<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 June 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
August 1, 2000:
Common Stock, $0.01 par value 69,860,274
----------------------------- ---------------
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 Six Months Ended June 30, 2000 and 1999
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues $ 167,823 $ 173,737 $ 336,690 $ 349,696
Operating expenses, exclusive
of provision for bad debts,
depreciation and amortization 76,660 85,928 153,839 165,205
Interest expense 62,538 60,267 122,656 124,192
Provision for bad debts 1,106 3,064 3,341 4,376
Depreciation and amortization 23,291 21,973 43,986 49,345
Equity in earnings of
unconsolidated real estate
ventures 31,576 20,682 55,142 44,015
Current income taxes 71 83 153 157
----------- ------------ ----------- ----------
Earnings before gain (loss)on
dispositions of operating
property assets, net and
extraordinary items 35,733 23,104 67,857 50,436
Gain (loss) on dispositions of
operating property assets,
net (1,224) 6,858 (1,980) 7,452
----------- ------------ ----------- ----------
Earnings before extraordinary
items 34,509 29,962 65,877 57,888
Extraordinary loss, net (722) (910) (722) (910)
----------- ------------ ----------- ----------
Net earnings 33,787 29,052 65,155 56,978
Other items of comprehensive
income (loss) - minimum
pension liability adjustment (117) (334) (236) (668)
----------- ------------ ------------ ----------
Comprehensive income $ 33,670 $ 28,718 $ 64,919 $ 56,310
=========== ============ ============ ==========
Net earnings applicable
to common shareholders $ 30,749 $ 26,014 $ 59,079 $ 50,902
=========== ============ ============ ==========
</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, 2000 and 1999
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
---------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE OF
COMMON STOCK:
Basic:
Earnings before
extraordinary items $ .45 $ .37 $ .85 $ .72
Extraordinary loss (.01) (.01) (.01 ) (.01)
------------ ----------- ----------- ------------
Total $ .44 $ .36 $ .84 $ .71
=========== =========== =========== ===========
Diluted:
Earnings before
extraordinary items $ .45 $ .37 $ .84 $ .71
Extraordinary loss (.01) (.01) (.01) (.01)
----------- ----------- ----------- -----------
Total $ .44 $ .36 $ .83 $ .70
=========== =========== =========== ===========
DIVIDENDS PER SHARE:
Common stock $ .33 $ .30 $ .66 $ .60
=========== =========== =========== ===========
Preferred stock $ .75 $ .75 $ 1.50 $ 1.50
=========== =========== =========== ===========
</TABLE>
3
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999
(in thousands except share data)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
------------------ ------------------
<S> <C> <C>
Assets:
Property:
Operating properties:
Property and deferred costs
of projects $ 3,599,901 $ 3,811,956
Less accumulated depreciation
and amortization 591,254 574,837
----------------- -----------------
3,008,647 3,237,119
Properties in development 174,250 288,058
Properties held for sale 453,720 10,984
----------------- -----------------
Total property 3,636,617 3,536,161
Investments in and advances to
unconsolidated real estate ventures 504,281 533,341
Prepaid expenses, receivables under
finance leases and other assets 236,136 247,279
Accounts and notes receivable 58,607 61,224
Investments in marketable securities 21,663 23,321
Cash and cash equivalents 16,655 25,890
----------------- -----------------
Total $ 4,473,959 $ 4,427,216
================= =================
</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, continued
June 30, 2000 and December 31, 1999
(in thousands except share data)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
----------------- ----------------
<S> <C> <C>
Liabilities:
Debt:
Property debt not carrying a Parent
Company guarantee of repayment $ 2,578,532 $ 2,529,334
Parent Company debt and debt carrying
a Parent Company guarantee of
repayment:
Property debt 101,567 161,585
Other debt 721,439 643,500
---------------- ----------------
823,006 805,085
---------------- ----------------
Total debt 3,401,538 3,334,419
---------------- ----------------
Accounts payable, accrued expenses
and other liabilities 301,826 317,252
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;
69,942,163 shares issued in 2000 and
70,693,789 shares issued in 1999 699 707
Additional paid-in capital 790,510 808,277
Accumulated deficit (156,913) (169,974)
Accumulated other comprehensive
income (loss) (707) (471)
---------------- ----------------
Net shareholders' equity 633,630 638,580
---------------- ----------------
Total $ 4,473,959 $ 4,427,216
================ =================
</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 Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Rents and other revenues received $ 336,862 $ 337,398
Proceeds from land sales and notes receivable from land sales --- 21,682
Interest received 3,615 4,907
Operating expenditures (149,312) (160,160)
Interest paid (123,489) (125,874)
Dividends, interest and other operating distributions received
from unconsolidated majority financial interest ventures 26,926 26,717
--------- ---------
Net cash provided by operating activities 94,602 104,670
--------- ---------
Cash flows from investing activities:
Expenditures for properties in development and improvements to
existing properties funded by debt (119,024) (110,904)
Expenditures for property acquisitions (19,029) ---
Expenditures for improvements to existing properties funded
by cash provided by operating activities (11,874) (11,732)
Payments received on loans (advances made) to unconsolidated
majority financial interest ventures 65,154 (34,850)
Proceeds from sales of operating properties and other investments 980 126,860
Other 1,658 (7,513)
--------- ---------
Net cash used by investing activities (82,135) (38,139)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of property debt 139,667 111,438
Repayments of property debt:
Scheduled principal payments (29,168) (24,014)
Other payments (121,613) ---
Proceeds from issuance of other debt 93,750 198,368
Repayments of other debt (15,367) (296,919)
Proceeds from exercise of stock options 7,132 32
Purchases of Company common stock (41,479) (12,810)
Dividends paid (52,094) (49,370)
Other (2,530) (6,397)
--------- ---------
Net cash used by financing activities (21,702) (79,672)
--------- ---------
Net decrease in cash and cash equivalents (9,235) (13,141)
Cash and cash equivalents at beginning of period 25,890 28,688
--------- ---------
Cash and cash equivalents at end of period $ 16,655 $ 15,547
========= =========
</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
Six Months Ended June 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 $ 65,155 $ 56,978
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 43,986 49,345
Undistributed earnings of majority financial interest ventures (35,926) (21,078)
Loss (gain) on dispositions of operating property assets, net 1,980 (7,452)
Extraordinary loss, net 722 910
Participation expense pursuant to Contingent Stock Agreement 13,118 12,487
Provision for bad debts 3,341 4,376
Other, net 2,226 9,104
-------- --------
Net cash provided by operating activities $ 94,602 $104,670
======== ========
Schedule of Noncash Investing and Financing Activities:
Common stock issued pursuant to Contingent Stock Agreement $ 14,208 $ 16,207
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 1,278
======== ========
</TABLE>
7
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 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 June 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. The Company intends to refile 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 June 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 built-in
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
---------------------
gains which might be recognized and the potential for the Company to
enter into alternative structures, if necessary. At June 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>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Majority financial interest ventures $319,633 $349,991
Minority interest ventures 184,648 183,350
---------- ------------
Total $504,281 $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 Six months
ended June 30, ended June 30,
----------------- -----------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Majority financial interest ventures $25,787 $15,613 $49,737 $36,390
Minority interest ventures 5,789 5,069 5,405 7,625
-------- ------- -------- -------
Total $31,576 $20,682 $55,142 $44,015
======== ======= ======== =======
</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>
June 30, December 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Assets:
Operating properties, net $ 387,937 $ 378,789
Properties in development 11,795 26,924
Properties held for sale 15,015 ---
Land held for development and sale 249,947 257,773
Investments in and advances to
unconsolidated real estate ventures 105,161 107,813
Prepaid expenses, receivables under
finance leases and other assets 78,279 95,090
Accounts and notes receivable 67,092 88,765
Cash and cash equivalents 1,942 8,194
--------------- --------------
Total $ 917,168 $ 963,348
=============== ==============
Liabilities and shareholders' deficit:
Loans and advances from the Company $ 445,516 $ 514,792
Mortgages payable and other long-term debt 347,422 350,646
Other liabilities 118,816 118,525
Redeemable Series A Preferred stock 50,000 50,000
Shareholders' deficit (44,586) (70,615)
--------------- --------------
Total $ 917,168 $ 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 Six months
ended June 30, ended June 30,
------------------------------ --------------------------------
2000 1999 2000 1999
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues, excluding interest
on loans to the Company $ 82,031 $ 64,580 $ 166,440 $ 147,695
Interest income on loans
to the Company --- --- --- 2,577
Operating expenses (42,461) (37,084) (84,909) (83,326)
Interest expense, excluding
interest on borrowings from
the Company (2,957) (2,668) (6,388) (5,467)
Interest expense on borrowings
from the Company (13,003) (14,717) (26,693) (29,294)
Depreciation and amortization (4,413) (3,047) (8,642) (5,933)
Equity in earnings (loss) of
unconsolidated real estate
ventures (626) 622 (698) 807
Gain on dispositions of operating
property assets, net --- 175 --- 882
Income taxes, primarily deferred (4,892) (3,768) (13,081) (11,841)
------------ ------------ ------------- ------------
Net earnings $ 13,679 $ 4,093 $ 26,029 $ 16,100
============ =========== ============ ============
</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 the earnings before extraordinary items of the
ventures is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------------------ -----------------------
2000 1999 2000 1999
------------ ------------- --------- ----------
<S> <C> <C> <C> <C>
Share of net earnings based
on ownership interest $ 13,542 $ 4,052 $ 25,769 $ 15,939
Participation by others in
the Company's share of earnings (4,616) (5,046) (13,115) (11,405)
Interest on loans to and advances
from the ventures, net 13,003 14,717 26,693 26,717
Eliminations, basis adjustments
and ot 3,858 1,890 10,390 5,139
--------- --------- --------- ---------
$ 25,787 $ 15,613 $ 49,737 $ 36,390
========= ========= ========= =========
</TABLE>
(4) Debt
----
Debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------- --------------------------
Due in Due in
Total one year Total one year
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgages and bonds $ 2,591,761 $ 56,417 $ 2,572,496 $ 55,126
Medium-term notes 81,500 30,000 91,500 10,000
Credit line borrowings 237,000 --- 174,000 ---
Other loans 491,277 6,757 496,423 6,467
----------- ---------- ----------- -----------
Total $ 3,401,538 $ 93,174 $ 3,334,419 $ 71,593
=========== ========== =========== ===========
</TABLE>
The amounts due in one year reflect the terms of existing loan agree-
ments 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.
Segment information for the prior periods has been restated to reflect
this change. Segment operating results are measured and assessed based
on a performance measure referred to as Funds From Operations (FFO)
computed using the revised definition developed by the National
Association of Real Estate Investment Trusts (NAREIT), which definition
is effective January 1, 2000. NAREIT defines FFO as net earnings
(computed in accordance with generally accepted accounting principles),
excluding cumulative effects of changes in accounting principles,
extraordinary items and gain (loss) on dispositions of operating
property assets, plus depreciation and amortization. Additionally,
equity in earnings of unconsolidated real estate ventures and minority
interests have been adjusted to reflect FFO on the same basis. FFO for
prior periods has been presented in conformity with the new definition.
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. 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. Additionally, the Company's share of FFO of unconsolidated real
estate ventures in which it holds a minority interest 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
June 30, 2000
-------------
Revenues $ 145,404 $ 55,435 $ 54,234 $ --- $ 278 $ 255,351
Operating expenses* 65,716 20,832 33,118 949 6,158 126,773
Interest expense 42,940 21,428 718 --- 409 65,495
----------- ------------- ------------ ----------- ------------ -----------
FFO $ 36,748 $ 13,175 $ 20,398 $ (949) $ (6,289) $ 63,083
=========== ============= ============ =========== ============ ===========
Three months ended
June 30, 1999
-------------
Revenues $ 147,051 $ 51,416 $ 44,197 $ --- $ 1,089 $ 243,753
Operating expenses* 68,704 19,035 32,731 (172) 12,247 132,545
Interest expense 43,330 20,541 813 --- (1,749) 62,935
----------- ------------- ------------ ----------- ------------ -----------
FFO $ 35,017 $ 11,840 $ 10,653 $ 172 $ (9,409) $ 48,273
=========== ============= ============ =========== ============ ===========
Six months ended
June 30, 2000
-------------
Revenues $ 291,935 $ 108,758 $ 113,027 $ --- $ 501 $ 514,221
Operating expenses* 133,556 41,225 70,600 1,648 12,095 259,124
Interest expense 84,813 41,747 1,517 --- 967 129,044
----------- ------------- ------------ ----------- ------------ -----------
FFO $ 73,566 $ 25,786 $ 40,910 $ (1,648) $ (12,561) $ 126,053
=========== ============= ============ =========== ============ ===========
Six months ended
June 30, 1999
-------------
Revenues $ 298,450 $ 102,462 $ 104,778 $ --- $ 1,284 $ 506,974
Operating expenses* 137,735 38,300 73,448 1,301 19,837 270,621
Interest expense 89,857 41,125 1,739 --- (3,062) 129,659
----------- ------------- ------------ ----------- ------------ -----------
FFO $ 70,858 $ 23,037 $ 29,591 $ (1,301) $ (15,491) $ 106,694
=========== ============= ============ =========== ============ ===========
</TABLE>
* Operating expenses in this table exclude 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 June 30,
---------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Revenues:
Total reported above $ 255,351 $ 243,753
Revenues of majority financial interest
ventures excluding interest on advances
to the Company (82,031) (64,580)
Revenues representing the Company's share of
FFO of minority financial interest ventures (5,497) (5,436)
------------ ------------
Total in consolidated financial statements $ 167,823 $ 173,737
============ ============
Operating expenses, exclusive of depreciation
and amortization:
Total reported above $ 126,773 $ 132,545
Operating expenses of majority financial
interest ventures (42,461) (37,084)
Provision for bad debts (1,106) (3,064)
Participation by others in the Company's share of
earnings of majority financial interest ventures (4,616) (5,046)
Income taxes and other (1,930) (1,423)
------------ ------------
Total in consolidated financial statements $ 76,660 $ 85,928
============ ============
Interest expense:
Total reported above $ 65,495 $ 62,935
Interest expense of majority financial
interest ventures excluding interest on
borrowings from the Company (2,957) (2,668)
------------ ------------
Total in consolidated financial statements $ 62,538 $ 60,267
============ ============
Operating results:
FFO reported above $ 63,083 $ 48,273
Depreciation and amortization (23,291) (21,973)
Gain (loss) on dispositions of operating
property assets, net (1,224) 6,858
Share of depreciation and amortization,
and gain (loss) on dispositions of operating
property assets of unconsolidated real
estate ventures, net (4,059) (3,196)
------------ ------------
Earnings before extraordinary items in consolidated
financial statements $ 34,509 $ 29,962
============ ============
</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>
Six months
ended June 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
Total reported above $ 514,221 $ 506,974
Revenues of majority financial interest
ventures excluding interest on advances
to the Company (166,440) (147,695)
Revenues representing the Company's share of
FFO of minority financial interest ventures (11,091) (9,583)
--------- ---------
Total in consolidated financial statements $ 336,690 $ 349,696
========= =========
Operating expenses, exclusive of depreciation and amortization:
Total reported above $ 259,124 $ 270,621
Operating expenses of majority financial
interest ventures (84,909) (83,326)
Provision for bad debts (3,341) (4,376)
Participation by others in the Company's share of
earnings of majority financial interest ventures (13,115) (11,405)
Income taxes and other (3,920) (6,309)
--------- ---------
Total in consolidated financial statements $ 153,839 $ 165,205
========= =========
Interest expense:
Total reported above $ 129,044 $ 129,659
Interest expense of majority financial
interest ventures excluding interest on
borrowings from the Company (6,388) (5,467)
--------- ---------
Total in consolidated financial statements $ 122,656 $ 124,192
========= =========
Operating results:
FFO reported above $ 126,053 $ 106,694
Depreciation and amortization (43,986) (49,345)
Gain (loss) on dispositions of operating
property assets, net (1,980) 7,452
Share of depreciation and amortization,
and gain (loss) on dispositions of operating
property assets of unconsolidated real
estate ventures, net (14,210) (6,913)
--------- ---------
Earnings before extraordinary items in consolidated
financial statements $ 65,877 $ 57,888
========= =========
</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):
June 30, December 31,
2000 1999
---------- ----------
Retail centers $3,165,209 $3,125,395
Office and other properties 1,233,128 1,211,222
Land sales operations 377,204 434,195
Development 79,651 34,680
Corporate 102,367 105,605
---------- ----------
Total $4,957,559 $4,911,097
========== ==========
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 (loss) on dispositions of operating property assets, net
-------------------------------------------------------------
The net loss on dispositions of operating property assets for the three
months ended June 30, 2000 related to a provision for loss on a
leasehold interest in a retail center the Company decided to dispose.
The net loss on operating properties for the six months ended June 30,
2000 related primarily to the provision discussed above 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 gain on dispositions
of operating property assets in the three and six months ended June 30,
1999 related primarily to the sale of an operating property.
(7) Extraordinary loss, net
-----------------------
The extraordinary loss, net for the three and six months ended June 30,
2000 and 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 the refinancing of
property debt and 8% Senior Debt issued in 1999.
17
<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, 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 $ 34,509 $ 34,509 $ 29,962 $ 29,962
Dividends on Preferred
stock (3,038) (3,038) (3,038) (3,038)
Dividends on unvested
common stock awards
and other (111) (84) (115) (84)
Interest on convertible
property debt --- 769 --- ---
-------- -------- -------- --------
Adjusted earnings before
extraordinary items
used in EPS computation $ 31,360 $ 32,156 $ 26,809 $ 26,840
======== ======== ======== ========
Weighted-average shares
outstanding 69,637 69,637 71,760 71,760
Dilutive securities:
Convertible property debt --- 1,941 --- ---
Options, warrants,
unvested common stock
awards and other --- 676 --- 590
-------- -------- -------- --------
Adjusted weighted-average
shares used in EPS
computation 69,637 72,254 71,760 72,350
======== ======== ======== ========
</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 (EPS) of
common stock for the six months ended June 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 $ 65,877 $ 65,877 $ 57,888 $ 57,888
Dividends on Preferred
stock (6,076) (6,076) (6,076) (6,076)
Dividends on unvested
common stock awards
and other (221) (185) (238) (322)
Interest on convertible
property debt --- 1,538 --- ---
-------- -------- -------- --------
Adjusted earnings before
extraordinary items
used in EPS computation $ 59,580 $ 61,154 $ 51,574 $ 51,490
======== ======== ======== ========
Weighted-average shares
outstanding 70,027 70,027 71,813 71,813
Dilutive securities:
Convertible property debt --- 1,930 --- ---
Options, warrants,
unvested common stock
awards and other --- 454 --- 588
-------- -------- -------- --------
Adjusted weighted-average
shares used in EPS
computation 70,027 72,411 71,813 72,401
======== ======== ======== ========
</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) Property dispositions and related matters
-----------------------------------------
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.
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 properties. Accordingly, the net book
values of the properties were reclassified to properties held for sale.
In June 2000, the Company sold one of the properties and recognized a
gain of $345,000 on the sale.
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 June 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 event
----------------
In July 2000, the Company sold substantially all of its ownership
interest in North Star, a retail center in San Antonio, Texas, for cash
proceeds of approximately $84 million.
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 six months ended June 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 (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 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.
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 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 properties. In June 2000, the Company
completed a sale of one of these properties.
22
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
General, continued:
------------------
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 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 and the
Company's share of FFO of unconsolidated real estate ventures in which it
holds a minority interest 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 Six
months ended months ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues $ 145.4 $ 147.0 $ 292.0 $ 298.5
Operating expenses, exclusive
of depreciation and
amortization 65.7 68.7 133.6 137.7
Interest expense 42.9 43.3 84.8 89.9
---------- ---------- ---------- ----------
36.8 35.0 73.6 70.9
Depreciation and amortization 19.0 16.2 38.3 38.9
---------- ---------- ---------- ----------
Operating income $ 17.8 $ 18.8 $ 35.3 $ 32.0
========== =========== ========== ==========
</TABLE>
24
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Operating Properties - Retail Centers, continued:
------------------------------------------------
Revenues decreased $1.6 million and $6.5 million for the three and six months
ended June 30, 2000, respectively, compared to the same periods in 1999. The
decreases were attributable primarily to effects of the contribution of
properties to a joint venture and the disposition of Santa Monica Place
(approximately $4.8 million and $15.8 million for the three and six months ended
June 30, 2000, respectively) and lower average occupancy levels at comparable
properties (92.4% for the six months in 2000 compared to 93.6% for the six
months in 1999). These decreases were partially offset by the project expansions
(approximately $6.1 million and $7.4 million for the three and six months ended
June 30, 2000, respectively) and higher rents on released space.
Total operating and interest expenses decreased $3.4 million and $9.2 million
for the three and six months ended June 30, 2000, respectively, compared to the
same periods in 1999. The decreases were attributable primarily to the
contribution of properties to a joint venture and the disposition of Santa
Monica Place (approximately $3.5 million and $13.7 million for the three and six
months ended June 30, 2000, respectively) and lower bad debt expenses at
comparable properties, partially offset by project expansions (approximately
$3.4 million and $5.8 million for the three and six months ended June 30, 2000,
respectively). Depreciation and amortization expense increased $2.8 million and
decreased $.6 million for the three and six months ended June 30, 2000,
respectively, compared to the same periods in 1999. These changes were
attributable primarily to the changes in the portfolio referred to above.
Operating Properties - Office and Other Properties:
--------------------------------------------------
Operating results of office and other properties are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Three Six
months ended months ended
June 30, June 30,
---------------------------- -------------------------
2000 1999 2000 1999
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 55.4 $ 51.4 $ 108.7 $ 102.5
Operating expenses, exclusive
of depreciation and
amortization 20.8 19.0 41.2 38.4
Interest expense 21.4 20.6 41.7 41.1
-------- -------- -------- --------
13.2 11.8 25.8 23.0
Depreciation and amortization 8.4 9.3 16.0 18.4
-------- -------- -------- --------
Operating income $ 4.8 $ 2.5 $ 9.8 $ 4.6
======== ======== ======== ========
</TABLE>
25
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Operating Properties - Office and Other Properties, continued:
-------------------------------------------------------------
Revenues increased $4.0 million and $6.2 million for the three and six months
ended June 30, 2000, respectively, compared to the same periods in 1999. The
increases were attributable primarily increases in operating expenses at
comparable properties to the project openings in 1999 (approximately $1.4
million and $2.6 million for the three and six months ended June 30, 2000,
respectively) and higher rents on released space. These increases were
partially offset by the aforementioned dispositions in 1999 and 2000
(approximately $.4 million and $.9 million for the three and six months
ended June 30, 2000, respectively).
Total operating and interest expenses increased $2.6 million and $3.4 million
for the three and six months ended June 30, 2000, respectively, compared to
the same periods in 1999. The increases in operating and interest expenses
were attributable in part to project openings in 1999 (approximately $.9
million and $1.9 million for the three and six months ended June 30, 2000,
respectively). This increase was partially offset by the aforementioned
dispositions (approximately $.2 million and $.4 million for the three and
six months ended June 30, 2000, respectively). Depreciation and amortization
expense decreased $.9 million and $2.4 million for the three and six months
ended June 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 the first quarter of
2000, partially offset by project openings in 1999.
Land Sales Operations:
---------------------
Landsales 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.
26
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Land Sales Operations, continued:
--------------------------------
Operating results of land sales operations are summarized as follows (in
millions):
<TABLE>
Three months Six months
ended June 30, ended June 30,
---------------------------- --------------------------------
2000 1999 2000 1999
----------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Nevada Land Operations:
Revenues:
Summerlin $ 22.8 $ 27.1 $ 54.7 $ 53.2
Other .7 2.8 6.2 7.0
Operating costs and expenses:
Summerlin 18.2 21.6 42.7 42.1
Other .6 3.2 4.9 6.8
Interest expense --- --- .1 ---
----------- ---------- ----------- ------------
Operating income $ 4.7 $ 5.1 $ 13.2 $ 11.3
=========== ========== =========== ============
Columbia and Other:
Revenues $ 30.7 $ 14.3 $ 52.1 $ 44.5
Operating costs and expenses 14.3 7.9 23.0 24.5
Interest expense .7 .8 1.4 1.7
----------- ---------- ----------- ------------
Operating income $ 15.7 $ 5.6 $ 27.7 $ 18.3
=========== ========== =========== ============
Total:
Revenues $ 54.2 $ 44.2 $ 113.0 $ 104.7
Operating costs and expenses 33.1 32.7 70.6 73.4
Interest expense .7 .8 1.5 1.7
----------- ---------- ----------- ------------
Operating income $ 20.4 $ 10.7 $ 40.9 $ 29.6
=========== ========== =========== ============
</TABLE>
27
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Land Sales Operations, continued:
--------------------------------
Revenues from Summerlin land sales operations decreased $4.3 million and
increased $1.5 million for the three months and six months ended June 30,
2000, respectively, while related costs and expenses decreased $3.4 million
and increased $.6 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 sales for residential
purposes partially offset by higher levels of sales for commercial uses.
Revenues from Columbia and other land sales operations increased $16.4 million
and $7.6 million for the three and six months ended June 30, 2000,
respectively, while related costs and expenses increased $6.3 million and
decreased $1.8 million, respectively, compared to the same periods in 1999.
Revenues and related costs and expenses from sales of land in New Jersey
were $14.0 million and $6.5 million, respectively, for the three months
ended June 30, 2000. Revenues and related costs and expenses from sales of
land in New Jersey were $4.0 million and $3.8 million, respectively, for the
three months ended March 31, 1999. 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.
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, net 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, credit
28
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Corporate, continued:
--------------------
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, federal income taxes and distributions on the
redeemable preferred securities, net of distributions allocated to other
segments.
Corporate operating expenses decreased $6.0 million and $7.7 million for the
three and six months ended June 30, 2000, respectively, compared to the same
periods 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 $2.1 million and $4.0 million for the
three and six months ended June 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.
Gain (loss) on dispositions of operating property assets, net:
Gain(loss) 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>
Three months Six months
ended June 30, ended June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net gain (loss) on operating
properties $ (1.2) $ 7.3 $ (5.9) $ 8.6
========= ========= ========= =========
</TABLE>
29
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Gain (loss) on dispositions of operating property assets, net, continued:
------------------------------------------------------------------------
The net loss on dispositions of operating property assets for the three months
ended June 30, 2000 related to a provision for loss on a leasehold interest
in a retail center the Company decided to dispose. The net loss on operating
properties for the six months ended June 30, 2000 related primarily to the
provision discussed above 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 gain on dispositions of operating property assets in the three
and six months ended June 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 loss, net:
-----------------------
The extraordinary loss, net for the three and six months ended June 30, 2000 and
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 the refinancing of property debt and 8% Senior Debt
issued in 1999.
Net earnings:
------------
The increases in net earnings for the three and six months ended June 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 gain (loss)
on dispositions of operating property assets, net and the analysis of
extraordinary loss, net.
Financial condition and liquidity:
---------------------------------
Shareholders' equity decreased by $5.0 million from December 31, 1999 to June
30, 2000. The decrease was primarily attributable to payment of regular
quarterly dividends on the Company's common and Preferred stocks and
purchases of common stock, partially offset by net earnings for the six
months ended June 30, 2000 and issuance of common stock pursuant to the
Contingent Stock Agreement.
The Company had cash and cash equivalents and investments in marketable
securities totaling $38.3 million at June 30, 2000, including $3.9 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 $213
million at June 30, 2000.
As of June 30, 2000, debt due in one year was $93.2 million, including balloon
payments on mortgages of $7.4 million and repayments of medium-term notes of
$30 million. These payments are expected to be made from the proceeds of
property refinancings, credit facility borrowings, proceeds of 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 in 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 cash. 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 cash.
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 of June
30, 2000, the Company had repurchased approximately 2.7 million shares under
this program for approximately $61 million.
31
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Financial condition and liquidity, continued:
--------------------------------------------
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 June 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 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.
Net cash provided by operating activities was $94.6 million and $104.7 million
for the six months ended June 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 decrease in net cash provided of $10.1 million was due
primarily to lower receipts from notes receivable on land sales made before
1998, offset by a decrease in operating expenditures. The decrease in
operating expenditures was primarily attributable to benefit and other
payments made due to the
32
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Financial condition and liquidity, continued:
--------------------------------------------
organizational changes in 1999 described in the analysis of the corporate
segment. Cash provided by operating distributions from unconsolidated
majority financial interest ventures relates primarily to net interest and
dividend payments made by the ventures to the Company and is affected by the
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 business segments.
Net cash used in investing activities was $82.1 million and $38.1 million for
the six months ended June 30, 2000 and 1999, respectively. The increase in
net cash used of $44.0 million was due primarily to lower proceeds from sales
of operating properties (1999 included the 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 a department store site) partially offset by higher net payments received
on loans to unconsolidated majority financial interest ventures.
Net cash used in financing activities was $21.7 million and $79.7 million for
the six months ended June 30, 2000 and 1999, respectively. The decrease in
net cash used of $58.0 million was due primarily to higher net proceeds from
the issuance of other debt (primarily higher net credit line draws) partially
offset by 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 and amendments to 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. While the Company has
not completed its analysis of Statement 133, it does not believe that
adoption will have a material effect on its financial position and results of
operations based on its current limited use of derivative instruments.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation" (FIN 44). The provisions of FIN 44
are effective July 1, 2000, and generally are to be applied prospectively.
Based on the current price of the Company's common stock, the Company does
not believe adoption of FIN 44 will have a material effect on the Company's
results of operations.
33
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, 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 are among the factors
that could cause actual results to differ materially from historical results
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 these and other
derivative financial instruments is insignificant at June 30, 2000.
34
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
Market risk information, continued:
----------------------------------
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>
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 June 30, 2000, approximately $101.5 million of the Company's variable rate
debt relates to borrowings under project construction loans. The borrowings
under project construction loans are expected to be repaid from proceeds of
long-term, fixed rate loans at dates from 2000 to 2001 when construction of
the related projects is scheduled to be completed.
At June 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 June 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
June 30, 2000, the Company's hedging strategies during that period and
interest rates.
35
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
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: August 14, 2000 By /s/ Jeffrey H. Donahue
----------------------------- ---------------------------------
Jeffrey H. Donahue
Executive Vice President and
Chief Financial Officer
Principal Accounting Officer:
Date: August 14, 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
