased $.8 million and $4.5 million for the three and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. The increases in operating and interest expenses were attributable primarily to higher average occupancy levels and to project openings in 1999 (approximately $.8 million and $2.3 million for the three and nine months ended September 30, 2000, respectively). These increases were partially offset by the aforementioned dispositions (approximately $.1 million and $.4 million for the three and nine months ended September 30, 2000, respectively). Depreciation and amortization expense decreased $2.0 million and $4.4 million for the three and nine months ended September 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 2000. 26 Part I. Financial Information, continued Item 1. Financial Statements, continued: Land Sales Operations: - --------------------- Land sales 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. Operating results of land sales operations are summarized as follows (in millions):
Three months Nine months ended September 30, ended September 30, --------------------------- -------------------------------- 2000 1999 2000 1999 ----------- ---------- ----------- ----------- Nevada Land Operations: Revenues: Summerlin $ 19.3 $ 23.8 $ 74.0 $ 77.0 Other 1.6 9.9 7.8 16.9 Operating costs and expenses: Summerlin 17.0 18.8 59.8 62.0 Other 1.5 9.4 7.7 16.5 Interest expense --- --- .1 --- ---------- ---------- ----------- ----------- Operating income $ 2.4 $ 5.5 $ 14.2 $ 15.4 ========== ========== =========== =========== Columbia and Other: Revenues $ 23.4 $ 14.1 $ 75.5 $ 58.7 Operating costs and expenses 11.3 7.6 35.0 33.3 Interest expense .8 .9 2.2 2.6 ---------- ---------- ----------- ----------- Operating income $ 11.3 $ 5.6 $ 38.3 $ 22.8 ========== ========== =========== =========== Total: Revenues $ 44.3 $ 47.8 $ 157.3 $ 152.6 Operating costs and expenses 29.8 35.8 102.5 111.8 Interest expense .8 .9 2.3 2.6 ---------- ---------- ----------- ----------- Operating income $ 13.7 $ 11.1 $ 52.5 $ 38.2 ========== ========== =========== ===========
27 Part I. Financial Information, continued Item 1. Financial Statements, continued: Land Sales Operations, continued: - -------------------------------- Revenues from Summerlin land sales operations decreased $4.5 million and $3.0 million for the three months and nine months ended September 30, 2000, respectively, while related costs and expenses decreased $1.8 million and $2.2 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 land available for sale. The Company is developing additional land inventory, expected to be sold in the fourth quarter. The decreases in revenues and related costs and expenses from other Nevada land sales for the three months and nine months ended September 30, 2000, compared to the same periods in 1999, were attributed to lower levels of sales of investment and business park land. Revenues from Columbia and other land sales operations increased $9.3 million and $16.8 million for the three and nine months ended September 30, 2000, respectively, while related costs and expenses increased $3.6 million and $1.3 million, respectively, compared to the same periods in 1999. The increases in revenues and related costs and expenses for the three months ended September 30, 2000 were attributable to higher levels of land sales in Columbia for commercial and residential uses. The increases in revenues and related costs and expenses for the nine months ended September 30, 2000 were attributable primarily to higher levels of investment land sales in Columbia at a higher profit margin and to higher levels of sales of investment land in New Jersey (approximately $10.0 million sales increase and $2.7 million cost and expense increase). 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. Development expenses increased $1.1 million and $1.5 million for the three months and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. The increases in development expenses relate primarily to increased preconstruction expenses related to the Company's development pipeline. 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 28 Part I. Financial Information, continued Item 1. Financial Statements, continued: Corporate, continued: - -------------------- 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 of 1999, the unsecured 8% notes issued in the second quarter 1999, the unsecured 8.5% notes, the medium-term notes, credit 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 and distributions on the redeemable preferred securities, net of distributions allocated to other segments. Corporate operating expenses decreased $5.1 million for the nine months ended September 30, 2000, compared to the same period 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 $2.4 million and $6.4 million for the three and nine months ended September 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. Gains on dispositions of operating property assets, net: - ------------------------------------------------------ Gains 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 Nine months ended September 30, ended September 30, -------------------- -------------------- 2000 1999 2000 1999 -------- ------ ------- -------- Net gains on operating properties $ 37.5 $ 1.6 $ 31.6 $ 10.2 ======== ====== ======= ========
29 Part I. Financial Information, continued Item 1. Financial Statements, continued: Gains on dispositions of operating property assets, net, continued: - ----------------------------------------------------------------- The net gains on dispositions of operating property assets for the three months ended September 30, 2000 related primarily to the sale of substantially all of the Company's ownership interest in North Star, a retail center. In connection with the sale of the ownership interest, the Company deferred approximately $25 million of gain due to the continuing involvement of the Company. The net gains on operating properties for the nine months ended September 30, 2000 related primarily to the sale discussed above, partially offset by a provision for loss on a leasehold interest in a retail center the Company decided to dispose 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 gains on dispositions of operating property assets for the nine months ended September 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 gain (loss), net: - ------------------------------ The extraordinary gain (loss), net for the three and nine months ended September 30, 2000 related primarily to the substantial modification of terms of certain property debt and extinguishment of other debt. The extraordinary gain (loss), net for the three and nine months ended September 30, 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 credit facility borrowings, refinancing of property debt and 8% Senior Debt issued in 1999. Net earnings: - ------------ The increases in net earnings for the three and nine months ended September 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 gains on dispositions of operating property assets, net and the analysis of extraordinary gain (loss), net. Financial condition and liquidity: - --------------------------------- Shareholders' equity increased by $21.9 million from December 31, 1999 to September 30, 2000. The increase was primarily attributed to net earnings for the nine months ended September 30, 2000 and the issuance of common stock pursuant to the Contingent Stock Agreement, partially offset by the payment of regular quarterly dividends on the Company's common and Preferred stocks and purchases of common stock. The Company had cash and cash equivalents and investments in marketable securities totaling $32.3 million at September 30, 2000, including $4.3 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 $191 million at September 30, 2000. The Company is currently negotiating terms of a $375 million replacement credit facility that it expects to obtain in the fourth quarter of 2000. As of September 30, 2000, debt due in one year was $285.3 million, including balloon payments on mortgages of $201.2 million and repayments of medium-term notes of $30 million. These payments are expected to be made from the proceeds of property refinancings (including refinancings of the mortgages due), credit facility borrowings, proceeds from 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 during the remaining part of 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. 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. In the fourth quarter of 2000, the Company sold interests in two retail centers and expects to sell interests in two office/industrial parks. 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 31 Part I. Financial Information, continued Item 1. Financial Statements, continued: Financial condition and liquidity, continued: - -------------------------------------------- of September 30, 2000, the Company had repurchased approximately 3.6 million shares under this program for approximately $81.2 million. 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 September 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 subject to the 2000 termination date 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. In December 1999, the "REIT Modernization Act" (RMA), which is effective January 1, 2001, became law. Certain provisions of the RMA allow REITs to conduct certain previously prohibited business activities through Taxable REIT Subsidiaries (TRS) and allow a REIT to own 100% of TRS. The Company is currently evaluating the provisions of the RMA and is considering the purchase of the majority of the voting stock of certain unconsolidated real estate ventures in which it holds substantially all (at least 98%) of the financial interest. These ventures would then elect to be TRS. The Company currently accounts for these ventures using the equity method. Note 3 to the consolidated financial statements in this form 10-Q contains condensed, combined balance sheets and statements of operations of these ventures. Net cash provided by operating activities was $159.7 million and $155.4 million for the nine months ended September 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 increase in net cash provided by operating activities was due to the factors discussed previously under the operating results of the business segments. Net cash used in investing activities was $54.1 million and $101.9 million for the nine months ended September 30, 2000 and 1999, respectively. The decrease in net cash used of $47.8 million was due primarily to lower proceeds from sales of operating properties (1999 included the 32 Part I. Financial Information, continued Item 1. Financial Statements, continued: 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 department store sites. These items were partially offset by higher net payments received on loans to unconsolidated majority financial interest ventures, due primarily to higher net cash flows from the ventures' land sales activities. Net cash used in financing activities was $122.2 million and $64.0 million for the nine months ended September 30, 2000 and 1999, respectively. The increase in net cash used of $58.2 million was due primarily to 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 with respect to and amends 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. Derivative instruments held by the Company at September 30, 2000 consisted solely of interest rate cap agreements used to hedge interest rate risks associated with specific variable rate loans. The fair values and carrying values of these instruments were not significant at September 30, 2000. Based on its current limited use of derivative instruments for cash flow hedging purposes, the Company does not believe that adoption of Statement 133, as amended, will have a material effect on its financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), relating to the application of generally accepted accounting principles to revenue recognition, including contingent rentals. The Company's revenue recognition policy with respect to contingent rentals is consistent with SAB 101 and, accordingly, the Company does not believe that application of SAB 101 will have a material effect on its results of operations. In May 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-01, "Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures" (EITF 00-01). EITF 00-01 requires that the proportionate share method of presenting the balance sheet and income statement information for partnerships and other ventures in which entities have joint interest and control be discontinued, except under certain limited circumstances. EITF 00-01 is applicable to annual periods ending after June 15, 2000 and is applicable to the Company as of December 31, 2000 and for the year then ended. Also, upon adoption all comparative financial statements presented shall be restated to conform to the revised presentation. If the Company were required to adopt EITF 00-01 as of September 30, 2000, revenues and operating and interest expenses would be reduced by $39.6 million and $23.1 million, respectively, and equity in earnings of unconsolidated real estate ventures would be increased by $16.5 million, for the nine months ended September 30, 2000. Revenues and operating and interest expenses would be reduced by $38.5 million and $21.6 million, respectively, and equity in earnings would be increased by $16.9 million, for the nine months ended September 30, 1999. In addition, assets of $162 million and liabilities of $116 million would have been reclassified to investments in unconsolidated real estate ventures. 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 33 Part I. Financial Information, continued Item 1. Financial Statements, continued: 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 derivative financial instruments is insignificant at September 30, 2000. 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 (dollars 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 September 30, 2000, approximately $106.5 million of the Company's variable rate debt relates to borrowings under project construction 34 Part I. Financial Information, continued Item 1. Financial Statements, continued: Market risk information, continued: - ---------------------------------- loans. The borrowings under project construction loans are expected to be repaid from proceeds of long-term, fixed rate loans at various dates to 2003 when construction of the related projects is scheduled to be completed. At September 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 September 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 September 30, 2000, the Company's hedging strategies during that period and interest rates. 35 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: November 13, 2000 By /s/ Jeffrey H. Donahue ------------------ ------------------------------- Jeffrey H. Donahue Executive Vice President and Chief Financial Officer Principal Accounting Officer: Date: November 13, 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 FINANCIAL DATA SCHEDULE
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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 SEP-30-2000 9,387 22,882 85,462 25,885 0 117,442 4,250,307 611,981 4,518,754 593,362 3,402,928 0 41 692 659,721 4,518,754 515,451 515,451 0 232,780 0 5,212 185,983 139,482 227 136,284 0 3,198 0 139,255 1.86 1.82 Current assets include cash, unrestricted marketable securities, current portion of accounts and notes receivables 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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