<PAGE>
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 March 31, 1998
-----------------------------
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 May 5, 1998:
Common Stock, $0.01 par value 68,467,886
- ----------------------------- -------------------
Title of Class Number of Shares
<PAGE>
Part I. Financial Information
Item 1. Financial Statements:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(Unaudited, in thousands except per share amounts, note 1)
Three months
ended March 31,
-------------------
1998 1997
--------- --------
Revenues:
Retail centers $108,515 $117,307
Office, mixed-use and other 39,441 51,752
Land sales 22,612 37,594
Corporate interest income 970 1,089
-------- --------
171,538 207,742
-------- --------
Operating expenses, exclusive of
provision for bad debts,
depreciation and amortization:
Retail centers 54,609 59,840
Office, mixed-use and other 16,902 25,867
Land sales 19,772 27,876
Development 3,566 1,123
Corporate 4,098 3,293
-------- --------
98,947 117,999
-------- --------
Interest expense:
Retail centers 29,974 31,658
Office, mixed-use and other 17,555 20,572
Land sales 267 931
Corporate (2,210) 1,161
-------- --------
45,586 54,322
-------- --------
Provision for bad debts 854 897
Depreciation and amortization 18,790 20,122
-------- --------
164,177 193,340
-------- --------
7,361 14,402
-------- --------
The accompanying notes are an integral part of these statements.
2
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(Unaudited, in thousands except per share amounts, note 1)
Three months
ended March 31,
-------------------
1998 1997
--------- --------
Equity in earnings of unconsolidated
real estate ventures (note 3) $25,342 $ 1,886
Gain (loss) on disposition of
assets and other provisions,
net (note 5) 1,935 --
------- -------
Earnings before income taxes,
extraordinary losses and cumulative effect
of change in accounting principle 34,638 16,288
Income taxes (note 2):
Current 106 155
Deferred -- 7,723
------- -------
106 7,878
------- -------
Earnings before extraordinary
losses and cumulative effect of change
in accounting principle 34,532 8,410
Extraordinary losses from extinguishments
of debt, net (note 6) (916) (2,129)
Cumulative effect at January 1, 1998 of
change in accounting for participating
mortgages (note 7) (4,629) --
------- -------
Net earnings $28,987 $ 6,281
======= =======
Net earnings applicable
to common shareholders $25,949 $ 5,081
======= =======
The accompanying notes are an integral part of these statements.
3
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997
(Unaudited, in thousands except per share amounts, note 1)
Three months
ended March 31,
-------------------
1998 1997
-------- --------
EARNINGS PER SHARE OF
COMMON STOCK (note 8):
Basic:
Earnings before extraordinary losses $ .47 $ .10
Extraordinary losses (.01) (.03)
Cumulative effect of change in accounting
principle (.07) --
-------- --------
Total $ .39 $ .07
======== ========
Diluted:
Earnings before extraordinary losses $ .46 $ .10
Extraordinary losses (.01) (.03)
Cumulative effect of change in accounting
principle (.06) --
-------- --------
Total $ .39 $ .07
======== ========
DIVIDENDS PER SHARE:
Common stock $ .28 $ .25
======== ========
Preferred stock $ .75 $ .30
======== ========
The accompanying notes are an integral part of these statements.
4
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(in thousands, note 1)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
---------- ------------
<S> <C> <C>
Assets:
Property:
Operating properties:
Property and deferred costs
of projects $3,205,841 $3,079,962
Less accumulated depreciation
and amortization 533,786 515,229
---------- ----------
2,672,055 2,564,733
Properties in development 170,428 232,349
Properties held for sale 11,517 20,052
---------- ----------
Total property 2,854,000 2,817,134
---------- ----------
Investments in and advances to unconsolidated
real estate ventures (note 3) 342,939 338,692
Prepaid expenses, receivables under finance
leases and other assets 229,772 228,956
Accounts and notes receivable 112,833 114,300
Investments in marketable securities 3,590 3,586
Cash and cash equivalents 92,180 87,100
---------- ----------
Total $3,635,314 $3,589,768
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets, continued
March 31, 1998 and December 31, 1997
(in thousands, note 1)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
----------- ------------
<S> <C> <C>
Liabilities:
Debt (note 4):
Property debt not carrying a Parent
Company guarantee of repayment $2,102,994 $2,085,456
Parent Company debt and debt carrying a
Parent Company guarantee of repayment:
Property debt 167,357 158,093
Convertible subordinated debentures 129,620 130,000
Other debt 246,000 256,000
---------- ----------
542,977 544,093
---------- ----------
Total debt 2,645,971 2,629,549
---------- ----------
Obligations under capital leases 54,340 54,591
Accounts payable, accrued expenses
and other liabilities 322,303 300,113
Deferred income taxes 2,500 2,500
Company-obligated mandatorily redeemable
preferred securities of a trust holding
solely Parent Company subordinated debt
securities 137,500 137,500
Shareholders' equity:
Series B Convertible Preferred stock
with a liquidation preference of
$202,500 41 41
Common stock of 1 cent par value per share;
250,000,000 shares authorized; 66,937,421
shares issued in 1998 and 66,910,901
shares issued in 1997 669 669
Additional paid-in capital 686,970 686,976
Accumulated deficit (214,980) (222,171)
---------- ----------
Total shareholders' equity 472,700 465,515
---------- ----------
Total $3,635,314 $3,589,768
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997
(Unaudited, in thousands, note 1)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Rents and other revenues received $148,006 $ 177,098
Proceeds from land sales 33,338 33,612
Interest received 3,752 3,205
Land development expenditures - (21,096)
Operating expenditures (84,893) (104,344)
Interest paid (46,969) (55,647)
Distributions from unconsolidated real estate
ventures in which the Company holds a
majority financial interest 31,708 --
-------- ---------
Net cash provided by operating activities 84,942 32,828
-------- ---------
Cash flows from investing activities:
Expenditures for properties in development
and improvements to existing properties
funded by debt (71,382) (57,650)
Expenditures for improvements to existing
properties funded by cash provided by
operating activities:
Tenant leasing and remerchandising (1,501) (1,045)
Building and equipment (3,641) (2,350)
Proceeds from sales of operating properties
and other investments 16,952 --
Other (3,840) 2,705
-------- ---------
Net cash used by investing activities (63,412) (58,340)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of property debt 21,858 114,787
Repayments of property debt:
Scheduled principal payments (10,739) (11,303)
Other payments (1,499) (146,318)
Proceeds from issuance of other debt 22,000 15,000
Repayments of other debt (10,135) (35,502)
Proceeds from issuance of Series B Preferred
stock -- 197,145
Purchases of common stock (16,258) (16,286)
Proceeds from exercise of stock options 121 1,351
Dividends paid (21,798) (17,900)
Other -- (250)
-------- ---------
Net cash provided (used) by financing
activities (16,450) 100,724
-------- ---------
Net increase in cash and cash equivalents 5,080 75,212
Cash and cash equivalents at beginning of period 87,100 43,766
-------- ---------
Cash and cash equivalents at end of period $ 92,180 $ 118,978
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Three Months Ended March 31, 1998 and 1997
(Unaudited, in thousands, note 1)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $28,987 $ 6,281
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 18,790 20,122
(Gain) loss on dispositions of assets
and other provisions, net (1,935) --
Deferred income taxes -- 7,723
Extraordinary losses, net 916 2,129
Cumulative effect of change in accounting
principle 4,629 --
Additions to preconstruction reserve 2,000 500
Provision for bad debts 854 897
Decrease (increase) in operating assets and
liabilities, net 30,701 (4,824)
------- -------
Net cash provided by operating activities $84,942 $32,828
======= =======
Schedule of Noncash Investing and Financing
Activities:
Common stock issued pursuant to Contingent
Stock Agreement $15,754 $17,313
Debt assumed by purchasers of land 2 3,995
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1998
(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 1997 Annual Report
to Shareholders, except that, effective January 1, 1998, the Company
adopted the American Institute of Certified Public Accountants Statement of
Position 97-1 "Accounting by Participating Mortgage Loan Borrowers" (see
note 7).
(2) Tax status
----------
Effective January 1, 1998, the Company determined that it would elect to
be taxed as a real estate investment trust (REIT) pursuant to the
Internal Revenue Code, as amended. In general, a corporation that
distributes at least 95% of its REIT taxable income to shareholders in any
taxable year and complies with certain other requirements (relating
primarily to the nature of its assets and the sources of its revenues) is
not subject to federal income taxation to the extent of the income which it
distributes. Management believes that the Company met the qualifications
for REIT status as of March 31, 1998, intends for it to continue to meet
the qualifications in the future and does not expect that the Company will
be liable for income taxes or taxes on "built-in gains" on its assets at
the Federal level or in most states in which it operates in 1998 and future
years. Accordingly, the provision for income taxes for the three months
ended March 31, 1998 relates only to certain state income taxes.
(3) Unconsolidated real estate ventures
-----------------------------------
Investments in and advances to unconsolidated real estate ventures at
March 31, 1998 and December 31, 1997 are summarized, based on the
level of the Company's financial interest, as follows (in thousands):
March 31, December 31,
1998 1997
----------- ------------
Majority interest ventures $ 262,668 $ 259,320
Joint interest and control ventures 3,694 3,412
Minority interest ventures 76,577 75,960
--------- ---------
Total $ 342,939 $ 338,692
========= =========
9
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(3) Unconsolidated real estate ventures, continued
----------------------------------------------
The equity in earnings of unconsolidated real estate ventures for the
three months ended March 31, 1998 and 1997 is summarized, based on the
level of the Company's financial interest, as follows (in thousands):
1998 1997
-------- -------
Majority interest ventures $ 22,943 $ --
Minority interest ventures 2,399 1,886
-------- -------
Total $ 25,342 $ 1,886
======== =======
The condensed, combined balance sheets of the ventures in which the Company
holds majority financial interests at March 31, 1998 and December 31, 1997
are summarized as follows (in thousands):
March 31, December 31,
1998 1997
------------ ------------
Assets:
Operating properties, net $ 212,819 $ 211,385
Properties in development 28,850 23,144
Properties held for sale 32,965 46,289
Land held for development and sale 212,376 233,406
Investment land 41,481 34,947
Other 143,683 143,970
---------- ---------
Total $ 672,174 $ 693,141
========== =========
Liabilities and shareholders' deficit:
Mortgages payable and other long-term debt $ 256,287 $ 280,595
Other liabilities 89,275 89,710
Loans and advances from The Rouse Company 386,856 405,871
Shareholders' deficit (60,244) (83,035)
---------- ---------
Total $ 672,174 $ 693,141
========== =========
10
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(3) Unconsolidated Real Estate Ventures, continued
----------------------------------------------
The condensed combined statements of operations of the ventures in
which the Company holds a majority financial interest for the three
months ended March 31, 1998 are summarized as follows (in thousands):
Revenues, including interest on
advances to the Company of $3,610 $100,769
Operating expenses (54,244)
Interest expense, including interest
on loans from the Company of $11,645 (18,666)
Depreciation and amortization (2,525)
Equity in earnings of unconsolidated
real estate ventures 1,281
Gain on dispositions of assets 12,439
Income taxes including a deferred tax
provision of $15,293 (15,338)
Extraordinary loss (925)
--------
Net earnings $ 22,791
========
The Company's share of the net earnings before extraordinary loss of the
ventures is summarized as follows (in thousands):
Share of net earnings based on ownership
interest $ 22,545
Share of extraordinary loss 916
Participation by others in the Company's
share of earnings of majority financial
interest ventures (7,481)
Interest on loans and advances,
and eliminations, net 6,939
Other, net 24
---------
$ 22,943
=========
11
<PAGE>
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 March 31, 1998 and December 31, 1997 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------------- ----------------------
Due in Due in
Total one year Total one year
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Mortgages and bonds 2,166,414 $ 48,493 $2,159,418 $ 48,019
Convertible subordi-
nated debentures 129,620 -- 130,000 --
Medium-term notes 100,300 2,800 110,300 12,800
Credit line borrowings 22,000 -- -- --
Other loans 227,637 17,105 229,831 9,319
--------- -------- ---------- --------
Total 2,645,971 $ 68,398 $2,629,549 $ 70,138
========= ======== ========== ========
</TABLE>
The amounts due in one year reflect the terms of existing loan agreements
except where refinancing commitments from outside lenders have been
obtained. In these instances, maturities are determined based on the terms
of the refinancing commitments.
In April 1998, mortgages payable totaling approximately $96,060,000 were
extinguished prior to their scheduled maturities, resulting in an
extraordinary loss of approximately $8,300,000. Credit line borrowings were
used to pay the mortgages, although it is anticipated that the related
property will be refinanced on a long-term basis in 1998.
(5) Gain (loss) on dispositions of assets and other provisions, net
---------------------------------------------------------------
The gain in 1998 relates primarily to a reduced provision for loss on a
retail center which the Company sold in April 1998 and partial recovery of
a loss previously recognized on a litigation matter. These items were
partially offset by losses on the sales of a hotel and an office building.
(6) Extraordinary losses, net
-------------------------
During the three months ended March 31, 1998, the extraordinary loss
relates to the Company's share of the loss incurred by a majority
financial interest venture on the extinguishment of debt prior to its
scheduled maturity. The debt was related to a hotel property that the
venture sold, and a portion of the proceeds of the sale were used to pay
the debt.
12
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(6) Extraordinary losses, net of related income tax benefits, continued
-------------------------------------------------------------------
During the three months ended March 31, 1997, the Company incurred
extraordinary losses related to extinguishments of debt prior to scheduled
maturity of $3,275,000, net of related income tax benefits of $1,146,000.
The sources of funds used to pay the debt and fund the prepayment
penalties, where applicable, were primarily refinancings of properties. The
benefit of these payments will be reflected as improved operating results
over the remaining terms of the refinanced loans.
(7) Cumulative effect of change in accounting for participating mortgages
---------------------------------------------------------------------
Effective January 1, 1998, the Company adopted the American Institute
of Certified Public Accountants' Statement of Position 97-1 "Accounting
by Participating Mortgage Loan Borrowers." This Statement prescribes
borrowers' accounting for participating mortgage loans and requires,
among other things, that borrowers recognize liabilities for the
estimated fair value of lenders' participations in the appreciation
in value (if any) of mortgaged real estate projects and record such
participations as interest over the term of the related loans. The
Company had not previously recognized lenders' participations in the
appreciation in value of mortgaged properties and, accordingly, it
recognized the cumulative effect of initially adopting the Statement
in its statement of operations for the three months ended March 31, 1998.
The cumulative effect of this accounting change at January 1, 1998 was to
reduce net earnings by approximately $4,629,000 ($.07 per share basic and
$.06 per share diluted). The effect of this change for the three months
ended March 31,1998, excluding the cumulative effect of initial adoption,
was to increase interest expense and reduce net earnings by $411,000 ($.01
per share). Ongoing application of the Statement will result in changes in
interest expense and liabilities to lenders reported in the financial
statements; however, because of the unpredictability of the timing and
magnitude of changes in property values, it is not possible to estimate the
timing, amount or direction of these changes.
13
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(8) Earnings per share
------------------
Information relating to the calculation of earnings per share of common
stock for the three month period ended March 31, 1998 and 1997 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings before extraordinary
losses and cumulative effect
of change in accounting
principle $34,532 $34,532 $ 8,410 $ 8,410
Dividends on Preferred
stock (3,038) (3,038) (1,200) (1,200)
Dividends on unvested
common stock awards (134) (69) (162) (162)
Interest on convertible
subordinated debentures -- 1,842 -- --
------- ------- ------- -------
Adjusted earnings
before extraordinary
losses and cumulative
effect of change in
accounting principle
used in EPS computation $31,360 $33,267 $ 7,048 $ 7,048
======= ======= ======= =======
Weighted-average shares
outstanding 66,662 66,662 66,186 66,186
Dilutive securities:
Convertible subordinated
debentures -- 4,538 -- --
Convertible Preferred stock -- -- -- --
Options, warrants and
unvested common stock
awards -- 1,196 -- 1,078
------- ------- ------- -------
Adjusted weighted-average
shares used in EPS
computation 66,662 72,396 66,186 67,264
======= ======= ======= =======
</TABLE>
Effects of potentially dilutive securities are presented only in
periods in which they are dilutive.
14
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(9) Contingencies
-------------
The Company and certain of its subsidiaries are defendants in various
litigation matters arising in the ordinary course of business, some of
which involve claims for damages that are substantial in amount. Some
of these litigation matters are covered by insurance. In the opinion of
management, adequate provision has been made for losses with respect to all
litigation matters, where appropriate, and the ultimate resolution of all
such litigation matters is not likely to have a material effect on the
consolidated financial position of the Company. Due to the Company's
fluctuating net earnings (loss), it is not possible to predict whether the
resolution of these matters is likely to have a material effect on the
Company's consolidated net earnings (loss), and it is, therefore, possible
that resolution of these matters could have such an effect in any future
quarter or year.
(10) Subsequent Events
-----------------
On April 6, 1998, the Company and Westfield America, Inc. entered into an
agreement to purchase a portfolio of interests in retail centers from
TrizecHahn Centers, Inc. Under terms of the agreement and subject to
certain terms and conditions, the Company will purchase interests in seven
centers for approximately $1.1 billion. The agreement is subject to the
ratification of certain conditions, including customary due diligence
review of the centers, and includes a provision for the substitution of,
or increase or decrease in the number of, centers to be acquired. The
acquisitions are expected to close in a series of transactions in the
third and fourth quarters of 1998.
At March 31, 1998, the Company had registered to sell up to an aggregate of
$297,500,000 (based on the public offering price) of common stock,
Preferred stock and debt securities. The stock and debt may be issued from
time to time in amounts and on terms determined at the time of offering.
In April 1998, 1,493,976 shares of common stock were issued pursuant to
this registration for gross proceeds of $46,500,003, reducing the balance
of securities issuable pursuant to this registration to $250,999,997. In
May 1998, the Company filed a registration statement for future sale of up
to an aggregate of an additional $2,000,000,000 of common stock, Preferred
stock and debt securities.
15
<PAGE>
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, 1997 and any material changes in
the results of operations for the three months ended March 31, 1998 as
compared to the same period in 1997. 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 1997
Annual Report to Shareholders.
General:
- -------
The Company's primary objective is to own and operate premier properties -
shopping centers, office and industrial buildings and major mixed-use
projects - in major markets across the United States. In order to achieve this
objective, management is continually evaluating opportunities to acquire
properties owned by others that may have future prospects consistent with the
Company's long-term objectives and the future outlook for properties in the
Company's portfolio. This includes considering opportunities to expand and/or
renovate the properties and assessing whether particular properties are
meeting or have the potential to meet the Company's investment criteria. The
Company plans to continue making substantial investments to expand, renovate
and/or add new department stores to its existing properties to meet its
objective. The Company has sold a number of properties over the last several
years and intends to continue to dispose of properties that are not meeting
and/or are not considered to have the potential to meet its investment
criteria. 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 consolidated financial position of the Company.
Operating Results:
- -----------------
As indicated in the 1997 Annual Report to Shareholders, the discussion of
operating results focuses on the Company's business segments as management
believes that segment analysis provides the most effective means of
understanding the business. For purposes of comparability, the analyses of
operating results for the segments present the revenues and expenses of the
Company and consolidated subsidiaries and the Company's share of revenues and
expenses (including the other owner's share of funds from operations) of real
estate ventures in which the Company holds substantially all (at least 98%) of
the financial interest but does not own a majority voting interest. These
ventures were initiated on December 31, 1997 when certain wholly owned
subsidiaries issued 91% of their voting stock to The Rouse Company Incentive
Compensation Statutory Trust, an entity which is neither owned nor controlled
by the Company. The ventures are accounted for using the equity method in 1998
while the subsidiaries were consolidated in 1997.
16
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating Properties - Retail Centers:
Operating results of retail properties are summarized as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------ --------
Consoli- Majority Minority
dated Interest Interest
Properties Ventures Ventures Total Total
---------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues $108.5 $13.3 $ 2.9 $124.7 $119.6*
Operating expenses, exclusive
of depreciation and amortization 55.4 6.9 -- 62.3 61.3
Interest expense 30.0 3.1 -- 33.1 31.7
------ ----- ----- ------ ------
23.1 3.3 2.9 29.3 26.6
Depreciation and amortization 12.1 1.1 .6 13.8 12.4*
------ ----- ----- ------ ------
Operating income $ 11.0 $ 2.2 $ 2.3 $ 15.5 $ 14.2
====== ===== ===== ====== ======
</TABLE>
* The Company's share of earnings before depreciation and deferred taxes and
depreciation and amortization of real estate ventures in which it holds a
minority financial interest are included in revenues and depreciation and
amortization, respectively, in the summary of operating results for 1997.
Revenues from retail centers increased $5.1 million for the three months ended
March 31, 1998, while total operating and interest expenses increased
$3.8 million, as compared to the same period in 1997. The increases in
revenues and expenses for the period were attributable primarily to the
effects of increased average occupancy (90.8% for the three months ended March
31, 1998 compared to 88.8% for the same period in 1997), the operations of a
property acquired in December 1997, the opening of a retail center expansion
in the third quarter of 1997 and the opening of a new retail center in 1998.
These increases were partially offset by the effects of dispositions of
interests in four retail centers in the third and fourth quarters of 1997.
17
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating Properties - Office, Mixed-Use and Other Properties:
Operating results of office, mixed-use and other properties are summarized as
follows (in millions):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------ --------
Consoli- Majority Minority
dated Interest Interest
Properties Ventures Ventures Total Total
---------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 39.4 $15.8 $ .3 $55.5 $52.1*
Operating expenses, exclusive
of provision for bad debts,
depreciation and amortization 16.9 9.9 -- 26.8 25.9
Interest expense 17.5 3.1 -- 20.6 20.6
Provision for bad debts .1 -- -- .1 (.6)
------ ----- ----- ----- ------
4.9 2.8 .3 8.0 6.2
Depreciation and amortization 6.6 1.4 .2 8.2 8.2*
------ ----- ----- ----- ------
Operating income (loss) $ (1.7) $ 1.4 $ .1 $ (.2) $ (2.0)
====== ===== ===== ===== ======
</TABLE>
* The Company's share of earnings before depreciation and deferred taxes and
depreciation and amortization of real estate ventures in which it holds a
minority financial interest are included in revenues and depreciation and
amortization, respectively, in the summary of operating results for 1997.
Revenues from office, mixed-use and other properties increased $3.4 million and
operating and interest expenses increased $1.6 million for the three months
ended March 31, 1998, as compared to the same period in 1997. The increases
in revenues and expenses were attributable primarily to openings of new office
projects in Las Vegas and higher occupancy levels. These increases were
partially offset by the disposition of two hotel properties in March 1998.
The increase in expenses also includes a higher provision for bad debts as the
first quarter of 1997 included the recovery of a note receivable previously
reserved (approximately $800,000).
18
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Land sales:
Land sales operations relate primarily to the communities of Columbia, Maryland
and Summerlin, Nevada. Generally, revenues and operating income from land
sales are affected by such factors as the availability to purchasers of
construction and permanent mortgage financing at acceptable interest rates,
consumer and business confidence, availability of saleable land for particular
uses and management's decisions to sell, develop or retain land.
Operating results of land sales are summarized as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------
Majority
Consolidated Interest
Properties Ventures Total Total
------------ -------- ----- -----
<S> <C> <C> <C> <C>
Hughes Division:
Revenues $22.6 $45.1 $67.7 $28.3
Operating costs and
expenses 19.8 34.4 54.2 23.0
Interest expense .1 -- .1 --
----- ----- ----- -----
Operating income $ 2.7 $10.7 $13.4 $ 5.3
===== ===== ===== =====
Columbia and other:
Revenues $ -- $22.9 $22.9 $ 9.3
Operating costs and
expenses -- 10.6 10.6 4.8
Interest expense .2 .8 1.0 1.0
----- ----- ----- -----
Operating income (loss) $ (.2) $11.5 $11.3 $ 3.5
===== ===== ===== =====
Total:
Revenues $22.6 $68.0 $90.6 $37.6
Operating costs and
expenses 19.8 45.0 64.8 27.8
Interest expense .3 .8 1.1 1.0
----- ----- ----- -----
Operating income $ 2.5 $22.2 $24.7 $ 8.8
===== ===== ===== =====
</TABLE>
Revenues from sales of land at the Hughes Division increased $39.4 million and
related costs and expenses increased $31.3 million for the three months ended
March 31, 1998 as compared to the same period in 1997. The increase in
revenues was due primarily to increased land sales at Summerlin ($9.0 million)
and the disposition of the remaining land at a master planned office park in
Los Angeles ($28.5 million) and the increase in costs and expenses was also
due primarily to higher levels of sales.
19
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Revenues from sales of land in Columbia increased $13.6 million and related
costs and expenses increased $5.8 million for the three months ended March 31,
1998, as compared to the same period in 1997. The increase in revenues was
due primarily to higher levels of sales for residential uses ($4.4 million)
and commercial and other uses ($9.2 million) and the increase in costs and
expenses was also due primarily to the higher levels of sales.
Development:
Development expenses consist primarily of additions to the preconstruction
reserve and new business costs. The preconstruction reserve is maintained to
provide for costs of projects which may not go forward to completion. New
business costs relate primarily to the initial evaluation of potential
acquisition and development opportunities. The increase in expenses of
$2,443,000 for the three months ended March 31, 1998 as compared to the same
period in 1997 is a result of increased additions to the preconstruction
reserve and increased costs associated with acquisition efforts due to higher
levels of activity.
Corporate:
Corporate expenses consist of certain interest and operating expenses reduced by
costs capitalized or allocated to other segments. Interest is capitalized on
corporate funds invested in projects under development, and interest on the
proceeds of corporate borrowings and distributions on the Company-obligated
mandatorily redeemable preferred securities which are used for other segments
are allocated to those segments. Accordingly, corporate interest expense
consists primarily of interest on the convertible subordinated debentures,
the unsecured 8.5% notes, the medium term notes, and unallocated proceeds from
refinancings of certain properties, net of interest capitalized on development
projects or allocated to other segments, and corporate operating expenses
consist primarily of general and administrative costs and distributions on the
redeemable preferred securities, net of distributions allocated to other
segments. These costs decreased $2,566,000 for the three months ended March
31, 1998, as compared to the same period in 1997. The decrease in these costs
is attributable primarily to higher levels of corporate funds invested in
development projects and allocated to other segments.
Gain (loss) on dispositions of assets and other provisions, net:
The gain in 1998 relates primarily to a reduced provision for loss on a retail
center which the Company sold in April 1998 and partial recovery on a loss
previously recognized on a litigation matter. These items were partially
offset by losses on the sales of a hotel and an office building.
20
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Extraordinary losses, net:
During the three months ended March 31, 1998, the extraordinary loss relates to
the Company's share of the loss incurred by a majority financial interest
venture on the extinguishment of debt prior to its scheduled maturity. The debt
was related to a hotel property that the venture sold, and a portion of the
proceeds of the sale were used to repay the debt.
During the three months ended March 31, 1997, the Company incurred extraordinary
losses related to extinguishments of debt prior to scheduled maturity of
$3,275,000, net of related income tax benefits of $1,146,000. The sources of
funds used to pay the debt and fund the prepayment penalties, where applicable,
were provided primarily by refinancings of properties. The benefit of these
payments will be reflected as improved operating results over the remaining
terms of the refinanced loans.
Cumulative effect of change in accounting for participating mortgages:
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 97-1 "Accounting by
Participating Mortgage Loan Borrowers." This Statement prescribes borrowers'
accounting for participating mortgage loans and requires, among other things,
that borrowers recognize liabilities for the estimated fair value of lenders'
participations in the appreciation in value (if any) of mortgaged real estate
projects and record such participations as interest over the term of the
related loans. The Company had not previously recognized lenders'
participations in the appreciation in value of mortgaged properties and,
accordingly, it recognized the cumulative effect of initially adopting the
Statement in its statement of operations for the three months ended March 31,
1998. The cumulative effect of this accounting change at January 1, 1998 was to
reduce net earnings by approximately $4,629,000 ($.07 per share basic and $.06
per share diluted). The effect of this change for the three months ended March
31, 1998, excluding the effect of the initial adoption, was to increase
interest expense and reduce net earnings by $411,000 ($.01 per share). Ongoing
application of the Statement will result in changes in interest expense and
liabilities to lenders reported in the financial statements; however, because
of the unpredictability of the timing and magnitude of changes in property
values, it is not possible to estimate the timing, amount or direction of these
changes.
Net earnings:
Net earnings for the three months ended March 31, 1998 and 1997 were affected by
unusual and/or nonrecurring items. The most significant of these are the items
discussed above in gain (loss) on dispositions of assets and other provisions,
net, extraordinary losses, net and the cumulative effect of change in
accounting for participating mortgages. In periods prior to the Company's
decision to elect to be taxed as a REIT, net earnings (loss) was also affected
to a much greater extent by income taxes. The Company's effective tax rate
(based on earnings before income taxes and
21
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
extraordinary losses) was 56% for the three months ended March 31, 1997.
The effective rate reflected permanent differences, primarily the distri-
butions payable to the former Hughes owners (or their successors) under
the Contingent Stock Agreement which are not fully deductible for income
tax purposes.
Financial Condition and Liquidity:
Shareholders' equity increased by $7,185,000 from December 31, 1997 to March 31,
1998. The increase was primarily attributable to the net earnings for the three
months ended March 31, 1998, partially offset by the payment of regular
quarterly dividends on the Company's common and Preferred stocks.
The Company had cash and cash equivalents and investments in marketable
securities totaling $95,770,000 at March 31, 1998, including $3,590,000 of
investments held for restricted uses.
The Company has a line of credit with a group of commercial banks and other
lenders that provides for aggregate unsecured borrowings of up to $250,000,000
including outstanding borrowings of $22,000,000 at March 31, 1998. This line of
credit can be used for various purposes, including project development costs,
property acquisitions, liquidity and other corporate needs. It may also be
utilized to pay some portion of existing debt, including maturities in 1998. As
of March 31, 1998, debt due in one year was $68,398,000, including balloon
maturities of $12,078,000. The Company is continually evaluating sources of
capital, and management believes there are satisfactory sources available for
all requirements without necessitating property sales.
Net cash provided by operating activities was $84,942,000 and $32,828,000 for
the three months ended March 31, 1998 and 1997, respectively. The increase in
net cash provided of $52,114,000 was due primarily to the factors discussed
previously under the operating results of the four major business segments. The
level of net cash provided by operating activities is also effected by the
timing of receipt of revenues and payment of operating and interest expenses.
Net cash used in investing activities was $63,412,000 and $58,340,000 for the
three months ended March 31, 1998 and 1997, respectively. The increase in net
cash used of $5,072,000 was due primarily to increases in expenditures for
properties under development partially offset by higher proceeds from sales of
properties and investments.
Net cash used in financing activities was $16,450,000 and net cash provided by
financing activities was $100,724,000 for the three months ended March 31, 1998
and 1997, respectively. Cash flows from financing activities for 1997 included
the proceeds from the public offering of Series B Convertible Preferred stock.
There was no similar transaction in the 1998 period.
22
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Recent accounting pronouncement:
In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 97-11 relating to the accounting
for internal staff costs associated with acquisitions of operating properties.
The consensus requires that these costs by expensed (for transactions
occurring after March 19, 1998) similar to the accounting for such costs in
business combination transactions. As the Company has followed a practice of
capitalizing certain internal staff costs relating to acquisitions of
operating properties, this consensus will result in a change in accounting
policy; however, the change is not expected to have a material effect on net
earnings.
Information relating to forward-looking statements:
This report on Form 10-Q of the Company includes forward-looking statements
which reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those identified below, which could cause
actual results to differ materially from historical results or those
anticipated. The words believe, expect, anticipate and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. The following factors could cause actual results to
differ materially from historical results or those anticipated: (1) risks
associated with the Company's qualification and operation as a REIT; (2)real
estate investment risks; (3) development risks; (4) illiquidity of real estate
investments; (5) dependence on rental income from real property; (6) effect of
uninsured loss; (7) lack of geographical diversification; (8) possible
environmental liabilities; (9) difficulties of compliance with the Americans
with Disabilities Act; (10) competition; (11) changes in the economic climate
and (12) certain matters relating to Nevada properties; (13) changes in tax
laws or regulations. For a more detailed discussion of these factors, see
Exhibit 99.2 of the Company's Form 10-K for the fiscal year ended December 31,
1997.
23
<PAGE>
Part II. Other Information.
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K
None
24
<PAGE>
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: May 14, 1998 By /s/Jeffrey H. Donahue
------------------ ---------------------
Jeffrey H. Donahue
Senior Vice President and
Chief Financial Officer
Principal Accounting Officer:
Date: May 14, 1998 By /s/George L. Yungmann
------------------ ---------------------
George L. Yungmann
Senior Vice President and
Controller
25
<PAGE>
Exhibit Index
Exhibit Number Description
- -------------- -----------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS SUBMITTED IN ACCORDANCE WITH REGULATION 5-K ITEM
601(c)(2). THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE ANNUAL PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 92,180
<SECURITIES> 3,590
<RECEIVABLES> 134,153
<ALLOWANCES> 21,320
<INVENTORY> 0
<CURRENT-ASSETS> 228,386<F1>
<PP&E> 3,387,786
<DEPRECIATION> 533,786
<TOTAL-ASSETS> 3,635,314
<CURRENT-LIABILITIES> 391,028<F2>
<BONDS> 0
0
41
<COMMON> 669
<OTHER-SE> 471,990
<TOTAL-LIABILITY-AND-EQUITY> 3,635,314
<SALES> 171,538
<TOTAL-REVENUES> 171,538
<CGS> 0
<TOTAL-COSTS> 117,737
<OTHER-EXPENSES> (27,277)
<LOSS-PROVISION> 854
<INTEREST-EXPENSE> 45,586
<INCOME-PRETAX> 34,638
<INCOME-TAX> 106
<INCOME-CONTINUING> 34,532
<DISCONTINUED> 0
<EXTRAORDINARY> (916)
<CHANGES> (4,629)
<NET-INCOME> 28,987
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS SUBMITTED IN ACCORDANCE WITH REGULATION S-K ITEM
601(c)(2). THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 118,978
<SECURITIES> 3,895
<RECEIVABLES> 104,396
<ALLOWANCES> (22,278)
<INVENTORY> 0
<CURRENT-ASSETS> 206,335<F1>
<PP&E> 3,943,616
<DEPRECIATION> (571,153)
<TOTAL-ASSETS> 3,756,406
<CURRENT-LIABILITIES> 357,202<F2>
<BONDS> 0
0
41
<COMMON> 668
<OTHER-SE> 364,341
<TOTAL-LIABILITY-AND-EQUITY> 3,756,406
<SALES> 207,742
<TOTAL-REVENUES> 207,742
<CGS> 0
<TOTAL-COSTS> 138,121
<OTHER-EXPENSES> (1,886)
<LOSS-PROVISION> 897
<INTEREST-EXPENSE> 54,322
<INCOME-PRETAX> 16,288
<INCOME-TAX> 7,878
<INCOME-CONTINUING> 8,410
<DISCONTINUED> 0
<EXTRAORDINARY> (2,129)
<CHANGES> 0
<NET-INCOME> 6,281
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<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 ACCOUNT
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES.
</FN>
</TABLE>
