Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
August 13, 1996:
Common Stock, $0.01 par value 57,381,102
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 Six Months Ended June 30, 1996 and 1995
(Unaudited, in thousands except per share amounts, note 1)
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
Revenues:
Operating properties:
Retail centers $122,966 $121,537 $241,756 $237,300
Office, mixed-use and other 40,579 37,298 76,447 72,473
163,545 158,835 318,203 309,773
Land sales 14,802 4,240 32,463 15,031
Corporate interest income 703 561 1,532 1,347
179,050 163,636 352,198 326,151
Operating expenses, exclusive of
provision for bad debts,
depreciation and amortization:
Operating properties:
Retail centers 62,533 61,168 123,415 120,586
Office, mixed-use and other 19,011 17,492 36,278 34,846
81,544 78,660 159,693 155,432
Land sales 12,206 2,553 21,650 8,031
Development 482 1,601 1,697 3,505
Corporate 2,098 2,422 4,124 4,520
96,330 85,236 187,164 171,488
Interest expense:
Operating properties:
Retail centers 31,312 31,563 62,544 62,463
Office, mixed-use and other 17,195 17,162 34,266 34,473
48,507 48,725 96,810 96,936
Land sales 237 1,249 487 2,535
Development 95 89 170 183
Corporate 3,519 2,837 7,142 5,543
52,358 52,900 104,609 105,197
Provision for bad debts 501 705 1,122 1,465
Depreciation and amortization 18,800 18,296 37,084 36,848
167,989 157,137 329,979 314,998
Gain (loss) on dispositions of
assets and other provisions,
net (note 6) (295) (3,624) (295) (8,480)
1
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations, continued
Three and Six Months Ended June 30, 1996 and 1995
(Unaudited, in thousands except per share amounts, note 1)
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
Earnings before income
taxes and extraordinary losses $10,766 $ 2,875 $ 21,924 $ 2,673
Income taxes
Current - primarily state 171 132 350 245
Deferred 4,287 1,340 8,523 1,658
4,458 1,472 8,873 1,903
Earnings before
extraordinary losses 6,308 1,403 13,051 770
Extraordinary losses from
extinguishments of debt, net
of related income tax benefits
(note 7) -- -- (1,315) (7,217)
Net earnings (loss) $ 6,308 $ 1,403 $ 11,736 $ (6,447)
Net earnings (loss) applicable
to common shareholders $ 2,647 $(2,258) $ 4,415 $(13,768)
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK AFTER PROVISION
FOR DIVIDENDS ON PREFERRED
STOCK:
Earnings (loss) before
extraordinary losses $ .05 $ (.05) $ .11 $ (.14)
Extraordinary losses -- -- (.02) (.15)
$ .05 $ (.05) $ .09 $ (.29)
DIVIDENDS PER SHARE:
Common stock $ .22 $ .20 $ .44 $ .40
Preferred stock $ .81 $ .81 $ 1.62 $ 1.62
2
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
(Unaudited, in thousands, note 1)
June 30, December 31,
1996 1995
Assets:
Property (note 3):
Operating properties:
Property and deferred costs of projects $3,416,850 $3,006,356
Less accumulated depreciation
and amortization 547,477 519,319
2,869,373 2,487,037
Properties in development 122,670 56,151
Properties held for sale 9,634 22,602
Land held for development and sale 232,647 134,168
Total property 3,234,324 2,699,958
Prepaid expenses, deferred charges
and other assets 188,633 151,068
Accounts and notes receivable 69,414 36,751
Investments in marketable securities 3,585 2,910
Cash and cash equivalents 27,094 94,922
Total $3,523,050 $2,985,609
3
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets, continued
June 30, 1996 and December 31, 1995
(Unaudited, in thousands, note 1)
June 30, December 31,
1996 1995
Liabilities:
Debt (note 4):
Property debt not carrying a Parent
Company guarantee of repayment $2,233,987 $1,990,041
Parent Company debt and debt carrying a
Parent Company guarantee of repayment:
Property debt 138,810 138,488
Convertible subordinated debentures 130,000 130,000
Other debt 258,500 221,000
527,310 489,488
Total debt 2,761,297 2,479,529
Obligations under capital leases 58,516 58,786
Accounts payable, accrued expenses
and other liabilities 246,806 185,561
Deferred income taxes 117,289 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
$213,760 in 1996 and $225,250 in 1995
(note 5) 43 45
Common stock of 1 cent par value per share;
250,000,000 shares authorized; 56,626,595
shares issued in 1996 and 47,922,749
shares issued in 1995 566 479
Additional paid-in capital 487,562 309,943
Accumulated deficit (286,529) (267,883)
Total shareholders' equity 201,642 42,584
Total $3,523,050 $2,985,609
4
Part 1. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995
(Unaudited, in thousands, note 1)
1996 1995
Cash flows from operating activities:
Rents and other revenues received $315,046 $310,162
Proceeds from land sales 30,221 15,137
Interest received 5,643 5,273
Land development expenditures (8,455) (7,000)
Operating expenditures:
Operating properties (156,628) (147,013)
Land sales, development and corporate (12,206) (13,788)
Interest paid:
Operating properties (101,159) (104,497)
Land sales, development and corporate (3,332) (4,797)
Net cash provided by operating activities 69,130 53,477
Cash flows from investing activities:
Expenditures for properties in development
and improvements to existing properties
funded by debt (32,065) (31,405)
Expenditures for acquisition of The
Hughes Corporation (net of acquired cash) (29,731) --
Expenditures for improvements to
existing properties funded by cash
provided by operating activities:
Tenant leasing and re-merchandising (3,809) (3,612)
Building and equipment (3,994) (2,078)
Proceeds from sales of operating properties 6,388 --
Purchases of marketable securities (3,912) (2,838)
Proceeds from redemptions or sales of
marketable securities 3,237 25,278
Other 652 (2,054)
Net cash used in investing activities (63,234) (16,709)
Cash flows from financing activities:
Proceeds from issuance of property debt 80,802 119,030
Repayments of property debt:
Scheduled principal payments (17,378) (17,900)
Other payments (141,070) (212,222)
Proceeds from issuance of other debt 52,400 99,582
Repayments of other debt (16,057) (8,955)
Proceeds from exercise of stock options 112 727
Dividends paid (30,381) (26,444)
Other (2,152) --
Net cash used in financing activities (73,724) (46,182)
Net decrease in cash and cash equivalents (67,828) (9,414)
Cash and cash equivalents at beginning of period 94,922 49,398
Cash and cash equivalents at end of period $ 27,094 $ 39,984
5
Part 1. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Six Months Ended June 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) $ 11,736 $ (6,447)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 37,084 36,848
(Gain) loss on dispositions of assets
and other provisions, net 295 8,480
Deferred income taxes 8,523 1,658
Extraordinary losses, net of related income
tax benefits 1,315 7,217
Additions to pre-construction reserve 1,000 1,800
Provision for bad debts 1,122 1,465
Decrease in operating assets and
liabilities, net 8,055 2,456
Net cash provided by operating activities $ 69,130 $ 53,477
Schedule of Non-Cash Investing and Financing
Activities:
Debt and other liabilities assumed in acquisition
of The Hughes Corporation, net (note 2) $ 378,008 $ --
Common stock issued in acquisition of
The Hughes Corporation (note 2) 176,400 --
Mortgage debt extinguished on disposition of
an interest in an operating property -- (20,779)
Notes received from sales of operating properties 8,440 --
6
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 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 have been and will continue to be 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 $176,400,000 and incurred or assumed
debt and other liabilities of $378,008,000 (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 (Summerlin) in Las Vegas, Nevada, 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 six months
ended June 30, 1996 include revenues and costs and expenses from the
date of acquisition. The Company's pro forma consolidated results of
operations for the six months ended June 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 $403,967 $479,596
Earnings before extraordinary losses 14,297 16,931
Net earnings 12,982 9,714
Earnings per share of common
stock after provision for dividends
on Preferred stock:
Earnings before extraordinary losses .02 .17
Net earnings .02 .04
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 at 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 $18,099,000 at June 30, 1996.
Changes in pre-construction costs, net, for the six months ended
June 30, 1996 are summarized as follows (in thousands):
Balance at beginning of period, before
pre-construction reserve $21,463
Costs incurred 12,818
Costs transferred to construction and development
in progress (14,652)
Costs transferred to operating properties (339)
Costs of unsuccessful projects written off (390)
18,900
Less pre-construction reserve 15,989
Balance at end of period, net $2,911
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 June 30, 1996 and December 31, 1995 is summarized as
follows (in thousands):
June 30, 1996 December 31, 1995
Due in Due in
Total one year Total one year
Mortgages and bonds $2,177,292 $ 99,092 $1,997,998 $102,428
Convertible sub-
ordinated debentures 130,000 -- 130,000 --
Medium-term notes 115,300 5,000 100,300 5,000
Other loans 338,705 10,954 251,231 3,001
Total $2,761,297 $115,046 $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 June 30, 1996,
approximately $58,250,000 of debt due in one year relates to two
retail center mortgages due in April 1997. The Company expects to
refinance these mortgages on a long-term basis at or prior to their
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. At June 30, 1996
and December 31, 1995, there were 4,275,209 and 4,505,009 shares
outstanding, respectively.
(6) Gain (loss) on dispositions of assets and other provisions, net
The loss in 1996 relates primarily to an additional provision for
costs associated with the litigation matter discussed in note 8.
The loss in 1995 relates primarily to provisions for losses on several
retail centers the Company decided to sell. 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 six months ended June 30, 1996 and 1995, the Company
incurred extraordinary losses related to extinguishments of debt prior
to scheduled maturity of $2,023,000 and $11,103,000, respectively,
net of related income tax benefits of $708,000 and $3,886,000,
respectively.
9
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements, (Unaudited), continued
(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.
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
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
Agreement in July 1996 and will reverse approximately $9,100,000 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 six months ended June 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,
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 significant effects on reported net earnings (loss) in
future quarters or fiscal years, they are not anticipated to have a
material effect on the consolidated financial position of the Company.
Operating Results:
Operating Properties:
Revenues from retail centers increased $1,429,000 and $4,456,000 and total
operating and interest expenses increased $2,226,000 and $4,240,000 for
the three and six months ended June 30, 1996 as compared to the same
periods in 1995. The increases in revenues are attributable primarily
to the operations of two properties that the Company acquired interests
in during the third quarter of 1995, higher rents on re-leased space,
the operations of a retail center expansion which opened in the first
quarter of 1995 and the operations of the retail center acquired in the
purchase of Hughes. These increases have been partially offset by
slightly lower average occupancy levels (88.5% in 1996 compared to 90.4%
in 1995) and the sale of two retail centers in the first quarter of
1996. The increases in expenses are attributable primarily to the
12
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating Properties (continued):
changes in the portfolio of properties referred to above and lower
interest expense due to refinancings of certain properties in 1995.
Revenues from office, mixed-use and other properties increased $3,281,000
and $3,974,000 and total operating and interest expenses increased
$740,000 and decreased $212,000 for the three and six months ended June
30, 1996 as compared to the same periods in 1995. The increases in
revenues are attributable primarily to higher occupancy levels at
certain office properties, primarily in Columbia, and the operations of
the office, mixed-use and other properties acquired in the purchase of
Hughes. These increases have been partially offset by lower lease
termination payments from tenant restructurings and, for the six month
period, lower revenues at a hotel property which underwent a renovation
during the first quarter of 1996. The increase in expenses for the
three month period is attributable primarily to the operations of the
acquired properties referred to above. This increase was partially
offset by the sale of an industrial building in the second quarter of
1996. The decrease in expenses for the six month period is attributable
primarily to lower bad debt expenses due to recoveries of amounts
previously reserved, lower expenses at the hotel property referred to
above and the sale of the industrial building referred to above. These
decreases were partially offset by the operations of the acquired
properties referred to above.
Land sales:
Revenues from land sales increased $10,562,000 and $17,432,000, and total
costs and expenses increased $8,641,000 and $11,571,000, for the three
and six months ended June 30, 1996. The increase in revenues is
attributable to higher levels of land sales in Columbia, particularly
for commercial uses, and sales of land acquired in the purchase of Hughes
($7,175,000), primarily residential property in Summerlin. The
increases in costs and expenses are attributable primarily to increases in
costs of sales. The increases in the cost of sales for Columbia land of
$1,541,000 and $4,430,000, respectively, for the three and six month
periods ended June 30, 1996, are attributable primarily to the higher
levels of sales revenues. The cost of sales for land acquired in the
purchase of Hughes for the periods of $5,562,000 is relatively high as a
percentage of revenues as the land sold consisted primarily of inventory
on which development was completed or substantially completed at the
date of acquisition.
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
13
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued):
Development (continued):
acquisition and development opportunities. These costs decreased
$1,113,000 and $1,821,000 for the three and six months ended June 30,
1996 as compared to the same periods in 1995. The decreases are due
primarily to lower additions to the pre-construction reserve as several
projects progressed to construction in progress and to reduced new
business costs as the Company's focus on the acquisition of Hughes has
deferred evaluation of other opportunities.
Corporate:
Corporate interest costs were $4,902,000 and $3,624,000 for the three
months ended June 30, 1996 and 1995, respectively, and $9,240,000 and
$7,204,000 for the six months ended June 30, 1996 and 1995,
respectively. Of such amounts, $1,383,000 and $787,000 were capitalized
during the three months ended June 30, 1996 and 1995, respectively, and
$2,098,000 and $1,661,000 were capitalized during the six months ended
June 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 primarily to an additional provision for costs
associated with 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. These provisions were
recognized 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 six months ended June 30, 1996 and 1995, the Company incurred
extraordinary losses related to extinguishments of debt prior to
scheduled maturity of $2,023,000 and $11,103,000, respectively, net of
related income tax benefits of $708,000 and $3,886,000, respectively.
Financial Condition and Liquidity:
Shareholders' equity increased by $159,058,000 from $42,584,000 at December
31, 1995 to $201,642,000 at June 30, 1996. The increase was due
primarily to the value of shares of common stock issued in the
acquisition of Hughes ($176,400,000) and net earnings for the six months
ended June 30, 1996, partially offset by the payment of regular
quarterly dividends on the Company's common and Preferred stocks.
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, (continued):
The Company had cash and cash equivalents and investments in marketable
securities totaling $30,679,000 and $97,832,000 at June 30, 1996 and
December 31, 1995, respectively, including $3,585,000 and $2,910,000,
respectively, held for restricted uses.
The Company has lines of credit for up to $254,909,000 of which
$148,409,000 was available at June 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. As of June 30, 1996, debt
due in one year was $115,046,000. Approximately $58,250,000 of this
debt relates to two retail center mortgages due in April 1997. The
Company expects to refinance these mortgages 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 $69,130,000 and $53,477,000
for the six months ended June 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 $63,234,000 and $16,709,000 for
the six months ended June 30, 1996 and 1995, respectively. The increase
in net cash used of $46,525,000 was due primarily to the acquisition of
Hughes and lower net sales or redemptions of marketable securities.
Net cash used in financing activities was $73,724,000 and $46,182,000 for
the six months ended June 30, 1996 and 1995, respectively. The increase
in net cash used of $27,542,000 is attributable primarily to 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. The following factors could cause actual results to differ
materially from historical results or those anticipated: (1) real
15
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued)
Financial Condition and Liquidity (continued):
Information relating to forward-looking statements (continued):
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.
The Annual Meeting of Stockholders of The Rouse Company was held
on May 23, 1996. The only matter voted upon at the meeting was
the election of Directors. The vote was asfollows:
Votes
Nominee Voted For Withheld
David H. Benson 43,752,514 387,209
Jeremiah E. Casey 43,753,014 386,709
Anthony W. Deering 44,108,964 30,759
Rohit M. Desai 44,112,064 27,659
Mathias J. DeVito 43,736,724 402,999
Juanita T. James 44,107,454 32,269
Thomas J. McHugh 44,111,374 28,349
Hanne M. Merriman 44,106,314 33,409
Roger W. Schipke 44,107,427 32,296
Alexander B. Trowbridge 44,099,524 40,199
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
On June 27, 1996, the Company filed a report on Form 8-K
to report its acquisition of all of the outstanding
equity interests in The Hughes Corporation (THC) and its
affiliated partnership, Howard Hughes Properties,
Limited Partnership. Consolidated financial statements
of THC and subsidiaries as of December 31, 1995 and 1994
and for each of the years in the three-year period ended
December 31, 1995 were incorporated in the Form 8-K by
reference to the Company's Registration Statement on
Form S-4 (File No. 333-1693), as amended (the "Registra-
tion Statement") which became effective on May 14, 1996,
and the proxy Statement/Prospectus dated May 14, 1996
included in such Registration Statement.
On August 14, 1996, the Company filed an amendment to
its report on Form 8-K to file unaudited interim
consolidated financial statements of THC and
subsidiaries as of March 31, 1996 and for the three
month periods ended March 31, 1996 and 1995.
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: August 14, 1996 By /s/Jeffrey H. Donahue
Jeffrey H. Donahue
Senior Vice President and
Chief Financial Officer
Principal Accounting Officer:
Date: August 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
Exhibit 11
THE ROUSE COMPANY AND SUBSIDIARIES
Computation of Fully Diluted Earnings (Loss) Per Share
(Unaudited, in thousands except per share amounts)
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
Earnings before
extraordinary losses $ 6,308 $ 1,403 $13,051 $ 770
Add after-tax interest expense
applicable to convertible
subordinated debentures 1,215 1,215 2,430 2,430
Earnings before extra-
ordinary losses, as adjusted 7,523 2,618 15,481 3,200
Extraordinary losses -- -- (1,315) (7,217)
Net earnings (loss), as adjusted $ 7,523 $ 2,618 $14,166 $(4,017)
Shares:
Weighted average number of
common shares outstanding 49,869 47,804 48,801 47,734
Assuming conversion of
convertible Preferred stock 10,528 10,600 10,564 10,600
Assuming conversion of convertible
subordinated debentures 4,541 4,541 4,541 4,541
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 799 153 799 156
Weighted average number of shares
outstanding, as adjusted 65,737 63,098 64,705 63,031
Earnings (loss) per common share
assuming full dilution:
Earnings before extraordinary
losses, as adjusted $ .11 $ .04 $ .24 $ .05
Extraordinary losses -- -- (.02) (.12)
Net earnings (loss), adjusted $ .11 $ .04 $ .22 $ (.07)
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
June 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> $ 27,094
<SECURITIES> $ 3,585
<RECEIVABLES> $ 95,385
<ALLOWANCES> $ (25,970)
<INVENTORY> 0
<CURRENT-ASSETS> $ 159,816<F1>
<PP&E> $ 3,781,801
<DEPRECIATION> $ (547,477)
<TOTAL-ASSETS> $ 3,523,050
<CURRENT-LIABILITIES> $ 361,852<F2>
<BONDS> $ 2,761,297
<COMMON> $ 566
0
$ 43
<OTHER-SE> $ 201,033
<TOTAL-LIABILITY-AND-EQUITY> $ 3,523,050
<SALES> $ 352,198
<TOTAL-REVENUES> $ 352,198
<CGS> 0
<TOTAL-COSTS> $ 329,979
<OTHER-EXPENSES> $ 295
<LOSS-PROVISION> $ 1,122
<INTEREST-EXPENSE> $ 104,069
<INCOME-PRETAX> $ 21,924
<INCOME-TAX> $ 8,873
<INCOME-CONTINUING> $ 13,051
<DISCONTINUED> 0
<EXTRAORDINARY> $ (1,315)
<CHANGES> 0
<NET-INCOME> $ 11,736
<EPS-PRIMARY> $ .09
<EPS-DILUTED> $ .22
<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>
