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Form 10-Q

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

(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization)		52-0735512 (I.R.S. Employer Identification No.)
10275 Little Patuxent Parkway Columbia, Maryland (Address of principal executive offices)		21044-3456 (Zip Code)

        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 November 12, 2002:

Part I.    Financial Information

Item 1.    Financial Statements:

THE ROUSE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited; in thousands, except per share data)

(continued)

The accompanying notes are an integral part of these statements.

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THE ROUSE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income, continued
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited; in thousands, except per share data)

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THE ROUSE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
(In thousands, except share data)

The accompanying notes are an integral part of these statements.

4

THE ROUSE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, continued
September 30, 2002 and December 31, 2001
(In thousands, except share data)

5

THE ROUSE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
(Unaudited, in thousands)

The accompanying notes are an integral part of these statements.

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THE ROUSE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, continued
Nine Months Ended September 30, 2002 and 2001
(Unaudited, in thousands)

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THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 to a component of an entity that, subsequent to or on January 1, 2002, either has been disposed of (by sale, abandonment, or 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 as properties held for sale in the first quarter of 2002. The 11 community retail centers were sold in April 2002 (see note 7). We decided to sell these properties because they did 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.

        In addition, we previously classified Tampa Bay Center as held for sale in the first and second quarters of 2002. In the third quarter 2002, negotiations with the expected buyer ended, and we no longer believe that the sale of this property is probable within one year. Accordingly, we have presented the operating results of this property in continuing operations for all periods presented. The operating results of this property do not materially affect our reported results.

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

        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 $69.7 million and $42.0 million, respectively, at September 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 $2.2 million and $6.5 million for the three and nine months ended September 30, 2002, respectively, and $2.0 million and $5.8 million for the three and nine months ended September 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 previously 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.

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(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 September 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. Income tax provisions for the TRS may increase as land values are expected to appreciate. Current Federal income taxes of the TRS are likely to increase in future years as the net loss carryforwards of certain TRS are exhausted and certain land development projects are completed.

        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, 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 September 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, noncontrolling 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 noncontrolling interests. As a result, these entities are consolidated in our financial statements from the date of the 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 was $251.2 million.

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(4) Debt

        Debt is summarized as follows (in thousands):

        The amounts due in one year represent maturities under 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 October 2002, we repaid $114.2 million of the other loans due in one year, and in November 2002, we repaid $61.0 million of mortgages due in one year. These repayments were made with proceeds from the issuance of 7.20% Notes (see note 10). Also, in October 2002, we repaid $111.5 million of the credit facility borrowings due in one year from distribution proceeds from two unconsolidated real estate ventures (see note 12).

(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 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.

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        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 depreciation and amortization.

        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

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accounting principle in the condensed consolidated financial statements are summarized as follows (in thousands):

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

        Total segment assets exceed total assets reported in the condensed consolidated financial statements due to the inclusion of our share of the assets of the proportionate share ventures. The increase in total segment assets is primarily attributable to the acquisition of assets from Rodamco (see note 11).

(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. In April 2002, we sold the contracts for net proceeds of $10.2 million and recognized a 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 November 14, 2002, we owned no foreign currency or financial instruments that exposed us to risk of movements in currency exchange rates.

        In September 2002, we announced and initiated several changes to the senior management organizational structure. The costs relating to these changes, primarily severance and other benefits to retiring employees, aggregated approximately $8.6 million.

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        In the third quarter of 2002, we agreed to pay $2.4 million of costs incurred by an entity that sold us a portfolio of office and industrial buildings in 1998 to resolve certain tax related matters arising from the transaction.

(7) Net gains (losses) on operating properties

        The net gains on operating properties for the three and nine months ended September 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 $42.6 million that we recorded on this transaction is included in continuing operations. The cash proceeds from these transactions were used to fund a portion of the cash payments required to close the acquisition of assets from Rodamco.

(8) Earnings per share

        Information relating to the calculations of earnings per share (EPS) of common stock for the three months ended September 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.

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        Information relating to the calculations of earnings per share (EPS) of common stock for the nine months ended September 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.

(9) Commitments and contingencies

        We have guaranteed the repayment of a construction loan of the unconsolidated real estate venture that owns the Village of Merrick Park. At September 30, 2002, the outstanding balance under this loan was $157.9 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 September 30, 2002, the outstanding balance under this loan was $95.6 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. At September 30, 2002, a subsidiary of The Rouse Company Incentive Compensation Statutory Trust, an entity that we neither own nor control, owned the controlling interest in the lessee. We agreed to purchase this controlling interest for $0.1 million and the assumption of $101 million of debt and other liabilities of the entity and expect this transaction to close in November 2002.

        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.

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(10) Shelf registration statement

        In January and February 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.

        In September 2002, we issued $400 million of 7.20% Notes due in 2012 for net proceeds of $396.9 million under our effective shelf registration statement. We used $220.4 million of the proceeds to repay a portion of the bridge loan facility used to fund the acquisition of the assets of Rodamco. On October 10, 2002, we used $116.2 million of the proceeds to repay $114.2 million of other debt (with prepayment penalties of $2.0 million) that was due in January 2003. We used the remaining proceeds on November 1, 2002 to repay $61 million of property debt due in 2003.

        At September 30, 2002, an aggregate of $1.03 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 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 closed.

        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:

Notes:

(1)

Properties were owned by existing joint ventures or through tenancies in common between Rodamco and us. As a result of the acquisition, we own 100% interests in these properties.

(2)

Property began operations in March 2002.

(3)

Property also contains significant office space.

        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

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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, including:

•

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 and was sold by the Purchasers on August 2, 2002,

•

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

•

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

•

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

•

A 50% interest in Westin New York, a hotel under development in New York City that began operations in October 2002.

        Our share of these jointly held assets is 27.285%. The Purchasers intend to sell the interests in River Ridge and Sawmill Place Plaza. The Purchasers intend to operate Urban Retail Properties Co., solely to manage properties held by others, and have currently developed plans to do so. These plans include significant staffing reductions and have and will cause the Purchasers to incur significant severance costs. Our share of these and other costs that may by incurred in order to operate 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 some of the 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, 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 was based on the allocated prices of the properties that we acquired, directly or indirectly, our share of the assets we own jointly with Simon and Westfield and our share of Rodamco's obligations retired 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.

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