Back to GetFilings.com

Form 10-Q

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

Commission File Number 0-1743

The Rouse Company
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (410) 992-6000

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

        Yes ý                                       No o

        Indicate the number of shares outstanding of the issuer's common stock as of August 9, 2002:

Part I. Financial Information

Item 1. Financial Statements

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income
Three and Six Months Ended June 30, 2002 and 2001
(Unaudited; in thousands, except per share data)

The accompanying notes are an integral part of these statements.

2

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
(In thousands, except share data)

The accompanying notes are an integral part of these statements.

3

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
(Unaudited, in thousands)

4

The accompanying notes are an integral part of these statements.

5

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002

(1) Principles of statement presentation

        The unaudited condensed consolidated financial statements of The Rouse Company, our subsidiaries and partnerships ("we," "Rouse" or "us") include all adjustments which are necessary, in the opinion of management, to fairly represent our financial position and results of operations. All such adjustments are of a normal recurring nature. Except as noted below, the statements have been prepared using the accounting policies described in the 2001 Annual Report to Shareholders.

        In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Statement does not change the fundamental provisions of SFAS No. 121; however, it resolves various implementation issues of SFAS No. 121 and establishes a single accounting model for long-lived assets to be disposed of by sale. It retains the requirement of Opinion No. 30 to report separately discontinued operations, and extends that reporting for all periods presented for a component of an entity that, subsequent to or on January 1, 2002, either has been disposed of (by sale, abandonment, for in distribution to owners) or is classified as held for sale. Additionally, SFAS No. 144 requires that assets and liabilities of components held for sale, if material, be disclosed separately in the balance sheet. We adopted SFAS No. 144 effective January 1, 2002.

        Under the provisions of SFAS No. 144, we classified 11 community retail centers in Columbia, Maryland and Tampa Bay Center as properties held for sale in the first quarter of 2002. The 11 community retail centers were sold in April 2002 (see note 7) and we expect to sell Tampa Bay Center during 2002. At June 30, 2002, Tampa Bay Center was encumbered by a mortgage of approximately $17.6 million. We decided to sell these properties as they do not meet the criteria of one of our primary business strategies of owning and operating large-scale premier shopping centers. The operating results of these properties do not materially affect the reported segment results in note 5.

        Operating results of properties classified as held for sale in 2002 are included in discontinued operations for all periods presented. Operating results for these properties are summarized as follows (in thousands):

6

        In order to conform to general industry practice, we have also reclassified certain building and land improvement costs that are recoverable from tenants from other assets to property. These costs and related accumulated depreciation were $62.0 million and $39.8 million, respectively, at June 30, 2002 and $56.7 million and $35.5 million, respectively, at December 31, 2001. Depreciation of these assets was reclassified from operating expenses to depreciation. Depreciation of these assets was $2.3 million and $4.3 million for the three and six months ended June 30, 2002, respectively, and $2.0 million and $3.8 million for the three and six months ended June 30, 2001, respectively.

        In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Upon adoption of SFAS No. 145, we are required to apply the criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in determining the classification of gains and losses resulting from the early extinguishment of debt.

        SFAS No. 145 is effective for us on January 1, 2003 with early adoption of the provisions related to the rescission of SFAS No. 4 encouraged. We adopted the provisions relating to the rescission of SFAS No. 4 on April 1, 2002. Upon adoption, we determined that gains and losses we recognized on early extinguishment of debt were not extraordinary items and accordingly reclassified them as follows (in thousands):

        In addition to the above reclassifications, other amounts for 2001 have been reclassified to conform to our current presentation.

(2) Tax status

        We elected to be taxed as a real estate investment trust (REIT) pursuant to the Internal Revenue Code of 1986, as amended, effective January 1, 1998. We believe that we met the qualifications for REIT status as of June 30, 2002 and intend to meet the qualifications in the future.

        A REIT is permitted to own voting stock in taxable REIT subsidiaries ("TRS"). TRS are corporations that are permitted to engage in nonqualifying REIT activities. We own and operate several TRS that are principally engaged in the development and sale of land for residential, commercial and other uses, primarily in and around Columbia, Maryland and Summerlin, Nevada. The TRS also operate and/or own several retail centers and office and other properties. Except with respect to the TRS, management does not believe that we will be liable for significant income taxes at the Federal level or in most of the states in which we operate in 2002 and future years.

        In connection with our election to be taxed as a REIT, we have also elected to be subject to the "built-in gain" rules on the assets of our Qualified REIT Subsidiaries ("QRS"). Under these rules,

7

taxes will be payable at the time and to the extent that the net unrealized gains on our assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten-year period following conversion. Such net unrealized gains were approximately $2.5 billion. We believe that we will not be required to make significant payments of taxes on built-in gains with respect to these assets throughout the ten-year period (which ends in 2008) due to the availability of our net operating loss carryforward and the potential for us to make like-kind exchanges, if necessary. It may be necessary to recognize a liability for such taxes in the future, if our plans and intentions with respect to QRS asset dispositions or the related tax laws change.

(3) Unconsolidated real estate ventures

        We own interests in unconsolidated real estate ventures that own and/or develop properties. We use these ventures to limit our risk associated with individual properties and to reduce our capital requirements. These ventures are accounted for using the equity or cost method, as appropriate. At June 30, 2002 and December 31, 2001, these ventures were primarily partnerships and corporations which own retail centers. Most of these properties are managed by our affiliates.

        In May 2002, we acquired partial ownership interests in Oakbrook Center, Water Tower Place and certain other assets from Rodamco North America N.V. ("Rodamco") (see note 11). We report these interests as investments in unconsolidated real estate ventures. Additionally, we acquired from Rodamco the remaining interests in properties (Collin Creek, North Star, Perimeter Mall and Willowbrook) in which we previously owned partial, noncontrolling interests. As a result, these entities are consolidated in our financial statements from the date of acquisition. Prior to this acquisition, these property interests were reported as investments in unconsolidated real estate ventures. The net increase in investments in unconsolidated real estate ventures as a result of the Rodamco transaction is $251.3 million.

(4) Debt

        Debt is summarized as follows (in thousands):

        The amounts due in one year represent the terms of existing loan agreements except where refinancing commitments from outside lenders have been obtained. In these instances, maturities are determined based on the terms of the refinancing commitments. In July 2002, we repaid $41 million of the other loans due in one year.

(5) Segment information

        We have five reportable segments: retail centers, office and other properties, community development, commercial development and corporate. The operating measure used to assess operating results for the reportable segments is Net Operating Income ("NOI"). We define NOI as net earnings (computed in accordance with accounting principles generally accepted in the United States of America), excluding cumulative effects of changes in accounting principles, extraordinary items, net

8

gains (losses) on operating properties, certain other provisions and losses, real estate depreciation and amortization, deferred income taxes, certain current income taxes and fixed charges. Fixed charges include interest expense (net of interest income earned on corporate investments), distributions on Company-obligated mandatorily redeemable preferred securities and other subsidiary preferred stock, ground rent expense and certain preference returns to partners. Additionally, discontinued operations, equity in earnings of unconsolidated real estate ventures and minority interests are adjusted to present NOI on the same basis. Effective January 1, 2002, we revised our definition of NOI to exclude ground rents and depreciation attributable to building and land improvement costs that are recoverable from tenants. Accordingly, NOI for prior periods has been presented in conformity with the revised definition.

        We use the same accounting policies for our segment reporting as those used to prepare our condensed consolidated financial statements, except that:

•

we account for real estate ventures in which we have joint interest and control and certain other minority interest ventures ("proportionate share ventures") using the proportionate share method rather than the equity method; and



•

we include our share of NOI less fixed charges of other unconsolidated minority interest ventures ("other ventures") in revenues.

        These differences affect only the reported revenues and operating expenses of the segments and have no effect on our reported net earnings.

        Operating results for the segments are summarized as follows (in thousands):

(1)

Revenues exclude interest income earned on corporate investments.

(2)

Operating expenses include provisions for bad debts and certain current income taxes and exclude ground rent expense, distributions on Company-obligated mandatorily redeemable preferred securities and other subsidiary preferred stock and real estate depreciation and amortization.

9

        Reconciliations of total revenues and operating expenses reported above to the related amounts in the condensed consolidated financial statements and of NOI reported above to earnings before net gains (losses) on operating properties, discontinued operations and cumulative effect of change in accounting principle in the condensed consolidated financial statements are summarized as follows (in thousands):

10

        The assets by segment are as follows (in thousands):

        Total segment assets exceed total assets reported in the financial statements due to the inclusion of our share of the assets of the proportionate share ventures.

(6) Other provisions and losses, net

        Other provisions and losses, net consist of the following (in thousands):

        MerchantWired is an unconsolidated joint venture with other real estate companies to provide broadband telecommunication services to tenants. In the second quarter of 2002, we and the other real estate companies decided to discontinue the operations of MerchantWired. Accordingly, we recorded an impairment provision for the entire amount of our net investment in the venture.

        A portion of the purchase price for the acquisition of assets from Rodamco (see note 11) was payable in euros. In January 2002, we acquired options to purchase 601 million euros at a weighted-average per euro price of $0.8819. These transactions were executed to reduce our exposure to movements in currency exchange rates between the date of the purchase agreement and the closing date. The contracts were scheduled to expire in May 2002 and had an aggregate cost of $11.3 million. At March 31, the value of these contracts had declined to $3.1 million and we recorded a loss of $8.2 million in the three months then ended. In April 2002, we sold the contracts for net proceeds of $10.2 million and we recorded a gain of $7.1  million for the three months ended June 30, 2002. For the six months ended June 30, 2002, we recognized a realized loss of $1.1 million. We also executed and subsequently sold a euro forward contract and realized a gain of $2.2 million. As of August 14, 2002, we owned no euros or financial instruments that exposed us to risk of movements of currency exchange rates.

(7) Net gains (losses) on operating properties

        The net gains on operating properties for the three and six months ended June 30, 2002 related primarily to gains recorded on the sale of our interests in retail centers. In April 2002, we sold our interests in 12 community retail centers for net proceeds of approximately $111 million. We recorded a total gain on this transaction of approximately $32.0 million, net of deferred income taxes of $18.4 million. Our interests in one of the community retail centers were reported in unconsolidated real estate ventures and the gain on the sale of our interests in this property ($4.3 million, net of deferred income taxes of $2.0 million) is included in continuing operations. The remaining gain on this transaction ($27.7 million, net of deferred income taxes of $16.4 million) is classified as a component of discontinued operations (see note 1). In May 2002, we also sold our interest in Franklin Park, a regional retail center in Toledo, Ohio, for $20.2 million and the buyer assumed our share of the center's debt ($44.7 million). Our interest in this property was reported in unconsolidated real estate ventures and, accordingly, the gain of $42.7 million that we recorded on this transaction is included in continuing operations. The cash proceeds from both transactions were used to fund a portion of cash payments required to close the acquisition of assets from Rodamco.

11

(8) Earnings per share

        Information relating to the calculations of earnings per share (EPS) of common stock for the three months ended June 30, 2002 and 2001 is summarized as follows (in thousands):

        Effects of potentially dilutive securities are presented only in periods in which they are dilutive.

        Information relating to the calculations of earnings per share (EPS) of common stock for the six months ended June 30, 2002 and 2001 is summarized as follows (in thousands):

        Effects of potentially dilutive securities are presented only in periods in which they are dilutive.

12

(9) Commitments and Contingencies

        We have guaranteed the repayment of a construction loan of the unconsolidated real estate venture that is developing the Village of Merrick Park. At June 30, 2002, the outstanding balance under this loan was $105.2 million, all of which was guaranteed. The maximum amount that may be borrowed under the loan is $200 million. The amount of the guarantee may be reduced to a minimum of 20% upon the achievement of certain lender requirements. Additionally, venture partners have provided guarantees to us for their share (60%) of the construction loan.

        During 2001, we leased land and improvements at Fashion Show to an entity that is developing a portion of the expansion of the retail center. In connection with this lease, we have guaranteed the repayment of construction loan borrowings by the lessee. At June 30, 2002, the outstanding balance under this loan was $80.6 million, all of which was guaranteed. The maximum amount that may be borrowed under the loan is $111 million. An affiliate of Rodamco owned a 99% limited partnership interest in the lessee, and we acquired this interest in connection with the acquisition of the assets of Rodamco described in note 11. A subsidiary of The Rouse Company Incentive Compensation Statutory Trust, an entity that we neither own nor control, owns the controlling interest in the lessee.

        We and certain of our subsidiaries are defendants in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Some of these litigation matters are covered by insurance. We are also aware of claims arising from disputes in the ordinary course of business. In our opinion, adequate provision has been made for losses with respect to litigation matters and other claims, where appropriate, and the ultimate resolution of these matters is not likely to have a material effect on our consolidated financial position. Due to our fluctuating net earnings, it is not possible to predict whether the resolution of these matters is likely to have a material effect on our net earnings and it is, therefore, possible that the resolution of these matters could have such an effect in any future quarter or year.

(10) Shelf registration statement

        In January and February of 2002, we issued a total of 16.675 million shares of common stock for net proceeds of $456.3 million ($27.40 per share less issuance costs) under our effective shelf registration statement. We used the proceeds of the stock issuance to repay property and other debt and to fund a portion of the purchase price of the acquisition of the assets of Rodamco described in note 11.

        At June 30, 2002, an aggregate of $1.4 billion remained available under the shelf registration statement for the future sale (based on the public offering price) of common stock, Preferred stock and debt securities.

(11) Acquisition of assets from Rodamco

        In January 2002, we, Simon Property Group, Inc. ("Simon") and Westfield America Trust ("Westfield") announced that affiliates of each (collectively, the "Purchasers") entered into a Purchase Agreement with Rodamco to purchase substantially all of the assets of Rodamco for an aggregate purchase price of approximately 2.48 billion euros, subject to adjustment, and the assumption of substantially all of Rodamco's liabilities. In connection with the Purchase Agreement, affiliates of the Purchasers entered into a Joint Purchase Agreement that specified the assets each would acquire and set forth the basis upon which the portion of the aggregate purchase price to be paid to Rodamco by each Purchaser would be determined. On May 3, 2002, the purchase of the assets of Rodamco closed.

13

        The primary assets we acquired are direct or indirect ownership interests in eight regional retail centers, leased primarily to national retailers, which we intend to continue to operate, and are described below:

        Other primary assets we acquired include a 100% interest in a parcel of land and building at Collin Creek that is leased to Dillard's department store and a 99% noncontrolling limited partnership interest in an entity that is developing a portion of the expansion of Fashion Show, a retail center in Las Vegas, Nevada, on land that is leased from us.

        The Purchasers also jointly acquired interests in several other assets, primarily:

•

A 50% interest in Westin New York, a hotel under development in New York City,

•

A 40% interest in River Ridge, a retail center in Lynchburg, VA,

•

Sawmill Place Plaza, a retail center in Columbus, OH,

•

A 50% interest in Durham Associates, a partnership that owns and operates South Square Mall, a regional shopping center in Durham, NC that was subject to a contract of sale at the closing date,

•

A 59.17% interest in Kravco Investments, L.P., a limited partnership that owns investments in retail centers, primarily in the greater Philadelphia area,

•

A 9.84% investment in MerchantWired, a joint venture with other real estate companies to provide broadband telecommunication services to tenants,

•

Purchase money notes receivable that arose from the sales of other assets by Rodamco; and

•

Urban Retail Properties Co., a property management company that manages properties formerly owned by Rodamco and properties held by others.

        Our share of these jointly held assets is approximately 27%. The Purchasers intend to sell the interests in River Ridge, Durham Associates and Sawmill Place Plaza. The operations of MerchantWired will be discontinued, as discussed in note 6. The Purchasers intend to operate Urban Retail Properties Co., solely to manage properties held by others and are currently developing plans to do so. These plans include significant staffing reductions and will likely cause the Purchasers to incur significant severance costs. Our share of these and other costs that may by incurred in order to operate

14

Urban Retail Properties Co. in accordance with the Purchasers' intentions are expected to be in the range of $4 million to $6 million. The Purchasers intend to hold the other jointly held investments.

        Our share of the purchase price was approximately $1.59 billion, including our share of debt at properties owned by joint ventures that we account for using the equity method. We paid approximately 605 million euros (approximately $546 million based on exchange rates then in effect) to Rodamco at closing. We also paid approximately $257 million to retire certain obligations of Rodamco and to pay transaction costs. Our share of the debt secured by the operating properties in which we acquired interests is approximately $675 million, including our share of debt of unconsolidated real estate ventures, and our share of subsidiary perpetual preferred stock assumed by the Purchasers is approximately $24 million. In addition, as described below, we acquired a limited partnership interest in an entity developing a portion of the expansion of Fashion Show in Las Vegas, Nevada. Our share of the debt of this entity at the time of acquisition was approximately $72 million which we had previously guaranteed pursuant to the lease agreement described in note 9. The debt secured by the operating properties we acquired or by the Fashion Show expansion does not include debt encumbering properties to be held by the Purchasers jointly, which totals approximately $14 million. Our share of the purchase price, which is subject to adjustment, was based on the allocated prices of the properties that we acquired, directly or indirectly, our share of the properties we own jointly with Simon and Westfield and our proportionate share of Rodamco's debt and the transaction expenses for the acquisition. The aggregate purchase price was determined as a result of negotiations between Rodamco and the Purchasers; our portion of the aggregate purchase price was determined as a result of negotiations among the Purchasers. We have incurred additional transaction costs of approximately $14 million in connection with the acquisition and expect to pay additional transaction costs as acquired assets are sold, as discussed above.

        Funds for payment of our portion of the purchase price were provided as follows (in millions):

        In connection with the purchase, we borrowed $393 million on a bridge loan facility provided by Banc of America Securities, LLC and Banc of America Mortgage Capital Corporation. The bridge loan facility provides for no additional availability and has an initial maturity of six months from the closing of the acquisition. We have the right to extend the maturity on $320 million of the borrowings for an additional six months and on $250 million for another six months. We believe we will have sufficient liquidity to repay the borrowings under the bridge loan facility before its extended maturity. We are required to use any proceeds from the sales of interests in operating properties, most property financings and/or issuances of corporate debt or equity securities to repay borrowings under the bridge loan facility.

        The remaining net proceeds of $177 million from the issuance of common stock in January and February 2002 were used primarily to repay property debt secured by the Columbia community centers and to reduce credit facility borrowings.

15

        The effect of the acquisition on our condensed consolidated balance sheet is summarized as follows (in thousands):