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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR QUARTER ENDED JUNE 30, 2002 OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                              TO                             

COMMISSION FILE NO. 1-12504

THE MACERICH COMPANY
(Exact name of registrant as specified in its charter)

MARYLAND
(State or other jurisdiction of
incorporation or organization)		   95-4448705
(I.R.S. Employer Identification Number)

401 Wilshire Boulevard, Suite 700,
Santa Monica, CA
(Address of principal executive office)
 
90401
(Zip code)

 
 
 

(310) 394-6000
Registrant's telephone number, including area code

N/A
(Former name, former address and former fiscal year, if changed since last report)

Common stock, par value $.01 per share: 36,257,095 shares
Number of shares outstanding of the registrant's common stock, as of August 8, 2002.

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 twelve (12) months (or such shorter period that the Registrant was required to file such report) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes ý    No o


Form 10-Q

INDEX

 
    
   Page
Part I:   Financial Information    

Item 1.
 
Financial Statements
 
 

 
 
Consolidated balance sheets of the Company as of June 30, 2002 and December 31, 2001
 
1

 
 
Consolidated statements of operations of the Company for the periods from January 1 through June 30, 2002 and 2001
 
2

 
 
Consolidated statements of operations of the Company for the periods from April 1 through June 30, 2002 and 2001
 
3

 
 
Consolidated statements of cash flows of the Company for the periods from January 1 through June 30, 2002 and 2001
 
4

 
 
Notes to condensed and consolidated financial statements
 
5 to 19

Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
20 to 32

Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
33

Part II:
 
Other Information
 
34

Item 1.
 
Legal Proceedings
 
34

Item 2.
 
Changes in Securities and Use of Proceeds
 
34

Item 3.
 
Defaults Upon Senior Securities
 
34

Item 4.
 
Submission of Matters to a Vote of Security Holders
 
34

Item 5.
 
Other Information
 
34

Item 6.
 
Exhibits and Reports on Form 8-K
 
35


CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)

 
   June 30,
2002
   December 31,
2001
  
ASSETS  

Property,net
 
$
2,024,896
 
$
1,887,329
 
Cash and cash equivalents     59,605     26,470  
Tenant receivables, including accrued overage rents of $326 in 2002 and $6,390 in 2001     34,562     42,537  
Deferred charges and other assets, net     61,953     59,640  
Investments in joint ventures and the Management Companies     260,985     278,526  
   
 
 
    Total assets   $ 2,442,001   $ 2,294,502  
   
 
 

LIABILITIES, PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY:
 

Mortgage notes payable:
 
 
 
 
 
 
 
  Related parties   $ 81,054   $ 81,882  
  Others     1,259,713     1,157,630  
   
 
 
    Total     1,340,767     1,239,512  
Bank notes payable     175,000     159,000  
Convertible debentures     125,148     125,148  
Accounts payable and accrued expenses     21,450     26,161  
Due to affiliates     11,157     998  
Other accrued liabilities     26,160     28,394  
Preferred stock dividend payable     5,013     5,013  
   
 
 
    Total liabilities     1,704,695     1,584,226  
   
 
 
Minority interest in Operating Partnership     115,237     113,986  
   
 
 
Commitments and contingencies (Note 9)              
 
Series A cumulative convertible redeemable preferred stock, $.01 par value, 3,627,131 shares authorized, issued and outstanding at June 30, 2002 and December 31, 2001
 
 
98,934
 
 
98,934
 
 
Series B cumulative convertible redeemable preferred stock, $.01 par value, 5,487,471 shares authorized, issued and outstanding at June 30, 2002 and December 31, 2001
 
 
148,402
 
 
148,402
 
   
 
 
      247,336     247,336  
   
 
 
Common stockholders' equity:              
 
Common stock, $.01 par value, 100,000,000 shares authorized, 36,257,095 and 33,981,946 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively
 
 
360
 
 
340
 
  Additional paid in capital     416,085     366,349  
  Accumulated deficit     (27,658 )   (4,944 )
  Accumulated other comprehensive loss     (5,161 )   (5,820 )
  Unamortized restricted stock     (8,893 )   (6,971 )
   
 
 
    Total common stockholders' equity     374,733     348,954  
   
 
 
      Total liabilities, preferred stock and common stockholders' equity   $ 2,442,001   $ 2,294,502  
   
 
 

The accompanying notes are an integral part of these financial statements.

1

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)

 
   Six Months Ended June 30,
  
 
   2002
   2001
  
REVENUES:              
  Minimum rents   $ 97,723   $ 97,292  
  Percentage rents     2,288     2,948  
  Tenant recoveries     51,380     51,993  
  Other     4,667     5,069  
   
 
 
    Total revenues     156,058     157,302  
   
 
 
EXPENSES:              
  Shopping center and operating expenses     53,353     51,727  
  General and administrative expense     3,544     3,515  
  Interest expense:              
    Related parties     2,899     3,959  
    Others     47,260     51,534  
   
 
 
    Total interest expense     50,159     55,493  
   
 
 
  Depreciation and amortization     33,635     32,317  
Equity in income of unconsolidated joint ventures and the management companies     5,406     12,681  
Loss on sale or write-down of assets     (3,701 )   (188 )
   
 
 
Income before extraordinary item and minority interest     17,072     26,743  
Extraordinary loss on early extinguishment of debt     —     (187 )
   
 
 
Income of the Operating Partnership from continuing operations     17,072     26,556  
Discontinued Operations:              
  Gain on sale of asset     13,916     —  
  Income from discontinued operations     292     728  
   
 
 
Income before minority interest     31,280     27,284  
Less minority interest in net income of the Operating Partnership     5,180     4,377  
   
 
 
Net income     26,100     22,907  
Less preferred dividends     10,026     9,662  
   
 
 
Net income available to common stockholders   $ 16,074   $ 13,245  
   
 
 
Earnings per common share—basic:              
Income from continuing operations before extraordinary item   $ 0.15   $ 0.38  
  Extraordinary item     —     (0.01 )
  Discontinued operations     0.30     0.02  
   
 
 
Net income per share available to common stockholders   $ 0.45   $ 0.39  
   
 
 
Weighted average number of common shares outstanding—basic     35,498,000     33,706,000  
   
 
 
Weighted average number of common shares outstanding—basic, assuming full conversion of operating partnership units outstanding     46,651,000     44,860,000  
   
 
 
Earnings per common share—diluted:              
Income from continuing operations before extraordinary item   $ 0.15   $ 0.37  
  Extraordinary item     —     —  
  Discontinued operations     0.30     0.02  
   
 
 
Net income per share—available to common stockholders   $ 0.45   $ 0.39  
   
 
 
Weighted average number of common shares outstanding—diluted for EPS     46,651,000     44,860,000  
   
 
 

The accompanying notes are an integral part of these financial statements.

2

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)

 
   Three Months Ended June 30,
  
 
   2002
   2001
  
REVENUES:              
  Minimum rents   $ 49,587   $ 49,005  
  Percentage rents     991     1,105  
  Tenant recoveries     26,313     27,274  
  Other     2,217     2,629  
   
 
 
    Total revenues     79,108     80,013  
   
 
 
EXPENSES:              
  Shopping center and operating expenses     27,654     27,676  
  General and administrative expense     2,012     1,832  
  Interest expense:              
    Related parties     1,454     1,474  
    Others     23,582     26,023  
   
 
 
    Total interest expense     25,036     27,497  
   
 
 
  Depreciation and amortization     17,126     16,300  
Equity in (loss) income of unconsolidated joint ventures and the management companies     (900 )   6,625  
(Loss) gain on sale or write-down of assets     (2,533 )   132  
   
 
 
Income before extraordinary item and minority interest     3,847     13,465  
Extraordinary loss on early extinguishment of debt     —     (1 )
   
 
 
Income of the Operating Partnership from continuing operations     3,847     13,464  
Discontinued Operations:              
  Loss on sale of asset     (508 )   —  
  Income from discontinued operations     4     442  
   
 
 
Income before minority interest     3,343     13,906  
Less minority interest in net income of the Operating Partnership     (393 )   2,249  
   
 
 
Net income     3,736     11,657  
Less preferred dividends     5,013     4,831  
   
 
 
Net income (loss) available to common stockholders   $ (1,277 ) $ 6,826  
   
 
 
Earnings per common share—basic:              
Income (loss) from continuing operations before extraordinary item   $ (0.03 ) $ 0.19  
  Extraordinary item     —     —  
  Discontinued operations     (0.01 )   0.01  
   
 
 
Net income (loss) per share available to common stockholders   $ (0.04 ) $ 0.20  
   
 
 
Weighted average number of common shares outstanding—basic     36,241,000     33,771,000  
   
 
 
Weighted average number of common shares outstanding—basic, assuming full conversion of operating partnership units outstanding     47,393,000     44,924,000  
   
 
 
Earnings per common share—diluted:              
Income (loss) from continuing operations before extraordinary item   $ (0.03 ) $ 0.19  
  Extraordinary item     —     —  
  Discontinued operations     (0.01 )   0.01  
   
 
 
Net income (loss) per share—available to common stockholders   $ (0.04 ) $ 0.20  
   
 
 
Weighted average number of common shares outstanding—diluted for EPS     47,393,000     44,924,000  
   
 
 

The accompanying notes are an integral part of these financial statements.

3


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
   For the six months ended June 30,
  
 
   2002
   2001
  
Cash flows from operating activities:              
  Net income—available to common stockholders   $ 16,074   $ 13,245  
  Preferred dividends     10,026     9,662  
   
 
 
  Net income     26,100     22,907  
   
 
 
  Adjustments to reconcile net income to net cash provided by operating activities:              
  Extraordinary loss on early extinguishment of debt     —     187  
  (Gain) loss on sale or write-down of assets     (10,215 )   188  
  Depreciation and amortization     33,750     32,491  
  Amortization of net discount on trust deed note payable     17     17  
  Minority interest in net income of the Operating Partnership     5,180     4,377  
  Changes in assets and liabilities:              
    Tenant receivables, net     7,975     4,595  
    Other assets     (691 )   236  
    Accounts payable and accrued expenses     (4,711 )   (4,551 )
    Due to affiliates     10,159     (6,315 )
    Other liabilities     (2,234 )   178  
   
 
 
      Total adjustments     39,230     31,403  
   
 
 
  Net cash provided by operating activities     65,330     54,310  
   
 
 
Cash flows from investing activities:              
  Acquisitions of property and property improvements     (159,649 )   (4,703 )
  Redevelopment and expansions of centers     (13,058 )   (13,491 )
  Renovations of centers     (1,066 )   (3,921 )
  Tenant allowances     (4,705 )   (5,140 )
  Deferred leasing charges     (6,254 )   (4,431 )
  Equity in income of unconsolidated joint ventures and the management companies     (5,406 )   (12,681 )
  Distributions from joint ventures     29,232     23,982  
  Contributions to joint ventures     (6,285 )   (9,202 )
  Proceeds from sale of assets     23,817     —  
   
 
 
  Net cash used in investing activities     (143,374 )   (29,587 )
   
 
 
Cash flows from financing activities:              
  Proceeds from mortgages, notes and debentures payable     124,000     134,410  
  Payments on mortgages, notes and debentures payable     (6,762 )   (103,286 )
  Deferred financing costs     (1,809 )   (1,499 )
  Net proceeds from equity offerings     51,963     —  
  Dividends and distributions     (46,187 )   (53,595 )
  Dividends to preferred stockholders     (10,026 )   (9,662 )
   
 
 
  Net cash provided by (used in) financing activities     111,179     (33,632 )
   
 
 
  Net increase (decrease) in cash     33,135     (8,909 )
Cash and cash equivalents, beginning of period     26,470     36,273  
   
 
 
Cash and cash equivalents, end of period   $ 59,605   $ 27,364  
   
 
 
Supplemental cash flow information:              
  Cash payment for interest, net of amounts capitalized   $ 50,625   $ 55,977  
   
 
 

The accompanying notes are an integral part of these financial statements.

4


NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)


1.    Interim Financial Statements and Basis of Presentation:

        The accompanying consolidated financial statements of The Macerich Company (the "Company") have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements and have not been audited by independent public accountants.

        The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. The results for interim periods are not necessarily indicative of the results to be expected for a full year. The accompanying consolidated balance sheet as of December 31, 2001 has been derived from the audited financial statements, but does not include all disclosures required by GAAP.

        Certain reclassifications have been made in the 2001 consolidated financial statements to conform to the 2002 financial statement presentation.

Accounting Pronouncements:

        In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delayed the implementation of SFAS 133 from January 1, 2000 to January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133," ("SFAS 138"), which amended the accounting and reporting standards of SFAS 133. As a result of the adoption of SFAS 133 on January 1, 2001, the Company recorded a transition adjustment of $7,148 to accumulated other comprehensive income related to treasury rate lock transactions settled in prior years. The entire transition adjustment was reflected in the quarter ended March 31, 2001. The Company reclassified $659 and expects to reclassify $1,328 from accumulated other comprehensive income to earnings for the six months ended June 30, 2002 and for the year ended December 31, 2002, respectively.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. The Company does not believe that the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.

5


        On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires that the purchase method of accounting be used for all business combinations for which the date of acquisition is after June 30, 2001. SFAS 141 also establishes specific criteria for the recognition of intangible assets. The Company has determined that the adoption of SFAS 141 will not have an impact on its consolidated financial statements.

        In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company adopted SFAS 144 on January 1, 2002. The Company sold Boulder Plaza on March 19, 2002 and in accordance with SFAS 144 the results of Boulder Plaza for the periods from January 1, 2002 to March 19, 2002 and from January 1, 2001 to June 30, 2001 have been reclassified into "discontinued operations" on the consolidated statements of operations. Total revenues associated with Boulder Plaza were $470 and $1,152 for the periods January 1, 2002 to March 19, 2002 and January 1, 2001 to June 30, 2001, respectively.

        In May 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections" ("SFAS 145"), which is effective for fiscal years beginning after May 15, 2002. SFAS 145 rescinds SFAS 4, SFAS 44 and SFAS 64 and amends SFAS 13 to modify the accounting for sales-leaseback transactions. SFAS 4 required the classification of gains and losses resulting from extinguishments of debt to be classified as extraordinary items. SFAS 64 amended SFAS 4 and is no longer necessary because SFAS 4 has been rescinded. The Company expects to reclassify a loss of $2,034 and $304 for the years ending December 31, 2001 and 2000, respectively, from extraordinary items upon adoption of SFAS 145 on January 1, 2003.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not believe that the adoption of SFAS No. 146 will have a material impact on its consolidated financial statements.

        Stock-based compensation expense.    In the second quarter of 2002 and effective beginning in the first quarter of 2002, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". The Company values stock options issued using the Black-Scholes option-pricing model and recognizes this value as an expense over the period in which the options vest. Under this standard, recognition of expense for stock options is applied to all options granted after the beginning of the year of adoption. Prior to the second quarter of 2002, the Company followed the intrinsic method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees". The Company has not issued stock options in 2002 and accordingly the Company has not recognized any stock-based compensation expense for the six months ending June 30, 2002.

Earnings Per Share ("EPS"):

        The computation of basic earnings per share is based on net income and the weighted average number of common shares outstanding for the six and three months ending June 30, 2002 and 2001. The computation of diluted earnings per share does not include the effect of outstanding restricted stock and common stock options issued under the employee and director stock incentive plans as they

6


are antidilutive using the treasury method. The Operating Partnership units ("OP units") not held by the Company have been included in the diluted EPS calculation since they are redeemable on a one-for-one basis for shares of common stock. The following table reconciles the basic and diluted earnings per share calculation:

 
   For the Six Months Ended June 30,
 
   2002
   2001
 
   Net
Income
   Shares
   Per Share
   Net
Income
   Shares
   Per Share
 
   (In thousands, except per share data)
Net income   $ 26,100             $ 22,907          
Less: Preferred stock dividends     10,026               9,662          
   
           
         
Basic EPS:                                
Net income—available to common stockholders     16,074   35,498   $ 0.45     13,245   33,706   $ 0.39

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:                                
  Conversion of OP units     5,180   11,153           4,377   11,154      
  Employee stock options and restricted stock     n/a—antidilutive for EPS     n/a—antidilutive for EPS
  Convertible preferred stock     n/a—antidilutive for EPS     n/a—antidilutive for EPS
  Convertible debentures     n/a—antidilutive for EPS     n/a—antidilutive for EPS
   
 
Net income—available to common stockholders   $ 21,254   46,651   $ 0.45   $ 17,622   44,860   $ 0.39
   
 
 
  
For the Three Months Ended June 30,
 
   2002
   2001
 
   Net
Income
   Shares
   Per Share
   Net
Income
   Shares
   Per Share
 
   (In thousands, except per share data)
Net income   $ 3,736             $ 11,657          
Less: Preferred stock dividends     5,013               4,831          
   
           
         
Basic EPS:                                
Net income (loss)—available to common stockholders     (1,277 ) 36,241     (0.04 )   6,826   33,771   $ 0.20

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of dilutive securities:                                
  Conversion of OP units     (393 ) 11,152           2,249   11,153      
  Employee stock options and restricted stock     n/a—antidilutive for EPS     n/a—antidilutive for EPS
  Convertible preferred stock     n/a—antidilutive for EPS     n/a—antidilutive for EPS
  Convertible debentures     n/a—antidilutive for EPS     n/a—antidilutive for EPS
   
 
Net income (loss)—available to common stockholders   $ (1,670 ) 47,393   $ (0.04 ) $ 9,075   44,924   $ 0.20
   
 

7


2.    Organization:

        The Company is involved in the acquisition, ownership, redevelopment, management and leasing of regional and community shopping centers located throughout the United States. The Company is the sole general partner of, and owns a majority of the ownership interests in, The Macerich Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"). As of June 30, 2002, the Operating Partnership owns or has an ownership interest in 47 regional shopping centers and three community shopping centers aggregating approximately 42 million square feet of gross leasable area ("GLA"). These 50 regional and community shopping centers are referred to hereinafter as the "Centers", unless the context otherwise requires. The Company is a self-administered and self-managed real estate investment trust ("REIT") and conducts all of its operations through the Operating Partnership and the Company's three management companies, Macerich Property Management Company, LLC, a single-member Delaware limited liability company, Macerich Manhattan Management Company, a California corporation, and Macerich Management Company, a California corporation (collectively, the "Management Companies"). The term "Management Companies" includes Macerich Property Management Company, a California corporation, prior to the merger with Macerich Property Management Company, LLC on March 29, 2001.

        The Company was organized to qualify as a REIT under the Internal Revenue Code of 1986, as amended. As of June 30, 2002, the 20% limited partnership interest of the Operating Partnership not owned by the Company is reflected in these financial statements as minority interest.


3.    Investments in Unconsolidated Joint Ventures and the Management Companies:

        The following are the Company's investments in various joint ventures. The Operating Partnership's interest in each joint venture as of June 30, 2002 is as follows:

Joint Venture
   The Operating Partnership's
Ownership %
  
Macerich Northwestern Associates   50 %
Manhattan Village, LLC   10 %
MerchantWired, LLC   9.64 %
Pacific Premier Retail Trust   51 %
Panorama City Associates   50 %
SDG Macerich Properties, L.P.   50 %
West Acres Development   19 %

        As of March 28, 2001, the Operating Partnership also owned all of the non-voting preferred stock of Macerich Property Management Company and Macerich Management Company, which is generally entitled to dividends equal to 95% of the net cash flow of each company. Macerich Manhattan Management Company is a wholly owned subsidiary of Macerich Management Company. Effective March 29, 2001, Macerich Property Management Company merged with and into Macerich Property Management Company, LLC ("MPMC, LLC"). MPMC, LLC is a single-member Delaware limited liability company and is 100% owned by the Operating Partnership. The ownership structure of Macerich Management Company has remained unchanged.

        The Company accounts for the Management Companies (exclusive of MPMC, LLC) and joint ventures using the equity method of accounting. Effective March 29, 2001, the Company consolidated the accounts for MPMC, LLC.

        On September 30, 2000, Manhattan Village, a 551,847 square foot regional shopping center, 10% of which was owned by the Operating Partnership, was sold. The joint venture sold the property for

8


$89,000, including a note receivable from the buyer for $79,000 at a fixed interest rate of 8.75% payable monthly, until its maturity date of September 30, 2001. On December 28, 2001, the note receivable was paid down by $5,000 and the maturity date was extended to September 30, 2002 at a new fixed interest rate of 9.5%. On July 2, 2002, the note receivable of $74,000 was paid down in full.

        MerchantWired LLC was formed by six major mall companies, including the Company, to provide a private, high-speed IP network to malls across the United States. The members of MerchantWired LLC agreed to sell all their collective membership interests in MerchantWired LLC under the terms of a definitive agreement with Transaction Network Services, Inc ("TNSI"). The transaction was expected to close in the second quarter of 2002, but TNSI unexpectedly informed the members of MerchantWired LLC that it would not complete the transaction. As a result, MerchantWired LLC is shutting down its operations and transitioning its customers to alternate service providers. The Company does not anticipate making further cash contributions to MerchantWired LLC, and wrote-off their remaining investment of $8,947 in the three months ended June 30, 2002, which is reflected in the equity in income (loss) of unconsolidated joint ventures.

        Combined and condensed balance sheets and statements of operations are presented below for all unconsolidated joint ventures and the Management Companies.

COMBINED AND CONDENSED BALANCE SHEETS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES

 
   June 30,
2002
   December 31,
2001
Assets:            
  Properties, net   $ 2,037,375   $ 2,179,908
  Other assets     114,807     157,494
   
 
    Total assets   $ 2,152,182   $ 2,337,402
   
 
Liabilities and partners' capital:            
  Mortgage notes payable   $ 1,449,909   $ 1,457,871
  Other liabilities     39,208     138,531
  The Company's capital     260,985     278,526
  Outside partners' capital     402,080     462,474
   
 
    Total liabilities and partners' capital   $ 2,152,182   $ 2,337,402
   
 

9

COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES

 
   Six Months Ended June 30, 2002
  
 
   SDG
Macerich
Properties, L.P.
   Pacific
Premier
Retail Trust
   Other
Joint Ventures
   Management
Companies
   Total
  
Revenues:                                
  Minimum rents   $ 45,987   $ 50,906   $ 11,573     —   $ 108,466  
  Percentage rents     1,634     1,471     545     —     3,650  
  Tenant recoveries     20,896     18,621     4,004     —     43,521  
  Management fee     —     —     —   $ 4,421     4,421  
  Other     613     844     6,241     —     7,698  
   
 
 
 
 
 
Total revenues     69,130     71,842     22,363     4,421     167,756  
   
 
 
 
 
 
Expenses:                                
  Shopping center and operating expenses     26,314     21,119     10,967     —     58,400  
  Interest expense     15,052     24,206     5,785     (148 )   44,895  
  Management Company expense     —     —     —     4,082     4,082  
  Depreciation and amortization     12,765     11,880     7,356     734     32,735  
   
 
 
 
 
 
  Total operating expenses     54,131     57,205     24,108     4,668     140,112  
   
 
 
 
 
 
Gain (loss) on sale or write-down of assets     12     —     (106,868 )   (33 )   (106,889 )
   
 
 
 
 
 
  Net income (loss)   $ 15,011   $ 14,637   $ (108,613 ) $ (280 ) $ (79,245 )
   
 
 
 
 
 
Company's pro rata share of net income (loss)   $ 7,506   $ 7,443   $ (9,277 ) $ (266 ) $ 5,406  
   
 
 
 
 
 

10

COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES

 
   Six Months Ended June 30, 2001
 
   SDG
Macerich
Properties, L.P.
   Pacific
Premier
Retail Trust
   Other
Joint Ventures
   Management
Companies
   Total
Revenues:                              
  Minimum rents   $ 45,362   $ 48,750   $ 9,957     —   $ 104,069
  Percentage rents     2,087     1,422     578     —     4,087
  Tenant recoveries     21,286     17,591     4,583     —     43,460
  Management fee     —     —     —   $ 5,402     5,402
  Other     1,298     891     7,550     —     9,739
   
 
 
 
 
Total revenues     70,033     68,654     22,668     5,402     166,757
   
 
 
 
 
Expenses:                              
  Shopping center and operating expenses     26,047     19,347     18,193     —     63,587
  Interest expense     19,740     24,786     3,852     (67 )   48,311
  Management Company expense     —     —     —     5,924     5,924
  Depreciation and amortization     12,439     11,213     3,317     533     27,502
   
 
 
 
 
  Total operating expenses     58,226     55,346     25,362     6,390     145,324
   
 
 
 
 
Gain (loss) on sale or write-down of assets     (12 )   72     259     —     319
   
 
 
 
 
  Net income (loss)   $ 11,795   $ 13,380   $ (2,435 ) $ (988 ) $ 21,752
   
 
 
 
 
Company's pro rata share of net income (loss)   $ 5,897   $ 6,824   $ 899   $ (939 ) $ 12,681
   
 
 
 
 

11

COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES

 
   Three Months Ended June 30, 2002
  
 
   SDG
Macerich
Properties, L.P.
   Pacific
Premier
Retail Trust
   Other
Joint Ventures
   Management
Companies
   Total
  
Revenues:                                
  Minimum rents   $ 23,270   $ 25,632   $ 5,866     —   $ 54,768  
  Percentage rents     419     557     321     —     1,297  
  Tenant recoveries     10,566     9,242     2,098     —     21,906  
  Management fee     —     —     —   $ 2,249     2,249  
  Other     317     410     1,995     —     2,722  
   
 
 
 
 
 
Total revenues     34,572     35,841     10,280     2,249     82,942  
   
 
 
 
 
 
Expenses:                                
  Shopping center and operating expenses     13,453     10,588     2,530     —     26,571  
  Interest expense     7,505     12,102     2,023     (58 )   21,572  
  Management Company expense     —     —     —     2,099     2,099  
  Depreciation and amortization     6,363     6,044     1,007     429     13,843  
   
 
 
 
 
 
  Total operating expenses     27,321     28,734     5,560     2,470     64,085  
   
 
 
 
 
 
Gain (loss) on sale or write-down of assets     12     —     (92,807 )   (33 )   (92,828 )
   
 
 
 
 
 
  Net income (loss)   $ 7,263   $ 7,107   $ (88,087 ) $ (254 ) $ (73,971 )
   
 
 
 
 
 
Company's pro rata share of net income (loss)   $ 3,632   $ 3,612   $ (7,903 ) $ (241 ) $ (900 )
   
 
 
 
 
 

12

COMBINED STATEMENTS OF OPERATIONS OF JOINT VENTURES
AND THE MANAGEMENT COMPANIES

 
   Three Months Ended June 30, 2001
  
 
   SDG
Macerich
Properties, L.P.
   Pacific
Premier
Retail Trust
   Other
Joint Ventures
   Management
Companies
   Total
  
Revenues:                                
  Minimum rents   $ 22,552   $ 24,640   $ 4,992     —   $ 52,184  
  Percentage rents     415     566     443     —     1,424  
  Tenant recoveries     10,403     9,000     2,338     —     21,741  
  Management fee     —     —     —   $ 2,351     2,351  
  Other     804     287     5,582     —     6,673  
   
 
 
 
 
 
Total revenues     34,174     34,493     13,355     2,351     84,373  
   
 
 
 
 
 
Expenses:                                
  Shopping center and operating expenses     12,791     10,095     11,281     —     34,167  
  Interest expense     9,289     12,419     2,010     (34 )   23,684  
  Management Company expense     —     —     —     1,982     1,982  
  Depreciation and amortization     6,291     5,702     2,478     239     14,710  
   
 
 
 
 
 
  Total operating expenses     28,371     28,216     15,769     2,187     74,543  
   
 
 
 
 
 
Gain (loss) on sale or write-down of assets     (11 )   —     (1 )   —     (12 )
   
 
 
 
 
 
  Net income (loss)   $ 5,792   $ 6,277   $ (2,415 ) $ 164   $ 9,818  
   
 
 
 
 
 
Company's pro rata share of net income (loss)   $ 2,895   $ 3,202   $ 373   $ 155   $ 6,625  
   
 
 
 
 
 

13

        Significant accounting policies used by the unconsolidated joint ventures and the Management Companies are similar to those used by the Company.

        Included in mortgage notes payable are amounts due to affiliates of Northwestern Mutual Life ("NML") of $155,380 and $157,567 as of June 30, 2002 and December 31, 2001, respectively. NML is considered a related party because they are a joint venture partner with the Company in Macerich Northwestern Associates. Interest expense incurred on these borrowings amounted to $5,217 and $5,367 for the six months ended June 30, 2002 and 2001, respectively; and $2,614 and $2,686 for the three months ended June 30, 2002 and 2001, respectively.


4.    Property:

        Property is summarized as follows:

 
   June 30,
2002
   December 31,
2001
  
Land   $ 411,046   $ 382,739  
Building improvements     1,809,497     1,688,720  
Tenant improvements     68,649     66,808  
Equipment and furnishings     20,211     18,405  
Construction in progress     79,551     71,161  
   
 
 
      2,388,954     2,227,833  

Less, accumulated depreciation
 
 
(364,058
)
 
(340,504
)
   
 
 
    $ 2,024,896   $ 1,887,329  
   
 
 

        A gain on sale or write-down of assets of $10,215 for the six months ended June 30, 2002 includes a gain of $13,916 as a result of the Company selling Boulder Plaza on March 19, 2002 and is offset by a loss of $3,029 as a result of writing-off the Company's various technological investments in the quarter ended June 30, 2002.

14


5.    Mortgage Notes Payable:

        Mortgage notes payable at June 30, 2002 and December 31, 2001 consist of the following:

 
   Carrying Amount of Notes
    
    
    
 
   2002
   2001
    
    
    
Property Pledged As Collateral
   Other
   Related
Party
   Other
   Related
Party
   Interest
Rate
   Payment
Terms
   Maturity
Date
Wholly Owned Centers:                                    

Capitola Mall(b)
 
 
—
 
$
47,271
 
 
—
 
$
47,857
 
7.13
%
380(a)
 
2011
Carmel Plaza   $ 28,213     —   $ 28,358     —   8.18 % 202(a)   2009
Chesterfield Towne Center     62,290     —     62,742     —   9.07 % 548(c)   2024
Citadel     69,979     —     70,708     —   7.20 % 554(a)   2008
Corte Madera, Village at     70,262     —     70,626     —   7.75 % 516(a)   2009
Crossroads Mall-Boulder(d)     —     33,783     —     34,025   7.08 % 244(a)   2010
Fresno Fashion Fair     68,362     —     68,724     —   6.52 % 437(a)   2008
Greeley Mall     13,826     —     14,348     —   8.50 % 187(a)   2003
Green Tree Mall/Crossroads—OK/Salisbury(e)     117,714     —     117,714     —   7.23 % interest only   2004
Northwest Arkansas Mall     59,266     —     59,867     —   7.33 % 434(a)   2009
The Oaks(f)     108,000     —     —     —   2.99 % interest only   2004
Pacific View(g)     88,274     —     88,715     —   7.16 % 602(a)   2011
Queens Center     97,732     —     98,278     —   6.88 % 633(a)   2009
Rimrock Mall(h)     45,754     —     45,966     —   7.45 % 320(a)   2011
Santa Monica Place     83,913     —     84,275     —   7.70 % 606(a)   2010
South Plains Mall     63,148     —     63,474     —   8.22 % 454(a)   2009
South Towne Center     64,000     —     64,000     —   6.61 % interest only   2008
Valley View Center     51,000     —     51,000     —   7.89 % interest only   2006
Vintage Faire Mall     68,922     —     69,245     —   7.89 % 508(a)   2010
Westside Pavilion     99,058     —     99,590     —   6.67 % interest only   2008
   
 
 
 
           
Total—Wholly Owned Centers   $ 1,259,713   $ 81,054   $ 1,157,630   $ 81,882            
   
 
 
 
           
Joint Venture Centers (at pro rata share):                                    
Broadway Plaza(50%)(i)     —   $ 34,955     —   $ 35,328   6.68 % 257(a)   2008
Pacific Premier Retail Trust(51%)(i):                                    
  Cascade Mall   $ 12,317     —   $ 12,642     —   6.50 % 122(a)   2014
  Kitsap Mall/Kitsap Place(j)     30,985     —     31,110     —   8.06 % 230(a)   2010
  Lakewood Mall(k)     64,770     —     64,770     —   7.20 % interest only   2005
  Lakewood Mall(l)     8,224     —     8,224     —   4.38 % interest only   2003
  Los Cerritos Center     58,969     —     59,385     —   7.13 % 421(a)   2006
  North Point Plaza     1,709     —     1,747     —   6.50 % 16(a)   2015
  Redmond Town Center—Retail     31,240     —     31,564     —   6.50 % 224(a)   2011
  Redmond Town Center—Office(m)     —     43,590     —     44,324   6.77 % 370(a)   2009
  Stonewood Mall     39,653     —     39,653     —   7.41 % 275(a)   2010
  Washington Square     57,760     —     58,339     —   6.70 % 421(a)   2009
  Washington Square Too     5,966     —     6,088     —   6.50 % 53(a)   2016
SDG Macerich Properties L.P.(50%)(i)     184,625     —     185,306     —   6.54 %(n) 1,120(a)   2006
SDG Macerich Properties L.P.(50%)(i)     92,250     —     92,250     —   2.35 %(n) interest only   2003
SDG Macerich Properties L.P.(50%)(i)     40,700     —     40,700     —   2.22 %(n) interest only   2006
West Acres Center(19%)(i)     7,326     —     7,425     —   6.52 % 57(a)   2009
West Acres Center(19%)(i)     1,873     —     1,894     —   9.17 % 18(a)   2009
   
 
 
 
           
Total—Joint Venture Centers   $ 638,367   $ 78,545     641,097   $ 79,652            
   
 
 
 
           
Total—All Centers   $ 1,898,080   $ 159,599   $ 1,798,727   $ 161,534            
   
 
 
 
           
(a)
This represents the monthly payment of principal and interest.

(b)
On May 2, 2001, the Company refinanced the debt on Capitola Mall. The prior loan was paid in full and a new note was issued for $48,500 bearing interest at a fixed rate of 7.13% and maturing May 15, 2011.

15

(c)
This amount represents the monthly payment of principal and interest. In addition, contingent interest, as defined in the loan agreement, may be due to the extent that 35% of the amount by which the property's gross receipts (as defined in the loan agreement) exceeds a base amount specified therein. Contingent interest expense recognized by the Company was $324 and $165 for the six and three months ended June 30, 2002, respectively; and $278 and $74 for the six and three months ended June 30, 2001, respectively.

(d)
This note was issued at a discount. The discount is being amortized over the life of the loan using the effective interest method. At June 30, 2002 and December 31, 2001, the unamortized discount was $281 and $297, respectively.

(e)
This loan is cross-collateralized by Green Tree Mall, Crossroads Mall-Oklahoma and the Centre at Salisbury.

(f)
Concurrent with the acquisition of the mall, the Company placed a $108.0 million loan bearing interest at LIBOR plus 1.15% and maturing July 1, 2004 with three consecutive one year options. $92.0 million of the loan is at LIBOR plus 0.7% and $16.0 million is at LIBOR plus 3.75%. This variable rate debt is covered by an interest rate cap agreement over two years which effectively prevents the LIBOR interest rate from exceeding 7.10%. At June 30, 2002, the total weighted average interest rate was 2.99%.

(g)
This loan was issued on July 10, 2001 for $89,000, and may be increased up to $96,000 subject to certain conditions.

(h)
On October 9, 2001, the Company refinanced the debt on Rimrock Mall. The prior loan was paid in full and a new note was issued for $46,000 bearing interest at a fixed rate of 7.45% and maturing October 1, 2011. The Company incurred a loss on early extinguishment of the prior debt in October 2001 of $1,702.

(i)
Reflects the Company's pro rata share of debt.

(j)
This loan is interest only until December 31, 2001. Effective January 1, 2002, monthly principal and interest of $450 will be payable through maturity. The debt is cross-collateralized by Kitsap Mall and Kitsap Place.

(k)
In connection with the acquisition of this property, the joint venture assumed $127,000 of collateralized fixed rate notes (the "Notes"). The Notes bear interest at an average fixed rate of 7.20% and mature in August 2005. The Notes require the joint venture to deposit all cash flow from the property operations with a trustee to meet its obligations under the Notes. Cash in excess of the required amount, as defined, is released. Included in cash and cash equivalents is $750 of restricted cash deposited with the trustee at June 30, 2002 and at December 31, 2001.

(l)
On July 28, 2000, the joint venture placed a $16,125 floating rate note on the property bearing interest at LIBOR plus 2.25% and maturing July 2003. At June 30, 2002 and December 31, 2001, the total interest rate was 4.38%.

(m)
Concurrent with the acquisition, the joint venture placed $76,700 of debt and obtained a construction loan for an additional $16,000. The entire principal of $16,000 has been drawn on the construction loan.

(n)
In connection with the acquisition of these Centers, the joint venture assumed $485,000 of mortgage notes payable which are collateralized by the properties. At acquisition, the $300,000 fixed rate portion of this debt reflected a fair value of $322,700, which included an unamortized premium of $22,700. This premium is being amortized as interest expense over the life of the loan using the effective interest method. At June 30, 2002 and December 31, 2001, the unamortized balance of the debt premium was $12,150 and $13,512, respectively. This debt is due in May 2006 and requires monthly payments of $1,852. $184,500 of this debt is due in May 2003 and requires monthly interest payments at a variable weighted average rate (based on LIBOR) of 2.35% and 2.39% at June 30, 2002 and December 31, 2001, respectively. This variable rate debt is covered by an interest rate cap agreement, which effectively prevents the interest rate from exceeding 11.53%. On April 12, 2000, the joint venture issued $138,500 of additional mortgage notes, which are collateralized by the properties and are due in May 2006. $57,100 of this debt requires fixed monthly interest payments of $387 at a weighted average rate of 8.13% while the floating rate notes of $81,400 require monthly interest payments at a variable weighted average rate (based on LIBOR) of 2.22% and 2.27% at June 30, 2002 and December 31, 2001, respectively. This variable rate debt is covered by an interest rate cap agreement which effectively prevents the interest rate from exceeding 11.83%.

        Certain mortgage loan agreements contain a prepayment penalty provision for the early extinguishment of the debt.

        Total interest expense capitalized, including the pro rata share of joint ventures of $237 and $104, during the six and three months ended June 30, 2002, was $3,470 and $1,773, respectively. Total interest

16


expense capitalized, including the pro rata share of joint ventures of $173 and $80 during the six and three months ended June 30, 2001, was $2,564 and $1,320, respectively.

        The fair value of mortgage notes payable, (including the pro rata share of joint ventures of $726,451 and $721,084 at June 30, 2002 and December 31, 2001 respectively), is estimated to be approximately $2,109,367 and $1,983,183 at June 30, 2002 and December 31, 2001, respectively, based on current interest rates for comparable loans.


6.    Bank and Other Notes Payable:

        The Company had a credit facility of $200,000 with a maturity of July 26, 2002 with a right to extend the facility to May 26, 2003 subject to certain conditions. The interest rate on such credit facility fluctuated between 1.35% and 1.80% over LIBOR depending on leverage levels. As of June 30, 2002 and December 31, 2001, $175,000 and $159,000 of borrowings were outstanding under this line of credit at an interest rate of 3.53% and 3.65%, respectively.

        On July 26, 2002, the Company replaced the $200,000 credit facility with a new $425,000 revolving line of credit. This increased revolving line of credit has a three-year term plus a one-year extension. The interest rate fluctuates from LIBOR plus 1.75% to LIBOR plus 3.00% depending on the Company's overall leverage level. At closing the interest rate was 4.82% (See Note 12.).

        Additionally, as of June 30, 2002, the Company has obtained $290 in letters of credit guaranteeing performance by the Company of certain obligations relating to the Centers. The Company does not believe that these letters of credit will result in a liability to the Company.


7.    Convertible Debentures:

        During 1997, the Company issued and sold $161,400 of its convertible subordinated debentures (the "Debentures"). The Debentures, which were sold at par, bear interest at 7.25% annually (payable semi-annually) and are convertible into common stock at any time, on or after 60 days, from the date of issue at a conversion price of $31.125 per share. In November and December 2000, the Company purchased and retired $10,552 of the Debentures. The Company recorded a gain on early extinguishment of debt of $1,018 related to the transaction. In December 2001, the Company purchased and retired an additional $25,700 of the Debentures. The Debentures mature on December 15, 2002 and are callable by the Company after June 15, 2002 at par plus accrued interest. The Company expects to use the new revolving credit facility to fully retire the Debentures at their maturity.


8.    Related-Party Transactions:

        The Company engaged the Management Companies to manage the operations of its properties and certain unconsolidated joint ventures. For the six and three months ending June 30, 2002, no management fees were incurred to the Management Companies by the Company. For the six and three months ending June 30, 2001, management fees of $757 and $0, respectively, were incurred to the Management Companies by the company. For the six and three months ending June 30, 2002, management fees of $3,767 and $1,894 respectively; and for the six and three months ending June 20, 2001, management fees of $3,561 and $1,789, respectively, were paid to the Management Companies by the joint ventures.

        Certain mortgage notes are held by one of the Company's joint venture partners, NML. Interest expense in connection with these notes was $2,889 and $1,444 for the six and three months ended June 30, 2002, respectively; and $3,959 and $1,474 for the six and three months ended June 30, 2001, respectively. Included in accounts payable and accrued expenses is interest payable to NML of $244 and $263 at June 30, 2002 and December 31, 2001, respectively.

17


        In 1997 and 1999, certain executive officers received loans from the Company totaling $6,500. These loans are full recourse to the executives. $6,000 of the loans were issued under the terms of the employee stock incentive plan, bear interest at 7%, are due in 2007 and 2009 and are secured by Company common stock owned by the executives. On February 9, 2000, $300 of the $6,000 of these loans was forgiven with respect to three of these officers and charged to compensation expense. On April 2, 2002, $2,700 of these loans were paid off in full by three of these officers. The $500 loan issued in 1997 is non interest bearing and is forgiven ratably over a five year term. These loans receivable totaling $3,175 and $5,189 are included in other assets at June 30, 2002 and December 31, 2001, respectively.

        Certain Company officers and affiliates have guaranteed mortgages of $21,750 at one of the Company's joint venture properties and $2,000 at Greeley Mall.


9.    Commitments and Contingencies:

        The Company has certain properties subject to noncancellable operating ground leases. The leases expire at various times through 2070, subject in some cases to options to extend the terms of the lease. Certain leases provide for contingent rent payments based on a percentage of base rental income, as defined. Ground rent expenses, net of amounts capitalized, were $633 and $310 for the six and three months ended June 30, 2002, respectively; and were $85 and $77 for the six and three months ended June 30, 2001, respectively. No contingent rent was incurred in either period.

        Perchloroethylene ("PCE") has been detected in soil and groundwater in the vicinity of a dry cleaning establishment at North Valley Plaza, formerly owned by a joint venture of which the Company was a 50% member. The property was sold on December 18, 1997. The California Department of Toxic Substances Control ("DTSC") advised the Company in 1995 that very low levels of Dichloroethylene ("1,2 DCE"), a degradation byproduct of PCE, had been detected in a municipal water well located 1/4 mile west of the dry cleaners, and that the dry cleaning facility may have contributed to the introduction of 1,2 DCE into the water well. According to DTSC, the maximum contaminant level ("MCL") for 1,2 DCE which is permitted in drinking water is 6 parts per billion ("ppb"). The 1,2 DCE was detected in the water well at a concentration of 1.2 ppb, which is below the MCL. The Company has retained an environmental consultant and has initiated extensive testing of the site. The joint venture agreed (between itself and the buyer) that it would be responsible for continuing to pursue the investigation and remediation of impacted soil and groundwater resulting from releases of PCE from the former dry cleaner. Approximately $22 and $15 have already been incurred by the joint venture for remediation, professional and legal fees for the six months ending June 30, 2002 and 2001, respectively. An additional $166 remains reserved by the joint venture as of June 30, 2002. The joint venture has been sharing costs with former owners of the property.

        The Company acquired Fresno Fashion Fair in December 1996. Asbestos has been detected in structural fireproofing throughout much of the Center. Testing data conducted by professional environmental consulting firms indicates that the fireproofing is largely inaccessible to building occupants and is well adhered to the structural members. Additionally, airborne concentrations of asbestos were well within OSHA's permissible exposure limit ("PEL") of .1 fcc. The accounting for this acquisition includes a reserve of $3,300 to cover future removal of this asbestos, as necessary. The Company incurred $49 and $54 in remediation costs for the three months ending June 30, 2002 and 2001, respectively. An additional $2,561 remains reserved at June 30, 2002.


10.    Cumulative Convertible Redeemable Preferred Stock:

        On February 25, 1998, the Company issued 3,627,131 shares of Series A cumulative convertible redeemable preferred stock ("Series A Preferred Stock") for proceeds totaling $100,000 in a private placement. The preferred stock can be converted on a one for one basis into common stock and will

18


pay a quarterly dividend equal to the greater of $0.46 per share, or the dividend then payable on a share of common stock.

        On June 17, 1998, the Company issued 5,487,471 shares of Series B cumulative convertible redeemable preferred stock ("Series B Preferred Stock") for proceeds totaling $150,000 in a private placement. The preferred stock can be converted on a one for one basis into common stock and will pay a quarterly dividend equal to the greater of $0.46 per share, or the dividend then payable on a share of common stock.

        No dividends will be declared or paid on any class of common or other junior stock to the extent that dividends on Series A Preferred Stock and Series B Preferred Stock have not been declared and/or paid.

        The holders of Series A Preferred Stock and Series B Preferred Stock have redemption rights if a change of control of the Company occurs, as defined under the respective Articles Supplementary for each series. Under such circumstances, the holders of the Series A Preferred Stock and Series B Preferred Stock are entitled to require the Company to redeem their shares, to the extent the Company has funds legally available therefor, at a price equal to 105% of their respective liquidation preference plus accrued and unpaid dividends. The Series A Preferred Stock holder also has the right to require the Company to repurchase its shares if the Company fails to be taxed as a REIT for federal tax purposes at a price equal to 115% of its liquidation preference plus accrued and unpaid dividends, to the extent funds are legally available therefor.


11.    Common Stock Offerings:

        On February 28, 2002, the Company issued 1,968,957 common shares with total net proceeds of $51,963. The proceeds from the sale of the common shares will be used principally to finance a portion of the Queens Center expansion and redevelopment project and for general corporate purposes.


12.    Subsequent Events:

        On July 26, 2002, the Operating Partnership acquired Westcor Realty Limited Partnership and its affiliated companies ("Westcor"). Westcor is the dominant owner, operator and developer of regional malls and specialty retail assets in the greater Phoenix area. The total purchase price was approximately $1,475,000 including the assumption of $733,000 in existing debt and the issuance of approximately $72,000 of convertible preferred operating partnership units at a price of $36.55 per unit. The balance of the purchase price was paid in cash which was provided primarily from a $380,000 interim loan with a term of up to 18 months bearing interest at an average rate of LIBOR plus 3.25% and a $250,000 term loan with a maturity of up to five years with an interest rate ranging from LIBOR plus 2.75% to LIBOR plus 3.00% depending on the Company's overall leverage level.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations,

General Background and Performance Measurement

        The Company believes that the most significant measures of its operating performance are Funds from Operations ("FFO") and EBITDA. FFO is defined as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring, sales or write-down of assets and cumulative effect of change in accounting principle, plus depreciation and amortization (excluding depreciation on personal property and amortization of loan and financial instrument costs), and after adjustments for unconsolidated entities. Adjustments for unconsolidated entities are calculated on the same basis. FFO does not represent cash flow from operations as defined by GAAP and is not necessarily indicative of cash available to fund all cash flow needs. FFO, as presented, may not be comparable to similarly titled measures reported by other real estate investment trusts.

        EBITDA represents earnings before interest, income taxes, depreciation, amortization, minority interest, equity in income (loss) of unconsolidated entities, extraordinary items, gain (loss) on sale or write-down of assets, preferred dividends and cumulative effect of change in accounting principle. This data is relevant to an understanding of the economics of the shopping center business as it indicates cash flow available from operations to service debt and satisfy certain fixed obligations. EBITDA should not be construed as an alternative to operating income as an indicator of the Company's operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) or as a measure of liquidity. EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies. While the performance of individual Centers and the Management Companies determines EBITDA, the Company's capital structure also influences FFO. The most important component in determining EBITDA and FFO is Center revenues. Center revenues consist primarily of minimum rents, percentage rents and tenant expense recoveries. Minimum rents will increase to the extent that new leases are signed at market rents that are higher than prior rents. Minimum rents will also fluctuate up or down with changes in the occupancy level. Additionally, to the extent that new leases are signed with more favorable expense recovery terms, expense recoveries will increase.

        Percentage rents generally increase or decrease with changes in tenant sales. As leases roll over, however, a portion of historical percentage rent is often converted to minimum rent. It is therefore common for percentage rents to decrease as minimum rents increase. Accordingly, in discussing financial performance, the Company combines minimum and percentage rents in order to better measure revenue growth.

        The following discussion is based primarily on the consolidated balance sheet of the Company as of June 30, 2002 and also compares the activities for the six and three months ended June 30, 2002 to the activities for the six and three months ended June 30, 2001. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These financial statements include all adjustments, which are, in the opinion of management, necessary to reflect the fair representation of the results for the interim periods presented and all such adjustments are of a normal recurring nature.

Forward-Looking Statements

        This quarterly report on Form 10-Q contains or incorporates statements that constitute forward-looking statements. Those statements appear in a number of places in this Form 10-Q and include statements regarding, among other matters, the Company's growth, acquisition, redevelopment and development opportunities, the Company's acquisition and other strategies, regulatory matters pertaining to compliance with governmental regulations and other factors affecting the Company's financial condition or results of operations. Words such as "expects," "anticipates," "intends," "projects," "predicts," "plans," "believes," "seeks," "estimates," and "should" and variations of these

20


words and similar expressions, are used in many cases to identify these forward-looking statements. Stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company or industry to vary materially from the Company's future results, performance or achievements, or those of the industry, expressed or implied in such forward-looking statements. Such factors include the matters described herein and the following factors among others: general industry, economic and business conditions, which will, among other things, affect demand for retail space or retail goods, availability and creditworthiness of current and prospective tenants, tenant bankruptcies, lease rates and terms, availability and cost of financing, interest rate fluctuations and operating expenses; adverse changes in the real estate markets including, among other things, competition from other companies, retail formats and technologies, risks of real estate redevelopment, development, acquisitions and dispositions; governmental actions and initiatives (including legislative and regulatory changes); environmental and safety requirements; and terrorist activities that could adversely affect all of the above factors. The Company will not update any forward-looking information to reflect actual results or changes in the factors affecting the forward-looking information.

Statement on Critical Accounting Policies

        The Securities and Exchange Commission ("SEC") recently issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        Some of these estimates and assumptions include judgements on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectable accounts and estimates for environmental matters. The Company's significant accounting policies are described in more detail in Note 2 of the audited consolidated financial statements included in the Company's Annual Report on Form 10K for the year ended December 31, 2001. However, the following policies could be deemed to be critical within the SEC definition.

Revenue Recognition:

        Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of rent due in a year and the amount recorded as rental income is referred to as the "straight lining of rent adjustment." Currently, 29% of the mall and freestanding leases contain provisions for CPI rent increases periodically throughout the term of the lease. The Company believes that using CPI increases, rather than fixed contractual rent increases, results in revenue recognition that more closely matches the cash revenue from each lease and will provide more consistent rent growth throughout the term of the leases. Percentage rents are recognized on an accrual basis consistent with Staff Accounting Bulletin 101. Recoveries from tenants for real estate taxes, insurance and other shopping center operating expenses are recognized as revenues in the period the applicable expenses are incurred.

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Property:

        Costs related to the redevelopment, construction and improvement of properties are capitalized and depreciated as outlined below. Interest incurred or imputed on redevelopment and construction projects are capitalized until construction is substantially complete.

        Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which includes HVAC equipment, roofs, parking lots, etc. are capitalized and depreciated over their estimated useful lives. Realized gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.

        Property is recorded at cost and is depreciated using a straight-line method over the estimated useful lives of the assets as follows:

Buildings and improvements   5-40 years
Tenant improvements   initial term of related lease
Equipment and furnishings   5-7 years

        The Company assesses whether there has been an impairment in the value of its long-lived assets by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants' ability to perform their duties and pay rent under the terms of the leases. The Company may recognize an impairment loss if the income stream is not sufficient to cover its investment. Such a loss would be determined as the difference between the carrying value and the fair value of a center.

Deferred Charges:

        Costs relating to obtaining tenant leases are deferred and amortized over the initial term of the agreement using the straight-line method. Cost relating to financing of shopping center properties are deferred and amortized over the life of the related loan using the straight-line method, which approximates the effective interest method. The range of the terms of the agreements are as follows:

Deferred lease costs   1-15 years
Deferred financing costs   1-15 years

Recent Transactions

        On December 14, 2001, Villa Marina Marketplace, a 448,262 square foot community shopping center located in Marina del Rey, California, a wholly-owned property of the Company, was sold. The center was sold for approximately $99.0 million, including the assumption of the existing mortgage of $58.0 million, which resulted in a $24.7 million gain. The Company used approximately $26 million of the net proceeds from this sale to retire $25.7 million of its outstanding Debentures. The remaining balance of the proceeds was used for general corporate purposes.

        On March 19, 2002, the Company sold Boulder Plaza, a 159,238 square foot community center in Boulder, Colorado for $24.8 million. The proceeds of $23.7 million from the sale will be used for general corporate purposes.

        On June 10, 2002, the Company acquired The Oaks, a 1.1 million square foot super-regional mall in Thousand Oaks, California. The total purchase price was $152.5 million and was funded with $108.0 million of debt, bearing interest at LIBOR plus 1.15%, placed concurrently with the closing. The balance of the purchase price was funded by cash and borrowings under the Company's line of credit. The Oaks is referred to herein as the "Acquisition Center."

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        On July 26, 2002, the Operating Partnership acquired Westcor Realty Limited Partnership and its affiliated companies ("Westcor"). Westcor is the dominant owner, operator and developer of regional malls and specialty retail assets in the greater Phoenix area. The total purchase price was approximately $1.475 billion including the assumption of $733 million in existing debt and the issuance of approximately $72 million of convertible preferred operating partnership units at a price of $36.55 per unit. The balance of the purchase price was paid in cash which was provided primarily from a $380 million interim loan with a term of up to 18 months bearing interest at an average rate of LIBOR plus 3.25% and a $250 million term loan with a maturity of up to five years with an interest rate ranging from LIBOR plus 2.75% to LIBOR plus 3.00% depending on the Company's overall leverage level.

        Crossroads Mall-Boulder and Parklane Mall are currently under redevelopment and are referred to herein as the "Redevelopment Centers." All other Centers, excluding the Acquisition Center and the Redevelopment Centers, are referred to herein as the "Same Centers," unless the context otherwise requires.

        Revenues include rents attributable to the accounting practice of straight lining of rents which requires rent to be recognized each year in an amount equal to the average rent over the term of the lease, including fixed rent increases over that period. The amount of straight lined rents, included in consolidated revenues, recognized for the six and three months ended June 30, 2002 was ($0.3) million and ($0.1) million, respectively, compared to $0.1 million and $0.2 million for the six and three months ended June 30, 2001, respectively; Additionally, the Company recognized through equity in income of unconsolidated joint ventures $0.4 million and $0.2 million as its pro rata share of straight lined rents from joint ventures for the six and three months ended June 30, 2002, respectively, compared to $0.7 and $0.3 million for the six and three months ended June 30, 2001, respectively. These decreases resulted from the Company structuring the majority of its new leases using annual Consumer Price Index ("CPI") increases, which generally do not require straight lining treatment. Currently, 29% of the mall and freestanding leases contain provisions for CPI rent increases periodically throughout the term of the lease. The Company believes that using CPI increases, rather than fixed contractual rent increases, results in revenue recognition that more closely matches the cash revenue from each lease and will provide more consistent rent growth throughout the term of the leases.

Risk Factors

        The Company's historical growth in revenues, net income and Funds From Operations have been closely tied to the acquisition and redevelopment of shopping centers. Many factors, including the availability and cost of capital, the Company's total amount of debt outstanding, interest rates and the availability of attractive acquisition targets, among others, will affect the Company's ability to acquire, redevelop and develop additional properties in the future. The Company may not be successful in pursuing acquisition opportunities, and newly acquired properties may not perform as well as expected. Expenses arising from the Company's efforts to complete acquisitions, redevelop or develop properties or increase its market penetration may have an adverse effect on its business, financial condition and results of operations. In addition, the following describes some of the other significant factors that may impact the Company's future results of operations.

        General Factors Affecting the Centers; Competition:    Real property investments are subject to varying degrees of risk that may affect the ability of the Centers to generate sufficient revenues to meet operating and other expenses, including debt service, lease payments, capital expenditures and tenant improvements, and to make distributions to the Company and the Company's stockholders. Income from shopping center properties may be adversely affected by a number of factors, including: the national economic climate; the regional and local economy (which may be adversely impacted by plant closings, industry slowdowns, adverse weather conditions, natural disasters, terrorist activities, and other factors); local real estate conditions (such as an oversupply of, or a reduction in demand for, retail

23


space or retail goods and the availability and creditworthiness of current and prospective tenants); perceptions by retailers or shoppers of the safety, convenience and attractiveness of the shopping center; and increased costs of maintenance, insurance and operations (including real estate taxes). A significant percentage of the Centers are located in California and the Westcor centers are concentrated in Arizona. To the extent that economic or other factors affect California or Arizona (or their respective regions generally) more severely than other areas of the country, the negative impact on the Company's economic performance could be significant. There are numerous shopping facilities that compete with the Centers in attracting tenants to lease space, and an increasing number of new retail formats and technologies other than retail shopping centers that compete with the Centers for retail sales. Increased competition could adversely affect the Company's revenues. Income from shopping center properties and shopping center values are also affected by such factors as applicable laws and regulations, including tax, environmental, safety and zoning laws, interest rate levels and the availability and cost of financing.

        Dependence on Tenants:    The Company's revenues and funds available for distribution would be adversely affected if a significant number of the Company's lessees were unable (due to poor operating results, bankruptcy or other reasons) to meet their obligations, if the Company were unable to lease a significant amount of space in the Centers on economically favorable terms, or if for any reason, the Company were unable to collect a significant amount of rental payments. A decision by a department store or another significant tenant to cease operations at a Center could also have an adverse effect on the Company. In addition, mergers, acquisitions, consolidations, dispositions or bankruptcies in the retail industry could result in the loss of tenants at one or more Centers. Furthermore, if the store sales of retailers operating in the Centers were to decline sufficiently, tenants might be unable to pay their minimum rents or expense recovery charges. In the event of a default by a lessee, the Center may also experience delays and costs in enforcing its rights as lessor.

        Real Estate Development Risks:    Through the Company's acquisition of Westcor, its business strategy has expanded to include the selective development and construction of retail properties. Any development, redevelopment and construction activities that the Company undertakes will be subject to the risks of real estate development, including lack of financing, construction delays, environmental requirement, budget overruns, sunk costs and lease-up. Furthermore, occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable. Real estate development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. If any of the above events occur, the ability to pay distributions and service the Company's indebtedness could be adversely affected.

Comparison of Six Months Ended June 30, 2002 and 2001

Revenues

        Minimum and percentage rents decreased by less than 0.1% to $100.0 million in 2002 from $100.2 million in 2001. Approximately $4.4 million of the decrease is attributed to the sales of Villa Marina Marketplace and Boulder Plaza and $0.8 million of the decrease relates to the Redevelopment Centers. This is offset by a $4.4 million increase relating to the Same Centers primarily due to releasing space at higher rents and $0.6 million relating to the Acquisition Center.

        Tenant recoveries decreased to $51.4 million in 2002 from $52.0 million in 2001.    Approximately $0.1 million of the decrease is attributable to the sales of Villa Marina Marketplace and Boulder Plaza and $0.6 million of the decrease relates to the Same Centers. This is offset by $0.1 million increase relating to the Acquisition Center.

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Expenses

        Shopping center and operating expenses increased to $53.4 million in 2002 compared to $51.7 million in 2001. The increase is a result of $2.0 million of increased property taxes, insurance and other recoverable expenses at the Same Centers. Additionally, effective March 29, 2001, the Macerich Property Management Company merged with and into Macerich Property Management Company, LLC ("MPMC, LLC"). Expenses for MPMC, LLC for periods commencing March 29, 2001, are now consolidated and represented $1.2 million of the change. Prior to March 29, 2001, MPMC, LLC was an unconsolidated entity accounted for using the equity method of accounting. The Acquisition Center accounted for $0.3 million of the increase in expenses. These increases are offset by approximately $1.6 million related to the sales of Villa Marina Marketplace and Boulder Plaza and $0.2 million from the Redevelopment Centers.

Interest Expense

        Interest expense decreased to $50.2 million in 2002 from $55.5 million in 2001. Capitalized interest was $3.2 million in 2002, up from $2.4 million in 2001. Approximately $2.1 million of the decrease in interest expense related to the sale of Villa Marina Marketplace and approximately $1.4 million related to the payoff of debt in 2001. In addition, the Company purchased and retired an additional $25.7 million of debentures in December 2001 which reduced interest expense by $1.0 million in 2002 compared to 2001.

Depreciation and Amortization

        Depreciation and amortization increased to $33.6 million in 2002 from $32.3 million in 2001. Approximately $2.2 million relates to additional capital costs at the Same Centers and $0.2 million relates to the Acquisition Center, which is offset by $1.1 million from the sale of Villa Marina Marketplace and Boulder Plaza.

Income From Unconsolidated Joint Ventures and Management Companies

        The income from unconsolidated joint ventures and the Management Companies was $5.4 million for 2002, compared to income of $12.7 million in 2001. Income from the Management Companies increased by $0.7 million primarily due to MPMC, LLC being consolidated effective March 29, 2001. SDG Macerich Properties, LP income increased by $1.6 million primarily due to lower interest expense on floating rate debt. These increases are offset by $10.2 million of loss from the write-down of the Company's investment in MerchantWired, LLC.

Gain (loss) on Sale or Write-down of Assets

        A gain of $10.2 million in 2002 compares to a loss of $0.2 million in 2001. The 2002 gain was a result of the Company selling Boulder Plaza on March 19, 2002, which is offset by a $3.0 million loss representing the write-down of assets from the Company's various technological investments.

Extraordinary Loss from Early Extinguishment of Debt

        In 2001, the Company recorded a loss from early extinguishment of debt of $0.2 million which was a result of write-offs of unamortized financing costs.

Net Income Available to Common Stockholders

        Primarily as a result of the sale of Boulder Plaza and the foregoing results, net income available to common stockholders increased to $16.1 million in 2002 from $13.2 million in 2001.

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Operating Activities

        Cash flow from operations was $65.3 million in 2002 compared to $54.3 million in 2001. The increase is primarily due to consolidating the results of MPMC, LLC effective March 29, 2001 and increased net operating income at the Centers as mentioned above.

Investing Activities

        Cash used in investing activities was $143.4 million in 2002 compared to cash used in investing activities of $29.6 million in 2001. The change resulted primarily from the Acquisition Center and the write-down of assets of $10.2 million relating to MerchantWired, LLC which are reflected in equity in income of unconsolidated joint ventures. These decreases are offset by the net cash proceeds received of $23.8 million in 2002 from the sale of Boulder Plaza.

Financing Activities

        Cash flow provided by financing activities was $111.2 million in 2002 compared to cash flow used in financing activities of $33.6 million in 2001. The change resulted primarily from the $52.0 million of net proceeds from the 2002 equity offering, the Acquisition Center in 2002 and the refinancing of Centers in 2001.

Funds From Operations

        Primarily because of the factors mentioned above, Funds from Operations—Diluted increased 6.3% to $81.7 million in 2002 from $76.8 million in 2001.

Comparison of Three Months Ended June 30, 2002 and 2001

Revenues

        Minimum and percentage rents increased by 1.0% to $50.6 million in 2002 from $50.1 million in 2001. Approximately $2.3 million of the increase is attributed to the Same Centers primarily due to releasing space at higher rents and $0.7 million relates to the Acquisition Center. This is offset by $2.3 million relating to the sales of Villa Marina Marketplace and Boulder Plaza and $0.2 million from the Redevelopment Centers.

        Tenant recoveries decreased to $26.3 million in 2002 from $27.3 million in 2001.    Approximately $0.6 million of the decrease is attributable to the sales of Villa Marina Marketplace and Boulder Plaza and $0.8 million of the decrease relates to the Same Centers. This is offset by $0.1 million increase relating to the Redevelopment Centers and $0.3 million relating to the Acquisition Center.

Expenses

        Shopping center and operating expenses were $27.7 million in 2002 and 2001. The results of the quarter ended June 30, 2002 included $0.6 million of increased property taxes, insurance and other recoverable expenses at the Same Centers and $0.3 million relating to the Acquisition Center. These increases are offset by approximately $0.9 million related to the sales of Villa Marina Marketplace and Boulder Plaza.

Interest Expense

        Interest expense decreased to $25.0 million in 2002 from $27.5 million in 2001. Capitalized interest was $1.7 million in 2002, up from $1.2 million in 2001. Approximately $1.1 million of the decrease in interest expense related to the sale of Villa Marina Marketplace and approximately $0.3 million related to the payoff of debt in 2001. In addition, the Company purchased and retired an additional

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$25.7 million of debentures in December 2001, which reduced interest expense by $0.6 million in 2002 compared to 2001.

Depreciation and Amortization

        Depreciation and amortization increased to $17.1 million in 2002 from $16.3 million in 2001. Approximately $1.2 million relates to additional capital costs at the Same Centers and $0.2 million relates to the Acquisition Center, which is offset by $0.6 million from the sale of Villa Marina Marketplace and Boulder Plaza.

Income (Loss) From Unconsolidated Joint Ventures and Management Companies

        The income (loss) from unconsolidated joint ventures and the Management Companies was a loss of $0.9 million for 2002, compared to income of $6.6 million in 2001. SDG Macerich Properties, LP income increased by $0.7 million primarily due to lower interest expense on floating rate debt. These increases are offset by $9.0 million of loss from the write-down of the Company's remaining investment in MerchantWired, LLC in the quarter ending June 30, 2002.

Gain (loss) on Sale or Write-Down of Assets

        A loss of $2.5 million in 2002 compares to a gain of $0.1 million in 2001. Approximately $3.0 million of the loss in 2002 was a result of the Company writing down the Company's various technological investments.

Extraordinary Loss from Early Extinguishment of Debt

        In 2001, the Company recorded a loss from early extinguishment of debt of $0.1 million, which was a result of write-offs of unamortized financing costs.

Net Income (Loss) Available to Common Stockholders

        Primarily as a result of the write-down of assets and the foregoing results, net income (loss) available to common stockholders decreased to ($1.3) million in 2002 from $6.8 million in 2001.

Funds From Operations

        Primarily because of the factors mentioned above, Funds from Operations—Diluted increased 4.7% to $40.5 million in 2002 from $38.7 million in 2001.

Liquidity and Capital Resources

        The Company intends to meet its short term liquidity requirements through cash generated from operations and working capital reserves and borrowing under the new revolving line of credit. The Company anticipates that revenues will continue to provide necessary funds for its operating expenses and debt service requirements, and to pay dividends to stockholders in accordance with REIT requirements. The Company anticipates that cash generated from operations, together with cash on hand, will be adequate to fund capital expenditures which will not be reimbursed by tenants, other than

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non-recurring capital expenditures. The following table summarizes capital expenditures incurred at the Centers, including the pro rata share of joint ventures, for the six months ending June 30,:

 
   2002
   2001
 
   (Dollars in Millions)
Acquisitions of property and equipment   $ 160.2   $ 6.8
Redevelopment and expansion of centers     13.5     19.2
Renovations of centers     1.5     4.0
Tenant allowances     5.8     8.3
Deferred leasing charges     7.1     6.0
   
 
  Total   $ 188.1   $ 44.3
   
 

        Excluding the impact of the acquisition of Westcor which closed on July 26, 2002, management expects similar levels to be incurred in future years for tenant allowances and deferred leasing charges and to incur between $25 million to $75 million in 2002 for redevelopment and expansions, excluding Queens Center expansion which will be separately financed. Capital for major expenditures or major redevelopments has been, and is expected to continue to be, obtained from equity or debt financings which include borrowings under the Company's line of credit and construction loans. However, many factors impact the Company's ability to access capital, such as its overall debt level, interest rates, interest coverage ratios and prevailing market conditions.

        On February 28, 2002, the Company issued 1,968,957 common shares with total net proceeds of $52.0 million. The proceeds from the sale of the common shares will be used principally to finance a portion of the Queens Center expansion and redevelopment project and for general corporate purposes. The Queens Center expansion and redevelopment is anticipated to cost approximately $275 million. The Company is currently negotiating construction and permanent loans, which will be secured by the Queens Center property to finance the remaining project costs. Construction began in the second quarter of 2002 with completion estimated to be, in phases, through late 2004.

        The Company believes that it will have access to the capital necessary to expand its business in accordance with its strategies for growth and maximizing Funds from Operations. The Company presently intends to obtain additional capital necessary for these purposes through a combination of debt or equity financings, joint ventures and the sale of non-core assets. The Company believes joint venture arrangements have in the past and may in the future provide an attractive alternative to other forms of financing, whether for acquisitions or other business opportunities.

        The Company's total outstanding loan indebtedness at June 30, 2002 was $2.4 billion (including its pro rata share of joint venture debt of $716.9 million). This equated to a debt to Total Market Capitalization (defined as total debt of the Company, including its pro rata share of joint venture debt, plus aggregate market value of outstanding shares of common stock, assuming full conversion of OP Units and preferred stock into common stock) ratio of approximately 57% at June 30, 2002. The majority of the Company's debt consists of fixed-rate conventional mortgages payable secured by individual properties.

        The Company has filed a shelf registration statement, effective June 6, 2002, to sell securities. The shelf registration is for a total of $1 billion of common stock, common stock warrants or common stock rights.

        The Company had an unsecured line of credit for up to $200.0 million with a maturity of July 26, 2002 with a right to extend the facility to May 26, 2003 subject to certain conditions. There were $175.0 million of borrowings outstanding at June 30, 2002. On July 26, 2002, concurrent with the closing of Westcor, the Company replaced this $200.0 million credit facility with a new $425.0 million

28


revolving line of credit. This increased revolving line of credit has a three-year term plus a one-year extension. The interest rate fluctuates from LIBOR plus 1.75% to LIBOR plus 3.00% depending on the Company's overall leverage level. At closing the interest rate was 4.82%.

        The Company has $125.1 million of convertible subordinated debentures (the "Debentures"), which mature December 15, 2002. The Debentures are callable after June 15, 2002 at par plus accrued interest. The Company expects to use the new revolving line of credit to fully retire the Debentures at their maturity.

        At June 30, 2002, the Company had cash and cash equivalents available of $59.6 million.

Funds From Operations:

        The Company believes that the most significant measure of its performance is Funds from Operations ("FFO"). FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") to be: Net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring, sales or write-down of assets, and cumulative effect of change in accounting principle, plus depreciation and amortization (excluding depreciation on personal property and amortization of loan and financial instrument costs) and after adjustments for unconsolidated entities. Adjustments for unconsolidated entities are calculated on the same basis. FFO does not represent cash flow from operations, as defined by GAAP, and is not necessarily indicative of cash available to fund all cash flow needs. FFO, as presented, may not be comparable to similarly titled measures reported by other real estate investment trusts. The following reconciles net income available to common stockholders to FFO:

 
   Six Months Ended June 30,
  
 
   2002
   2001
  
 
   Shares
   Amount
   Shares
   Amount
  
 
   (amounts in thousands)

  
Net income—available to common stockholders       $ 16,074       $ 13,245  
Adjustments to reconcile net income to FFO—basic:                      
  Minority interest         5,180         4,377  
  Depreciation and amortization on wholly owned centers         33,750         32,491  
  Pro rata share of unconsolidated entities' depreciation and amortization         14,465         13,320  
  (Gain) loss on sale of wholly-owned assets         (10,215 )       188  
  Loss on early extinguishment of debt         —         187  
  Pro rata share of loss (gain) on sale or write-down of assets from unconsolidated entities         10,419         (123 )
  Less: Depreciation on personal property and amortization of loan costs and interest rate caps         (2,826 )       (2,394 )
       
     
 
FFO—basic(1)   46,651     66,847   44,860     61,291  

Additional adjustments to arrive at FFO—diluted:
 
 
 
 
 
 
 
 
 
 
 
  Impact of convertible preferred stock   9,115     10,026   9,115     9,662  
  Impact of convertible debentures   4,021     4,807   4,848     5,859  
   
 
 
 
 
FFO—diluted(2)   59,787   $ 81,680   58,823   $ 76,812  
   
 
 
 
 

29

 
   Three Months Ended June 30,
  
 
   2002
   2001
  
 
   Shares
   Amount
   Shares
   Amount
  
 
   (amounts in thousands)

  
Net income (loss)—available to common stockholders       $ (1,277 )       $ 6,826  
Adjustments to reconcile net income to FFO—basic:                        
  Minority interest         (393 )         2,249  
  Depreciation and amortization on wholly owned centers         17,126           16,387  
  Pro rata share of unconsolidated entities' depreciation and amortization         7,090           6,800  
  (Gain) loss on sale of wholly-owned assets         3,041           (132 )
  Loss on early extinguishment of debt         —           1  
  Pro rata share of loss (gain) on sale or write-down of assets from unconsolidated entities         9,000           (37 )
  Less: Depreciation on personal property and amortization of loan costs and interest rate caps         (1,415 )         (1,176 )
       
       
 
FFO—basic(1)   47,393     33,172     44,924     30,918  

Additional adjustments to arrive at FFO—diluted:
 
 
 
 
 
 
 
 
 
 
 
 
  Impact of convertible preferred stock   9,115     5,013     9,115     4,831  
  Impact of convertible debentures   4,021     2,362     4,847     2,955  
   
 
 
 
 
FFO—diluted(2)   60,529   $ 40,547   $ 58,886   $ 38,704  
   
 
 
 
 
1)
Calculated based upon basic net income as adjusted to reach basic FFO. Weighted average number of shares includes the weighted average number of shares of common stock outstanding for 2002 and 2001 assuming the conversion of all outstanding OP units. As of June 30, 2002, 11.1 million of OP units were outstanding.

2)
The computation of FFO—diluted and diluted average number of shares outstanding includes the effect of outstanding common stock options and restricted stock using the treasury method. The convertible debentures are dilutive for the six and three months ending June 30, 2002 and 2001, and are included in the FFO calculation. On February 25,1998, the Company sold $100 million of its Series A Preferred Stock. On June 17, 1998, the Company sold $150 million of its Series B Preferred Stock. The preferred stock can be converted on a one for one basis for common stock. The preferred shares are assumed converted for purposes of FFO diluted, as they are dilutive to that calculation.

        Included in minimum rents were rents attributable to the accounting practice of straight lining of rents. The amount of straight lining of rents, including the Company's pro rata share from joint ventures, that impacted minimum rents was $0.1 million and $0.1 million for the six and three months ended June 30, 2002, respectively; and $0.8 million and $0.5 million for the six and three months ended June 30, 2001, respectively. The decline in straight lining of rents from 2001 to 2002 is due to the Company structuring its new leases using rent increases tied to the change in the CPI rather than using contractually fixed rent increases. CPI increases do not generally require straight lining of rent treatment.

Inflation

        In the last three years, inflation has not had a significant impact on the Company because of a relatively low inflation rate. Most of the leases at the Centers have rent adjustments periodically

30


through the lease term. These rent increases are either in fixed increments or based on increases in the CPI. In addition, about 8%-12% of the leases expire each year, which enables the Company to replace existing leases with new leases at higher base rents if the rents of the existing leases are below the then existing market rate. Additionally, the majority of the leases require the tenants to pay their pro rata share of operating expenses. This reduces the Company's exposure to increases in costs and operating expenses resulting from inflation.

Seasonality

        The shopping center industry is seasonal in nature, particularly in the fourth quarter during the holiday season when retailer occupancy and retail sales are typically at their highest levels. In addition, shopping malls achieve a substantial portion of their specialty (temporary retailer) rents during the holiday season and the majority of percentage rent is recognized in the fourth quarter. As a result of the above, and the implementation of Staff Accounting Bulletin 101, earnings are generally higher in the fourth quarter of each year.

New Pronouncements Issued

        In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which requires companies to record derivatives on the balance sheet, measured at fair value. Changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities," which delayed the implementation of SFAS 133 from January 1, 2000 to January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133," ("SFAS138"), which amended the accounting and reporting standards of SFAS 133. As a result of the adoption of SFAS 133 on January 1, 2001, the Company recorded a transition adjustment of approximately $7.1 million to accumulated other comprehensive income related to treasury rate lock transactions settled in prior years. The entire transition adjustment was reflected in the quarter ended March 31, 2001. The Company reclassified approximately $0.7 million and expects to reclassify approximately $1.3 million from accumulated other comprehensive income to earnings for the six months ended June 30, 2002 and for the year ended December 31, 2002, respectively.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. The Company does not believe that the adoption of SFAS No. 143 will have a material impact on its consolidated financial statements.

        On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires that the purchase method of accounting be used for all business combinations for which the date of acquisition is after June 30, 2001. SFAS 141 also establishes specific criteria for the recognition of intangible assets. The Company has determined that the adoption of SFAS 141 will not have an impact on its consolidated financial statements.

31


        In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 144 establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company adopted SFAS 144 on January 1, 2002. The Company sold Boulder Plaza on March 19, 2002 and in accordance with SFAS 144 the results of Boulder Plaza for the periods from January 1, 2002 to March 19, 2002 and from January 1, 2001 to June 30, 2001 have been reclassified into "discontinued operations" on the consolidated statements of operations. Total revenues associated with Boulder Plaza were approximately $0.5 and $1.2 million for the periods January 1, 2002 to March 19, 2002 and January 1, 2001 to June 30, 2001, respectively.

        In May 2002, the FASB issued SFAS No. 145, "Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections" ("SFAS 145"), which is effective for fiscal years beginning after May 15, 2002. SFAS 145 rescinds SFAS 4, SFAS 44 and SFAS 64 and amends SFAS 13 to modify the accounting for sales-leaseback transactions. SFAS 4 required the classification of gains and losses resulting from extinguishments of debt to be classified as extraordinary items. SFAS 64 amended SFAS 4 and is no longer necessary because SFAS 4 has been rescinded. The Company expects to reclassify a loss of approximately $2.0 million and $0.3 million for the years ending December 31, 2001 and 2000, respectively, from extraordinary items upon adoption of SFAS 145 on January 1, 2003.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not believe that the adoption of SFAS No. 146 will have a material impact on its consolidated financial statements.

        Stock-based compensation expense.    In the second quarter of 2002 and effective beginning in the first quarter of 2002, the Company adopted the expense recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". The Company values stock options issued using the Black-Scholes option-pricing model and recognizes this value as an expense over the period in which the options vest. Under this standard, recognition of expense for stock options is applied to all options granted after the beginning of the year of adoption. Prior to the second quarter of 2002, the Company followed the intrinsic method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees". The Company has not issued stock options in 2002 and accordingly the Company has not recognized any stock-based compensation expense for the six months ending June 30, 2002.

32



Item 3.  Quantitative and Qualitative Disclosures About Market Risk

        The Company's primary market risk exposure is interest rate risk. The Company has managed and will continue to manage interest rate risk by (1) maintaining a conservative ratio of fixed rate, long-term debt to total debt such that variable rate exposure is kept at an acceptable level, (2) reducing interest rate exposure on certain long-term variable rate debt through the use of interest rate caps with appropriately matching maturities, (3) using treasury rate locks where appropriate to fix rates on anticipated debt transactions, and (4) taking advantage of favorable market conditions for long-term debt and/or equity.

        The following table sets forth information as of June 30, 2002 concerning the Company's long term debt obligations, including principal cash flows by scheduled maturity, weighted average interest rates and estimated fair value ("FV").

 
   For the Years Ended December 31,
    
    
    
 
   2002
   2003
   2004
   2005
   2006
   Thereafter
   Total
   FV
 
   (dollars in thousands)

    
    
    
Wholly Owned Centers:                                                
Long term debt:                                                
  Fixed rate   $ 7,098   $ 26,316   $ 132,200   $ 15,671   $ 67,851   $ 983,631   $ 1,232,767   $ 1,274,916
  Average interest rate     7.39 %   7.38 %   7.39 %   7.39 %   7.36 %   7.36 %   7.38 %   —
  Fixed rate—Debentures     125,148     —     —     —     —     —     125,148     125,658
  Average interest rate     7.25 %   —     —     —     —     —     7.25 %   —
  Variable rate     175,000     —     108,000     —     —     —     283,000     283,000
  Average interest rate     3.65 %   —     2.99 %   —     —     —     3.40 %   —
   
 
 
 
 
 
 
 
Total debt—Wholly owned Centers   $ 307,246   $ 26,316   $ 240,200   $ 15,671   $ 67,851   $ 983,631   $ 1,640,915   $ 1,683,574
   
 
 
 
 
 
 
 
Joint Venture Centers:                                                
(at Company's pro rata share)                                                
  Fixed rate   $ 3,929   $ 8,655   $ 9,241   $ 74,752   $ 64,023   $ 415,138   $ 575,738   $ 585,277
  Average interest rate     6.87 %   6.87 %   6.87 %   6.83 %   6.97 %   6.97 %   6.87 %   —
  Variable rate     —     100,474     —     —     40,700     —     141,174     141,174
  Average interest rate     —     2.52 %   —     —     2.22 %   —     2.43 %   —
   
 
 
 
 
 
 
 
Total debt—Joint Ventures   $ 3,929   $ 109,129   $ 9,241   $ 74,752   $ 104,723   $ 415,138   $ 716,912   $ 726,451
   
 
 
 
 
 
 
 
Total debt—All Centers   $ 311,175   $ 135,445   $ 249,441   $ 90,423   $ 172,574   $ 1,398,769   $ 2,357,827   $ 2,410,025
   
 
 
 
 
 
 
 

        The $175.0 million of variable debt maturing in 2002 represents the outstanding borrowings under the Company's $200.0 million credit facility. On July 26, 2002, the Company replaced the $200.0 million credit facility with a new $425.0 million revolving credit facility. The new revolving line of credit has a three year term plus a one year extension. The interest rate fluctuates from LIBOR plus 1.75% to LIBOR plus 3.00% depending on the Company's overall leverage level. At closing the interest rate was 4.82%.

        The Company has $125.1 million of Debentures which will mature on December 15, 2002. The Debentures are callable after June 15, 2002 at par plus accrued interest. The Company expects to use the new revolving credit facility to fully retire the Debentures at their maturity.

        In addition, the Company has assessed the market risk for its variable rate debt as of June 30, 2002 and believes that a 1% increase in interest rates would decrease future earnings and cash flows by approximately $4.2 million per year based on $424.2 million outstanding at June 30, 2002. After the acquisition of Westcor, the Company has $1.4 billion of floating rate debt and a 1% change in average annual variable interest rates would impact future earnings and cash flows by approximately $14.0 million.

        The fair value of the Company's long term debt is estimated based on discounted cash flows at interest rates that management believes reflect the risks associated with long term debt of similar risk and duration.

33


PART II

OTHER INFORMATION


Item 1  Legal Proceedings

        During the ordinary course of business, the Company, from time to time, is threatened with, or becomes a party to, legal actions and other proceedings. Management is of the opinion that the outcome of currently known actions and proceedings to which it is a party will not, singly or in the aggregate, have a material adverse effect on the Company.


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

        The following matters were voted upon at the Annual Meeting held on May 17, 2002:

 
   For
   Authority Withheld
Dana K. Anderson   27,602,590   1,197,451
Theodore S. Hochstim   27,616,967   1,183,074
Stanley A. Moore   18,905,707   9,894,334
Votes
    
For:   27,058,788
Against:   1,702,767
Abstain:   38,486


Item 5  Other Information

        None

34



Item 6  Exhibits and Reports on Form 8-K

10.1   $250,000,000 Term Loan Facility Credit Agreement by and among The Macerich Partnership, L.P. and various affiliates and Deutsche Bank Trust Company Americas, JPMorgan Chase Bank and other lenders dated as of July 26, 2002.

10.2
 
$380,000,000 Interim Facility Credit Agreement by and among The Macerich Partnership, L.P. and various affiliates and Deutsche Bank Trust Company Americas, JPMorgan Chase Bank and various other lenders dated as of July 26, 2002.

10.3
 
$425,000,000 Revolving Loan Facility Credit Agreement by and among The Macerich Partnership, L.P. and various affiliates and Deutsche Bank Trust Company Americas, JPMorgan Chase Bank and other lenders dated as of July 26, 2002.

10.4
 
Form of Incidental Registration Rights Agreement between The Macerich Company and various investors dated as of July 26, 2002.

10.5
 
List of Omitted Incidental Registration Rights Agreements.

35


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.

Date: August 14, 2002   THE MACERICH COMPANY

 
 
 
 
    By: /s/  THOMAS E. O'HERN      
Thomas E. O'Hern
Executive Vice President and Chief Financial Officer

 
 
 
 

36


EXHIBIT INDEX

Exhibit No.
    
   Page
         

Number
   Description
10.1   $250,000,000 Term Loan Facility Credit Agreement by and among The Macerich Partnership, L.P. and various affiliates and Deutsche Bank Trust Company Americas, JPMorgan Chase Bank and other lenders dated as of July 26, 2002.

10.2
 
$380,000,000 Interim Facility Credit Agreement by and among The Macerich Partnership, L.P. and various affiliates and Deutsche Bank Trust Company Americas, JPMorgan Chase Bank and various other lenders dated as of July 26, 2002.

10.3
 
$425,000,000 Revolving Loan Facility Credit Agreement by and among The Macerich Partnership, L.P. and various affiliates and Deutsche Bank Trust Company Americas, JPMorgan Chase Bank and other lenders dated as of July 26, 2002.

10.4
 
Form of Incidental Registration Rights Agreement between The Macerich Company and various investors dated as of July 26, 2002.

10.5
 
List of Omitted Incidental Registration Rights Agreements.

37



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