<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 June 30, 1999
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 0-1743
--------
The Rouse Company
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-0735512
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10275 Little Patuxent Parkway
Columbia, Maryland 21044-3456
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 992-6000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate the number of shares outstanding of the issuer's common stock as of
August 5, 1999:
Common Stock, $0.01 par value 72,287,250
- ----------------------------- ----------
Title of Class Number of Shares
<PAGE>
Part I. Financial Information
Item 1. Financial Statements:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited, in thousands except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Retail centers $ 121,617 $ 113,634 $ 248,386 $ 222,149
Office, mixed-use and other 51,271 39,215 103,394 78,690
Land sales operations 2,730 1,394 3,784 31,630
Corporate interest income 983 498 1,079 1,468
------------ ----------- --------- ---------
Total revenues 176,601 154,741 356,643 333,937
------------ ----------- --------- ---------
Operating expenses, exclusive of
provision for bad debts,
depreciation and amortization:
Retail centers 56,207 56,512 114,409 111,121
Office, mixed-use and other 18,986 15,827 39,044 32,763
Land sales operations 2,864 82 3,520 23,164
Development (183) 938 1,283 4,504
Corporate 4,678 4,473 8,168 8,571
------------ ----------- --------- ---------
82,552 77,832 166,424 180,123
------------ ----------- --------- ---------
Interest expense:
Retail centers 35,875 30,192 75,250 60,166
Office, mixed-use and other 21,732 15,790 43,610 33,345
Land sales operations 227 264 435 531
Corporate 2,000 3,338 4,163 5,696
------------ ----------- --------- ---------
59,834 49,584 123,458 99,738
------------ ----------- --------- ---------
Provision for bad debts 3,064 936 4,376 1,790
Depreciation and amortization 22,406 17,409 50,079 36,199
------------ ----------- --------- ---------
Total expenses 167,856 145,761 344,337 317,850
------------ ----------- --------- ---------
Earnings before equity in
earnings of unconsolidated
real estate ventures and
income taxes 8,745 8,980 12,306 16,087
</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 and Comprehensive Income, continued
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited, in thousands except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Equity in earnings of
unconsolidated real estate
ventures (note 3) $ 20,682 $ 20,143 $ 44,015 $ 45,739
Current income taxes (83) (93) (157) (199)
-------- --------- --------- ---------
Earnings before gain on
dispositions of assets and
other provisions, net,
extraordinary items and
cumulative effect of change
in accounting principle 29,344 29,030 56,164 61,627
Gain on dispositions of
assets and other provisions,
net (note 6) 618 234 1,724 2,169
-------- --------- --------- ---------
Earnings before extraordinary
items and cumulative effect
of change in accounting
principle 29,962 29,264 57,888 63,796
Extraordinary gain (loss),
net (note 7) (910) 7,491 (910) 6,575
Cumulative effect at
January 1, 1998 of change
in accounting for participating
mortgages --- --- --- (4,629)
-------- --------- --------- ---------
Net earnings 29,052 36,755 56,978 65,742
Other items of comprehensive
income - minimum pension
liability adjustment (334) --- (668) ---
-------- --------- --------- ---------
Comprehensive income $ 28,718 $ 36,755 $ 56,310 $ 65,742
======== ========= ========= =========
Net earnings applicable
to common shareholders $ 26,014 $ 33,717 $ 50,902 $ 59,666
======== ========= ========= =========
</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 and Comprehensive Income, continued
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited, in thousands except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE OF
COMMON STOCK (note 8):
Basic:
Earnings before extra-
ordinary items $ .37 $ .39 $ .72 $ .86
Extraordinary gain (loss) (.01) .11 (.01) .10
Cumulative effect of change
in accounting principle --- --- --- (.07)
------ ----- ------ ------
Total $ .36 $ .50 $ .71 $ .89
====== ===== ====== ======
Diluted:
Earnings before extra-
ordinary items $ .37 $ .38 $ .71 $ .84
Extraordinary gain (loss) (.01) .11 (.01) .09
Cumulative effect of change
in accounting principle --- --- --- (.06)
------ ----- ------ ------
Total $ .36 $ .49 $ .70 $ .87
====== ===== ====== ======
DIVIDENDS PER SHARE:
Common stock $ .30 $ .28 $ .60 $ .56
====== ===== ====== ======
Preferred stock $ .75 $ .75 $ 1.50 $ 1.50
====== ===== ====== ======
</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
June 30, 1999 and December 31, 1998
(in thousands, except share data, note 1)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
----------- -----------
<S> <C> <C>
Assets:
Property:
Operating properties:
Property and deferred costs
of projects $3,817,596 $4,718,727
Less accumulated depreciation
and amortization 546,343 578,311
---------- ----------
3,271,253 4,140,416
Properties in development 202,774 167,360
Properties held for sale 73,930 165,894
---------- ----------
Total property 3,547,957 4,473,670
Investments in and advances to unconsolidated
real estate ventures (note 3) 508,132 322,066
Prepaid expenses, receivables under finance
leases and other assets 239,685 241,040
Accounts and notes receivable 79,609 75,917
Investments in marketable securities 4,578 4,256
Cash and cash equivalents 25,870 37,694
---------- ----------
Total $4,405,831 $5,154,643
========== ==========
</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
June 30, 1999 and December 31, 1998
(in thousands, except share data, note 1)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
----------- -----------
<S> <C> <C>
Liabilities:
Debt (note 4):
Property debt not carrying a Parent
Company guarantee of repayment $2,485,242 $2,865,119
Parent Company debt and debt carrying a
Parent Company guarantee of repayment:
Property debt 161,546 161,986
Convertible subordinated debentures --- 128,515
Other debt 664,500 903,200
---------- ----------
826,046 1,193,701
---------- ----------
Total debt 3,311,288 4,058,820
---------- ----------
Accounts payable, accrued expenses
and other liabilities 315,371 329,932
Company-obligated mandatorily redeemable
preferred securities of a trust holding
solely Parent Company subordinated debt
securities 136,965 136,965
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; 72,279,778
shares issued in 1999 and 72,225,223
shares issued in 1998 723 723
Additional paid-in capital 842,845 836,508
Accumulated deficit (198,908) (206,520)
Accumulated other comprehensive income (2,494) (1,826)
---------- ----------
Net shareholders' equity 642,207 628,926
---------- ----------
Total $4,405,831 $5,154,643
========== ==========
</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
Six Months Ended June 30, 1999 and 1998
(Unaudited, in thousands, note 1)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Rents and other revenues received $ 344,345 $ 300,884
Proceeds from land sales and on notes
receivable from land sales 21,682 55,830
Interest received 4,907 6,530
Operating expenditures (172,781) (154,785)
Interest paid (125,874) (91,798)
Dividends, interest and other operating
distributions received from unconsolidated
majority financial interest ventures 31,022 56,080
---------- ----------
Net cash provided by operating activities 103,301 172,741
---------- ----------
Cash flows from investing activities:
Expenditures for properties in development
and improvements to existing properties
funded by debt (110,904) (161,162)
Expenditures for improvements to existing
properties funded by cash provided by
operating activities:
Tenant leasing and remerchandising (2,225) (3,735)
Building and equipment (9,507) (5,826)
Payments received on loans and advances to
unconsolidated majority financial interest
ventures (33,481) 38,636
Proceeds from sales of operating properties
and other investments 126,860 30,938
Other (6,196) (3,780)
---------- ----------
Net cash used by investing activities (35,453) (104,929)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of property debt 111,438 108,126
Repayments of property debt:
Scheduled principal payments (24,014) (21,542)
Other payments --- (166,503)
Proceeds from issuance of other debt 198,368 197,004
Repayments of other debt (296,919) (184,250)
Proceeds from issuance of common stock --- 43,414
Purchases of common stock (12,810) (47,687)
Proceeds from exercise of stock options 32 192
Dividends paid (49,370) (44,019)
Other (6,397) ---
---------- ----------
Net cash used by financing activities (79,672) (115,265)
---------- ----------
Net decrease in cash and cash equivalents (11,824) (47,453)
Cash and cash equivalents at beginning of
period 37,694 87,100
---------- ----------
Cash and cash equivalents at end of period $ 25,870 $ 39,647
========== ==========
</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
Six Months Ended June 30, 1999 and 1998
(Unaudited, in thousands, note 1)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 56,978 $ 65,742
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 50,079 36,199
Gain on dispositions of assets
and other provisions, net (1,724) (2,169)
Undistributed earnings of majority
financial interest ventures (16,773) --
Extraordinary (gain) loss, net 910 (6,575)
Cumulative effect of change in accounting
principle -- 4,629
Additions to preconstruction reserve 600 3,845
Provision for bad debts 4,376 1,790
Participation expense pursuant to
Contingent Stock Agreement 12,487 34,255
Decrease (increase) in operating assets
and liabilities, net (3,632) 35,025
-------- --------
Net cash provided by operating activities $103,301 $172,741
======== ========
Schedule of Noncash Investing and Financing
Activities:
Common stock issued pursuant to Contingent
Stock Agreement $ 16,207 $ 15,754
Property and other assets contributed to an
unconsolidated real estate venture 701,105 --
Mortgage debt, other debt and other liabilities
related to property and other assets
contributed to an unconsolidated real
estate venture 432,525 --
Other debt repaid in the formation of an
unconsolidated real estate venture 271,233 --
Capital lease obligations incurred 1,278 --
Mortgage debt assumed by purchaser of
a property 40,000 --
Common stock issued upon conversion of
convertible subordinated debentures -- 1,460
======== ========
</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)
June 30, 1999
(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 1998 Annual Report
to Shareholders.
Certain amounts have been reclassified to conform to the current
presentation.
(2) Tax status
----------
The Company determined that it would elect to be taxed as a real estate
investment trust (REIT) effective January 1, 1998 pursuant to the Internal
Revenue Code, as amended. Management believes the Company met the
qualifications for REIT status as of June 30, 1999, intends for it to
continue to meet the qualifications in the future and accordingly, does not
expect that the Company will be liable for significant income taxes at the
Federal level or in most states in which it operates in 1999 and future
years.
In connection with its election to be taxed as a REIT, the Company will
also elect to be subject to the "built-in gain" rules. Under these rules,
taxes may be payable at the time and to the extent that the net unrealized
gains on the Company's assets at the date of conversion to REIT status are
recognized in taxable dispositions of such assets in the ten-year period
following conversion. Such net unrealized gains at June 30, 1999 were
approximately $2,200,000. At June 30, 1999, the regular tax net operating
loss carryforward is sufficient to offset built-in gains on assets the
Company has identified for disposition and no net deferred tax liability
for built-in gain taxes has been recognized. It may however, be necessary
to recognize a liability for such taxes in the future if management's plans
and intentions with respect to asset dispositions, or the related tax laws,
change.
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 June
30, 1999 and December 31, 1998 are summarized, based on the level of the
Company's financial interest, as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Majority financial interest ventures $327,649 $270,085
Joint interest and control ventures 859 1,140
Minority interest ventures 179,624 50,841
-------- --------
Total $508,132 $322,066
======== ========
</TABLE>
The equity in earnings of unconsolidated real estate ventures for the three
and six months ended June 30, 1999 and 1998 is summarized, based on the
level of the Company's financial interest, as follows (in thousands):
<TABLE>
<CAPTION>
Three months Six months
ended June 30 ended June 30
------------------- --------------------
1999 1998 1999 1998
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Majority financial interest ventures $ 15,613 $ 17,844 $ 36,390 $ 41,041
Minority interest ventures 5,069 2,299 7,625 4,698
-------- -------- -------- --------
Total $ 20,682 $ 20,143 $ 44,015 $ 45,739
======== ======== ======== ========
</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 June 30, 1999 and December 31, 1998
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -------------
<S> <C> <C>
Assets:
Operating properties, net $277,083 $244,470
Properties in development 82,833 66,442
Land held for development and sale 224,289 236,999
Investment land 39,841 41,156
Investments in and advances to
unconsolidated real estate ventures 122,576 32,586
Advances to the Company 14,664 112,310
Prepaid expenses, receivables under
finance leases and other assets 34,449 31,453
Deferred tax asset 43,916 53,662
Accounts and notes receivable 74,940 74,736
-------- --------
Total $914,591 $893,814
======== ========
Liabilities and shareholders' deficit:
Loans and advances from the Company $520,119 $488,363
Mortgages payable and other long-term debt 340,011 332,945
Other liabilities 82,099 116,244
Redeemable Series A Preferred stock 50,000 50,000
Shareholders' deficit (77,638) (93,738)
-------- --------
Total $914,591 $893,814
======== ========
</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 six
months ended June 30, 1999 and 1998 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- -------------------------
1999 1998 1999 1998
-------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Revenues, excluding interest
on advances to the Company $ 67,660 $ 63,728 $153,108 $160,887
Interest income on advances
to the Company -- -- 2,577 --
Operating expenses (40,068) (36,208) (88,644) (90,452)
Interest expense, excluding
interest on borrowings from
the Company (2,648) (2,259) (5,437) (4,712)
Interest expense on borrowings
from the Company (14,717) (20,534) (29,294) (33,137)
Depreciation and amortization (3,067) (2,529) (5,963) (5,054)
Equity in earnings of
unconsolidated real estate
ventures 526 (432) 712 849
Gain on dispositions of
assets, net 175 3,407 882 15,846
Income taxes, primarily deferred (3,768) (2,909) (11,841) (18,247)
Extraordinary loss, net -- -- -- (925)
-------- -------- -------- --------
Net earnings $ 4,093 $ 2,264 $ 16,100 $ 25,055
======== ======== ======== ========
</TABLE>
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 earnings before extraordinary items of the
ventures for the three and six months ended June 30, 1999 and 1998 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Share of net earnings based on
ownership interest $ 4,052 $ 2,241 $ 15,939 $ 24,804
Share of extraordinary loss -- -- -- 916
Participation by others in the
Company's share of earnings (5,046) (7,558) (11,405) (15,039)
Interest on loans to and
advances from the Company, net 14,717 20,534 26,717 33,137
Eliminations and other, net 1,890 2,627 5,139 (2,777)
---------- ------- ---------- --------
$ 15,613 $17,844 $ 36,390 $ 41,041
========== ======= ========== ========
</TABLE>
(4) Debt
----
Debt at June 30, 1999 and December 31, 1998 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
----------------------- -----------------------
Due in Due in
Total one year Total one year
----------------------- -----------------------
<S> <C> <C> <C> <C>
Mortgages and bonds $ 2,527,765 $ 79,869 $ 2,948,324 $ 159,171
Convertible subordinated
debentures --- --- 128,515 ---
Medium-term notes 91,500 10,000 97,500 6,000
Credit line borrowings 195,000 --- 602,000 304,000
Unsecured corporate notes 378,000 --- 178,000 ---
Other loans 119,023 1,050 104,481 27,294
----------- -------- ----------- ---------
Total $ 3,311,288 $ 90,919 $ 4,058,820 $ 496,465
=========== ======== =========== =========
</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
(5) Segment Information
-------------------
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement establishes standards for reporting financial
information about operating segments in interim and annual financial
reports and provides for a "management approach" to identifying the
reportable segments in place of the industry segment approach used
previously.
The Company has five reportable segments: retail centers, office, mixed-use
and other properties, land sales operations, development and corporate.
Segment operating results are measured and assessed based on a performance
measure referred to as Funds from Operations (FFO). The Company defines FFO
as net earnings (computed in accordance with generally accepted accounting
principles), excluding cumulative effects of changes in accounting
principles, extraordinary or unusual items and gains or losses from sales
of properties, plus depreciation and amortization and deferred income
taxes, and after adjustments for minority interests and to record
unconsolidated partnerships and joint ventures on the same basis. The
method used by the Company to compute FFO may differ from methods used by
other REITs. FFO is not a measure of operating results or cash flows from
operating activities as measured by generally accepted accounting
principles, and is not necessarily indicative of cash available to fund
cash needs and should not be considered an alternative to cash flows as a
measure of liquidity.
The accounting policies of the segments are the same as those of the
Company, except that 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 are accounted for on a consolidated basis,
rather than using the equity method, and the Company's share of FFO of
unconsolidated real estate ventures in which it holds a minority interest
is included in revenues.
14
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(5) Segment Information, continued
------------------------------
Operating results for the segments for the three and six months ended June
30, 1999 and 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Office, Mixed- Land
Retail Use and Other Sales
Centers Properties Operations Development Corporate Total
--------- -------------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Three months ended
June 30, 1999
- -------------
Revenues $ 141,839 $ 62,574 $ 44,197 $ --- $ 1,192 $249,802
Operating expenses,
exclusive of
depreciation and
amortization 67,560 26,120 32,731 (172) 5,446 131,685
Interest expense 39,594 23,872 813 --- (1,797) 62,482
---------- --------- -------- ----------- -------- --------
FFO $ 34,685 $ 12,582 $ 10,653 $ 172 $ (2,457) $ 55,635
========== ========= ======== =========== ======== ========
Three months ended
June 30, 1998
- -------------
Revenues $ 129,666 $ 51,091 $ 39,788 $ --- $ 776 $221,321
Operating expenses,
exclusive of
depreciation and
amortization 64,646 24,129 28,646 938 4,726 123,085
Interest expense 33,347 18,199 1,166 --- (909) 51,803
---------- --------- -------- ----------- -------- --------
FFO $ 31,673 $ 8,763 $ 9,976 $ (938) $ (3,041) $ 46,433
========== ========= ======== =========== ======== ========
Six months ended
June 30, 1999
- -------------
Revenues $ 287,857 $ 125,416 $104,778 $ --- $ 1,463 $519,514
Operating expenses,
exclusive of
depreciation and
amortization 135,466 52,928 73,448 1,301 10,627 273,770
Interest expense 82,556 47,757 1,739 --- (3,157) 128,895
---------- --------- -------- ----------- -------- --------
FFO $ 69,835 $ 24,731 $ 29,591 $ (1,301) $ (6,007) $116,849
========== ========= ======== =========== ======== ========
Six months ended
June 30, 1998
- -------------
Revenues $ 254,334 $ 106,660 $130,352 $ --- $ 2,083 $493,429
Operating expenses,
exclusive of
depreciation and
amortization 127,063 51,108 93,479 4,504 8,846 285,000
Interest expense 66,411 38,819 2,299 --- (3,079) 104,450
---------- --------- -------- ----------- -------- --------
FFO $ 60,860 $ 16,733 $ 34,574 $ (4,504) $ (3,684) $103,979
========== ========= ======== =========== ======== ========
</TABLE>
15
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(5) Segment Information, continued
------------------------------
Reconciliations of the total revenues and expenses reported above to the
related amounts in the consolidated financial statements and of FFO
reported above to earnings before extraordinary items and cumulative effect
of change in accounting principle in the financial statements for the three
months ended June 30, 1999 and 1998 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three months
ended June 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Total reported above $ 249,802 $ 221,321
Revenues of majority financial interest
ventures excluding interest on advances
to the Company (67,660) (63,728)
Revenues representing the Company's share of
FFO of minority financial interest ventures (5,389) (2,666)
Other (152) (186)
--------- ---------
Total in financial statements $ 176,601 $ 154,741
========= =========
Operating expenses, exclusive of depreciation
and amortization:
Total reported above $ 131,685 $ 123,085
Operating expenses of majority financial
interest ventures (40,068) (36,208)
Current income taxes applicable to operations (83) (93)
Current income taxes of majority financial
interest ventures (767) (249)
Provision for bad debts (3,064) (936)
Participation by others in the Company's
share of earnings of majority financial
interest ventures (5,046) (7,558)
Other (105) (209)
--------- ---------
Total in financial statements $ 82,552 $ 77,832
========= =========
Interest expense:
Total reported above $ 62,482 $ 51,803
Interest expense of majority financial
interest ventures excluding interest on
borrowings from the Company (2,648) (2,259)
Other --- 40
--------- ---------
Total in financial statements $ 59,834 $ 49,584
========= =========
Operating results:
FFO reported above $ 55,635 $ 46,433
Depreciation and amortization (22,406) (17,409)
Gain on dispositions of assets and other
provisions, net 618 234
Depreciation and amortization, gain on
disposition of assets and deferred income
taxes of unconsolidated real estate
ventures, net (3,885) 6
--------- ---------
Earnings before extraordinary items and cumulative
effect of change in accounting principle $ 29,962 $ 29,264
========= =========
</TABLE>
16
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(5) Segment Information, continued
------------------------------
Reconciliations of the total revenues and expenses reported above to the
related amounts in the consolidated financial statements and of FFO
reported above to earnings before extraordinary items and cumulative effect
of change in accounting principle in the financial statements for the six
months ended June 30, 1999 and 1998 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Six months
ended June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Total reported above $ 519,514 $ 493,429
Revenues of majority financial interest
ventures excluding interest on advances
to the Company (153,108) (160,887)
Revenues representing the Company's share of
FFO of minority financial interest ventures (9,490) (5,930)
Other (273) 7,325
---------- ----------
Total in financial statements $ 356,643 $ 333,937
========== ==========
Operating expenses, exclusive of depreciation
and amortization:
Total reported above $ 273,770 $ 285,000
Operating expenses of majority financial
interest ventures (88,644) (90,452)
Current income taxes applicable to operations (157) (199)
Current income taxes of majority financial
interest ventures (2,468) (294)
Provision for bad debts (4,376) (1,790)
Participation by others in the Company's
share of earnings of majority financial
interest ventures (11,405) (15,039)
Other (296) 2,897
---------- ----------
Total in financial statements $ 166,424 $ 180,123
========== ==========
Interest expense:
Total reported above $ 128,895 $ 104,450
Interest expense of majority financial
interest ventures excluding interest on
borrowings from the Company (5,437) (4,712)
---------- ----------
Total in financial statements $ 123,458 $ 99,738
========== ==========
Operating results:
FFO reported above $ 116,849 $ 103,979
Depreciation and amortization (50,079) (36,199)
Gain on dispositions of assets and other
provisions, net 1,724 2,169
Depreciation and amortization, gain on
disposition of assets and deferred income
taxes of unconsolidated real estate
ventures, net (10,606) (6,153)
---------- ----------
Earnings before extraordinary items and
cumulative effect of change in
accounting principle $ 57,888 $ 63,796
========== ==========
</TABLE>
17
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(5) Segment Information, continued
------------------------------
The assets by segment at June 30, 1999 and December 31, 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- --------------
<S> <C> <C>
Retail centers $2,848,492 $3,636,874
Office, mixed-use and other
properties 1,420,145 1,417,622
Land sales operations 451,081 497,391
Development 59,294 61,166
Corporate 91,406 57,933
---------- ----------
Total $4,870,418 $5,670,986
========== ==========
</TABLE>
Total segment assets exceeds total assets reported in the financial
statements primarily because of the consolidation of the majority financial
interest ventures for segment reporting purposes.
(6) Gain on dispositions of assets and other provisions, net
--------------------------------------------------------
Gain on dispositions of assets and other provisions, net, is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net gain on operating properties $ 6,866 $ 26 $ 7,453 $ 1,534
Termination benefits related to
corporate realignment (6,248) -- (6,248) --
Other, net -- 208 519 635
-------- ------ -------- --------
$ 618 $ 234 $ 1,724 $ 2,169
======== ====== ======== ========
</TABLE>
The net gain on operating properties in 1999 relates primarily to a gain on
the sale of a property in the second quarter of 1999. The net gain in 1998
relates primarily to a reduced provision for a loss recorded in the first
quarter, relating to a retail center sold in April 1998.
18
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(6) Gain on dispositions of assets and other provisions, net, continued
-------------------------------------------------------------------
During the second quarter of 1999, the Company announced and initiated the
consolidation of its Retail Operations and Office and Mixed-Use Operations
divisions into a single Property Operations Division. In addition, the
Company integrated certain operating, administrative and support functions
of the Hughes Division into its Columbia headquarters. The costs relating
to these organizational changes of $6.2 million represent primarily
severance and other benefits to terminated employees.
(7) Extraordinary gain(loss), net
-----------------------------
The extraordinary loss for the three and six months ended June 30, 1999
relates to a loss on the extinguishment of the convertible subordinated
debentures prior to their scheduled maturity.
The gain for the three and six months ended June 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 ($14.8
million). This gain was partially offset by losses on extinguishment of
other debt prior to scheduled maturity ($7.4 million). 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 is net of related taxes.
19
<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 calculations of earnings per share (EPS) of
common stock for the three months ended June 30, 1999 and 1998 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings before extra-
ordinary items and
cumulative effect of
change in accounting
principle $29,962 $29,962 $29,264 $29,264
Dividends on Preferred
stock (3,038) (3,038) (3,038) (3,038)
Dividends on unvested
common stock awards (115) (84) (134) (58)
Interest on convertible
subordinated debentures -- -- -- --
------- ------- ------- -------
Adjusted earnings before
extraordinary items
and cumulative effect
of change in accounting
principle used in EPS
computation $26,809 $26,840 $26,092 $26,168
======= ======= ======= =======
Weighted-average shares
outstanding 71,760 71,760 67,291 67,291
Dilutive securities:
Convertible subordinated
debentures -- -- -- --
Options, warrants, and
unvested common stock
awards -- 590 -- 1,247
------- ------- ------- -------
Adjusted weighted-average
shares used in EPS
computation 71,760 72,350 67,291 68,538
======= ======= ======= =======
</TABLE>
20
<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
-----------------------------
Information relating to the calculations of earnings per share (EPS) of
common stock for the six months ended June 30, 1999 and 1998 is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings before extra-
ordinary items and
cumulative effect of
change in accounting
principle $57,888 $57,888 $63,796 $63,796
Dividends on Preferred
stock (6,076) (6,076) (6,076) (6,076)
Dividends on unvested
common stock awards (238) (322) (268) (192)
Interest on convertible
subordinated debentures -- -- -- 3,659
------- ------- ------- -------
Adjusted earnings before
extraordinary items
and cumulative effect
of change in accounting
principle used in EPS
computation $51,574 $51,490 $57,452 $61,187
======= ======= ======= =======
Weighted-average shares
outstanding 71,813 71,813 66,978 66,978
Dilutive securities:
Convertible subordinated
debentures -- -- -- 4,515
Options, warrants, and
unvested common stock
awards -- 588 -- 1,227
------- ------- ------- -------
Adjusted weighted-average
shares used in EPS
computation 71,813 72,401 66,978 72,720
======= ======= ======= =======
</TABLE>
Effects of potentially dilutive securities are presented only in periods in
which they are dilutive.
21
<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, dispositions and related matters
-------------------------------------------------------
In 1998, the Company completed several property acquisitions, including the
purchase of interests in seven retail centers from TrizecHahn Centers Inc.
(Trizec). In February 1999, the Company contributed its ownership interests
in four of the acquired centers (Bridgewater Commons, Fashion Place Mall,
Park Meadows and Towson Town Center) to a joint venture (the "Four State
Venture") in which it retained a 35% ownership interest. Another venturer
contributed approximately $271 million in cash to the Four State Venture
and received a 65% ownership interest. Four State Venture used the
contributed cash to repay approximately $271 million of Company borrowings
under its bridge loan credit facility. The fair value of the consideration
received in the formation of the joint venture was considered in the
Company's allocation of the initial acquisition costs of all of the
property interests acquired from Trizec. Accordingly, no gain or loss was
recognized on the sale. The Company's 35% ownership interest in the Four
State Venture related to these property interests is accounted for using
the equity method.
The Four State Venture agreement provides for the purchase, at the option
of the Company or the other venturer and subject to certain terms and
conditions, of the other venturer's interest in the Four State Venture
related to Fashion Place Mall at a specified amount. Accordingly, the
transaction related to Fashion Place Mall was accounted for as a financing.
If the option is exercised, the
22
<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, dispositions and related matters, continued
------------------------------------------------------------------
purchase price can be paid, at the option of the Company, in cash or in
common stock of the Company.
In June, 1999 the Company sold its interest in Valley Fair Mall to
Westfield America, Inc. for approximately $147 million. The Company
acquired the property in July 1998 from TrizecHahn Centers Inc. for
approximately the same cost with the intention to sell it and, accordingly,
recognized no gain or loss on the sale. In June 1999, the Company also
disposed of its ownership interest in an operating property located in
Los Angeles, California.
(11) Shelf registration statement
----------------------------
At June 30, 1999, the Company had a shelf registration statement for future
sale of up to an aggregate of $1.9 billion (based on the public offering
price) of common stock, Preferred stock and debt securities. On May 4,
1999, the Company issued $200 million of unsecured 8% notes, due in May
2009, under this registration statement. The Company used the net proceeds
of approximately $198 million to repay the convertible subordinated
debentures and certain other debt.
23
<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, 1998 and any material changes in the results of
operations for the three and six months ended June 30, 1999 as compared to the
same periods in 1998. 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 1998 Annual Report to Shareholders.
General:
- -------
Through its subsidiaries and affiliates, the Company acquires, develops and
manages a diversified portfolio of retail centers, office and industrial
buildings and mixed-use and other properties (office/mixed-use properties)
located throughout the United States and develops and sells land for
residential, commercial and other uses, primarily in Columbia, Maryland and
Summerlin, Nevada.
One of the Company's primary objectives is to own and operate premier
properties-shopping centers, geographically concentrated groups of 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 and/or other anchor tenants to its
existing properties to meet its objective. The Company is also continually
evaluating opportunities for new operating properties and/or land development
projects it believes have future prospects consistent with its objectives. 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.
The Company may also selectively dispose of properties for other reasons. 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 or operating income of the Company.
24
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Portfolio changes:
- -----------------
In 1998, the Company completed several transactions designed to upgrade the
overall quality of its portfolio of operating properties. In the third and
fourth quarters, the Company purchased ownership interests in eight retail
centers, including the interests of partners in two centers (The Fashion Show
and Governor's Square) in which the Company now holds 100% ownership interests.
In February 1999, the Company contributed its ownership interests in four of the
acquired centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and
Towson Town Center) to a joint venture in which it retained a 35% ownership
interest. The Company acquired the other two ownership interests with the intent
to sell them. One of these (Valley Fair Mall) was sold in June 1999. Also in
1998, the Company disposed of four retail centers (Eastfield Mall and Salem Mall
in the second quarter, and Greengate Mall and St. Louis Union Station in the
third quarter) and its 5% ownership interest in six retail centers (five in the
second quarter and one in the fourth quarter.) In the fourth quarter of 1998,
the Company acquired the portfolio of office and industrial properties and
salable land of an entity in which the Company previously held a 5% ownership
interest. The acquired assets consisted of 64 buildings (excluding three which
were subsequently sold) and approximately 100 acres of land. Substantially all
of the acquired assets are in the Baltimore-Washington metropolitan area. The
Company and its affiliates disposed of their interests in two hotels and certain
industrial buildings in Baltimore and Columbia and their office properties in
Los Angeles in the first quarter of 1998. In June 1999, the Company disposed of
its ownership interest in an operating property located in Los Angeles,
California.
The Company and its affiliates also completed certain development projects to
enhance the quality of its portfolio. A new regional shopping center opened in
Orlando, Florida in the first quarter of 1998, and two community retail centers
opened in the Summerlin/Las Vegas area in the second quarter of 1998. Expansions
of nine retail centers opened in 1998 (three in the first quarter and six in the
fourth quarter), and three community retail centers in Columbia were
substantially redeveloped. Six office and industrial buildings opened in Las
Vegas and Summerlin in 1998, and Arizona Center, in Phoenix was expanded in the
first quarter of 1998 to include a 90,000 square foot cinema. In January 1999,
an affiliate of the Company opened a new 100,000 square foot office building in
Columbia's town center.
25
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating results:
- -----------------
As indicated in the 1998 Annual Report to Shareholders, the discussion of
operating results covers each of the Company's business segments as
management believes that a segment analysis provides the most effective
means of understanding the business. Note 5 to the consolidated financial
statements should be referred to when reading this discussion and analysis.
As discussed in note 5, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1998. As required by the Statement, segment
operating data are reported using the accounting policies followed by the
Company for internal reporting to management. These policies are the same
as those followed for external reporting, except that real estate ventures
in which the Company holds substantially all (at least 98%) of the
financial interests, but does not own a majority voting interest, are
reported on a consolidated basis rather than using the equity method; the
Company's share of FFO of unconsolidated real estate ventures in which it
holds a minority interest is included in revenues; and the Company's share
of depreciation and amortization expense of unconsolidated real estate
ventures in which it holds a minority interest is included in depreciation
and amortization expense. Also, gains on dispositions of assets and other
provisions, net in this discussion and analysis includes the Company's
share of those items recorded by the majority financial interest ventures.
These differences affect only the reported revenue, operating and interest
expenses and depreciation and amortization expense of the segments and
elements of gains on dispositions of assets and other provisions, net, and
have no effect on the reported net earnings of the Company. Revenues and
operating and interest expenses reported for the segments are reconciled to
the related amounts reported in the financial statements in note 5.
26
<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>
Three months Six months
ended June 30, ended June 30,
------------------------ --------------
1999 1998 1999 1998
------------ ---------- ------ ------
<S> <C> <C> <C> <C>
Revenues $141.8 $129.7 $287.9 $254.3
Operating expenses, exclusive
of depreciation and
amortization 67.6 64.7 135.5 127.0
Interest expense 39.6 33.3 82.6 66.4
------ ------ ------ ------
34.6 31.7 69.8 60.9
Depreciation and amortization, including
unconsolidated real estate ventures 15.4 12.4 37.2 26.2
------ ------ ------ ------
Operating income $ 19.2 $ 19.3 $ 32.6 $ 34.7
====== ====== ====== ======
</TABLE>
Revenues from retail centers increased $12.1 and $33.6 for the three and six
months ended June 30, 1999, respectively, compared to the same periods in 1998.
The increases in revenues were attributable primarily to effects of the
aforementioned acquisitions (approximately $8.8 and $23.8 for the three and six
months ended June 30, 1999, respectively) and project openings and expansions
(approximately $4.4 and $11.8 for the three and six months ended June 30, 1999,
respectively), and higher average occupancy levels at comparable properties
(94.6% in 1999 compared to 91.6% in 1998). These increases were partially offset
by the aforementioned dispositions (approximately $5.0 and $11.0 for the three
and six months ended June 30, 1999, respectively).
Total operating and interest expenses for retail centers increased $9.2 and
$24.7 for the three and six months ended June 30, 1999, respectively, compared
to the same periods in 1998. The increases in operating and interest expenses
were attributable primarily to the aforementioned acquisitions (approximately
$7.1 and $20.8 for the three and six months ended June 30, 1999, respectively),
project openings and expansions (approximately $5.1 and $11.4 for the three
and six months ended June 30, 1999, respectively) and higher levels of bad debt
expense at other properties, primarily those experiencing some construction
related operating disruptions. These increases were partially offset by the
aforementioned dispositions (approximately $5.4 and $11.9 for the three and six
months ended June 30, 1999, respectively). Depreciation and amortization expense
increased $3.0 and $11.0 for the three and six months ended June 30, 1999,
respectively, compared to the same periods in 1998. The increases were
attributable primarily to the portfolio changes described above.
27
<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>
Three months Six months
ended June 30, ended June 30,
--------------- --------------
1999 1998 1999 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
Revenues $62.6 $51.1 $125.4 $106.6
Operating expenses, exclusive
of depreciation and
amortization 26.1 24.1 52.9 51.1
Interest expense 23.9 18.2 47.8 38.8
----- ----- ------ ------
12.6 8.8 24.7 16.7
Depreciation and amortization, including
unconsolidated real estate ventures 10.5 8.3 20.7 16.5
----- ----- ------ ------
Operating income $ 2.1 $ .5 $ 4.0 $ .2
===== ===== ====== ======
</TABLE>
Revenues from office, mixed-use and other properties increased $11.5 and $18.8
for the three and six months ended June 30, 1999, respectively, compared to the
same periods in 1998. The increases in revenues were attributable primarily to
the aforementioned acquisition (approximately $10.3 and $20.5 for the three and
six months ended June 30, 1999, respectively) and project openings and expansion
(approximately $1.9 and $3.6 for the three and six months ended June 30, 1999,
respectively). These increases were partially offset by the dispositions of
properties in 1998 (approximately $1.1 and $6.1 for the three and six months
ended June 30, 1999, respectively).
Total operating and interest expenses for office, mixed-use and other properties
increased $7.7 and $10.8 for the three and six months ended June 30, 1999,
respectively, compared to the same periods in 1998. The increases in operating
and interest expenses were attributable primarily to the aforementioned
acquisition (approximately $8.2 and $16.7 for three three and six months ended
June 30, 1999, respectively) and project openings and expansion (approximately
$1.3 and $2.2 for the three and six months ended June 30, 1999, respectively).
These increases were partially offset by the aforementioned dispositions
(approximately $1.2 and $5.8 for the three and six months ended June 30, 1999,
respectively) and lower interest expense related to the refinancing of a mixed-
use property. Depreciation and amortization expense increased $2.2 and $4.2 for
the three and six months ended June 30, 1999, respectively, compared to the same
periods in 1998. The increases were attributable primarily to the portfolio
changes described above.
28
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
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.
Operating results of land sales operations are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hughes Operations:
Revenues $29.9 $30.3 $ 60.2 $ 98.0
Operating costs and expenses 24.8 23.5 48.9 77.8
----- ----- ------ ------
Operating income $ 5.1 $ 6.8 $ 11.3 $ 20.2
===== ===== ====== ======
Columbia and other:
Revenues $14.3 $ 9.4 $ 44.5 $ 32.3
Operating costs and expenses 7.9 5.1 24.5 15.7
Interest expense .8 1.2 1.7 2.2
----- ----- ------ ------
Operating income $ 5.6 $ 3.1 $ 18.3 $ 14.4
===== ===== ====== ======
Total:
Revenues $44.2 $39.7 $104.7 $130.3
Operating costs and expenses 32.7 28.6 73.4 93.5
Interest expense .8 1.2 1.7 2.2
----- ----- ------ ------
Operating income $10.7 $ 9.9 $ 29.6 $ 34.6
===== ===== ====== ======
</TABLE>
29
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Revenues from Hughes land sales operations decreased $37.8 for the six months
ended June 30, 1999, while related costs and expenses decreased $28.9 compared
to the same period in 1998. The decrease in revenues and related costs and
expenses for the six months relate primarily to a reduction in sales of business
park land, particularly in Los Angeles. The Company sold all of the land in its
Los Angeles business park in the first quarter of 1998.
Revenues from land sales operations in Columbia increased $4.9 and $12.2 for the
three and six months ended June 30, 1999, respectively, while related costs and
expenses increased $2.4 and $8.3, respectively, compared to the same periods in
1998. The increases in revenues and related costs and expenses for the three and
six month periods were due primarily to higher levels of sales for residential
and commercial uses.
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 to the evaluation of potential regional retail center
sites, acquisition and disposition opportunities and alternative revenue
sources. The expenses decreased $3.2 million and $1.1 million for the three and
six months ended June 30, 1999, respectively, compared to the same periods in
1998. The decreases in expenses are a result of projects progressing to further
stages of development and the unexpected recovery of certain costs previously
expensed.
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 which
were retired in the second quarter 1999, the unsecured 8% notes issued in the
second quarter 1999, 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 million and
increased $1.8 million for the three and six months ended June 30, 1999,
respectively, as compared to the same periods in 1998.
30
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Corporate, continued:
The increase in the six month period was primarily attributable to higher income
taxes incurred by certain majority financial interest ventures due to the sales
of certain land parcels.
Corporate revenue consists primarily of corporate interest income on cash
invested and notes receivable. The revenue increased $.4 million and decreased
$.6 million for the three and six months ended June 30, 1999, respectively, due
to changes in interest income as a result of fluctuating invested cash balances.
Gain on dispositions of assets and other provisions, net:
Gain on dispositions of assets and other provisions, net, including the
Company's share of those recorded by the majority financial interest ventures,
is summarized as follows (in millions):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net gain on operating properties $ 7.1 $ 3.7 $ 8.6 $ 17.6
Termination benefits related to
Corporate realignment (6.2) -- (6.2) --
Other, net .1 .8 .4 1.2
------ ----- ------ ------
$ 1.0 $ 4.5 $ 2.8 $ 18.8
====== ===== ====== ======
</TABLE>
The net gain on operating properties in 1999 relates primarily to a gain on the
sale of a property in the second quarter of 1999. The net gain in 1998 relates
primarily to a reduced provision for a loss on a retail center sold in April
1998 and to a net gain recorded by a majority financial interest venture related
to the sale of a hotel property.
During the second quarter of 1999, the Company announced and initiated the
consolidation of its Retail Operations and Office and Mixed-Use Operations
divisions into a single Property Operations Division. In addition, the Company
integrated certain operating, administrative and support functions of the
Hughes Division into its Columbia headquarters. The costs relating to these
organizational changes of $6.2 million represent primarily severance and other
benefits to terminated employees.
31
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Extraordinary gain(loss), net:
The extraordinary loss for the three and six months ended June 30, 1999 relates
to a loss on the extinguishment of the convertible subordinated debentures prior
to their scheduled maturity.
The gain for the three and six months ended June 30, 1998 resulted from debt
extinguishment in connection with the transfer of title to a property to the
related mortgage lender in the second quarter of 1998 ($14.8 million). This gain
was partially offset by losses on extinguishment of other debt prior to
scheduled maturity ($7.4 million). 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 is net of
related taxes.
Net earnings:
Net earnings for the three and six months ended June 30, 1999 and 1998 were
affected by unusual and/or nonrecurring items. The most significant of these are
the items discussed above in gain on dispositions of assets and other
provisions, net, extraordinary loss, net and in 1998, the cumulative effect of
change in accounting for participating mortgages.
Financial condition and liquidity:
Shareholders' equity increased by $13.3 million from December 31, 1998 to June
30, 1999. The increase was primarily attributable to the net earnings for the
six months ended June 30, 1999 and issuance of common stock pursuant to the
Contingent Stock Agreement, partially offset by the payment of regular quarterly
dividends on the Company's common and Preferred stocks and purchases of common
stock.
The Company had cash and cash equivalents and investments in marketable
securities totaling $30.4 million at June 30, 1999, including $4.6 million of
investments held for restricted uses.
In July 1998, the Company obtained an $800 million unsecured line of credit
facility from a group of lenders to replace a $250 million revolving line of
credit facility. The facility is structured as a $350 million 364 day bridge
loan facility to fund specific property acquisitions made in the third and
fourth quarters of 1998, and a $450 million three-year revolving line of credit.
Repayment of borrowings under the new facilities is guaranteed by certain of the
Company's majority financial interest ventures. The revolving line of credit may
be used for various purposes, including project development costs, property
acquisitions, liquidity
32
<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:
and other corporate needs. It may also be used to pay some portion of
existing debt, including maturities in 1999. At June 30, 1999, the Company
had outstanding borrowings of $195 million under the line of credit. In
April 1999, the Company used a portion of the proceeds from a new mortgage
secured by an operating property to repay the bridge loan facility.
As of June 30, 1999, debt due in one year was $91 million, including
balloon payments due in the first half of 2000 of $30 million. These
balloon payments are expected to be paid at or before the scheduled
maturity dates of the related loans from the proceeds of property
refinancings, credit facility borrowings, proceeds of the
sales of property interests held for sale, or other available corporate
funds. The Company had remaining availability under its revolving credit
facility of $255 million at June 30, 1999. There is no availability under
the bridge loan facility, and this facility has expired. The Company is
continually evaluating sources of capital, and management believes there
are satisfactory sources available for all requirements without
necessitating sales of other operating properties. The Company may,
however, selectively dispose of operating properties or groups of operating
properties when it believes it is prudent to do so.
The Company has a shelf registration statement for the sale of up to an
aggregate of approximately $2.25 billion (based on the public offering
price) of common stock, Preferred stock and debt securities. On May 4,
1999, the Company issued $200 million of unsecured 8% notes, due in May
2009, under this registration statement. The Company used the net proceeds
of approximately $198 million to repay the convertible subordinated
debentures and certain other debt. At June 30, 1999, the Company had issued
approximately $358 million of common stock and debt securities (including
the unsecured notes referred to above) under the shelf registration
statement, with a remaining availability of approximately $1.9 billion.
Also, under an effective registration statement the Company may issue
additional medium-term notes of up to $29.7 million.
Net cash provided by operating activities was $103.3 million and $172.7
million for the six months ended June 30, 1999 and 1998, respectively. The
level of cash flows provided by operating activities is affected by the
timing of receipts of rents and other revenues and payment of operating and
interest expenses. The decrease in net cash provided of $69.4 million was
due primarily to lower proceeds from land sales and on notes receivable
from land sales that the Company financed prior to 1998, and lower
operating distributions from unconsolidated majority financial interest
ventures. The level of cash provided by operating distributions from
unconsolidated majority financial interest ventures is affected by the
33
<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:
timing of receipt of their land sales revenues, payment of operating and
interest expenses and other sources and uses of cash. Other changes in net
cash provided by operating activities were due to the factors discussed
previously under the operating results of the four major business segments.
Net cash used in investing activities was $35.5 million and $104.9 million
for the six months ended June 30, 1999 and 1998, respectively. The decrease
in net cash used of $69.4 million was due primarily to higher proceeds
from sales of interests in properties (primarily Valley Fair Mall) and a
decrease in expenditures for properties in development partially offset by
lower payments received on loans to majority financial interest ventures.
Net cash used by financing activities was $79.7 million and $115.3 million
for the six months ended June 30, 1999 and 1998, respectively. The decrease
in net cash used of $35.6 million was due primarily to lower repayments of
property debt ($164.0 million) partially offset by higher repayments of
other debt ($112.6 million), primarily with proceeds from sales of
operating properties.
Year 2000 issue:
The year 2000 (Y2K) 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 Y2K 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 data 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 have been
replaced with systems that have been certified by the vendors as Y2K
compliant. To date, the Company has implemented new financial accounting,
accounts payable, property management, human resources, payroll and leasing
systems. The Company completed testing of all new mission-critical systems
in the second quarter and has addressed all Y2K compliance issues
identified during testing. In addition, in connection with the Company's
normal upgrade and replacement process, all new network and desktop
equipment meet the requirements for Y2K. The hardware and software that
supports the Company's local and wide area networks have been tested. All
network components identified as not Y2K compliant have been replaced or
upgraded with hardware or software
34
<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:
that is Y2K compliant. The cost to specifically remediate Y2K issues has
not been material.
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 exceed $2 million.
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.
It is very difficult to identify "the most reasonably likely worst-case
scenario." 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, there could be failures 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 has identified the top 20 tenants, ten anchor stores,
five banks, three contractors and three third party benefit administrators
with which it does business. The Company is continuing its review of Form
10-K and Form 10-Q reports and Y2K compliance statements for those entities
identified which are publicly owned. In addition, a Y2K compliance letter
and questionnaire will be sent to any of these entities that have not
provided a public statement disclosing the status of their Y2K compliance
efforts. Upon completion of this review, the Company will determine whether
specific contingency plans should be developed. There can be no assurance,
however, that the Company has adequately assessed or identified all aspects
of its business which may be affected by Y2K issues, and that Y2K issues
including those that may affect its vendors, suppliers and tenants, will
not have a material adverse effect on the Company's financial condition or
results of operations.
35
<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:
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, 1998.
36
<PAGE>
Part I. Financial Information, continued
Item 3. Quantitative and Qualitative Disclosures about Market Risk:
Market risk information:
The market risk associated with financial instruments and derivative
financial and commodity instruments is the risk of loss from adverse
changes in market prices or rates. The Company's market risk arises
primarily from interest rate risk relating to variable rate borrowings used
to maintain liquidity (e.g., revolving credit facility advances) or finance
project acquisition or development costs (e.g., construction loan
advances). The Company's interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows. In
order to achieve this objective, the Company relies primarily on long-term,
fixed rate, nonrecourse loans from institutional lenders to finance its
operating properties. In addition, long-term, fixed rate financing is
typically arranged concurrently with or shortly after a variable rate
project acquisition or construction loan is negotiated. The Company also
makes limited use of interest rate exchange agreements, including interest
rate swaps and caps, to mitigate its interest rate risk on variable rate
debt. The Company does not enter into interest rate exchange agreements for
speculative purposes and the fair value of these and other derivative
financial instruments is insignificant at June 30, 1999.
The Company's interest rate risk is monitored closely by management. The
table below presents the principal amounts due and weighted-average
interest rates applicable to principal amounts outstanding at the end of
each year. This information may be used to evaluate the expected cash flows
of the Company under debt and related agreements and its sensitivity to
interest rate changes. The information relating to debt maturities (in
millions) is based on expected maturity dates which consider anticipated
refinancing or other transactions:
<TABLE>
<CAPTION>
Remaining
1999 2000 2001 2002 2003 Thereafter Total
----- ----- ----- ----- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 34 $ 54 $ 201 $ 86 $ 403 $ 2,019 $ 2,797
Average interest rate 7.8% 7.8% 7.9% 7.9% 7.9% 7.9% 7.8%
Variable rate LIBOR debt $ 1 $ 106 $ 288 $ 66 $ 2 $ 51 $ 514
Average interest rate 5.9% 5.9% 5.6% 6.1% 6.1% 6.1% 5.9%
</TABLE>
At June 30, 1999, the Company had interest rate cap agreements which
effectively limit the average interest rate on all of the variable rate
LIBOR debt maturing in 2002 to 9.0%.
As the table incorporates only those exposures that exist as of June 30,
1999, it does not consider exposures or positions which could arise after
that date. As a result, the Company's ultimate realized gain or loss with
respect to interest rate fluctuations will depend on the exposures that
arise after June 30, 1999, the Company's hedging strategies during that
period and interest rates.
37
<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 April 21, 1999
to file the consents of KPMG LLP, PricewaterhouseCoopers LLP
and Deloitte & Touche LLP to incorporate by reference
certain of their reports into certain Registration
Statements of The Rouse Company.
38
<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.
on behalf of
THE ROUSE COMPANY and as
Principal Financial Officer:
Date: August 13, 1999 By /s/ Jeffrey H. Donahue
--------------- ----------------------
Jeffrey H. Donahue
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer:
Date: August 13, 1999 By /s/ Melanie M. Lundquist
--------------- ------------------------
Melanie M. Lundquist
Vice President and
Controller
39
<PAGE>
Exhibit Index
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
40
<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 JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 25,870
<SECURITIES> 4,578
<RECEIVABLES> 102,399
<ALLOWANCES> 22,790
<INVENTORY> 0
<CURRENT-ASSETS> 128,230<F1>
<PP&E> 4,094,300
<DEPRECIATION> 546,343
<TOTAL-ASSETS> 4,405,831
<CURRENT-LIABILITIES> 395,588<F2>
<BONDS> 3,311,288
0
41
<COMMON> 723
<OTHER-SE> 641,443
<TOTAL-LIABILITY-AND-EQUITY> 4,405,831
<SALES> 356,643
<TOTAL-REVENUES> 356,643
<CGS> 0
<TOTAL-COSTS> 216,503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,376
<INTEREST-EXPENSE> 123,458
<INCOME-PRETAX> 58,045
<INCOME-TAX> 157
<INCOME-CONTINUING> 56,164
<DISCONTINUED> (1,724)
<EXTRAORDINARY> 910
<CHANGES> 0
<NET-INCOME> 56,978
<EPS-BASIC> .71
<EPS-DILUTED> .70
<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>
