-----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, Glz5Xk1x67Y+BRFKEvgqcUP7LcbFvYQVG+GIFZqnZqtStzZ3GtzVNlyiGTP2mK4Q wtai7ItzdzbiMx467Zj0gQ== 0000928385-99-002568.txt : 19990816 0000928385-99-002568.hdr.sgml : 19990816 ACCESSION NUMBER: 0000928385-99-002568 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROUSE COMPANY CENTRAL INDEX KEY: 0000085388 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 520735512 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11543 FILM NUMBER: 99687094 BUSINESS ADDRESS: STREET 1: 10275 LITTLE PATUXENT PKWY CITY: COLUMBIA STATE: MD ZIP: 21044-3456 BUSINESS PHONE: 4109926000 MAIL ADDRESS: STREET 1: 10275 LITTLE PATUXENT PARKWAY CITY: COLUMBIA STATE: MD ZIP: 21044 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNITY RESEARCH & DEVELOPMENT INC DATE OF NAME CHANGE: 19660913 10-Q 1 FORM 10-Q Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 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, 1999 ------------- 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 5, 1999: Common Stock, $0.01 par value 72,287,250 - ----------------------------- ---------- Title of Class Number of Shares Part I. Financial Information Item 1. Financial Statements: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income Three and Six Months Ended June 30, 1999 and 1998 (Unaudited, in thousands except per share amounts, note 1)
Three months ended June 30, Six months ended June 30, ----------------------------- ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenues: Retail centers $ 121,617 $ 113,634 $ 248,386 $ 222,149 Office, mixed-use and other 51,271 39,215 103,394 78,690 Land sales operations 2,730 1,394 3,784 31,630 Corporate interest income 983 498 1,079 1,468 ------------ ----------- --------- --------- Total revenues 176,601 154,741 356,643 333,937 ------------ ----------- --------- --------- Operating expenses, exclusive of provision for bad debts, depreciation and amortization: Retail centers 56,207 56,512 114,409 111,121 Office, mixed-use and other 18,986 15,827 39,044 32,763 Land sales operations 2,864 82 3,520 23,164 Development (183) 938 1,283 4,504 Corporate 4,678 4,473 8,168 8,571 ------------ ----------- --------- --------- 82,552 77,832 166,424 180,123 ------------ ----------- --------- --------- Interest expense: Retail centers 35,875 30,192 75,250 60,166 Office, mixed-use and other 21,732 15,790 43,610 33,345 Land sales operations 227 264 435 531 Corporate 2,000 3,338 4,163 5,696 ------------ ----------- --------- --------- 59,834 49,584 123,458 99,738 ------------ ----------- --------- --------- Provision for bad debts 3,064 936 4,376 1,790 Depreciation and amortization 22,406 17,409 50,079 36,199 ------------ ----------- --------- --------- Total expenses 167,856 145,761 344,337 317,850 ------------ ----------- --------- --------- Earnings before equity in earnings of unconsolidated real estate ventures and income taxes 8,745 8,980 12,306 16,087
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, 1999 and 1998 (Unaudited, in thousands except per share amounts, note 1)
Three months Six months ended June 30, ended June 30, --------------------------------- --------------------------------- 1999 1998 1999 1998 ------------ -------------- ------------ -------------- Equity in earnings of unconsolidated real estate ventures (note 3) $ 20,682 $ 20,143 $ 44,015 $ 45,739 Current income taxes (83) (93) (157) (199) -------- --------- --------- --------- Earnings before gain on dispositions of assets and other provisions, net, extraordinary items and cumulative effect of change in accounting principle 29,344 29,030 56,164 61,627 Gain on dispositions of assets and other provisions, net (note 6) 618 234 1,724 2,169 -------- --------- --------- --------- Earnings before extraordinary items and cumulative effect of change in accounting principle 29,962 29,264 57,888 63,796 Extraordinary gain (loss), net (note 7) (910) 7,491 (910) 6,575 Cumulative effect at January 1, 1998 of change in accounting for participating mortgages --- --- --- (4,629) -------- --------- --------- --------- Net earnings 29,052 36,755 56,978 65,742 Other items of comprehensive income - minimum pension liability adjustment (334) --- (668) --- -------- --------- --------- --------- Comprehensive income $ 28,718 $ 36,755 $ 56,310 $ 65,742 ======== ========= ========= ========= Net earnings applicable to common shareholders $ 26,014 $ 33,717 $ 50,902 $ 59,666 ======== ========= ========= =========
The accompanying notes are an integral part of these statements 3 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income, continued Three and Six Months Ended June 30, 1999 and 1998 (Unaudited, in thousands except per share amounts, note 1)
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 --------- --------- --------- ---------- EARNINGS PER SHARE OF COMMON STOCK (note 8): Basic: Earnings before extra- ordinary items $ .37 $ .39 $ .72 $ .86 Extraordinary gain (loss) (.01) .11 (.01) .10 Cumulative effect of change in accounting principle --- --- --- (.07) ------ ----- ------ ------ Total $ .36 $ .50 $ .71 $ .89 ====== ===== ====== ====== Diluted: Earnings before extra- ordinary items $ .37 $ .38 $ .71 $ .84 Extraordinary gain (loss) (.01) .11 (.01) .09 Cumulative effect of change in accounting principle --- --- --- (.06) ------ ----- ------ ------ Total $ .36 $ .49 $ .70 $ .87 ====== ===== ====== ====== DIVIDENDS PER SHARE: Common stock $ .30 $ .28 $ .60 $ .56 ====== ===== ====== ====== Preferred stock $ .75 $ .75 $ 1.50 $ 1.50 ====== ===== ====== ======
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 June 30, 1999 and December 31, 1998 (in thousands, except share data, note 1)
June 30, December 31, 1999 1998 (Unaudited) ----------- ----------- Assets: Property: Operating properties: Property and deferred costs of projects $3,817,596 $4,718,727 Less accumulated depreciation and amortization 546,343 578,311 ---------- ---------- 3,271,253 4,140,416 Properties in development 202,774 167,360 Properties held for sale 73,930 165,894 ---------- ---------- Total property 3,547,957 4,473,670 Investments in and advances to unconsolidated real estate ventures (note 3) 508,132 322,066 Prepaid expenses, receivables under finance leases and other assets 239,685 241,040 Accounts and notes receivable 79,609 75,917 Investments in marketable securities 4,578 4,256 Cash and cash equivalents 25,870 37,694 ---------- ---------- Total $4,405,831 $5,154,643 ========== ==========
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 Balance Sheets, continued June 30, 1999 and December 31, 1998 (in thousands, except share data, note 1)
June 30, December 31, 1999 1998 (Unaudited) ----------- ----------- Liabilities: Debt (note 4): Property debt not carrying a Parent Company guarantee of repayment $2,485,242 $2,865,119 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt 161,546 161,986 Convertible subordinated debentures --- 128,515 Other debt 664,500 903,200 ---------- ---------- 826,046 1,193,701 ---------- ---------- Total debt 3,311,288 4,058,820 ---------- ---------- Accounts payable, accrued expenses and other liabilities 315,371 329,932 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; 72,279,778 shares issued in 1999 and 72,225,223 shares issued in 1998 723 723 Additional paid-in capital 842,845 836,508 Accumulated deficit (198,908) (206,520) Accumulated other comprehensive income (2,494) (1,826) ---------- ---------- Net shareholders' equity 642,207 628,926 ---------- ---------- Total $4,405,831 $5,154,643 ========== ==========
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 Six Months Ended June 30, 1999 and 1998 (Unaudited, in thousands, note 1)
1999 1998 -------------- -------------- Cash flows from operating activities: Rents and other revenues received $ 344,345 $ 300,884 Proceeds from land sales and on notes receivable from land sales 21,682 55,830 Interest received 4,907 6,530 Operating expenditures (172,781) (154,785) Interest paid (125,874) (91,798) Dividends, interest and other operating distributions received from unconsolidated majority financial interest ventures 31,022 56,080 ---------- ---------- Net cash provided by operating activities 103,301 172,741 ---------- ---------- Cash flows from investing activities: Expenditures for properties in development and improvements to existing properties funded by debt (110,904) (161,162) Expenditures for improvements to existing properties funded by cash provided by operating activities: Tenant leasing and remerchandising (2,225) (3,735) Building and equipment (9,507) (5,826) Payments received on loans and advances to unconsolidated majority financial interest ventures (33,481) 38,636 Proceeds from sales of operating properties and other investments 126,860 30,938 Other (6,196) (3,780) ---------- ---------- Net cash used by investing activities (35,453) (104,929) ---------- ---------- Cash flows from financing activities: Proceeds from issuance of property debt 111,438 108,126 Repayments of property debt: Scheduled principal payments (24,014) (21,542) Other payments --- (166,503) Proceeds from issuance of other debt 198,368 197,004 Repayments of other debt (296,919) (184,250) Proceeds from issuance of common stock --- 43,414 Purchases of common stock (12,810) (47,687) Proceeds from exercise of stock options 32 192 Dividends paid (49,370) (44,019) Other (6,397) --- ---------- ---------- Net cash used by financing activities (79,672) (115,265) ---------- ---------- Net decrease in cash and cash equivalents (11,824) (47,453) Cash and cash equivalents at beginning of period 37,694 87,100 ---------- ---------- Cash and cash equivalents at end of period $ 25,870 $ 39,647 ========== ==========
The accompanying notes are an integral part of these statements 7 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, 1999 and 1998 (Unaudited, in thousands, note 1)
1999 1998 --------- --------- Reconciliation of net earnings to net cash provided by operating activities: Net earnings $ 56,978 $ 65,742 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 50,079 36,199 Gain on dispositions of assets and other provisions, net (1,724) (2,169) Undistributed earnings of majority financial interest ventures (16,773) -- Extraordinary (gain) loss, net 910 (6,575) Cumulative effect of change in accounting principle -- 4,629 Additions to preconstruction reserve 600 3,845 Provision for bad debts 4,376 1,790 Participation expense pursuant to Contingent Stock Agreement 12,487 34,255 Decrease (increase) in operating assets and liabilities, net (3,632) 35,025 -------- -------- Net cash provided by operating activities $103,301 $172,741 ======== ======== Schedule of Noncash Investing and Financing Activities: Common stock issued pursuant to Contingent Stock Agreement $ 16,207 $ 15,754 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 -- Capital lease obligations incurred 1,278 -- Mortgage debt assumed by purchaser of a property 40,000 -- Common stock issued upon conversion of convertible subordinated debentures -- 1,460 ======== ========
The accompanying notes are an integral part of these statements. 8 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 (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 1998 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, as amended. Management believes the Company met the qualifications for REIT status as of June 30, 1999, intends for it to continue to meet the qualifications in the future and accordingly, does not expect that the Company will be liable for significant income taxes at the Federal level or in most states in which it operates in 1999 and future years. In connection with its election to be taxed as a REIT, the Company will also elect to be subject to the "built-in gain" rules. Under these rules, taxes may 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. Such net unrealized gains at June 30, 1999 were approximately $2,200,000. At June 30, 1999, the regular tax net operating loss carryforward is sufficient to offset built-in gains on assets the Company has identified for disposition and no net deferred tax liability for built-in gain taxes has been recognized. It may however, 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. 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 ----------------------------------- Investments in and advances to unconsolidated real estate ventures at June 30, 1999 and December 31, 1998 are summarized, based on the level of the Company's financial interest, as follows (in thousands):
June 30, December 31, 1999 1998 -------- ------------ Majority financial interest ventures $327,649 $270,085 Joint interest and control ventures 859 1,140 Minority interest ventures 179,624 50,841 -------- -------- Total $508,132 $322,066 ======== ========
The equity in earnings of unconsolidated real estate ventures for the three and six months ended June 30, 1999 and 1998 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 ------------------- -------------------- 1999 1998 1999 1998 -------- --------- --------- -------- Majority financial interest ventures $ 15,613 $ 17,844 $ 36,390 $ 41,041 Minority interest ventures 5,069 2,299 7,625 4,698 -------- -------- -------- -------- Total $ 20,682 $ 20,143 $ 44,015 $ 45,739 ======== ======== ======== ========
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 balance sheets of the ventures in which the Company holds majority financial interests at June 30, 1999 and December 31, 1998 are summarized as follows (in thousands):
June 30, December 31, 1999 1998 --------- ------------- Assets: Operating properties, net $277,083 $244,470 Properties in development 82,833 66,442 Land held for development and sale 224,289 236,999 Investment land 39,841 41,156 Investments in and advances to unconsolidated real estate ventures 122,576 32,586 Advances to the Company 14,664 112,310 Prepaid expenses, receivables under finance leases and other assets 34,449 31,453 Deferred tax asset 43,916 53,662 Accounts and notes receivable 74,940 74,736 -------- -------- Total $914,591 $893,814 ======== ======== Liabilities and shareholders' deficit: Loans and advances from the Company $520,119 $488,363 Mortgages payable and other long-term debt 340,011 332,945 Other liabilities 82,099 116,244 Redeemable Series A Preferred stock 50,000 50,000 Shareholders' deficit (77,638) (93,738) -------- -------- Total $914,591 $893,814 ======== ========
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 condensed combined statements of operations of the ventures in which the Company holds a majority financial interest for the three and six months ended June 30, 1999 and 1998 are summarized as follows (in thousands):
Three months ended June 30, Six months ended June 30, ---------------------------- ------------------------- 1999 1998 1999 1998 -------- ----------- --------- --------- Revenues, excluding interest on advances to the Company $ 67,660 $ 63,728 $153,108 $160,887 Interest income on advances to the Company -- -- 2,577 -- Operating expenses (40,068) (36,208) (88,644) (90,452) Interest expense, excluding interest on borrowings from the Company (2,648) (2,259) (5,437) (4,712) Interest expense on borrowings from the Company (14,717) (20,534) (29,294) (33,137) Depreciation and amortization (3,067) (2,529) (5,963) (5,054) Equity in earnings of unconsolidated real estate ventures 526 (432) 712 849 Gain on dispositions of assets, net 175 3,407 882 15,846 Income taxes, primarily deferred (3,768) (2,909) (11,841) (18,247) Extraordinary loss, net -- -- -- (925) -------- -------- -------- -------- Net earnings $ 4,093 $ 2,264 $ 16,100 $ 25,055 ======== ======== ======== ========
12 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 for the three and six months ended June 30, 1999 and 1998 is summarized as follows (in thousands):
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ----------- ---------- ---------- ---------- Share of net earnings based on ownership interest $ 4,052 $ 2,241 $ 15,939 $ 24,804 Share of extraordinary loss -- -- -- 916 Participation by others in the Company's share of earnings (5,046) (7,558) (11,405) (15,039) Interest on loans to and advances from the Company, net 14,717 20,534 26,717 33,137 Eliminations and other, net 1,890 2,627 5,139 (2,777) ---------- ------- ---------- -------- $ 15,613 $17,844 $ 36,390 $ 41,041 ========== ======= ========== ========
(4) Debt ---- Debt at June 30, 1999 and December 31, 1998 is summarized as follows (in thousands):
June 30, 1999 December 31, 1998 ----------------------- ----------------------- Due in Due in Total one year Total one year ----------------------- ----------------------- Mortgages and bonds $ 2,527,765 $ 79,869 $ 2,948,324 $ 159,171 Convertible subordinated debentures --- --- 128,515 --- Medium-term notes 91,500 10,000 97,500 6,000 Credit line borrowings 195,000 --- 602,000 304,000 Unsecured corporate notes 378,000 --- 178,000 --- Other loans 119,023 1,050 104,481 27,294 ----------- -------- ----------- --------- Total $ 3,311,288 $ 90,919 $ 4,058,820 $ 496,465 =========== ======== =========== =========
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. 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 ------------------- In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" to identifying the reportable segments in place of the industry segment approach used previously. The Company has five reportable segments: retail centers, office, mixed-use and other properties, land sales operations, development and corporate. 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 or unusual items and gains or losses from sales of properties, plus depreciation and amortization and deferred income taxes, and after adjustments for minority interests and to record unconsolidated partnerships and joint ventures on the same basis. 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, and 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 are accounted for 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. 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 ------------------------------ Operating results for the segments for the three and six months ended June 30, 1999 and 1998 are summarized as follows (in thousands):
Office, Mixed- Land Retail Use and Other Sales Centers Properties Operations Development Corporate Total --------- -------------- ---------- ------------ ----------- --------- Three months ended June 30, 1999 - ------------- Revenues $ 141,839 $ 62,574 $ 44,197 $ --- $ 1,192 $249,802 Operating expenses, exclusive of depreciation and amortization 67,560 26,120 32,731 (172) 5,446 131,685 Interest expense 39,594 23,872 813 --- (1,797) 62,482 ---------- --------- -------- ----------- -------- -------- FFO $ 34,685 $ 12,582 $ 10,653 $ 172 $ (2,457) $ 55,635 ========== ========= ======== =========== ======== ======== Three months ended June 30, 1998 - ------------- Revenues $ 129,666 $ 51,091 $ 39,788 $ --- $ 776 $221,321 Operating expenses, exclusive of depreciation and amortization 64,646 24,129 28,646 938 4,726 123,085 Interest expense 33,347 18,199 1,166 --- (909) 51,803 ---------- --------- -------- ----------- -------- -------- FFO $ 31,673 $ 8,763 $ 9,976 $ (938) $ (3,041) $ 46,433 ========== ========= ======== =========== ======== ======== Six months ended June 30, 1999 - ------------- Revenues $ 287,857 $ 125,416 $104,778 $ --- $ 1,463 $519,514 Operating expenses, exclusive of depreciation and amortization 135,466 52,928 73,448 1,301 10,627 273,770 Interest expense 82,556 47,757 1,739 --- (3,157) 128,895 ---------- --------- -------- ----------- -------- -------- FFO $ 69,835 $ 24,731 $ 29,591 $ (1,301) $ (6,007) $116,849 ========== ========= ======== =========== ======== ======== Six months ended June 30, 1998 - ------------- Revenues $ 254,334 $ 106,660 $130,352 $ --- $ 2,083 $493,429 Operating expenses, exclusive of depreciation and amortization 127,063 51,108 93,479 4,504 8,846 285,000 Interest expense 66,411 38,819 2,299 --- (3,079) 104,450 ---------- --------- -------- ----------- -------- -------- FFO $ 60,860 $ 16,733 $ 34,574 $ (4,504) $ (3,684) $103,979 ========== ========= ======== =========== ======== ========
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 the 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 and cumulative effect of change in accounting principle in the financial statements for the three months ended June 30, 1999 and 1998 are summarized as follows (in thousands):
Three months ended June 30, ---------------------- 1999 1998 ---------- ---------- Revenues: Total reported above $ 249,802 $ 221,321 Revenues of majority financial interest ventures excluding interest on advances to the Company (67,660) (63,728) Revenues representing the Company's share of FFO of minority financial interest ventures (5,389) (2,666) Other (152) (186) --------- --------- Total in financial statements $ 176,601 $ 154,741 ========= ========= Operating expenses, exclusive of depreciation and amortization: Total reported above $ 131,685 $ 123,085 Operating expenses of majority financial interest ventures (40,068) (36,208) Current income taxes applicable to operations (83) (93) Current income taxes of majority financial interest ventures (767) (249) Provision for bad debts (3,064) (936) Participation by others in the Company's share of earnings of majority financial interest ventures (5,046) (7,558) Other (105) (209) --------- --------- Total in financial statements $ 82,552 $ 77,832 ========= ========= Interest expense: Total reported above $ 62,482 $ 51,803 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company (2,648) (2,259) Other --- 40 --------- --------- Total in financial statements $ 59,834 $ 49,584 ========= ========= Operating results: FFO reported above $ 55,635 $ 46,433 Depreciation and amortization (22,406) (17,409) Gain on dispositions of assets and other provisions, net 618 234 Depreciation and amortization, gain on disposition of assets and deferred income taxes of unconsolidated real estate ventures, net (3,885) 6 --------- --------- Earnings before extraordinary items and cumulative effect of change in accounting principle $ 29,962 $ 29,264 ========= =========
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 ------------------------------ Reconciliations of the 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 and cumulative effect of change in accounting principle in the financial statements for the six months ended June 30, 1999 and 1998 are summarized as follows (in thousands):
Six months ended June 30, ------------------------ 1999 1998 ----------- ----------- Revenues: Total reported above $ 519,514 $ 493,429 Revenues of majority financial interest ventures excluding interest on advances to the Company (153,108) (160,887) Revenues representing the Company's share of FFO of minority financial interest ventures (9,490) (5,930) Other (273) 7,325 ---------- ---------- Total in financial statements $ 356,643 $ 333,937 ========== ========== Operating expenses, exclusive of depreciation and amortization: Total reported above $ 273,770 $ 285,000 Operating expenses of majority financial interest ventures (88,644) (90,452) Current income taxes applicable to operations (157) (199) Current income taxes of majority financial interest ventures (2,468) (294) Provision for bad debts (4,376) (1,790) Participation by others in the Company's share of earnings of majority financial interest ventures (11,405) (15,039) Other (296) 2,897 ---------- ---------- Total in financial statements $ 166,424 $ 180,123 ========== ========== Interest expense: Total reported above $ 128,895 $ 104,450 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company (5,437) (4,712) ---------- ---------- Total in financial statements $ 123,458 $ 99,738 ========== ========== Operating results: FFO reported above $ 116,849 $ 103,979 Depreciation and amortization (50,079) (36,199) Gain on dispositions of assets and other provisions, net 1,724 2,169 Depreciation and amortization, gain on disposition of assets and deferred income taxes of unconsolidated real estate ventures, net (10,606) (6,153) ---------- ---------- Earnings before extraordinary items and cumulative effect of change in accounting principle $ 57,888 $ 63,796 ========== ==========
17 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 at June 30, 1999 and December 31, 1998 are as follows (in thousands):
June 30, December 31, 1999 1998 ---------- -------------- Retail centers $2,848,492 $3,636,874 Office, mixed-use and other properties 1,420,145 1,417,622 Land sales operations 451,081 497,391 Development 59,294 61,166 Corporate 91,406 57,933 ---------- ---------- Total $4,870,418 $5,670,986 ========== ==========
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 on dispositions of assets and other provisions, net -------------------------------------------------------- Gain on dispositions of assets and other provisions, net, is summarized as follows (in thousands):
For the three months For the six months ended June 30, ended June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net gain on operating properties $ 6,866 $ 26 $ 7,453 $ 1,534 Termination benefits related to corporate realignment (6,248) -- (6,248) -- Other, net -- 208 519 635 -------- ------ -------- -------- $ 618 $ 234 $ 1,724 $ 2,169 ======== ====== ======== ========
The net gain on operating properties in 1999 relates primarily to a gain on the sale of a property in the second quarter of 1999. The net gain in 1998 relates primarily to a reduced provision for a loss recorded in the first quarter, relating to a retail center sold in April 1998. 18 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (6) Gain on dispositions of assets and other provisions, net, continued ------------------------------------------------------------------- During the second quarter of 1999, the Company announced and initiated the consolidation of its Retail Operations and Office and Mixed-Use Operations divisions into a single Property Operations Division. In addition, the Company integrated certain operating, administrative and support functions of the Hughes Division into its Columbia headquarters. The costs relating to these organizational changes of $6.2 million represent primarily severance and other benefits to terminated employees. (7) Extraordinary gain(loss), net ----------------------------- The extraordinary loss for the three and six months ended June 30, 1999 relates to a loss on the extinguishment of the convertible subordinated debentures prior to their scheduled maturity. The gain for the three and six months ended June 30, 1998 resulted from debt extinguished in connection with the transfer of title to a property to the related mortgage lender in the second quarter of 1998 ($14.8 million). This gain was partially offset by losses on extinguishment of other debt prior to scheduled maturity ($7.4 million). One of the losses was incurred by a majority financial interest venture. The debt was related to a hotel property which the venture sold, and a portion of the proceeds of the sale were used to repay the debt. The loss related to the majority financial interest venture is net of related taxes. 19 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, 1999 and 1998 is summarized as follows (in thousands):
1999 1998 ------------------ ------------------ Basic Diluted Basic Diluted -------- -------- -------- -------- Earnings before extra- ordinary items and cumulative effect of change in accounting principle $29,962 $29,962 $29,264 $29,264 Dividends on Preferred stock (3,038) (3,038) (3,038) (3,038) Dividends on unvested common stock awards (115) (84) (134) (58) Interest on convertible subordinated debentures -- -- -- -- ------- ------- ------- ------- Adjusted earnings before extraordinary items and cumulative effect of change in accounting principle used in EPS computation $26,809 $26,840 $26,092 $26,168 ======= ======= ======= ======= Weighted-average shares outstanding 71,760 71,760 67,291 67,291 Dilutive securities: Convertible subordinated debentures -- -- -- -- Options, warrants, and unvested common stock awards -- 590 -- 1,247 ------- ------- ------- ------- Adjusted weighted-average shares used in EPS computation 71,760 72,350 67,291 68,538 ======= ======= ======= =======
20 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, continued ----------------------------- Information relating to the calculations of earnings per share (EPS) of common stock for the six months ended June 30, 1999 and 1998 is summarized as follows (in thousands):
1999 1998 ------------------ ------------------ Basic Diluted Basic Diluted -------- -------- -------- -------- Earnings before extra- ordinary items and cumulative effect of change in accounting principle $57,888 $57,888 $63,796 $63,796 Dividends on Preferred stock (6,076) (6,076) (6,076) (6,076) Dividends on unvested common stock awards (238) (322) (268) (192) Interest on convertible subordinated debentures -- -- -- 3,659 ------- ------- ------- ------- Adjusted earnings before extraordinary items and cumulative effect of change in accounting principle used in EPS computation $51,574 $51,490 $57,452 $61,187 ======= ======= ======= ======= Weighted-average shares outstanding 71,813 71,813 66,978 66,978 Dilutive securities: Convertible subordinated debentures -- -- -- 4,515 Options, warrants, and unvested common stock awards -- 588 -- 1,227 ------- ------- ------- ------- Adjusted weighted-average shares used in EPS computation 71,813 72,401 66,978 72,720 ======= ======= ======= =======
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. 21 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 (loss), it is not possible to predict whether the resolution of these matters is likely to have a material effect on the Company's consolidated net earnings (loss), and it is, therefore, possible that resolution of these matters could have such an effect in any future quarter or year. (10) Property acquisitions, dispositions and related matters ------------------------------------------------------- In 1998, the Company completed several property acquisitions, including the purchase of interests in seven retail centers from TrizecHahn Centers Inc. (Trizec). In February 1999, the Company contributed its ownership interests in four of the acquired centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and Towson Town Center) to a joint venture (the "Four State Venture") in which it retained a 35% ownership interest. Another venturer contributed approximately $271 million in cash to the Four State Venture and received a 65% ownership interest. Four State Venture used the contributed cash to repay approximately $271 million of Company borrowings under its bridge loan credit facility. The fair value of the consideration received in the formation of the joint venture was considered in the Company's allocation of the initial acquisition costs of all of the property interests acquired from Trizec. Accordingly, no gain or loss was recognized on the sale. The Company's 35% ownership interest in the Four State Venture related to these property interests is accounted for using the equity method. The Four State Venture agreement provides for the purchase, at the option of the Company or the other venturer and subject to certain terms and conditions, of the other venturer's interest in the Four State Venture related to Fashion Place Mall at a specified amount. Accordingly, the transaction related to Fashion Place Mall was accounted for as a financing. If the option is exercised, the 22 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (10) Property acquisitions, dispositions and related matters, continued ------------------------------------------------------------------ purchase price can be paid, at the option of the Company, in cash or in common stock of the Company. 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. (11) Shelf registration statement ---------------------------- At June 30, 1999, 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. On May 4, 1999, the Company issued $200 million of unsecured 8% notes, due in May 2009, under this registration statement. The Company used the net proceeds of approximately $198 million to repay the convertible subordinated debentures and certain other debt. 23 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: THE ROUSE COMPANY AND SUBSIDIARIES The following discussion and analysis covers any material changes in financial condition since December 31, 1998 and any material changes in the results of operations for the three and six months ended June 30, 1999 as compared to the same periods in 1998. 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 1998 Annual Report to Shareholders. General: - ------- Through its subsidiaries and affiliates, the Company acquires, develops and manages a diversified portfolio of retail centers, office and industrial buildings and mixed-use and other properties (office/mixed-use 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 properties-shopping centers, geographically concentrated groups of office and industrial buildings and major mixed-use projects - 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. The Company may also selectively dispose of properties for other reasons. While disposition decisions may cause the Company to recognize gains or losses that could have material effects on reported net earnings (loss) in future quarters or fiscal years, they are not anticipated to have a material effect on the overall consolidated financial position or operating income of the Company. 24 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Portfolio changes: - ----------------- In 1998, the Company completed several transactions designed to upgrade the overall quality of its portfolio of operating properties. In the third and fourth quarters, the Company purchased ownership interests in eight retail centers, including the interests of partners in two centers (The Fashion Show and Governor's Square) in which the Company now holds 100% ownership interests. In February 1999, the Company contributed its ownership interests in four of the acquired centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and Towson Town Center) to a joint venture in which it retained a 35% ownership interest. The Company acquired the other two ownership interests with the intent to sell them. One of these (Valley Fair Mall) was sold in June 1999. Also in 1998, the Company disposed of four retail centers (Eastfield Mall and Salem Mall in the second quarter, and Greengate Mall and St. Louis Union Station in the third quarter) and its 5% ownership interest in six retail centers (five in the second quarter and one in the fourth quarter.) In the fourth quarter of 1998, the Company acquired the portfolio of office and industrial properties and salable land of an entity in which the Company previously held a 5% ownership interest. The acquired assets consisted of 64 buildings (excluding three which were subsequently sold) and approximately 100 acres of land. Substantially all of the acquired assets are in the Baltimore-Washington metropolitan area. The Company and its affiliates disposed of their interests in two hotels and certain industrial buildings in Baltimore and Columbia and their office properties in Los Angeles in the first quarter of 1998. In June 1999, the Company disposed of its ownership interest in an operating property located in Los Angeles, California. The Company and its affiliates also completed certain development projects to enhance the quality of its portfolio. A new regional shopping center opened in Orlando, Florida in the first quarter of 1998, and two community retail centers opened in the Summerlin/Las Vegas area in the second quarter of 1998. Expansions of nine retail centers opened in 1998 (three in the first quarter and six in the fourth quarter), and three community retail centers in Columbia were substantially redeveloped. Six office and industrial buildings opened in Las Vegas and Summerlin in 1998, and Arizona Center, in Phoenix was expanded in the first quarter of 1998 to include a 90,000 square foot cinema. In January 1999, an affiliate of the Company opened a new 100,000 square foot office building in Columbia's town center. 25 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Operating results: - ----------------- As indicated in the 1998 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 should be referred to when reading this discussion and analysis. As discussed in note 5, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1998. As required by the Statement, 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 real estate ventures in which the Company holds substantially all (at least 98%) of the financial interests, but does not own a majority voting interest, are reported on a consolidated basis rather than using the equity method; the Company's share of FFO of unconsolidated real estate ventures in which it holds a minority interest is included in revenues; and the Company's share of depreciation and amortization expense of unconsolidated real estate ventures in which it holds a minority interest is included in depreciation and amortization expense. Also, gains on dispositions of assets and other provisions, net in this discussion and analysis includes the Company's share of those items recorded by the majority financial interest ventures. These differences affect only the reported revenue, operating and interest expenses and depreciation and amortization expense of the segments and elements of gains on dispositions of assets and other provisions, net, and have no effect on the reported net earnings of the Company. Revenues and operating and interest expenses reported for the segments are reconciled to the related amounts reported in the financial statements in note 5. 26 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Operating Properties - Retail Centers: Operating results of retail properties are summarized as follows (in millions):
Three months Six months ended June 30, ended June 30, ------------------------ -------------- 1999 1998 1999 1998 ------------ ---------- ------ ------ Revenues $141.8 $129.7 $287.9 $254.3 Operating expenses, exclusive of depreciation and amortization 67.6 64.7 135.5 127.0 Interest expense 39.6 33.3 82.6 66.4 ------ ------ ------ ------ 34.6 31.7 69.8 60.9 Depreciation and amortization, including unconsolidated real estate ventures 15.4 12.4 37.2 26.2 ------ ------ ------ ------ Operating income $ 19.2 $ 19.3 $ 32.6 $ 34.7 ====== ====== ====== ======
Revenues from retail centers increased $12.1 and $33.6 for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The increases in revenues were attributable primarily to effects of the aforementioned acquisitions (approximately $8.8 and $23.8 for the three and six months ended June 30, 1999, respectively) and project openings and expansions (approximately $4.4 and $11.8 for the three and six months ended June 30, 1999, respectively), and higher average occupancy levels at comparable properties (94.6% in 1999 compared to 91.6% in 1998). These increases were partially offset by the aforementioned dispositions (approximately $5.0 and $11.0 for the three and six months ended June 30, 1999, respectively). Total operating and interest expenses for retail centers increased $9.2 and $24.7 for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The increases in operating and interest expenses were attributable primarily to the aforementioned acquisitions (approximately $7.1 and $20.8 for the three and six months ended June 30, 1999, respectively), project openings and expansions (approximately $5.1 and $11.4 for the three and six months ended June 30, 1999, respectively) and higher levels of bad debt expense at other properties, primarily those experiencing some construction related operating disruptions. These increases were partially offset by the aforementioned dispositions (approximately $5.4 and $11.9 for the three and six months ended June 30, 1999, respectively). Depreciation and amortization expense increased $3.0 and $11.0 for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The increases were attributable primarily to the portfolio changes described above. 27 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Operating Properties - Office, Mixed-Use and Other Properties: Operating results of office, mixed-use and other properties are summarized as follows (in millions):
Three months Six months ended June 30, ended June 30, --------------- -------------- 1999 1998 1999 1998 ----- ----- ------ ------ Revenues $62.6 $51.1 $125.4 $106.6 Operating expenses, exclusive of depreciation and amortization 26.1 24.1 52.9 51.1 Interest expense 23.9 18.2 47.8 38.8 ----- ----- ------ ------ 12.6 8.8 24.7 16.7 Depreciation and amortization, including unconsolidated real estate ventures 10.5 8.3 20.7 16.5 ----- ----- ------ ------ Operating income $ 2.1 $ .5 $ 4.0 $ .2 ===== ===== ====== ======
Revenues from office, mixed-use and other properties increased $11.5 and $18.8 for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The increases in revenues were attributable primarily to the aforementioned acquisition (approximately $10.3 and $20.5 for the three and six months ended June 30, 1999, respectively) and project openings and expansion (approximately $1.9 and $3.6 for the three and six months ended June 30, 1999, respectively). These increases were partially offset by the dispositions of properties in 1998 (approximately $1.1 and $6.1 for the three and six months ended June 30, 1999, respectively). Total operating and interest expenses for office, mixed-use and other properties increased $7.7 and $10.8 for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The increases in operating and interest expenses were attributable primarily to the aforementioned acquisition (approximately $8.2 and $16.7 for three three and six months ended June 30, 1999, respectively) and project openings and expansion (approximately $1.3 and $2.2 for the three and six months ended June 30, 1999, respectively). These increases were partially offset by the aforementioned dispositions (approximately $1.2 and $5.8 for the three and six months ended June 30, 1999, respectively) and lower interest expense related to the refinancing of a mixed- use property. Depreciation and amortization expense increased $2.2 and $4.2 for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The increases were attributable primarily to the portfolio changes described above. 28 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (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 Six months ended June 30, ended June 30, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Hughes Operations: Revenues $29.9 $30.3 $ 60.2 $ 98.0 Operating costs and expenses 24.8 23.5 48.9 77.8 ----- ----- ------ ------ Operating income $ 5.1 $ 6.8 $ 11.3 $ 20.2 ===== ===== ====== ====== Columbia and other: Revenues $14.3 $ 9.4 $ 44.5 $ 32.3 Operating costs and expenses 7.9 5.1 24.5 15.7 Interest expense .8 1.2 1.7 2.2 ----- ----- ------ ------ Operating income $ 5.6 $ 3.1 $ 18.3 $ 14.4 ===== ===== ====== ====== Total: Revenues $44.2 $39.7 $104.7 $130.3 Operating costs and expenses 32.7 28.6 73.4 93.5 Interest expense .8 1.2 1.7 2.2 ----- ----- ------ ------ Operating income $10.7 $ 9.9 $ 29.6 $ 34.6 ===== ===== ====== ======
29 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Revenues from Hughes land sales operations decreased $37.8 for the six months ended June 30, 1999, while related costs and expenses decreased $28.9 compared to the same period in 1998. The decrease in revenues and related costs and expenses for the six months relate primarily to a reduction in sales of business park land, particularly in Los Angeles. The Company sold all of the land in its Los Angeles business park in the first quarter of 1998. Revenues from land sales operations in Columbia increased $4.9 and $12.2 for the three and six months ended June 30, 1999, respectively, while related costs and expenses increased $2.4 and $8.3, respectively, compared to the same periods in 1998. The increases in revenues and related costs and expenses for the three and six month periods were due primarily to higher levels of sales for residential and commercial uses. Development: Development expenses consist primarily of additions to the preconstruction reserve and new business costs. The preconstruction reserve is maintained to provide for 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. The expenses decreased $3.2 million and $1.1 million for the three and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The decreases in expenses are a result of projects progressing to further stages of development and the unexpected recovery of certain costs previously expensed. 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, 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, and unallocated proceeds from refinancings of certain properties, net of interest capitalized on development projects or allocated to other segments, and corporate operating expenses consist primarily of general and administrative costs and distributions on the redeemable preferred securities, net of distributions allocated to other segments. These costs decreased $.2 million and increased $1.8 million for the three and six months ended June 30, 1999, respectively, as compared to the same periods in 1998. 30 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Corporate, continued: The increase in the six month period was primarily attributable to higher income taxes incurred by certain majority financial interest ventures due to the sales of certain land parcels. Corporate revenue consists primarily of corporate interest income on cash invested and notes receivable. The revenue increased $.4 million and decreased $.6 million for the three and six months ended June 30, 1999, respectively, due to changes in interest income as a result of fluctuating invested cash balances. Gain on dispositions of assets and other provisions, net: Gain on dispositions of assets and other provisions, net, including the Company's share of those recorded by the majority financial interest ventures, is summarized as follows (in millions):
Three months Six months ended June 30, ended June 30, ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net gain on operating properties $ 7.1 $ 3.7 $ 8.6 $ 17.6 Termination benefits related to Corporate realignment (6.2) -- (6.2) -- Other, net .1 .8 .4 1.2 ------ ----- ------ ------ $ 1.0 $ 4.5 $ 2.8 $ 18.8 ====== ===== ====== ======
The net gain on operating properties in 1999 relates primarily to a gain on the sale of a property in the second quarter of 1999. The net gain in 1998 relates primarily to a reduced provision for a loss on a retail center sold in April 1998 and to a net gain recorded by a majority financial interest venture related to the sale of a hotel property. During the second quarter of 1999, the Company announced and initiated the consolidation of its Retail Operations and Office and Mixed-Use Operations divisions into a single Property Operations Division. In addition, the Company integrated certain operating, administrative and support functions of the Hughes Division into its Columbia headquarters. The costs relating to these organizational changes of $6.2 million represent primarily severance and other benefits to terminated employees. 31 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Extraordinary gain(loss), net: The extraordinary loss for the three and six months ended June 30, 1999 relates to a loss on the extinguishment of the convertible subordinated debentures prior to their scheduled maturity. The gain for the three and six months ended June 30, 1998 resulted from debt extinguishment in connection with the transfer of title to a property to the related mortgage lender in the second quarter of 1998 ($14.8 million). This gain was partially offset by losses on extinguishment of other debt prior to scheduled maturity ($7.4 million). One of the losses was incurred by a majority financial interest venture. The debt was related to a hotel property which the venture sold, and a portion of the proceeds of the sale were used to repay the debt. The loss related to the majority financial interest venture is net of related taxes. Net earnings: Net earnings for the three and six months ended June 30, 1999 and 1998 were affected by unusual and/or nonrecurring items. The most significant of these are the items discussed above in gain on dispositions of assets and other provisions, net, extraordinary loss, net and in 1998, the cumulative effect of change in accounting for participating mortgages. Financial condition and liquidity: Shareholders' equity increased by $13.3 million from December 31, 1998 to June 30, 1999. The increase was primarily attributable to the net earnings for the six months ended June 30, 1999 and 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 $30.4 million at June 30, 1999, including $4.6 million of investments held for restricted uses. In July 1998, the Company obtained an $800 million unsecured line of credit facility from a group of lenders to replace a $250 million revolving line of credit facility. The facility is structured as a $350 million 364 day bridge loan facility to fund specific property acquisitions made in the third and fourth quarters of 1998, and a $450 million three-year revolving line of credit. Repayment of borrowings under the new facilities is guaranteed by certain of the Company's majority financial interest ventures. The revolving line of credit may be used for various purposes, including project development costs, property acquisitions, liquidity 32 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Financial condition and liquidity, continued: and other corporate needs. It may also be used to pay some portion of existing debt, including maturities in 1999. At June 30, 1999, the Company had outstanding borrowings of $195 million under the line of credit. In April 1999, the Company used a portion of the proceeds from a new mortgage secured by an operating property to repay the bridge loan facility. As of June 30, 1999, debt due in one year was $91 million, including balloon payments due in the first half of 2000 of $30 million. These balloon payments are expected to be paid at or before the scheduled maturity dates of the related loans from the proceeds of property refinancings, credit facility borrowings, proceeds of the sales of property interests held for sale, or other available corporate funds. The Company had remaining availability under its revolving credit facility of $255 million at June 30, 1999. There is no availability under the bridge loan facility, and this facility has expired. The Company is continually evaluating sources of capital, and management believes there are satisfactory sources available for all requirements without necessitating sales of other operating properties. The Company may, however, selectively dispose of operating properties or groups of operating properties when it believes it is prudent to do so. 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. On May 4, 1999, the Company issued $200 million of unsecured 8% notes, due in May 2009, under this registration statement. The Company used the net proceeds of approximately $198 million to repay the convertible subordinated debentures and certain other debt. At June 30, 1999, the Company had issued approximately $358 million of common stock and debt securities (including the unsecured notes referred to above) 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. Net cash provided by operating activities was $103.3 million and $172.7 million for the six months ended June 30, 1999 and 1998, 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 $69.4 million was due primarily to lower proceeds from land sales and on notes receivable from land sales that the Company financed prior to 1998, and lower operating distributions from unconsolidated majority financial interest ventures. The level of cash provided by operating distributions from unconsolidated majority financial interest ventures is affected by the 33 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Financial condition and liquidity, continued: 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 four major business segments. Net cash used in investing activities was $35.5 million and $104.9 million for the six months ended June 30, 1999 and 1998, respectively. The decrease in net cash used of $69.4 million was due primarily to higher proceeds from sales of interests in properties (primarily Valley Fair Mall) and a decrease in expenditures for properties in development partially offset by lower payments received on loans to majority financial interest ventures. Net cash used by financing activities was $79.7 million and $115.3 million for the six months ended June 30, 1999 and 1998, respectively. The decrease in net cash used of $35.6 million was due primarily to lower repayments of property debt ($164.0 million) partially offset by higher repayments of other debt ($112.6 million), primarily with proceeds from sales of operating properties. Year 2000 issue: The year 2000 (Y2K) issue relates to whether computer systems will properly recognize date sensitive information to allow accurate processing of transactions and data relating to the year 2000 and beyond. In addition, the Y2K issue relates to whether non-Information Technology (IT) systems that depend on embedded computer technology will recognize the year 2000. Systems that do not properly recognize such information could generate erroneous data or fail. In 1996, the Company adopted a plan to replace virtually all of its management information and accounting systems. This plan was adopted in the context of the Company's long-term Information Systems strategy. In accordance with this plan, all mission-critical IT systems have been replaced with systems that have been certified by the vendors as Y2K compliant. To date, the Company has implemented new financial accounting, accounts payable, property management, human resources, payroll and leasing systems. The Company completed testing of all new mission-critical systems in the second quarter and has addressed all Y2K compliance issues identified during testing. In addition, in connection with the Company's normal upgrade and replacement process, all new network and desktop equipment meet the requirements for Y2K. The hardware and software that supports the Company's local and wide area networks have been tested. All network components identified as not Y2K compliant have been replaced or upgraded with hardware or software 34 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Year 2000 issue, continued: that is Y2K compliant. The cost to specifically remediate Y2K issues has not been material. For non-IT systems, the Company has completed a comprehensive review of computer hardware and software in mechanical systems and has developed a program to repair or replace non-IT systems that are not year 2000 compliant. It is anticipated that the program will be completed in the third quarter of 1999. Costs to specifically remediate non-IT systems (e.g., escalators, elevators, heating, ventilating and cooling systems, etc.) that are non-compliant are not expected to exceed $2 million. Management does not believe that the year 2000 issue will pose significant problems in its IT or non-IT systems, or that resolution of any potential problems with respect to these systems will have a material effect on the Company's financial condition or results of operations. It is very difficult to identify "the most reasonably likely worst-case scenario." The Company's exposure is widely spread, with no known major direct exposure. The Company believes that the most likely worst-case exposure is at the indirect level, involving vendors, suppliers and tenants. For example, there could be failures in the information systems of certain tenants that may delay the payment of rents. While it is not possible at this time to determine the likely impact of these potential problems, the Company has identified the top 20 tenants, ten anchor stores, five banks, three contractors and three third party benefit administrators with which it does business. The Company is continuing its review of Form 10-K and Form 10-Q reports and Y2K compliance statements for those entities identified which are publicly owned. In addition, a Y2K compliance letter and questionnaire will be sent to any of these entities that have not provided a public statement disclosing the status of their Y2K compliance efforts. Upon completion of this review, the Company will determine whether specific contingency plans should be developed. There can be no assurance, however, that the Company has adequately assessed or identified all aspects of its business which may be affected by Y2K issues, and that Y2K issues including those that may affect its vendors, suppliers and tenants, will not have a material adverse effect on the Company's financial condition or results of operations. 35 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (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 factors could cause actual results to differ materially from historical results or those anticipated: (1) risks associated with the Company's qualification and operation as a REIT; (2) real estate investment risks; (3) development risks; (4) illiquidity of real estate investments; (5) dependence on rental income from real property; (6) effect of uninsured loss; (7) lack of geographical diversification; (8) possible environmental liabilities; (9) difficulties of compliance with the Americans with Disabilities Act; (10) competition; (11) changes in the economic climate and (12) certain matters relating to Nevada properties; (13) 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, 1998. 36 Part I. Financial Information, continued Item 3. Quantitative and Qualitative Disclosures about Market Risk: 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., revolving 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, 1999. 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 1999 2000 2001 2002 2003 Thereafter Total ----- ----- ----- ----- ----- ---------- ------ Fixed rate debt $ 34 $ 54 $ 201 $ 86 $ 403 $ 2,019 $ 2,797 Average interest rate 7.8% 7.8% 7.9% 7.9% 7.9% 7.9% 7.8% Variable rate LIBOR debt $ 1 $ 106 $ 288 $ 66 $ 2 $ 51 $ 514 Average interest rate 5.9% 5.9% 5.6% 6.1% 6.1% 6.1% 5.9%
At June 30, 1999, the Company had interest rate cap agreements which effectively limit the average interest rate on all of the variable rate LIBOR debt maturing in 2002 to 9.0%. As the table incorporates only those exposures that exist as of June 30, 1999, 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, 1999, the Company's hedging strategies during that period and interest rates. 37 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 Current Report on Form 8-K filed April 21, 1999 to file the consents of KPMG LLP, PricewaterhouseCoopers LLP and Deloitte & Touche LLP to incorporate by reference certain of their reports into certain Registration Statements of The Rouse Company. 38 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 13, 1999 By /s/ Jeffrey H. Donahue --------------- ---------------------- Jeffrey H. Donahue Executive Vice President and Chief Financial Officer Principal Accounting Officer: Date: August 13, 1999 By /s/ Melanie M. Lundquist --------------- ------------------------ Melanie M. Lundquist Vice President and Controller 39 Exhibit Index Exhibit Number Description - -------------- ----------- 27 Financial Data Schedule 40 EX-27 2 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 ANNUAL PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1999 JUN-30-1999 25,870 4,578 102,399 22,790 0 128,230 4,094,300 546,343 4,405,831 395,588 3,311,288 0 41 723 641,443 4,405,831 356,643 356,643 0 216,503 0 4,376 123,458 58,045 157 56,164 (1,724) 910 0 56,978 .71 .70 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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