exv99w1

Assumed health care cost trend rates have an effect on the amounts reported for the postretirement plan. Actuarial assumptions used to determine amounts reported for the postretirement plan included health care costs increasing at 5% per year, representing the ultimate trend rate. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in thousands):


	1% Increase		1% Decrease

Effect on total of service and interest cost components	$	13		$	11

Effect on postretirement benefit obligation	$	217		$	197

We also have a deferred compensation program which permits directors and certain management employees to defer portions of their compensation on a pre-tax basis. The effect of this program on net earnings was insignificant in 2003, 2002 and 2001.

In February 2004, we adopted a plan to terminate our funded and supplemental plans effective May 1, 2004. When we terminate the plans, we will be required to settle the obligations of the funded plan by paying accumulated benefits to eligible participants. Depending on the market value of the assets of the funded plan and the relevant interest rates at the time of settlement, we may be required to make additional contributions to that plan, which could be significant. At December 31, 2003, the funded plan had sufficient assets to settle its obligations without additional contributions by us. At the time of settlement of the obligations of the funded plan, we will recognize any unrecognized losses associated with that plan. At December 31, 2003, these unrecognized losses were approximately $19.8 million. However, we expect the unrecognized losses will increase due to the acceleration of payments of benefits as a result of termination of the plan and may also change depending on the market value of plan assets, interest rates and other factors. We expect that a portion of these losses will be recognized prior to the final distribution of plan assets as plan participants retire or otherwise terminate employment in the normal course of business. The termination of the funded plan is subject to approvals by the Pension Benefit Guaranty Corporation and the Internal Revenue Service, and while the timing is uncertain, we expect to settle all of the plan’s remaining obligations in late 2004. In connection with the funded plan termination, we expect to transfer the assets of the funded plan to highly-liquid, low-risk investments to mitigate market risk during the period prior to distributions to participants.

Concurrent with the distribution of funded plan assets, we will transfer credits for benefits earned under the supplemental plan to a deferred compensation plan and recognize settlement losses equal to any unrecognized loss at the date of transfer. At December 31, 2003, these unrecognized losses were approximately $4 million and may change depending on interest rates and other factors. We expect to fund these benefits as participants retire or terminate. The supplemental plan obligations were $16.9 million at December 31, 2003.

(7) Debt

Debt is classified as follows:

(a)		“Property debt not carrying a Parent Company guarantee of repayment” which is subsidiary company debt having no express written obligation which would require the Parent Company to repay the principal amount of such debt during the full term of the loan (“nonrecourse loans”); and
(b)		“Parent Company debt and debt carrying a Parent Company guarantee of repayment” which is our debt and subsidiary company debt with an express written obligation from the Parent Company to repay the principal amount of such debt during the full term of the loan.

With respect to nonrecourse loans, we have in the past and may in the future, under some circumstances, support those subsidiary companies whose annual expenditures, including debt service, exceed their operating revenues. At December 31, 2003 and 2002, nonrecourse loans include $240.7 million and $278.2 million, respectively, of subsidiary companies’ mortgages and bonds which are subject to agreements with lenders requiring us to provide support for operating and debt service costs, where necessary, for defined periods or until specified conditions relating to the operating results of the related properties are met. At December 31, 2003, approximately $1.0 billion of the total debt was payable to one lender.

Debt at December 31, 2003 and 2002 is summarized as follows (in thousands):


	2003		2002

Mortgages and bonds	$	3,025,802	$	3,410,257
Medium-term notes		45,500		48,500
Credit facility borrowings		271,000		242,690
Other loans		1,102,190		740,030

Total	$	4,444,492	$	4,441,477

Mortgages and bonds are secured by deeds of trust or mortgages on properties and general assignments of rents. This debt matures at various dates through 2031 and, at December 31, 2003, bears interest at a weighted-average effective rate of 6.2%. At December 31, 2003 and December 31, 2002, approximately $83 million of our debt provided for payments of additional interest based on operating results of the related properties in excess of stated levels. The participating debt primarily relates to a retail center where the lender receives a fixed interest rate of 7.625% and a 5% participation in cash flows. The lender also will receive a payment at maturity (November 2004) equal to the greater 5% of the value of the property in excess of the debt balance or the amount required to provide an internal rate of return of 8.375% over the term of the loan. The internal rate of return of the lender is limited to 12.5%. We recognize interest expense on this debt at a rate required to provide the lender the required minimum internal rate of return (8.375%) and monitor the accrued liability and the fair value of the projected payment due at maturity. Based on our analysis, we believe that the payment at maturity will be the balance needed to provide the specified minimum internal rate of return.

We have issued unsecured, medium-term notes. The notes bear interest at fixed interest rates. The notes outstanding at December 31, 2003 mature at various dates from 2005 to 2007, bear interest at a weighted-average effective rate of 8.3% and have a weighted-average maturity of 1.4 years.

We have a credit facility with a group of lenders that is secured by the stock of some of our TRS and guaranteed by some of our subsidiaries. In July 2003, we negotiated an amendment to the facility. The amount that may be borrowed under this facility increased from $450 million to $900 million and the amended facility will be available until July 2006, subject to a one-year renewal at our option. The facility bears interest at LIBOR plus a margin. The margin is determined based on the ratings assigned to our senior unsecured long-term debt securities by Moody’s Investors Service, Inc. (Moody’s) and/or Standard & Poor’s Credit Market Services (S&P) and may range from 0.60% to 1.25%. At December 31, 2003, our senior unsecured long-term debt securities were rated Baa3 by Moody’s and BBB- by S&P. These ratings resulted in a margin of 0.90% on our credit facility. The revolving credit facility may be used for various purposes, including land and project development costs, property acquisitions, liquidity and other corporate needs. It may also be used to pay some portion of existing debt, including secured debt. Availability under the facility was $629 million at December 31, 2003.

Other loans at December 31, 2003 include $350 million of 5.375% Notes due in 2013 which we issued in November 2003 for net proceeds of $347.7 million. Other loans also include $400 million of 7.20% Notes issued in September 2002 which are due in 2012, $200 million of 8% Notes due in 2009, various property acquisition loans and certain other borrowings. These loans include aggregate unsecured borrowings of $1,069.7 million and $733.5 million at December 31, 2003 and 2002, respectively, and at December 31, 2003, bear interest at a weighted-average effective rate of 6.8%.

The agreements relating to various loans impose limitations on us. The most restrictive of these limit the levels and types of debt we and our affiliates may incur and require us and our affiliates to maintain specified minimum levels of debt service coverage and net worth. The agreements also impose restrictions on the dividend payout ratio and on sale, lease and certain other transactions, subject to various exclusions and limitations. These restrictions have not limited our normal business activities.

The annual maturities of debt at December 31, 2003 are summarized as follows (in thousands):


			Parent
			Company
			and
	Nonrecourse		Recourse
	Loans		Loans		Total

2004	$	388,787	$	127,948	$	516,735
2005		387,778		111,732		499,510
2006		338,146		288,673		626,819
2007		478,199		15,066		493,265
2008		429,858		65,055		494,913
Subsequent to 2008		856,455		956,795		1,813,250

Total	$	2,879,223	$	1,565,269	$	4,444,492

The annual maturities reflect the terms of existing loan agreements except where refinancing commitments from outside lenders have been obtained. In these instances, maturities are based on the terms of the refinancing commitments. The debt due in 2004 consists of a $30.8 million note, $412.1 million of balloon payments on mortgages and construction loans on four retail centers, four office buildings and one commercial development property and $73.8 million of regularly scheduled principal payments. We expect to make the balloon payments at or before the scheduled maturity dates of the related loans from proceeds of property refinancings (including refinancings of the maturing mortgages), credit facility borrowings, proceeds from corporate debt offerings or other available corporate funds. In January and February of 2004, we repaid $199.6 million of the mortgages and construction loans due in 2004 and $240.3 million of the construction loans due in 2005 using proceeds from credit facility borrowings. The regularly scheduled principal payments will be paid from operating cash flows.

At December 31, 2003, we had interest rate swap agreements and forward-starting swap agreements in place that effectively fix the LIBOR rate on a portion of our variable-rate debt through December 2006. Information related to the swap agreements as of December 31, 2003 and 2002 is as follows (dollars in millions):


	2003			2002

Total notional amount	$	561.9		$	315.6
Average fixed effective rate (pay rate)		3.5	%		5.7	%
Average variable interest rate of related debt (receive rate)		2.7	%		3.3	%

In accordance with SFAS 133, the net unrealized gains (losses) on derivatives designated as cash flow hedges (including our share of unrealized gains (losses) on derivatives held by unconsolidated real estate ventures accounted for using the equity method) of $3.0 million and ($6.9 million) for 2003 and 2002, respectively, have been recognized as other comprehensive income (loss). We expect $6.5 million of the amount recorded in other comprehensive income (loss) at December 31, 2003 to be recognized in net earnings during 2004 and the remainder before December 2006. Interest rate exchange agreements did not have a material effect on the weighted-average effective interest rates on debt at December 31, 2003, 2002 and 2001 or interest expense for 2003, 2002 and 2001. The fair value of our derivative financial instruments was a liability of approximately $5.0 million at December 31, 2003. The fair value of interest rate cap agreements was insignificant at December 31, 2003.

Total interest costs included in continuing operations were $260.6 million in 2003, $248.1 million in 2002 and $217.6 million in 2001, of which $37.8 million, $38.1 million and $35.7 million were capitalized, respectively.

We recognized net gains on the early extinguishment of debt of $21.3 million in 2003, including gains of discontinued operations of $26.9 million. We recognized net losses on the early extinguishment of debt of $7.7 million in 2002 and $0.5 million in 2001, including losses of discontinued operations of $5.3 million in 2002. The sources of funds used to pay the debt and fund the prepayment penalties, where applicable, were refinancings of properties, proceeds from the sale of properties secured by extinguished debt and the issuance of the 7.20% Notes.

We estimated fair values of debt instruments based on quoted market prices for publicly-traded debt and on the discounted estimated future cash payments to be made for other debt. The discount rates used approximate current market rates for loans or groups of loans with similar maturities and credit quality. The estimated future payments include scheduled principal and interest payments and lenders’ participations in operating results, where applicable.

The carrying amount and estimated fair value of our debt at December 31, 2003 and 2002 are summarized as follows (in thousands):


	2003				2002
	Carrying		Estimated Fair		Carrying		Estimated Fair
	Amount		Value		Amount		Value

Fixed-rate debt	$	3,336,678	$	3,623,390	$	3,216,998	$	3,409,037
Variable-rate debt		1,107,814		1,107,814		1,224,479		1,224,479

Total	$	4,444,492	$	4,731,204	$	4,441,477	$	4,633,516

Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of our debt obligations at fair value may not be possible and may not be a prudent management decision.

(8) Parent Company-obligated mandatorily redeemable preferred securities

The redeemable preferred securities consist of Cumulative Quarterly Income Preferred Securities (preferred securities) at December 31, 2003 and 2002, respectively, with a liquidation amount of $25 per security, which were issued in November 1995 by a statutory business trust. The trust used the proceeds of the preferred securities and other assets to purchase at par $141.8 million of our junior subordinated debentures (“debentures”) due in November 2025, which are the sole assets of the trust. The terms of the preferred securities match the terms of the debentures.

Payments to be made by the trust on the preferred securities are dependent on payments that we have undertaken to make, particularly the payments to be made by us on the debentures. Our compliance with our undertakings, taken together, would have the effect of providing a full, irrevocable and unconditional guarantee of the trust’s obligations under the preferred securities.

Distributions on the preferred securities are payable from interest payments received on the debentures and are due quarterly at an annual rate of 9.25% of the liquidation amount, subject to deferral for up to five years under certain conditions. Distributions payable are included in operating expenses. Redemptions of the preferred securities are payable at the liquidation amount from redemption payments received on the debentures.

We may redeem the debentures at par at any time, but redemptions at or prior to maturity are payable only from the proceeds of issuance of our capital stock or of securities substantially comparable in economic effect to the preferred securities. During 2003, we redeemed approximately $57.1 million of the securities using proceeds from the exercise of stock options. We recognized a loss of $1.7 million related to unamoritized issuance costs upon the redemption of the securities. In January 2004, we redeemed approximately $56.4 million of the securities using proceeds from the exercise of stock options, and in February 2004, called for the redemption of the remaining securities effective March 17, 2004. We will recognize aggregate losses of $2.2 million related to unamortized issuance costs relating to the redeemed securities as a result of these transactions.

The estimated fair value of the outstanding redeemable preferred securities was $116.1 million and $216.7 million at December 31, 2003 and 2002, respectively.

(9) Segment information

We have five business segments: retail centers, office and other properties, community development, commercial development and corporate. The retail centers segment includes the operation and management of regional shopping centers, downtown specialty marketplaces, the retail components of mixed-use projects and community retail centers. The office and other properties segment includes the operation and management of office and industrial properties and the nonretail components of the mixed-use projects. The community development segment includes the development and sale of land, primarily in large-scale, long-term community development projects in and around Columbia, Maryland, Summerlin, Nevada and Houston, Texas. The commercial development segment includes the evaluation of all potential new development projects (including expansions of existing properties) and acquisition opportunities and the management of them through the development or acquisition process. The corporate segment is responsible for shareholder and director services, financial management, strategic planning and certain other general and support functions. Our business segments offer different products or services and are managed separately because each requires different operating strategies or management expertise.

The operating measure used to assess operating results for the business segments is Net Operating Income (“NOI”). Prior to July 1, 2003, we included certain income taxes in our definition of NOI. Effective July 1, 2003, we revised our definition to exclude these amounts from NOI, affecting primarily the presentation of our community development activities. We made this change because we now assess the operating results of our segments on a pre-tax basis and believe this revised measure better reflects the performance of the underlying assets. Amounts for prior periods have been reclassified to conform to the current definition.

The accounting policies of the segments are the same as those described in note 1, 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;
	•		we include our share of NOI less interest expense and ground rent expense of other unconsolidated minority interest ventures (“other ventures”) in revenues; and
	•		we include discontinued operations and minority interests in NOI rather than presenting them separately.

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):


			Office
	Retail		and Other		Community		Commercial
	Centers		Properties		Development		Development			Corporate			Total
2003
Revenues	$	843,241	$	200,994	$	291,439	$	—		$	—		$	1,335,674
Operating expenses		334,336		78,810		167,549		13,833			18,969			613,497

NOI	$	508,905	$	122,184	$	123,890	$	(13,833	)	$	(18,969	)	$	722,177


2002
Revenues	$	775,513	$	205,191	$	240,992	$	—		$	—		$	1,221,696
Operating expenses		305,686		80,195		154,827		12,986			16,324			570,018

NOI	$	469,827	$	124,996	$	86,165	$	(12,986	)	$	(16,324	)	$	651,678


2001
Revenues	$	637,211	$	203,716	$	218,322	$	—		$	—		$	1,059,249
Operating expenses		261,494		75,814		140,317		6,871			13,138			497,634

NOI	$	375,717	$	127,902	$	78,005	$	(6,871	)	$	(13,138	)	$	561,615

Segment revenues exclude corporate interest income and gains (losses) on marketable securities classified as trading. Segment operating expenses include provision for bad debts, losses (gains) on marketable securities and net losses (gains) on sales of properties developed for sale and exclude income taxes, ground rent expense, distributions on Parent Company-obligated mandatorily redeemable preferred securities and other subsidiary preferred stock and real estate depreciation and amortization.

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


	2003			2002			2001
Revenues:
Total reported above	$	1,335,674		$	1,221,696		$	1,059,249
Our share of revenues of unconsolidated real estate ventures		(151,229	)		(117,123	)		(97,789	)
Revenues of discontinued operations		(79,755	)		(156,618	)		(163,538	)
Other		176			1,273			4,028

Total in consolidated financial statements	$	1,104,866		$	949,228		$	801,950


Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Total reported above	$	613,497		$	570,018		$	497,634
Our share of operating expenses of unconsolidated real estate ventures		(50,914	)		(36,907	)		(27,987	)
Operating expenses of discontinued operations		(34,592	)		(67,027	)		(70,676	)
Other		14,518			16,832			16,215

Total in consolidated financial statements	$	542,509		$	482,916		$	415,186


Operating results:
NOI reported above	$	722,177		$	651,678		$	561,615
Interest expense		(222,766	)		(209,993	)		(181,898	)
NOI of discontinued operations		(45,163	)		(89,591	)		(92,862	)
Depreciation and amortization		(173,280	)		(131,594	)		(102,361	)
Other provisions and losses, net		(32,513	)		(37,631	)		(816	)
Impairment losses on operating properties		(7,900	)		—			(374	)
Income taxes, primarily deferred		(42,500	)		(29,013	)		(26,639	)
Our share of interest expense, ground rent expense, depreciation and amortization, other provisions and losses, net, income taxes and gains on operating properties of unconsolidated real estate ventures, net		(68,894	)		(46,957	)		(37,241	)
Other		(16,270	)		(20,551	)		(18,955	)


Earnings before net gains (losses) on dispositions of interests in operating properties, discontinued operations and cumulative effect of change in accounting principle in consolidated financial statements	$	112,891		$	86,348		$	100,469

The assets by segment and the reconciliation of total segment assets to the total assets in the consolidated financial statements at December 31, 2003, 2002 and 2001 are summarized as follows (in thousands):


	2003			2002			2001
Retail centers	$	5,069,644		$	5,183,442		$	3,459,666
Office and other properties		1,165,599			1,105,636			1,053,789
Community development		835,525			461,403			472,226
Commercial development		114,439			67,228			134,627
Corporate		327,294			153,836			125,613

Total segment assets		7,512,501			6,971,545			5,245,921
Our share of assets of unconsolidated proportionate share ventures		(1,464,329	)		(923,372	)		(587,733	)
Investment in and advances to unconsolidated proportionate share ventures		591,072			345,978			225,295

Total assets in consolidated financial statements	$	6,639,244		$	6,394,151		$	4,883,483

Investments in and advances to unconsolidated real estate ventures, by segment, are summarized as follows (in thousands):


	2003		2002		2001
Retail centers	$	345,486	$	320,849	$	219,159
Office and other properties		158,360		98,005		30,700
Community development		144,021		23,551		19,714

Total	$	647,867	$	442,405	$	269,573

Additions to long-lived assets of the segments are summarized as follows (in thousands):


	2003		2002		2001
Retail centers:
Redevelopment, expansions and renovations	$	98,940	$	128,660	$	126,171
Improvements for tenants and other		54,895		36,813		44,274
Acquisitions		382,775		864,776		—

		536,610		1,030,249		170,445

Office and other properties:
Improvements for tenants and other		19,652		19,381		14,894
Acquisitions		122,534		25,000		—

		142,186		44,381		14,894

Community development:
Land development expenditures		103,651		109,139		116,753
Acquisitions		320,398		—		—

		424,049		109,139		116,753

Commercial development — costs of new projects		79,196		98,873		77,025

Total	$	1,182,041	$	1,282,642	$	379,117

Approximately $36.5 million, $75.0 million and $70.6 million of the additions (exclusive of acquisitions) in 2003, 2002 and 2001, respectively, relate to properties owned by unconsolidated real estate ventures.

(10) Income taxes

The REIT Modernization Act (“RMA”) was included in the Tax Relief Extension Act of 1999 (“Act”), which was enacted into law on December 17, 1999. RMA includes numerous amendments to the provisions governing the qualification and taxation of REITs, and these amendments were effective January 1, 2001. The Act provided, among other things, for the creation of taxable REIT subsidiaries (“TRS”). TRS are corporations that are permitted to engage in nonqualifying REIT activities. A REIT is permitted to own up to 100% of the voting stock of a TRS. Previously, a REIT could not own more than 10% of the voting stock of a corporation conducting nonqualifying activities. Relying on this legislation, in January 2001, we acquired all of the voting stock of the majority financial interest ventures owned by a trust, of which certain employees are beneficiaries. We and these now wholly owned subsidiaries made a joint election to treat the subsidiaries as TRS for Federal and certain state income tax purposes beginning January 2, 2001.

As a REIT, we generally will not be subject to corporate level Federal income tax on taxable income we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for the next four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to Federal income and excise taxes on our undistributed taxable income. In addition, taxable income of a TRS is subject to Federal, state and local income taxes. Current Federal income taxes of the TRS are likely to increase in future years as we exhaust the net loss carryforwards of certain TRS and complete certain land development projects. These increases could be significant.

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 our conversion to REIT status (January 1, 1998) are recognized in taxable dispositions of such assets in the ten-year period following conversion. Such net unrealized gains were approximately $2.5 billion on January 1, 1998. We believe that we will not be required to make significant payments of taxes on built-in gains throughout the ten-year period due to the availability of our net operating loss carryforward to offset built-in gains which might be recognized and the potential for us to make nontaxable dispositions through 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.

The income tax provisions (benefits) for the years ended December 31, 2003, 2002 and 2001 are summarized as follows (in thousands):


	2003						2002								2001
	Current		Deferred		Total		Current		Deferred			Total			Current		Deferred		Total
Continuing operations:
Operating income	$	1,286	$	41,214	$	42,500	$	1,496	$	27,517		$	29,013		$	3,483	$	23,156	$	26,639
Gains on dispositions		934		2,091		3,025		—		2,010			2,010			—		—		—

Discontinued operations:
Operating income		289		—		289		—		(598	)		(598	)		—		2,246		2,246
Gains on dispositions		—		618		618		—		17,938			17,938			—		—		—

	$	2,509	$	43,923	$	46,432	$	1,496	$	46,867		$	48,363		$	3,483	$	25,402	$	28,885

Income tax expense attributable to continuing operations is reconciled to the amount computed by applying the Federal corporate tax rate as follows (in thousands):


	2003			2002			2001
Tax at statutory rate on earnings from continuing operations before income taxes	$	64,767		$	58,208		$	44,488
Increase (decrease) in valuation allowance, net		(10,304	)		1,284			1,613
State income taxes, net of Federal income tax benefit		1,218			1,056			1,376
Tax at statutory rate on earnings not subject to Federal income taxes and other		(10,156	)		(29,525	)		(20,838	)

Income tax expense	$	45,525		$	31,023		$	26,639

Each TRS is a tax paying component for purposes of classifying deferred tax assets and liabilities. At December 31, 2003, our net deferred tax assets were $91.0 million and our net deferred tax liabilities were $86.4 million. Our net deferred tax liabilities were $92.4 million at December 31, 2002. The amounts are summarized as follows (in thousands):


	2003			2002
Total deferred tax assets	$	184,060		$	31,132
Total deferred tax liabilities		(177,261	)		(111,010	)
Valuation allowance		(2,230	)		(12,534	)

Net deferred tax assets (liabilities)	$	4,569		$	(92,412	)

The tax effects of temporary differences and loss carryforwards included in the net deferred tax assets (liabilities) at December 31, 2003 and 2002 are summarized as follows (in thousands):


	2003			2002
Property, primarily differences in depreciation and amortization, the tax basis of land assets and treatment of interest and certain other costs	$	(164,292	)	$	(103,853	)
Interest deduction carryforwards		162,569			13,484
Operating loss and tax credit carryforwards		12,319			13,111
Other		(6,027	)		(15,154	)

Total	$	4,569		$	(92,412	)

In September 2003, we acquired a controlling financial interest in an entity (in which we previously held a minority interest acquired from Rodamco) whose assets include, among other things, approximately $400 million of temporary differences (primarily interest deduction carryforwards). We believe that it is more likely than not that we will realize these assets and, accordingly, recorded a deferred tax asset of approximately $140 million. We also recorded a deferred credit of approximately $122 million in accordance with EITF Issue 98-11, “Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations.” This deferred credit will reduce income tax expense when the deferred tax asset is realized.

As indicated above, the deferred tax assets relate primarily to differences in the book and tax bases of property (particularly land assets) and to operating loss and interest deduction carryforwards for Federal income tax purposes. A valuation allowance has been established due to the uncertainty of realizing operating loss and interest deduction carryforwards of certain TRS. Prior to the third quarter of 2003, we had recorded valuation allowances related to certain deferred tax assets that we could not conclude were more likely than not to be realized. A significant portion of these assets related to temporary differences, primarily net operating loss carryforwards, attributed to a TRS that is an investor in the planned community of Fairwood. Land sales at Fairwood began in the fourth quarter of 2001. Based on our experience through the third quarter of 2003 and our projections to completion of the project, we determined that it is more likely than not that we will realize substantially all of these deferred tax assets. Accordingly, in the third quarter of 2003, we eliminated $8.1 million of the valuation allowance related to these deferred tax assets. Reversals of other valuation allowances of $3.4 million in 2003 and $1.8 million in 2002 related to certain tax credit carryforwards that we were previously unable to conclude were more likely than not to be realized. Based on projections of future taxable income, management believes that it is more likely than not that the deferred tax assets at December 31, 2003, net of the valuation allowance, will be realized. The amount of the deferred tax assets considered realizable could be reduced in the near term, however, if estimates of future taxable income are reduced. Deferred income taxes will become payable as temporary differences reverse (primarily due to the completion of land development projects) and TRS net operating loss carryforwards are exhausted.

At December 31, 2003, the income tax bases of our assets and liabilities were approximately $5.7 billion and $5.6 billion, respectively. The REIT net operating loss carryforward at December 31, 2003 for Federal income tax purposes aggregated approximately $208.6 million and will expire from 2005 to 2011. The TRS net operating and capital loss carryforwards at December 31, 2003 for Federal income tax purposes aggregated approximately $36.1 million and will begin to expire in 2007. The TRS interest deduction carryforwards at December 31, 2003 for Federal income tax purposes aggregated approximately $464.5 million and do not expire.

(11) Other provisions and losses, net

Other provisions and losses, net are summarized as follows (in thousands):


	2003			2002			2001
Pension plan curtailment loss (see note 6)	$	10,212		$	—		$	—
Pension plan settlement losses (see note 6)		10,827			8,267			—
Provision for organizational changes and early retirement costs		7,982			13,549			—
Losses on early extinguishment of debt		7,242			2,333			451
Impairment provision — MerchantWired		—			11,623			—
Gain on foreign exchange derivatives		—			(1,134	)		—
Other		(3,750	)		2,993			365

Total	$	32,513		$	37,631		$	816

The provision for organizational changes related primarily to costs incurred to reduce the size of our workforce (including executive management) in 2003 and 2002 and to our consolidation of the management of our Property Operations and Commercial and Office Development divisions into a single Asset Management Group in 2002. In connection with these changes, we adopted voluntary early retirement programs in which employees who met certain criteria were eligible to participate. The costs relating to these organizational changes and the early retirement program, primarily severance and other benefit costs, aggregated $8.0 million in 2003 and $13.5 million in 2002. These amounts include $2.7 million and $8.6 million related to changes in executive management in 2003 and 2002, respectively.

We recognized net losses, primarily prepayment penalties and unamortized issuance costs, of $7.2 million, $2.3 million and $0.5 million in 2003, 2002 and 2001, respectively, related to the extinguishment of debt not associated with discontinued operations prior to scheduled maturity.

MerchantWired was 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 18) 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 December 31, 2003, we owned no foreign currency or financial instruments that exposed us to risk of movements in currency exchange rates.

In 2003, we earned a fee of $4.0 million on the facilitation of a real estate transaction between two parties that are unrelated to us.

In 2002, we agreed to pay $3.0 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.

(12) Impairment losses on operating properties reported in continuing operations

In 2003, we recognized an impairment loss of $6.5 million on Westdale Mall, a retail center in Cedar Rapids, Iowa. We also recognized impairment losses aggregating $1.4 million on two office properties in Hunt Valley, Maryland. In 2001, we recognized an additional impairment loss ($0.4 million) on our investment in a retail center (Randhurst) that we and the other venturer intend to dispose. We changed our plans and intentions as to the manner in which these properties would be operated in the future and revised estimates of the most likely holding periods. As a result, we evaluated the recoverability of the carrying amounts of the properties, determined that the carrying amounts were not recoverable from the future cash flows and recognized the impairment losses.

(13) Net gains (losses) on dispositions of interests in operating properties

Net gains (losses) on dispositions of interests in operating properties included in earnings from continuing operations are summarized as follows (in thousands):


	2003		2002		2001
Regional retail centers	$	21,561	$	42,582	$	—
Community retail center		—		4,316		—
Other		5,071		2,048		(58	)

Total	$	26,632	$	48,946	$	(58	)

In 2003, in a transaction related to the sale of retail centers in the Philadelphia metropolitan area (see note 2), we acquired Christiana Mall from a party related to the purchaser and assumed a participating mortgage secured by Christiana Mall. The participating mortgage had a fair value of $160.9 million. The holder of this mortgage had the right to receive $120 million in cash and participation in cash flows and the right to convert this participation feature into a 50% equity interest in Christiana Mall. The holder exercised this right in June 2003. We recorded a portion of the cost of Christiana Mall based on the historical cost of the properties we exchanged to acquire this property because a portion of the transaction was considered nonmonetary under EITF Issue 01-2, “Interpretations of APB Opinion No. 29.” As a consequence, when we subsequently disposed of the 50% interest in the property, we recognized a gain of $21.6 million.

Also in 2003, we sold our investment in Kravco Investments, L.P. for approximately $52 million. We recorded a gain on this transaction of approximately $4.6 million, net of taxes of approximately $3.0 million.

In April 2002, we sold our interests in 12 community retail centers (see note 2). 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 is classified as a component of discontinued operations. In April 2002, we sold our interest in Franklin Park, a regional retail center in Toledo, Ohio, for $20.5 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.

(14) Preferred stock

We have authorized 50,000,000 shares of Preferred stock of 1¢ par value per share of which, at December 31, 2003 (a) 4,505,168 shares were classified as Series A Convertible Preferred; (b) 4,600,000 shares were classified as Series B Convertible Preferred; (c) 10,000,000 shares were classified as Increasing Rate Cumulative Preferred; and (d) 37,362 shares were classified as 10.25% Junior Preferred, Series 1996.

The shares of Series B Convertible Preferred stock have a liquidation preference of $50 per share and earn dividends at an annual rate of 6% of the liquidation preference. At the option of the holders, each share of the Series B Convertible Preferred stock is convertible into shares of our common stock at a conversion price of $38.125 per share (equivalent to a conversion rate of approximately 1.311 shares of common stock for each share of Preferred stock). The conversion price is subject to adjustment in certain circumstances such as stock dividends, stock splits, rights offerings, mergers and similar transactions. In addition, these shares of Preferred stock are redeemable for shares of common stock at our option, subject to certain conditions related to the market price of our common stock. There were 4,047,555 shares and 4,050,000 shares of Preferred stock issued and outstanding at December 31, 2003 and 2002, respectively. On January 7, 2004, we called for the redemption of all outstanding shares of the Series B Convertible Preferred stock pursuant to the terms of its issuance and established February 10, 2004 as the redemption date. In January and February 2004, we issued 5,306,797 shares of common stock upon conversion or redemption of all of the outstanding shares of Series B Convertible Preferred stock.

Shares of the Increasing Rate Cumulative Preferred stock are issuable only to former Hughes owners or their successors pursuant to the Contingent Stock Agreement described in note 15. These shares are issuable only in limited circumstances and no shares have been issued. There were no shares of the Series A Convertible Preferred stock or 10.25% Junior Preferred stock, Series 1996, outstanding at December 31, 2003 and 2002. In February 2004, our Board of Directors adopted resolutions rescinding the classification of the Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock and the 10.25% Junior Preferred Stock.

(15) Common stock

At December 31, 2003, shares of authorized and unissued common stock are reserved as follows: (a) 9,692,408 shares for issuance under the Contingent Stock Agreement discussed below; (b) 10,800,024 shares for issuance under our stock option and stock bonus plans and (c) 5,306,797 shares for conversion of the Series B Convertible Preferred stock.

In connection with the acquisition of The Hughes Corporation (“Hughes”) in 1996, we entered into a Contingent Stock Agreement (“Agreement”) for the benefit of the former Hughes owners or their successors (“beneficiaries”). Under terms of the Agreement, additional shares of common stock (or in certain circumstances, Increasing Rate Cumulative Preferred stock) are issuable to the beneficiaries based on the appraised values of four defined groups of acquired assets at specified “termination dates” to 2009 and/or cash flows generated from the development and/or sale of those assets prior to the termination dates (“earnout periods”). The distributions of additional shares, based on cash flows, are determined and payable semiannually as of June 30 and December 31. At December 31, 2003, approximately 333,000 shares ($15.3 million) were issuable to the beneficiaries, representing their share of cash flows for the semiannual period ended December 31, 2003.

The Agreement is, in substance, an arrangement under which we and the beneficiaries will share in cash flows from development and/or sale of the defined assets during their respective earnout periods, and we will issue additional shares of common stock to the beneficiaries based on the value, if any, of the defined asset groups at the termination dates. We account for the beneficiaries’ shares of earnings from the assets subject to the agreement as an operating expense. We account for any distributions to the beneficiaries as of the termination dates related to assets we own as of the termination dates as additional investments in the related assets (i.e., contingent consideration). At the time of acquisition of Hughes, we reserved 20,000,000 shares of common stock for possible issuance under the Agreement. The number of shares reserved was determined based on estimates in accordance with the provisions of the Agreement. The actual number of shares issuable will be determined only from events occurring over the term of the Agreement and could differ significantly from the number of shares reserved. All shares of common stock repurchased in 2003, 2002 and 2001 were subsequently issued pursuant to the Contingent Stock Agreement.

In 1999, our Board of Directors authorized the repurchase of common shares for up to $250 million, subject to certain pricing restrictions. No shares were repurchased under this program in 2003, 2002 or 2001.

In January and February 2002, we issued 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 (see note 18).

Under our stock option plans, options to purchase shares of common stock and stock appreciation rights may be awarded to our directors, officers and employees. Stock options are generally granted with an exercise price equal to the market price of the common stock on the date of grant, typically vest over a three- to five-year period, subject to certain conditions, and have a maximum term of ten years. We have not granted any stock appreciation rights. Changes in options outstanding under the plans are summarized as follows:


	2003					2002					2001
				Weighted-					Weighted-					Weighted-
				average					average					average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Balance at beginning of year		10,124,004		$	26.72		8,813,085		$	25.58		7,841,881		$	24.78
Options granted		2,941,137			32.53		2,769,932			29.14		2,370,888			25.97
Options exercised		(6,191,184	)		27.32		(1,307,854	)		24.06		(1,296,434	)		21.64
Options expired or cancelled		(55,861	)		27.40		(151,159	)		27.32		(103,250	)		23.15

Balance at end of year		6,818,096		$	30.10		10,124,004		$	26.72		8,813,085		$	25.58

Information about stock options outstanding at December 31, 2003 is summarized as follows:


Options Outstanding							Options Exercisable
			Weighted-		Weighted-				Weighted-
Range of			average		average				average
Exercise			Remaining		Exercise				Exercise
Prices	Shares		Life (Years)		Price		Shares		Price
$18.00-26.50		2,066,374		6.2	$	23.26		582,072	$	22.37
$26.51-39.70		4,006,709		7.5		30.97		1,309,554		31.38
$39.71-47.00		745,013		4.8		44.40		745,013		44.40

		6,818,096		6.8	$	30.10		2,636,639	$	33.07

At December 31, 2002 and 2001, options to purchase 4,767,166 and 3,728,711 shares, respectively, were exercisable at per share weighted-average prices of $27.68 and $26.95, respectively.

The option prices were greater than or equal to the market prices at the date of grant for all of the options granted in 2003, 2002 and 2001 and, because we use the intrinsic value-based method of accounting for stock options, no compensation cost has been recognized for stock options granted to our directors, officers and employees. Expense recognized for stock options granted to employees of our unconsolidated ventures was insignificant.

Under our stock bonus plans, shares of common stock may be awarded to our directors, officers and employees. Shares awarded under the plans are typically subject to forfeiture restrictions which lapse at defined annual rates. Awards granted in 2003, 2002 and 2001 aggregated 145,800 shares, 146,950 shares and 266,850 shares, respectively, with a weighted-average market value per share of $32.64, $28.14 and $24.84, respectively. In connection with certain stock bonus plan awards, we made loans (when permissible) to the recipients for the payment of related income taxes, which loans were forgiven (when permissible) subject to the recipients’ continued employment. The total loans outstanding at December 31, 2002 and 2001 were $0.1 million and $0.5 million, respectively. There were no such loans outstanding at December 31, 2003. We recognize amortization of the fair value of the stock awarded and any forgiven loans as compensation costs on a straight-line basis over the terms of the awards. Such costs amounted to $6.3 million in 2003, $5.5 million in 2002 and $3.2 million in 2001.

The tax status of dividends per share of common stock was as follows:


	2003		2002		2001
Ordinary income	$	0.50	$	1.56	$	1.27
Qualified dividend income-15% tax rate		0.64		—		—
Return of capital		0.54		—		0.15

Total	$	1.68	$	1.56	$	1.42

(16) Earnings per share

Information relating to the calculations of earnings per share (“EPS”) of common stock is summarized as follows (in thousands):


	2003						2002						2001
	Basic			Diluted			Basic			Diluted			Basic			Diluted
Earnings from continuing operations	$	139,523		$	139,523		$	135,294		$	135,294		$	100,411		$	100,411
Dividends on unvested common stock awards and other		(660	)		(660	)		(860	)		(860	)		(679	)		(679	)
Dividends on Series B Convertible Preferred stock		(12,150	)		(12,150	)		(12,150	)		(12,150	)		(12,150	)		(12,150	)

Adjusted earnings from continuing operations	$	126,713		$	126,713		$	122,284		$	122,284		$	87,582		$	87,582

Weighted average shares outstanding		88,453			88,453			84,954			84,954			68,637			68,637
Dilutive securities:
Options, unvested common stock awards and other		—			2,155			—			1,492			—			932

Adjusted weighted-average shares used in EPS computation		88,453			90,608			84,954			86,446			68,637			69,569

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

(17) Leases

We, as lessee, have entered into operating leases, primarily for land at operating properties, expiring at various dates through 2076. Rents under such leases at properties included in continuing operations and discontinued operations aggregated $7.5 million in 2003, $8.6 million in 2002 and $8.8 million in 2001, including contingent rents, based on the operating performance of the related properties, of $1.5 million, $2.2 million and $2.5 million, respectively. In addition, we are responsible for real estate taxes, insurance and maintenance expenses. Minimum rent payments due under operating leases in effect at properties included in continuing operations at December 31, 2003 are summarized as follows (in thousands):


2004	$	4,960
2005		4,960
2006		4,960
2007		4,960
2008		4,960
Subsequent to 2008		177,139

Total	$	201,939

We lease space in our operating properties to tenants primarily under operating leases. In addition to minimum rents, the majority of the retail center leases provide for percentage rents when the tenants’ sales volumes exceed stated amounts, and the majority of the retail center and office leases provide for other rents which reimburse us for certain of our operating expenses. Rents from tenants at properties included in earnings from continuing operations are summarized as follows (in thousands):


	2003		2002		2001
Minimum rents	$	502,598	$	436,600	$	355,276
Percentage rents		9,276		9,521		7,589
Other rents, primarily reimbursements of operating expenses		253,767		209,877		162,372

Total	$	765,641	$	655,998	$	525,237

Minimum rents to be received from tenants under operating leases in effect at properties included in continuing operations at December 31, 2003 are summarized as follows (in thousands):


2004	$	487,613
2005		435,128
2006		380,925
2007		330,597
2008		274,469
Subsequent to 2008		798,132

Total	$	2,706,864

Rents under finance leases aggregated $8.7 million in 2003, 2002 and 2001. The net investment in finance leases at December 31, 2003 and 2002 is summarized as follows (in thousands):


	2003			2002
Total minimum rent payments to be received over lease terms	$	94,378		$	103,113
Estimated residual values of leased properties		788			788
Unearned income		(33,557	)		(38,857	)

Net investment in finance leases	$	61,609		$	65,044

Minimum rent payments to be received from tenants under finance leases in effect at December 31, 2003 are summarized as follows (in thousands):


2004	$	8,931
2005		8,970
2006		8,472
2007		8,444
2008		8,444
Subsequent to 2008		51,117

Total	$	94,378

(18) 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 North America N.V. (“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 include 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:


	Interest		Leasable		Department
	Acquired		Mall		Store
Property	(%)		Square Feet		Square Feet		Location
Collin Creek (1)		70		331,000		790,000	Plano, TX
Lakeside Mall		100		516,000		961,000	Sterling Heights, MI
North Star (2)		96		435,000		816,000	San Antonio, TX
Oakbrook Center (4)		47		842,000		1,425,000	Oakbrook, IL
Perimeter Mall (1), (5)		50		502,000		779,000	Atlanta, GA
The Streets at South Point (3)		94		590,000		730,000	Durham, NC
Water Tower Place (4)		52		310,000		510,000	Chicago, IL
Willowbrook (1)		62		500,000		1,028,000	Wayne, NJ

Notes:

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

(2) In 2000, we transferred a 33.95% ownership interest in North Star to our joint venture partner (an affiliate of Rodamco) and retained a 3.55% ownership interest in the property. We also relinquished our rights to jointly control the operation of the property and terminated our property management agreement. We received a cash distribution of approximately $82.5 million in this transaction. We accounted for this transaction as a partial sale of real estate. Accordingly, we realized a gain for the difference between the sales value and the proportionate cost (90.5%) of the partial interest sold. We deferred recognition of this gain due to our continuing involvement with the venture related to our guarantee of up to $25 million of its debt obligations. We allocated the cost of the acquisition of Rodamco to the acquired assets (including acquired interests in North Star) and liabilities assumed based on their estimated fair values at the time of acquisition. As a result, the $25 million deferred gain was recorded as a reduction in our investment in North Star.

(3) Property began operations in March 2002.

(4) Property also contains significant office space.

(5) In October 2002, we contributed our ownership interest in Perimeter Mall to a joint venture in exchange for a 50% interest in that joint venture and a cash distribution of $67.1 million.

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 leased land from us to redevelop a portion of Fashion Show (a retail center in Las Vegas, Nevada). The first phase of the redevelopment project opened in November 2002. A subsidiary of a trust, of which certain employees are beneficiaries (an entity that we neither own nor control), owned the controlling interest in the limited partnership. Prior to opening, we acquired the controlling interest for $0.1 million. In connection with the acquisition, we consolidated the accounts of the limited partnership, including $100.8 million of property debt.

The Purchasers also jointly acquired interests in several other assets. Our share of these jointly held assets is 27.285%. These assets included:

• A 40% interest in River Ridge, a retail center in Lynchburg, VA, that the purchasers disposed of in July 2003;

• Sawmill Place Plaza, a retail center in Columbus, OH, that was sold by the Purchasers on November 15, 2002;

• A 50% interest in Durham Associates, a partnership that owned and operated 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. We sold our share of the interest in Kravco Investments, L.P. to Simon in December 2003;

• Urban Retail Properties Co., a property management company that manages properties owned 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 in New York City that began operations in October 2002.

The allocation of the purchase cost is summarized as follows (in thousands):


Property and property-related deferred costs	$	1,156,129
Properties in development		2,059
Investments in and advances to unconsolidated real estate ventures		248,928
Prepaid expenses, receivables under finance leases and other assets		79,078
Accounts and notes receivable		1,998
Total assets		1,488,192

Less-Debt and other liabilities		672,903

Cash required	$	815,289

We paid approximately 605 million euros (approximately $546 million based on exchange rates then in effect) to Rodamco at closing. We also paid approximately $269 million to retire some of the obligations of Rodamco and to pay our share of transaction costs. 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 jointly held assets and our share of Rodamco’s obligations retired and the transaction expenses. 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.

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


Sale of Columbia community retail centers	$	111,120
Sale of interest in Franklin Park		20,500
Issuance of common stock in January and February 2002		279,347
Borrowings under bridge loan facility		392,500
Cash on hand		11,822

Cash required	$	815,289

In connection with the purchase, we borrowed $392.5 million under a bridge loan facility provided by Banc of America Securities LLC and Banc of America Mortgage Capital Corporation. The facility provided for no additional availability and had an initial maturity of November 2002 which was extended to May 2003. We repaid approximately $220.4 million of the bridge loan facility with a portion of the proceeds from the issuance of the 7.20% Notes in September 2002 (see note 7). Additionally, in October 2002, we repaid $111.2 million of the facility with the distribution proceeds from two unconsolidated real estate ventures (see note 2). In November and December 2002, we repaid the remaining borrowings under the facility using proceeds from borrowings under our revolving credit facility.

The consolidated statement of operations for the year ended December 31, 2002 includes revenues and costs and expenses of the assets acquired from Rodamco from the date of acquisition. We prepared pro forma consolidated results of operations for the years ended December 31, 2002 and 2001, assuming the acquisition of assets from Rodamco and the sales of assets used to fund a portion of the cash requirement of the acquisition occurred on January 1, 2001. The net gains related to these sales of assets are excluded from the pro forma results. The unaudited pro forma results are summarized as follows (in thousands, except per share data):


	2002			2001

Revenues	$	1,005,534		$	947,586
Equity in earnings of unconsolidated real estate ventures		32,995			35,073
Earnings before net gains (losses) on dispositions of interests in operating properties, discontinued operations and cumulative effect of change in accounting principle		96,310			122,886
Net earnings		77,438			130,890


Earnings per share of common stock
Basic:
Continuing operations	$	1.00		$	1.37
Discontinued operations		(.25	)		.13
Cumulative effect of change in accounting principle		—			(.01	)

Net earnings	$	.75		$	1.49



Diluted:
Continuing operations	$	.99		$	1.35
Discontinued operations		(.25	)		.13
Cumulative effect of change in accounting principle		—			(.01	)

Net earnings	$	.74		$	1.47

The pro forma revenues, equity in earnings of unconsolidated real estate ventures and net earnings summarized above are not necessarily indicative of the results that would have occurred if the acquisition and sales had been consummated at January 1, 2001 or of future results of operations.

(19) Other commitments and contingencies

Other commitments and contingencies (that are not reflected in the consolidated balance sheet) at December 31, 2003 are summarized as follows (in millions):


Guarantee of debt of unconsolidated real estate ventures:
Village of Merrick Park	$	100.0
Hughes Airport-Cheyenne Centers		28.8
Construction contracts for properties in development:
Consolidated subsidiaries, primarily related to Fashion Show and The Shops at La Cantera		103.1
Our share of unconsolidated real estate ventures, primarily related to the Village of Merrick Park		9.5
Contract to purchase an interest in Mizner Park		18.0
Construction and purchase contracts for land development		83.1
Our share of long-term ground lease obligations of unconsolidated real estate ventures		121.1
Bank letters of credit and other		14.9

	$	478.5

We previously guaranteed the repayment of a construction loan of the unconsolidated real estate venture that owns the Village of Merrick Park. In October 2003, the venture repaid this loan with proceeds from a $194 million mortgage loan. We have guaranteed $100 million of the mortgage loan. The amount of the guarantee may be reduced or eliminated upon the achievement of certain lender requirements. The fair value of the guarantee is not material. Additionally, venture partners have provided guarantees to us for their share (60%) of the loan guarantee.

At December 31, 2003, we had a shelf registration statement for the future sale of up to an aggregate of $680 million (based on the public offering price) of common stock, Preferred stock and debt securities. Securities may be issued pursuant to this registration statement in amounts and on terms to be determined at the time of offering.

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. We record provisions for litigation matters and other claims when we believe a loss is probable and can be reasonably estimated. At December 31, 2003, recorded aggregate liabilities related to these claims were not significant. We further believe that any losses we may suffer for litigation and other claims in excess of the recorded aggregate liabilities are not material. Accordingly, in our opinion, adequate provision has been made for losses with respect to litigation matters and other claims, and the ultimate resolution of these matters is not likely to have a material effect on our consolidated financial position or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.

(20) Subsequent events

In January 2004, we acquired our partners’ interests in entities developing Fairwood for approximately $32 million.

In January and February of 2004, we disposed of most of our remaining assets at Hughes Center for approximately $172 million and recognized gains, net of taxes, of approximately $39.5 million.

In January 2004, we acquired a 50% interest in additional office components at Mizner Park for approximately $18 million.

In January and February 2004, we redeemed, or called for redemption, all remaining outstanding Parent Company-obligated mandatorily redeemable preferred securities (see note 8).

In January and February 2004, we redeemed all outstanding shares of Series B Convertible Preferred Stock (see note 14).

In February 2004, we adopted a plan to terminate our funded and supplemental defined benefit pension plans (see note 6).

On February 9, 2004, we issued, in a public offering, 4.0 million shares of common stock for proceeds of approximately $193.2 million ($48.30 per share). We also granted to the underwriter an option to purchase 0.6 million shares of common stock to cover over-allotments. The underwriter exercised this option, and we issued 0.6 million shares on February 23, 2004 for proceeds of approximately $29.0 million ($48.30 per share). The offering was made under our effective shelf registration statement. After issuance of these shares of common stock, availability under our effective shelf registration statement was approximately $457 million.

In February 2004, we agreed to purchase Providence Place, a regional retail center in Providence, Rhode Island. We expect to assume mortgage debt with a face value of approximately $240 million and a payment in lieu of real estate taxes loan of approximately $47 million and to pay $270 million to the seller, using the proceeds of the common stock offering discussed above and borrowings under our revolving credit facility. We expect this transaction to close in March 2004.

(21) New financial accounting standards

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. Our adoption of SFAS 146 in January 2003 did not have a material effect on our results of operations or financial condition.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosures required by a guarantor in its interim and annual financial statements about obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize liabilities for the fair values of obligations undertaken in guarantees issued or modified after December 31, 2002. As of December 31, 2003, we had not entered into guarantees since January 1, 2003 that have had a material effect on our balance sheet, and the adoption of FIN 45 did not have a material effect on our financial position or results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based compensation and requires disclosure in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. We have adopted the disclosure provisions of SFAS 148. We have not determined whether we will change to the fair value-based method of accounting for stock-based compensation and, if so, which of the alternative methods of transition we would adopt.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses the consolidation of variable interest entities (“VIEs”) in which the equity investors lack one or more of the essential characteristics of a controlling financial interest or where the equity investment at risk is not sufficient for the entity to finance its activities without additional subordinated financial support. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”). FIN 46R or FIN 46 applies in the fourth quarter of 2003 to all special purpose entities (“SPEs”) and to VIEs formed after January 31, 2003 and in the first quarter of 2004 to all other VIEs. Application of FIN 46 in 2003 had no effect on our financial statements as we previously consolidated the SPE that issued our Parent Company-obligated mandatorily redeemable preferred securities and, at December 31, 2003, held no interests in other VIEs formed after January 31, 2003. Based on our preliminary analysis, we do not anticipate that full application of FIN 46R in the first quarter of 2004 will have a material effect on our results of operations or financial condition.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 was effective for contracts entered into or modified after June 30, 2003. Implementation had no effect on our reported results of operations or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). In particular, it requires that mandatorily redeemable financial instruments be classified as liabilities and reported at fair value and that changes in their fair values be reported as interest cost. SFAS 150 was effective for us as of July 1, 2003. On October 29, 2003, the FASB indefinitely delayed the provision of the statement related to non-controlling interests in consolidated limited-life entities formed prior to November 5, 2003. Based on the FASB’s deferral of this provision, adoption of SFAS 150 did not affect our financial statements. We determined that several of our consolidated partnerships are limited-life entities. We estimate the fair values of minority interests in these partnerships at December 31, 2003 aggregated approximately $56.6 million. The aggregate carrying values of the minority interests were approximately $28.5 million at December 31, 2003.

Five Year Comparison of Selected Financial Data (Notes 1, 2, 3 and 4)
Years ended December 31, (in thousands, except per share data)


	2003			2002			2001			2000			1999

Operating results data:
Revenues from continuing operations	$	1,104,866		$	949,228		$	801,950		$	498,218		$	505,254
Earnings from continuing operations		139,523			135,294			100,411			171,663			150,785
Basic earnings from continuing operations applicable to common shareholders per share of common stock		1.43			1.44			1.28			2.29			1.93
Diluted earnings from continuing operations applicable to common shareholders per share of common stock		1.40			1.42			1.26			2.25			1.90
Balance sheet data:
Total assets		6,639,244			6,394,151			4,883,483			4,175,538			4,233,101
Debt and capital leases		4,464,377			4,461,901			3,501,398			3,058,038			3,155,312
Shareholders’ equity		1,324,964			1,112,084			655,360			630,468			638,580
Shareholders’ equity per share of common stock (note 4)		13.65			12.06			8.78			8.61			8.40
Other selected data:
Net cash provided (used) by:
Operating activities		375,966			376,144			301,754			261,240			197,288
Investing activities		(288,605	)		(863,711	)		(126,595	)		(275	)		28,629
Financing activities		(11,764	)		497,077			(157,778	)		(273,713	)		(237,389	)
Dividends per share of common stock		1.68			1.56			1.42			1.32			1.20
Dividends per share of convertible Preferred stock		3.00			3.00			3.00			3.00			3.00
Market price per share of common stock at year end		47.00			31.70			29.29			25.50			21.25
Market price per share of convertible Preferred stock at year end		61.30			46.03			43.50			36.63			32.63
Weighted-average common shares outstanding (basic)		88,453			84,954			68,637			69,475			71,705
Weighted-average common shares outstanding (diluted)		90,608			86,446			69,569			72,153			75,787

Notes:

(1) Reference is made to note 18 of the consolidated financial statements for information related to the acquisition of properties and other assets from Rodamco in 2002.

(2) In 2001, we acquired all of the voting stock of the majority financial interest ventures owned by a trust. The majority financial interest ventures were initiated on December 31, 1997, at which time we began accounting for our investment in them using the equity method. Subsequent to acquisition in 2001, we consolidated these entities in our financial statements. Reference is made to note 10 of the consolidated financial statements for information related to the acquisition of the majority financial interest ventures in 2001.

(3) Reference is made to note 2 of the consolidated financial statements for information related to the reclassification of prior year operating results to discontinued operations.

(4) Shareholders’ equity per share of common stock assumes conversion of the Series B Convertible Preferred stock issued in 1997.

Interim Financial Information (Unaudited)
Interim consolidated results of operations are summarized as follows (in thousands, except per share data):


	Quarter ended
	2003								2002
	December 31		September 30		June 30		March 31		December 31			September 30		June 30		March 31

Revenues	$	290,549	$	265,438	$	285,195	$	263,684	$	271,788		$	258,569	$	216,353	$	202,518
Operating income		40,292		35,552		17,871		19,176		25,731			26,270		20,469		13,878
Earnings from continuing operations		44,848		35,824		39,445		19,406		25,692			26,431		68,179		14,992
Net earnings (loss)		57,865		40,492		138,092		24,140		(5,300	)		32,299		98,149		14,703


Earnings (loss) per common share
Basic:
Continuing operations	$	.47	$	.37	$	.41	$	.19	$	.26		$	.27	$	.76	$	.14
Discontinued operations		.14		.05		1.13		.05		(.36	)		.07		.34		—

Total	$	.61	$	.42	$	1.54	$	.24	$	(.10	)	$	.34	$	1.10	$	.14


Diluted:
Continuing operations	$	.45	$	.36	$	.40	$	.19	$	.26		$	.26	$	.72	$	.14
Discontinued operations		.14		.05		1.10		.05		(.36	)		.07		.32		—

Total	$	.59	$	.41	$	1.50	$	.24	$	(.10	)	$	.33	$	1.04	$	.14

Note:

Quarterly amounts have been restated to reflect consolidated properties that we sold in 2003 or 2002 and where we did not have a continuing involvement, as discontinued operations. Net earnings for the second quarter of 2003 include gains on the sales of retail properties of approximately $65.4 million ($0.75 per share basic and $0.73 per share diluted), a gain on the disposal of an interest in a retail property of $21.6 million ($0.25 per share basic and $0.24 per share diluted) and a gain on the extinguishment of debt of $26.9 million ($0.31 per share basic and $0.30 per share diluted). Net earnings for the third quarter of 2003 include an impairment loss on a retail center of $6.5 million ($0.07 per share basic and diluted). Net earnings for the fourth quarter of 2003 include impairment losses on two office properties of $1.4 million ($0.02 per share basic and diluted) and a gain on sale of office and related properties of $10.1 million ($ 0.11 per share basic and diluted). Net earnings for the second quarter of 2002 include a gain on the disposition of our interest in a retail center of $42.6 million ($0.50 per share basic and $0.45 per share diluted). Net loss for the fourth quarter of 2002 includes impairment losses on two retail centers of $42.1 million ($0.49 per share basic and diluted).

Price of Common Stock and Dividends
Our common stock is traded on the New York Stock Exchange. The prices and dividends per share were as follows:


	Quarter ended
	2003								2002
	December 31		September 30		June 30		March 31		December 31		September 30		June 30		March 31

High	$	47.22	$	41.90	$	39.40	$	35.19	$	31.79	$	32.70	$	33.35	$	30.98
Low		41.90		38.13		34.33		30.45		28.25		28.47		31.16		27.50
Dividends		.42		.42		.42		.42		.39		.39		.39		.39

Number of Holders of Common Stock
The number of holders of record of our common stock as of March 1, 2004 was 1,751.

EX-99.2 5 c89046exv99w2.htm UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS exv99w2

EXHIBIT 99.2

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, 2004 and 2003
(Unaudited; in thousands, except per share data)


	Three months						Six months
	ended June 30,						ended June 30,
	2004			2003			2004			2003
Revenues:
Rents from tenants	$	207,704		$	180,522		$	406,904		$	358,874
Land sales		96,203			88,256			205,188			157,439
Other		15,389			14,442			28,252			28,410

Total revenues		319,296			283,220			640,344			544,723

Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Operating properties		(86,584	)		(77,346	)		(172,312	)		(153,676	)
Land sales operations		(57,672	)		(59,117	)		(125,434	)		(99,680	)
Other		(9,292	)		(20,502	)		(19,497	)		(35,357	)

Total operating expenses, exclusive of provision for bad debts, depreciation and amortization		(153,548	)		(156,965	)		(317,243	)		(288,713	)

Interest expense		(59,963	)		(52,931	)		(118,247	)		(109,678	)
Provision for bad debts		(1,982	)		(1,502	)		(4,650	)		(2,685	)
Depreciation and amortization		(48,521	)		(40,567	)		(96,346	)		(78,567	)
Other income, net		945			4,549			2,339			4,189
Other provisions and losses, net		(2,086	)		(8,631	)		(6,180	)		(19,757	)

Earnings before income taxes, equity in earnings of unconsolidated real estate ventures, net gains on dispositions of interests in operating properties and discontinued operations		54,141			27,173			100,017			49,512
Income taxes, primarily deferred		(20,498	)		(15,993	)		(39,114	)		(26,578	)
Equity in earnings of unconsolidated real estate ventures		5,337			6,781			8,635			14,281

Earnings before net gains on dispositions of interests in operating properties and discontinued operations		38,980			17,961			69,538			37,215
Net gains on dispositions of interests in operating properties		14,096			21,573			13,888			21,804

Earnings from continuing operations		53,076			39,534			83,426			59,019
Discontinued operations		8,163			98,558			44,927			103,213

Net earnings		61,239			138,092			128,353			162,232
Other items of comprehensive income (loss):
Minimum pension liability adjustment		229			390			(1,637	)		390
Unrealized net gains (losses) on derivatives designated as cash flow hedges		4,859			153			2,103			(3,199	)
Unrealized net gains (losses) on available-for-sale securities		(160	)		—			426			—

Comprehensive income	$	66,167		$	138,635		$	129,245		$	159,423

Net earnings applicable to common shareholders	$	61,239		$	135,054		$	128,353		$	156,156

Earnings per share of common stock
Basic:
Continuing operations	$	.52		$	.41		$	.83		$	.60
Discontinued operations		.08			1.13			.45			1.19

Total	$	.60		$	1.54		$	1.28		$	1.79

Diluted:
Continuing operations	$	.50		$	.40		$	.81		$	.59
Discontinued operations		.08			1.10			.43			1.16

Total	$	.58		$	1.50		$	1.24		$	1.75

Dividends per share:
Common stock	$	.47		$	.42		$	.94		$	.84

Preferred stock	$	—		$	.75		$	—		$	1.50

The accompanying notes are an integral part of these statements.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(In thousands, except share data)


	June 30,			December 31,
	2004			2003
	(Unaudited)
Assets:
Property and property-related deferred costs:
Operating properties:
Property	$	5,830,436		$	5,351,748
Less accumulated depreciation		973,241			897,277

		4,857,195			4,454,471

Deferred costs		251,346			238,122
Less accumulated amortization		103,146			94,424

		148,200			143,698

Net operating properties		5,005,395			4,598,169

Properties in development		224,732			167,073
Properties held for sale		8,241			138,823
Investment land and land held for development and sale		455,494			414,666

Total property and property-related deferred costs		5,693,862			5,318,731

Investments in unconsolidated real estate ventures		573,541			628,305
Advances to unconsolidated real estate ventures		14,222			19,562
Prepaid expenses, receivables under finance leases and other assets		559,379			479,409
Accounts and notes receivable		67,147			53,694
Investments in marketable securities		25,187			22,313
Cash and cash equivalents		36,220			117,230

Total assets	$	6,969,558		$	6,639,244

Liabilities:
Debt:
Property debt not carrying a Parent Company guarantee of repayment	$	2,604,864		$	2,768,288
Debt secured by properties held for sale		—			110,935
Parent Company debt and debt carrying a Parent Company guarantee of repayment:
Property debt		181,548			179,150
Other debt		1,778,504			1,386,119

		1,960,052			1,565,269

Total debt		4,564,916			4,444,492

Accounts payable and accrued expenses		156,838			179,530
Other liabilities		657,907			611,042

Parent Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities		—			79,216
Shareholders’ equity:
Series B Convertible Preferred stock with a liquidation preference of $202,500		—			41
Common stock of 1¢ par value per share; authorized 500,000,000 shares in 2004 and 250,000,000 shares in 2003; issued 102,612,050 shares in 2004 and 91,759,723 shares in 2003		1,026			918
Additional paid-in capital		1,579,015			1,346,890
Retained earnings (accumulated deficit)		20,858			(10,991	)
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment		(6,265	)		(4,628	)
Unrealized net losses on derivatives designated as cash flow hedges		(5,163	)		(7,266	)
Unrealized net gains on available-for-sale securities		426			—
Total shareholders’ equity		1,589,897			1,324,964

Total liabilities and shareholders’ equity	$	6,969,558		$	6,639,244

The accompanying notes are an integral part of these statements.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
(Unaudited, in thousands)


	2004			2003

Cash flows from operating activities:
Rents from tenants and other revenues received	$	425,732		$	446,753
Proceeds from land sales and notes receivable from land sales		188,784			173,509
Interest received		3,709			3,847
Operating expenditures		(212,292	)		(232,258	)
Land development and acquisition expenditures		(88,187	)		(75,487	)
Interest paid		(115,350	)		(125,146	)
Income taxes paid		(15,859	)		(2,881	)
Operating distributions from unconsolidated real estate ventures		18,815			27,733

Net cash provided by operating activities		205,352			216,070

Cash flows from investing activities:
Expenditures for properties in development		(54,177	)		(98,015	)
Expenditures for improvements to existing properties		(32,013	)		(32,794	)
Expenditures for acquisitions of interests in properties and other assets		(291,412	)		(1,501	)
Proceeds from dispositions of interests in properties		88,402			264,772
Other distributions from unconsolidated real estate ventures		31,518			—
Expenditures for investments in unconsolidated real estate ventures		(4,620	)		(23,834	)
Other		(451	)		4,702

Net cash provided (used) by investing activities		(262,753	)		113,330

Cash flows from financing activities:
Proceeds from issuance of property debt		6,825			193,560
Repayments of property debt:
Scheduled principal payments		(36,643	)		(37,889	)
Other payments		(442,866	)		(271,848	)
Proceeds from issuance of other debt		502,736			6,747
Repayments of other debt		(89,000	)		(121,690	)
Repayments of Parent Company-obligated mandatorily redeemable preferred securities		(79,751	)		(9,750	)
Purchases of common stock		(31,117	)		(20,886	)
Proceeds from issuance of common stock		221,917			—
Proceeds from exercise of stock options		24,554			31,684
Dividends paid		(96,506	)		(79,802	)
Other		(3,758	)		(8,430	)

Net cash used by financing activities		(23,609	)		(318,304	)

Net increase (decrease) in cash and cash equivalents		(81,010	)		11,096
Cash and cash equivalents at beginning of period		117,230			41,633

Cash and cash equivalents at end of period	$	36,220		$	52,729

The accompanying notes are an integral part of these statements.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows, continued
Six Months Ended June 30, 2004 and 2003
(Unaudited, in thousands)


	2004			2003
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings	$	128,353		$	162,232
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		97,325			90,580
Change in undistributed earnings of unconsolidated real estate ventures		10,180			14,352
Net gains on dispositions of interests in operating properties		(58,602	)		(91,606	)
Impairment losses on operating properties		270			—
Losses (gains) on extinguishment of debt		3,312			(21,169	)
Participation expense pursuant to Contingent Stock Agreement		36,001			36,120
Land development and acquisition expenditures in excess of cost of land sales		(16,339	)		—
Provision for bad debts		4,664			3,568
Debt assumed by purchasers of land		(4,723	)		(16,585	)
Deferred income taxes		30,057			22,466
Decrease (increase) in accounts and notes receivable		(17,600	)		2,440
Decrease in other assets		24,662			14,856
Increase (decrease) in accounts payable, accrued expenses and other liabilities		(37,539	)		3,435
Other, net		5,331			(4,619	)

Net cash provided by operating activities	$	205,352		$	216,070

Schedule of noncash investing and financing activities:
Common stock issued pursuant to Contingent Stock Agreement	$	13,177		$	21,058
Capital lease obligations incurred		6,938			1,429
Lapses of restrictions on common stock awards and grants of common stock		4,108			6,839
Debt assumed by purchasers of land		4,723			16,585
Debt assumed by purchasers of operating properties		130,787			276,588
Debt and other liabilities assumed or issued in acquisition of assets		340,524			226,567
Debt extinguished in excess of cash paid		—			28,026
Property and other assets contributed to an unconsolidated real estate venture		—			164,306
Debt and other liabilities related to property contributed to an unconsolidated real estate venture		—			163,406

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of presentation

The unaudited consolidated financial statements include the accounts of The Rouse Company, our subsidiaries and ventures (“we,” “Rouse” or “us”) in which we have a majority voting interest and control. We also consolidate the accounts of variable interest entities where we are the primary beneficiary. We account for investments in other ventures using the equity or cost methods as appropriate in the circumstances. Significant intercompany balances and transactions are eliminated in consolidation.

The unaudited condensed consolidated financial statements include all adjustments which are necessary, in the opinion of management, to fairly present our financial position and results of operations. All such adjustments are of a normal recurring nature. The statements have been prepared using the accounting policies described in our 2003 Annual Report to Shareholders.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Significant estimates are inherent in the preparation of our financial statements in a number of areas, including the cost ratios and completion percentages used for land sales, evaluation of impairment of long-lived assets (including operating properties and properties held for development or sale), evaluation of collectibility of accounts and notes receivable and allocation of the purchase price of acquired properties. Actual results could differ from these and other estimates.

In April 2004, we reclassified certain costs and expenses (primarily employee termination benefits) related to organizational changes and early retirements from other provisions and losses, net to operating expenses. We made these reclassifications because these expenses are neither infrequent nor unusual and are becoming a normal cost of doing business. The amounts reclassified were $5.2 million and $3.9 million in the three and six months ended June 30, 2003, respectively, and $1.0 million in the three months ended March 31, 2004.

Certain amounts for 2003 have been reclassified to conform to our current presentation.

(b) Property and property-related deferred costs

Properties to be developed or held and used in operations are carried at cost reduced for impairment losses, where appropriate. Acquisition, development and construction costs of properties in development are capitalized including, where applicable, salaries and related costs, real estate taxes, interest and preconstruction costs directly related to the project. The preconstruction stage of development of an operating property (or an expansion of an existing property) includes efforts and related costs to secure land control and zoning, evaluate feasibility and complete other initial tasks which are essential to development. Provisions are made for costs of potentially unsuccessful preconstruction efforts by charges to operations. Development and construction costs and costs of significant improvements and replacements and renovations at operating properties are capitalized, while costs of maintenance and repairs are expensed as incurred.

Direct costs associated with leasing of operating properties are capitalized as deferred costs and amortized using the straight-line method over the terms of the related leases.

Depreciation of each operating property is computed using the straight-line method. The annual rate of depreciation for each retail center (with limited exceptions) is based on a 55-year composite life and a salvage value of approximately 10%. Office buildings and other properties are depreciated using composite lives of 40 years. Furniture and fixtures and certain common area improvements are depreciated using estimated useful lives ranging from 2 to 10 years.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

If events or circumstances indicate that the carrying value of an operating property to be held and used may be impaired, a recoverability analysis is performed based on estimated undiscounted future cash flows to be generated from the property. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. Fair values are determined based on appraisals and/or estimated future cash flows using appropriate discount and capitalization rates.

Properties held for sale are carried at the lower of their carrying values (i.e. cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. The net carrying values of operating properties are classified as properties held for sale when the properties are actively marketed, their sale is considered probable within one year and various other criteria relating to their disposition are met. Depreciation of these properties is discontinued at that time, but operating revenues, interest and other operating expenses continue to be recognized until the date of sale. Revenues and expenses of properties that are classified as held for sale are presented as discontinued operations for all periods presented in the statements of operations if the properties will be or have been sold on terms where we have limited or no continuing involvement with them after the sale. If active marketing ceases or the properties no longer meet the criteria to be classified as held for sale, the properties are reclassified as operating, depreciation is resumed, depreciation for the period the properties were classified as held for sale is recognized and deferred selling costs, if any, are charged to expense. Additionally, we present other assets and liabilities of properties classified as held for sale separately in the balance sheet, if material.

Gains from dispositions of interests in operating properties are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by us with the properties disposed of are met. Gains relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances.

(c) Acquisitions of operating properties

We allocate the purchase price of acquired properties to tangible and identified intangible assets based on their fair values. In making estimates of fair values for purposes of allocating purchase price, we use a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.

The fair values of tangible assets are determined on an “if-vacant” basis. The “if-vacant” fair value is allocated to land, where applicable, buildings, tenant improvements and equipment based on property tax assessments and other relevant information obtained in connection with the acquisition of the property.

Our intangible assets arise primarily from contractual rights and include leases with above- or below-market rents (including ground leases where we are lessee), in-place lease and customer relationship values and a real estate tax stabilization agreement.

Above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received or paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding space, measured over a period equal to the remaining non-cancelable term of the lease (including those under bargain renewal options). The capitalized above- and below-market lease values are amortized as adjustments to rental income or rental expense over the remaining terms of the respective leases (including periods under bargain renewal options).

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

The aggregate fair values of in-place leases and customer relationship assets acquired are measured based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. This value is allocated to in-place lease and customer relationship assets (both anchor stores and tenants). The fair value of in-place leases is based on our estimates of carrying costs during the expected lease-up periods and costs to execute similar leases. Our estimate of carrying costs includes real estate taxes, insurance and other operating expenses and lost rentals during the expected lease-up periods considering current market conditions. Our estimate of costs to execute similar leases includes leasing commissions, legal and other related costs. The fair value of anchor store agreements is determined based on our experience negotiating similar relationships (not in connection with property acquisitions). The fair value of tenant relationships is based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics we consider in determining these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors. The value of in-place leases is amortized to expense over the initial term of the respective leases, primarily ranging from two to ten years. The value of anchor store agreements is amortized to expense over the estimated term of the anchor store’s occupancy in the property. Should an anchor store vacate the premises, the unamortized portion of the related intangible is charged to expense. The value of tenant relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense. The value allocated to the tax stabilization agreement was determined based on the difference between the present value of estimated market real estate taxes and amounts due under the agreement and is amortized to operating expense over the term of the agreement, which is approximately 24 years.

The aggregate purchase price of properties acquired in 2004 and 2003 was allocated to intangible assets and liabilities as follows (in millions):


	2004		2003

Above-market leases	$	3.8	$	1.1
In-place lease assets		2.9		2.0
Tenant relationships		6.5		0.6
Below-market leases		4.2		4.7
Anchor store agreements		1.5		2.5
Below-market ground lease		14.5		—
Real estate tax stabilization agreement		94.2		—

(d) Investments in marketable securities and cash and cash equivalents

Our investment policy defines authorized investments and establishes various limitations on the maturities, credit quality and amounts of investments held. Authorized investments include U.S. government and agency obligations, certificates of deposit, bankers’ acceptances, repurchase agreements, commercial paper, money market mutual funds and corporate debt and equity securities. We may also invest in mutual funds to closely match the investment selections of participants in nonqualified deferred compensation plans.

Debt security investments with maturities at dates of purchase in excess of three months are classified as marketable securities and carried at amortized cost as it is our intention to hold these investments until maturity. Short-term investments with maturities at dates of purchase of three months or less are classified as cash equivalents. Most investments in marketable equity securities are classified as trading securities and are carried at market value with changes in values recognized in earnings. Investments in marketable equity securities subject to significant restrictions on sale or transfer are classified as available-for-sale and are carried at market value with unrealized changes in values recognized in other comprehensive income.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

Other income, net in the three and six months ended June 30, 2004 and 2003 is summarized as follows (in thousands):


	Three months				Six months
	ended June 30,				ended June 30,
	2004		2003		2004		2003

Interest income	$	611	$	570	$	1,194	$	1,161
Dividends		22		22		52		46
Gains on trading securities, net		312		3,957		1,093		2,982

	$	945	$	4,549	$	2,339	$	4,189

(e) Revenue recognition and related matters

Minimum rent revenues are recognized on a straight-line basis over the terms of the leases. Rents based on tenant sales are recognized when tenant sales exceed contractual thresholds.

Revenues related to variable recoveries from tenants of real estate taxes, utilities, maintenance, insurance and other expenses pursuant to leases are recognized in the period in which the related expenses are incurred. Fixed contributions from tenants related to these expenses are recognized when due. Lease termination fees are recognized when the related agreements are executed. Management fee revenues are calculated as a fixed percentage of revenues of the managed properties and are recognized as the managed properties’ revenues are earned.

Revenues from land sales are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by us with the land sold are met. Revenues relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. For land sale transactions under the terms of which we are required to perform additional services and incur significant costs after title has passed, revenues and cost of sales are recognized on a percentage of completion basis.

Cost of land sales is determined as a specified percentage of land sales revenues recognized for each community development project. The cost ratios used are based on actual costs incurred and estimates of development costs and sales revenues to completion of each project. The ratios are reviewed regularly and revised for changes in sales and cost estimates or development plans. Significant changes in these estimates or development plans, whether due to changes in market conditions or other factors, could result in changes to the cost ratio used for a specific project. The specific identification method is used to determine cost of sales for certain parcels of land, including acquired parcels we do not intend to develop or for which development is complete at the date of acquisition.

(f) Derivative financial instruments

We use derivative financial instruments to reduce risk associated with movements in interest rates. We may choose to reduce cash flow and earnings volatility associated with interest rate risk exposure on variable-rate borrowings and/or forecasted fixed-rate borrowings. In some instances, lenders may require us to do so. In order to limit interest rate risk on variable-rate borrowings, we may enter into pay fixed-receive variable interest rate swaps or interest rate caps to hedge specific risks. In order to limit interest rate risk on forecasted borrowings, we may enter into forward-rate agreements, forward starting swaps, interest rate locks and interest rate collars. We may also enter into pay variable-receive fixed interest rate swaps to hedge the fair values of fixed-rate borrowings. In addition, we may use derivative financial instruments to reduce risk associated with movements in currency exchange rates if and when we are exposed to such risk. We do not use derivative financial instruments for speculative purposes.

Under interest rate cap agreements, we make initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates exceed specified levels during the agreement period. Under interest rate swap agreements, we and the counterparties agree to exchange the difference between fixed-rate and variable-rate interest amounts calculated by reference to specified notional principal amounts during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

Parties to interest rate exchange agreements are subject to market risk for changes in interest rates and risk of credit loss in the event of nonperformance by the counterparty. We do not require any collateral under these agreements but deal only with highly rated financial institution counterparties (which, in certain cases, are also the lenders on the related debt) and expect that all counterparties will meet their obligations.

All of the pay fixed-receive variable interest rate swaps and other pay fixed-receive variable derivative financial instruments we used in 2004 and 2003 qualified as cash flow hedges and hedged our exposure to forecasted interest payments on variable-rate LIBOR-based debt or the forecasted issuance of fixed-rate debt. Accordingly, the effective portion of the instruments’ gains or losses is reported as a component of other comprehensive income and reclassified into earnings when the related forecasted transactions affect earnings. If we discontinue a cash flow hedge because it is probable that the original forecasted transaction will not occur, the net gain or loss in accumulated other comprehensive income is immediately reclassified into earnings. If we discontinue a cash flow hedge because the variability of the probable forecasted transaction has been eliminated, the net gain or loss in accumulated other comprehensive income is reclassified to earnings over the term of the designated hedging relationship. Any subsequent changes in the fair value of the derivative are immediately recognized in earnings.

In 2004, we entered into pay variable-receive fixed interest rate swaps designated as fair value hedges of fixed-rate debt instruments. These hedges and the hedged instruments are carried at their fair values with changes in their fair values recorded in earnings. Because the hedges are highly effective, the changes in their values are substantially equal and offsetting.

We have not recognized any losses as a result of hedge discontinuance, and the expense that we recognized related to changes in the time value of interest rate cap agreements was insignificant for 2004 and 2003.

Amounts receivable or payable under interest rate cap and swap agreements are accounted for as adjustments to interest expense on the related debt.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

(g) Stock-based compensation

We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock or stock options to our officers and employees only if the quoted market price of the stock at the grant date (or other measurement date, if later) is greater than the amount the grantee must pay to acquire the stock. The following table summarizes the pro forma effects on net earnings (in thousands) and earnings per share of common stock of using the fair value-based method, rather than the intrinsic value-based method, to account for stock-based compensation awards made since 1995.


	Three months						Six months
	ended June 30,						ended June 30,
	2004			2003			2004			2003

Net earnings, as reported	$	61,239		$	138,092		$	128,353		$	162,232

Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects and amounts capitalized		735			1,259			1,668			3,095

Deduct: Total stock-based employee compensation expense determined under fair value-based method, net of related tax effects and amounts capitalized		(3,093	)		(2,418	)		(5,514	)		(5,754	)

Pro forma net earnings	$	58,881		$	136,933		$	124,507		$	159,573


Earnings per share of common stock:
Basic:
As reported	$	.60		$	1.54		$	1.28		$	1.79
Pro forma	$	.57		$	1.53		$	1.24		$	1.76

Diluted:
As reported	$	.58		$	1.50		$	1.24		$	1.75
Pro forma	$	.56		$	1.49		$	1.21		$	1.73

The per share weighted-average estimated fair values of options granted during 2004 and 2003 were $6.83 and $3.37, respectively. These fair values were estimated on the dates of each grant using the Black-Scholes option-pricing model with the following assumptions:


	Three months ended						Six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Risk-free interest rate		3.9	%		2.0	%		3.5	%		3.2	%
Dividend yield		4.5	%		4.5	%		4.0	%		5.4	%
Volatility factor		20.0	%		20.0	%		20.0	%		20.0	%
Expected life in years		5.4			4.0			6.4			6.5

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

(2) TAX MATTERS

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, 2004 and intend to meet the qualifications in the future.

A REIT is permitted to own securities of taxable REIT subsidiaries (“TRS”) in an amount up to 20% of the fair value of its assets. TRS are taxable corporations that are used by REITs generally to engage in nonqualifying REIT activities or perform nonqualifying services. 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, Summerlin, Nevada and Houston, Texas. 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 2004 and future years. Current Federal income taxes of the TRS are likely to increase in future years as we exhaust the net loss carryforwards of certain TRS and complete certain land development projects. These increases could be significant.

In connection with our election to be taxed as a REIT, we also elected to be subject to the “built-in gain” rules. Under these rules, during the ten-year period following conversion, a corporate level tax will be payable, at the time and to the extent that the net unrealized gains on our assets at the date of our conversion to REIT status (January 1, 1998) are recognized in taxable dispositions of such assets. Such net unrealized gains were approximately $2.5 billion on January 1, 1998. We believe that we will not be required to make significant payments of taxes on built-in gains throughout the ten-year period due to the availability of our net operating loss carryforward to offset built-in gains which might be recognized and the potential for us to make nontaxable dispositions through 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 our REIT asset dispositions or the related tax laws change.

Our net deferred tax assets were $81.0 million and our deferred tax liabilities were $112.0 million at June 30, 2004. Our net deferred tax assets were $91.0 million and our deferred tax liabilities were $86.4 million at December 31, 2003. Deferred income taxes will become payable as temporary differences reverse (primarily due to the completion of land development projects) and TRS net operating loss carryforwards are exhausted.

(3) DISCONTINUED OPERATIONS

We may sell interests in retail centers that are not consistent with our long-term business strategies or not meeting our investment criteria and office and other properties that are not located in our master-planned communities or not part of urban mixed-use properties. We may also dispose of properties for other reasons.

In May 2004, we agreed to sell our interests in two office buildings in Hunt Valley, Maryland. These sales are expected to settle by the end of 2004. We recorded aggregate impairment losses of $1.4 million in the fourth quarter of 2003 and $0.3 million in the second quarter of 2004 related to these properties. These properties are classified as held for sale at June 30, 2004.

In May 2004, we sold our interest in one office building in Hughes Center, a master-planned business park in Las Vegas, Nevada, as part of the 2003 agreements under which we acquired interests in entities developing The Woodlands, a master-planned community in the Houston, Texas metropolitan area, for cash of $7.0 million and the assumption by the buyer of $3.5 million of mortgage debt. We recorded a gain on this sale of $5.5 million. In January and February 2004, we sold interests in five office buildings and seven parcels subject to ground leases in Hughes Center as part of the same 2003 agreements, for cash of $64.3 million and the assumption by the buyer of $107.3 million of mortgage debt. We recorded aggregate gains on these sales in the first quarter of 2004 of approximately $35.3 million (net of deferred income taxes of $2.7 million). In December 2003, in related transactions, we sold interests in two office buildings and two parcels subject to ground leases in Hughes Center.

We also recorded, in the three months ended June 30, 2004, net gains of $2.8 million (net of deferred income taxes of $0.4 million) related to the resolutions of certain contingencies related to disposals of properties in 2002, 2003 and 2004.

Part I. Financial Information

Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

In March 2004, we sold our interests in Westdale Mall, a retail center in Cedar Rapids, Iowa, for cash of $1.3 million and the assumption by the buyer of $20.0 million of mortgage debt. We recognized a gain of $0.8 million relating to this sale. We recorded an impairment loss of $6.5 million in the third quarter of 2003 related to this property.

In August 2003, we sold The Jacksonville Landing, a retail center in Jacksonville, Florida.

In May and June 2003, we sold eight office and industrial buildings in the Baltimore-Washington corridor for net proceeds of $46.6 million and recorded aggregate gains of $4.4 million.

In April and May 2003, we sold six retail centers in the Philadelphia metropolitan area and, in a related transaction, acquired Christiana Mall from a party related to the purchaser. In connection with these transactions, we received net cash proceeds of $218.4 million, the purchaser assumed $276.6 million of property debt, and we assumed a participating mortgage secured by Christiana Mall. We recognized aggregate gains of $65.4 million relating to the monetary portions of these transactions. We recorded an impairment loss of $38.8 million in the fourth quarter of 2002 related to one of the retail centers sold.

We also recorded a net gain of $26.9 million related to the extinguishment of debt secured by two of the properties sold in the Philadelphia metropolitan area when the lender released the mortgages for a cash payment by us of less than the aggregate carrying amount of the debt.

The operating results of the properties included in discontinued operations are summarized as follows (in thousands):


	Three months						Six months
	ended June 30,						ended June 30,
	2004			2003			2004			2003

Revenues	$	599		$	24,884		$	3,604		$	65,220
Operating expenses, exclusive of depreciation and amortization		(294	)		(12,574	)		(1,490	)		(31,342	)
Interest expense		(11	)		(5,832	)		(737	)		(15,197	)
Depreciation and amortization		(84	)		(4,445	)		(979	)		(12,013	)
Other provisions and losses, net		—			26,896			—			26,896
Impairment losses on operating properties		(270	)		—			(270	)		—
Gains on dispositions of interests in operating properties, net		8,278			69,760			44,714			69,802
Income tax benefit (provision), primarily deferred		(55	)		(131	)		85			(153	)

Discontinued operations	$	8,163		$	98,558		$	44,927		$	103,213

(4) UNCONSOLIDATED REAL ESTATE VENTURES

We own interests in unconsolidated real estate ventures that own and/or develop properties, including master-planned communities. We use these ventures to limit our risk associated with individual properties and to reduce our capital requirements. We may also contribute interests in properties we own to unconsolidated ventures for cash distributions and interests in the ventures to provide liquidity as an alternative to outright property sales. We account for the majority of these ventures using the equity method because the ventures do not meet the definition of a variable interest entity and we have joint interest and control of these properties with our venture partners. For those ventures where we own less than a 5% interest and have virtually no influence on the venture’s operating and financial policies, we account for our investments using the cost method.

At December 31, 2003, these ventures were primarily partnerships and corporations which own retail centers (most of which we manage) and ventures developing the master-planned communities known as The Woodlands, near Houston, Texas, and Fairwood, in Prince George’s County, Maryland. In January 2004, we acquired our partners’ interests in the joint venture that is developing Fairwood, increasing our ownership interest to 100%. Prior to this transaction, we held a noncontrolling interest in this venture and accounted for our investment as an investment in unconsolidated real estate ventures. We consolidated the venture in our financial statements from the date of the acquisition.

In December 2003, we acquired a 50% interest in the retail and certain office components of Mizner Park, a mixed-use project in Boca Raton, Florida. In January 2004, we acquired a 50% interest in additional office components of Mizner Park.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

In April 2004, we sold most of our interest in Westin New York, a hotel in New York City, for net proceeds of $15.8 million and recognized a gain of approximately $1.4 million (net of deferred income taxes of $0.8 million).

(5) DEBT

Debt is summarized as follows (in thousands):


	June 30, 2004				December 31, 2003
			Due in one				Due in one
	Total		year		Total		year

Mortgages and bonds	$	2,725,227	$	603,960	$	3,025,802	$	484,588
Medium-term notes		45,500		43,500		45,500		—
Credit facility borrowings		182,000		—		271,000		—
3.625% Notes due March 2009		378,999		—		—		—
8% Notes due April 2009		200,000		—		200,000		—
7.2% Notes due September 2012		399,579		—		399,553		—
5.375% Notes due November 2013		453,864		—		350,000		—
Other loans		179,747		64,762		152,637		32,147

Total	$	4,564,916	$	712,222	$	4,444,492	$	516,735

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.

We expect to repay the debt due in one year with operating cash flows, proceeds from property financings (including refinancings of maturing mortgages), credit facility borrowings, proceeds from corporate debt offerings or other available corporate funds.

During the first quarter of 2004, we repaid approximately $443 million of mortgage loans with proceeds from borrowings under our credit facility. In March 2004, we issued $400 million of 3.625% Notes due in March 2009 and $100 million of 5.375% Notes due in November 2013 for net proceeds of approximately $503 million. The proceeds were primarily used to repay credit facility borrowings.

At June 30, 2004 and December 31, 2003, approximately $82 million and $83 million, respectively, of our debt provided for payments of additional interest based on operating results of the related properties in excess of stated levels. The participating debt primarily relates to a retail center where the lender receives a fixed interest rate of 7.625% and a 5% participation in cash flows. The lender also will receive a payment at maturity (November 2004) equal to the greater of 5% of the value of the property in excess of the debt balance or the amount required to provide an internal rate of return of 8.375% over the term of the loan. The internal rate of return of the lender is limited to 12.5%. We recognize interest expense on this debt at a rate required to provide the lender the required minimum internal rate of return (8.375%) and monitor the accrued liability and the fair value of the projected payment due on maturity. Based on our analysis, we believe that the payment at maturity will be the balance needed to provide the specified minimum internal rate of return.

At June 30, 2004, we had interest rate swap agreements and forward-starting swap agreements in place that effectively fix the LIBOR rate on a portion of our variable-rate debt through December 2006. Information related to the in-place swap agreements as of June 30, 2004 is as follows (dollars in millions):


Total notional amount	$	564.4
Average fixed effective rate (pay rate)		2.1	%
Average variable interest rate of related debt (receive rate)		1.3	%
Fair values of assets	$	1.9
Fair values of liabilities	$	2.1

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

As discussed above, we issued $400 million of 3.625% Notes in March 2004. We simultaneously entered into agreements to effectively convert this fixed-rate debt to variable-rate debt for the term of these notes. Under these agreements, we receive a fixed rate of 3.625% and pay a variable rate based on the six-month LIBOR rate, set in arrears, plus an average spread of 19.375 basis points. The expected pay rate was 2.47% at June 30, 2004. The fair value of these agreements was a liability of $19.8 million at June 30, 2004.

(6) PENSION PLANS

We have a qualified defined benefit pension plan (“funded plan”) covering substantially all employees, and separate nonqualified unfunded defined benefit pension plans primarily covering participants in the funded plan whose defined benefits exceed the plan’s limits (“supplemental plan”). In February 2003, our Board of Directors approved modifications to our funded plan and supplemental plan so that covered employees would not earn additional benefits for future services. The curtailment of the funded and supplemental plans required us to immediately recognize substantially all unamortized prior service cost and unrecognized transition obligation and resulted in a curtailment loss of $10.2 million for the six months ended June 30, 2003. We also incurred settlement losses of $2.9 million and $7.4 million for the six months ended June 30, 2004 and 2003, respectively, related to lump-sum distributions made primarily to employees retiring as a result of organizational changes and early retirement programs offered in 2003 and 2002 and a change in the senior management organizational structure in March 2003. The lump-sum distributions were paid to participants primarily from assets of our funded plan, or with respect to the supplemental plan, from contributions made by us.

In February 2004, we adopted a proposal to terminate our funded and supplemental plans. When we complete the terminations, we will be required to settle the obligations of the funded plan by paying accumulated benefits to eligible participants. Depending on the market value of the assets of the funded plan and the relevant interest rates at the time of settlement, we may be required to make additional contributions to that plan, which could be significant if we do not terminate the plan in 2004. At June 30, 2004, the funded plan had sufficient assets to settle its obligations without additional contributions by us. At the time of settlement of the obligations of the funded plan, we will recognize any unrecognized losses associated with that plan. At June 30, 2004, these unrecognized losses were approximately $26.5 million. The unrecognized losses may change depending on interest rates and other factors if we do not terminate the plan in 2004. We expect that a portion of these losses will be recognized prior to the final distribution of plan assets as plan participants retire or otherwise terminate employment in the normal course of business. The review period for the Pension Benefit Guaranty Corporation has expired. We expect to settle all of the plan’s remaining obligations in the fourth quarter of 2004. In connection with the adoption of the proposal to terminate the plans, we transferred the assets of the funded plan to cash and cash equivalents to mitigate market risk during the period prior to distributions to participants.

Concurrent with the distribution of funded plan assets, we will terminate the supplemental plan by merger into our nonqualified supplemental defined contribution plan and expect to establish and fund an irrevocable trust for benefits earned under that plan and recognize settlement losses equal to any unrecognized loss at that date. At June 30, 2004, these unrecognized losses were approximately $5.8 million and may change depending on interest rates and other factors if we do not terminate the pension plan in 2004. The supplemental plan obligations were $17.7 million at June 30, 2004.

We have a qualified defined contribution plan and a nonqualified supplemental defined contribution plan available to substantially all employees. In 2004 and 2003, we matched 100% of participating employees’ pre-tax contributions up to a maximum of 3% of eligible compensation and 50% of participating employees’ pre-tax contributions up to an additional maximum of 2% of eligible compensation.

In an action related to the curtailment of the funded and supplemental plans, we added new components to the defined contribution plans under which we either make or accrue discretionary contributions to the plans for all employees who were previously covered by the defined benefit pension plans. Expenses related to these plans were $1.4 million and $2.8 million for the three and six months ended June 30, 2004, respectively, and $2.5 million and $3.4 million for the three and six months ended June 30, 2003, respectively.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

The normal date for measurement of our pension plan obligations is December 31 of each year, unless more recent measurements of both plan assets and obligations are available, or if a significant event occurs, such as a plan amendment or curtailment, that would ordinarily call for such measurements. In February 2004, we adopted a plan to terminate our funded and supplemental plans. Due to the termination of the plans, we measured our benefit obligations as of March 31, 2004, including the impact of the termination. Information relating to the obligations, assets and funded status of the plans at March 31, 2004 and December 31, 2003 is summarized as follows (dollars in thousands):


	Pension Plans
													Postretirement
	Funded						Supplemental and Other						Plan
	March 31,			December 31,			March 31,			December 31,			March 31,			December 31,
	2004			2003			2004			2003			2004			2003
Projected benefit obligation at end of period	$	64,862		$	56,228		$	18,441		$	17,855		$	N/A		$	N/A
Accumulated benefit obligation at end of period		64,862			56,228			18,441			17,846			17,645			17,555


Benefit obligations at end of period	$	64,862		$	56,228		$	18,441		$	17,855		$	17,645		$	17,555
Fair value of plan assets at end of period		65,304			65,339			—			—			—			—

Funded status	$	442		$	9,111		$	(18,441	)	$	(17,855	)	$	(17,645	)	$	(17,555	)


Weighted-average assumptions at period end:
Discount rate		5.12	%		6.00	%		5.16	%		6.00	%		6.00	%		6.00	%
Lump sum rate		5.12			6.00			5.16			6.00			—			—
Expected rate of return on plan assets		5.12			8.00			—			—			—			—
Rate of compensation increase		N/A			N/A			N/A			N/A			N/A			N/A


Weighted-average assumptions used to determine net periodic benefit cost:
Discount rate		6.00	%		6.50	%		6.00	%		6.50	%		6.00	%		6.50	%
Lump sum rate		6.00			6.00			6.00			6.00			—			—
Expected rate of return on plan assets		8.00			8.00			8.00			—			—			—
Rate of compensation increase		N/A			4.50			N/A			4.50			N/A			N/A

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

The assets of the funded plan historically consisted primarily of fixed income and marketable equity securities. The primary investment objective for the funded plan had been to provide for growth of capital with a moderate level of volatility. In connection with the approval to terminate the plans, we transferred the assets of the funded plan to cash and cash equivalents to mitigate market risk during the period prior to distributions to participants.

The net pension cost includes the following components (in thousands):


	Three months						Six months
	ended June 30,						ended June 30,
	2004			2003			2004			2003

Service cost	$	—		$	(1	)	$	—		$	—
Interest cost on projected benefit obligations		1,044			1,179			2,121			2,587
Expected return on funded plan assets		(818	)		(1,154	)		(2,108	)		(2,433	)
Prior service cost recognized		6			8			15			388
Net actuarial loss recognized		401			634			779			1,462
Amortization of transition obligation		—			—			—			17

Net pension cost before special events		633			666			807			2,021
Special events:
Settlement losses		2,086			2,951			2,868			7,419
Curtailment loss		—			—			—			10,212

Net pension cost	$	2,719		$	3,617		$	3,675		$	19,652

The curtailment loss in 2003 and settlement losses for the three and six months ended June 30, 2004 and 2003 are included in other provisions and losses, net, in the condensed consolidated statements of operations.

The net postretirement benefit cost includes the following components (in thousands):


	Three months						Six months
	ended June 30,						ended June 30,
	2004			2003			2004			2003

Service cost	$	121		$	99		$	241		$	198
Interest cost on accumulated benefit obligations		255			259			509			516
Net actuarial loss recognized		35			28			71			56
Amortization of prior service cost		(61	)		(61	)		(121	)		(121	)

Net postretirement benefit cost	$	350		$	325		$	700		$	649

(7) SEGMENT INFORMATION

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

The operating measure used to assess operating results for the business segments is Net Operating Income (“NOI”). Prior to April 1, 2004, we excluded certain expenses related to organizational changes and early retirement costs from our definition of NOI. Effective April 1, 2004, we revised our definition to include these amounts in our corporate segment. We made these reclassifications because these expenses are neither infrequent nor unusual and are becoming a normal cost of doing business. Prior to July 1, 2003, we included certain income taxes in our definition of NOI. Effective July 1, 2003, we revised our definition to exclude these amounts from NOI, affecting primarily the presentation of our community development activities. We made this change because we now assess the operating results of our segments on a pre-tax basis and believe this revised measure better reflects the performance of the underlying assets. Amounts for prior periods have been reclassified to conform to the current definition.

The accounting policies of the segments are the same as those used to prepare our condensed consolidated financial statements, except that:

• we consolidate the venture developing the community of The Woodlands and reflect the other partner’s share of NOI as an operating expense rather than using the equity method;

• we account for other 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;

• we include our share of NOI less interest expense and ground rent expense of other unconsolidated minority interest ventures (“other ventures”) in revenues; and

• we include discontinued operations and minority interests in NOI rather than presenting them separately.

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):


			Office and
	Retail		Other		Community		Commercial
	Centers		Properties		Development		Development			Corporate			Total
Three months ended June 30, 2004
Revenues	$	219,109	$	59,566	$	124,963	$	—		$	—		$	403,638
Operating expenses		84,054		33,430		85,601		2,466			6,114			211,665

NOI	$	135,055	$	26,136	$	39,362	$	(2,466	)	$	(6,114	)	$	191,973


Three months ended June 30, 2003
Revenues	$	206,821	$	50,370	$	88,452	$	—		$	—		$	345,643
Operating expenses		82,476		19,482		59,157		3,047			10,055			174,217

NOI	$	124,345	$	30,888	$	29,295	$	(3,047	)	$	(10,055	)	$	171,426


Six months ended June 30, 2004
Revenues	$	424,788	$	119,943	$	256,053	$	—		$	—		$	800,784
Operating expenses		166,189		67,270		175,359		5,092			11,835			425,745

NOI	$	258,599	$	52,673	$	80,694	$	(5,092	)	$	(11,835	)	$	375,039


Six months ended June 30, 2003
Revenues	$	423,178	$	100,217	$	158,927	$	—		$	—		$	682,322
Operating expenses		169,186		39,449		99,719		7,975			14,353			330,682

NOI	$	253,992	$	60,768	$	59,208	$	(7,975	)	$	(14,353	)	$	351,640

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

Segment operating expenses include provision for bad debts, losses (gains) on marketable securities classified as trading, net losses (gains) on sales of properties developed for sale and our partner’s share of NOI of the venture developing The Woodlands and exclude income taxes, ground rent expense, distributions on Parent Company-obligated mandatorily redeemable preferred securities and other subsidiary preferred stock and real estate 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 on dispositions of interests in operating properties and discontinued operations in the condensed consolidated financial statements are summarized as follows (in thousands):


	Three months						Six months
	ended June 30,						ended June 30,
	2004			2003			2004			2003
Revenues:
Total reported above	$	403,638		$	345,643		$	800,784		$	682,322
Our share of revenues of proportionate share and other ventures and revenues of The Woodlands community development venture		(83,743	)		(37,576	)		(156,836	)		(72,466	)
Revenues of discontinued operations		(599	)		(24,884	)		(3,604	)		(65,220	)
Other		—			37			—			87

Total in condensed consolidated financial statements	$	319,296		$	283,220		$	640,344		$	544,723

Operating expenses, exclusive of provision for bad debts, depreciation and amortization:
Total reported above	$	211,665		$	174,217		$	425,745		$	330,682
Our share of operating expenses of proportionate share ventures and operating expenses of The Woodlands community development venture and partner’s share of its NOI		(58,055	)		(12,637	)		(107,884	)		(25,256	)
Operating expenses of discontinued operations		(294	)		(12,082	)		(1,372	)		(30,102	)
Other		232			7,467			754			13,389

Total in condensed consolidated financial statements	$	153,548		$	156,965		$	317,243		$	288,713



Operating results:
NOI	$	191,973		$	171,426		$	375,039		$	351,640
Interest expense		(59,963	)		(52,931	)		(118,247	)		(109,678	)
NOI of discontinued operations		(305	)		(12,802	)		(2,232	)		(35,118	)
Depreciation and amortization		(48,521	)		(40,567	)		(96,346	)		(78,567	)
Other provisions and losses, net		(2,086	)		(8,631	)		(6,180	)		(19,757	)
Income taxes, primarily deferred		(20,498	)		(15,993	)		(39,114	)		(26,578	)
Our share of interest expense, ground rent expense, depreciation and amortization, other provisions and losses, net, income taxes and gains on operating properties of unconsolidated real estate ventures, net		(20,351	)		(18,158	)		(40,317	)		(32,929	)
Other		(1,269	)		(4,383	)		(3,065	)		(11,798	)

Earnings before net gains on dispositions of interests in operating properties and discontinued operations in condensed consolidated financial statements	$	38,980		$	17,961		$	69,538		$	37,215

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

The assets by segment and the reconciliation of total segment assets to the total assets in the condensed consolidated financial statements are as follows (in thousands):


	June 30,			December 31,
	2004			2003

Retail centers	$	5,607,595		$	5,069,644
Office and other properties		1,054,129			1,165,599
Community development		833,199			835,525
Commercial development		143,255			114,439
Corporate		241,084			327,294

Total segment assets		7,879,262			7,512,501
Our share of assets of unconsolidated proportionate share ventures		(1,481,827	)		(1,464,329	)
Investments in and advances to unconsolidated proportionate share ventures		572,123			591,072

Total assets in condensed consolidated financial statements	$	6,969,558		$	6,639,244

Investments in and advances to unconsolidated real estate ventures, by segment, are summarized as follows (in thousands):


	June 30,		December 31,
	2004		2003

Retail centers	$	309,754	$	345,486
Office and other properties		158,738		158,360
Community development		119,271		144,021

Total	$	587,763	$	647,867

(8) OTHER PROVISIONS AND LOSSES, NET

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


	Three months				Six months
	ended June 30,				ended June 30,
	2004		2003		2004		2003

Pension plan settlement losses (see note 6)	$	2,086	$	2,898	$	2,868	$	7,364
Pension plan curtailment loss (see note 6)		—		—		—		10,212
Net losses on early extinguishment of debt		—		5,733		3,312		5,727
Other, net		—		—		—		(3,546	)

Total	$	2,086	$	8,631	$	6,180	$	19,757

As discussed in note 6 above, we curtailed our defined benefit pension plans in the first quarter of 2003 and recognized a loss.

During the six months ended June 30, 2004, we recognized net losses of $3.3 million, primarily unamortized issuance costs, related to the extinguishment of debt not associated with discontinued operations prior to scheduled maturity and to the redemption of the Parent Company-obligated mandatorily redeemable securities. During the three and six months ended June 30, 2003, we recognized net losses of $5.7 million, primarily prepayment penalties related to the extinguishment of debt not associated with discontinued operations prior to scheduled maturity.

The other amount for the six months ended June 30, 2003 consists primarily of a fee of $3.8 million that we earned on the facilitation of a real estate transaction between two parties that are unrelated to us.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

(9) NET GAINS ON DISPOSITIONS OF INTERESTS IN OPERATING PROPERTIES

Net gains on dispositions of interests in operating properties included in earnings from continuing operations are summarized as follows (in thousands):


	Three months				Six months
	ended June 30,				ended June 30,
	2004		2003		2004			2003

Regional retail centers	$	—	$	21,561	$	—		$	21,561
Office and other properties		14,096		—		14,096			—
Other		—		12		(208	)		243

Total	$	14,096	$	21,573	$	13,888		$	21,804

In 2000, we contributed our ownership interests in 37 buildings in two industrial parks to a joint venture in exchange for cash and a minority interest in the venture. We also guaranteed $44.0 million of indebtedness of the venture and, because of the nature of our continuing involvement in the venture, deferred gains of approximately $14.4 million. In June 2004, we redeemed our interest in the venture and terminated our guarantee of its indebtedness. Accordingly, we recognized the previously deferred gain, net of deferred income taxes of approximately $1.7 million.

In April 2004, we sold most of our interest in Westin New York, a hotel in New York City, for net proceeds of $15.8 million and recognized a gain of $1.4 million (net of deferred income taxes of $0.8 million).

In 2003, in a transaction related to the sale of retail centers in the Philadelphia metropolitan area (see note 3), we acquired Christiana Mall from a party related to the purchaser and assumed a participating mortgage secured by Christiana Mall. The participating mortgage had a fair value of $160.9 million. The holder of this mortgage had the right to receive $120 million in cash and participation in cash flows and the right to convert this participation feature into a 50% equity interest in Christiana Mall. The holder exercised this right in June 2003. We recorded a portion of the cost of Christiana Mall based on the historical cost of the properties we exchanged to acquire this property because a portion of the transaction was considered nonmonetary under EITF Issue 01-2, “Interpretations of APB Opinion No. 29.” As a consequence, when we subsequently disposed of the 50% interest in the property, we recognized a gain of $21.6 million.

(10) PREFERRED STOCK

The shares of Series B Convertible Preferred stock had a liquidation preference of $50 per share and earned dividends at an annual rate of 6% of the liquidation preference. At the option of the holders, each share of the Series B Convertible Preferred stock was convertible into shares of our common stock at a conversion price of $38.125 per share (equivalent to a conversion rate of approximately 1.311 shares of common stock for each share of Preferred stock). The conversion price was subject to adjustment in certain circumstances such as stock dividends, stock splits, rights offerings, mergers and similar transactions. In addition, these shares of Preferred stock were redeemable for shares of common stock at our option, subject to certain conditions related to the market price of our common stock. There were 4,047,555 shares of Preferred stock issued and outstanding at December 31, 2003. On January 7, 2004, we called for the redemption of all outstanding shares of the Series B Convertible Preferred stock pursuant to the terms of its issuance and established February 10, 2004 as the redemption date. In the first quarter of 2004, we issued 5,308,199 shares of common stock upon conversion or redemption of all of the outstanding shares of Series B Convertible Preferred stock.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

(11) EARNINGS PER SHARE

Information relating to the calculations of earnings per share (“EPS”) of common stock for the three months ended June 30, 2004 and 2003 is summarized as follows (in thousands):


	2004						2003
	Basic			Diluted			Basic			Diluted

Earnings from continuing operations	$	53,076		$	53,076		$	39,534		$	39,534
Dividends on unvested common stock awards and other		(164	)		(548	)		(165	)		(165	)
Dividends on Series B Convertible Preferred stock		—			—			(3,038	)		(3,038	)

Adjusted earnings from continuing operations used in EPS computation	$	52,912		$	52,528		$	36,331		$	36,331


Weighted-average shares outstanding		102,436			102,436			87,628			87,628
Dilutive securities:
Options, unvested common stock awards and other		—			1,883			—			2,296
Series B Convertible Preferred stock		—			—			—			—

Adjusted weighted-average shares used in EPS computation		102,436			104,319			87,628			89,924

Information relating to the calculations of earnings per share (“EPS”) of common stock for the six months ended June 30, 2004 and 2003 is summarized as follows (in thousands):


	2004						2003
	Basic			Diluted			Basic			Diluted

Earnings from continuing operations	$	83,426		$	83,426		$	59,019		$	59,019
Dividends on unvested common stock awards and other		(335	)		(335	)		(343	)		(343	)
Dividends on Series B Convertible Preferred stock		—			—			(6,076	)		(6,076	)

Adjusted earnings from continuing operations used in EPS computation	$	83,091		$	83,091		$	52,600		$	52,600


Weighted-average shares outstanding		100,191			100,191			87,180			87,180
Dilutive securities:
Options, unvested common stock awards and other		—			1,978			—			1,918
Series B Convertible Preferred stock		—			938			—			—

Adjusted weighted-average shares used in EPS computation		100,191			103,107			87,180			89,098

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

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

(12) COMMITMENTS AND CONTINGENCIES

Other commitments and contingencies (that are not reflected in the condensed consolidated balance sheets) at June 30, 2004 and December 31, 2003 are summarized as follows (in millions):


	June 30,		December 31,
	2004		2003
Guarantee of debt of unconsolidated real estate ventures:
Village of Merrick Park	$	100.0	$	100.0
Hughes Airport-Cheyenne Centers		—		28.8
Construction contracts for properties in development:
Consolidated subsidiaries, primarily related to Fashion Show and The Shops at La Cantera		106.1		103.1
Our share of unconsolidated real estate ventures, primarily related to the Village of Merrick Park and the venture developing The Woodlands		14.6		9.5
Contract to purchase an interest in Mizner Park		—		18.0
Construction contracts for land development:
Consolidated subsidiaries, primarily Columbia and Summerlin operations		67.0		83.1
Our share of the unconsolidated venture developing The Woodlands		21.4		—
Our share of long-term ground lease obligations of unconsolidated real estate ventures		120.6		121.1
Bank letters of credit and other		16.1		14.9

	$	445.8	$	478.5

We have guaranteed up to $100 million for the repayment of a mortgage loan of the unconsolidated real estate venture that owns the Village of Merrick Park. The amount of the guarantee may be reduced or eliminated upon the achievement of certain lender requirements. The fair value of the guarantee is not material. Additionally, venture partners have provided guarantees to us for their share (60%) of the loan guarantee.

We determined that several of our consolidated partnerships are limited-life entities. We estimate the fair values of minority interests in these partnerships at June 30, 2004 aggregated approximately $54.4 million. The aggregate carrying values of the minority interests were approximately $29.4 million at June 30, 2004.

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. We record provisions for litigation matters and other claims when we believe a loss is probable and can be reasonably estimated. We continuously monitor these claims and adjust recorded liabilities as developments warrant. We further believe that any losses we may suffer for litigation and other claims in excess of the recorded aggregate liabilities are not material. Accordingly, in our opinion, adequate provision has been made for losses with respect to litigation matters and other claims, and the ultimate resolution of these matters is not likely to have a material effect on our consolidated financial position or results of operations. Our assessment of the potential outcomes of these matters involves significant judgment and is subject to change based on future developments.

(13) SUBSEQUENT EVENTS

In August 2004, we agreed to purchase Oxmoor Center, a regional retail center in Louisville, Kentucky. We expect to assume mortgage debt with a face value of approximately $60 million and to pay $63 million in cash to the seller, using the proceeds of borrowings under our revolving credit facility and/or other borrowings. We expect this transaction, which is subject to lender consent and other customary closing conditions, to close in September 2004.

Part I. Financial Information
Item 1. Financial Statements.

THE ROUSE COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), continued

(14) NEW FINANCIAL ACCOUNTING STANDARDS

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses the consolidation of variable interest entities (“VIEs”) in which the equity investors lack one or more of the essential characteristics of a controlling financial interest or where the equity investment at risk is not sufficient for the entity to finance its activities without additional subordinated financial support. In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”). FIN 46R or FIN 46 applies in the fourth quarter of 2003 to all special purpose entities (“SPEs”) and to VIEs formed after January 31, 2003 and in the first quarter of 2004 to all other VIEs. Application of FIN 46 in 2003 and 2004 had no effect on our financial statements as we previously consolidated the SPE that issued our Parent Company-obligated mandatorily redeemable preferred securities and, at June 30, 2004, held no interests in other VIEs formed after January 31, 2003. Full application of FIN 46R in 2004 did not have a material effect on our results of operations or financial condition.

EX-99.3 6 c89046exv99w3.txt BACK-STOP AGREEMENT EXHIBIT 99.3 M.B. CAPITAL PARTNERS III 300 North Dakota Avenue Suite 202 Sioux Falls, South Dakota 57104 October 22, 2004 Mr. Bernard Freibaum Executive Vice President and Chief Financial Officer General Growth Properties, Inc. 110 North Wacker Drive Chicago, Illinois 60606 Re: Equity Financing Commitment Dear Sir: In connection with the warrants offering, if any, undertaken by General Growth Properties, Inc. ("GGP") prior to or within 60 days after GGP's acquisition of all of the outstanding common stock of The Rouse Company pursuant to the agreement and plan of merger, dated August 19, 2004, entered into by and among The Rouse Company, GGP and a merger affiliate thereof (such offering, the "Offering"), the undersigned hereby commits to (x) exercise any basic subscription rights that are granted to the undersigned in the Offering and (y) subscribe for additional common stock in the Offering with an aggregate purchase price equal to the positive difference, if any, between $500 million and the aggregate purchase price of the stock otherwise subscribed for in the Offering, thereby ensuring that at least $500 million, in the aggregate, will be raised in the Offering; provided, however, that (a) the undersigned shall have no obligation hereunder unless the price of a share of GGP common stock in the Offering is not greater than the trading price of a share of GGP common stock as of the initiation of the Offering (and such condition shall be deemed to have been satisfied if the price is determined by averaging the high and low prices for each of three or more days within the five day trading period prior to the initiation of the Offering), (b) the undersigned shall not be obligated to expend more than a maximum of $500 million in the aggregate pursuant to this letter and (c) the undersigned shall not be obligated to perform any obligation hereunder if the aforesaid agreement and plan of merger is terminated prior to performance of such obligation. The undersigned hereby acknowledges that the proceeds of the Offering will be used in connection with GGP's proposed purchase of all of the outstanding common stock of The Rouse Company. This letter represents the entire understanding of the undersigned and GGP with respect to the subject matter hereof and supersedes any prior agreements or understandings between them with respect to such subject matter, including without limitation that certain letter dated August 19, 2004, from the undersigned to GGP. October 22, 2004 Page 2 Very truly yours, M.B. CAPITAL PARTNERS III, a South Dakota general partnership By: GENERAL TRUST COMPANY, not individually but solely as Trustee of a partner By: /s/ E. Michael Greaves ---------------------------------- Name: E. Michael Greaves Title: Vice President and Cashier ACKNOWLEDGED AND AGREED: GENERAL GROWTH PROPERTIES, INC., a Delaware corporation By: /s/ Bernard Freibaum ----------------------------- Name: Bernard Freibaum Title: Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----


	2003			2002			2001
Cash flows from operating activities:
Rents from tenants and other revenues received	$	878,048		$	863,166		$	743,394
Proceeds from land sales and notes receivable from land sales		273,788			231,220			193,064
Interest received		7,623			9,883			6,711
Operating expenditures		(445,730	)		(427,155	)		(353,972	)
Land development and acquisition expenditures		(136,955	)		(105,199	)		(99,407	)
Interest paid		(231,135	)		(233,403	)		(213,781	)
Income taxes paid		(5,440	)		(1,409	)		(2,665	)
Operating distributions from unconsolidated real estate ventures		35,767			39,041			28,410


Net cash provided by operating activities		375,966			376,144			301,754


Cash flows from investing activities:
Expenditures for properties in development		(168,341	)		(172,718	)		(146,103	)
Expenditures for improvements to existing properties		(71,456	)		(53,751	)		(48,473	)
Expenditures for acquisitions of interests in properties and other assets		(396,891	)		(889,776	)		—
Proceeds from dispositions of interests in properties		355,572			252,036			4,594
Other distributions from unconsolidated real estate ventures		—			44,853			109,329
Expenditures for investments in unconsolidated real estate ventures		(27,051	)		(35,715	)		(45,955	)
Other		19,562			(8,640	)		13


Net cash used by investing activities		(288,605	)		(863,711	)		(126,595	)


Cash flows from financing activities:
Proceeds from issuance of property debt		315,967			195,164			259,401
Repayments of property debt:
Scheduled principal payments		(74,272	)		(76,058	)		(58,681	)
Other payments		(436,314	)		(209,453	)		(234,381	)
Proceeds from issuance of other debt		389,919			812,691			28,000
Repayments of other debt		(3,000	)		(509,689	)		(37,872	)
Purchases of Parent Company-obligated mandatorily redeemable preferred securities		(57,124	)		(625	)		—
Purchases of common stock		(71,964	)		(21,188	)		(28,199	)
Proceeds from issuance of common stock		—			456,347			—
Proceeds from exercise of stock options		109,755			14,348			8,872
Dividends paid		(161,840	)		(147,166	)		(110,116	)
Other		(22,891	)		(17,294	)		15,198


Net cash provided (used) by financing activities		(11,764	)		497,077			(157,778	)


Net increase in cash and cash equivalents		75,597			9,510			17,381

Cash and cash equivalents at beginning of year		41,633			32,123			14,742


Cash and cash equivalents at end of year	$	117,230		$	41,633		$	32,123


	2003			2002			2001
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities:

Net earnings	$	260,589		$	139,851		$	110,706
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		188,171			162,922			133,542
Change in undistributed earnings of unconsolidated real estate ventures		5,246			5,763			(4,151	)
Net losses (gains) on dispositions of interests in operating properties		(112,155	)		(81,958	)		58
Impairment losses on operating properties and other assets		7,900			53,746			374
Losses (gains) on extinguishment of debt		(19,654	)		7,679			451
Cumulative effect of change in accounting principle		—			—			411
Participation expense pursuant to Contingent Stock Agreement		64,293			52,870			32,904
Land development expenditures in excess of cost of land sales		(37,782	)		(33,668	)		(12,025	)
Provision for bad debts		11,964			9,059			8,992
Debt assumed by purchasers of land		(19,595	)		(16,186	)		(24,634	)
Deferred income taxes		41,214			26,919			25,402
Decrease (increase) in accounts and notes receivable		(14,038	)		24,049			11,213
Decrease in other assets		6,877			3,450			2,531
Increase (decrease) in accounts payable, accrued expenses and other liabilities		(7,351	)		7,155			18,439
Other, net		287			14,493			(2,459	)


Net cash provided by operating activities	$	375,966		$	376,144		$	301,754


Schedule of Noncash Investing and Financing Activities:

Common stock issued pursuant to Contingent Stock Agreement	$	66,785		$	19,356		$	40,820
Capital lease obligations incurred		7,504			12,720			3,359
Lapses of restrictions on common stock awards		7,515			2,809			2,704
Debt assumed by purchasers of land and other assets		19,595			16,656			24,634
Debt assumed by purchasers of operating properties		286,186			—			—
Debt and other liabilities assumed and consolidated in acquisition of assets from Rodamco North America N.V. and other partners’ interests in unconsolidated real estate ventures		95,770			915,976			547,531
Property and other assets contributed to unconsolidated real estate ventures		164,306			196,920			—
Debt and other liabilities related to property and other assets contributed to unconsolidated real estate ventures		163,406			129,801			—
Debt and other liabilities assumed or issued in other acquisitions of assets		289,208			—			105,195
Common stock issued in acquisition of voting interests in majority financial interest ventures		—			—			3,500
Property and other assets obtained in acquisition of majority financial interest ventures		—			—			884,572


	2003			2002			2001

Revenues	$	79,755		$	156,618		$	163,538
Operating expenses, exclusive of depreciation and amortization		(36,155	)		(69,363	)		(72,736	)
Interest expense		(19,773	)		(37,511	)		(46,669	)
Depreciation and amortization		(14,891	)		(31,328	)		(31,181	)
Gains (losses) on extinguishment of debt, net		26,896			(5,346	)		—
Impairment losses on operating properties		—			(42,123	)		—
Gains on dispositions of operating properties, net		85,523			33,012			—
Income tax benefit (provision), primarily deferred		(289	)		598			(2,246	)

Discontinued operations	$	121,066		$	4,557		$	10,706


	2003		2002

Net property and property-related deferred costs	$	2,776,448	$	2,075,720
Investments in unconsolidated real estate ventures		50,570		78,717
Accounts and notes receivable		75,059		20,502
Prepaid expenses and other assets		246,034		40,633
Cash and cash equivalents		61,333		38,729

Total assets	$	3,209,444	$	2,254,301


Nonrecourse property debt	$	1,681,252	$	1,195,359
Property debt guaranteed by us		100,000		175,180
Accounts payable and other liabilities		384,503		134,206
Venturers’ equity		1,043,689		749,556

Total liabilities and venturers’ equity	$	3,209,444	$	2,254,301


	2003			2002			2001
Revenues	$	335,855		$	307,486		$	322,646
Equity in earnings of unconsolidated investments		15,990			9,651			—
Operating and interest expenses		(220,297	)		(207,263	)		(219,183	)
Depreciation and amortization		(67,069	)		(49,020	)		(41,105	)
Loss on early extinguishment of debt		(269	)		(260	)		(556	)
Cumulative effect of change in accounting principle		—			—			(292	)

Net earnings	$	64,210		$	60,594		$	61,510


												Accumulated
	Series B					Additional						other
	Preferred		Common			paid-in			Accumulated			comprehensive
	stock		stock			capital			deficit			income (loss)			Total
Balance at December 31, 2000	$	41	$	679		$	735,669		$	(103,015	)	$	(2,906	)	$	630,468

Net earnings		—		—			—			110,706			—			110,706
Other comprehensive income (loss)		—		—			—			—			(3,395	)		(3,395	)
Dividends declared:
Common stock-$1.42 per share		—		—			—			(97,966	)		—			(97,966	)
Preferred stock-$3.00 per share		—		—			—			(12,150	)		—			(12,150	)
Purchases of common stock		—		(11	)		(28,188	)		—			—			(28,199	)
Common stock issued pursuant to Contingent Stock Agreement		—		16			40,804			—			—			40,820
Proceeds from exercise of stock options		—		9			8,863			—			—			8,872
Common stock issued in acquisition of voting interests in majority financial interest ventures		—		1			3,499			—			—			3,500
Lapses of restrictions on common stock awards		—		—			2,704			—			—			2,704

Balance at December 31, 2001		41		694			763,351			(102,425	)		(6,301	)		655,360

Net earnings		—		—			—			139,851			—			139,851
Other comprehensive income (loss)		—		—			—			—			(7,633	)		(7,633	)
Dividends declared:
Common stock-$1.56 per share		—		—			—			(135,016	)		—			(135,016	)
Preferred stock-$3.00 per share		—		—			—			(12,150	)		—			(12,150	)
Purchases of common stock		—		(7	)		(21,181	)		—			—			(21,188	)
Common stock issued pursuant to Contingent Stock Agreement		—		6			19,350			—			—			19,356
Proceeds from exercise of stock options		—		9			14,339			—			—			14,348
Other common stock issuances		—		167			456,180			—			—			456,347
Lapses of restrictions on common stock awards		—		—			2,809			—			—			2,809

Balance at December 31, 2002		41		869			1,234,848			(109,740	)		(13,934	)		1,112,084

Net earnings		—		—			—			260,589			—			260,589
Other comprehensive income (loss)		—		—			—			—			2,040			2,040
Dividends declared:
Common stock-$1.68 per share		—		—			—			(149,690	)		—			(149,690	)
Preferred stock-$3.00 per share		—		—			—			(12,150	)		—			(12,150	)
Purchases of common stock		—		(19	)		(71,945	)		—			—			(71,964	)
Common stock issued pursuant to Contingent Stock Agreement		—		19			66,766			—			—			66,785
Proceeds from exercise of stock options		—		49			109,706			—			—			109,755
Lapses of restrictions on common stock awards		—		—			7,515			—			—			7,515


Balance at December 31, 2003	$	41	$	918		$	1,346,890		$	(10,991	)	$	(11,894	)	$	1,324,964


	2003		2002

Buildings and improvements	$	4,679,036	$	5,019,394
Land		637,409		664,326
Furniture and equipment		35,303		27,225

Total	$	5,351,748	$	5,710,945


	2003		2002

Land under development	$	300,553	$	208,675
Finished land		68,956		63,753
Investment and raw land		45,157		49,316

Total	$	414,666	$	321,744


	2003		2002

Accounts receivable, primarily rents under tenant leases	$	65,295	$	66,853
Notes receivable from sales of operating properties		281		538
Notes receivable from sales of land		18,978		16,733

		84,554		84,124
Less allowance for doubtful receivables		30,860		27,197

Total	$	53,694	$	56,927


			Allocation of Plan Assets
	Target Allocation		(%)
	(%)		2003		2002
Equity securities		35–75		59.0		45.5
Debt securities		20–45		28.4		23.2
International equity securities		5–20		7.5		9.3
Cash		0–20		5.1		22.0

Total				100.0		100.0

	(1)		Properties were owned by existing joint ventures or through tenancies in common between Rodamco and us. As a result, we owned 100% interests in these properties upon acquisition.
	(2)		In 2000, we transferred a 33.95% ownership interest in North Star to our joint venture partner (an affiliate of Rodamco) and retained a 3.55% ownership interest in the property. We also relinquished our rights to jointly control the operation of the property and terminated our property management agreement. We received a cash distribution of approximately $82.5 million in this transaction. We accounted for this transaction as a partial sale of real estate. Accordingly, we realized a gain for the difference between the sales value and the proportionate cost (90.5%) of the partial interest sold. We deferred recognition of this gain due to our continuing involvement with the venture related to our guarantee of up to $25 million of its debt obligations. We allocated the cost of the acquisition of Rodamco to the acquired assets (including acquired interests in North Star) and liabilities assumed based on their estimated fair values at the time of acquisition. As a result, the $25 million deferred gain was recorded as a reduction in our investment in North Star.
	(3)		Property began operations in March 2002.
	(4)		Property also contains significant office space.
	(5)		In October 2002, we contributed our ownership interest in Perimeter Mall to a joint venture in exchange for a 50% interest in that joint venture and a cash distribution of $67.1 million.

	•		A 40% interest in River Ridge, a retail center in Lynchburg, VA, that the purchasers disposed of in July 2003;
	•		Sawmill Place Plaza, a retail center in Columbus, OH, that was sold by the Purchasers on November 15, 2002;
	•		A 50% interest in Durham Associates, a partnership that owned and operated 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. We sold our share of the interest in Kravco Investments, L.P. to Simon in December 2003;
	•		Urban Retail Properties Co., a property management company that manages properties owned 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 in New York City that began operations in October 2002.

	(1)		Reference is made to note 18 of the consolidated financial statements for information related to the acquisition of properties and other assets from Rodamco in 2002.
	(2)		In 2001, we acquired all of the voting stock of the majority financial interest ventures owned by a trust. The majority financial interest ventures were initiated on December 31, 1997, at which time we began accounting for our investment in them using the equity method. Subsequent to acquisition in 2001, we consolidated these entities in our financial statements. Reference is made to note 10 of the consolidated financial statements for information related to the acquisition of the majority financial interest ventures in 2001.
	(3)		Reference is made to note 2 of the consolidated financial statements for information related to the reclassification of prior year operating results to discontinued operations.
	(4)		Shareholders’ equity per share of common stock assumes conversion of the Series B Convertible Preferred stock issued in 1997.

	•		we consolidate the venture developing the community of The Woodlands and reflect the other partner’s share of NOI as an operating expense rather than using the equity method;

	•		we account for other 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;

	•		we include our share of NOI less interest expense and ground rent expense of other unconsolidated minority interest ventures (“other ventures”) in revenues; and

	•		we include discontinued operations and minority interests in NOI rather than presenting them separately.