Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-1743
The Rouse Company
(Exact name of registrant as specified in its charter)
Maryland 52-0735512
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10275 Little Patuxent Parkway
Columbia, Maryland 21044-3456
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 992-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of the issuer's common stock as
of November 12, 1996:
Common Stock, $0.01 par value 66,725,919
Title of Class Number of Shares
Part I. Financial Information
Item 1. Financial Statements:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1996 and 1995
(Unaudited, in thousands except per share amounts, note 1)
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
Revenues:
Operating properties:
Retail centers $127,894 $123,202 $369,650 $360,502
Office, mixed-use and other 51,639 36,959 128,086 109,432
179,533 160,161 497,736 469,934
Land sales 47,384 8,519 79,847 23,550
Corporate interest income 758 485 2,290 1,832
227,675 169,165 579,873 495,316
Operating expenses, exclusive of
provision for bad debts,
depreciation and amortization:
Operating properties:
Retail centers 65,928 62,456 189,343 183,042
Office, mixed-use and other 24,346 17,160 60,624 52,006
90,274 79,616 249,967 235,048
Land sales 41,054 4,542 62,704 12,573
Development 2,019 605 3,716 4,110
Corporate 1,608 1,452 5,732 5,972
134,955 86,215 322,119 257,703
Interest expense:
Operating properties:
Retail centers 33,172 32,863 95,716 95,326
Office, mixed-use and other 21,248 17,272 55,514 51,745
54,420 50,135 151,230 147,071
Land sales 508 1,263 995 3,798
Development 95 88 265 271
Corporate 2,646 2,294 9,788 7,837
57,669 53,780 162,278 158,977
Provision for (recovery of)
bad debts 362 (236) 1,484 1,229
Depreciation and amortization 23,212 18,026 60,296 54,874
216,198 157,785 546,177 472,783
Gain (loss) on dispositions of
assets and other provisions,
net (note 6) (6,060) (5,638) (6,355) (14,118)
The accompanying notes are an integral part of these statements.
1
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations, continued
Three and Nine Months Ended September 30, 1996 and 1995
(Unaudited, in thousands except per share amounts, note 1)
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
Earnings before income
taxes and extraordinary losses $ 5,417 $ 5,742 $27,341 $ 8,415
Income tax provision:
Current - primarily state 155 184 505 429
Deferred 7,718 2,389 16,241 4,047
7,873 2,573 16,746 4,476
Earnings (loss) before
extraordinary losses (2,456) 3,169 10,595 3,939
Extraordinary losses from
extinguishments of debt, net
of related income tax benefits
(note 7) (46) (137) (1,361) (7,354)
Net earnings (loss) $(2,502) $ 3,032 $ 9,234 $ (3,415)
Net earnings (loss) applicable
to common shareholders $(5,714) $ (628) $(1,299) $(14,396)
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK AFTER PROVISION
FOR DIVIDENDS ON PREFERRED
STOCK:
Earnings (loss) before
extraordinary losses $ (.10) $ (.01) $ -- $ (.15)
Extraordinary losses, net -- -- (.03) (.15)
$ (.10) $ (.01) $ (.03) $ (.30)
DIVIDENDS PER SHARE:
Common stock $ .22 $ .20 $ .66 $ .60
Preferred stock $ .81 $ .81 $ 2.43 $ 2.43
The accompanying notes are an integral part of these statements.
2
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
(Unaudited, in thousands, note 1)
September 30, December 31,
1996 1995
Assets:
Property (note 3):
Operating properties:
Property and deferred costs of projects $3,427,889 $3,006,356
Less accumulated depreciation
and amortization 555,606 519,319
2,872,283 2,487,037
Properties in development 142,530 56,151
Properties held for sale 30,431 22,602
Land held for development and sale 232,692 134,168
Total property 3,277,936 2,699,958
Prepaid expenses, deferred charges
and other assets 187,193 151,068
Accounts and notes receivable 89,343 36,751
Investments in marketable securities 3,690 2,910
Cash and cash equivalents 57,763 94,922
Total $3,615,925 $2,985,609
The accompanying notes are an integral part of these statements.
3
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets, continued
September 30, 1996 and December 31, 1995
(Unaudited, in thousands, note 1)
September 30, December 31,
1996 1995
Liabilities:
Debt (note 4):
Property debt not carrying a Parent
Company guarantee of repayment $2,279,641 $1,990,041
Parent Company debt and debt carrying a
Parent Company guarantee of repayment:
Property debt 162,361 138,488
Convertible subordinated debentures 130,000 130,000
Other debt 296,500 221,000
588,861 489,488
Total debt 2,868,502 2,479,529
Obligations under capital leases 58,166 58,786
Accounts payable, accrued expenses
and other liabilities 240,323 185,561
Deferred income taxes 125,489 81,649
Company-obligated mandatorily redeemable
preferred securities of a trust holding
solely Parent Company subordinated debt
securities 137,500 137,500
Shareholders' equity:
Series A Convertible Preferred stock
with a liquidation preference of
$0 in 1996 and $225,250 in 1995 (note 5) -- 45
Common stock of 1 cent par value per share;
250,000,000 shares authorized; 66,692,721
shares issued in 1996 and 47,922,749
shares issued in 1995 667 479
Additional paid-in capital 490,160 309,943
Accumulated deficit (304,882) (267,883)
Total shareholders' equity 185,945 42,584
Total $3,615,925 $2,985,609
The accompanying notes are an integral part of these statements.
4
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
(Unaudited, in thousands, note 1)
1996 1995
Cash flows from operating activities:
Rents and other revenues received $ 490,120 $ 463,544
Proceeds from land sales 77,685 23,715
Interest received 8,556 7,599
Land development expenditures (32,327) (13,248)
Operating expenditures:
Operating properties (265,727) (229,114)
Land sales, development and corporate (19,910) (14,104)
Interest paid:
Operating properties (154,416) (156,688)
Land sales, development and corporate (12,917) (12,179)
Net cash provided by operating activities 91,064 69,525
Cash flows from investing activities:
Expenditures for acquisition of The Hughes
Corporation (net of acquired cash) (35,872) --
Expenditures for properties in development
and improvements to existing properties
funded by debt (67,024) (52,711)
Expenditures for property acquisitions (2,724) (27,767)
Expenditures for improvements to
existing properties funded by cash
provided by operating activities:
Tenant leasing and remerchandising (5,482) (6,696)
Building and equipment (7,448) (2,711)
Proceeds from sales of operating properties 6,299 --
Purchases of marketable securities (7,064) (4,626)
Proceeds from redemptions or sales of
marketable securities 8,447 29,238
Other 183 1,186
Net cash used in investing activities (110,685) (64,087)
Cash flows from financing activities:
Proceeds from issuance of property debt 172,476 170,643
Repayments of property debt:
Scheduled principal payments (28,885) (27,268)
Other payments (182,407) (251,327)
Proceeds from issuance of other debt 90,400 124,947
Repayments of other debt (16,303) (8,079)
Purchases of treasury stock (5,247) --
Proceeds from exercise of stock options 599 2,138
Dividends paid (46,233) (39,687)
Other (1,938) --
Net cash used in financing activities (17,538) (28,633)
Net decrease in cash and cash equivalents (37,159) (23,195)
Cash and cash equivalents at beginning of period 94,922 49,398
Cash and cash equivalents at end of period $ 57,763 $ 26,203
The accompanying notes are an integral part of these statements.
5
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Nine Months Ended September 30, 1996 and 1995
(Unaudited, in thousands, note 1)
1996 1995
Reconciliation of net earnings (loss) to net cash
provided by operating activities:
Net earnings (loss) $ 9,234 $ (3,415)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 60,296 54,874
(Gain) loss on dispositions of assets
and other provisions, net 6,355 14,118
Deferred income tax provision 16,241 4,047
Extraordinary losses, net of related income
tax benefits 1,361 7,354
Additions to pre-construction reserve 2,200 1,800
Provision for bad debts 1,484 1,229
Increase in operating assets and
liabilities, net (6,107) (10,482)
Net cash provided by operating activities $ 91,064 $ 69,525
Schedule of Non-Cash Investing and Financing
Activities:
Debt and other liabilities assumed in acquisition
of The Hughes Corporation, net (note 2) $354,577 $ --
Common stock issued in acquisition of
The Hughes Corporation (note 2) 178,086 --
Common stock issued pursuant to Contingent Stock
Agreement (note 2) 5,025 --
Mortgage debt extinguished on disposition of
an interest in an operating property -- (20,779)
Mortgage debt assumed by purchasers of land (10,412) --
Mortgage debt assumed on acquisitions of
interests in properties 21,090 6,175
Notes received from sales of operating
properties 8,440 --
Notes received from sales of land 16,500 --
Value of non-cash consideration given in
connection with acquisitions of interests in
properties 13,520 79,811
The accompanying notes are an integral part of these statements.
6
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 1996
(1) Principles of statement presentation
The unaudited consolidated financial statements include all
adjustments which are necessary, in the opinion of management, to
fairly reflect the Company's financial position and results of
operations. All such adjustments are of a normal recurring nature.
The statements have been prepared using the accounting policies
described in the 1995 Annual Report to Shareholders, except that,
effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Statement No. 121 establishes new standards for measurement and
recognition of impairment of long-lived assets. Initial adoption had
no effect on the financial position or results of operations reported
by the Company.
In its annual reports, the Company has included certain supplementary
current value basis financial statements with the historical cost
basis financial statements. The current value basis financial
statements are an integral part of the Company's formal, year-end
reporting, but they are not included in quarterly reports to
shareholders. Therefore, all of the financial information contained
herein is based on the historical cost basis as required by generally
accepted accounting principles.
(2) Acquisition of The Hughes Corporation and Related Matters
On June 12, 1996, the Company acquired all of the outstanding equity
interests in The Hughes Corporation and its affiliated partnership,
Howard Hughes Properties, Limited Partnership (together, "Hughes").
In connection with the acquisition, the Company issued 7,742,884
shares of common stock valued at $178,086,000 and incurred or assumed
debt and other liabilities of $354,577,000 (net of certain
receivables and other assets acquired). Additional shares of common
stock (or, in certain circumstances, Increasing Rate Preferred Stock)
may be issued to the former Hughes owners or their successors
pursuant to terms of a Contingent Stock Agreement based on the values
of certain specified assets at various "termination" dates from 2000
to 2009 and cash flows generated from the development and/or sale of
those assets prior to the "termination" dates. The acquisition was
accounted for using the purchase method. The total purchase cost
approximated the aggregate fair value of the assets acquired which
consist primarily of a regional shopping center and a large-scale,
master-planned community in Las Vegas, Nevada, and four large-scale,
master-planned business parks and various other properties in Nevada
and Southern California.
7
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(2) Acquisition of The Hughes Corporation and Related Matters, continued
The consolidated statements of operations for the three and nine months
ended September 30, 1996 include revenues and costs and expenses from
the date of acquisition. The Company's pro forma consolidated
results of operations for the nine months ended September 30, 1996
and 1995, assuming the acquisition of Hughes occurred on January 1,
1995, are summarized as follows (in thousands, except per share
data):
1996 1995
Revenues $631,642 $688,892
Earnings before extraordinary losses 13,699 20,179
Net earnings 12,338 12,825
Earnings per share of common stock
after provision for dividends
on Preferred stock:
Earnings before extraordinary
losses .06 .17
Net earnings $ .03 $ .03
The pro forma revenues and earnings summarized above are not
necessarily indicative of the results that would have occurred if the
acquisition had been consummated on January 1, 1995 or of future
results of operations of the combined companies.
(3) Property
Properties in development include construction and development in
progress and pre-construction costs, net. The construction and
development in progress accounts include land and land improvements
of $25,483,000 at September 30, 1996.
Changes in pre-construction costs, net, for the nine months ended
September 30, 1996 are summarized as follows (in thousands):
Balance at beginning of period, before
pre-construction reserve $ 21,463
Costs incurred 15,579
Costs transferred to construction and development
in progress (16,742)
Costs transferred to operating properties (435)
Costs of unsuccessful projects written off (917)
18,948
Less pre-construction reserve 16,662
Balance at end of period, net $ 2,286
8
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(4) Debt
Debt at September 30, 1996 and December 31, 1995 is summarized as
follows (in thousands):
September 30, 1996 December 31, 1995
Due in Due in
Total one year Total one year
Mortgages and bonds $2,211,308 $114,966 $1,997,998 $102,428
Convertible subordi-
nated debentures 130,000 -- 130,000 --
Medium-term notes 115,300 5,000 100,300 5,000
Other loans 411,894 3,131 251,231 3,001
Total $2,868,502 $123,097 $2,479,529 $110,429
The amounts due in one year reflect the terms of existing loan
agreements except where refinancing commitments from outside lenders
have been obtained. In those instances, maturities are determined
based on the terms of the refinancing commitments. At September 30,
1996, approximately $63,147,000 of debt due in one year relates to
balloon payments on three retail center mortgages due in the second
quarter of 1997 and $11,934,000 relates to a balloon payment on an
office building mortgage due in the third quarter of 1997. The
Company expects to refinance these loans on a long-term basis or
extend their terms at or prior to their scheduled maturities.
(5) Series A Convertible Preferred stock
The Company has authorized issuance of 50,000,000 shares of Preferred
stock of 1 cent par value per share of which 4,505,168 shares have
been classified as Series A Convertible Preferred. On September 30,
1996, 4,497,459 shares of Series A Convertible Preferred stock were
converted into 10,582,000 shares of common stock. If the conversion
had occurred on January 1, 1995, pro forma earnings (loss) per share
of common stock for the nine months ended September 30, 1996 and 1995
would have been $.14 and $(.06), respectively. At September 30, 1996
and December 31, 1995, there were 7,550 and 4,505,009 shares
outstanding, respectively.
(6) Gain (loss) on dispositions of assets and other provisions, net
The loss in 1996 relates to provisions for losses on two retail
centers the Company has decided to sell ($15,071,000). These
provisions were based on the estimated fair values of the properties
less costs to sell. These losses were partially offset by a gain
from the reversal of a portion (approximately $9,000,000) of the
provision for the litigation matter discussed in note 8.
9
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, (Unaudited), continued
(6) Gain (loss) on dispositions of assets and other provisions, net
(continued)
The loss in 1995 relates primarily to provisions for losses on several
retail centers the Company decided to sell ($16,058,000). These
provisions were based on the estimated fair values of the properties
less costs to sell. These losses were partially offset by a gain on
the disposition of a retail center property ($1,940,000).
(7) Extraordinary losses, net of related income tax benefits
During the nine months ended September 30, 1996 and 1995, the Company
incurred extraordinary losses related to extinguishments of debt
prior to scheduled maturity of $2,094,000 and $11,314,000,
respectively, net of related income tax benefits of $733,000 and
$3,960,000, respectively.
(8) Contingencies
On November 6, 1990, Robert P. Guastella Equities, Inc. ("Plaintiff"),
a former tenant at the Riverwalk Shopping Center in New Orleans,
Louisiana ("Riverwalk"), which is owned and operated by New Orleans
Riverwalk Associates, an affiliate of the Company ("NORA"), filed
suit in the Civil District Court of Orleans Parish, Louisiana against
NORA, the Company, two Company affiliates and a partner of NORA
(collectively, "Defendants"). Plaintiff alleges that Defendants
breached Plaintiff's lease agreement with NORA for the operation of a
restaurant at Riverwalk and that as a result of these breaches it
suffered losses and could not pay the rentals due under the lease
agreement, as a result of which the lease and its tenancy were
terminated by NORA. Plaintiff sought damages of approximately
$600,000 for these alleged breaches. In addition, on September 3,
1992, Plaintiff claimed $33,000,000 for alleged lost future profits
which it claimed it would have earned had its lease not been
terminated. The defendants filed answers denying the claims of
Plaintiff and asserted other defenses. NORA also asserted a
counterclaim against Plaintiff and its individual guarantors for past
due rentals and other charges in the approximate amount of $300,000
plus interest and attorneys' fees as provided for in the lease
agreement. The case was tried before a jury and, on October 28,
1993, the jury returned a verdict against Defendants upon which
judgment was entered by the trial court on January 7, 1994, in the
total net amount of approximately $9,128,000 (including a net award
for lost future profits of approximately $8,640,000) plus interest
and attorney's fees. On May 6, 1994, the trial court denied all
post-trial motions of both Plaintiff and Defendants. The trial court
also entered an amended judgment in which it awarded the Plaintiff
$450,000 in attorneys' fees and awarded Defendants $25,000 in
attorneys' fees.
10
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, (Unaudited), continued
(8) Contingencies, continued
On May 23, 1994, Defendants appealed this judgment to the Louisiana
Court of Appeal, Fourth Circuit. On November 16, 1995, the Louisiana
Court of Appeal reduced the judgment by $240,000, but otherwise
affirmed the damage award to Plaintiff. Defendants subsequently
filed a motion for reconsideration with the Louisiana Court of
Appeal, which was denied on December 19, 1995. On January 18, 1996,
Defendants filed a petition requesting the Louisiana Supreme Court to
consider a further appeal of this judgment. On April 8, 1996, the
Louisiana Supreme Court granted Defendants' petition. Subsequently,
the parties entered into settlement discussions which culminated in a
July 25, 1996 Settlement Agreement which dismissed all claims and
counterclaims with prejudice. The Company recorded in the fourth
quarter of 1995 a pre-tax provision of $12,321,000, representing the
full amount of the modified award (including attorneys' fees) plus
interest, less pre-tax provisions previously recorded totaling
$1,150,000. Additional provisions for interest totaling $295,000
were recorded in the six months ended June 30, 1996. The Company
satisfied its financial and other obligations under the Settlement
Agreement in July 1996 and reversed approximately $9,000,000 of the
previously recorded provision for loss on this matter in the third
quarter of 1996.
The Company and certain of its subsidiaries are defendants in various
other litigation matters arising in the ordinary course of business,
some of which involve claims for damages that are substantial in
amount. Some of these litigation matters are covered by insurance.
In the opinion of management, adequate provision has been made for
losses with respect to all litigation matters, where appropriate, and
the ultimate resolution of all such litigation matters is not likely
to have a material effect on the consolidated financial position of
the Company. Due to the Company's modest and fluctuating net
earnings (loss), it is not possible to predict whether the resolution
of these matters is likely to have a material effect on the Company's
consolidated net earnings (loss), and it is, therefore, possible that
the resolution of these matters could have such a material effect in
any future quarter or year.
11
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
THE ROUSE COMPANY AND SUBSIDIARIES
The following discussion and analysis covers any material changes in
financial condition since December 31, 1995 and any material changes in
the results of operations for the three and nine months ended September
30, 1996 as compared to the same periods in 1995. This discussion and
analysis should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in
the 1995 Annual Report to Shareholders.
General
On June 12, 1996, the Company purchased all of the outstanding equity
interests in The Hughes Corporation and its affiliated partnership,
Howard Hughes Properties, Limited Partnership (together, Hughes). The
assets of Hughes consist primarily of a regional shopping center and a
large-scale, master-planned community (Summerlin) in Las Vegas, Nevada,
and four large-scale, master-planned business parks and various other
properties in Nevada and Southern California. Management believes that
the acquisition of Hughes will enable the Company to capitalize on its
existing strengths in retail and office/mixed-use projects and large
scale land development projects in the fast-growing Las Vegas market.
For additional information about the acquisition of Hughes, see note 2
to the consolidated financial statements.
Management is continually reviewing and evaluating the portfolio of
properties to identify expansion, renovation and/or remerchandising
opportunities and properties that may not have future prospects
consistent with the Company's long-term objectives. The Company will
continue to dispose of properties that are not meeting and/or are not
considered to have the potential to meet its investment criteria,
particularly smaller properties in smaller market areas. While
disposition decisions may cause the Company to recognize gains or losses
that could have material effects on reported net earnings (loss) in
future quarters or fiscal years, they are not anticipated to have a
material effect on the overall consolidated financial position of the
Company.
Operating Results:
Operating Properties:
Revenues from retail centers increased $4,692,000 and $9,148,000 for the
three and nine months ended September 30, 1996, as compared to the same
periods in 1995. Total operating and interest expenses increased
$6,837,000 and $11,077,000, including increased depreciation and
amortization of $2,546,000 and $3,882,000, respectively, for the three
and nine months ended September 30, 1996 as compared to the same periods
in 1995. The increases in revenues and expenses for these periods are
attributable primarily to the net effect of changes in the Company's
portfolio of retail centers, including acquisitions of interests in four
properties (two in the third quarter of 1995, one in connection with the
acquisition of Hughes in the second quarter of 1996 and one in the third
quarter of 1996), the opening of an expansion in the first quarter of
12
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating Properties (continued):
1995 and sales of two properties in the first quarter of 1996.
Increases in effective rents on re-leased space, particularly in the
Company's larger centers in larger trade areas, also contributed to the
increases in revenues for these periods. The increases in revenues for
the periods were partially offset by the effects of slightly lower
overall average occupancy levels (88.2% and 88.3%, respectively, for the
three and nine months ended September 30, 1996, as compared to 91.0% and
90.6%, respectively, for the same periods in 1995) and decreases in
lease cancellation payments.
Revenues from office, mixed-use and other properties increased $14,680,000
and $18,654,000 for the three and nine months ended September 30, 1996,
as compared to the same periods in 1995. These increases are due
primarily to the acquisition of Hughes. Improved occupancy levels at
hotel and office properties contributed to the increases in each period;
however, the increase for the nine months ended September 30, 1996, was
partially offset by a decrease in lease termination payments from tenant
restructurings. Total operating and interest expenses increased
$13,888,000 and $13,676,000 for the three and nine months ended
September 30, 1996, as compared to the same periods in 1995. These
increases are also attributable primarily to the acquisition of Hughes
and were partially offset by the effects of a sale of an unoccupied
industrial building in the second quarter of 1996.
Land sales:
Revenues from land sales, excluding sales of land acquired in the purchase
of Hughes, decreased $3,630,000 and increased $6,627,000, and related
costs and expenses decreased $1,697,000 and increased $3,033,000, for
the three and nine months ended September 30, 1996 as compared to the
same periods in 1995. The decrease in revenues for the three month
period is attributable to lower levels of land sales in Columbia,
particularly for residential use. The increase in revenues for the nine
month period is attributable to higher levels of land sales in Columbia,
particularly for commercial use. The changes in related costs and
expenses are attributable primarily to changes in the cost of sales.
Revenues from sales of land acquired in the purchase of Hughes were
$42,495,000 and $49,670,000, and related costs and expenses were
$37,454,000 and $44,295,000, for the three and nine months ended
September 30, 1996. The cost of sales for land acquired in the purchase
of Hughes for the periods is relatively high as a percentage of revenues
as the land sold consists primarily of inventory on which development
was completed or in progress at the date of acquisition. Cost of sales
for land acquired in the purchase of Hughes is expected to be lower as a
percentage of revenues in future periods as the inventory of land on
which development was completed or in progress at the date of
acquisition is depleted.
13
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued):
Development:
These costs consist primarily of additions to the pre-construction reserve
and new business costs. The pre-construction reserve is maintained to
provide for costs of projects which may not go forward to completion.
New business costs relate primarily to the initial evaluation of
acquisition and development opportunities. These costs increased and
decreased $1,414,000 and $394,000 for the three and nine months ended
September 30, 1996 as compared to the same periods in 1995. The
increase in the three month period is attributable primarily to an
increase in additions to the pre-construction reserve due to the
Company's more active pursuit of retail center development
opportunities. The decrease in the nine month period is due primarily
to reduced new business costs as the Company's focus on the acquisition
of Hughes deferred evaluation of other opportunities, particularly
during the first half of 1996.
Corporate:
Corporate interest costs were $4,380,000 and $3,275,000 for the three
months ended September 30, 1996 and 1995, respectively, and $13,620,000
and $10,479,000 for the nine months ended September 30, 1996 and 1995,
respectively. Of such amounts, $1,734,000 and $981,000 were capitalized
during the three months ended September 30, 1996 and 1995, respectively,
and $3,832,000 and $2,642,000 were capitalized during the nine months
ended September 30, 1996 and 1995, respectively, on funds invested in
development projects. The increases in corporate interest costs are due
to higher levels of debt used for corporate purposes.
Gain (loss) on dispositions of assets and other provisions, net
The loss in 1996 relates to provisions for losses on two retail centers the
Company has decided to sell ($15,071,000). These provisions were based
on the estimated fair values of the properties less costs to sell.
These losses were partially offset by a gain from the reversal of a
portion (approximately $9,000,000) of the provision for the litigation
matter discussed in note 8 to the consolidated financial statements.
The loss in 1995 relates primarily to provisions for losses on several
retail centers the Company decided to sell ($16,058,000). These
provisions were based on the estimated fair values of the properties
less costs to sell. These losses were partially offset by a gain on the
disposition of a retail center property ($1,940,000).
Extraordinary losses, net of related income tax benefits
During the nine months ended September 30, 1996 and 1995, the Company
incurred extraordinary losses related to extinguishments of debt prior
to scheduled maturity of $2,094,000 and $11,314,000, respectively, net
of related income tax benefits of $733,000 and $3,960,000, respectively.
14
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Financial Condition and Liquidity:
Shareholders' equity increased by $143,361,000 from $42,584,000 at
December 31, 1995 to $185,945,000 at September 30, 1996. The increase
was due primarily to the value of shares of common stock issued in the
acquisition of Hughes ($178,086,000) and net earnings for the nine
months ended September 30, 1996, partially offset by the payment of
regular quarterly dividends on the Company's common and Preferred
stocks. On September 30, 1996 substantially all of the outstanding
shares of Series A Preferred stock were converted into 10,582,000 shares
of common stock. The conversion had no effect on shareholders' equity.
The Company had cash and cash equivalents and investments in marketable
securities totaling $61,453,000 and $97,832,000 at September 30, 1996
and December 31, 1995, respectively, including $3,690,000 and
$2,910,000, respectively, held for restricted uses.
The Company has lines of credit for up to $148,120,000 of which
$77,620,000 was available at September 30, 1996. These lines of credit
may be used to provide corporate liquidity, fund property acquisition
and development costs and finance other corporate needs, subject to
lenders' approvals. They may also be utilized to pay some portion of
existing debt, including maturities in 1996 and 1997. Howard Hughes
Properties, Limited Partnership (HHPLP), a wholly-owned by
the Company, has a line of credit for up to $100,000,000 of which
$4,000,000 was available at September 30, 1996. This line can be used
to fund certain development costs. In November, 1996, HHPLP refinanced
several office properties that had previously been financed on the
credit line and used the proceeds to repay the credit line, restoring
availability to $55,000,000. As of September 30, 1996, debt due in one
year was $123,097,000. Approximately $63,147,000 of this debt relates
to three retail center mortgages due in the second quarter of 1997, and
$11,934,000 relates to an office building mortgage due in the third
quarter of 1997. The Company expects to refinance these loans or extend
their terms at or prior to their scheduled maturities. The Company
continues to actively evaluate sources of capital and is confident that
it will be able to make these payments, arrange to refinance these
maturities prior to their scheduled repayment dates or obtain new
sources of capital without necessitating property sales.
Net cash provided by operating activities was $91,064,000 and $69,525,000
for the nine months ended September 30, 1996 and 1995, respectively.
The factors discussed previously under the operating results of the four
major business segments, particularly higher land sales revenues,
affected the level of net cash provided by operating activities.
Net cash used in investing activities was $110,685,000 and $64,087,000 for
the nine months ended September 30, 1996 and 1995, respectively. The
increase in net cash used of $46,598,000 was due primarily to the
acquisition of Hughes and lower net sales or redemptions of marketable
securities.
15
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
Financial Information and Liquidity (continued):
Net cash used in financing activities was $17,538,000 and $28,633,000 for
the nine months ended September 30, 1996 and 1995, respectively. The
decrease in net cash used of $11,095,000 is attributable primarily to
the use of lines of credit to fund the acquisition of Hughes and certain
project development costs partially offset by increases in dividends,
purchases of treasury stock and the use of financing proceeds received
in the fourth quarter of 1995 to repay certain higher rate property
debt.
Information relating to forward-looking statements:
This report on Form 10-Q of the Company includes forward-looking statements
which reflect the Company's current views with respect to future events
and financial performance. These forward-looking statements are subject
to certain risks and uncertainties, including those identified below,
which could cause actual results to differ materially from historical
results or those anticipated. The words "believe", "expect", "anticipate"
and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes
no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise. Readers are cautioned not to place undue reliance on these
forward-looking statements. The following factors could cause actual
results to differ materially from historical results or those
anticipated: (1) real estate investment risks; (2) development risks;
(3) illiquidity of real estate investments; (4) dependence on rental
income from real property; (5) effect of uninsured loss; (6) lack of
geographical diversification; (7) possible environmental liabilities;
(8) difficulties of compliance with the Americans with Disabilities Act;
(9) competition; (10) changes in the economic climate; and (11) factors
relating to the Hughes acquisition. For a more detailed discussion of
these factors, see Exhibit 99.2 of the Company's Form 10-K for the
fiscal year ended December 31, 1995.
16
Part II. Other Information
Item 1. Legal Proceedings
On November 6, 1990, Robert P. Guastella Equities, Inc. ("Plaintiff"), a
former tenant at the Riverwalk Shopping Center in New Orleans, Louisiana
("Riverwalk"), which is owned and operated by New Orleans Riverwalk
Associates, an affiliate of the Company ("NORA"), filed suit in the
Civil District Court of Orleans Parish, Louisiana against NORA, the
Company, two Company affiliates - Rouse-New Orleans, Inc. and New
Orleans Riverwalk Limited Partnership - and Connecticut General Life
Insurance Company, which is a general partner of NORA (collectively,
"Defendants"). Plaintiff alleged that Defendants breached Plaintiff's
lease agreement with NORA for the operation of a restaurant at Riverwalk
by (I) failing to prevent the leased premises from flooding, (ii)
refusing to permit entertainment on the leased premises, (iii)
interfering with the operation of air conditioning equipment on the
leased premises and (iv) failing to provide adequate security.
Plaintiff claimed that as a result of these breaches it suffered losses
and could not pay the rentals due under the lease agreement, as a result
of which the lease and its tenancy were terminated by NORA. Plaintiff
sought damages of approximately $600,000 for these alleged breaches. In
addition, on September 3, 1992, Plaintiff claimed $33,000,000 for
alleged lost future profits which it claimed it would have earned had
its lease not been terminated. All Defendants filed answers denying the
claims of Plaintiff and asserting other defenses. NORA also asserted a
counterclaim against Plaintiff and its guarantors, Robert Guastella and
Charles Kovacs, for past due rentals and other charges in the
approximate amount of $300,000 plus interest and attorneys' fees as
provided for in the lease agreement. The case was tried before a jury
and, on October 28, 1993, the jury returned a verdict against Defendants
upon which judgment was entered by the trial court on January 7, 1994,
in the total net amount of approximately $9,128,000 (which included a
net award for lost future profits of approximately $8,640,000) plus
interest from the date the suit was filed and attorneys' fees in an
amount to be determined. On May 6, 1994, the trial court denied all
post-trial motions of both Plaintiff and Defendants. The trial court
also entered an amended judgment in which it awarded Plaintiff $450,000
in attorneys' fees and awarded Defendants $25,000 in attorneys' fees.
On May 23, 1994, Defendants appealed this judgment to the Louisiana Court
of Appeal, Fourth Circuit. On November 16, 1995, the Louisiana Court of
Appeal in a 2 to 1 decision reduced the judgment by $240,000, but
otherwise affirmed the damage award to Plaintiff. Defendants
subsequently filed a motion for reconsideration with the Louisiana Court
of Appeal, which was denied on December 19, 1995, again in a 2 to 1
decision. On January 18, 1996, Defendants filed a petition requesting
the Louisiana Supreme Court to consider a further appeal of this
judgment. On April 8, 1996, the Louisiana Supreme Court granted
Defendants' petition. Subsequently, the parties entered into settlement
discussions which culminated in a July 25, 1996 Settlement Agreement
which dismissed all claims and counterclaims with prejudice. The
Company has satisfied its financial and other obligations under the
Settlement Agreement. For additional information about this suit, see
note 8 - Contingencies - to the consolidated financial statements.
17
Part II. Other Information
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K
None
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ROUSE COMPANY
Principal Financial Officer:
Date: November 14, 1996 By /s/Jeffrey H. Donahue
Jeffrey H. Donahue
Senior Vice President and
Chief Financial Officer
Principal Accounting Officer:
Date: November 14, 1996 By /s/George L. Yungmann
George L. Yungmann
Senior Vice President and
Controller
19
Exhibit Index
Exhibit Number Description
11 Statement re Computation of per
share earnings (loss)
20
THE ROUSE COMPANY AND SUBSIDIARIES
Computation of Fully Diluted Earnings (Loss) Per Share
(Unaudited, in thousands except per share amounts)
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
Earnings (loss) before
extraordinary losses $(2,456) $ 3,169 $10,595 $ 3,939
Add after-tax interest expense
applicable to convertible
subordinated debentures 1,215 1,215 3,644 3,644
Earnings (loss) before extra-
ordinary losses, as adjusted (1,241) 4,384 14,239 7,583
Extraordinary losses (46) (137) (1,361) (7,354)
Net earnings (loss), as adjusted $(1,287) $ 4,247 $12,878 $ 229
Shares:
Weighted average number of
common shares outstanding 57,292 47,868 51,760 47,779
Assuming conversion of
convertible Preferred stock 9,395 10,600 10,172 10,600
Assuming conversion of
convertible subordinated
debentures 4,542 4,542 4,542 4,542
Assuming exercise of options and
warrants reduced by the number
of shares which could have
been purchased with the
proceeds from the exercise of
such options 800 376 800 376
Weighted average number of shares
outstanding, as adjusted 72,029 63,386 67,274 63,297
Earnings (loss) per common share
assuming full dilution:
Earnings (loss) before extra-
ordinary losses, as adjusted $ (.02) $ .07 $ .21 $ .12
Extraordinary losses -- -- (.02) (.12)
Net earnings (loss), adjusted $ (.02) $ .07 $ .19 $ --
This calculation is submitted in accordance with Regulation S-K item 601
(b) (11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule is included to comply with the requirements of
Item 601 (c) (2) of Regulations S-K and S-B. This schedule contains summary
financial information extracted from Form 10-Q for the quarterly period ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> $ 57,763
<SECURITIES> $ 3,690
<RECEIVABLES> $ 116,221
<ALLOWANCES> $ (26,877)
<INVENTORY> 0
<CURRENT-ASSETS> $ 188,288<F1>
<PP&E> $ 3,427,889
<DEPRECIATION> $ (555,606)
<TOTAL-ASSETS> $ 3,615,925
<CURRENT-LIABILITIES> $ 363,420<F2>
<BONDS> $ 2,868,502
<COMMON> $ 667
0
$ 0
<OTHER-SE> $ 185,278
<TOTAL-LIABILITY-AND-EQUITY> $ 3,615,925
<SALES> $ 579,873
<TOTAL-REVENUES> $ 579,873
<CGS> 0
<TOTAL-COSTS> $ 382,415
<OTHER-EXPENSES> $ 6,355
<LOSS-PROVISION> $ 1,484
<INTEREST-EXPENSE> $ 162,278
<INCOME-PRETAX> $ 27,341
<INCOME-TAX> $ 16,746
<INCOME-CONTINUING> $ 10,595
<DISCONTINUED> 0
<EXTRAORDINARY> $ (1,361)
<CHANGES> 0
<NET-INCOME> $ 9,234
<EPS-PRIMARY> $ (.03)
<EPS-DILUTED> $ .19
<FN>
<F1>Current assets include cash, unrestricted marketable securities, current
portion of accounts and notes receivable and prepaid expenses and deposits.
<F2>Current liabilities include the current portion of long-term debt and
accounts payable, accrued expenses and other liabilities.
</FN>
</TABLE>
