<PAGE>
Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
--------------------
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, 2000:
Common Stock, $0.01 par value 68,730,793
----------------------------- ------------------
Title of Class Number of Shares
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Three and Nine Months Ended September 30, 2000 and 1999
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
-------------------------- ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 178,761 $ 172,419 $ 515,451 $ 522,115
Operating expenses, excluding
provision for bad debts,
depreciation and amortization 78,941 80,027 232,780 242,964
Interest expense 63,327 60,408 185,983 184,600
Provision for bad debts 1,871 1,974 5,212 6,350
Depreciation and amortization 23,184 23,548 67,170 72,893
Equity in earnings of
unconsolidated real estate ventures 21,254 20,281 76,396 62,028
Current income taxes 74 108 227 265
--------- --------- --------- ---------
Earnings before gains on
dispositions of operating
property assets, net and
extraordinary items 32,618 26,635 100,475 77,071
Gains on dispositions of
operating property assets, net 37,562 22 35,582 7,474
--------- --------- --------- ---------
Earnings before extraordinary items 70,180 26,657 136,057 84,545
Extraordinary gain (loss), net 3,920 (3) 3,198 (913)
--------- --------- --------- ---------
Net earnings 74,100 26,654 139,255 83,632
Other items of comprehensive
income (loss) - minimum
pension liability adjustment (119) (334) (355) (1,002)
--------- --------- --------- ---------
Comprehensive income $ 73,981 $ 26,320 $ 138,900 $ 82,630
========= ========= ========= =========
Net earnings applicable
to common shareholders $ 71,062 $ 23,616 $ 130,141 $ 74,518
========= ========= ========= =========
</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 Nine Months Ended September 30, 2000 and 1999
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------------------ -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE OF
COMMON STOCK:
Basic:
Earnings before
extraordinary items $ .96 $ .33 $ 1.81 $ 1.04
Extraordinary gain (loss) .06 -- .05 (.01)
----------- ----------- ----------- -----------
Total $ 1.02 $ .33 $ 1.86 $ 1.03
=========== =========== =========== ===========
Diluted:
Earnings before
extraordinary items $ .91 $ .32 $ 1.78 $ 1.03
Extraordinary gain (loss) .05 -- .04 (.01)
----------- ----------- ----------- -----------
Total $ .96 $ .32 $ 1.82 $ 1.02
=========== =========== =========== ===========
DIVIDENDS PER SHARE:
Common stock $ .33 $ .30 $ .99 $ .90
=========== =========== =========== ===========
Preferred stock $ .75 $ .75 $ 2.25 $ 2.25
=========== =========== =========== ===========
</TABLE>
3
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
------------- ------------
<S> <C> <C>
Assets:
Property:
Operating properties:
Property and deferred costs
of projects $ 3,716,107 $ 3,790,364
Less accumulated depreciation
and amortization 611,981 564,632
------------- ------------
3,104,126 3,225,732
Properties in development 178,388 288,058
Properties held for sale 355,812 10,984
------------- ------------
Total property 3,638,326 3,524,774
Investments in and advances to
unconsolidated real estate ventures 529,865 533,341
Prepaid expenses, receivables under
finance leases and other assets 258,717 258,666
Accounts and notes receivable 59,577 61,224
Investments in marketable securities 22,882 23,321
Cash and cash equivalents 9,387 25,890
------------- ------------
Total $ 4,518,754 $ 4,427,216
============= ============
</TABLE>
The accompanying notes are 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, continued
September 30, 2000 and December 31, 1999
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
------------- ------------
<S> <C> <C>
Liabilities:
Debt:
Property debt not carrying a Parent
Company guarantee of repayment $ 2,555,425 $ 2,529,334
Parent Company debt and debt carrying
a Parent Company guarantee of repayment:
Property debt 104,064 161,585
Other debt 743,439 643,500
------------- ------------
847,503 805,085
------------- ------------
Total debt 3,402,928 3,334,419
------------- ------------
Accounts payable, accrued expenses
and other liabilities 318,407 317,252
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;
69,167,888 shares issued in 2000 and
70,693,789 shares issued in 1999 692 707
Additional paid-in capital 769,347 808,277
Accumulated deficit (108,800) (169,974)
Accumulated other comprehensive income (loss) (826) (471)
------------- ------------
Net shareholders' equity 660,454 638,580
------------- ------------
Total $ 4,518,754 $ 4,427,216
============= ============
</TABLE>
5
<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, 2000 and 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Rents and other revenues received $ 506,060 $ 505,108
Proceeds from land sales and on notes
receivable from land sales 6,787 24,016
Interest received 7,536 12,563
Operating expenditures (218,184) (237,322)
Interest paid (181,967) (184,977)
Dividends, interest and other operating
distributions received from unconsolidated
majority financial interest ventures 39,472 35,975
----------- -----------
Net cash provided by operating activities 159,704 155,363
----------- -----------
Cash flows from investing activities:
Expenditures for properties in development
and improvements to existing properties
funded by debt (156,846) (155,371)
Expenditures for property acquisitions (21,903) ---
Expenditures for improvements to existing
properties funded by cash provided by
operating activities (13,379) (15,454)
Payments received on loans (advances made)
to unconsolidated majority financial
interest ventures 53,315 (44,133)
Proceeds from sales of operating properties
and other investments 84,322 126,875
Other 439 (13,857)
----------- -----------
Net cash used by investing activities (54,052) (101,940)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of property debt 150,954 233,062
Repayments of property debt:
Scheduled principal payments (44,404) (36,717)
Other payments (161,732) (80,853)
Proceeds from issuance of other debt 115,750 200,248
Repayments of other debt (15,727) (268,323)
Purchases of Company common stock (91,665) (31,016)
Dividends paid (78,081) (74,053)
Other 2,750 (6,369)
----------- -----------
Net cash used by financing activities (122,155) (64,021)
----------- -----------
Net decrease in cash and cash equivalents (16,503) (10,598)
Cash and cash equivalents at beginning of period 25,890 28,688
----------- -----------
Cash and cash equivalents at end of period $ 9,387 $ 18,090
=========== ===========
</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, continued
Nine Months Ended September 30, 2000 and 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $139,255 $ 83,632
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 67,170 72,893
Undistributed earnings of majority
financial interest ventures (46,885) (33,236)
Gains on dispositions of operating
property assets, net (35,582) (7,474)
Extraordinary loss (gain), net (3,198) 913
Participation expense pursuant to
Contingent Stock Agreement 19,415 20,984
Provision for bad debts 5,212 6,350
Other, net 14,317 11,301
-------- --------
Net cash provided by operating activities $159,704 $155,363
======== ========
Schedule of Noncash Investing and Financing
Activities:
Common stock issued pursuant to Contingent
Stock Agreement $ 42,630 $ 34,491
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
Mortgage debt assumed by purchaser of a property -- 40,000
Capital lease obligations incurred 1,168 1,589
======== ========
</TABLE>
7
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2000
(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 1999 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 of 1986, as amended. Management believes the
Company met the qualifications for REIT status as of September 30, 2000,
and intends for it to continue to meet the qualifications in the future.
In connection with its election to be taxed as a REIT, the Company also
elected to be subject to the "built-in gain" rules. In February 2000,
temporary and proposed regulations were issued providing guidance
regarding the application of the "built-in gain" rules to REITs and are
effective retroactive to June 10, 1987. The regulations require a REIT to
refile its election to be subject to the "built-in gain" rules. In
September 2000, the Company refiled its election with respect to assets
owned by the Company on the date of conversion to REIT status. Under
these rules, taxes will 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. At September 30, 2000, net
unrealized gains were approximately $2,465,000,000. Management believes
that the Company will not be required to make significant payments of
taxes on built-in gains throughout the ten-year period due to the
availability of its net operating loss carryforward to offset certain
8
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(2) Tax status, continued
---------------------
built-in gains which might be recognized and the potential for the
Company to enter into alternative structures, if necessary. At September
30, 2000, the regular tax net operating loss carryforward is sufficient
to offset built-in gains on assets the Company intends to sell and no net
deferred tax liability for built-in gains taxes has been recognized.
However, it may 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.
(3) Unconsolidated real estate ventures
-----------------------------------
Investments in and advances to unconsolidated real estate ventures are
summarized, based on the level of the Company's financial interest, as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Majority financial interest ventures $ 342,430 $ 349,991
Minority interest ventures 187,435 183,350
---------- ----------
Total $ 529,865 $ 533,341
========== ==========
</TABLE>
The equity in earnings of unconsolidated real estate ventures 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,
---------------------- -----------------------
2000 1999 2000 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Majority financial interest
ventures $ 17,202 $ 15,187 $ 66,939 $ 49,309
Minority interest ventures 4,052 5,094 9,457 12,719
--------- ---------- --------- ----------
Total $ 21,254 $ 20,281 $ 76,396 $ 62,028
========= ========== ========= ==========
</TABLE>
9
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(3) Unconsolidated real estate ventures, continued
----------------------------------------------
The condensed, combined balance sheets of the ventures in which the Company
holds majority financial interests are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets:
Operating properties, net $ 381,819 $ 375,651
Properties in development 17,172 26,924
Properties held for sale 15,242 ---
Land held for development and sale 256,388 257,773
Investments in and advances to
unconsolidated real estate ventures 85,000 107,813
Prepaid expenses, receivables under
finance leases and other assets 84,803 98,228
Accounts and notes receivable 70,737 88,765
Cash and cash equivalents 3,366 8,194
---------- ----------
Total $ 914,527 $ 963,348
========== ==========
Liabilities and shareholders' deficit:
Loans and advances from the Company $ 434,540 $ 514,792
Mortgages payable and other long-term debt 354,720 350,646
Other liabilities 112,491 118,525
Redeemable Series A Preferred stock 50,000 50,000
Shareholders' deficit (37,224) (70,615)
---------- ----------
Total $ 914,527 $ 963,348
========== ==========
</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 statements of operations of the ventures in which
the Company holds a majority financial interest are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
-------------------------- ---------------------------
2000 1999 2000 1999
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues, excluding interest
on loans to the Company $ 70,458 $ 71,157 $ 236,898 $ 218,852
Interest income on loans
to the Company --- --- --- 2,577
Operating expenses (37,343) (40,385) (122,252) (125,979)
Interest expense, excluding
interest on borrowings from
the Company (4,451) (2,080) (10,839) (7,547)
Interest expense on borrowings
from the Company (12,779) (10,881) (39,472) (40,175)
Depreciation and amortization (4,309) (2,944) (12,951) (8,877)
Equity in earnings of
unconsolidated real estate ventures 1,661 768 963 1,575
Gains on dispositions of operating
property assets, net --- 1,633 --- 2,515
Income taxes, primarily deferred (5,875) (6,840) (18,956) (18,681)
--------- ---------- ----------- -----------
Net earnings $ 7,362 $ 10,428 $ 33,391 $ 24,260
========= ========== =========== ===========
</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 Company's share of net earnings of the ventures is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
-------------------------- -------------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Share of net earnings based
on ownership interest $ 7,288 $ 10,324 $ 33,057 $ 24,018
Participation by others in
the Company's share of earnings (6,303) (8,497) (19,418) (19,902)
Interest on loans to and advances
from the ventures, net 12,779 10,881 39,472 37,598
Eliminations, basis adjustments
and other, net 3,438 2,479 13,828 7,595
--------- --------- ---------- ----------
$ 17,202 $ 15,187 $ 66,939 $ 49,309
========= ========= ========== ==========
</TABLE>
(4) Debt
----
Debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------------- -----------------------
Due in Due in
Total one year Total one year
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Mortgages and bonds $ 2,571,206 $ 248,702 $ 2,572,496 $ 55,126
Medium-term notes 81,500 30,000 91,500 10,000
Credit line borrowings 259,000 --- 174,000 ---
Other loans 491,222 6,631 496,423 6,467
----------- ---------- ----------- ---------
Total $ 3,402,928 $ 285,333 $ 3,334,419 $ 71,593
=========== ========== =========== =========
</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.
12
<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
-------------------
The Company has five reportable segments: retail centers, office and other
properties, land sales operations, development and corporate. In 2000,
the Company reclassified the segment operating results and assets of the
retail components of its five mixed-use projects to retail centers. In
connection therewith, the office, mixed-use and other properties segment
has been renamed office and other properties. In the third quarter
of 2000, the Company adjusted its method of computing FFO to exclude
deferred income taxes. Segment information for all periods has been
restated to reflect these changes. 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
items, gains (losses) on dispositions of operating property assets,
depreciation and amortization and deferred income taxes. Additionally,
equity in earnings of unconsolidated real estate ventures and minority
interests has been adjusted to reflect FFO on the same basis. FFO for
prior periods has been presented in conformity with the above definition.
The exclusion of deferred income taxes results in the Company's
definition of FFO differing from the definition used by the National
Association of Real Estate Investment Trusts. Also, the Company's
definition of FFO may differ from those 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. It 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 (majority financial interest ventures) are
accounted for on a consolidated basis, rather than using the equity
method. Effective in the third quarter of 2000, the Company's
proportionate share of assets, revenues and expenses of unconsolidated
real estate ventures accounted for on the equity method of accounting and
in which it holds at least a 30% interest are included in segment assets
and operating results. Accordingly, certain segment revenue, expense and
asset information has been reclassified to conform to this presentation.
The Company's share of FFO of other minority interest ventures is
included in revenues.
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, continued
------------------------------
Funds From Operations for the segments are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Office Land
Retail and Other Sales
Centers Properties Operations Development Corporate Total
--------- ---------- ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Three months ended
September 30, 2000
------------------
Revenues $ 159,709 $ 56,225 $ 44,254 $ --- $ 220 $ 260,408
Operating expenses* 72,350 21,739 29,815 1,760 3,477 129,141
Interest expense 47,982 21,623 771 --- 228 70,604
--------- --------- --------- --------- ---------- ---------
FFO $ 39,377 $ 12,863 $ 13,668 $ (1,760) $ (3,485) $ 60,663
========= ========= ========= ========= ========== =========
Three months ended
September 30, 1999
------------------
Revenues $ 155,457 $ 52,340 $ 47,796 $ --- $ (185) $ 255,408
Operating expenses* 72,474 21,925 35,793 648 3,466 134,306
Interest expense 46,014 20,614 880 --- (2,127) 65,381
--------- --------- --------- --------- ---------- ---------
FFO $ 36,969 $ 9,801 $ 11,123 $ (648) $ (1,524) $ 55,721
========= ========= ========= ========= ========== =========
Nine months ended
September 30, 2000
------------------
Revenues $ 463,561 $ 164,983 $ 157,282 $ --- $ 721 $ 786,547
Operating expenses* 212,066 62,964 102,489 3,408 12,034 392,961
Interest expense 138,552 63,370 2,288 --- 1,195 205,405
--------- --------- --------- --------- ---------- ---------
FFO $ 112,943 $ 38,649 $ 52,505 $ (3,408) $ (12,508) $ 188,181
========= ========= ========= ========= ========== =========
Nine months ended
September 30, 1999
------------------
Revenues $ 464,228 $ 154,803 $ 152,610 $ --- $ 1,099 $ 772,740
Operating expenses* 215,680 60,226 111,759 1,949 17,161 406,775
Interest expense 140,721 61,739 2,619 --- (5,189) 199,890
--------- --------- --------- --------- ---------- ---------
FFO $ 107,827 $ 32,838 $ 38,232 $ (1,949) $ (10,873) $ 166,075
========= ========= ========= ========= ========== =========
</TABLE>
* Operating expenses in this table exclude deferred income taxes and
depreciation and amortization.
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
------------------------------
Reconciliations of 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 in the
consolidated financial statements are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three months
ended September 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Total reported above $ 260,408 $ 255,408
Revenues of majority financial interest
ventures excluding interest on advances
to the Company (70,458) (71,157)
Company's share of revenues of 30% or more owned
minority interest ventures (9,740) (9,768)
Company's share of FFO of other minority interest
ventures (1,449) (2,064)
------------ ------------
Total in consolidated financial statements $ 178,761 $ 172,419
============ ============
Operating expenses, exclusive of depreciation
and amortization:
Total reported above $ 129,141 $ 134,306
Operating expenses of majority financial
interest ventures (37,343) (40,385)
Company's share of operating expenses of
30% or more owned minority interest ventures (3,573) (3,286)
Provision for bad debts (1,871) (1,974)
Participation by others in the Company's share of
earnings of majority financial interest ventures (6,303) (8,497)
Income taxes and other (1,110) (137)
------------ ------------
Total in consolidated financial statements $ 78,941 $ 80,027
============ ============
Interest expense:
Total reported above $ 70,604 $ 65,381
Interest expense of majority financial
interest ventures excluding interest on
borrowings from the Company (4,451) (2,080)
Company's share of interest expense of 30% or more
owned minority interest ventures (2,826) (2,893)
------------ ------------
Total in consolidated financial statements $ 63,327 $ 60,408
============ ============
Operating results:
FFO reported above $ 60,663 $ 55,721
Depreciation and amortization (23,184) (23,548)
Gains on dispositions of operating property
assets, net 37,562 22
Share of depreciation and amortization, deferred
taxes and gains on dispositions of operating
property assets of unconsolidated real
estate ventures, net (4,861) (5,538)
------------ ------------
Earnings before extraordinary items in consolidated
financial statements $ 70,180 $ 26,657
============ ============
</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 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 in the
consolidated financial statements are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Nine months
ended September 30,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Total reported above $ 786,547 $ 772,740
Revenues of majority financial interest
ventures excluding interest on advances
to the Company (236,898) (218,852)
Company's share of revenues of 30% or more owned
minority interest ventures (28,370) (25,702)
Company's share of FFO of other minority interest
ventures (5,828) (6,071)
------------ ------------
Total in consolidated financial statements $ 515,451 $ 522,115
============ ============
Operating expenses, exclusive of depreciation and amortization:
Total reported above $ 392,961 $ 406,775
Operating expenses of majority financial
interest ventures (122,252) (125,979)
Company's share of operating expenses of 30% or more
owned minority interest ventures (9,730) (8,792)
Provision for bad debts (5,212) (6,350)
Participation by others in the Company's share of
earnings of majority financial interest ventures (19,418) (19,902)
Income taxes and other (3,569) (2,788)
------------ ------------
Total in consolidated financial statements $ 232,780 $ 242,964
============ ============
Interest expense:
Total reported above $ 205,405 $ 199,890
Interest expense of majority financial
interest ventures excluding interest on
borrowings from the Company (10,839) (7,547)
Company's share of interest expense of 30% or more
owned minority interest ventures (8,583) (7,743)
------------ ------------
Total in consolidated financial statements $ 185,983 $ 184,600
============ ============
Operating results:
FFO reported above $ 188,181 $ 166,075
Depreciation and amortization (67,170) (72,893)
Gains on dispositions of operating
property assets, net 35,582 7,474
Share of depreciation and amortization, deferred
taxes, and gains (losses) on dispositions of operating
property assets of unconsolidated real
estate ventures, net (20,536) (16,111)
------------ ------------
Earnings before extraordinary items in consolidated
financial statements $ 136,057 $ 84,545
============ ============
</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
------------------------------
The assets by segment are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ------------
<S> <C> <C>
Retail centers $ 3,367,343 $ 3,289,819
Office and other properties 1,234,205 1,215,993
Land sales operations 401,065 435,279
Development 87,885 33,371
Corporate 84,324 106,537
-------------- ------------
Total $ 5,174,822 $ 5,080,999
============== ============
</TABLE>
Total segment assets exceeds total assets reported in the consolidated
financial statements primarily because of the consolidation of the
majority financial interest ventures and the Company's proportionate
share of assets of certain minority interest ventures for segment
reporting purposes.
(6) Gains on dispositions of operating property assets, net
----------------------------------------------------------------
The net gains on dispositions of operating property assets for the three
months ended September 30, 2000 related primarily to the sale in July
2000, of substantially all of the Company's ownership interest in North
Star, a retail center in San Antonio, Texas for approximately $84
million. In connection with the sale of the ownership interest, the
Company deferred approximately $25 million of gain due to the continuing
involvement of the Company. The net gains on operating properties for the
nine months ended September 30, 2000 related primarily to the sale
discussed above, partially offset by a provision for loss on a leasehold
interest in a retail center the Company decided to dispose and a
provision for loss on an interest in a retail center property that the
Company and its venture partner decided to sell. The net gains on
dispositions of operating property assets for the nine months ended
September 30, 1999 related primarily to the sale in June 1999 of an
operating property in Los Angeles, California.
17
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(7) Extraordinary gain (loss), net
------------------------------
The extraordinary gain (loss), net for the three and nine months ended
September 30, 2000 related primarily to the substantial modification of
terms of certain property debt and to the extinguishment of other debt.
The extraordinary gain (loss), net for the three and nine months ended
September 30, 1999 related to the extinguishment of debt prior to
scheduled maturity. The sources of funds used to pay the debt and fund
the prepayment penalties, where applicable, were credit facility
borrowings, refinancing of property debt and 8% Senior Debt issued in
1999.
(8) Earnings per share
------------------
Information relating to the calculations of earnings per share of common
stock (EPS) for the three months ended September 30, 2000 and 1999 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
Basic Diluted Basic Diluted
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Earnings before extra-
ordinary items $ 70,180 $ 70,180 $ 26,657 $ 26,657
Dividends on Preferred
stock (3,038) --- (3,038) (3,038)
Dividends on unvested
common stock awards
and other (111) (4) (115) (305)
Interest on convertible
property debt --- 769 --- ---
--------- -------- --------- ---------
Adjusted earnings before
extraordinary items
used in EPS computation $ 67,031 $ 70,945 $ 23,504 $ 23,314
========= ======== ========= =========
Weighted-average shares
outstanding 69,751 69,751 71,979 71,979
Dilutive securities:
Convertible property debt --- 1,657 --- ---
Convertible preferred stock --- 5,310 --- ---
Options, warrants,
unvested common stock
awards and other --- 1,049 --- 608
--------- -------- --------- ---------
Adjusted weighted-average
shares used in EPS
computation 69,751 77,767 71,979 72,587
========= ======== ========= =========
</TABLE>
18
<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 of common
stock (EPS) for the nine months ended September 30, 2000 and 1999 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
----------------------------- -------------------------------
Basic Diluted Basic Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings before extra-
ordinary items $ 136,057 $ 136,057 $ 84,545 $ 84,545
Dividends on Preferred
stock (9,114) --- (9,114) (9,114)
Dividends on unvested
common stock awards
and other (332) (256) (353) (627)
Interest on convertible
property debt --- 2,307 --- ---
------------ ------------ ------------- --------------
Adjusted earnings before
extraordinary items
used in EPS computation $ 126,611 $ 138,108 $ 75,078 $ 74,804
============ ============ ============= ==============
Weighted-average shares
outstanding 69,939 69,939 71,868 71,868
Dilutive securities:
Convertible property debt --- 1,930 --- ---
Convertible preferred stock --- 5,310 --- ---
Options, warrants,
unvested common stock
awards and other --- 610 --- 594
------------ ------------ ------------- --------------
Adjusted weighted-average
shares used in EPS
computation 69,939 77,789 71,868 72,462
============ ============ ============= ==============
</TABLE>
Effects of potentially dilutive securities are presented only in periods in
which they are dilutive.
19
<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, 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, and it is, therefore, possible that
resolution of these matters could have such an effect in any future
quarter or year.
(10) Properties held for sale
------------------------
In September 1999, the Company announced that it was considering selling
interests in certain operating properties and land parcels and using the
proceeds to repay debt and repurchase (subject to certain price
restrictions) up to $250 million of the Company's common stock. In
January 2000, management authorized specific disposition plans and began
actively marketing interests in the operating properties. Accordingly,
the net book values of the operating properties were reclassified to
properties held for sale. In June 2000, the Company sold one of the
properties for an amount approximating its net book value.
20
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(11) Shelf registration statement:
----------------------------
At September 30, 2000, 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.
(12) Subsequent events
-----------------
In October 2000, the Company sold Midtown Square, a retail center in
Charlotte, North Carolina for approximately $9.5 million. The Company
will record a net gain on the sale of this property of approximately $4.7
million in the fourth quarter of 2000. Additionally, in November 2000,
the Company disposed of its leasehold interest in The Grand Avenue, a
retail center in Milwaukee, Wisconsin for approximately $3.0 million. No
significant gain or loss will be recorded relating to this transaction.
21
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
The following discussion and analysis covers any material changes in financial
condition since December 31, 1999 and any material changes in the results of
operations for the three and nine months ended September 30, 2000 as
compared to the same periods in 1999. 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 1999 Annual Report to
Shareholders.
General:
-------
Through its subsidiaries and affiliates, the Company acquires, develops and
manages a diversified portfolio of retail centers and office, industrial,
mixed-use and other properties (collectively, office and other 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 shopping
centers, major mixed-use projects and geographically concentrated groups of
office and industrial buildings (principally complementing community
development activities) in major markets across the United States. In order
to achieve this objective, management is actively evaluating opportunities
to acquire properties and expand and/or renovate existing properties that
may have future prospects consistent with the Company's long-term investment
criteria. The Company plans to continue to make 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 this
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 meet the Company's investment criteria. In September 1999,
the Company announced that it would pursue developing a strategy to dispose
of interests in certain office and industrial properties and land parcels
and use the proceeds to expand or develop properties, to repay debt and to
repurchase (subject to certain price restrictions) up to $250 million of the
Company's common stock. In January 2000, management authorized specific
disposition plans and began actively marketing interests in the properties.
In June 2000, the Company completed a sale of one of these properties. The
Company expects to close the sale of a majority
22
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
General, continued:
------------------
of its interests in two office/industrial business parks in Las Vegas in
December 2000. The Company may also selectively dispose of properties for
other reasons. These disposition decisions may cause the Company to
recognize gains or losses that could have material effects on reported net
earnings in future quarters or fiscal years and taken together with the use
of sales proceeds, may have a material effect on the overall consolidated
financial position of the Company.
Portfolio changes:
-----------------
In February 1999, the Company contributed its ownership interests in four retail
centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and Towson
Town Center) to a joint venture in which it retained a 35% ownership
interest. In June 1999, the Company sold Lucky's Center, an other property
in Los Angeles, California. In October 1999, the Company sold Santa Monica
Place, a retail center in Santa Monica, California. In June 2000, the
Company sold an industrial building in Baltimore, Maryland. In July 2000,
the Company sold substantially all of its ownership interest in North Star,
a retail center in San Antonio, Texas. In August 2000, the Company purchased
an additional interest in Westdale, a retail center in Cedar Rapids, Iowa.
In 2000 and 1999, the Company and its affiliates completed a number of
development projects to enhance the quality of its portfolio. This
development activity is summarized as follows:
Retail Centers Date Opened
-------------- -----------
Oakwood Center Expansion March 1999
The Mall in Columbia Expansion-Phase II September 1999
Exton Square Expansion - Phase I November 1999
Moorestown Mall Expansion-Phase I November 1999
Moorestown Mall Expansion-Phase II March 2000
Pioneer Place Expansion March 2000
Exton Square Expansion - Phase II May 2000
Perimeter Mall Expansion - Phase II June 2000
Office and Other Date Opened
---------------- -----------
Park Square, Columbia Office January 1999
Hughes Airport Center (4 buildings) May 1999
Summerlin Commercial (1 building) September 1999
Hughes Center (1 building) October 1999
23
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Operating results:
-----------------
As indicated in the 1999 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 included in this Form 10-Q should be referred to when reading
this discussion and analysis. As discussed in note 5, 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 majority financial interest
ventures (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 reported on a consolidated basis rather than using the equity
method. Additionally, the Company's proportionate share of revenues and
expenses of unconsolidated real estate ventures accounted for on the equity
method of accounting and in which it holds at least a 30% interest are
included in segment operating results. The Company's share of FFO of other
unconsolidated real estate ventures is included in revenues. These
differences affect only the reported revenues and operating and interest
expenses of the segments and have no effect on the reported net earnings or
FFO of the Company. Revenues and operating and interest expenses reported
for the segments are reconciled to the related amounts reported in the
consolidated financial statements in note 5.
Operating Properties - Retail Centers:
-------------------------------------
Operating results of retail centers are summarized as follows (in millions):
<TABLE>
<CAPTION>
Three Nine
months ended months ended
September 30, September 30,
---------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 159.7 $ 155.5 $ 463.6 $ 464.2
Operating expenses, exclusive
of depreciation and
amortization 72.3 72.5 212.1 215.7
Interest expense 48.0 46.0 138.6 140.7
----------- ----------- ---------- -----------
39.4 37.0 112.9 107.8
Depreciation and amortization 20.1 17.2 58.4 56.1
----------- ----------- ---------- -----------
Operating income $ 19.3 $ 19.8 $ 54.5 $ 51.7
=========== =========== ========== ===========
</TABLE>
24
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Operating Properties - Retail Centers, continued:
------------------------------------------------
Revenues increased $4.2 million and decreased $.6 million for the three and nine
months ended September 30, 2000, respectively, compared to the same periods
in 1999. The increase for the three months ended September 30, 2000 was
attributable primarily to project expansions (approximately $5.6 million),
the acquisition of an additional interest in Westdale (approximately $1.3
million) and higher rents on released space. These increases were partially
offset by the dispositions of Santa Monica Place and North Star
(approximately $6.7 million). The decrease for the nine months ended
September 30, 2000 was attributable primarily to the aforementioned
dispositions and contribution of properties to a joint venture (approximately
$21.0 million). These decreases were substantially offset by project
expansions (approximately $12.7 million), the aforementioned acquisition
(approximately $1.3 million) and higher rents on released space.
Total operating and interest expenses increased $1.8 million and decreased $5.7
million for the three and nine months ended September 30, 2000, respectively,
compared to the same periods in 1999. The increase for the three months ended
September 30, 2000 was attributable primarily to project expansions
(approximately $6.5 million) and the acquisition of an additional interest in
Westdale (approximately $1.1 million). These increases were partially offset
by the dispositions of Santa Monica Place and North Star (approximately $3.9
million) and lower interest expenses due to debt repayments. The decrease for
the nine months ended September 30, 2000 was attributable primarily to the
aforementioned dispositions and contribution of properties to a joint venture
(approximately $16.9 million) and lower interest expenses due to debt
repayments. These decreases were partially offset by project expansions
(approximately $12.8 million) and the aforementioned acquisition
(approximately $1.1 million). Depreciation and amortization expense increased
$2.9 million and $2.3 million for the three and nine months ended September
30, 2000, respectively, compared to the same periods in 1999. These changes
were attributable primarily to the changes in the portfolio referred to
above.
25
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Operating Properties - Office and Other Properties:
--------------------------------------------------
Operating results of office and other properties are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Three Nine
months ended months ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 56.2 $ 52.3 $ 165.0 $ 154.8
Operating expenses, exclusive
of depreciation and
amortization 21.7 21.9 63.0 60.2
Interest expense 21.6 20.6 63.4 61.7
---------- ----------- ---------- -----------
12.9 9.8 38.6 32.9
Depreciation and amortization 7.8 9.8 23.8 28.2
---------- ----------- ---------- -----------
Operating income $ 5.1 $ --- $ 14.8 $ 4.7
========== =========== ========== ===========
</TABLE>
Revenues increased $3.9 million and $10.2 million for the three and nine months
ended September 30, 2000, respectively, compared to the same periods in
1999. The increases were attributable primarily to higher average occupancy
levels (92.9% in 2000 compared to 90.5% in 1999), project openings in 1999
(approximately $1.4 million and $3.8 million for the three and nine months
ended September 30, 2000, respectively) and higher rents on released space.
These increases were partially offset by the aforementioned dispositions in
1999 and 2000.
Total operating and interest expenses increased $.8 million and $4.5 million
for the three and nine months ended September 30, 2000, respectively,
compared to the same periods in 1999. The increases in operating and
interest expenses were attributable primarily to higher average occupancy
levels and to project openings in 1999 (approximately $.8 million and $2.3
million for the three and nine months ended September 30, 2000,
respectively). These increases were partially offset by the aforementioned
dispositions (approximately $.1 million and $.4 million for the three and
nine months ended September 30, 2000, respectively). Depreciation and
amortization expense decreased $2.0 million and $4.4 million for the three
and nine months ended September 30, 2000, respectively, compared to the same
periods in 1999. The decreases were attributable primarily to cessation of
depreciation of properties the Company classified as held for sale in 2000.
26
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, 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 Nine months
ended September 30, ended September 30,
--------------------------- --------------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Nevada Land Operations:
Revenues:
Summerlin $ 19.3 $ 23.8 $ 74.0 $ 77.0
Other 1.6 9.9 7.8 16.9
Operating costs and expenses:
Summerlin 17.0 18.8 59.8 62.0
Other 1.5 9.4 7.7 16.5
Interest expense --- --- .1 ---
---------- ---------- ----------- -----------
Operating income $ 2.4 $ 5.5 $ 14.2 $ 15.4
========== ========== =========== ===========
Columbia and Other:
Revenues $ 23.4 $ 14.1 $ 75.5 $ 58.7
Operating costs and expenses 11.3 7.6 35.0 33.3
Interest expense .8 .9 2.2 2.6
---------- ---------- ----------- -----------
Operating income $ 11.3 $ 5.6 $ 38.3 $ 22.8
========== ========== =========== ===========
Total:
Revenues $ 44.3 $ 47.8 $ 157.3 $ 152.6
Operating costs and expenses 29.8 35.8 102.5 111.8
Interest expense .8 .9 2.3 2.6
---------- ---------- ----------- -----------
Operating income $ 13.7 $ 11.1 $ 52.5 $ 38.2
========== ========== =========== ===========
</TABLE>
27
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Land Sales Operations, continued:
--------------------------------
Revenues from Summerlin land sales operations decreased $4.5 million and $3.0
million for the three months and nine months ended September 30, 2000,
respectively, while related costs and expenses decreased $1.8 million and $2.2
million, respectively, compared to the same periods in 1999. The decreases in
land sales and related costs and expenses for the three months were due
primarily to lower levels of land available for sale. The Company is
developing additional land inventory, expected to be sold in the fourth
quarter. The decreases in revenues and related costs and expenses from other
Nevada land sales for the three months and nine months ended September 30,
2000, compared to the same periods in 1999, were attributed to lower levels of
sales of investment and business park land.
Revenues from Columbia and other land sales operations increased $9.3 million
and $16.8 million for the three and nine months ended September 30, 2000,
respectively, while related costs and expenses increased $3.6 million and $1.3
million, respectively, compared to the same periods in 1999. The increases in
revenues and related costs and expenses for the three months ended September
30, 2000 were attributable to higher levels of land sales in Columbia for
commercial and residential uses. The increases in revenues and related costs
and expenses for the nine months ended September 30, 2000 were attributable
primarily to higher levels of investment land sales in Columbia at a higher
profit margin and to higher levels of sales of investment land in New Jersey
(approximately $10.0 million sales increase and $2.7 million cost and expense
increase). There is no remaining saleable land at the New Jersey site.
Development:
-----------
Development expenses consist primarily of preconstruction expenses and new
business costs. Preconstruction expenses relate to 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 and investment opportunities.
Development expenses increased $1.1 million and $1.5 million for the three
months and nine months ended September 30, 2000, respectively, compared to the
same periods in 1999. The increases in development expenses relate primarily
to increased preconstruction expenses related to the Company's development
pipeline.
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
28
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Corporate, continued:
--------------------
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, net corporate interest expense consists primarily of interest on
the convertible subordinated debentures which were retired in the second
quarter of 1999, the unsecured 8% notes issued in the second quarter 1999, the
unsecured 8.5% notes, the medium-term notes, credit facility borrowings, and
unallocated proceeds from refinancings of certain properties, net of interest
capitalized on development projects or allocated to other segments. Corporate
operating expenses consist primarily of general and administrative costs and
distributions on the redeemable preferred securities, net of distributions
allocated to other segments.
Corporate operating expenses decreased $5.1 million for the nine months ended
September 30, 2000, compared to the same period in 1999. In the second quarter
of 1999, the Company announced and initiated the consolidation of the
management and administration of its Retail Operations and Office and Mixed-
Use divisions into a single Property Operations Division and the integration
of certain operating, administrative and support functions of the Hughes
Division into other divisions. The costs relating to these organizational
changes, primarily severance and other benefits to terminated employees of the
Company and its affiliates aggregated approximately $6.2 million in the three
months ended June 30, 1999. There was no similar event in 2000.
Corporate interest expense, net, increased $2.4 million and $6.4 million for the
three and nine months ended September 30, 2000, respectively, compared to the
same periods in 1999. The increases were attributable primarily to interest
expense incurred on the 8% Senior Debt issued in May 1999, partially offset by
lower interest expense on the convertible subordinated debentures that were
repaid using a portion of the proceeds from the issuance of the 8% Senior
Debt.
Gains on dispositions of operating property assets, net:
------------------------------------------------------
Gains on dispositions of operating property assets, net, including the Company's
share of those recorded by unconsolidated real estate ventures, is
summarized as follows (in millions):
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- ------ ------- --------
<S> <C> <C> <C> <C>
Net gains on operating
properties $ 37.5 $ 1.6 $ 31.6 $ 10.2
======== ====== ======= ========
</TABLE>
29
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Gains on dispositions of operating property assets, net, continued:
-----------------------------------------------------------------
The net gains on dispositions of operating property assets for the three months
ended September 30, 2000 related primarily to the sale of substantially all of
the Company's ownership interest in North Star, a retail center. In connection
with the sale of the ownership interest, the Company deferred approximately
$25 million of gain due to the continuing involvement of the Company. The net
gains on operating properties for the nine months ended September 30, 2000
related primarily to the sale discussed above, partially offset by a provision
for loss on a leasehold interest in a retail center the Company decided to
dispose and a provision for loss on an interest in a retail center property
that the Company and its venture partner decided to sell. The net gains on
dispositions of operating property assets for the nine months ended September
30, 1999 related primarily to the sale of an operating property by the Company
and the sale of a service station by a majority financial interest venture.
Extraordinary gain (loss), net:
------------------------------
The extraordinary gain (loss), net for the three and nine months ended September
30, 2000 related primarily to the substantial modification of terms of certain
property debt and extinguishment of other debt. The extraordinary gain (loss),
net for the three and nine months ended September 30, 1999 related to the
extinguishment of debt prior to scheduled maturity. The sources of funds used
to pay the debt and fund the prepayment penalties, where applicable, were
credit facility borrowings, refinancing of property debt and 8% Senior Debt
issued in 1999.
Net earnings:
------------
The increases in net earnings for the three and nine months ended September 30,
2000 as compared to the same periods in 1999 were attributable to the factors
discussed above in the analyses of the segments, the analysis of gains on
dispositions of operating property assets, net and the analysis of
extraordinary gain (loss), net.
Financial condition and liquidity:
---------------------------------
Shareholders' equity increased by $21.9 million from December 31, 1999 to
September 30, 2000. The increase was primarily attributed to net earnings for
the nine months ended September 30, 2000 and the 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 $32.3 million at September 30, 2000, including $4.3
million of investments held for restricted uses.
30
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Financial condition and liquidity, continued:
--------------------------------------------
In 1998, the Company obtained a $450 million unsecured revolving credit facility
from a group of lenders. The facility is available until July 2001, and is
subject to a one-year renewal option. The group of lenders also provided a
bridge loan facility that was available for specific property acquisitions
completed in 1998. Related borrowings under the bridge loan facility were
repaid on or before July 30, 1999. The revolving credit facility may be used
for various purposes, including project development costs, property
acquisitions, liquidity and other corporate needs. It may also be used to pay
some portion of existing debt. Availability under the facility was $191
million at September 30, 2000. The Company is currently negotiating terms of a
$375 million replacement credit facility that it expects to obtain in the
fourth quarter of 2000.
As of September 30, 2000, debt due in one year was $285.3 million, including
balloon payments on mortgages of $201.2 million and repayments of medium-term
notes of $30 million. These payments are expected to be made from the proceeds
of property refinancings (including refinancings of the mortgages due), credit
facility borrowings, proceeds from the sales of property interests held for
sale, proceeds from the sales of other property interests or other available
corporate funds. The Company is continually evaluating sources of capital, and
management believes there are satisfactory sources available for all
requirements. Dispositions of properties are expected to provide capital
resources during the remaining part of 2000 and 2001 and may also provide them
in subsequent years.
The Company began actively marketing interests in certain office and industrial
properties in the first quarter of 2000. The Company expects that proceeds
from sales will be used to repay debt, repurchase common stock and/or fund
project development costs. The Company sold one of these properties in June
2000 for approximately $1.2 million. In July 2000, the Company sold
substantially all of its ownership interest in North Star, a regional retail
center in San Antonio, Texas, for approximately $84 million. In the fourth
quarter of 2000, the Company sold interests in two retail centers and expects
to sell interests in two office/industrial parks.
The Company may also sell interests in other operating properties. The Company
and its affiliates also consider certain investment and other land assets as
significant sources of cash flows and may decide to accelerate sales in order
to provide additional liquidity for other purposes, including the funding of
development activities.
Also as discussed above, the Company has approval to repurchase, subject to
certain pricing restrictions, up to $250 million of common stock. As
31
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Financial condition and liquidity, continued:
--------------------------------------------
of September 30, 2000, the Company had repurchased approximately 3.6 million
shares under this program for approximately $81.2 million.
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. At September 30, 2000,
the Company had issued approximately $358 million of common stock and debt
securities 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.
In connection with the acquisition of the Hughes Corporation (Hughes) in 1996,
the Company entered into a Contingent Stock Agreement (Agreement) for the
benefit of the former Hughes owners or their successors (the beneficiaries).
Under terms of the agreement, additional shares of common stock (or in certain
circumstances, Increasing Rate Cumulative Preferred stock) are issuable to the
beneficiaries based on the appraised values of four defined groups of acquired
assets at specified "termination dates" from 2000 to 2009 and/or cash flows
generated from the development and/or sale of those assets prior to the
termination dates. To date, the Company has repurchased shares of its common
stock for issuance to the beneficiaries. The Company believes that a
substantial portion of the assets (primarily certain land in Las Vegas and
Summerlin, Nevada) subject to the 2000 termination date (December 31, 2000)
will not be sold in 2000. The Company has entered into discussions with the
beneficiaries to extend the termination date with respect to these assets, but
there can be no assurance that the termination date will be extended.
Preliminary estimates of the values of the related assets subject to the 2000
termination date indicate that a distribution of approximately $30-40 million
may be required under terms of the Agreement. If an extension of the
termination date is not obtained, the Company currently expects to use
corporate funds or borrowings under its credit facility to repurchase shares
of its common stock for issuance to the beneficiaries.
In December 1999, the "REIT Modernization Act" (RMA), which is effective
January 1, 2001, became law. Certain provisions of the RMA allow REITs to
conduct certain previously prohibited business activities through Taxable REIT
Subsidiaries (TRS) and allow a REIT to own 100% of TRS. The Company is
currently evaluating the provisions of the RMA and is considering the purchase
of the majority of the voting stock of certain unconsolidated real estate
ventures in which it holds substantially all (at least 98%) of the financial
interest. These ventures would then elect to be TRS. The Company currently
accounts for these ventures using the equity method. Note 3 to the
consolidated financial statements in this form 10-Q contains condensed,
combined balance sheets and statements of operations of these ventures.
Net cash provided by operating activities was $159.7 million and $155.4 million
for the nine months ended September 30, 2000 and 1999, 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 increase in net cash provided by operating activities was due to
the factors discussed previously under the operating results of the business
segments.
Net cash used in investing activities was $54.1 million and $101.9 million for
the nine months ended September 30, 2000 and 1999, respectively. The decrease
in net cash used of $47.8 million was due primarily to lower proceeds from
sales of operating properties (1999 included the
32
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
sale of the Company's interest in Valley Fair Mall) and higher expenditures
for property acquisitions in 2000 (primarily certain commercial properties
adjacent to a development project and department store sites. These items were
partially offset by higher net payments received on loans to unconsolidated
majority financial interest ventures, due primarily to higher net cash flows
from the ventures' land sales activities.
Net cash used in financing activities was $122.2 million and $64.0 million for
the nine months ended September 30, 2000 and 1999, respectively. The increase
in net cash used of $58.2 million was due primarily to higher repurchases of
Company common stock.
New accounting standards not yet adopted:
----------------------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 137 (Statement 137), an amendment to
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133), issued in June
1998. Statement 137 defers the required adoption date of Statement 133 for the
Company to no later than January 1, 2001. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, which provides additional
guidance with respect to and amends Statement 133. The Company's use of
derivative instruments has consisted primarily of interest rate swap and cap
agreements related to specific debt financings. The Company will adopt
Statement 133, as amended, effective January 1, 2001. Derivative instruments
held by the Company at September 30, 2000 consisted solely of interest rate
cap agreements used to hedge interest rate risks associated with specific
variable rate loans. The fair values and carrying values of these instruments
were not significant at September 30, 2000. Based on its current limited use
of derivative instruments for cash flow hedging purposes, the Company does not
believe that adoption of Statement 133, as amended, will have a material
effect on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), relating to the application of generally accepted
accounting principles to revenue recognition, including contingent rentals.
The Company's revenue recognition policy with respect to contingent rentals is
consistent with SAB 101 and, accordingly, the Company does not believe that
application of SAB 101 will have a material effect on its results of
operations.
In May 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 00-01, "Investor Balance Sheet and Income Statement Display under the
Equity Method for Investments in Certain Partnerships and Other Ventures"
(EITF 00-01). EITF 00-01 requires that the proportionate share method of
presenting the balance sheet and income statement information for partnerships
and other ventures in which entities have joint interest and control be
discontinued, except under certain limited circumstances. EITF 00-01 is
applicable to annual periods ending after June 15, 2000 and is applicable to
the Company as of December 31, 2000 and for the year then ended. Also, upon
adoption all comparative financial statements presented shall be restated to
conform to the revised presentation. If the Company were required to adopt
EITF 00-01 as of September 30, 2000, revenues and operating and interest
expenses would be reduced by $39.6 million and $23.1 million, respectively,
and equity in earnings of unconsolidated real estate ventures would be
increased by $16.5 million, for the nine months ended September 30, 2000.
Revenues and operating and interest expenses would be reduced by $38.5 million
and $21.6 million, respectively, and equity in earnings would be increased by
$16.9 million, for the nine months ended September 30, 1999. In addition,
assets of $162 million and liabilities of $116 million would have been
reclassified to investments in unconsolidated real estate ventures.
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 are among the factors that could cause
actual results to differ materially from historical results
33
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
or those anticipated: (1) real estate investment trust rules; (2) real estate
development and investment risks; (3) illiquidity of real estate investments;
(4) dependence on rental income from real property; (5) effect of uninsured
loss; (6) lack of geographical diversification; (7) possible environmental
liabilities; (8) difficulties of compliance with the Americans with
Disabilities Act; (9) competition; (10) changes in the economic climate; and
(11) 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, 1999.
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.,
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 derivative financial instruments is insignificant at
September 30, 2000.
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 (dollars in millions) is
based on expected maturity dates which consider anticipated refinancing or
other transactions.
<TABLE>
<CAPTION>
Remaining
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 25 $130 $129 $331 $289 $ 1,822 $2,726
Average interest rate 7.8% 7.9% 7.9% 7.8% 7.9% 7.9% 7.8%
Variable rate LIBOR debt $ 7 $334 $198 $ 6 $ 4 $ 127 $ 676
Average interest rate 7.8% 8.0% 8.3% 8.3% 8.3% 8.3% 7.8%
</TABLE>
At September 30, 2000, approximately $106.5 million of the Company's variable
rate debt relates to borrowings under project construction
34
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Market risk information, continued:
----------------------------------
loans. The borrowings under project construction loans are expected to be
repaid from proceeds of long-term, fixed rate loans at various dates to 2003
when construction of the related projects is scheduled to be completed.
At September 30, 2000, the Company had interest rate cap agreements which
effectively limit the average interest rate on $100 million of the variable
rate LIBOR debt maturing in 2002 to 9.1%, and the average rate on $6 million
of the variable rate LIBOR debt maturing in 2010 to 8.7%.
As the table incorporates only those exposures that exist as of September 30,
2000, 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
September 30, 2000, the Company's hedging strategies during that period and
interest rates.
35
<PAGE>
Part II. Other Information.
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K
None
36
<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: November 13, 2000 By /s/ Jeffrey H. Donahue
------------------ -------------------------------
Jeffrey H. Donahue
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer:
Date: November 13, 2000 By /s/ Melanie M. Lundquist
------------------ -------------------------------
Melanie M. Lundquist
Vice President and
Corporate Controller
37
<PAGE>
Exhibit Index
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
38
