-----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, CypMUoZSuVHGhJzokUlqeXUWRF86gbPUME0nLULMdZTEpzu1Txek8udAfaVpPN/W RirB0Q4K1X7RvqvgDnVkjQ== 0000950137-04-011291.txt : 20041222 0000950137-04-011291.hdr.sgml : 20041222 20041221184451 ACCESSION NUMBER: 0000950137-04-011291 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20041112 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041222 DATE AS OF CHANGE: 20041221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL GROWTH PROPERTIES INC CENTRAL INDEX KEY: 0000895648 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 421283895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11656 FILM NUMBER: 041218750 BUSINESS ADDRESS: STREET 1: 110 N WACKER DRIVE STREET 2: STE 3100 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3129605000 MAIL ADDRESS: STREET 1: 110 N WACKER DRIVE STREET 2: STE 3100 CITY: CHICAGO STATE: IL ZIP: 60606 8-K/A 1 c90586e8vkza.txt AMENDMENT TO FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Current Report Pursuant to Section 13 or 15(d) of The Securities Act of 1934 Date of Report (Date of Earliest Event Reported) ----------------------------------------------- November 12, 2004 GENERAL GROWTH PROPERTIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-11656 42-1283895 -------- ------- ---------- (State or other (Commission (I.R.S. Employer jurisdiction of File Number) Identification incorporation) Number) 110 N. Wacker Drive, Chicago, Illinois 60606 -------------------------------------------- (Address of principal executive offices) (Zip Code) (312) 960-5000 -------------- (Registrant's telephone number, including area code) N/A --- (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ONLY THOSE ITEMS AMENDED ARE REPORTED HEREIN. The registrant hereby amends its Current Report on Form 8-K signed November 12, 2004, as amended November 18, 2004, as follows: ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS. Listed below are the financial statements, pro forma financial information and exhibits filed as a part of this report: (a) Financial Statements of Businesses Acquired. 1. Audited consolidated financial statements of The Rouse Company ("Rouse") as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 were previously filed by General Growth Properties, Inc. (the "Company") on its Form 8-K/A dated October 29, 2004, as amended November 9, 2004. 2. Unaudited condensed consolidated financial statements of Rouse as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003 and attached as Exhibit 99.2 to this report. (b) Pro Forma Financial Information. The pro forma financial information of the Company listed in the accompanying Index is filed as part of this Current Report on Form 8-K/A. (c) Exhibits. See the Exhibit Index attached hereto and incorporated herein by reference (c) Exhibits Exhibit Number Name ------- ---- 2.1 Agreement and Plan of Merger by and Among The Rouse Company, General Growth Properties, Inc. and Red Acquisition, LLC dated as of August 19, 2004 (previously filed) 10.1 $7,295,000,000 Amended and Restated Credit Agreement among General Growth Properties, Inc., GGP Limited Partnership and GGPLP L.L.C, as Borrowers, the Several Lenders from Time to Time Parties hereto, Lehman Brothers Inc., Banc of America Securities LLC, Credit Suisse First Boston and Wachovia Capital Markets, LLC, as Arrangers, Bank of America, N.A. and Credit Suisse First Boston, as Syndication Agents, Eurohypo AG, New York Branch, as Documentation Agent, Lehman Commercial Paper Inc., as Tranche B Administrative Agent, and Wachovia Bank, National Association, as General Administrative Agent dated as of November 12, 2004 (previously filed) 10.2 Sixth Amendment dated November 12, 2004 to the Second Amended and Restated Operating Agreement of GGPLP, L.L.C. (previously filed) 10.3 Amendment dated November 12, 2004 to the Second Amended and Restated Agreement of Limited Partnership of GGP Limited Partnership (previously filed) 99.1 Press Release dated November 12, 2004 entitled "General Growth Properties, Inc. Completes Merger of The Rouse Company" (previously filed) 99.2 Unaudited condensed consolidated financial statements of Rouse as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENERAL GROWTH PROPERTIES, INC. By: /s/ Bernard Freibaum ------------------------------------ Bernard Freibaum Executive Vice President and Chief Financial Officer Date: December 20, 2004 EXHIBIT INDEX
EXHIBIT NUMBER NAME - ------- ---- 2.1 Agreement and Plan of Merger by and Among The Rouse Company, General Growth Properties, Inc. and Red Acquisition, LLC dated as of August 19, 2004 (previously filed) 10.1 $7,295,000,000 Amended and Restated Credit Agreement among General Growth Properties, Inc., GGP Limited Partnership and GGPLP L.L.C, as Borrowers, the Several Lenders from Time to Time Parties hereto, Lehman Brothers Inc., Banc of America Securities LLC, Credit Suisse First Boston and Wachovia Capital Markets, LLC, as Arrangers, Bank of America, N.A. and Credit Suisse First Boston, as Syndication Agents, Eurohypo AG, New York Branch, as Documentation Agent, Lehman Commercial Paper Inc., as Tranche B Administrative Agent, and Wachovia Bank, National Association, as General Administrative Agent dated as of November 12, 2004 (previously filed) 10.2 Sixth Amendment dated November 12, 2004 to the Second Amended and Restated Operating Agreement of GGPLP, L.L.C. (previously filed) 10.3 Amendment dated November 12, 2004 to the Second Amended and Restated Agreement of Limited Partnership of GGP Limited Partnership (previously filed) 99.1 Press Release dated November 12, 2004 entitled "General Growth Properties, Inc. Completes Merger of The Rouse Company" (previously filed) 99.2 Unaudited condensed consolidated financial statements of Rouse as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003
INDEX GENERAL GROWTH PROPERTIES, INC.: Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2004................. F-2 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2004...................................................... F-3 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 2003.............................................................. F-4 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.......................... F-5
GENERAL GROWTH PROPERTIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2004 (DOLLARS IN THOUSANDS)
HISTORICAL HISTORICAL TOTAL GENERAL GROWTH THE ROUSE PRO FORMA PRO FORMA PROPERTIES, INC.(1) COMPANY(2) ADJUSTMENTS(3) CONSOLIDATED ------------------- ------------- -------------- ------------ ASSETS Investment in real estate: Land $ 1,535,836 $ 648,478 $ 498,163 a $ 2,682,477 Building and equipment 9,920,089 5,470,445 4,202,417 a 19,592,951 Less accumulated depreciation (1,333,356) (1,122,143) 1,122,143 a (1,333,356) Developments in progress 171,540 255,362 - 426,902 ------------ ------------ -------------- ------------ Net property and equipment 10,294,109 5,252,142 5,822,723 21,368,974 Investment in Unconsolidated Real Estate Affiliates 759,481 576,679 523,120 a 1,859,280 Investment land and land held for development and sale - 480,337 669,159 a 1,149,496 Properties held for sale 51,935 8,063 - 59,998 ------------ ------------ -------------- ------------ Net investment in real estate 11,105,525 6,317,221 7,015,002 24,437,748 Cash 20,963 33,107 (30,203)b 23,867 Tenant accounts receivable, net 163,009 76,407 - 239,416 Other assets 248,169 622,469 44,096 c 914,734 ------------ ------------ -------------- ------------ TOTAL ASSETS $ 11,537,666 $ 7,049,204 $ 7,028,895 $ 25,615,765 ============ ============ ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Mortgage notes and other debt payable $ 8,614,821 $ 4,636,072 $ 7,127,278 d $ 20,378,171 Accounts payable and accrued expenses 531,790 849,791 952,209 e 2,333,790 ------------ ------------ -------------- ------------ 9,146,611 5,485,863 8,079,487 22,711,961 Minority interest: Preferred units 403,486 - - 403,486 Common units 388,932 - (22,519)f 366,413 Stockholders' equity 1,598,637 1,563,341 (1,028,073)f 2,133,905 ------------ ------------ -------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,537,666 $ 7,049,204 $ 7,028,895 $ 25,615,765 ============ ============ ============== ============
(1) Amounts are derived from the Condensed Consolidated Balance Sheet included in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. (2) Amounts are derived from detail supporting the Condensed Consolidated Balance Sheet included in The Rouse Company's ("Rouse") Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. Certain amounts have been reclassified to conform to the Company's presentation. (3) For alphabetical references, refer to Note 2-Pro Forma Adjustments. The accompanying notes are an integral part of these statements. F-2 GENERAL GROWTH PROPERTIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Other Acquisitions Rouse Acquisition Historical -------------------------------- -------------------------- Total General Growth Historical Other Pro Forma Historical Pro Forma Pro Forma Properties, Inc.(1) Acquisitions Adjustments(3) Rouse(2) Adjustments(3) Consolidated ------------------- ---------------- -------------- ---------- -------------- ------------ Revenues Minimum rent $ 698,232 $ 28,211 $ 6,422 g $ 425,911 $ 57,008 g $ 1,215,784 Tenant charges 342,432 21,435 1 h 198,529 2,857 i 565,254 Land sales - - - 258,894 - 258,894 Other 91,041 72 (59)j 55,041 504 i 146,599 ------------- ------------- ---------- --------- ----------- ------------ Total revenues 1,131,705 49,718 6,364 938,375 60,369 2,186,531 ------------- ------------- ---------- --------- ----------- ------------ Expenses: Real estate taxes 87,124 2,692 - 56,512 121 i 146,449 Other property operating 266,658 17,143 - 225,029 2,259 i 511,089 Land sales operations - - - 155,443 60,190 k 215,633 Property management, general and administrative costs 70,994 - - 54,844 l 875 l 126,713 Depreciation and amortization 240,687 371 14,694 m 143,522 78,867 m 478,141 ------------- ------------- ---------- --------- ----------- ------------ Total expenses 665,463 20,206 14,694 635,350 142,312 1,478,025 ------------- ------------- ---------- --------- ----------- ------------ Operating income 466,242 29,512 (8,330) 303,025 (81,943) 708,506 Interest expense, net (277,445) - (19,962)n (179,832) (224,355)n (701,594) Allocations to minority interests (73,011) - (742)o - 41,480 o (32,273) Income taxes, primarily deferred - - - (56,919) 24,076 p (32,843) Equity in income of unconsolidated affiliates 55,770 3,982 (2,970)q 15,134 (2,648)q 69,268 ------------- ------------- ---------- --------- ----------- ------------ Income from continuing operations available to common stockholders $ 171,556 $ 33,494 $ (32,004) $ 81,408 $ (243,390) $ 11,064 ============= ============= ========== ========= =========== ============ Weighted-average shares outstanding: Basic 218,080,000 15,909,000 r 233,989,000 Diluted 218,759,000 15,909,000 r 234,668,000 Income from continuing operations per share: Basic $ 0.79 $ 0.05 Diluted 0.78 0.05
(1) Amounts are derived from the Condensed Consolidated Statement of Operations included in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. (2) Amounts are derived from detail supporting the Condensed Consolidated Statement of Operations included in Rouse's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. Certain amounts have been reclassified to conform to the Company's presentation. (3) For alphabetical references, refer to Note 2-Pro Forma Adjustments. The accompanying notes are an integral part of these statements. F-3 GENERAL GROWTH PROPERTIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Other Acquisitions (2) Rouse Acquisition Historical ---------------------------------------- --------------------------- General Growth Historical Total Properties, Other Pro Forma Historical Pro Forma Pro Forma Inc.(1) Acquisitions Adjustments(5) Pro Forma Rouse(3) Adjustments(5) Consolidated -------------- ------------ -------------- ---------- ----------- -------------- ------------ Revenues Minimum rent $ 775,320 $ 187,582 $ 25,047 g $ 987,949 $ 531,252 $ 76,198 g $ 1,595,399 Tenant charges 367,065 114,031 746 h 481,842 230,506 3,936 i 716,284 Land sales - - - - 284,840 - 284,840 Other 120,406 9,259 (4,120)j 125,545 82,686 680 i 208,911 ------------ --------- ---------- ---------- ----------- ----------- ------------ Total revenues 1,262,791 310,872 21,673 1,595,336 1,129,284 80,814 2,805,434 ------------ --------- ---------- ---------- ----------- ----------- ------------ Expenses: Real estate taxes 88,276 25,557 - 113,833 64,367 162 i 178,362 Other property operating 277,641 91,915 - 369,556 270,098 2,784 i 642,438 Land sales operations - - - - 167,538 65,341 k 232,879 Property management, general and administrative costs 118,377 - - 118,377 64,421 1,150 i 183,948 Depreciation and amortization 230,195 7,724 69,225 m 307,144 171,183 107,674 m 586,001 ------------ --------- ---------- ---------- ----------- ----------- ------------ Total expenses 714,489 125,196 69,225 908,910 737,607 177,111 1,823,628 ------------ --------- ---------- ---------- ----------- ----------- ------------ Operating income 548,302 185,676 (47,552) 686,426 391,677 (96,297) 981,806 Interest expense, net (276,235) - (87,523)n (363,758) (233,498) (307,705)n (904,961) Allocations to minority interests (110,984) - (12,268)o (123,252) - 54,209 o (69,043) Income taxes, primarily deferred - - - - (42,598) 26,136 p (16,462) Equity in income of unconsolidated affiliates 94,480 9,080 (19,928)q 83,632 31,421 (3,524)q 111,529 ------------ --------- ---------- ---------- ----------- ----------- ------------ Income from continuing operations 255,563 194,756 (167,271) 283,048 147,002 (327,181) 102,869 Convertible preferred stock dividends (13,030) - - (13,030) - - (13,030) ------------ --------- ---------- ---------- ----------- ----------- ------------ Income from continuing operations available to common stockholders $ 242,533 $ 194,756 $ (167,271) $ 270,018 $ 147,002 $ (327,181) $ 89,839 ============ ========= ========== ========== =========== =========== ============ Weighted-average shares outstanding: Basic 200,875,000 15,909,000 r 216,784,000 Diluted (4) 215,079,000 2,450,000 r 217,529,000 Income from continuing operations per share: Basic $ 1.21 $ 0.41 Diluted (4) 1.19 0.41
(1) Amounts are derived from the Condensed Consolidated Statement of Operations originally included in the Company's Annual Report on Form 10-K for the Year for the Year Ended December 31, 2003 and revised on Form 8-K filed on December 21, 2004. (2) Amounts are derived from the Company's Form 8-K/A filed on August 2, 2004. (3) Amounts are derived from detail supporting the Condensed Consolidated Statement of Operations originally presented in Rouse's Annual Report on Form 10-K for the Year Ended December 31, 2003 and revised on Form 8-K filed on November 9, 2004. Certain amounts have been reclassified to conform to the Company's presentation. (4) The convertible preferred stock was dilutive to the historical diluted earnings per share of the Company, but anti-dilutive to the total pro forma consolidated results. (5) For alphabetical references, refer to Note 2-Pro Forma Adjustments. The accompanying notes are an integral part of these statements. F-4 NOTE 1 PRO FORMA BASIS OF PRESENTATION GENERAL - The pro forma condensed consolidated financial statements are based upon the historical financial information of General Growth Properties, Inc. ("GGP" or the "Company"), excluding discontinued operations, and the historical financial information of each of the acquisitions listed below as if the acquisitions had occurred on the first day of the earliest period presented for the unaudited pro forma condensed consolidated statements of operations and as of the date of the unaudited pro forma condensed consolidated balance sheet. In management's opinion, all adjustments necessary to reflect these transactions have been included. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the Company's Current Reports on Form 8-K/A filed on August 2, 2004, November 10, 2004 and November 18, 2004, the Company's Current Reports on Form 8-K filed on October 25, 2004, November 12, 2004 and December 21, 2004, The Rouse Company's ("Rouse") Current Report on Form 8-K filed on November 9, 2004, the Annual Reports on Form 10-K for the year ended December 31, 2003 of the Company and Rouse and the Quarterly Reports on Form 10-Q for the quarter ended September 30, 2004 of the Company and Rouse. The Rouse acquisition, as further described below, will be accounted for as a purchase business combination. The fair value of the consideration paid by GGP will be used as the valuation basis for the Rouse acquisition. The consolidated assets and liabilities of Rouse will be revalued based on their respective fair values as of the effective date of the acquisition. The unaudited pro forma adjustments, including the preliminary purchase accounting adjustments, are based on currently available information and upon preliminary assumptions and estimates that the Company believes are reasonable. The preliminary purchase accounting allocations are subject to reallocation as additional information, including third-party market valuations, become available and when the final purchase accounting is completed. The costs of the assets acquired and liabilities assumed in conjunction with the other acquisitions, as further described below, have also been allocated based on estimates of their respective fair values. These preliminary purchase allocations are also based on the information available at this time. Subsequent adjustments and refinements to the allocations are expected to be made as additional information becomes available. The pro forma financial information contained in these pro forma condensed consolidated financial statements may not necessarily be indicative of what actual results of the Company would have been if such transactions had been completed as of the dates indicated nor does it purport to represent the results of operations for future periods. GGP management believes that the Rouse merger will create potential cost savings and operating efficiencies, such as elimination of redundant administrative and property management costs. Additionally, the Company expects to continue to finance or refinance both Rouse and GGP properties with secured debt which is expected to bear interest at rates lower than the interest rates assumed in determining the pro forma interest expense adjustments in the accompanying condensed consolidated statements of operations. These potential cost and interest savings have not been reflected in the accompanying unaudited pro forma condensed consolidated statements of operations as the Company is currently unable to quantify them and there is no assurance that any anticipated savings will be realized. The Company, Rouse, and a majority of their affiliates have elected to be treated as Real Estate Investment Trusts ("REITs") pursuant to the Internal Revenue Code of 1986, as amended. As a REIT, the majority of the Company's operations will generally not be subject to federal income tax on taxable income distributed currently to its stockholders. However, certain affiliates of the Company and Rouse are taxable REIT subsidiaries ("TRS"). A TRS is permitted to engage in non-qualifying REIT activities and the taxable income of a TRS is subject to federal, state and local income taxes. Deferred income taxes relate primarily to the TRS and are accounted for using the asset and liability method. F-5 ROUSE ACQUISITION - On November 12, 2004, the Company completed its previously announced merger with Rouse, a real estate development and management company. Under the terms of the merger agreement, stockholders of Rouse received a cash payment of $65.20526 per share. The total value of the acquisition is estimated as follows:
(IN THOUSANDS) - -------------- Purchase of outstanding Rouse shares (103,718,038 shares at $65.20526 per share)................. $ 6,762,962 Assumption of Rouse's historical debt............................................................ 4,636,072 Assumption of Rouse debt related to Rouse's extraordinary dividend............................... 238,006 Assumption of Rouse's historical liabilities..................................................... 849,791 Adjustment to reflect Rouse's historical debt at estimated fair market value..................... 224,225 Adjustment to reflect Rouse's historical other liabilities at estimated fair market value........ 202,277 Below-market lease adjustment.................................................................... 349,932 Merger costs: Employee and related costs................................................................... 275,000 Legal, investment advisory, accounting and other fees........................................ 125,000 ----------- 400,000 ----------- $13,663,265 ===========
The Company entered into a credit agreement on November 12, 2004 to fund the cash portion of the Rouse merger consideration and, with other cash and financing sources, fund other costs of the merger transaction. The credit agreement includes a six-month bridge loan of approximately $1.145 billion, a three-year $3.65 billion term loan, a four-year $2 billion term loan and a three-year $500 million revolving credit facility of which only $250 million was initially borrowed. Repayment of the three-year $3.65 billion term loan begins in November 2005 with semi-annual payments in 2006, quarterly payments in 2007 and a final $1.775 billion payment in November 2007. Repayment of the four-year $2 billion term loan begins in March 2005 with quarterly payments through September 2008 and a final $1.925 billion payment in November 2008. The credit agreement currently bears interest at a weighted-average rate of LIBOR plus approximately 2.21 percent. With exceptions for capital expenditures and other items, the Company is required to apply the net proceeds of future mortgage financings and refinancings, sales of equity, and asset dispositions (including by casualty or condemnation) toward prepayment of the credit agreement in accordance with various priorities set out in the credit agreement. The credit agreement is secured by a pledge of the Company's operating partnership's ownership interest in Rouse and in GGPLP L.L.C and also by a pledge of the interest in an operating account in which the Company will deposit any distributions the operating partnership receives from its interests in the Rouse companies. During the term of the facility, the Company is subject to customary affirmative and negative covenants. Upon the occurrence of an event of default contained in the credit agreement, the lenders under the facilities will have the option of declaring immediately due and payable all amounts outstanding under the agreement. The credit agreement contains events of default including a failure by the Company to maintain its status as a REIT under the Internal Revenue Code, a failure by the Company to remain listed on the New York Stock Exchange and such customary events as nonpayment of principal, interest, fees or other amounts, breach of representations and warranties, breach of covenant, cross-default to other indebtedness and certain bankruptcy events. In addition, on November 9, 2004, the Company closed a warrant offering to existing equity holders. Subscribers in the warrants offering purchased approximately 15.9 million shares of the Company's common stock, at $32.23 per share, for total gross proceeds of approximately $513 million. The Company accepted the subscriptions and issued the common stock on Friday, November 12, 2004. Historical results of operations of Rouse have been prepared in accordance with Rule 3-05 of Regulation S-X of the United States Securities and Exchange Commission ("Regulation S-X"). Pro forma adjustments and results related to the Rouse acquisition have been prepared in accordance with Article 11 of Regulation S-X. F-6 On November 10, 2004, Rouse acquired Oxmoor Center ("Oxmoor"), a regional retail center in Louisville, Kentucky, for $123 million, including $60 million in assumed debt. The results of operations of this center are included in the Rouse acquisition pro forma adjustments. OTHER ACQUISITIONS - Other acquisitions include all acquisitions of the Company since January 1, 2003 other than the Rouse acquisition. These other acquisitions are summarized below. Historical results of operations of the other acquisitions have been prepared in accordance with Rule 3-14 of Regulation S-X. Pro forma adjustments and results related to the other acquisitions have been prepared in accordance with Article 11 of Regulation S-X. As the properties will be directly or indirectly owned by entities that will elect or have elected to be treated as real estate investment trusts (as specified under sections 856-860 of the Internal Revenue Code of 1986) for Federal income tax purposes, a presentation of estimated taxable operating results is not applicable. Other acquisitions include the following:
NEW OR ASSUMED DEBT(1) --------------------------- ACQUISITION PURCHASE PRO FORMA (IN THOUSANDS) DATE PRICE AMOUNT INTEREST RATE ----------- -------- -------- ------------- 2004 A 50% ownership interest in Burlington Town Center .............................................. January 7 $ 10,250 -- -- Redlands Mall.......................................... January 16 14,250 -- -- The remaining 50% ownership interest in Town East Mall ........................................... March 1 44,500 -- -- Four Seasons Town Centre .............................. March 5 161,000 $134,400(2) 5.6% A 33 1/3% ownership interest in GGP/Sambil Costa Rica........................................... April 30 12,217(3) -- -- A 50% ownership interest in Riverchase Galleria ............................................ May 11 166,000 100,000 3.26%(6) Mall of Louisiana ..................................... May 12 265,000 185,000 LIBOR+58 bp The Grand Canal Shoppes ............................... May 17 766,000 766,000 4.18% A 50% ownership interest in GGP/NIG Brazil............. July 30 32,000(4) -- -- Stonestown............................................. August 13 312,550 220,000 LIBOR+68 bp Land held for development and sale..................... November 22 14,158 -- -- 2003 Peachtree Mall......................................... April 30 $ 87,600 $ 53,000 LIBOR+85 bp Saint Louis Galleria................................... June 11 235,000 176,000 LIBOR+165 bp Coronado Center ....................................... June 11 175,000 131,000 LIBOR+85 bp The remaining 49% ownership interest in GGP Ivanhoe III.......................................... July 1 459,000 268,000 3.81% Lynnhaven Mall ........................................ August 27 256,500 180,000 LIBOR+125 bp Sikes Senter .......................................... October 14 61,000 41,500 LIBOR+70 bp The Maine Mall ........................................ October 29 270,000 202,500 LIBOR+125 bp Glenbrook Square....................................... October 31 219,000 164,250 LIBOR+108 bp Foothills Mall ........................................ December 5 100,500 45,750(5) 6.6% Chico Mall ............................................ December 23 62,390 30,600 7.0% Rogue Valley Mall ..................................... December 23 57,495 28,000 7.85%
(1) The interest rate used in the pro forma statements for the new or assumed variable-rate debt incurred in the property acquisitions listed above reflects a LIBOR rate of 1.84% for the nine months ended September 30, 2004 and 1.12% for the year ended December 31, 2003. Funding for the land held for development and sale acquisition was assumed to have been drawn on the $500 million revolving credit facility established in connection with the Rouse acquisition. Additional funding for all acquisitions prior to November 12, 2004, including for those acquisitions for which a specific and separate loan was not obtained or assumed, was assumed to have been drawn on the Company's line of credit at an interest rate of 2.62% for the nine months ended September 30, 2004 and 2.48% for the year ended December 31, 2003. F-7 (2) Excludes approximately $25.1 million in 7% Series E Cumulative Convertible Preferred Units of GGP Limited Partnership interest. (3) Approximately $9.7 million was funded at closing. The remaining amounts will be drawn on a letter of credit provided by the Company as additional construction and development costs of the project are incurred. (4) Approximately $7.0 million was funded at closing. The remaining amounts will be invested by the Company (upon the decision of both partners) to acquire additional interests in the properties currently owned or to acquire interests in other retail centers. (5) Excludes approximately $26.6 million in 6.5% Series D Cumulative Convertible Preferred Units of GGP Limited Partnership interest. (6) Including the impact of interest rate swaps. NOTE 2 PRO FORMA ADJUSTMENTS a) Adjustments to investments in real estate assets reflect preliminary purchase accounting adjustments to Rouse's historical investments in real estate assets based on preliminary estimates of their fair values and a $14.2 million acquisition of land held for development and sale. b) The cash adjustment reflects payment of Rouse's closing dividend on November 12, 2004. The closing dividend of $.29120 per share was equal to the pro rata portion of Rouse's regular quarterly dividend of $.47 per share. c) Adjustments to other assets primarily reflect preliminary purchase accounting adjustments to Rouse's historical other assets based on preliminary estimates of their fair values. d) Mortgage notes and other debt payable adjustments include the following:
(IN THOUSANDS) - -------------- Draws on credit facility........................................... $ 7,045,000 Net financing/refinancing of existing GGP properties............... 920,400 Net financing/refinancing of Rouse properties...................... 1,172,000 Repayment of GGP line of credit.................................... (1,799,011) Repayment of Rouse line of credit.................................. (449,494) Fair value adjustment to Rouse historical debt..................... 224,225 Acquisition of land held for development and sale.................. 14,158 ----------- $ 7,127,278 ===========
e) Adjustments to other liabilities primarily reflect pro forma adjustments to Rouse's historical other liabilities to reflect their estimated fair values, accrued merger costs and acquired below-market leases. Preliminary estimates for acquired below-market leases totaled $349.9 million and are included in accounts payable and accrued expenses. f) Minority interest and stockholders' equity adjustments reflect the issuance of approximately $513 million of newly-issued GGP common stock pursuant to the warrants offering. Stockholders' equity adjustments also reflect elimination of Rouse's historical equity. F-8 g) Minimum rent adjustments include the following:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 2004 DECEMBER 31, 2003 ------------------------- ------------------------- OTHER ROUSE OTHER ROUSE (IN THOUSANDS) ACQUISITIONS ACQUISITION ACQUISITIONS ACQUISITION ------------ ----------- ------------ ----------- Net amortization of acquired above and below-market leases for acquisitions ....... $ 3,372 $51,140 $16,717 $67,529 Oxmoor historical ................................. -- 5,868 -- 8,669 New leasing arrangements at Grand Canal Shoppes ... 2,920 -- 7,660 -- Reclassify specialty leasing revenues to conform to GGP presentation ............................... 130 -- 670 -- ------- ------- ------- ------- $ 6,422 $57,008 $25,047 $76,198 ======= ======= ======= =======
h) Tenant charges adjustment reflects the reclassification of overage rents to conform to GGP presentation. i) Adjustments reflect Oxmoor historical results. j) Other acquisitions adjustments to other revenue reflect the following:
OTHER ACQUISITIONS ---------------------------- NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, (IN THOUSANDS) 2004 2003 ------------- ------------ Termination of management agreements resulting from acquisition of remaining interests in GGP Ivanhoe III and Town East Mall ...... $ (145) $(2,412) Additional Riverchase management fees ............................ 216 600 Reclassifications to conform to GGP presentation: Overage rents ................................................ -- (746) Specialty leasing revenues ................................... (130) (670) Operations of property under development ..................... -- (812) Other ............................................................ -- (80) ------- ------- $ (59) $(4,120) ======= =======
k) Land sales operations adjustments reflect increases in the cost of land sold as a result of preliminary purchase accounting adjustments to increase the historical basis of Rouse's investment land and land held for development and sale based on preliminary estimates of their fair values. l) Historical Rouse results include $52.0 million of nonrecurring expenses resulting from Rouse's agreement with the Internal Revenue Service which addresses certain tax law requirements related to its REIT status. The property management, general and administrative cost adjustment reflects $875,000 of Oxmoor historical results. m) Depreciation and amortization adjustments reflect increases in deprecation and amortization expense as a result of preliminary purchase accounting adjustments to increase the historical basis of depreciable acquired buildings and equipment based on preliminary estimates of their fair market values. Such pro forma adjustments were depreciated over a weighted-average life of 40 years. n) Interest expense adjustments reflect a combination of debt assumption and increased borrowings. Since the interest rates on certain of the loans assumed or obtained in conjunction with the acquisitions are based on a spread over LIBOR and have not been converted to fixed-rate loans through the use of interest rate swap agreements, the rates will periodically change. If the interest F-9 rate on such variable-rate loans increase or decrease by 12.5 basis points, the annual interest expense will increase or decrease by approximately $6.1 million for the nine months ended September 30, 2004 and approximately $8.1 million for the year ended December 31, 2003. o) Minority interest adjustments reflect the allocation of earnings to the minority interests and changes in minority interest percentages pursuant to the issuance of approximately 15.9 million shares of newly-issued GGP common stock pursuant to the warrants offering. p) Income tax adjustments reflect reduced tax expense primarily as it relates to land sales. Substantially all of Rouse's investment land and land held for development and sale are owned by TRSs. As a result, the pro forma adjustments which decreased the profit margin on land sales operations also reduced the related income tax expense. q) Adjustments to equity in unconsolidated affiliates reflect the following:
OTHER ACQUISITIONS ---------------------------- NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, (IN THOUSANDS) 2004 2003 ------------- ------------ Town East .................. $ (430) $ (3,595) GGP Ivanhoe III ............ -- (9,085) Riverchase ................. (2,333) (6,658) GGP/NIG Brazil ............. (207) (1,037) GGP Ivanhoe IV ............. -- 447 -------- -------- $ (2,970) $(19,928) ======== ========
- Town East and GGP Ivanhoe III - Eliminates equity in income from these ventures due to the purchase of the remaining venture shares which causes the properties owned by these joint ventures to be fully consolidated. - Riverchase and GGP/NIG Brazil - Reflects reductions in the equity in income from these ventures due to pro forma adjustments which resulted in additional depreciation and interest expenses which were partially offset by amortization of below-market leases. - GGP Ivanhoe IV - Reflects equity in income of Eastridge Mall due to the transfer of its ownership by GGP Ivanhoe III, Inc. to GGP Ivanhoe IV. The Rouse acquisition adjustment reflects reductions in the equity in income from its joint ventures due to pro forma adjustments which resulted in additional depreciation and interest expenses which were partially offset by amortization of below-market leases. r) The weighted-average shares outstanding adjustment reflects the issuance of approximately 15.9 million shares of newly-issued GGP common stock pursuant to the warrants offering. The pro forma adjustment for the year ended December 31, 2003 also reflects 13.5 million shares of convertible preferred stock which were dilutive to the historical results and anti-dilutive to the pro forma consolidated results. F-10 EX-99.2 2 c90586exv99w2.txt UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 99.2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 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 001-11543 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( ) Indicate the number of shares outstanding of the issuer's common stock as of November 1, 2004: Common Stock, $0.01 par value 103,707,035 - --------------------------------- --------------------------------- Title of Class Number of Shares Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Operations and Comprehensive Income Three and Nine Months Ended September 30, 2004 and 2003 (Unaudited; in thousands, except per share data)
Three months Nine months ended September 30, ended September 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Revenues: Rents from tenants .................................................... $ 216,372 $ 189,405 $ 623,276 $ 548,279 Land sales ............................................................ 53,706 62,570 258,894 220,009 Other ................................................................. 13,340 11,392 41,592 39,802 ---------- ---------- ---------- ---------- Total revenues ..................................................... 283,418 263,367 923,762 808,090 ---------- ---------- ---------- ---------- Operating expenses, exclusive of provision for bad debts, depreciation and amortization: Operating properties .................................................. (93,940) (81,724) (266,252) (235,400) Land sales operations ................................................. (30,009) (29,505) (155,443) (129,185) Other ................................................................. (17,816) (13,238) (37,313) (48,595) ---------- ---------- ---------- ---------- Total operating expenses, exclusive of provision for bad debts, depreciation and amortization ........................... (141,765) (124,467) (459,008) (413,180) ---------- ---------- ---------- ---------- Interest expense ........................................................... (60,379) (54,195) (178,626) (163,873) Provision for bad debts .................................................... (2,408) (2,997) (7,058) (5,682) Depreciation and amortization .............................................. (47,175) (43,288) (143,521) (121,855) Other income, net .......................................................... 325 2,209 2,664 6,398 Other provisions and losses, net ........................................... (45,268) (2,887) (51,448) (22,644) ---------- ---------- ---------- ---------- EARNINGS (LOSS) BEFORE INCOME TAXES, EQUITY IN EARNINGS OF UNCONSOLIDATED REAL ESTATE VENTURES, NET GAINS ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES AND DISCONTINUED OPERATIONS .................................... (13,252) 37,742 86,765 87,254 Income taxes, primarily deferred ........................................... (18,205) (1,627) (57,319) (28,205) Equity in earnings of unconsolidated real estate ventures .................. 6,499 5,862 15,134 20,143 ---------- ---------- ---------- ---------- EARNINGS (LOSS) BEFORE NET GAINS ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES AND DISCONTINUED OPERATIONS ............ (24,958) 41,977 44,580 79,192 Net gains on dispositions of interests in operating properties ............. 166 272 14,054 22,076 ---------- ---------- ---------- ---------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS ......................... (24,792) 42,249 58,634 101,268 Discontinued operations .................................................... 602 (1,757) 45,529 101,456 ---------- ---------- ---------- ---------- NET EARNINGS (LOSS) ................................................ (24,190) 40,492 104,163 202,724 Other items of comprehensive income (loss): Minimum pension liability adjustment ............................... 418 --- (1,219) 390 Unrealized net gains on derivatives designated as cash flow hedges ............................................... 678 3,281 2,781 82 Unrealized net gains on available-for-sale securities .............. 144 --- 570 --- ---------- ---------- ---------- ---------- COMPREHENSIVE INCOME (LOSS) ........................................ $ (22,950) $ 43,773 $ 106,295 $ 203,196 ========== ========== ========== ========== NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS .............. $ (24,190) $ 37,454 $ 104,163 $ 193,610 ========== ========== ========== ========== EARNINGS (LOSS) PER SHARE OF COMMON STOCK Basic: Continuing operations .............................................. $ (.24) $ .44 $ .57 $ 1.05 Discontinued operations ............................................ .01 (.02) .45 1.15 ---------- ---------- ---------- ---------- Total .......................................................... $ (.23) $ .42 $ 1.02 $ 2.20 ========== ========== ========== ========== Diluted: Continuing operations .............................................. $ (.24) $ .43 $ .56 $ 1.02 Discontinued operations ............................................ .01 (.02) .44 1.13 ---------- ---------- ---------- ---------- Total .......................................................... $ (.23) $ .41 $ 1.00 $ 2.15 ========== ========== ========== ========== Dividends per share: Common stock ....................................................... $ .47 $ .42 $ 1.41 $ 1.26 ========== ========== ========== ========== Preferred stock .................................................... $ --- $ .75 $ --- $ 2.25 ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. 2 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Condensed Consolidated Balance Sheets September 30, 2004 and December 31, 2003 (In thousands, except share data)
September 30, 2004 December 31, (Unaudited) 2003 ------------- ------------ ASSETS: Property and property-related deferred costs: Operating properties: Property ................................................................. $ 5,863,991 $ 5,351,748 Less accumulated depreciation ............................................ 1,012,762 897,277 ------------- ------------ 4,851,229 4,454,471 ------------- ------------ Deferred costs ........................................................... 254,932 238,122 Less accumulated amortization ............................................ 109,381 94,424 ------------- ------------ 145,551 143,698 ------------- ------------ Net operating properties ................................................. 4,996,780 4,598,169 Properties in development .................................................... 255,362 167,073 Properties held for sale ..................................................... 8,063 138,823 Investment land and land held for development and sale ....................... 480,337 414,666 ------------- ------------ Total property and property-related deferred costs ....................... 5,740,542 5,318,731 ------------- ------------ Investments in unconsolidated real estate ventures ................................ 572,814 628,305 Advances to unconsolidated real estate ventures ................................... 3,865 19,562 Prepaid expenses, receivables under finance leases and other assets ............... 572,523 479,409 Accounts and notes receivable ..................................................... 76,407 53,694 Investments in marketable securities .............................................. 49,946 22,313 Cash and cash equivalents ......................................................... 33,107 117,230 ------------- ------------ TOTAL ASSETS ............................................................. $ 7,049,204 $ 6,639,244 ============= ============ LIABILITIES: Debt: Property debt not carrying a Parent Company guarantee of repayment ........... $ 2,588,514 $ 2,768,288 Debt secured by properties held for sale ..................................... --- 110,935 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt ........................................................ 180,192 179,150 Other debt ........................................................... 1,867,366 1,386,119 ------------- ------------ 2,047,558 1,565,269 ------------- ------------ Total debt ........................................................... 4,636,072 4,444,492 ------------- ------------ Accounts payable and accrued expenses ............................................. 208,404 179,530 Other liabilities ................................................................. 641,387 611,042 Parent Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities ........................ --- 79,216 SHAREHOLDERS' EQUITY: Series B Convertible Preferred stock with a liquidation preference of $202,500 .... --- 41 Common stock of 1(cent)par value per share; authorized 500,000,000 shares in 2004 and 250,000,000 shares in 2003; issued 103,687,717 shares in 2004 and 91,759,723 shares in 2003 .................................................... 1,037 918 Additional paid-in capital ........................................................ 1,624,088 1,346,890 Accumulated deficit ............................................................... (52,022) (10,991) Accumulated other comprehensive income (loss): Minimum pension liability adjustment ......................................... (5,847) (4,628) Unrealized net losses on derivatives designated as cash flow hedges .......... (4,485) (7,266) Unrealized net gains on available-for-sale securities ........................ 570 --- ------------- ------------ Total shareholders' equity ........................................................ 1,563,341 1,324,964 ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 7,049,204 $ 6,639,244 ============= ============
The accompanying notes are an integral part of these statements. 3 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2004 and 2003 (Unaudited, in thousands)
2004 2003 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Rents from tenants and other revenues received........................................ $ 654,630 $ 652,232 Proceeds from land sales and notes receivable from land sales......................... 225,946 228,276 Interest received..................................................................... 5,517 5,692 Operating expenditures................................................................ (367,642) (329,364) Land development and acquisition expenditures......................................... (130,424) (106,467) Interest paid......................................................................... (164,664) (177,702) Income taxes paid..................................................................... (22,374) (9,144) Operating distributions from unconsolidated real estate ventures...................... 37,238 41,206 ---------------- ---------------- Net cash provided by operating activities........................................ 238,227 304,729 ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for properties in development............................................ (79,748) (128,566) Expenditures for improvements to existing properties.................................. (54,137) (54,106) Expenditures for acquisitions of interests in properties and other assets............. (292,904) (173,896) Proceeds from dispositions of interests in properties................................. 87,823 272,061 Other distributions from unconsolidated real estate ventures.......................... 30,737 --- Expenditures for investments in unconsolidated real estate ventures................... (3,781) (42,739) Other................................................................................. (832) 19,291 ---------------- ---------------- Net cash used by investing activities............................................ (312,842) (107,955) ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of property debt............................................... 12,946 215,631 Repayments of property debt: Scheduled principal payments..................................................... (55,276) (55,426) Other payments................................................................... (446,652) (426,724) Proceeds from issuance of other debt.................................................. 502,736 269,655 Repayments of other debt.............................................................. (11,500) (3,690) Repayments of Parent Company-obligated mandatorily redeemable preferred securities....................................................................... (79,751) (32,056) Purchases of common stock............................................................. (31,117) (71,076) Proceeds from issuance of common stock................................................ 221,917 --- Proceeds from exercise of stock options............................................... 30,923 61,925 Dividends paid........................................................................ (145,195) (120,416) Other................................................................................. (8,539) (15,455) ---------------- ---------------- Net cash used by financing activities............................................ (9,508) (177,632) ---------------- ---------------- Net increase (decrease) in cash and cash equivalents..................................... (84,123) 19,142 Cash and cash equivalents at beginning of period......................................... 117,230 41,633 ---------------- ---------------- Cash and cash equivalents at end of period............................................... $ 33,107 $ 60,775 ================ ================
The accompanying notes are an integral part of these statements. 4 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, continued Nine Months Ended September 30, 2004 and 2003 (Unaudited, in thousands)
2004 2003 ------------- ------------ RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET EARNINGS $ 104,163 $ 202,724 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................................................ 144,501 136,448 Change in undistributed earnings of unconsolidated real estate ventures.............. 19,259 21,963 Net gains on dispositions of interests in operating properties....................... (59,235) (95,786) Impairment losses on operating properties............................................ 432 6,500 Losses (gains) on extinguishment of debt ............................................ 3,312 (20,454) Participation expense pursuant to Contingent Stock Agreement......................... 47,776 45,863 Land development and acquisition expenditures in excess of cost of land sales........ (39,153) (25,515) Provision for bad debts.............................................................. 7,058 6,536 Debt assumed by purchasers of land................................................... (5,618) (17,514) Deferred income taxes................................................................ 44,758 27,168 Increase in accounts and notes receivable............................................ (28,839) (7,826) Decrease (increase) in other assets.................................................. (22,906) 12,138 Increase in accounts payable, accrued expenses and other liabilities................. 26,661 8,769 Other, net........................................................................... (3,942) 3,715 ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES................................................. $ 238,227 $ 304,729 ============= ============ SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued pursuant to Contingent Stock Agreement................................ $ 51,817 $ 66,784 Capital lease obligations incurred........................................................ 3,704 1,429 Lapses of restrictions on common stock awards and grants of common stock.................. 4,287 6,974 Debt assumed by purchasers of land........................................................ 5,618 17,514 Debt assumed by purchasers of operating properties........................................ 130,787 276,588 Debt and other liabilities assumed or issued in acquisition of assets..................... 340,524 454,198 Debt extinguished in excess of cash paid.................................................. --- 28,026 Property and other assets contributed to an unconsolidated real estate venture............ --- 164,306 Debt and other liabilities related to property contributed to an unconsolidated real estate venture.................................................................. --- 163,406 ============= ============
5 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2004 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The unaudited consolidated financial statements include the accounts of The Rouse Company, our subsidiaries and ventures ("we," "Rouse" or "us") in which we have a majority voting interest and control. We also consolidate the accounts of variable interest entities where we are the primary beneficiary. We account for investments in other ventures using the equity or cost methods as appropriate in the circumstances. Significant intercompany balances and transactions are eliminated in consolidation. The unaudited condensed consolidated financial statements include all adjustments which are necessary, in the opinion of management, to fairly present our 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 our 2003 Annual Report to Shareholders. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Significant estimates are inherent in the preparation of our financial statements in a number of areas, including the cost ratios and completion percentages used for land sales, evaluation of impairment of long-lived assets (including operating properties and properties held for development or sale), evaluation of collectibility of accounts and notes receivable, allocation of the purchase price of acquired properties and evaluation of loss contingencies. Actual results could differ from these and other estimates. In April 2004, we reclassified certain costs and expenses (primarily employee termination benefits) related to organizational changes and early retirements from other provisions and losses, net to operating expenses. We made these reclassifications because these expenses are neither infrequent nor unusual and are becoming a normal cost of doing business. The amounts reclassified were $0.9 million and $7.9 million in the three and nine months ended September 30, 2003, respectively, and $1.0 million in the three months ended March 31, 2004. Certain other amounts for 2003 have been reclassified to conform to our current presentation. (b) Property and property-related deferred costs Properties to be developed or held and used in operations are carried at cost reduced for impairment losses, where appropriate. Acquisition, development and construction costs of properties in development are capitalized including, where applicable, salaries and related costs, real estate taxes, interest and preconstruction costs directly related to the project. The preconstruction stage of development of an operating property (or an expansion of an existing property) includes efforts and related costs to secure land control and zoning, evaluate feasibility and complete other initial tasks which are essential to development. Provisions are made for costs of potentially unsuccessful preconstruction efforts by charges to operations. Development and construction costs and costs of significant improvements and replacements and renovations at operating properties are capitalized, while costs of maintenance and repairs are expensed as incurred. Direct costs associated with leasing of operating properties are capitalized as deferred costs and amortized using the straight-line method over the terms of the related leases. Depreciation of each operating property is computed using the straight-line method. The annual rate of depreciation for each retail center (with limited exceptions) is based on a 55-year composite life and a salvage value of approximately 10%. Office buildings and other properties are depreciated using composite lives of 40 years. Furniture and fixtures and certain common area improvements are depreciated using estimated useful lives ranging from 2 to 10 years. 6 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued If events or circumstances indicate that the carrying value of an operating property to be held and used may be impaired, a recoverability analysis is performed based on estimated undiscounted future cash flows to be generated from the property. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. Fair values are determined based on appraisals and/or estimated future cash flows using appropriate discount and capitalization rates. Properties held for sale are carried at the lower of their carrying values (i.e. cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. The net carrying values of operating properties are classified as properties held for sale when the properties are actively marketed, their sale is considered probable within one year and various other criteria relating to their disposition are met. Depreciation of these properties is discontinued at that time, but operating revenues, interest and other operating expenses continue to be recognized until the date of sale. Revenues and expenses of properties that are classified as held for sale are presented as discontinued operations for all periods presented in the statements of operations if the properties will be or have been sold on terms where we have limited or no continuing involvement with them after the sale. If active marketing ceases or the properties no longer meet the criteria to be classified as held for sale, the properties are reclassified as operating, depreciation is resumed, depreciation for the period the properties were classified as held for sale is recognized and deferred selling costs, if any, are charged to expense. Additionally, we present other assets and liabilities of properties classified as held for sale separately in the balance sheet, if material. Gains from dispositions of interests in operating properties are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by us with the properties disposed of are met. Gains relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. (c) Acquisitions of operating properties We allocate the purchase price of acquired properties to tangible and identified intangible assets based on their fair values. In making estimates of fair values for purposes of allocating purchase price, we use a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. The fair values of tangible assets are determined on an "if-vacant" basis. The "if-vacant" fair value is allocated to land, where applicable, buildings, tenant improvements and equipment based on property tax assessments and other relevant information obtained in connection with the acquisition of the property. Our intangible assets arise primarily from contractual rights and include leases with above- or below-market rents (including ground leases where we are lessee), in-place lease and customer relationship values and a real estate tax stabilization agreement. Above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received or paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding space, measured over a period equal to the remaining non-cancelable term of the lease (including those under bargain renewal options). The capitalized above- and below-market lease values are amortized as adjustments to rental income or rental expense over the remaining terms of the respective leases (including periods under bargain renewal options). 7 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued The aggregate fair values of in-place leases and customer relationship assets acquired are measured based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. This value is allocated to in-place lease and customer relationship assets (both anchor stores and tenants). The fair value of in-place leases is based on our estimates of carrying costs during the expected lease-up periods and costs to execute similar leases. Our estimate of carrying costs includes real estate taxes, insurance and other operating expenses and lost rentals during the expected lease-up periods considering current market conditions. Our estimate of costs to execute similar leases includes leasing commissions, legal and other related costs. The fair value of anchor store agreements is determined based on our experience negotiating similar relationships (not in connection with property acquisitions). The fair value of tenant relationships is based on our evaluation of the specific characteristics of each tenant's lease and our overall relationship with that respective tenant. Characteristics we consider in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals, among other factors. The value of in-place leases is amortized to expense over the initial term of the respective leases, primarily ranging from two to ten years. The value of anchor store agreements is amortized to expense over the estimated term of the anchor store's occupancy in the property. Should an anchor store vacate the premises, the unamortized portion of the related intangible is charged to expense. The value of tenant relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense. The value allocated to the tax stabilization agreement was determined based on the difference between the present value of estimated market real estate taxes and amounts due under the agreement and is amortized to operating expense over the term of the agreement, which is approximately 24 years. The aggregate purchase price of properties acquired in 2004 and 2003 was allocated to intangible assets and liabilities as follows (in millions):
2004 2003 --------------- ----------------- Above-market leases...................................... $ 3.8 $ 1.1 In-place lease assets.................................... 2.9 2.0 Tenant relationships..................................... 6.5 0.6 Below-market leases...................................... 4.2 4.7 Anchor store agreements.................................. 1.5 2.5 Below-market ground lease................................ 14.5 --- Real estate tax stabilization agreement.................. 94.2 ---
(d) Investments in marketable securities and cash and cash equivalents Our investment policy defines authorized investments and establishes various limitations on the maturities, credit quality and amounts of investments held. Authorized investments include U.S. government and agency obligations, certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper, money market mutual funds and corporate debt and equity securities. We may also invest in mutual funds to closely match the investment selections of participants in nonqualified deferred compensation plans. Debt security investments with maturities at dates of purchase in excess of three months are classified as marketable securities and carried at amortized cost as it is our intention to hold these investments until maturity. Short-term investments with maturities at dates of purchase of three months or less are classified as cash equivalents. Most investments in marketable equity securities are held in an irrevocable trust for participants in our nonqualified defined benefit pension plan and our nonqualified defined contribution plans, are classified as trading securities and are carried at market value with changes in values recognized in earnings. Other investments in marketable equity securities subject to significant restrictions on sale or transfer are classified as available-for-sale and are carried at market value with unrealized changes in values recognized in other comprehensive income. 8 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued Other income, net in the three and nine months ended September 30, 2004 and 2003 is summarized as follows (in thousands):
Three months Nine months ended September 30, ended September 30, ---------------------------------- ------------------------------- 2004 2003 2004 2003 -------------- ---------------- ------------- -------------- Interest income....................................... $ 565 $ 529 $ 1,759 $ 1,690 Dividends............................................. 50 19 102 65 Gains (loss) on trading securities, net............... (290) 1,661 803 4,643 --------------- ---------------- ------------- -------------- $ 325 $ 2,209 $ 2,664 $ 6,398 ============== ================ ============= ==============
(e) Revenue recognition and related matters Minimum rent revenues are recognized on a straight-line basis over the terms of the leases. Rents based on tenant sales are recognized when tenant sales exceed contractual thresholds. Revenues related to variable recoveries from tenants of real estate taxes, utilities, maintenance, insurance and other expenses pursuant to leases are recognized in the period in which the related expenses are incurred. Fixed contributions from tenants related to these expenses are recognized when due. Lease termination fees are recognized when the related agreements are executed. Management fee revenues are calculated as a fixed percentage of revenues of the managed properties and are recognized as the managed properties' revenues are earned. Revenues from land sales are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by us with the land sold are met. Revenues relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. For land sale transactions under the terms of which we are required to perform additional services and incur significant costs after title has passed, revenues and cost of sales are recognized on a percentage of completion basis. Cost of land sales is determined as a specified percentage of land sales revenues recognized for each community development project. The cost ratios used are based on actual costs incurred and estimates of development costs and sales revenues to completion of each project. The ratios are reviewed regularly and revised for changes in sales and cost estimates or development plans. Significant changes in these estimates or development plans, whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a specific project. The specific identification method is used to determine cost of sales for certain parcels of land, including acquired parcels we do not intend to develop or for which development is complete at the date of acquisition. (f) Derivative financial instruments We use derivative financial instruments to reduce risk associated with movements in interest rates. We may choose to reduce cash flow and earnings volatility associated with interest rate risk exposure on variable-rate borrowings and/or forecasted fixed-rate borrowings. In some instances, lenders may require us to do so. In order to limit interest rate risk on variable-rate borrowings, we may enter into pay fixed-receive variable interest rate swaps or interest rate caps to hedge specific risks. In order to limit interest rate risk on forecasted borrowings, we may enter into forward-rate agreements, forward starting swaps, interest rate locks and interest rate collars. We may also enter into pay variable-receive fixed interest rate swaps to hedge the fair values of fixed-rate borrowings. In addition, we may use derivative financial instruments to reduce risk associated with movements in currency exchange rates if and when we are exposed to such risk. We do not use derivative financial instruments for speculative purposes. Under interest rate cap agreements, we make initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates exceed specified levels during the agreement period. Under interest rate swap agreements, we and the counterparties agree to exchange the difference between fixed-rate and variable-rate interest amounts calculated by reference to specified notional principal amounts during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less. 9 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued Parties to interest rate exchange agreements are subject to market risk for changes in interest rates and risk of credit loss in the event of nonperformance by the counterparty. We do not require any collateral under these agreements but deal only with highly rated financial institution counterparties (which, in certain cases, are also the lenders on the related debt) and expect that all counterparties will meet their obligations. All of the pay fixed-receive variable interest rate swaps and other pay fixed-receive variable derivative financial instruments we used in 2004 and 2003 qualified as cash flow hedges and hedged our exposure to forecasted interest payments on variable-rate LIBOR-based debt or the forecasted issuance of fixed-rate debt. Accordingly, the effective portion of the instruments' gains or losses is reported as a component of other comprehensive income and reclassified into earnings when the related forecasted transactions affect earnings. If we discontinue a cash flow hedge because it is probable that the original forecasted transaction will not occur, the net gain or loss in accumulated other comprehensive income is immediately reclassified into earnings. If we discontinue a cash flow hedge because the variability of the probable forecasted transaction has been eliminated, the net gain or loss in accumulated other comprehensive income is reclassified to earnings over the term of the designated hedging relationship. Any subsequent changes in the fair value of the derivative are immediately recognized in earnings. In 2004, we entered into pay variable-receive fixed interest rate swaps designated as fair value hedges of fixed-rate debt instruments. These hedges and the hedged instruments are carried at their fair values with changes in their fair values recorded in earnings. Because the hedges are highly effective, the changes in their values are substantially equal and offsetting. We have not recognized any losses as a result of hedge discontinuance, and the expense that we recognized related to changes in the time value of interest rate cap agreements was insignificant for 2004 and 2003. Amounts receivable or payable under interest rate cap and swap agreements are accounted for as adjustments to interest expense on the related debt. 10 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued (g) Stock-based compensation We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock or stock options to our officers and employees only if the quoted market price of the stock at the grant date (or other measurement date, if later) is greater than the amount the grantee must pay to acquire the stock. The following table summarizes the pro forma effects on net earnings (loss) (in thousands) and earnings (loss) per share of common stock of using the fair value-based method, rather than the intrinsic value-based method, to account for stock-based compensation awards made since 1995.
Three months Nine months ended September 30, ended September 30, --------------------------- --------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net earnings (loss), as reported ........................... $ (24,190) $ 40,492 $ 104,163 $ 202,724 Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects and amounts capitalized ......................... 782 391 2,450 3,487 Deduct: Total stock-based employee compensation expense determined under fair value-based method, net of related tax effects and amounts capitalized ...... (1,570) (1,530) (7,083) (8,511) ------------ ------------ ------------ ------------ Pro forma net earnings (loss) .............................. $ (24,978) $ 39,353 $ 99,530 $ 197,700 ============ ============ ============ ============ Earnings (loss) per share of common stock: Basic: As reported ............................................. $ (.23) $ .42 $ 1.02 $ 2.20 Pro forma ............................................... $ (.24) $ .41 $ .97 $ 2.14 Diluted: As reported ............................................. $ (.23) $ .41 $ 1.00 $ 2.15 Pro forma ............................................... $ (.24) $ .40 $ .96 $ 2.10
The per share weighted-average estimated fair values of options granted during 2004 and 2003 were $6.83 and $3.43, respectively. These fair values were estimated on the dates of each grant using the Black-Scholes option-pricing model with the following assumptions:
Three months ended Nine months ended September 30, September 30, --------------------------- --------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Risk-free interest rate..................... 3.7% 3.0% 3.5% 3.2% Dividend yield.............................. 3.9% 4.2% 4.0% 5.4% Volatility factor........................... 20.0% 20.0% 20.0% 20.0% Expected life in years...................... 5.7 4.5 6.4 6.4
11 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued (2) MERGER AGREEMENT WITH GENERAL GROWTH PROPERTIES, INC. AND EXTRAORDINARY DIVIDEND On August 19, 2004, we executed a definitive merger agreement with General Growth Properties, Inc. ("GGP"). Under the terms of the agreement, which has been approved by each company's Board of Directors, a subsidiary of GGP will be merged with and into Rouse, Rouse will become a subsidiary of GGP and holders of Rouse common stock will receive $67.50 per share (reduced by reason of theextraordinary dividend described below). The merger was approved by our shareholders on November 9, 2004 and is expected to close on November 12, 2004. On or prior to the closing of the merger, we will pay an extraordinary dividend of $2.29474 per share, which will result in merger consideration of $65.20526 per share. (3) TAX MATTERS We elected to be taxed as a real estate investment trust ("REIT") pursuant to the Internal Revenue Code of 1986, as amended, effective January 1, 1998. Subject to the payment of the extraordinary dividend noted above, we believe that we met, or have the ability to meet, the qualifications for REIT status as of September 30, 2004. One of the conditions for closing the merger is that we deliver to GGP an opinion of tax counsel acceptable to GGP with respect to our qualification as a REIT. In preparing for the merger, we discovered that we may have non-REIT earnings and profits that we did not distribute to our shareholders. These earnings and profits include non-REIT earnings and profits we would have succeeded to in 2001 if a tax election we made in 2001 with respect to one of our subsidiaries was determined to be invalid. Such earnings and provits also included earnings and profits which might be attributed to certain intercompany transactions. Based on advice from our outside legal counsel who assist us with REIT tax matters and our internal analysis, we believed that paying additional distributions to our shareholders (which we refer to as extraordinary dividends) and making payments of additional tax, interest and penalties were the most expedient courses of action to take. On November 9, 2004, we entered into an agreement with the Internal Revenue Service ("IRS") to settle these matters and treat the payment of extraordinary dividends as satisfying our distribution requirements. The amount of the extraordinary dividend to be paid is $238 million ($2.29474 per share). Additionally, we paid approximately $23.1 million of interest and a penalty of approximately $21.4 million to the IRS under the terms of the closing agreement with the IRS. We also expect to pay an additional $8.5 million of income taxes, penalty and interest. We recorded a liability of $52 million in the third quarter of 2004 and will record the interest applicable to the fourth quarter of 2004 in that period. A REIT is permitted to own securities of taxable REIT subsidiaries ("TRS") in an amount up to 20% of the fair value of its assets. TRS are taxable corporations that are used by REITs generally to engage in nonqualifying REIT activities or perform nonqualifying services. We own and operate several TRS that are principally engaged in the development and sale of land for residential, commercial and other uses, primarily in and around Columbia, Maryland, Summerlin, Nevada and Houston, Texas. The TRS also operate and/or own several retail centers and office and other properties. Except with respect to the TRS, management does not believe that we will be liable for significant income taxes at the Federal level or in most of the states in which we operate in 2004 and future years. Current Federal income taxes of the TRS are likely to increase in future years as we exhaust the net loss carryforwards of certain TRS and complete certain land development projects. These increases could be significant. Our net deferred tax assets were $69.4 million and our deferred tax liabilities were $115.2 million at September 30, 2004. Our net deferred tax assets were $91.0 million and our deferred tax liabilities were $86.4 million at December 31, 2003. Deferred income taxes will become payable as temporary differences reverse (primarily due to the completion of land development projects) and TRS net operating loss carryforwards are exhausted. (4) DISCONTINUED OPERATIONS In May 2004, we agreed to sell our interests in two office buildings in Hunt Valley, Maryland. We recorded aggregate impairment losses of $1.4 million in the fourth quarter of 2003 and $0.4 million in the nine months ended September 30, 2004 related to these properties. These properties are classified as held for sale at September 30, 2004 and were sold in October 2004. 12 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued In May 2004, we sold our interest in one office building in Hughes Center, a master-planned business park in Las Vegas, Nevada, as part of the 2003 agreements under which we acquired interests in entities developing The Woodlands, a master-planned community in the Houston, Texas metropolitan area, for cash of $7.0 million and the assumption by the buyer of $3.5 million of mortgage debt. We recorded a gain on this sale of $5.5 million. In January and February 2004, we sold interests in five office buildings and seven parcels subject to ground leases in Hughes Center as part of the same 2003 agreements, for cash of $64.3 million and the assumption by the buyer of $107.3 million of mortgage debt. We recorded aggregate gains on these sales in the first quarter of 2004 of approximately $35.3 million (net of deferred income taxes of $2.7 million). In December 2003, in related transactions, we sold interests in two office buildings and two parcels subject to ground leases in Hughes Center. We also recorded, in the nine months ended September 30, 2004, net gains of $3.6 million (net of deferred income taxes of $2.9 million) related to the resolutions of certain contingencies related to disposals of properties in 2002, 2003 and 2004. In March 2004, we sold our interests in Westdale Mall, a retail center in Cedar Rapids, Iowa, for cash of $1.3 million and the assumption by the buyer of $20.0 million of mortgage debt. We recognized a gain of $0.8 million relating to this sale. We recorded an impairment loss of $6.5 million in the third quarter of 2003 related to this property. In August 2003, we sold The Jacksonville Landing, a retail center in Jacksonville, Florida, for net proceeds of $4.8 million. We recognized a gain of $2.8 million relating to this sale. In July and September 2003, we sold three small neighborhood retail properties in Columbia, Maryland for aggregate proceeds of $2.2 million and recognized aggregate gains of $0.9 million. In May and June 2003, we sold eight office and industrial buildings in the Baltimore-Washington corridor for net proceeds of $46.6 million and recorded aggregate gains of $4.4 million. In April and May 2003, we sold six retail centers in the Philadelphia metropolitan area and, in a related transaction, acquired Christiana Mall from a party related to the purchaser. In connection with these transactions, we received net cash proceeds of $218.4 million, the purchaser assumed $276.6 million of property debt, and we assumed a participating mortgage secured by Christiana Mall. We recognized aggregate gains of $65.4 million relating to the monetary portions of these transactions. We also recorded a net gain of $26.9 million related to the extinguishment of debt secured by two of the properties sold in the Philadelphia metropolitan area when the lender released the mortgages for a cash payment by us of less than the aggregate carrying amount of the debt. 13 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued The operating results of the properties included in discontinued operations are summarized as follows (in thousands):
Three months Nine months ended September 30, ended September 30, --------------------------- ------------------------ 2004 2003 2004 2003 ------------ ----------- ----------- ---------- Revenues........................................................... $ 359 $ 11,720 $ 3,963 $ 76,940 Operating expenses, exclusive of depreciation and amortization..... (73) (5,349) (1,563) (36,691) Interest expense................................................... (1) (2,912) (738) (18,109) Depreciation and amortization...................................... (1) (2,580) (980) (14,593) Other provisions and losses, net................................... --- --- --- 26,896 Impairment losses on operating properties.......................... (162) (6,500) (432) (6,500) Gains on dispositions of interests in operating properties, net.... 467 3,908 45,181 73,710 Income tax benefit (provision), primarily deferred................. 13 (44) 98 (197) ------------ ----------- ----------- ---------- Discontinued operations.................................... $ 602 $ (1,757) $ 45,529 $ 101,456 ============ =========== =========== ==========
(5) UNCONSOLIDATED REAL ESTATE VENTURES We own interests in unconsolidated real estate ventures that own and/or develop properties, including master-planned communities. We use these ventures to limit our risk associated with individual properties and to reduce our capital requirements. We may also contribute interests in properties we own to unconsolidated ventures for cash distributions and interests in the ventures to provide liquidity as an alternative to outright property sales. We account for the majority of these ventures using the equity method because the ventures do not meet the definition of a variable interest entity and we have joint interest and control of these properties with our venture partners. For those ventures where we own less than a 5% interest and have virtually no influence on the venture's operating and financial policies, we account for our investments using the cost method. At December 31, 2003, these ventures were primarily partnerships and corporations which own retail centers (most of which we manage) and ventures developing the master-planned communities known as The Woodlands, near Houston, Texas, and Fairwood, in Prince George's County, Maryland. In January 2004, we acquired our partners' interests in the joint venture that is developing Fairwood, increasing our ownership interest to 100%. Prior to this transaction, we held a noncontrolling interest in this venture and accounted for our investment as an investment in unconsolidated real estate ventures. We consolidated the venture in our financial statements from the date of the acquisition. In August 2003, we acquired the remaining interest in Staten Island Mall, a regional retail center in Staten Island, New York, for approximately $148 million cash and assumption of the other venturer's share of debt (approximately $53 million) encumbering the property. We consolidated this property from the date of acquisition. In December 2003, we acquired a 50% interest in the retail and certain office components of Mizner Park, a mixed-use project in Boca Raton, Florida. In January 2004, we acquired a 50% interest in additional office components of Mizner Park. In April 2004, we sold most of our interest in Westin New York, a hotel in New York City, for net proceeds of $15.8 million and recognized a gain of approximately $1.4 million (net of deferred income taxes of $0.8 million). 14 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued (6) DEBT Debt is summarized as follows (in thousands):
September 30, 2004 December 31, 2003 --------------------------------------- ------------------------------------ Total Due in one year Total Due in one year ----------------- ---------------- ----------------- --------------- Mortgages and bonds............... $ 2,708,018 $ 595,041 $ 3,025,802 $ 484,588 Medium-term notes................. 45,500 43,500 45,500 --- Credit facility borrowings........ 259,500 --- 271,000 --- 3.625% Notes due March 2009....... 389,765 --- --- --- 8% Notes due April 2009........... 200,000 --- 200,000 --- 7.2% Notes due September 2012..... 399,592 --- 399,553 --- 5.375% Notes due November 2013.... 453,761 --- 350,000 --- Other loans....................... 179,936 72,312 152,637 32,147 ----------------- ---------------- ----------------- --------------- Total..................... $ 4,636,072 $ 710,853 $ 4,444,492 $ 516,735 ================= ================ ================= ===============
The amounts due in one year represent maturities under 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. We expect to repay the debt due in one year with operating cash flows, proceeds from property financings (including refinancings of maturing mortgages) or other available corporate funds. During the first quarter of 2004, we repaid approximately $443 million of mortgage loans with proceeds from borrowings under our credit facility. In March 2004, we issued $400 million of 3.625% Notes due in March 2009 and $100 million of 5.375% Notes due in November 2013 for net proceeds of approximately $503 million. The proceeds were primarily used to repay credit facility borrowings. At September 30, 2004 and December 31, 2003, approximately $82 million and $83 million, respectively, of our debt provided for payments of additional interest based on operating results of the related properties in excess of stated levels. The participating debt primarily relates to a retail center where the lender receives a fixed interest rate of 7.625% and a 5% participation in cash flows. The lender also will receive a payment at maturity (November 2004) equal to the greater of 5% of the value of the property in excess of the debt balance or the amount required to provide an internal rate of return of 8.375% over the term of the loan. The internal rate of return of the lender is limited to 12.5%. We recognize interest expense on this debt at a rate required to provide the lender the required minimum internal rate of return (8.375%) and monitor the accrued liability and the fair value of the projected payment due on maturity. Based on our analysis, we believe that the payment at maturity will be the balance needed to provide the specified minimum internal rate of return. 15 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued At September 30, 2004, we had interest rate swap agreements and forward-starting swap agreements in place that effectively fix the LIBOR rate on a portion of our variable-rate debt through December 2006. Information related to the in-place swap agreements as of September 30, 2004 is as follows (dollars in millions): Total notional amount.............................................. $563.1 Average fixed effective rate (pay rate)............................ 2.3% Average variable interest rate of related debt (receive rate)...... 1.7% Fair values of assets.............................................. $ 1.3 Fair values of liabilities......................................... $ 1.2
As discussed above, we issued $400 million of 3.625% Notes in March 2004. We simultaneously entered into agreements to effectively convert this fixed-rate debt to variable-rate debt for the term of these notes. Under these agreements, we receive a fixed rate of 3.625% and pay a variable rate based on the six-month LIBOR rate, set in arrears, plus an average spread of 19.375 basis points. The expected pay rate was 2.71% at September 30, 2004. The fair value of these agreements was a liability of $9.1 million at September 30, 2004. In November 2004, we terminated pay-foxed, receive variable interest rate swap agreements with aggregate notional amounts of $411.5 million and pay-variable, receive-fixed interest rate swap agreements with aggregate notional amounts of $400 million. (7) PENSION, POST RETIREMENT AND DEFERRED COMPENSATION PLANS We have a qualified defined benefit pension plan ("qualified plan") covering substantially all employees, and separate nonqualified unfunded defined benefit pension plans primarily covering participants in the qualified plan whose defined benefits exceed the qualified plan's limits ("supplemental plan"). In February 2003, our Board of Directors approved modifications to our qualified plan and supplemental plan so that covered employees would not earn additional benefits for future services. The curtailment of the qualified and supplemental plans required us to immediately recognize substantially all unamortized prior service cost and unrecognized transition obligation and resulted in a curtailment loss of $10.2 million for the nine months ended September 30, 2003. We also incurred settlement losses of $3.5 million and $9.6 million for the nine months ended September 30, 2004 and 2003, respectively, related to lump-sum distributions made primarily to employees retiring as a result of organizational changes and early retirement programs offered in 2003 and 2002 and a change in the senior management organizational structure in March 2003. The lump-sum distributions were paid to participants primarily from assets of our qualified plan, or with respect to the supplemental plan, from contributions made by us. In February 2004, we adopted a proposal to terminate our qualified and supplemental plans. When we complete the terminations, we will be required to settle the obligations of the qualified plan by paying accumulated benefits to eligible participants. In connection with the adoption of the proposal to terminate the plans, we transferred the assets of the qualified plan to cash and cash equivalents to mitigate market risk during the period prior to distributions to participants. At September 30, 2004, the qualified plan had sufficient assets to settle its obligations without additional contributions by us. On August 27, 2004, we received a favorable determination letter from the IRS approving the termination of our qualified plan. On October 4, 2004, we began distributing the plan's assets to its beneficiaries and recording associated settlement losses. We expect to make final distributions from the qualified plan and to record total settlement losses of approximately $26 million in the fourth quarter of 2004. Concurrent with the first distributions from the qualified plan, we terminated our supplemental plan by merger into our nonqualified supplemental defined contribution plan (as more fully described below) and recognized a settlement loss of approximately $5.4 million. We have a qualified defined contribution plan and a nonqualified supplemental defined contribution plan available to substantially all employees. In 2004 and 2003, we matched 100% of participating employees' pre-tax contributions up to a maximum of 3% of eligible compensation and 50% of participating employees' pre-tax contributions up to an additional maximum of 2% of eligible compensation. The supplemental plan obligations were $17.3 million at September 30, 2004. On August 20, 2004, we funded an irrevocable trust for the participants in our supplemental plan and our nonqualified supplemental defined contribution plan with cash of approximately $27.2 million and the transfer of marketable securities valued at approximately $25.2 million. 16 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued In an action related to the curtailment of the qualified and supplemental plans, we added new components to the defined contribution plans under which we either make or accrue discretionary contributions to the plans for all employees who were previously covered by the defined benefit pension plans. Expenses related to these plans were $1.4 million and $4.3 million for the three and nine months ended September 30, 2004, respectively, and $1.5 million and $4.9 million for the three and nine months ended September 30, 2003, respectively. We also have a retiree benefit plan that provides postretirement medical and life insurance benefits to full-time employees who meet minimum age and service requirements. We pay a portion of the cost of participants' life insurance coverage based on years of service, subject to a maximum annual contribution. 17 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued The normal date for measurement of our pension plan obligations is December 31 of each year, unless more recent measurements of both plan assets and obligations are available, or if a significant event occurs, such as a plan amendment or curtailment, that would ordinarily call for such measurements. In February 2004, we adopted a plan to terminate our qualified and supplemental plans. Due to the termination of the plans, we measured our benefit obligations as of March 31, 2004, including the impact of the termination. Information relating to the obligations, assets and funded status of the plans at March 31, 2004 and December 31, 2003 is summarized as follows (dollars in thousands):
Pension Plans --------------------------------------------------- Postretirement Qualified Supplemental and Other Plan ------------------------ ------------------------ ------------------------ March 31, December 31, March 31, December 31, March 31, December 31, 2004 2003 2004 2003 2004 2003 --------- ------------ --------- ------------ --------- ------------ Projected benefit obligation at end of period..... $ 64,862 $ 56,228 $ 18,441 $ 17,855 $ N/A $ N/A Accumulated benefit obligation at end of period... 64,862 56,228 18,441 17,846 17,645 17,555 ========= ============ ========= ============ ========= ============ Benefit obligations at end of period.............. $ 64,862 $ 56,228 $ 18,441 $ 17,855 $ 17,645 $ 17,555 Fair value of plan assets at end of period........ 65,304 65,339 --- --- --- --- --------- ------------ --------- ------------ --------- ------------ Funded status..................................... $ 442 $ 9,111 $ (18,441) $ (17,855) $ (17,645) $ (17,555) ========= ============ ========= ============ ========= ============ Weighted-average assumptions at period end: Discount rate..................................... 5.12% 6.00% 5.16% 6.00% 6.00% 6.00% Lump sum rate..................................... 5.12 6.00 5.16 6.00 --- --- Expected rate of return on plan assets............ 5.12 8.00 --- --- --- --- Rate of compensation increase..................... N/A N/A N/A N/A N/A N/A ========= ============ ========= ============ ========= ============ Weighted-average assumptions used to determine net periodic benefit cost: Discount rate..................................... 6.00% 6.50% 6.00% 6.50% 6.00% 6.50% Lump sum rate..................................... 6.00 6.00 6.00 6.00 --- --- Expected rate of return on plan assets............ 8.00 8.00 8.00 --- --- --- Rate of compensation increase..................... N/A 4.50 N/A 4.50 N/A N/A ========= ============ ========= ============ ========= ============
18 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued The assets of the qualified plan historically consisted primarily of fixed income and marketable equity securities. The primary investment objective for the qualified plan had been to provide for growth of capital with a moderate level of volatility. In connection with the approval to terminate the plans, we transferred the assets of the qualified plan to cash and cash equivalents to mitigate market risk during the period prior to distributions to participants. The net pension cost includes the following components (in thousands):
Three months Nine months ended September 30, ended September 30, --------------------------- ------------------------------ 2004 2003 2004 2003 ------------ ------------ ------------- ------------- Service cost...................................... $ --- $ --- $ --- $ --- Interest cost on projected benefit obligations.... 1,035 1,103 3,156 3,690 Expected return on funded plan assets............. (799) (1,158) (2,907) (3,591) Prior service cost recognized..................... 8 8 23 396 Net actuarial loss recognized..................... 387 918 1,167 2,380 Amortization of transition obligation............. --- --- --- 2,892 ------------ ------------ ------------- ------------- Net pension cost before special events......... 631 871 1,439 9,598 Special events: Settlement losses.............................. 680 2,179 3,547 9,985 Curtailment loss............................... --- --- --- 10,212 ------------ ------------ ------------- ------------- Net pension cost............................... $ 1,311 $ 3,050 $ 4,986 $ 22,702 ============ ============ ============= =============
The curtailment loss in 2003 and settlement losses for the three and nine months ended September 30, 2004 and 2003 are included in other provisions and losses, net, in the condensed consolidated statements of operations. The net postretirement benefit cost includes the following components (in thousands):
Three months Nine months ended September 30, ended September 30, ----------------------- ----------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Service cost ............................................... $ 120 $ 98 $ 361 $ 296 Interest cost on accumulated benefit obligations ........... 254 257 763 773 Net actuarial loss recognized .............................. 35 29 106 85 Amortization of prior service cost ......................... (60) (60) (181) (181) ---------- ---------- ---------- ---------- Net postretirement benefit cost ......................... $ 349 $ 324 $ 1,049 $ 973 ========== ========== ========== ==========
(8) SEGMENT INFORMATION We have five business segments: retail centers, office and other properties, community development, commercial development and corporate. The retail centers segment includes the operation and management of regional shopping centers, downtown specialty marketplaces, the retail components of mixed-use projects and community retail centers. The office and other properties segment includes the operation and management of office and industrial properties and the nonretail components of the mixed-use projects. The community development segment includes the development and sale of land, primarily in large-scale, long-term community development projects in and around Columbia, Maryland, Summerlin, Nevada and Houston, Texas. The commercial development segment includes the evaluation of all potential new development projects (including expansions of existing properties) and acquisition opportunities and the management of them through the development or acquisition process. The corporate segment is responsible for shareholder and director services, financial management, strategic planning and certain other general and support functions. Our business segments offer different products or services and are managed separately because each requires different operating strategies or management expertise. 19 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued The operating measure used to assess operating results for the business segments is Net Operating Income ("NOI"). Prior to April 1, 2004, we excluded certain expenses related to organizational changes and early retirement costs from our definition of NOI. Effective April 1, 2004, we revised our definition to include these amounts in our corporate segment. We made these reclassifications because these expenses are neither infrequent nor unusual and are becoming a normal cost of doing business. Amounts for prior periods have been reclassified to conform to the current definition. The accounting policies of the segments are the same as those used to prepare our condensed consolidated financial statements, except that: - we consolidate the venture developing the community of The Woodlands and reflect the other partner's share of NOI as an operating expense rather than using the equity method; - we account for other real estate ventures in which we have joint interest and control and certain other minority interest ventures ("proportionate share ventures") using the proportionate share method rather than the equity method; - we include our share of NOI less interest expense and ground rent expense of other unconsolidated minority interest ventures ("other ventures") in revenues; and - we include discontinued operations and minority interests in NOI rather than presenting them separately. These differences affect only the reported revenues and operating expenses of the segments and have no effect on our reported net earnings (loss). Operating results for the segments are summarized as follows (in thousands):
Office and Retail Other Community Commercial Centers Properties Development Development Corporate Total --------- ---------- ----------- ----------- --------- ----------- THREE MONTHS ENDED SEPTEMBER 30, 2004 Revenues..................... $ 223,797 $ 58,806 $ 86,215 $ --- $ --- $ 368,818 Operating expenses........... 90,902 32,950 59,113 3,137 14,527 200,629 --------- ---------- ----------- ----------- --------- ----------- NOI....................... $ 132,895 $ 25,856 $ 27,102 $ (3,137) $ (14,527) $ 168,189 ========= ========== =========== =========== ========= =========== THREE MONTHS ENDED SEPTEMBER 30, 2003 Revenues..................... $ 198,924 $ 49,738 $ 62,833 $ --- $ --- $ 311,495 Operating expenses........... 80,959 20,160 29,473 2,727 5,586 138,905 --------- ---------- ----------- ----------- --------- ----------- NOI....................... $ 117,965 $ 29,578 $ 33,360 $ (2,727) $ (5,586) $ 172,590 ========= ========== =========== =========== ========= =========== NINE MONTHS ENDED SEPTEMBER 30, 2004 Revenues..................... $ 648,585 $ 178,749 $ 342,268 $ --- $ --- $ 1,169,602 Operating expenses........... 257,091 100,220 234,472 8,229 26,362 626,374 --------- ---------- ----------- ----------- --------- ----------- NOI....................... $ 391,494 $ 78,529 $ 107,796 $ (8,229) $ (26,362) $ 543,228 ========= ========== =========== =========== ========= =========== NINE MONTHS ENDED SEPTEMBER 30, 2003 Revenues..................... $ 622,102 $ 149,955 $ 221,760 $ --- $ --- $ 993,817 Operating expenses........... 250,145 59,609 129,192 10,702 22,979 472,627 --------- ---------- ----------- ----------- --------- ----------- NOI....................... $ 371,957 $ 90,346 $ 92,568 $ (10,702) $ (22,979) $ 521,190 ========= ========== =========== =========== ========= ===========
20 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued Segment operating expenses include provision for bad debts, losses (gains) on marketable securities classified as trading, net losses (gains) on sales of properties developed for sale and our partner's share of NOI of the venture developing The Woodlands and exclude income taxes, ground rent expense, distributions on Parent Company-obligated mandatorily redeemable preferred securities and other subsidiary preferred stock and real estate depreciation and amortization. Reconciliations of total revenues and operating expenses reported above to the related amounts in the condensed consolidated financial statements and of NOI reported above to earnings (loss) before net gains on dispositions of interests in operating properties and discontinued operations in the condensed consolidated financial statements are summarized as follows (in thousands):
Three months Nine months ended September 30, ended September 30, ------------------- ---------------------- 2004 2003 2004 2003 -------- -------- ---------- --------- Revenues: Total reported above.................................................... $368,818 $311,495 $1,169,602 $ 993,817 Our share of revenues of proportionate share and other ventures and revenues of The Woodlands community development venture............................................................ (85,041) (36,478) (241,877) (108,944) Revenues of discontinued operations..................................... (359) (11,720) (3,963) (76,940) Other................................................................... --- 70 --- 157 -------- -------- ---------- --------- Total in condensed consolidated financial statements............... $283,418 $263,367 $ 923,762 $ 808,090 ======== ======== ========== ========= Operating expenses, exclusive of provision for bad debts, depreciation and amortization: Total reported above.................................................... $200,629 $138,905 $ 626,374 $ 472,627 Our share of operating expenses of proportionate share ventures and operating expenses of The Woodlands community development venture and partner's share of its NOI............................. (58,018) (12,717) (165,902) (37,973) Operating expenses of discontinued operations........................... (73) (5,030) (1,445) (35,132) Other................................................................... (773) 3,309 (19) 13,658 -------- -------- ---------- --------- Total in condensed consolidated financial statements............... $141,765 $124,467 $ 459,008 $ 413,180 ======== ======== ========== ========= Operating results: NOI..................................................................... $168,189 $172,590 $ 543,228 $ 521,190 Interest expense........................................................ (60,379) (54,195) (178,626) (163,873) NOI of discontinued operations.......................................... (286) (6,690) (2,518) (41,808) Depreciation and amortization........................................... (47,175) (43,288) (143,521) (121,855) Other provisions and losses, net........................................ (45,268) (2,887) (51,448) (22,644) Income taxes, primarily deferred........................................ (18,205) (1,627) (57,319) (28,205) Our share of interest expense, ground rent expense, depreciation and amortization, other provisions and losses, net, income taxes and gains on operating properties of unconsolidated real estate ventures, net............................................... (20,524) (17,899) (60,841) (50,828) Other................................................................... (1,310) (4,027) (4,375) (12,785) -------- -------- ---------- --------- Earnings (loss) before net gains on dispositions of interests in operating properties and discontinued operations in condensed consolidated financial statements.................... $(24,958) $ 41,977 $ 44,580 $ 79,192 ======== ======== ========== =========
21 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued The assets by segment and the reconciliation of total segment assets to the total assets in the condensed consolidated financial statements are as follows (in thousands):
September 30, December 31, 2004 2003 -------------- -------------- Retail centers.................................................................. $ 5,600,816 $ 5,069,644 Office and other properties..................................................... 1,068,466 1,165,599 Community development........................................................... 838,792 835,525 Commercial development.......................................................... 189,444 114,439 Corporate....................................................................... 246,786 327,294 -------------- -------------- Total segment assets.................................................... 7,944,304 7,512,501 Our share of assets of unconsolidated proportionate share ventures.............. (1,456,797) (1,464,329) Investments in and advances to unconsolidated proportionate share ventures...... 561,697 591,072 -------------- -------------- Total assets in condensed consolidated financial statements............. $ 7,049,204 $ 6,639,244 ============== ==============
Investments in and advances to unconsolidated real estate ventures, by segment, are summarized as follows (in thousands):
September 30, December 31, 2004 2003 ------------- -------------- Retail centers.................................................................. $ 304,501 $ 345,486 Office and other properties..................................................... 174,561 158,360 Community development........................................................... 97,617 144,021 ------------- -------------- Total................................................................... $ 576,679 $ 647,867 ============= ==============
(9) OTHER PROVISIONS AND LOSSES, NET Other provisions and losses, net consist of the following (in thousands):
Three months Nine months ended September 30, ended September 30, --------------------- ----------------------- 2004 2003 2004 2003 -------- ---------- ---------- ---------- Pension plan settlement losses (see note 7).......................... $ 680 $ 2,172 $ 3,547 $ 9,536 Pension plan curtailment loss (see note 7)........................... --- --- --- 10,212 Net losses on early extinguishment of debt........................... --- 715 3,313 6,442 Interest on the extraordinary dividend (see note 3).................. 22,215 --- 22,215 --- Interest and penalties for other tax related matters (see note 3).... 22,373 --- 22,373 --- Other, net........................................................... --- --- --- (3,546) -------- ---------- ---------- ---------- Total........................................................ $ 45,268 $ 2,887 $ 51,448 $ 22,644 ======== ========== ========== ==========
As discussed in note 7 above, we curtailed our defined benefit pension plans in the first quarter of 2003 and recognized a loss. During the nine months ended September 30, 2004, we recognized net losses of $3.3 million, primarily unamortized issuance costs, related to the extinguishment of debt not associated with discontinued operations prior to scheduled maturity and to the redemption of the Parent Company-obligated mandatorily redeemable securities. During the three and nine months ended September 30, 2003, we recognized net losses of $0.7 million and $6.4 million, respectively, primarily prepayment penalties related to the extinguishment of debt not associated with discontinued operations prior to scheduled maturity. As discussed in note 3, we agreed to pay interest on the extraordinary dividend and interest and penalties associated with other tax related matters.. The other amount for the nine months ended September 30, 2003 consists primarily of a fee of $3.8 million that we earned on the facilitation of a real estate transaction between two parties that are unrelated to us. 22 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued (10) NET GAINS ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES Net gains on dispositions of interests in operating properties included in earnings (loss) from continuing operations are summarized as follows (in thousands):
Three months Nine months ended September 30, ended September 30, ------------------------------- -------------------------------- 2004 2003 2004 2003 -------------- -------------- -------------- -------------- Regional retail centers..................... $ --- $ --- $ --- $ 21,561 Office and other properties................. --- --- 14,096 --- Other....................................... 166 272 (42) 515 -------------- -------------- -------------- -------------- Total.............................. $ 166 $ 272 $ 14,054 $ 22,076 ============== ============== ============== ==============
In 2000, we contributed our ownership interests in 37 buildings in two industrial parks to a joint venture in exchange for cash and a minority interest in the venture. We also guaranteed $44.0 million of indebtedness of the venture and, because of the nature of our continuing involvement in the venture, deferred gains of approximately $14.4 million. In June 2004, we redeemed our interest in the venture and terminated our guarantee of its indebtedness. Accordingly, we recognized the previously deferred gain of $14.4 million (net of deferred income taxes of approximately $1.7 million). In April 2004, we sold most of our interest in Westin New York, a hotel in New York City, for net proceeds of $15.8 million and recognized a gain of $1.4 million (net of deferred income taxes of $0.8 million). In 2003, in a transaction related to the sale of retail centers in the Philadelphia metropolitan area (see note 3), we acquired Christiana Mall from a party related to the purchaser and assumed a participating mortgage secured by Christiana Mall. The participating mortgage had a fair value of $160.9 million. The holder of this mortgage had the right to receive $120 million in cash and participation in cash flows and the right to convert this participation feature into a 50% equity interest in Christiana Mall. The holder exercised this right in June 2003. We recorded a portion of the cost of Christiana Mall based on the historical cost of the properties we exchanged to acquire this property because a portion of the transaction was considered nonmonetary under EITF Issue 01-2, "Interpretations of APB Opinion No. 29." As a consequence, when we subsequently disposed of the 50% interest in the property, we recognized a gain of $21.6 million. (11) PREFERRED STOCK The shares of Series B Convertible Preferred stock had a liquidation preference of $50 per share and earned dividends at an annual rate of 6% of the liquidation preference. At the option of the holders, each share of the Series B Convertible Preferred stock was convertible into shares of our common stock at a conversion price of $38.125 per share (equivalent to a conversion rate of approximately 1.311 shares of common stock for each share of Preferred stock). The conversion price was subject to adjustment in certain circumstances such as stock dividends, stock splits, rights offerings, mergers and similar transactions. In addition, these shares of Preferred stock were redeemable for shares of common stock at our option, subject to certain conditions related to the market price of our common stock. There were 4,047,555 shares of Preferred stock issued and outstanding at December 31, 2003. On January 7, 2004, we called for the redemption of all outstanding shares of the Series B Convertible Preferred stock pursuant to the terms of its issuance and established February 10, 2004 as the redemption date. In the first quarter of 2004, we issued 5,308,199 shares of common stock upon conversion or redemption of all of the outstanding shares of Series B Convertible Preferred stock. 23 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued (12) EARNINGS (LOSS) PER SHARE Information relating to the calculations of earnings (loss) per share ("EPS") of common stock for the three months ended September 30, 2004 and 2003 is summarized as follows (in thousands):
2004 2003 --------------------- --------------------- Basic Diluted Basic Diluted --------- --------- --------- --------- Earnings (loss) from continuing operations...................... $ (24,792) $ (24,792) $ 42,249 $ 42,249 Dividends on unvested common stock awards and other.................................................... (164) (164) (163) (91) Dividends on Series B Convertible Preferred stock............... --- --- (3,038) (3,038) --------- --------- --------- --------- Adjusted earnings (loss) from continuing operations used in EPS computation.............................................. $ (24,956) $ (24,956) $ 39,048 $ 39,120 ========= ========= ========= ========= Weighted-average shares outstanding............................. 103,153 103,153 89,117 89,117 Dilutive securities: Options, unvested common stock awards and other.............. --- --- --- 2,732 --------- --------- --------- --------- Adjusted weighted-average shares used in EPS computation.................................................. 103,153 103,153 89,117 91,849 ========= ========= ========= =========
Information relating to the calculations of earnings (loss) per share ("EPS") of common stock for the nine months ended September 30, 2004 and 2003 is summarized as follows (in thousands):
2004 2003 --------------------- --------------------- Basic Diluted Basic Diluted --------- --------- --------- --------- Earnings from continuing operations............................. $ 58,634 $ 58,634 $ 101,268 $ 101,268 Dividends on unvested common stock awards and other.................................................... (499) (499) (506) (506) Dividends on Series B Convertible Preferred stock............... --- --- (9,114) (9,114) --------- --------- --------- --------- Adjusted earnings from continuing operations used in EPS computation.............................................. $ 58,135 $ 58,135 $ 91,648 $ 91,648 ========= ========= ========= ========= Weighted-average shares outstanding............................. 101,188 101,188 87,841 87,841 Dilutive securities: Options, unvested common stock awards and other.............. --- 2,149 --- 2,132 Series B Convertible Preferred stock......................... --- 623 --- --- --------- --------- --------- --------- Adjusted weighted-average shares used in EPS computation.................................................. 101,188 103,960 87,841 89,973 ========= ========= ========= =========
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. 24 Part I. Financial Information Item 1. Financial Statements. THE ROUSE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), continued (13) COMMITMENTS AND CONTINGENCIES Other commitments and contingencies (that are not reflected in the condensed consolidated balance sheets) at September 30, 2004 and December 31, 2003 are summarized as follows (in millions):
September 30, December 31, 2004 2003 ------------- ------------ Guarantee of debt of unconsolidated real estate ventures: Village of Merrick Park.................................................................. $ 100.0 $ 100.0 Hughes Airport-Cheyenne Centers.......................................................... --- 28.8 Construction contracts for properties in development: Consolidated subsidiaries, primarily related to Fashion Show and The Shops at La Cantera.......................................................................... 136.0 103.1 Our share of unconsolidated real estate ventures, primarily related to the Village of Merrick Park and the venture developing The Woodlands............................ 9.4 9.5 Contract to purchase Oxmoor Center.......................................................... 118.0 --- Contract to purchase an interest in Mizner Park............................................. --- 18.0 Construction contracts for land development: Consolidated subsidiaries, primarily Columbia and Summerlin operations................... 84.3 83.1 Our share of the unconsolidated venture developing The Woodlands......................... 26.2 --- Our share of long-term ground lease obligations of unconsolidated real estate ventures...... 120.3 121.1 Bank letters of credit and other............................................................ 16.1 14.9 ------------- ------------ $ 610.3 $ 478.5 ============= ============
We have guaranteed up to $100 million for the repayment of a mortgage loan of the unconsolidated real estate venture that owns the Village of Merrick Park. The amount of the guarantee may be reduced or eliminated upon the achievement of certain lender requirements. The fair value of the guarantee is not material. Additionally, venture partners have provided guarantees to us for their share (60%) of the loan guarantee. In August 2004, we agreed to purchase Oxmoor Center, a regional retail center in Louisville, Kentucky. This transaction closed in November 2004.We expect to assumed mortgage debt with a face value of approximately $60 million and paid $58 million in cash to the seller, using the proceeds of borrowings under our credit facility. We determined that several of our consolidated partnerships are limited-life entities. We estimate the fair values of minority interests in these partnerships at September 30, 2004 aggregated approximately $63.8 million. The aggregate carrying values of the minority interests were approximately $29.8 million at September 30, 2004. We and certain of our 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. We are also aware of claims arising from disputes in the ordinary course of business or related to our agreement to be acquired by GGP. We record provisions for litigation matters and other claims when we believe a loss is probable and can be reasonably estimated. We continuously monitor these claims and adjust recorded liabilities as developments warrant. We further believe that any losses we may suffer for litigation and other claims in excess of the recorded aggregate liabilities are not material. Accordingly, in our opinion, adequate provision has been made for losses with respect to litigation matters and other claims, and the ultimate resolution of these matters is not likely to have a material effect on our consolidated financial position or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments. 25 -----END PRIVACY-ENHANCED MESSAGE-----