<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 September 30, 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
November 6, 1998:
Common Stock, $0.01 par value 68,603,062
- - ----------------------------- ----------------
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 and Nine Months Ended September 30, 1998 and 1997
(Unaudited, in thousands except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Retail centers $123,018 $123,096 $345,167 $359,501
Office, mixed-use and other 39,736 54,162 119,028 160,293
Land sales operations 1,126 51,076 32,756 153,065
Corporate interest income 438 997 1,906 3,816
-------- -------- -------- --------
Total revenues 164,318 229,331 498,857 676,675
-------- -------- -------- --------
Operating expenses, exclusive of
provision for bad debts,
depreciation and amortization:
Retail centers 58,197 64,451 169,318 184,581
Office, mixed-use and other 16,046 25,877 49,411 78,015
Land sales operations 524 34,990 23,688 113,213
Development (1,052) 1,815 3,452 4,267
Corporate 3,780 3,125 12,351 10,325
-------- -------- -------- --------
77,495 130,258 258,220 390,401
-------- -------- -------- --------
Interest expense:
Retail centers 32,855 29,269 93,021 92,152
Office, mixed-use and other 16,546 20,568 49,891 61,386
Land sales operations 182 1,130 713 3,038
Corporate (870) (773) (4,253) 586
-------- -------- -------- --------
48,713 50,194 139,372 157,162
-------- -------- -------- --------
Provision for bad debts 1,926 1,854 3,716 3,432
Depreciation and amortization 20,514 21,015 56,713 61,446
-------- -------- -------- --------
Total expenses 148,648 203,321 458,021 612,441
-------- -------- -------- --------
</TABLE>
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, continued
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited, in thousands except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Equity in earnings of
unconsolidated real estate
ventures (note 3) $13,268 $ 1,771 $49,928 $ 2,721
Gain (loss) on dispositions of
assets and other provisions,
net (note 5) (7,389) 1,538 (5,220) (8,513)
------- ------- ------- --------
Earnings before income taxes,
extraordinary items and
cumulative effect of change
in accounting principle 21,549 29,319 85,544 58,442
Income taxes (note 2):
Current 37 1,255 236 2,361
Deferred --- 11,793 --- 28,275
------- ------- ------- --------
37 13,048 236 30,636
------- ------- ------- --------
Earnings before extraordinary
items and cumulative effect
of change in accounting
principle 21,512 16,271 85,308 27,806
Extraordinary gain (loss) from
extinguishment of debt,
net (note 6) (1,901) (107) 4,674 (12,322)
Cumulative effect at
January 1, 1998 of change
in accounting for participating
mortgages (note 7) --- --- (4,629) ---
------- ------- ------- --------
Net earnings $19,611 $16,164 $85,353 $ 15,484
======= ======= ======= ========
Net earnings applicable
to common shareholders $16,573 $13,126 $76,239 $ 8,209
======= ======= ======= ========
</TABLE>
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, continued
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited, in thousands except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE OF
COMMON STOCK (Note 8):
Basic:
Earnings before extra-
ordinary items $ .27 $ .20 $ 1.12 $ .30
Extraordinary gain (loss) (.03) --- .07 (.18)
Cumulative effect of change
in accounting principle --- --- (.07) ---
-------- -------- -------- --------
Total $ .24 $ .20 $ 1.12 $ .12
======== ======== ======== ========
Diluted:
Earnings before extra-
ordinary items $ .27 $ .20 $ 1.11 $ .30
Extraordinary gain (loss) (.03) --- .07 (.18)
Cumulative effect of change
in accounting principle --- --- (.07) ---
-------- -------- -------- --------
Total $ .24 $ .20 $ 1.11 $ .12
======== ======== ======== ========
DIVIDENDS PER SHARE:
Common stock $ .28 $ .25 $ .84 $ .75
======== ======== ======== ========
Preferred stock $ .75 $ .75 $ 2.25 $ 1.80
======== ======== ======== ========
</TABLE>
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
September 30, 1998 and December 31, 1997
(in thousands, note 1)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets:
Property:
Operating properties:
Property and deferred costs
of projects $3,551,549 $3,079,962
Less accumulated depreciation
and amortization 554,209 515,229
---------- ----------
2,997,340 2,564,733
Properties in development 204,824 232,349
Properties held for sale 149,552 20,052
---------- ----------
Total property 3,351,716 2,817,134
Investments in and advances to unconsolidated
real estate ventures (note 3) 303,415 338,692
Prepaid expenses, receivables under finance
leases and other assets 234,420 228,956
Accounts and notes receivable 84,771 114,300
Investments in marketable securities 4,021 3,586
Cash and cash equivalents 42,102 87,100
---------- ----------
Total $4,020,445 $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
September 30, 1998 and December 31, 1997
(in thousands, note 1)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------ ------------
<S> <C> <C>
Liabilities:
Debt (note 4):
Property debt not carrying a Parent
Company guarantee of repayment $2,459,313 $2,085,456
Parent Company debt and debt carrying a
Parent Company guarantee of
repayment:
Property debt 242,093 158,093
Convertible subordinated debentures 128,515 130,000
Other debt 243,200 256,000
---------- ----------
613,808 544,093
---------- ----------
Total debt 3,073,121 2,629,549
Obligations under capital leases 8,246 54,591
Accounts payable, accrued expenses
and other liabilities 268,045 302,613
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;
68,482,514 shares issued in 1998 and 66,847,682
shares issued in 1997 685 669
Additional paid-in capital 735,628 686,976
Accumulated deficit (202,821) (222,171)
---------- ----------
Total shareholders' equity 533,533 465,515
---------- ----------
Total $4,020,445 $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
Nine Months Ended September 30, 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 $ 453,676 $ 520,522
Proceeds from land sales 72,007 120,908
Interest received 8,014 10,238
Land development expenditures --- (83,089)
Operating expenditures (234,550) (287,218)
Interest paid (131,804) (161,062)
Distributions received from unconsolidated
majority financial interest ventures, net 16,552 ---
--------- ---------
Net cash provided by operating activities 183,895 120,299
--------- ---------
Cash flows from investing activities:
Expenditures for properties in development
and improvements to existing properties
funded by debt (237,077) (190,927)
Expenditures for property acquisitions (251,106) ---
Expenditures for improvements to existing
properties funded by cash provided by
operating activities:
Tenant leasing and remerchandising (5,272) (5,014)
Building and equipment (8,306) (6,493)
Payments received on loans and advances to
unconsolidated majority financial interest
ventures 59,398 ---
Proceeds from sales of operating properties
and other investments 34,141 5,770
Other 5,683 5,042
--------- ---------
Net cash used by investing activities (402,539) (191,622)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of property debt 232,121 337,648
Repayments of property debt:
Scheduled principal payments (34,306) (35,033)
Other payments (167,491) (364,088)
Proceeds from issuance of other debt 455,971 45,000
Repayments of other debt (218,422) (44,358)
Proceeds from issuance of Series B Preferred
stock --- 196,826
Proceeds from issuance of common stock 43,429 ---
Purchases of common stock (65,819) (21,201)
Proceeds from exercise of stock options 353 1,963
Dividends paid (66,006) (57,385)
Other (6,184) (302)
--------- ---------
Net cash provided by financing activities 173,646 59,070
--------- ---------
Net decrease in cash and cash equivalents (44,998) (12,253)
Cash and cash equivalents at beginning of period 87,100 43,766
--------- ---------
Cash and cash equivalents at end of period $ 42,102 $ 31,513
========= =========
</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
Nine Months Ended September 30, 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 $ 85,353 $ 15,484
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 56,713 61,446
(Gain) loss on dispositions of assets
and other provisions, net 5,220 8,513
Deferred income taxes -- 28,275
Extraordinary (gain) loss, net (4,674) 12,322
Cumulative effect of change in accounting
principle 4,629 --
Additions to preconstruction reserve -- 2,400
Provision for bad debts 3,716 3,432
Decrease (increase) in operating assets
and liabilities, net 32,938 (11,573)
-------- --------
Net cash provided by operating activities $183,895 $120,299
======== ========
Schedule of Noncash Investing and Financing
Activities:
Common stock issued pursuant to Contingent
Stock Agreement $ 65,023 $ 23,313
Common stock issued upon conversion of
convertible subordinated debentures 1,484 --
Debt assumed by purchasers of land 2 16,675
Termination of capital lease obligation 46,387 --
Debt assumed on purchase of operating properties $192,618 $ --
======== ========
</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)
September 30, 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).
Certain amounts have been reclassified to conform to the current
presentation.
(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 the Company met the qualifications for REIT status as of September
30, 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 and nine months ended September 30,
1998 relates only to certain state income taxes.
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
-----------------------------------
Investments in and advances to unconsolidated real estate ventures at
September 30, 1998 and December 31, 1997 are summarized, based on the level
of the Company's financial interest, as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Majority interest ventures $236,900 $259,320
Joint interest and control ventures 691 3,412
Minority interest ventures 65,824 75,960
-------- --------
Total $303,415 $338,692
======== ========
</TABLE>
The equity in earnings of unconsolidated real estate ventures for the three
and nine months ended September 30, 1998 and 1997 is summarized, based on
the level of the Company's financial interest, as follows (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
------------------ ------------------
1998 1997 1998 1997
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Majority interest ventures $11,021 $ --- $42,983 $ ---
Minority interest ventures 2,247 1,771 6,945 2,721
------- ------ ------- ------
Total $13,268 $1,771 $49,928 $2,721
======= ====== ======= ======
</TABLE>
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 balance sheets of the ventures in which the Company
holds majority financial interests at September 30, 1998 and December 31,
1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets:
Operating properties, net $220,237 $211,385
Properties in development 59,376 23,144
Properties held for sale -- 46,289
Land held for development and sale 223,592 233,406
Investment land 40,919 34,947
Other 177,133 145,045
-------- --------
Total $721,257 $694,216
======== ========
Liabilities and shareholders' deficit:
Mortgages payable and other long-term debt $309,348 $280,595
Other liabilities 114,645 89,710
Loans and advances from The Rouse Company 355,594 405,871
Shareholders' deficit (58,330) (81,960)
-------- --------
Total $721,257 $694,216
======== ========
</TABLE>
11
<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 and nine months
ended September 30, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
1998 1998
------------- -------------
<S> <C> <C>
Revenues $ 59,621 $ 212,883
Operating expenses (37,576) (124,718)
Interest expense, including interest
on loans from the Company of $35,453
for the nine months and $11,395 for
the three months (16,708) (54,557)
Depreciation and amortization (2,489) (7,543)
Equity in earnings of unconsolidated
real estate ventures 13 862
Gain (loss) on dispositions of assets (123) 15,723
Income taxes (1,358) (18,095)
Extraordinary loss, net -- (925)
-------- ---------
Net earnings $ 1,380 $ 23,630
======== =========
</TABLE>
Revenues and operating expenses for the nine months ended September 30, 1998
reflect the elimination of certain land sales between the Company and the
majority interest ventures.
12
<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 Company's share of the net earnings before extraordinary loss of the
ventures is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
1998 1998
------------ -------------
<S> <C> <C>
Share of net earnings based on
ownership interest $ 1,366 $ 23,394
Share of extraordinary loss -- 916
Participation by others in the Company's
share of earnings of majority financial
interest ventures (3,980) (19,019)
Interest on loans and advances, net 11,395 35,453
Eliminations and other, net 2,240 2,239
---------- --------
$ 11,021 $ 42,983
========== ========
</TABLE>
(4) Debt
----
Debt at September 30, 1998 and December 31, 1997 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- ---------------------
Due in Due in
Total one year Total one year
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Mortgages and bonds $2,369,432 $121,359 $2,159,418 $ 48,019
Convertible subordi-
nated debentures 128,515 --- 130,000 ---
Medium-term notes 97,500 6,000 110,300 12,800
Credit line borrowings 250,000 --- --- ---
Other loans 227,674 29,584 229,831 9,319
---------- -------- ---------- --------
Total $3,073,121 $156,943 $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.
13
<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, continued
---------------
In July 1998, the Company obtained an $800 million unsecured line of credit
facility to replace a $250 million revolving line of credit facility. The
new facility is structured as a $350 million 364 day bridge loan facility
and a $450 million three-year revolving line of credit. Repayment of any
borrowings under the new facility is guaranteed by certain of the Company's
majority financial interest ventures.
(5) Gain (loss) on dispositions of assets and other provisions, net
---------------------------------------------------------------
The loss for the three months ended September 30, 1998 relates primarily to
a loss on the disposal of a retail property. The loss for the nine months
ended September 30, 1998 relates primarily to the third quarter disposal and
losses on the sales of a hotel and office building in the first quarter. The
loss for the nine months has been partially offset by a reduced provision
for loss on a retail center which the Company sold in April 1998, a first
quarter partial recovery of a loss previously recognized on a litigation
matter, and a gain in the second quarter on the sale of an office building.
The loss for the nine months ended September 30, 1997 relates primarily to
additional provisions for losses on several retail centers the Company was
holding for sale. The gain for the three months ended September 30, 1997
relates primarily to a reduced provision for loss on a retail center which
the Company sold in the fourth quarter 1997.
(6) Extraordinary gain (loss), net
------------------------------
The extraordinary gain and losses for the three and nine months ended
September 30, 1998 and 1997 relate to the extinguishment of debt prior to
the scheduled maturities. The net gain for the nine months ended September
30, 1998 resulted from debt extinguished in connection with the transfer of
title to a property to the related mortgage lender in the second quarter of
1998 ($14,875,000). This gain was partially offset by losses on
extinguishment of other debt prior to scheduled maturity ($9,285,000). One
of the losses was incurred by a majority financial interest venture. The
debt was related to a hotel property which the venture sold, and a portion
of the proceeds of the sale were used to repay the debt. The loss related to
the majority financial interest venture ($916,000) is net of related taxes.
14
<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 gain (loss), net, continued
-----------------------------------------
The loss for the nine months ended September 30, 1997 ($18,957,000), is net
of related income tax benefits of $6,635,000.
(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 recognized the cumulative effect of
initially adopting the Statement in its statement of operations for the nine
months ended September 30, 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 $.07 per share diluted). The effect of
this change excluding the cumulative effect of initial adoption was not
material (approximately $.01 per share basic and $.01 per share diluted for
the nine months ended September 30, 1998). 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.
15
<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 and nine months ended September 30, 1998 and 1997 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1998 September 30, 1998
----------------------------- -----------------------------
Basic Diluted Basic Diluted
------------------- -------- ------------------- --------
<S> <C> <C> <C> <C>
Earnings before extraordi-
nary gains and losses
and cumulative effect
of change in accounting
principle $21,512 $21,512 $85,308 $85,308
Dividends on Preferred
stock (3,038) (3,038) (9,114) (9,114)
Dividends on unvested
common stock awards (114) (60) (382) (252)
Interest on convertible
subordinated debentures -- -- -- --
------------------ ------- ------------------ -------
Adjusted earnings before
extraordinary gains and
losses and cumulative
effect of change in
accounting principle
used in EPS computation $18,360 $18,414 $75,812 $75,942
================== ======= ================== =======
Weighted-average shares
outstanding 68,323 68,323 67,437 67,437
Dilutive securities:
Convertible subordinated
debentures -- -- -- --
Convertible Preferred stock -- -- -- --
Options, warrants and
unvested common stock
awards -- 922 -- 1,125
------------------ ------- ------------------ -------
Adjusted weighted-average
shares used in EPS
computation 68,323 69,245 67,437 68,562
================== ======= ================== =======
</TABLE>
Effects of potentially dilutive securities are presented only in periods in
which they are dilutive.
16
<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, continued
-----------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1997 September 30, 1997
------------------------------- ------------------
Basic Diluted Basic Diluted
------------------- ---------- -------- --------
<S> <C> <C> <C> <C>
Earnings before extraordinary
losses and cumulative effect
of change in accounting
principle $16,271 $16,271 $27,806 $27,806
Dividends on Preferred
stock (3,038) (3,038) (7,275) (7,275)
Dividends on unvested
common stock awards (153) (81) (477) (342)
Interest on convertible
subordinated debentures -- -- -- --
------------------ --------- ------- -------
Adjusted earnings
before extraordinary
losses and cumulative
effect of change in
accounting principle
used in EPS computation $13,080 $13,152 $20,054 $20,189
================== ========= ======= =======
Weighted-average shares
outstanding 66,256 66,256 66,194 66,194
Dilutive securities:
Convertible subordinated
debentures -- -- -- --
Convertible Preferred stock -- -- -- --
Options, warrants and
unvested common stock
awards -- 1,178 -- 836
------------------ --------- ------- -------
Adjusted weighted-average
shares used in EPS
computation 66,256 67,434 66,194 67,030
================== ========= ======= =======
</TABLE>
Effects of potentially dilutive securities are presented only in periods in
which they are dilutive.
17
<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) Property acquisitions
---------------------
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, as amended, and
subject to certain terms and conditions, the Company will purchase
interests in seven retail centers for approximately $1.1 billion. On
July 31, 1998, the Company purchased ownership interests in two of the
retail centers for approximately $445 million, including debt assumed of
approximately $193 million. In October 1998, the Company purchased
ownership interests in four of the retail centers for approximately $433
million, including debt assumed of approximately $223 million. The Company
used available cash, new mortgage debt secured by one of the properties and
borrowings under its new credit facility to fund the net purchase price of
the retail center interests purchased in July and October 1998. In
connection with the acquisitions, the Company decided to sell its ownership
interests in two of the properties. One of the ownership interests the
Company decided to sell was purchased on July 31, 1998 and accordingly, the
Company classified the cost allocated to such ownership interest as
Property Held for Sale in the consolidated balance sheet of September 30,
1998. The Company expects to purchase the remaining property interest in
December 1998.
On June 30, 1998, the Company entered into an agreement to acquire all of
the income producing properties (office and industrial buildings) and
certain other assets of Rouse-Teachers Properties, Inc., an entity in which
the Company currently holds a 5% ownership interest.
18
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(10) Property acquisitions, continued
--------------------------------
The purchase price will be approximately $364 million, including property
debt assumed of approximately $103 million. The acquisition is expected to
close in the fourth quarter of 1998.
(11) Shelf registration statement
----------------------------
At September 30, 1998, the Company had a shelf registration statement for
future sale of up to an aggregate of $2.25 billion (based on the public
offering price) of common stock, Preferred stock and debt securities.
19
<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 and nine months ended September 30, 1998 as compared to
the same periods 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 actively evaluating opportunities to acquire properties owned by
others that may have future prospects consistent with the Company's long-term
investment criteria and is continually evaluating the future outlook for
properties in the Company's portfolio. This includes considering opportunities
to expand and/or renovate the properties and assessing whether particular
properties are meeting or have the potential to meet the Company's investment
criteria. The Company plans to continue making substantial investments to expand
and/or renovate leasable mall space and/or add new department stores 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 continue 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 overall 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 (majority interest ventures) but does not own a majority
voting interest.
20
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
These majority interest 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 majority interest ventures are accounted for
in the Company using the equity method in 1998 while the subsidiaries were
consolidated in 1997.
Operating Properties - Retail Centers:
Operating results of retail properties are summarized as follows (in millions):
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------------------------------
1998 1997
------------------------------------------------- ------
Consoli- Majority Minority
dated Interest Interest
Properties Ventures Ventures Total Total
--------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues $123.0 $15.4 $ 2.8 $141.2 $125.2*
Operating expenses,
exclusive of depreciation and
amortization 58.2 8.5 -- 66.7 64.5
Interest expense 32.9 2.9 -- 35.8 29.3
Provision for bad debts 1.7 .1 -- 1.8 1.8
------ ----- ----- ------ ------
30.2 3.9 2.8 36.9 29.6
Depreciation and amortization 13.8 1.1 .5 15.4 11.2*
------ ----- ----- ------ -----
Operating income $ 16.4 $ 2.8 $ 2.3 $ 21.5 $18.4
====== ===== ===== ====== =====
<CAPTION>
Nine months ended September 30,
------------------------------------------------------------
1998 1997
---------------------------------------------------- ------
Consoli- Majority Minority
dated Interest Interest
Properties Ventures Ventures Total Total
---------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues $345.2 $42.3 $ 8.1 $395.6 $365.8*
Operating expenses,
exclusive of depreciation and
amortization 169.3 22.8 -- 192.1 185.0
Interest expense 93.0 9.2 -- 102.2 92.2
Provision for bad debts 3.4 .1 -- 3.5 4.0
------ ----- ----- ------ ------
79.5 10.2 8.1 97.8 84.6
Depreciation and amortization 36.6 3.4 1.7 41.7 35.9*
------ ----- ----- ------ ------
Operating income $ 42.9 $ 6.8 $ 6.4 $ 56.1 $ 48.7
====== ===== ===== ====== ======
</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.
21
<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, (continued):
Revenues from retail centers increased $16.0 million and $29.8 million for the
three and nine months ended September 30, 1998, respectively, while total
operating and interest expenses increased $12.9 million and $22.4 million,
respectively, compared to the same periods in 1997. The increases in revenues
and expenses were attributable primarily to effects of higher average occupancy
(92.5% and 91.6% for the three and nine months ended September 30, 1998,
respectively, compared to 90.8% and 89.8% for the same periods in 1997), the
operations of two properties acquired, one in the fourth quarter 1997, and one
in the third quarter 1998, the opening of a retail center expansion in the third
quarter of 1997, and the openings of five retail centers, two in the fourth
quarter of 1997, one in the first quarter of 1998 and two in the second quarter
1998. These increases were partially offset by the effects of the disposition of
interests in eight retail centers in the third and fourth quarters of 1997 and
second and third quarters of 1998.
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>
Three months ended September 30,
--------------------------------------------------------
1998 1997
-------------------------------------------- -----
Consoli- Majority Minority
dated Interest Interest
Properties Ventures Ventures Total Total
---------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues $39.8 $9.7 $.3 $49.8 $54.5*
Operating expenses, exclusive
of provision for bad debts,
depreciation and amortization 16.0 6.9 -- 22.9 26.0
Interest expense 16.6 1.9 -- 18.5 20.6
Provision for bad debts .2 -- -- .2 --
----- ---- --- ----- -----
7.0 .9 .3 8.2 7.9
Depreciation and amortization 6.6 1.3 .3 8.2 8.6*
----- ---- --- ----- -----
Operating income (loss) $ .4 $(.4) $-- $ -- $ (.7)
===== ==== === ===== =====
</TABLE>
22
<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 (continued):
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------------------------
1998 1997
------------------------------------------------- ---------
Consoli- Majority Minority
dated Interest Interest
Properties Ventures Ventures Total Total*
---------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues $119.0 $37.0 $1.0 $157.0 $161.2
Operating expenses, exclusive
of provision for bad debts,
depreciation and amortization 49.4 25.1 -- 74.5 78.0
Interest expense 49.9 7.4 -- 57.3 61.4
Provision for bad debts .3 -- -- .3 (.6)
------ ----- ---- ------ ------
19.4 4.5 1.0 24.9 22.4
Depreciation and amortization 19.9 4.1 .7 24.7 25.3*
------ ----- ---- ------ ------
Operating income (loss) $ (.5) $ .4 $ .3 $ .2 $ (2.9)
====== ===== ==== ====== ======
</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 decreased $4.7 million and
$4.2 million for the three and nine months ended September 30, 1998,
respectively, while total operating and interest expenses decreased $5.4 million
and $7.3 million, respectively, compared to the same periods in 1997. The
decreases in revenues and expenses are primarily attributable to the disposition
of two hotel properties in March 1998 and six office buildings, two in the
fourth quarter 1997, three in the first quarter 1998, and one in the second
quarter 1998, partially offset by the openings of new office properties in Las
Vegas and higher average occupancy levels (93.9% for the nine months ended
September 30, 1998 compared to 92.1% for the same period in 1997). In addition,
the decrease in expenses for the nine months of 1998 is partially offset by a
higher provision for bad debts as the first quarter of 1997 included the
recovery of a note receivable previously reserved of approximately $800,000.
Land Sales Operations:
Land sales operations relate primarily to the communities of Columbia, Maryland
and Summerlin, Nevada. Generally, revenues and operating income from land sales
are affected by such factors as the availability to purchasers of construction
and permanent mortgage financing at acceptable interest rates, consumer and
business confidence, availability of saleable land for particular uses and
management's decisions to sell, develop or retain land.
23
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Land Sales Operations, (continued):
Operating results of land sales operations are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------
1998 1997
------------------------------------ -----
Majority
Consolidated Interest
Properties Ventures Total Total
------------ -------- ----- -----
<S> <C> <C> <C> <C>
Hughes Operations:
Revenues $ 1.1 $26.2 $27.3 $35.2
Operating costs and
expenses .5 21.1 21.6 26.9
Interest expense .1 -- .1 .1
----- ----- ----- -----
Operating income $ .5 $ 5.1 $ 5.6 $ 8.2
===== ===== ===== =====
Columbia and other:
Revenues $ -- $ 8.3 $ 8.3 $15.9
Operating costs and
expenses -- 5.2 5.2 8.2
Interest expense .1 .8 .9 1.0
----- ----- ----- -----
Operating income (loss) $ (.1) $ 2.3 $ 2.2 $ 6.7
===== ===== ===== =====
Total:
Revenues $ 1.1 $34.5 $35.6 $51.0
Operating costs and
expenses .5 26.3 26.8 35.0
Interest expense .2 .8 1.0 1.1
----- ----- ----- -----
Operating income $ .4 $ 7.4 $ 7.8 $14.9
===== ===== ===== =====
</TABLE>
24
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Land Sales Operations, (continued):
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------------------------------
1998 1997
-------------------------------------------------- -------------
Consoli- Majority
dated Interest
Properties Ventures Total Total
------------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Hughes Operations:
Revenues $32.8 $ 92.6 $125.4 $119.8
Operating costs and
expenses 23.7 75.8 99.5 95.9
Interest expense .1 -- .1 .2
----- ------ ------ ------
Operating income $ 9.0 $ 16.8 $ 25.8 $ 23.7
===== ====== ====== ======
Columbia and other:
Revenues $ -- $ 40.6 $ 40.6 $ 33.3
Operating costs and
expenses -- 20.9 20.9 17.4
Interest expense .6 2.5 3.1 2.8
----- ------ ------ ------
Operating income (loss) (.6) $ 17.2 $ 16.6 $ 13.1
===== ====== ====== ======
Total:
Revenues $32.8 $133.2 $166.0 $153.1
Operating costs and
expenses 23.7 96.6 120.4 113.3
Interest expense .7 2.6 3.2 3.0
----- ------ ------ ------
Operating income $ 8.4 $ 34.0 $ 42.4 $ 36.8
===== ====== ====== ======
</TABLE>
Revenues and expenses for the nine months ended September 30, 1998 reflect the
elimination of certain land sales between the Company and the majority interest
ventures.
Revenues from land sales operations in the Hughes Operations decreased $7.9
million and increased $5.6 million for the three and nine months ended September
30, 1998, respectively, while related costs and expenses decreased $5.3 million
and increased $3.5 million, respectively, compared to the same periods in 1997.
The decrease in revenues for the three months relates primarily to a reduction
in sales of Summerlin ($11.6 million). The decrease in costs and expenses
relates primarily to the lower level of land sales. The increase in revenues for
the nine months relates to the sale of the remaining land at a master planned
office park in Los Angeles ($28.5 million) partially offset by lower sales of
Summerlin ($18.0 million) and other Nevada land. The increase in costs and
expenses was due to the same factors.
25
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Land Sales Operations, (continued):
Revenues from land sales operations in Columbia decreased $7.6 and increased
$7.3 million for the three and nine months ended September 30, 1998,
respectively, while related costs and expenses decreased $3.1 and increased $3.8
million, respectively, compared to the same periods in 1997. The decreases in
revenues for the three month period was due primarily to lower levels of sales
for residential, commercial and other uses. The increase in revenues and costs
and expenses for the nine month period is due primarily to higher levels of
residential and commercial land 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 expenses decreased $2.8 million
and $.8 million for the three and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997. The decrease in expenses in
the three and nine months is primarily due to a reduction of the pre-
construction reserve as a large project progressed to further stages of
development, partially offset by increased acquisition costs.
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 increased $.6 million and decreased $2.8 million for the
three and nine months ended September 30, 1998, as compared to the same periods
in 1997. The decrease in these costs for the nine month period is attributable
primarily to higher levels of corporate funds invested in development projects
and allocated to other segments.
26
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Corporate, continued:
Corporate revenue consists primarily of corporate interest income on cash
invested and notes receivable. The decrease in revenue of $.6 and $1.9 million
for the three and nine months ended September 30, 1998, respectively, relates
primarily to lower interest income on cash invested.
Gain (loss) on dispositions of assets and other provisions, net:
The loss for the three months ended September 30, 1998 relates primarily to a
loss on the disposal of a retail property. The loss for the nine months ended
September 30, 1998 relates primarily to the third quarter disposal and losses on
the sales of a hotel and office building in the first quarter.
The loss for the nine months has been partially offset by a reduced provision
for loss on a retail center which the Company sold in April 1998, a first
quarter partial recovery of a loss previously recognized on a litigation matter,
and a gain in the second quarter on the sale of an office building.
The loss for the nine months ended September 30, 1997 relates primarily to
additional provisions for losses on several retail centers the Company was
holding for sale. The gain for the three months ended September 30, 1997 relates
primarily to a reduced provision for loss on a retail center which the Company
sold in the fourth quarter 1997.
Extraordinary gain (loss), net:
The extraordinary gain and losses for the three and nine months ended September
30, 1998 and 1997 relate to the extinguishment of debt prior to the scheduled
maturities. The net gain for the nine months ended September 30, 1998 resulted
from debt extinguished in connection with the transfer of title to a property to
the related mortgage lender in the second quarter of 1998 ($14,875,000). This
gain was partially offset by losses on extinguishment of other debt prior to
scheduled maturity ($9,285,000). One of the losses was incurred by a majority
financial interest venture. The debt was related to a hotel property which the
venture sold, and a portion of the proceeds of the sale were used to repay the
debt. The loss related to the majority financial interest venture ($916,000) is
net of related taxes.
The loss for the nine months ended September 30, 1997 ($18,957,000), is net of
related income tax benefits of $6,635,000.
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
27
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Cumulative effect of change in accounting for participating mortgages
(continued):
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 recognized the cumulative effect of initially
adopting the Statement in its statement of operations for the nine months ended
September 30, 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 $.07 per share diluted). The effect of this change excluding the
cumulative effect of initial adoption was not material (approximately $.01 per
share basic and $.01 per share diluted for the nine months ended September 30,
1998). 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 and nine months ended September 30, 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 gain (loss), 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 extraordinary losses) was 45%
and 52% for the three and nine months ended September 30, 1997, respectively.
The effective rate reflected the effects of permanent differences, primarily the
distributions 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 $68,018,000 from December 31, 1997 to
September 30, 1998. The increase was primarily attributable to the issuance of
common stock and net earnings for the nine months ended September 30, 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 $46,123,000 at September 30, 1998, including $4,021,000 of
investments held for restricted uses.
28
<PAGE>
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):
In July 1998, the Company obtained an $800 million unsecured line of credit
facility to replace a $250 million revolving line of credit facility. The new
facility is structured as a $350 million 364 day bridge loan facility to fund
acquisitions and a $450 million three-year revolving line of credit. Repayment
of any borrowings under the new facility is guaranteed by certain of the
Company's majority interest ventures. The revolving line of credit may 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. At September
30, 1998, the Company had outstanding borrowings of $250 million under the line
of credit.
As of September 30, 1998, debt due in one year was $156,943,000, including
balloon maturities of $70,353,000. The Company is continually evaluating sources
of capital, and management believes there are satisfactory sources available,
including approximately $2.25 billion under its universal shelf registration
statement and $284 million available under its credit facilities as of
October 31, 1998. Management may, however, decide to fund certain requirements
with proceeds from sales or exchanges of interests in properties.
Net cash provided by operating activities was $183,895,000 and $120,299,000 for
the nine months ended September 30, 1998 and 1997, respectively. The increase in
net cash provided of $63,596,000 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 affected by the
timing of receipt of revenues and payment of operating and interest expenses.
Net cash used in investing activities was $402,539,000 and $191,622,000 for the
nine months ended September 30, 1998 and 1997, respectively. The increase in net
cash used of $210,917,000 was due primarily to the purchase of the interests in
retail properties discussed previously and an increase in expenditures for
properties under development partially offset by payments received on loans to
majority financial interest ventures and higher proceeds from sales of
properties.
Net cash provided by financing activities was $173,646,000 and $59,070,000 for
the nine months ended September 30, 1998 and 1997, respectively. The increase in
net cash provided of $114,576,000 was due primarily to increased net borrowings
(approximately $302.2 million) principally to finance the purchase of interests
in retail properties and increased property development expenditures referred to
above. The increase in
29
<PAGE>
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):
cash flow from borrowings was partially offset by reduced proceeds from equity
transactions as 1997 included the proceeds from a public offering of Series B
Convertible Preferred stock of $196.8 million.
Property acquisitions:
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. The agreement, as amended, provides for the Company to purchase
interests in seven retail centers for approximately $1.1 billion. The agreement
is subject to the satisfaction of certain conditions and includes a provision
for the substitution of, or increase or decrease in the number of, centers to be
acquired. The Company plans to fund the purchase price by assuming existing
property debt of approximately $248 million, borrowing approximately $336
million in the form of mortgage debt on the properties, borrowing on its $800
million credit facility, and, depending upon market conditions, issuing common
stock, Preferred stock, debt securities and/or other securities under its
universal shelf or other registration statements. The Company may also fund a
portion of the purchase price with the proceeds from sales of interests in
properties, including those acquired in this transaction, or the exchange of
interests in properties. On July 31, 1998, the Company purchased two of the
property interests for a purchase price of approximately $445 million,
including approximately $193 million of mortgage debt assumed. The remainder of
the purchase price was provided by available cash balances and borrowings from
the aforementioned $800 million credit facilities. In October 1998, the Company
purchased ownership interests in four of the retail centers for approximately
$433 million, including debt assumed of approximately $223 million. The Company
used available cash, proceeds from new mortgage debt secured by one of the
properties and borrowings on its new credit facilities to fund these purchases.
In connection with the acquisitions, the Company decided to sell its ownership
interests in two of the properties. One of the ownership interests the Company
decided to sell was purchased on July 31, 1998 and accordingly, the Company
classified the cost allocated to such ownership interest as Property Held for
Sale in the consolidated balance sheet of September 30, 1998. The acquisition of
the remaining property interest is expected to close in December 1998.
On June 30, 1998, the Company entered into an agreement to acquire all of the
income-producing properties (office and industrial buildings) and certain other
assets of Rouse-Teachers Properties, Inc., an entity in which the Company
currently holds a 5% ownership interest. The purchase price will be
approximately $364 million, including property debt assumed of approximately
$103 million. The acquisition is expected to close in
30
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Property acquisitions, continued:
the fourth quarter of 1998. The Company expects to fund the net purchase price
by issuing approximately $100 million in common stock and $108 million in notes
to the seller, and paying approximately $53 million in cash. The Company expects
to fund the cash payment with available cash and borrowings under its credit
facility. The acquisition is expected to close in the fourth quarter of 1998.
Year 2000 issue:
The year 2000 issue relates to whether computer systems will properly recognize
date-sensitive information to allow accurate processing of transactions and data
relating to the year 2000 and beyond. In addition, the year 2000 issue relates
to whether non-Information Technology (IT) systems that depend on embedded
computer technology will recognize the year 2000. Systems that do not properly
recognize such information could generate erroneous information or fail.
In 1996, the Company adopted a plan to replace virtually all of its management
information and accounting systems. This plan was adopted in the context of the
Company's long-term Information Systems strategy. In accordance with this plan,
all mission-critical IT systems are being replaced with systems that are year
2000 compliant. The Company has already implemented new financial accounting,
payroll and leasing management systems that are year 2000 compliant. Also, the
Company is in the process of implementing new property management, cash
management and human resource systems (both of which are expected to become
operational on or before January 1, 1999) which will be year 2000 compliant. In
addition, as a result of the Company's normal upgrade and replacement process,
all network and desktop equipment meet the requirements for year 2000. As a
result, the Company expects that the costs to specifically remediate year 2000
IT issues will be minimal. For non-IT systems, the Company has completed a
comprehensive review of computer hardware and software in mechanical systems and
has developed a program to repair or replace non-IT systems that are not year
2000 compliant. It is anticipated that the program will be completed in the
third quarter of 1999. Costs to specifically remediate non-IT systems (e.g.,
escalators, elevators, heating, ventilating and cooling systems, etc.) that are
non-compliant are not expected to be material. Management does not believe that
the year 2000 issue will pose significant problems in its IT or non-IT systems,
or that resolution of any potential problems with respect to these systems will
have a material effect on the Company's financial condition or results of
operations.
31
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Year 2000 issue, continued:
It is very difficult to identify "the most reasonably likely worst-case
scenario" at this time. The Company's exposure is widely spread, with no known
major direct exposure. The Company believes that the most likely worst-case
exposure is at the indirect level, involving vendors, suppliers and tenants. For
example, the Company believes there could be failure in the information systems
of certain tenants that may delay the payment of rents. While it is not possible
at this time to determine the likely impact of these potential problems, the
Company will continue to evaluate these areas and develop contingency plans, as
appropriate.
Recent accounting pronouncements:
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 be expensed (for transactions occurring
after March 19, 1998) similar to the accounting for such costs in business
combination transactions. As the Company previously followed a practice of
capitalizing certain internal staff costs relating to acquisitions of operating
properties, this consensus results in a change in accounting policy; however,
the change has not had and is not expected to have a material effect on net
earnings (loss).
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activity," (Statement 133) which is required to be adopted by the
Company no later than January 1, 2000. The Company's use of derivative
instruments has consisted primarily of interest rate swap, cap and lock
agreements related to specific debt financings. While the Company has not
completed its analysis of Statement 133 and has not made a decision regarding
the timing of adoption, it does not believe that adoption will have a material
effect on its financial position and results of operations based on of its
current use of derivative instruments.
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
32
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Information relating to forward-looking statements, continued:
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.
33
<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
Current Report on Form 8-K filed August 13, 1998
disclosing acquisition of assets.
Current Report on Form 8-K/A filed October 9, 1998
disclosing financial statements required under Rule 3-14
of Regulation S-X and certain pro forma financial information.
Current Report on Form 8-K filed October 21, 1998
disclosing acquisition of assets.
Current Report on Form 8-K filed November 5, 1998
disclosing acquisition of assets.
Current Report on Form 8-K/A filed November 16, 1998
disclosing financial statements required under Rule 3-14
of Regulation S-X and certain pro forma financial information.
34
<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: November 16, 1998 By /s/Jeffrey H. Donahue
----------------- --------------------------
Jeffrey H. Donahue
Senior Vice President and
Chief Financial Officer
Principal Accounting Officer:
Date: November 16, 1998 By /s/George L. Yungmann
----------------- ---------------------
George L. Yungmann
Senior Vice President and
Controller
35
<PAGE>
Exhibit Index
Exhibit Number Description
- - -------------- -----------
2 Plan of Acquisition, Reorganization,
Arrangement, Liquidation or Succession
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
<PAGE>
Exhibit 2: Plan of acquisition, reorganization, arrangement, liquidation or
succession
June 30, 1998
Joseph W. Luik
Senior Managing Director
Teachers Insurance and Annuity
Association of America
730 Third Avenue
New York, NY 10017
Re: Purchase of The Rouse Company or its designated affiliate or
subsidiary (collectively, "TRC") of certain of the interests
of Teachers Properties, Inc. ("TPI") in Rouse-Teachers
Properties, Inc. ("Rouse-Teachers")
------------------------------------------------------------
Dear Joe:
Subject to the terms and conditions of this letter, TRC agrees to enter into the
transactions contemplated by this letter agreement concerning certain of TPI's
interests in Rouse-Teachers and its affiliated partnerships (including the
partnership interests owned by Hunt Valley Title Holding Corporation, a wholly
owned subsidiary of Rouse-Teachers). For purposes of this letter agreement, (i)
the term "Sale Properties" shall mean the income producing properties, and
certain undeveloped land, currently owned by Rouse-Teachers and such affiliates,
all as such real property is identified on Attachment I hereto (the "Sale
------------
Properties") and (ii) the term "RTPI" shall mean Rouse-Teachers, Hunt Valley
Title Holding Corporation, and all of the partnerships and corporations owned by
Rouse-Teachers and Hunt Valley Title Holding Corporation.
Structure of
Transaction: All of the assets owned by RTPI other than the Sale
- - ----------- Properties (the "Retained Properties") first will be
distributed down to a newly-formed, wholly owned subsidiary
of RTPI ("LandCo"). RTPI will then convey 95% of the stock
of LandCo to TPI and 5% of the stock of LandCo to The Rouse
Company or a designee of The Rouse Company which is
satisfactory to TPI. TPI will sell to TRC all of its stock
in Chesapeake Investors, Inc., the parent of RTPI. It is the
intent of the parties to minimize taxes to the extent
possible, and the structure of the transaction will be
subject to revision in order to achieve that goal.
<PAGE>
LandCo: TPI and TRC will continue their respective 95% and 5%
- - ------ ownership interests in LandCo. The Management Agreement
between RTPI and TRC will be terminated. TPI and TRC will
enter into an agreement patterned on the existing
Shareholder's Agreement (including appropriate provisions
from the Management Agreement) to govern their relationship
as shareholders of LandCo. TRC will agree to manage LandCo
for a reimbursement of costs only. The land operations
specifically related to LandCo will be separated from the
RTPI operations as of the closing date.
Gross Value: The agreed upon gross value of the income-producing
- - ----------- properties to be transferred is $367 million and the agreed
upon gross value for the undeveloped land is $8 million.
Proceeds: The sale of assets, net of existing debt, will result in
- - -------- proceeds to TPI before closing costs of $260,854,672, all as
more completely described on Attachment 2 made a part
------------
hereof.
Payment of
Proceeds: TPI will receive at closing (i) $53 million in cash, (ii)
- - -------- $100 million in Common Stock of The Rouse Company, (iii) a
promissory note in the amount of $49,854,672 secured by a
deed of trust on properties to be identified, and (iv) a
promissory note, which shall be (1) rated not less than
investment grade by a rating agency satisfactory to TPI, (2)
registered under the Securities Act of 1933, as amended,
with the Securities and Exchange Commission, and (3)
executed by The Rouse Company in the amount of $58 million.
TPI may elect to have Teachers Insurance and Annuity
Association of America ("TIAA") or any other affiliate of
TPI be the original lender with respect to the loans
referred to in clauses (iii) and (iv) above (such loans, the
"New Loans"). The specifics of the payment of proceeds are
more particularly set forth on Attachment 3 made a part
------------
hereof. The pro-rations to be effected as of the closing
date shall hereafter be negotiated in good faith by the
parties. Subject in all respects to the parties subsequent
agreement as to all pro-rations, certain aspects of such
pro-rations shall be reflected as set forth on Attachment 4
----------
made a part hereof. In order to assist TPI in the evaluation
of issues concerning pro-rations, TRC agrees to provide to
TPI, within thirty (30) days after the date that both
parties have executed and delivered to each other this
letter agreement (such date of execution and delivery, the
"Execution Date"), two separate estimates by TRC as to all
of the pro-rations which would be appropriate for a closing
of this transaction, one of which shall assume an October
31, 1998 closing and the other of which shall assume a
December 31, 1998 closing.
<PAGE>
Limitation On
Sale of Stock: In order to maintain a stable market in Rouse Common stock,
- - ------------- TPI will agree to sell no more than 1/3 of the holdings in
the six months after closing, and no more than an aggregate
of 2/3 within one year after closing. Such limitations shall
not apply by transfers to affiliates of TPI.
Closing: Closing is expected to occur on or about October 31, 1998,
- - ------- but in no event shall the closing occur later than December
31, 1998. The parties agree that, on or prior to September
1, 1998, they shall establish a closing date.
Conditions
Precedent: Each party's obligations hereunder are expressly conditioned
- - --------- upon the approval of the transactions contemplated herein by
all relevant TRC, TPI and RTPI Boards and Committees by
September 25, 1998 (collectively, "Board Approval"). TRC and
TPI shall notify the other party promptly in writing upon
receipt of Board Approval. If either party does not obtain
Board Approval by September 25, 1998, the other party may
terminate this letter agreement.
Representations
and Warranties:
Due Diligence: TRC will neither conduct any due diligence nor require TPI
- - ------------- to make any representations or warranties with regard to the
assets being conveyed or any other aspects of the
transactions contemplated hereby.
Costs and Expenses: The transaction has been structured to minimize transfer
- - ------------------ taxes. To the extent incurred, transfer taxes will be split
50%- 50%. Each party will pay its own costs in connection
with the transaction, including its own legal fees, except
that TRC shall pay all reasonable costs and expenses in
connection with the New Loans comprising a portion of the
purchase price, including, legal fees and expenses for the
New Loans, deed of trust recording taxes, and fees and costs
of rating and registering The Rouse Company's promissory
note.
Documentation: TRC will take the responsibility for preparing the necessary
- - ------------- documentation, subject to TPI's approval, except that TPI
will prepare the documents for the deed of trust loan, which
will be based on the TIAA forms used for the most recent
deed of trust or mortgage loan transaction consummated
between TIAA and an affiliate of TRC. The transaction will
be subject to each party's review and approval of all of the
documentation.
<PAGE>
Maryland Casualty
Litigation: TPI will have full authority to control and settle the
- - ---------- litigation. TRC will continue to make its personnel
available for the conduct of the litigation, and TRC will
cooperate with TPI in all aspects of the litigation. Any
post-closing litigation costs, settlement or judgment will
be paid 95% by TPI and 5% by TRC. An appropriate
indemnification agreement from LandCo will be drafted to
indemnify RTPI from losses resulting from the Maryland
Casualty case.
Syndication Deficit
Account: The parties agree that as of the date of closing, each
- - ------- party's balance in the Syndication Deficit Account shall be
zero.
Interim
Transactions: The parties agree that any proposed sale by RTPI of any of
- - ------------ the Sale Properties prior to the closing contemplated by
this letter agreement shall be dealt with pursuant to the
provisions of the Management Agreement, provided that (i)
all proceeds of any such sale which is consummated after the
closing hereunder shall belong to TRC and (ii) TRC shall be
solely responsible for any costs or expenses in connection
with any such sale.
Governing Law: This letter agreement, and the rights and obligations of the
- - ------------- parties shall be construed in accordance with New York law
(without regard to New York's principles of conflicts of
laws).
Use of Name: Immediately after closing, the name "Teachers" shall be
- - ----------- deleted from all entities owned by TRC, including Rouse-
Teachers, and TRC shall agree to communicate the change of
affiliation to third parties.
Date of Agreement: This letter agreement shall become effective as of the
- - ----------------- Execution Date.
This letter agreement shall constitute a binding obligation of each of the
parties herein, subject to the fulfillment of the conditions precedent set forth
herein and subject to each party's review and approval of all necessary
documentation. While it is not contemplated that a Stock Purchase Agreement
will be required, at the request of either TRC or TPI on or before July 31,
1998, TRC and TPI agree to negotiate in good faith to reach a Stock Purchase
Agreement between them as soon as possible.
<PAGE>
Please execute this letter where indicated below to evidence TPI's agreement to
the terms and conditions in this letter agreement and return a fully-executed
and dated original to me by telecopy (410) 992-6135 and by overnight mail.
Very truly yours,
/s/ Douglas A. McGregor
Douglas A. McGregor
Agreed to and accepted this 30th day of June, 1998
TEACHERS PROPERTIES, INC.
By: /s/ Joseph W. Luik
------------------------
Joseph W. Luik
Senior Managing Director
cc: Duke S. Kassolis
Robert Y. McCarter
<PAGE>
ATTACHMENT 1
------------
Rouse-Teachers Properties, Inc.
Properties in Operation
May 29, 1998
<TABLE>
<CAPTION>
Total
Gross Square # of
Property Footage Buildings
- - -------- ------------ ---------
<S> <C> <C>
North Baltimore
- - ---------------
Schilling Plaza North 98,786 1
Schilling Plaza South 108,478 1
Centerpointe 126,624 1
One Hunt Valley 212,958 1
201 International Circle 78,664 1
Hunt Valley Office 43 55,249 1
Loveton Center 9 52,456 1
-------
Subtotal North Baltimore Office 733,215 7
Hunt Valley Business Community: (Industrial)
- - ---------------------------------------------
Building 5 41,100 1
Building 12 68,387 1
Building 25 64,100 1
Building 32 46,851 1
Building 35 29,790 1
Building 36 72,200 1
Building 39 14,880 1
Building 44 24,060 1
Building 46 48,940 1
Building 49 78,546 1
Building 53 69,200 1
Building 55 67,934 1
Building 55A 67,953 1
Building 70 72,676 1
Building 72 72,230 1
Building 99 108,300 1
-------
Subtotal North Baltimore Industrial 947,147 16
Pulaski Industrial Park:
- - ------------------------
Building 11 156,800 1
-------
Subtotal Pulaski Industrial 156,800 1
Total North Baltimore and Pulaski 1,837,162 24
---------
Total
</TABLE>
<PAGE>
ATTACHMENT 1, continued
-----------------------
<TABLE>
<CAPTION>
Gross Square # of
Property Footage Buildings
- - -------- ------------ ---------
<S> <C> <C>
Pennsylvania
- - ------------
Senate Plaza (Camp Hill, PA) 230,675 1
-------
Baltimore
- - ---------
Rutherford Business Center: (Industrial)
Building 4 46,975 1
Building 5 74,520 1
Building 6 65,675 1
Building 10 84,955 1
Building 12 58,600 1
Building 29 59,200 1
Building 30 59,055 1
Building 46 38,930 1
Building 60 83,435 1
-------
Subtotal Rutherford Industrial 571,345 9
Triangle Business Center 74,300 4
Parkview 58,321 4
Ambassador Center 82,750 4
15-17 Governor's Court 29,220 2
21 Governor's Court 56,100 1
-------
Subtotal Baltimore Office 300,691 15
Total Rutherford 872,036 24
-------
Columbia
- - --------
Rivers Park I & II 306,400 6
Owen Brown I 45,700 1
Sieling Tech Center 76,350 1
-------
Total Columbia 428,450 8
-------
Inglewood
- - ---------
Inglewood Office Center I 106,000 1
Inglewood Office Center II 116,242 1
Inglewood Tech Center I 51,670 1
Inglewood Tech Center II 61,490 1
Inglewood Tech Center III 50,500 1
Inglewood Tech Center IV 74,625 1
Inglewood Tech Center V 78,665 1
-------
Total Inglewood 539,192 7
-------
</TABLE>
<PAGE>
ATTACHMENT 1, continued
-----------------------
<TABLE>
<CAPTION>
Gross Square # of
Property Footage Buildings
- - -------- ------------ ---------
<S> <C> <C>
Silver Spring
- - -------------
Silver Spring (O) 639,925 3
Metro Plaza (R) 48,192
---------
Total Silver Spring 688,117 3
---------
Baltimore
- - ---------
Lessor's Interest in Sheraton Parking Garage
GRAND TOTAL 4,595,632 67
---------
</TABLE>
<PAGE>
ATTACHMENT 1, continued
-----------------------
Land Parcels
------------
Property Salable Acres
- - -------- -------------
Inglewood South 25, 26, 30 14.10
Inglewood South 27 3.60
Inglewood South 31, 32, 35 10.50
Inglewood South 39 10.40
Inglewood South 42 4.10
Inglewood South 43 3.70
Inglewood South 44 2.80
Inglewood South 45 3.10
Inglewood South 48 1.20
Inglewood South 49 2.80
Inglewood South 51 3.00
Inglewood South 52 1.10
------
60.40
High Pointe I, Shawan Lot 8 7.05
High Pointe II, Shawan Lot 9 7.05
------
14.10
Loveton 10 3.00
Loveton 11 3.00
------
6.00
Rutherford 45 2.05
Rutherford 54 1.40
------
3.45
Rivers C4 3.50
International Trade Lot 8 11.90
Hunt Valley Lot 57 7.30
------
TOTAL OTHER LAND 106.65
======
<PAGE>
ATTACHMENT 2
------------
Rouse-Teachers Properties, Inc.
Sale of Income Property Portfolio
<TABLE>
<CAPTION>
<S> <C>
Income Properties $367,000,000.00
Selected Land Assets 8,000,000.00
---------------
Total Price 375,000,000.00
Existing Debt (12/31/98) 103,574,030.00
---------------
$271,425,970.00
Teachers 95% share $257,854,672.00
Additional Purchase Amount 3,000,000.00
---------------
$260,854,672.00
Cash $ 53,000,000.00
TRC Common Stock 100,000,000.00
Note Secured by Deed of Trust 49,854,672.00
Ratable Note 58,000,000.00
---------------
TOTAL $260,854,672.00
</TABLE>
<PAGE>
ATTACHMENT 3
------------
Stock Valuation: The number of shares of Common Stock of The Rouse
- - --------------- Company representing the $100 million in Common Stock will be
computed based on the average closing price for Common Stock
of The Rouse Company based on the five business days
immediately preceding the closing date.
Mortgage Debt: The following has been agreed to with respect to the
- - ------------- $49,854,672 mortgage debt: (i) the promissory note will be
executed or guaranteed by RTPI; (ii) the term will be ten
years, but calculated on a 25-year amortization schedule;
(iii) the interest rate will be 130 points above the ten year
treasury yield as of the close of business on the Execution
Date; (iv) RTPI will present three or more properties to TPI
to serve as security for the promissory note, which
properties (a) will have an aggregate value of not less than
$71 million, representing a 70% loan to value ratio, (b) will
comply with TIAA's current mortgage underwriting standards
and (c) will otherwise be satisfactory to TPI in all
respects; (v) TRC will be responsible for the costs of
recordation; however, TPI agrees to cooperate reasonably with
RTPI to minimize transfer and recordation taxes (including,
but without limitation, consideration by TPI of possible
structuring the transaction as an indemnity deed of trust);
and (vi) TRC shall comply with all of the requirements and
conditions of TIAA's standard loan application/commitment.
Promissory Note: The following has been agreed to with respect to the
- - --------------- $58,000,000 promissory note: (i) the promissory note will be
executed by TRC; (ii) the term will be ten years and shall
not be amortized; (iii) the interest rate will be 150 basis
points above the ten year treasury yield as of the close of
business on the Execution Date; and (iv) the promissory note
will be rated not less than investment grade by a rating
agency satisfactory to TPI, and will be registered under the
Securities Act of 1933, as amended, with the Securities and
Exchange Commission. TRC will be responsible for the costs of
obtaining such rating and registration.
<PAGE>
ATTACHMENT 4
------------
Proceeds to TPI shall be adjusted as follows:
1. All 1998 operating cash flow (including land operations) through the date
of closing will be distributed to the venture partners.
2. TPI will receive distributions to be determined, including:
i. 95% of the remaining principal balance and interest due on the MIE
Development promissory note for the International Trade Center;
ii. 95% of all escrow accounts with lenders, prepaid real estate taxes,
and other prepaid items, in each case, adjusted to the date of
closing;
iii. 95% of tenant accounts receivable (net of reserves for doubtful
accounts) and other accounts receivable; and
iv. 95% of all cash balances or other investments (excluding the Sale
Properties).
3. The amount to be distributed to TPI will take into account the following:
i. 95% of the $8,616,000 for the capital and tenant improvements budgeted
for 1998 and approved by the Board of Directors;
ii. All distributions to TPI from January 1, 1998, through the date of
closing; and
iii. 95% of any rent accruing after the date of closing, but received prior
to the date of closing.
4. Subsequent to the closing date, and as received, 95% of proceeds from notes
receivable that relate to periods prior to closing shall be paid to TPI.
5. All pro-rations shall be subject to a post-closing audit, with procedures
governing appropriate adjustments to be negotiated. TPI shall have the
right to conduct such audit, at TPI's expense, provided that TPI notifies
The Rouse Company, within one year after the closing, that TPI will be
commencing such audit.
<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 ANNUAL PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 42,102
<SECURITIES> 4,021
<RECEIVABLES> 102,554
<ALLOWANCES> 17,783
<INVENTORY> 0
<CURRENT-ASSETS> 152,587<F1>
<PP&E> 3,905,925
<DEPRECIATION> 554,209
<TOTAL-ASSETS> 4,020,445
<CURRENT-LIABILITIES> 425,718<F2>
<BONDS> 3,073,121
0
41
<COMMON> 685
<OTHER-SE> 532,807
<TOTAL-LIABILITY-AND-EQUITY> 4,020,445
<SALES> 498,857
<TOTAL-REVENUES> 498,857
<CGS> 0
<TOTAL-COSTS> 314,933
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,716
<INTEREST-EXPENSE> 139,372
<INCOME-PRETAX> 85,544
<INCOME-TAX> 236
<INCOME-CONTINUING> 90,764
<DISCONTINUED> (5,220)
<EXTRAORDINARY> 4,674
<CHANGES> (4,629)
<NET-INCOME> 85,353
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.11
<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 RESTATED FINANCIAL DATA SCHEDULE IS SUBMITTED IN ACCORDANCE WITH REGULATION
S-K ITEM 601(C)(2). THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-Q FOR THE ANNUAL PERIOD ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,513
<SECURITIES> 3,491
<RECEIVABLES> 155,841
<ALLOWANCES> 22,158
<INVENTORY> 0
<CURRENT-ASSETS> 208,788<F1>
<PP&E> 4,043,169
<DEPRECIATION> 588,960
<TOTAL-ASSETS> 3,820,266
<CURRENT-LIABILITIES> 456,916<F2>
<BONDS> 0
0
41
<COMMON> 668
<OTHER-SE> 335,439
<TOTAL-LIABILITY-AND-EQUITY> 3,820,266
<SALES> 676,675
<TOTAL-REVENUES> 676,675
<CGS> 0
<TOTAL-COSTS> 451,847
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,432
<INTEREST-EXPENSE> 157,162
<INCOME-PRETAX> 58,442
<INCOME-TAX> 30,636
<INCOME-CONTINUING> 66,955
<DISCONTINUED> (8,513)
<EXTRAORDINARY> (12,322)
<CHANGES> 0
<NET-INCOME> 15,484
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
<FN>
<F1>
CURRENT ASSETS INCLUDE CASH, UNRESTRICTED MARKETABLE SECURITIES, CURRENT
PORTION OF ACCOUNTS AND NOTES RECEIVABLE AND PREPAID EXPENSES AND DEPOSITS.
<F2>
CURRENT LIABILTIES INCLUDE THE CURRENT PORTION OF LONG-TERM DEBT AND ACCOUNTS
PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES.
</FN>
</TABLE>
