-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LxuNSIWyxKuG9jy+tAOvYyz3G9lXI6/IHXBKpgzt+shg3f+BuHz9a8pez0OcrB/D YkhysqQ0qkfTV7wf9wnrYQ== 0000928385-99-001741.txt : 19990514 0000928385-99-001741.hdr.sgml : 19990514 ACCESSION NUMBER: 0000928385-99-001741 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROUSE COMPANY CENTRAL INDEX KEY: 0000085388 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 520735512 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11543 FILM NUMBER: 99620027 BUSINESS ADDRESS: STREET 1: 10275 LITTLE PATUXENT PKWY CITY: COLUMBIA STATE: MD ZIP: 21044-3456 BUSINESS PHONE: 4109926000 MAIL ADDRESS: STREET 1: 10275 LITTLE PATUXENT PARKWAY CITY: COLUMBIA STATE: MD ZIP: 21044 FORMER COMPANY: FORMER CONFORMED NAME: COMMUNITY RESEARCH & DEVELOPMENT INC DATE OF NAME CHANGE: 19660913 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 --------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number 0-1743 ------ The Rouse Company ----------------- (Exact name of registrant as specified in its charter) Maryland 52-0735512 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10275 Little Patuxent Parkway Columbia, Maryland 21044-3456 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 992-6000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Indicate the number of shares outstanding of the issuer's common stock as of May 5, 1999: Common Stock, $0.01 par value 72,268,031 - ----------------------------- -------------- Title of Class Number of Shares Part I. Financial Information Item 1. Financial Statements: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income Three Months Ended March 31, 1999 and 1998 (Unaudited, in thousands, except per share amounts, note 1)
Three months ended March 31, -------------------- 1999 1998 -------- -------- Revenues: Retail centers $126,769 $108,515 Office, mixed-use and other 52,123 39,475 Land sales operations 1,054 22,612 Corporate interest income 96 970 -------- -------- Total revenues 180,042 171,572 -------- -------- Operating expenses, exclusive of provision for bad debts, depreciation and amortization: Retail centers 58,202 54,609 Office, mixed-use and other 20,058 16,936 Land sales operations 656 19,772 Development 1,466 3,566 Corporate 3,490 4,098 -------- -------- 83,872 98,981 -------- -------- Interest expense: Retail centers 39,375 29,974 Office, mixed-use and other 21,878 17,555 Land sales operations 208 267 Corporate 2,163 2,358 -------- -------- 63,624 50,154 -------- -------- Provision for bad debts 1,312 854 Depreciation and amortization 27,673 18,790 -------- -------- Total expenses 176,481 168,779 -------- -------- Earnings before equity in earnings of unconsolidated real estate ventures and income taxes 3,561 2,793
The accompanying notes are an integral part of these statements. 2 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income, continued Three Months Ended March 31, 1999 and 1998 (Unaudited, in thousands, except per share amounts, note 1)
Three months ended March 31, ------------------ 1999 1998 -------- -------- Equity in earnings of unconsolidated real estate ventures (note 3) $23,333 $29,910 Current income taxes (note 2) (74) (106) ------- ------- Earnings before gain on dispositions of assets and other provisions, net, extraordinary items and cumulative effect of change in accounting principle 26,820 32,597 Gain on dispositions of assets and other provisions, net (note 6) 1,106 1,935 ------- ------- Earnings before extraordinary items and cumulative effect of change in accounting principle 27,926 34,532 Extraordinary loss, net (note 7) --- (916) Cumulative effect at January 1, 1998 of change in accounting for participating mortgages --- (4,629) ------- ------- Net earnings 27,926 28,987 Other items of comprehensive income - minimum pension liability adjustment (334) --- ------- ------- Comprehensive income $27,592 $28,987 ======= ======= Net earnings applicable to common shareholders $24,888 $25,949 ======= =======
3 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income, continued Three Months Ended March 31, 1999 and 1998 (Unaudited, in thousands, except per share amounts, note 1)
Three months ended March 31, ----------------- 1999 1998 ------- -------- EARNINGS PER SHARE OF COMMON STOCK (Note 8): Basic: Earnings before extraordinary items and cumulative effect of change in accounting principle $ .34 $ .47 Extraordinary loss --- (.01) Cumulative effect of change in accounting principle --- (.07) ----- ----- Total $ .34 $ .39 ===== ===== Diluted: Earnings before extraordinary items and cumulative effect of change in accounting principle $ .34 $ .46 Extraordinary loss --- (.01) Cumulative effect of change in accounting principle --- (.06) ----- ----- Total $ .34 $ .39 ===== ===== DIVIDENDS PER SHARE: Common stock $ .30 $ .28 ===== ===== Preferred stock $ .75 $ .75 ===== =====
4 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets March 31, 1999 and December 31, 1998 (in thousands, except share data, note 1)
March 31, December 31, 1999 1998 (Unaudited) ----------- ------------ Assets: Property: Operating properties: Property and deferred costs of projects $3,873,646 $4,718,727 Less accumulated depreciation and amortization 540,345 578,311 ---------- ---------- 3,333,301 4,140,416 Properties in development 173,840 167,360 Properties held for sale (note 10) 169,266 165,894 ---------- ---------- Total property 3,676,407 4,473,670 Investments in and advances to unconsolidated real estate ventures (note 3) 473,574 322,066 Prepaid expenses, receivables under finance leases and other assets 247,970 241,040 Accounts and notes receivable 91,566 75,917 Investments in marketable securities 4,076 4,256 Cash and cash equivalents 29,470 37,694 ---------- ---------- Total $4,523,063 $5,154,643 ========== ==========
The accompanying notes are an integral part of these statements. 5 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Balance Sheets, continued March 31, 1999 and December 31, 1998 (in thousands, except share data, note 1)
March 31, December 31, 1999 1998 (Unaudited) ----------- ------------ Liabilities: Debt (notes 4 and 11): Property debt not carrying a Parent Company guarantee of repayment $2,458,334 $2,865,119 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt 161,983 161,986 Convertible subordinated debentures 128,515 128,515 Other debt 691,315 903,200 ---------- ---------- 981,813 1,193,701 ---------- ---------- Total debt 3,440,147 4,058,820 ---------- ---------- Accounts payable, accrued expenses and other liabilities 308,294 329,932 Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 136,965 136,965 Shareholders' equity: Series B Convertible Preferred stock with a liquidation preference of $202,500 41 41 Common stock of 1 cent par value per share; 250,000,000 shares authorized; 72,268,031 shares issued in 1999 and 72,225,223 shares issued in 1998 723 723 Additional paid-in capital 842,325 836,508 Accumulated deficit (203,272) (206,520) Accumulated other comprehensive income (2,160) (1,826) ---------- ---------- Net shareholders' equity 637,657 628,926 ---------- ---------- Total $4,523,063 $5,154,643 ========== ==========
6 Part I. Financial Information, continued: Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and 1998 (Unaudited, in thousands, note 1)
1999 1998 --------- -------- Cash flows from operating activities: Rents and other revenues received $163,737 $147,821 Proceeds from land sales and on notes receivable from land sales 5,731 33,344 Interest received 2,186 3,752 Operating expenditures (90,813) (85,172) Interest paid (59,957) (47,927) Dividends, interest and other operating distributions received from unconsolidated majority financial interest ventures -- 27,024 -------- -------- Net cash provided by operating activities 20,884 78,842 -------- -------- Cash flows from investing activities: Expenditures for properties in development and improvements to existing properties funded by debt (61,290) (71,382) Expenditures for improvements to existing properties funded by cash provided by operating activities: Tenant leasing and remerchandising (1,870) (1,501) Building and equipment (4,693) (3,641) Payments received on loans and advances to unconsolidated majority financial interest ventures 9,820 5,484 Proceeds from sales of operating properties 361 15,452 Other (3,313) (1,724) -------- -------- Net cash used in investing activities (60,985) (57,312) -------- -------- Cash flows from financing activities: Proceeds from issuance of property debt 28,938 21,858 Repayments of property debt: Scheduled principal payments (11,659) (10,739) Other payments --- (1,499) Proceeds from issuance of other debt 59,237 22,000 Repayments of other debt (440) (10,135) Purchases of common stock (13,152) (16,258) Proceeds from exercise of stock options 32 121 Dividends paid (24,683) (21,798) Other (6,396) --- -------- -------- Net cash provided (used) by financing activities 31,877 (16,450) -------- -------- Net increase (decrease) in cash and cash equivalents (8,224) 5,080 Cash and cash equivalents at beginning of period 37,694 87,100 -------- -------- Cash and cash equivalents at end of period $ 29,470 $ 92,180 ======== ========
The accompanying notes are an integral part of these statements. 7 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued Three Months Ended March 31, 1999 and 1998 (Unaudited, in thousands, note 1)
1999 1998 --------- -------- Reconciliation of net earnings to net cash provided by operating activities: Net earnings $ 27,926 $28,987 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 27,673 18,790 Undistributed earnings of majority financial interest ventures (27,136) (7,968) Gain on dispositions of assets and other provisions, net (1,106) (1,935) Extraordinary loss, net --- 916 Cumulative effect of change in accounting principle --- 4,629 Additions to preconstruction reserve 600 2,000 Participation expense pursuant to Contingent Stock Agreement 6,660 27,794 Provision for bad debts 1,312 854 Decrease (increase) in operating assets and liabilities, net (15,045) 4,775 -------- ------- Net cash provided by operating activities $ 20,884 $78,842 ======== ======= Schedule of Noncash Investing and Financing Activities: Common stock issued pursuant to Contingent Stock Agreement $ 16,207 $15,754 Property and other assets contributed to an unconsolidated real estate venture 701,105 --- Mortgage debt, other debt and other liabilities related to property and other assets contributed to an unconsolidated real estate venture 432,525 --- Other debt repaid in the formation of an unconsolidated real estate venture 271,233 --- Capital lease obligations incurred 1,278 --- ======== =======
8 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) March 31, 1999 (1) Principles of statement presentation ------------------------------------ The unaudited consolidated financial statements include all adjustments which are necessary, in the opinion of management, to fairly reflect the Company's financial position and results of operations. All such adjustments are of a normal recurring nature. The statements have been prepared using the accounting policies described in the 1998 Annual Report to Shareholders. Certain amounts have been reclassified to conform to the current presentation. (2) Tax status ---------- The Company determined that it would elect to be taxed as a real estate investment trust (REIT) effective January 1, 1998 pursuant to the Internal Revenue Code, as amended. Management believes the Company met the qualifications for REIT status as of March 31, 1999, intends for it to continue to meet the qualifications in the future and accordingly, does not expect that the Company will be liable for significant income taxes at the Federal level or in most states in which it operates in 1999 and future years. In connection with its election to be taxed as a REIT, the Company will also elect to be subject to the "built-in gain" rules. Under these rules, taxes may be payable at the time and to the extent that the net unrealized gains on the Company's assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten-year period following conversion. Such net unrealized gains were approximately $2,100,000,000 at January 1, 1998. At March 31, 1999, the regular tax net operating loss carryforward is sufficient to offset built-in gains on assets the Company has identified for disposition and no net deferred tax liability for built-in gains taxes has been recognized. It may however, be necessary to recognize a liability for such taxes in the future if management's plans and intentions with respect to asset dispositions, or the related tax laws, change. 9 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (3) Unconsolidated real estate ventures ----------------------------------- Investments in and advances to unconsolidated real estate ventures at March 31, 1999 and December 31, 1998 are summarized, based on the level of the Company's financial interest, as follows (in thousands):
March 31, December 31, 1999 1998 --------- ------------ Majority interest ventures $294,469 $270,085 Joint interest and control ventures 1,223 1,140 Minority interest ventures 177,882 50,841 -------- -------- Total $473,574 $322,066 ======== ========
The equity in earnings of unconsolidated real estate ventures for the three months ended March 31, 1999 and 1998 is summarized, based on the level of the Company's financial interest, as follows (in thousands):
1999 1998 ------- ------- Majority interest ventures $20,777 $27,511 Minority interest ventures 2,556 2,399 ------- ------- Total $23,333 $29,910 ======= =======
10 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (3) Unconsolidated real estate ventures, continued ---------------------------------------------- The condensed, combined balance sheets of the ventures in which the Company holds majority financial interests at March 31, 1999 and December 31, 1998 are summarized as follows (in thousands):
March 31, December 31, 1999 1998 ---------- ------------- Assets: Operating properties, net $ 257,513 $ 244,470 Properties in development 79,699 66,442 Land held for development and sale 224,604 236,999 Investment land 40,082 41,156 Advances to the Company 122,556 112,310 Other 164,939 192,437 --------- --------- Total $ 889,393 $ 893,814 ========= ========= Liabilities and shareholders' deficit: Loans and advances from the Company $ 507,807 $ 488,363 Mortgages payable and other long-term debt 341,947 332,945 Other liabilities 71,370 116,244 Redeemable Series A Preferred stock 50,000 50,000 Shareholders' deficit (81,731) (93,738) --------- --------- Total $ 889,393 $ 893,814 ========= =========
11 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolcdated Financial Statements (Unaudited), continued (3) Unconsolidated real estate ventures, continued ---------------------------------------------- The condensed combined statements of operations of the ventures in which the Company holds a majority financial interest for the three months ended March 31, 1999 and 1998 are summarized as follows (in thousands):
1999 1998 --------- --------- Revenues, including interest on loans to the Company of $2,577 in 1999 and $3,610 in 1998 $ 88,025 $100,769 Operating expenses (48,576) (54,244) Interest expense, including interest on loans from the Company of $14,577 in 1999 and $16,213 in 1998 (17,366) (18,666) Depreciation and amortization (2,896) (2,525) Equity in earnings of unconsolidated real estate ventures 186 1,281 Gain on dispositions of assets, net 707 7,519 Income taxes, including deferred tax provision of $6,372 in 1999 and $10,373 in 1998 (8,073) (10,418) Extraordinary loss, net --- (925) -------- -------- Net earnings $ 12,007 $ 22,791 ======== ========
12 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (3) Unconsolidated real estate ventures, continued ---------------------------------------------- The Company's share of the earnings before extraordinary items of the ventures at March 31, 1999 and 1998 is summarized as follows (in thousands):
1999 1998 ----------- --------- Share of net earnings based on ownership interest $ 11,887 $ 22,563 Share of extraordinary loss --- 916 Participation by others in the Company's share of earnings (6,359) (7,481) Interest on loans and advances, net 12,000 12,603 Eliminations and other, net 3,249 (1,090) ---------- -------- $ 20,777 $ 27,511 ========== ======== (4) Debt ---- Debt at March 31, 1999 and December 31, 1998 is summarized as follows (in thousands): March 31, 1999 December 31, 1998 -------------------- --------------------- Due in Due in Total one year Total one year ---------- -------- -------- --------- Mortgages and bonds $2,500,546 $177,245 $2,948,324 $159,171 Convertible subordi- nated debentures 128,515 --- 128,515 --- Medium-term notes 97,500 11,000 97,500 6,000 Credit line borrowings 390,000 32,000 602,000 304,000 Other loans 323,586 27,152 282,481 27,294 ---------- -------- ---------- -------- Total $3,440,147 $247,397 $4,058,820 $496,465 ========== ======== ========== ========
The amounts due in one year reflect the terms of existing loan agreements except where refinancing commitments from outside lenders have been obtained. In these instances, maturities are determined based on the terms of the refinancing commitments. 13 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment Information ------------------- In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" to identifying the reportable segments in place of the industry segment approach used previously. The Company has five reportable segments: retail centers, office, mixed-use and other properties, land sales operations, development and corporate. Segment operating results are measured and assessed based on a performance measure referred to as Funds from Operations (FFO). The National Association of Real Estate Investment Trusts defines FFO as net earnings (computed in accordance with generally accepted accounting principles), excluding cumulative effects of changes in accounting principles, extraordinary or unusual items and gains or losses from debt restructurings and sales of properties, plus depreciation and amortization, and after adjustments for minority interests and to record unconsolidated partnerships and joint ventures on the same basis. The Company also excludes deferred income taxes from its computation of FFO. The method used by the Company to compute FFO may differ from methods used by other REITs. FFO is not a measure of operating results or cash flows from operating activities as measured by generally accepted accounting principles, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. The accounting policies of the segments are the same as those of the Company, except that real estate ventures in which the Company holds substantially all (at least 98%) of the financial interest but does not own a majority voting interest are accounted for on a consolidated basis, rather than using the equity method, and the Company's share of FFO of unconsolidated real estate ventures in which it holds a minority interest is included in revenues. 14 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment Information, continued ------------------------------ Operating results for the segments are summarized as follows (in thousands):
Office, Mixed- Land Retail Use and Other Sales Centers Properties Operations Development Corporate Total --------- -------------- ---------- ----------- --------- --------- Three months ended March 31, 1999 - -------------- Revenues $146,018 $62,842 $60,581 $ --- $ 271 $269,712 Operating expenses, exclusive of depreciation and amortization 67,906 26,808 40,717 1,473 5,181 142,085 Interest expense 42,962 23,885 926 --- (1,360) 66,413 -------- ------- ------- ----------- -------- -------- FFO $ 35,150 $12,149 $18,938 $ (1,473) $ (3,550) $ 61,214 ======== ======= ======= =========== ======== ======== Three months ended March 31, 1998 - -------------- Revenues $124,668 $55,569 $90,564 $ --- $ 1,307 $272,108 Operating expenses, exclusive of depreciation and amortization 62,417 26,979 64,833 3,566 4,120 161,915 Interest expense 33,064 20,620 1,133 --- (2,170) 52,647 -------- ------- ------- ----------- -------- -------- FFO $ 29,187 $ 7,970 $24,598 $ (3,566) $ (643) $ 57,546 ======== ======= ======= =========== ======== ========
15 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (5) Segment Information, continued ------------------------------ Reconciliations of the total revenues and expenses reported above to the related amounts in the consolidated financial statements and of FFO reported above to earnings before extraordinary items and cumulative effect of change in accounting principle in the financial statements are summarized as follows (in thousands):
1999 1998 ---------- ---------- Revenues: Total reported above $ 269,712 $ 272,108 Revenues of majority financial interest ventures excluding interest on advances to the Company (85,448) (97,159) Revenues representing the Company's share of FFO of minority financial interest ventures (4,101) (3,224) Other (121) (153) --------- --------- Total in financial statements $ 180,042 $ 171,572 ========= ========= Operating expenses, exclusive of depreciation and amortization: Total reported above $ 142,085 $ 161,915 Operating expenses of majority financial interest ventures (48,576) (54,244) Current income taxes applicable to operation (74) (106) Provision for bad debts (1,312) (854) Participation by others in the Company's share of earnings of majority financial interest ventures (6,359) (7,481) Other (1,892) (249) --------- --------- Total in financial statements $ 83,872 $ 98,981 ========= ========= Interest expense: Total reported above $ 66,413 $ 52,647 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company (2,789) (2,453) Other -- (40) --------- --------- Total in financial statements $ 63,624 $ 50,154 ========= ========= Operating results: FFO reported above $ 61,214 $ 57,546 Depreciation and amortization (27,673) (18,790) Gain on dispositions of assets and other provisions, net 1,106 1,935 Depreciation and amortization, gain on disposition of assets and deferred income taxes of unconsolidated real estate ventures, net (6,721) (6,159) --------- --------- Earnings before extraordinary items and cumulative effect of change in accounting principle $ 27,926 $ 34,532 ========= =========
16 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (6) Gain on dispositions of assets and other provisions, net -------------------------------------------------------- The gain for the three months ended March 31, 1999 represents recoveries of certain costs relating to a property sale and of costs incurred in connection with the Company's determination to elect to be taxed as a REIT. The gain for the three months ended March 31, 1998 relates primarily to a reduced provision for loss on a retail center which the Company sold in April 1998, and partial recovery of a loss previously recognized on a litigation matter. These items were partially offset by losses on the sales of a hotel and an office building. (7) Extraordinary loss, net ----------------------- The extraordinary loss for the three months ended March 31, 1998 related to the Company's share of a loss (net of related income taxes) incurred by an unconsolidated majority interest venture on extinguishment of debt prior to its scheduled maturity. The debt was related to a hotel property which the venture sold, and a portion of the proceeds of the sale were used to repay the debt. 17 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (8) Earnings per share ------------------ Information relating to the calculation of earnings per share (EPS) of common stock for the three months ended March 31, 1999 and 1998 is summarized as follows (in thousands):
1999 1998 ------------------ ------------------ Basic Diluted Basic Diluted -------- -------- -------- -------- Earnings before extra- ordinary items and cumulative effect of change in accounting principle $27,926 $27,926 $34,532 $34,532 Dividends on Preferred stock (3,038) (3,038) (3,038) (3,038) Dividends on unvested common stock awards (123) (606) (134) (69) Interest on convertible subordinated debentures -- -- -- 1,842 ------- ------- ------- ------- Adjusted earnings before extraordinary items and cumulative effect of change in accounting principle used in EPS computation $24,765 $24,282 $31,360 $33,267 ======= ======= ======= ======= Weighted-average shares outstanding 71,865 71,865 66,662 66,662 Dilutive securities: Convertible subordinated debentures -- -- -- 4,538 Options, warrants, and unvested common stock awards -- 478 -- 1,196 ------- ------- ------- ------- Adjusted weighted-average shares used in EPS computation 71,865 72,343 66,662 72,396 ======= ======= ======= =======
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. 18 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (9) Contingencies ------------- The Company and certain of its subsidiaries are defendants in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Some of these litigation matters are covered by insurance. In the opinion of management, adequate provision has been made for losses with respect to all litigation matters, where appropriate, and the ultimate resolution of all such litigation matters is not likely to have a material effect on the consolidated financial position of the Company. Due to the Company's fluctuating net earnings (loss), it is not possible to predict whether the resolution of these matters is likely to have a material effect on the Company's consolidated net earnings (loss), and it is, therefore, possible that resolution of these matters could have such an effect in any future quarter or year. (10) Property acquisitions, dispositions and related matters ------------------------------------------------------- In 1998, the Company completed several property acquisitions, including the purchase of interests in seven retail centers from TrizecHahn Centers Inc. In February 1999, the Company contributed its ownership interests in four of the acquired centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and Towson Town Center) to a joint venture (the "Four State Venture") in which it retained a 35% ownership interest. Another venturer contributed approximately $271 million in cash to the Four State Venture and received a 65% ownership interest. Four State Venture used the contributed cash to repay approximately $271 million of Company borrowings under its bridge loan credit facility. The contribution of three of the centers to Four State Venture was accounted for as a sale, and the fair value of the joint venture interest received was considered in the Company's allocation of the acquisition costs of all of the property interests acquired. Accordingly, no gain or loss was recognized on the sale. The Company's 35% ownership interest in the Four State Venture related to these property interests is accounted for using the equity method. The Four State Venture agreement provides for the purchase, at the option of the Company or the other venturer and subject to certain terms and conditions, of the other venturer's interest in the Four State Venture related to Fashion Place at a specified amount. Accordingly, the transaction related to Fashion Place was accounted for as a financing. If the option is exercised, the purchase price 19 Part I. Financial Information, continued Item 1. Financial Statements, continued: THE ROUSE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), continued (10) Property acquisitions, dispositions and related matters, continued ------------------------------------------------------------------ can be paid, at the option of the Company, in cash or in common stock of the Company. In May, 1999 the Company agreed to sell its interest in Valley Fair Mall to Westfield America, Inc. for approximately $147 million. The Company acquired the property in July 1998 from TrizecHahn Centers Inc. for approximately the same price with the intention to sell it and, accordingly, will record no gain or loss on the sale. The Company expects the transaction to close in June, 1999. (11) Shelf registration statement ---------------------------- At March 31, 1999, the Company had a shelf registration statement for future sale of up to an aggregate of $2.1 billion (based on the public offering price) of common stock, Preferred stock and debt securities. On May 4, 1999, the Company issued $200 million of 8% unsecured notes, due in May 2009, under this registration statement. The Company plans to use the net proceeds of approximately $198 million to repay the convertible subordinated debentures and certain other debt. 20 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: THE ROUSE COMPANY AND SUBSIDIARIES The following discussion and analysis covers any material changes in financial condition since December 31, 1998 and any material changes in the results of operations for the three months ended March 31, 1999 as compared to the same period in 1998. This discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1998 Annual Report to Shareholders. General: - ------- Through its subsidiaries and affiliates, the Company acquires, develops and manages a diversified portfolio of retail centers, office and industrial buildings and mixed-use and other properties (office/mixed-use properties) located throughout the United States and develops and sells land for residential, commercial and other uses, primarily in Columbia, Maryland and Summerlin, Nevada. One of the Company's primary objectives is to own and operate premier properties - shopping centers, office and industrial buildings and major mixed-use projects - in major markets across the United States. In order to achieve this objective, management is actively evaluating opportunities to acquire properties owned by others that may have future prospects consistent with the Company's long-term investment criteria and is continually evaluating the future outlook for properties in the Company's portfolio. This includes considering opportunities to expand and/or renovate the properties and assessing whether particular properties are meeting or have the potential to meet the Company's investment criteria. The Company plans to continue making substantial investments to expand and/or renovate leasable mall space and/or add new department stores to its existing properties to meet its objective. The Company is also continually evaluating opportunities for new operating properties and/or land development projects it believes have future prospects consistent with its objectives. The Company has sold a number of properties over the last several years and intends to continue to dispose of properties that are not meeting and/or are not considered to have the potential to continue to meet its investment criteria. The Company may also selectively dispose of properties for other reasons. While disposition decisions may cause the Company to recognize gains or losses that could have material effects on reported net earnings (loss) in future quarters or fiscal years, they are not anticipated to have a material effect on the overall consolidated financial position or operating income of the Company. 21 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Portfolio changes: - ----------------- In 1998, the Company completed several transactions designed to upgrade the overall quality of its portfolio of operating properties. In the third and fourth quarters, the Company purchased ownership interests in eight retail centers, including the interests of partners in two centers (The Fashion Show and Governor's Square) in which the Company now holds 100% ownership interests. In February 1999, the Company contributed its ownership interests in four of the acquired centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and Towson Town Center) to a joint venture in which it retained a 35% ownership interest. The Company acquired the other two ownership interests with the intent to sell them. The Company disposed of four retail centers (Eastfield Mall and Salem Mall in the second quarter, and Greengate Mall and St. Louis Union Station in the third quarter) and its 5% ownership interest in six retail centers (five in the second quarter and one in the fourth quarter.) In the fourth quarter, the Company also acquired the portfolio of office and industrial properties and salable land of an entity in which the Company previously held a 5% ownership interest. The acquired assets consisted of 64 buildings (excluding three which were subsequently sold) and approximately 100 acres of land. Substantially all of the acquired assets are in the Baltimore- Washington metropolitan area. The Company and its affiliates disposed of their interests in two hotels and certain industrial buildings in Baltimore and Columbia and their office properties in Los Angeles in the first quarter of 1998. The Company and its affiliates also completed certain development projects designed to enhance the quality of its portfolio. A new regional shopping center opened in Orlando, Florida in the first quarter of 1998, and two community retail centers opened in the Summerlin/Las Vegas area in the second quarter of 1998. Expansions of nine retail centers opened in 1998 (three in the first quarter and six in the fourth quarter), and three community retail centers in Columbia were substantially redeveloped. Six office and industrial buildings opened in Las Vegas and Summerlin in 1998, and Arizona Center, in Phoenix was expanded in the first quarter of 1998 to include a 90,000 square foot cinema. In January 1999, an affiliate of the Company opened a new 100,000 square foot office building in Columbia's town center. 22 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Operating results: - ----------------- As indicated in the 1998 Annual Report to Shareholders, the discussion of operating results covers each of the Company's business segments as management believes that a segment analysis provides the most effective means of understanding the business. Note 5 to the consolidated financial statements should be referred to when reading this discussion and analysis. As discussed in note 5, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1998. As required by the Statement, segment operating data are reported using the accounting policies followed by the Company for internal reporting to management. These policies are the same as those followed for external reporting, except that real estate ventures in which the Company holds substantially all (at least 98%) of the financial interests, but does not own a majority voting interest, are reported on a consolidated basis rather than using the equity method; the Company's share of FFO of unconsolidated real estate ventures in which it holds a minority interest is included in revenues; and the Company's share of depreciation and amortization expense of unconsolidated real estate ventures in which it holds a minority interest is included in depreciation and amortization expense. These differences affect only the reported revenue, operating and interest expenses and depreciation and amortization expense of the segments, and have no effect on the reported net earnings of the Company. Revenues and operating and interest expenses reported for the segments are reconciled to the related amounts reported in the financial statements in note 5. 23 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Operating Properties - Retail Centers: Operating results of retail properties are summarized as follows (in millions):
Three months ended March 31, ---------------------------- 1999 1998 -------- -------- Revenues $146.0 $124.7 Operating expenses, exclusive of depreciation and amortization 67.9 62.4 Interest expense 43.0 33.1 ------ ------ 35.1 29.2 Depreciation and amortization, including unconsolidated real estate ventures 21.8 13.8 ------ ------ Operating income $ 13.3 $ 15.4 ====== ======
Revenues from retail centers increased $21.3 million for the three months ended March 31, 1999, compared to the same period in 1998. The increase in revenues was attributable primarily to effects of the aforementioned acquisitions (approximately $14.4 million) and project openings and expansions (approximately $7.4 million), and higher average occupancy levels at comparable properties (94.0% in 1999 compared to 91.2% in 1998). These increases were partially offset by the aforementioned dispositions (approximately $6.0 million). Total operating and interest expenses for retail centers increased $15.4 million for the three months ended March 31, 1999, compared to the same period in 1998. The increase in operating and interest expenses was attributable primarily to the aforementioned acquisitions (approximately $13.0 million) and project openings and expansions (approximately $6.1 million). These increases were partially offset by the aforementioned dispositions (approximately $6.6 million). Depreciation and amortization expense increased $8.0 million for the three months ended March 31, 1999, compared to the same period in 1998. The increase was attributable primarily to the portfolio changes described above. 24 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Operating Properties - Office, Mixed-Use and Other Properties: Operating results of office, mixed-use and other properties are summarized as follows (in millions):
Three months ended March 31, ---------------------------- 1999 1998 ------- ------- Revenues $ 62.8 $ 55.6 Operating expenses, exclusive of depreciation and amortization 26.8 27.0 Interest expense 23.9 20.6 ------- ------ 12.1 8.0 Depreciation and amortization, including unconsolidated real estate ventures 10.2 8.2 ------- ------- Operating income (loss) $ 1.9 $ (.2) ======= ======
Revenues from office, mixed-use and other properties increased $7.2 million for the three months ended March 31, 1999, compared to the same period in 1998. The increase in revenues was attributable primarily to the aforementioned acquisition (approximately $10.3 million) and project openings and expansion (approximately $2.1 million). These increases were partially offset by the dispositions of properties in 1998 (approximately $5.0 million). Total operating and interest expenses for office, mixed-use and other properties increased $3.1 million for the three months ended March 31, 1999, compared to the same period in 1998. The increase in operating and interest expenses was attributable primarily to the aforementioned acquisition (approximately $8.8 million) and project openings and expansion (approximately $1.4 million). These increases were substantially offset by the aforementioned dispositions (approximately $4.7 million) and lower interest expense related to the refinancing of a mixed-use property. Depreciation and amortization expense increased $2.0 million for the three months ended March 31, 1999, compared to the same period in 1998. The increase was attributable primarily to the portfolio changes described above. 25 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Land Sales Operations: Land sales operations relate primarily to the communities of Columbia, Maryland and Summerlin, Nevada. Generally, revenues and operating income from land sales are affected by such factors as the availability to purchasers of construction and permanent mortgage financing at acceptable interest rates, consumer and business confidence, availability of saleable land for particular uses and management's decisions to sell, develop or retain land. Operating results of land sales operations are summarized as follows (in millions):
Three months ended March 31, -------------------------------------------- 1999 1998 ----------------------- ------------------- Hughes Operations: Revenues $30.3 $67.6 Operating costs and expenses 24.1 54.2 Interest expense -- .1 ----- ----- Operating income $ 6.2 $13.3 ===== ===== Columbia and other: Revenues $30.3 $22.9 Operating costs and expenses 16.6 10.6 Interest expense .9 1.0 ----- ----- Operating income $12.8 $11.3 ===== ===== Total: Revenues $60.6 $90.5 Operating costs and expenses 40.7 64.8 Interest expense .9 1.1 ----- ----- Operating income $19.0 $24.6 ===== =====
26 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Revenues from Hughes land sales operations decreased $37.3 million for the three months ended March 31, 1999, while related costs and expenses decreased $30.2 million compared to the same period in 1998. The decreases in revenues and related costs and expenses for the three months relate primarily to a reduction in sales of business park land, particularly in Los Angeles. The Company sold all of the land in its Los Angeles business park in the first quarter of 1998. The decrease in costs and expenses relates primarily to the lower level of land sales. Revenues from land sales operations in Columbia increased $7.4 million for the three months ended March 31, 1999, while related costs and expenses increased $5.9 million compared to the same period in 1998. The increase in revenues and related costs and expenses for the three month period was due primarily to higher levels of sales for commercial uses. Development: Development expenses consist primarily of additions to the preconstruction reserve and new business costs. The preconstruction reserve is maintained to provide for costs of projects which may not go forward to completion. New business costs relate primarily to the initial evaluation of potential acquisition and development opportunities. The expenses decreased $2.1 million for the three months ended March 31, 1999 compared to the same period in 1998. The decrease in expenses is a result of projects progressing to further stages of development. Corporate: Corporate expenses consist of certain interest and operating expenses reduced by costs capitalized or allocated to other segments. Interest is capitalized on corporate funds invested in projects under development, and interest on the proceeds of corporate borrowings and distributions on the Company-obligated mandatorily redeemable preferred securities which are used for other segments are allocated to those segments. Accordingly, corporate interest expense consists primarily of interest on the convertible subordinated debentures, the unsecured 8.5% notes, the medium-term notes, and unallocated proceeds from refinancings of certain properties, net of interest capitalized on development projects or allocated to other segments, and corporate operating expenses consist primarily of general and administrative costs and distributions on the redeemable preferred securities, net of distributions allocated to other segments. These costs increased $1.9 million for the three months ended March 31, 1999, as compared to the same period in 1998. This increase was primarily attributable to higher income taxes incurred by certain majority financial interest ventures due to the sales of certain land parcels. 27 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Corporate, continued: Corporate revenue consists primarily of corporate interest income on cash invested and notes receivable. The decrease in revenue of $1.0 million for the three months ended March 31, 1999 relates primarily to lower interest income on lower invested cash balances. Gain on dispositions of assets and other provisions, net: The gain for the three months ended March 31, 1999 represents recoveries of certain costs relating to a property sale and of costs incurred in connection with the Company's determination to elect to be taxed as a REIT. The gain for the three months ended March 31, 1998 relates primarily to a reduced provision for loss on a retail center which the Company sold in April 1998, and partial recovery of a loss previously recognized on a litigation matter. These items were partially offset by losses on the sales of a hotel and an office building. Unconsolidated real estate ventures in which the Company holds substantially all of the financial interest recorded a net gain on disposition of assets of $7.5 million for the three months ended March 31, 1998, relating to the sales of a hotel and certain industrial buildings. Extraordinary loss, net: The extraordinary loss for the three months ended March 31, 1998 related to the Company's share of a loss (net of related income taxes) incurred by an unconsolidated majority interest venture on extinguishment of debt prior to its scheduled maturity. The debt was related to a hotel property which the venture sold, and a portion of the proceeds of the sale was used to repay the debt. Net earnings: Net earnings for the three months ended March 31, 1999 and 1998 were affected by unusual and/or nonrecurring items. The most significant of these are the items discussed above in gain on dispositions of assets and other provisions, net, extraordinary loss, net and the cumulative effect of change in accounting for participating mortgages. Financial condition and liquidity: Shareholders' equity increased by $8,731,000 from December 31, 1998 to March 31, 1999. The increase was primarily attributable to the net earnings for the three months ended March 31, 1999 and issuance of common stock pursuant to the Contingent Stock Agreement, partially offset by the payment of regular quarterly dividends on the Company's common and Preferred stocks and purchases of common stock. 28 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Financial condition and liquidity (continued): The Company had cash and cash equivalents and investments in marketable securities totaling $33,546,000 at March 31, 1999, including $4,076,000 of investments held for restricted uses. In July 1998, the Company obtained an $800 million unsecured line of credit facility from a group of lenders to replace a $250 million revolving line of credit facility. The new facility is structured as a $350 million 364 day bridge loan facility to fund specific property acquisitions made in the third and fourth quarters of 1998, and a $450 million three-year revolving line of credit. Repayment of borrowings under the new facilities is guaranteed by certain of the Company's majority interest ventures. The revolving line of credit may be used for various purposes, including project development costs, property acquisitions, liquidity and other corporate needs. It may also be used to pay some portion of existing debt, including maturities in 1999. At March 31, 1999, the Company had outstanding borrowings of $358 million under the line of credit and $32 million on the bridge loan facility. In April 1999, the Company used proceeds from a new mortgage secured by an operating property to repay the bridge loan facility. On May 4, 1999, the Company issued $200 million of 8% unsecured notes, due in May 2009, under its shelf registration statement. The Company plans to use the net proceeds of approximately $198 million to repay the convertible subordinated debentures and certain other debt. In May 1999, the Company agreed to sell its interest in Valley Fair Mall for approximately $147 million. The Company acquired Valley Fair Mall in 1998 with the intention to sell it. The Company expects the transaction to close in June 1999. The Company expects the purchase price to include the assumption of a $40 million mortgage secured by the property and cash of approximately $107 million. As of March 31, 1999, debt due in one year was $247 million, including balloon payments due of $200 million. The balloon payments due in one year include $40 million due on a mortgage securing the property referred to above that the Company has agreed to sell. The transaction is expected to close in the second quarter of 1999, and the Company expects the buyer to assume the mortgage. The remaining balloon payments due in one year are expected to be paid at or before the scheduled maturity dates of the related loans from proceeds of the sale of the property interest referred to above, the proceeds of the $200 million 8% unsecured notes referred to above, property refinancings, credit facility borrowings or other available corporate funds. The Company had remaining availability under its revolving credit facility of $92 million at March 31, 1999. There is no availability under the bridge loan facility. The Company is continually evaluating sources of capital, and management believes there are satisfactory sources available for all requirements without 29 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Financial condition and liquidity (continued): necessitating sales of other operating properties. The Company may, however, selectively dispose of properties or groups of properties when it believes it is prudent to do so. The Company has a shelf registration statement for the sale of up to an aggregate of approximately $2.25 billion (based on the public offering price) of common stock, Preferred stock and debt securities. At May 5, 1999, the Company had issued approximately $358 million of common stock and debt securities under the shelf registration statement, with a remaining availability of approximately $1.9 billion. Also, under an effective registration statement the Company may issue additional medium-term notes of up to $29.7 million. Net cash provided by operating activities was $20.9 and $78.8 million for the three months ended March 31, 1999 and 1998, respectively. The level of cash flows provided by operating properties is affected by the timing of receipts of rents and other revenues and payment of operating and interest expenses. The decrease in net cash provided of $57.9 million was due primarily to lower cash received on notes receivable from land sales that the Company financed prior to 1998, and lower operating distributions from unconsolidated majority financial interest ventures. The level of cash provided by operating distributions from unconsolidated majority financial interest ventures is affected by the timing of receipt of their land sales revenues, payment of operating and interest expenses and other sources and uses of cash. Other changes in net cash provided by operating activities were due to the factors discussed previously under the operating results of the four major business segments. Net cash used in investing activities was $61.0 and $57.3 million for the three months ended March 31, 1999 and 1998, respectively. The increase in net cash used of $3.7 million was due primarily to lower proceeds from sales of interests in properties partially offset by a decrease in expenditures for properties in development and higher principal payments received on loans to majority financial interest ventures. Net cash provided by financing activities was $31.9 million and net cash used by financing activities was $16.5 million for the three months ended March 31, 1999 and 1998, respectively. The increase in net cash provided of $48.4 million was due primarily to increased net credit facility borrowings principally to finance property development expenditures. Year 2000 issue: The year 2000 (Y2K) issue relates to whether computer systems will properly recognize date sensitive information to allow accurate processing of transactions and data relating to the year 2000 and beyond. In addition, the Y2K issue relates to whether non-Information Technology (IT) systems that depend on embedded computer technology will recognize the year 2000. Systems that do not properly recognize such information could generate erroneous data or fail. 30 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Year 2000 issue, continued: In 1996, the Company adopted a plan to replace virtually all of its management information and accounting systems. This plan was adopted in the context of the Company's long-term Information Systems strategy. In accordance with this plan, all mission-critical IT systems are being replaced with systems that have been certified by the vendors as Y2K compliant. To date, the Company has implemented new financial accounting, accounts payable, property management, human resources, payroll and leasing management systems. Certain legacy systems that are still in use by the Hughes Division are not Y2K compliant. The Company is in the process of migrating the Hughes Division from its legacy general ledger, accounts payable and property management systems to the Company's new systems. This migration is scheduled to be completed no later than October 1, 1999. Also, the Company is in the process of implementing a new cash management system, which is expected to be operational by June 1, 1999 and which will be tested for Y2K compliance by June 30, 1999. The Company has completed testing of its new mission-critical IT systems that have been implemented and has determined that these systems are Y2K compliant, except with respect to certain minor aspects of the financial accounting system. The issues relating to the financial accounting system are being addressed and the systems will be retested by June 30, 1999. In addition, in connection with the Company's normal upgrade and replacement process, all network and desktop equipment meet the requirements for the year 2000. Testing and remediation of other network and desktop equipment is expected to be completed by June 30, 1999. The hardware and software that supports the Company's local and wide area networks have been tested. Approximately 70% of the network components were determined to be Y2K compliant. The remaining 30% of the components will be upgraded or replaced with hardware or software that is Y2K compliant by June 30, 1999. The Company expects that the aggregate costs to specifically remediate Y2K IT issues will be minimal. For non-IT systems, the Company has completed a comprehensive review of computer hardware and software in mechanical systems and has developed a program to repair or replace non-IT systems that are not year 2000 compliant. It is anticipated that the program will be completed in the third quarter of 1999. Costs to specifically remediate non-IT systems (e.g., escalators, elevators, heating, ventilating and cooling systems, etc.) that are non-compliant are not expected to exceed $2 million. Management does not believe that the year 2000 issue will pose significant problems in its IT or non-IT systems, or that resolution of any potential problems with respect to these systems will have a material effect on the Company's financial condition or results of operations. It is very difficult to identify "the most reasonably likely worst-case scenario." The Company's exposure is widely spread, with no known major direct exposure. The Company believes that the most likely worst-case exposure is at the indirect level, involving vendors, suppliers and tenants. For example, there could be failures in the information systems of certain tenants that may delay the payment of rents. While it is not possible at this time to determine the likely impact of these potential problems, the Company has identified the top 20 tenants, ten anchor stores, five banks, three contractors and three third party benefit administrators with which it does business. The Company is in the process of reviewing the 1999 Form 10-K reports and Y2K compliance statements for the publicly owned entities. In addition, a Y2K compliance letter and questionnaire will be sent to any of these entities that have not provided a public statement disclosing the status of their Y2K compliance 31 Part I. Financial Information, continued Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (continued): Year 2000 issue, continued: efforts. This review is expected to be completed in the second quarter of 1999, at which time the Company will determine whether specific contingency plans should be developed. There can be no assurance, however, that the Company has adequately assessed or identified all aspects of its business which may be affected by Y2K issues, and that Y2K issues including those that may affect its vendors, suppliers and tenants, will not have a material adverse effect on the Company's financial condition or results of operations. Information relating to forward-looking statements: This report on Form 10-Q of the Company includes forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below, which could cause actual results to differ materially from historical results or those anticipated. The words believe, expect, anticipate and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The following factors could cause actual results to differ materially from historical results or those anticipated: (1) risks associated with the Company's qualification and operation as a REIT; (2) real estate investment risks; (3) development risks; (4) illiquidity of real estate investments; (5) dependence on rental income from real property; (6) effect of uninsured loss; (7) lack of geographical diversification; (8) possible environmental liabilities; (9) difficulties of compliance with the Americans with Disabilities Act; (10) competition; (11) changes in the economic climate and (12) certain matters relating to Nevada properties; (13) changes in tax laws or regulations. For a more detailed discussion of these factors, see Exhibit 99.2 of the Company's Form 10-K for the fiscal year ended December 31, 1998. 32 Part I. Financial Information, continued Item 3. Quantitative and Qualitative Disclosures about Market Risk: Market risk information: The market risk associated with financial instruments and derivative financial and commodity instruments is the risk of loss from adverse changes in market prices or rates. The Company's market risk arises primarily from interest rate risk relating to variable rate borrowings used to maintain liquidity (e.g., revolving credit facility advances) or finance project acquisition or development costs (e.g., acquisition bridge loan facility or construction loan advances). The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows. In order to achieve this objective, the Company relies primarily on long-term, fixed rate, nonrecourse loans from institutional lenders to finance its operating properties. In addition, long-term, fixed rate financing is typically arranged concurrently with or shortly after a variable rate project acquisition or construction loan is negotiated. The Company also makes limited use of interest rate exchange agreements, including interest rate swaps and caps, to mitigate its interest rate risk on variable rate debt. The Company does not enter into interest rate exchange agreements for speculative purposes and the fair value of these and other derivative financial instruments is insignificant at March 31, 1999. The Company's interest rate risk is monitored closely by management. The table below presents the principal amounts due and weighted-average interest rates applicable to principal amounts outstanding at the end of each year. This information may be used to evaluate the expected cash flows of the Company under debt and related agreements and its sensitivity to interest rate changes. The information relating to debt maturities (in millions) is based on expected maturity dates which consider anticipated refinancing or other transactions:
Remaining 1999 2000 2001 2002 2003 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Fixed rate debt $ 132 $ 52 $ 198 $ 213 $ 401 $1,704 $2,700 Average interest rate 7.8% 7.8% 7.9% 8.0% 8.0% 8.0% 7.8% Variable rate LIBOR debt $ 79 $ 106 $ 437 $ 66 $ 2 $ 50 $ 740 Average interest rate 6.1% 6.1% 5.6% 6.1% 6.1% 6.1% 6.0%
At March 31, 1999, the Company had interest rate cap agreements which effectively limit the average interest rate on all of the variable rate LIBOR debt maturing in 2002 to 8.9%. As the table incorporates only those exposures that exist as of March 31, 1999, it does not consider exposures or positions which could arise after that date. As a result, the Company's ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise after March 31, 1999, the Company's hedging strategies during that period and interest rates. 33 Part II. Other Information. Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Reference is made to the Exhibit Index. (b) Reports on Form 8-K Current Report on Form 8-K/A filed February 12, 1999 disclosing financial statements required under Rule 3-14 of Regulation S-X and certain pro forma financial information. Current Report on Form 8-K filed February 12, 1999 disclosing disposition of assets. Current Report on Form 8-K/A filed February 16, 1999 disclosing financial statements required under Rule 3-14 of Regulation S-X and certain pro forma financial information. 34 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. on behalf of THE ROUSE COMPANY and as Principal Financial Officer: Date: May 13, 1999 By /s/Jeffrey H. Donahue ------------ --------------------- Jeffrey H. Donahue Executive Vice President and Chief Financial Officer 35 Exhibit Index Exhibit Number Description - -------------- ----------- 1 Underwriting Agreement, dated April 28, 1999, among The Rouse Company, BT Alex Brown Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated. 4 8% Notes due 2009 in the aggregate principal amount of $200,000,000. 27.1 Financial Data Schedule 36 EX-1 2 EXHIBIT 1 THE ROUSE COMPANY DEBT SECURITIES UNDERWRITING AGREEMENT April 28, 1999 To the Representatives of the several Underwriters named in the respective Pricing Agreements hereinafter described. Ladies and Gentlemen: From time to time The Rouse Company, a Maryland corporation (the "Company"), proposes to enter into one or more Pricing Agreements (each a "Pricing Agreement") in the form of Annex I hereto, with such additions and deletions as the parties thereto may determine, and, subject to the terms and conditions stated herein and therein, to issue and sell to the firms named in Schedule I to the applicable Pricing Agreement (such firms constituting the "Underwriters" with respect to such Pricing Agreement and the securities specified therein) certain of its debt securities (the "Securities") specified in Schedule II to such Pricing Agreement (with respect to such Pricing Agreement, the "Designated Securities"). The terms and rights of any particular issuance of Designated Securities shall be as specified in the Pricing Agreement relating thereto and in or pursuant to the Indenture, dated as of February 24, 1995 (the "Indenture"), between the Company and The First National Bank of Chicago, as trustee (the "Trustee"). 1. Particular sales of Designated Securities may be made from time to time to the Underwriters of such Securities, for whom the firms designated as representatives of the Underwriters of such Securities in the Pricing Agreement relating thereto will act as representatives (the "Representatives"). The term "Representatives" also refers to a single firm acting as sole representative of the Underwriters and to an Underwriter or Underwriters who act without any firm being designated as its or their representatives. This Underwriting Agreement (the "Agreement") shall not be construed as an obligation of the Company to sell any of the Securities or as an obligation of any of the Underwriters to purchase the Securities. The obligation of the Company to issue and sell any of the Securities and the obligation of any of the Underwriters to purchase any of the Securities shall be evidenced by the Pricing Agreement with respect to the Designated Securities specified therein. Each Pricing Agreement shall specify the aggregate principal amount of such Designated Securities, the initial public offering price of such Designated Securities, the purchase price to the Underwriters of such Designated Securities, the names of the Underwriters of such Designated Securities, the names of the Representatives of such Underwriters and the principal amount of such Designated Securities to be purchased by each Underwriter and shall set forth the date, time and manner of delivery of such Designated Securities and payment therefor. The Pricing Agreement shall also specify (to the extent not set forth in the Indenture and the registration statement and prospectus with respect thereto) the terms and conditions of such Designated Securities. A Pricing Agreement shall be in the form of an executed writing (which may be in counterparts), and may be evidenced by an exchange of telegraphic communications or any other rapid transmission device designed to produce a written record of communications transmitted. The obligations of the Underwriters under this Agreement and each Pricing Agreement shall be several and not joint. 2. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-3 (File No. 333-67137) (the "Initial Registration Statement") in respect of the Securities has been filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered or to be delivered to the Representatives, excluding exhibits to such registration statement, but including all documents incorporated by reference in the prospectus included therein, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement") filed pursuant to Rule 462(b) of the rules and regulations of the Commission under the Act which became effective upon filing, no other document with respect to such registration statement or document incorporated by reference therein has heretofore been filed or transmitted for filing with the Commission (other than the prospectuses filed pursuant to Rule 424(b) of the rules and regulations of the Commission under the Act, each in the form heretofore delivered to the Representatives); and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued, and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act, is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the 462(b) Registration Statement, if any, including all exhibits thereto and including (i) the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) of the rules and regulations of the Commission under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A of the rules and regulations of the Commission under the Act to be part of the Initial Registration Statement at the time it was declared effective and (ii) the documents incorporated by reference in the prospectus contained in the registration statement at the time such part of the registration statement became effective, but excluding the Statement of Eligibility and Qualification of the Trustee on Form T-1 ("Form T-1"), each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became effective, are hereinafter collectively called the "Registration Statement"; the prospectus relating to the Securities, in the form in which it has most recently been filed, or transmitted for filing, with the Commission pursuant to Rule 2 424(b) under the Act on or prior to the date of this Agreement, is hereinafter called the "Prospectus"; any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of the Form S-3 under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be; any reference to any amendment or supplement to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after the date of such Preliminary Prospectus or Prospectus, as the case may be, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated therein by reference; any reference to any amendment to the Registration Statement shall be deemed to refer to and include any annual report of the Company filed pursuant to Section 13(a) or 15(d) of the Exchange Act after the effective date of the Initial Registration Statement that is incorporated by reference in the Registration Statement; and any reference to the Prospectus shall be deemed to refer to and include the Prospectus as amended or supplemented in relation to the applicable Designated Securities in the form filed or transmitted for filing with the Commission pursuant to Rule 424(b) under the Act and in accordance with Section 5(a) hereof, including any documents incorporated by reference therein as of the date of such filing) (notwithstanding the foregoing, for purposes of subsections (d), (e), (f) and (j) of this Section 2 and subsection (f) of Section 7, references to the Prospectus shall be deemed to mean the Prospectus as of the date hereof without, unless otherwise approved by you, giving effect to any amendment or supplement (including any document deemed to be incorporated by reference in the Prospectus) dated or filed with the Commission after the date hereof); (b) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (c) The Registration Statement and the Prospectus conform, and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the rules and regulations of the Commission thereunder; the Registration Statement and any amendment thereto do not and will not, as of the applicable effective date, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; the Prospectus and any amendment or supplement thereto, as of the applicable filing date, do not and will not, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter of Designated Securities through the Representatives expressly for use in the Prospectus relating to such Securities; 3 (d) The Company and its subsidiaries, taken as a whole, have not sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any change in the capital stock (other than issuances of capital stock (i) pursuant to bonus stock awards granted in the ordinary course of business, (ii) upon exercise of options and stock appreciation rights and upon conversions of convertible securities and (iii) pursuant to the terms of the Contingent Stock Agreement, effective as of January 1, 1996, executed in connection with the acquisition by the Company of all of the outstanding equity interests in The Hughes Corporation and its affiliated partnership, Howard Hughes Properties, Limited Partnership (the "Contingent Stock Agreement"), in each case, except with respect to bonus stock awards granted in the ordinary course of business, which were outstanding as of the date of the latest audited financial statements included or incorporated by reference in the Prospectus), or any material and adverse change in the long- term debt of the Company and its subsidiaries, taken as a whole (it being understood that, absent unusual circumstances, an increase in long term debt of the Company and its subsidiaries, taken as a whole, of less than 5% would not be a material and adverse change to the Company and its subsidiaries, taken as a whole), or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, current value basis shareholders' equity or results of operations (based on Funds from Operations) of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Prospectus; (e) The Company and its subsidiaries have, or in those cases where such subsidiary is a general partner in a partnership, such partnership has, good and marketable fee simple and/or leasehold title (as the case may be) to all real property (except for those lesser estates in real property which, in the aggregate, are not material in value to the Company and its subsidiaries), subject only to (A) those liens and encumbrances which have been reflected generally or in the aggregate in the financial statements of the Company as disclosed in the Prospectus or as are described specifically, generally or in the aggregate in the Prospectus, or (B) such liens and encumbrances (i) not required by generally accepted accounting principles to be disclosed in the financial statements of the Company, which (a) if all material covenants and conditions thereof are observed or performed, will not materially interfere with the use made or proposed to be made of such property by the Company and its subsidiaries or (b) are reasonable and customary with regard to the normal operation of land and improvements held for commercial purposes by first class owners and operators of commercial real estate, or (ii) which were incurred after the date of the latest audited financial statements included or incorporated by reference in the Prospectus in the ordinary course of business (including financings) and which, in the aggregate (on a net basis), are not material to the Company and its subsidiaries, taken as a whole. The Company and its subsidiaries have title to the personal property owned by it or them and, subject to the continued performance of the material covenants and conditions of liens and encumbrances thereon, have the right to use such without interference in the normal course of business, except for such interference as would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; 4 (f) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Maryland, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus, and has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which the failure so to qualify and maintain good standing would have a material adverse effect on the Company and its subsidiaries, taken as a whole; and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation except for such failures to maintain good standing as would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; (g) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non- assessable; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned (with exceptions that are disclosed (whether directly or through incorporation by reference) in the Prospectus or are not material to the Company and its subsidiaries, taken as a whole) directly or indirectly by the Company, free and clear of all liens, encumbrances or claims (collectively, "Liens") except (i) Liens relating to debt which has been disclosed specifically, generally or in the aggregate in the Prospectus or incurred after the date of the latest audited financial statements included or incorporated by reference in the Prospectus in the ordinary course of business (including financings), (ii) Liens incurred in the ordinary course of business which are not materially adverse to the operations of the Company and its subsidiaries, taken as a whole, and (iii) restrictions on the transfer or use of the stock of any subsidiary under any partnership, joint venture or lease agreements to which the Company or any of its subsidiaries is a party; (h) The Securities have been duly authorized, and, when Designated Securities are issued and delivered pursuant to this Agreement and the Pricing Agreement with respect to such Designated Securities, such Designated Securities will have been duly executed, authenticated, issued and delivered and will constitute valid and legally binding obligations of the Company entitled to the benefits provided by the Indenture, which will be substantially in the form filed as an exhibit to the Registration Statement; the Indenture has been duly authorized and duly qualified under the Trust Indenture Act and, at the Time of Delivery for such Designated Securities (as defined in Section 4 hereof), the Indenture will constitute a valid and legally binding instrument, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles; and the Indenture conforms and the Designated Securities will conform to the descriptions thereof contained in the Prospectus; (i) The issue and sale of the Securities, the compliance by the Company with all of the provisions of the Securities, the Indenture, this Agreement and any Pricing Agreement, and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other 5 agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject except for such conflict, breach, violation or default which does not have a material adverse effect on the Company and its subsidiaries, taken as a whole, nor will such actions result in any violation of the provisions of the Articles of Incorporation, as then amended or supplemented, or the Bylaws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required for the issue and sale of the Securities or the consummation by the Company of the other transactions contemplated by this Agreement, any Pricing Agreement or the Indenture, except such as have been, or will have been prior to the Time of Delivery, obtained under the Act or the Trust Indenture Act and such consents, approvals, authorizations, orders, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Underwriters; (j) Other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or to which any property of the Company or any of its subsidiaries is subject, which are likely, individually or in the aggregate, to have a material adverse effect on the Company and its subsidiaries taken as a whole, and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (k) The Company is not, and after giving effect to each offering and sale of the Securities will not be, an "investment company" or an entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); (l) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes; (m) The independent certified public accountants of the Company, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder; and (n) The Company has qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, commencing with the taxable year beginning on January 1, 1998; the Company intends to make the formal election to be treated as a REIT with the filing of its corporate income tax return for such 1998 taxable year; and the Company's organization and method of operation have enabled it to continue to so qualify as a REIT at all times subsequent to December 31, 1998. The Company intends to conduct its operations in a manner to enable it to continue to so qualify as a REIT. 6 3. Upon the execution of the Pricing Agreement applicable to any Designated Securities and authorization by the Representatives of the release of such Designated Securities, the several Underwriters propose to offer such Designated Securities for sale upon the terms and conditions set forth in the Prospectus. 4. Designated Securities to be purchased by each Underwriter pursuant to the Pricing Agreement relating thereto, in the form specified in such Pricing Agreement, and in such authorized denominations and registered in such names as the Representatives may request upon at least twenty-four hours' prior notice to the Company, shall be delivered by or on behalf of the Company to the Representatives for the account of such Underwriter, against payment by such Underwriter or on its behalf of the purchase price therefor by wire transfer in federal (same day) funds, payable to the order of the Company in the funds specified in such Pricing Agreement, all in the manner and at the place and time and date specified in such Pricing Agreement or at such other place and time and date as the Representatives and the Company may agree upon in writing, such time and date being herein called the "Time of Delivery" for such Securities. 5. The Company agrees with each of the Underwriters of any Designated Securities: (a) To prepare the Prospectus as amended or supplemented in relation to the applicable Designated Securities in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Act no later than the Commission's close of business on the second business day following the execution and delivery of the Pricing Agreement relating to the applicable Designated Securities or, if applicable, such earlier time as may be required by Rule 424(b); to make no further amendment or any supplement to the Registration Statement or Prospectus after the date of the Pricing Agreement relating to such Securities and prior to the Time of Delivery for such Securities which shall be disapproved by the Representatives for such Securities promptly after reasonable notice thereof; to advise the Representatives promptly of any such amendment or supplement after the Time of Delivery and furnish the Representatives with copies thereof; to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act for so long as the delivery of a prospectus is required in connection with the offering or sale of such Securities, and during such same period to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed with the Commission, of the issuance by the Commission of any stop order or any order preventing or suspending the use of any prospectus relating to the Securities, of the suspension of the qualification of such Securities for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any such stop order or of any such order preventing or suspending the use of any prospectus relating to the Securities or suspending any such qualification, to promptly use its best efforts to obtain the withdrawal of such order; 7 (b) Promptly from time to time to take such action as the Representatives may reasonably request to qualify such Securities for offering and sale under the securities laws of such jurisdictions as the Representatives may request and to comply with such laws so as to permit the continuance of sales and dealings therein for as long as may be necessary to complete the distribution of such Securities; provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) To furnish the Underwriters with copies of the Prospectus in such quantities as the Representatives may from time to time reasonably request, and, if the delivery of a prospectus is required at any time in connection with the offering or sale of the Securities and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such same period to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Act, the Exchange Act or the Trust Indenture Act, to notify the Representatives and upon their request to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance; (d) During the period beginning from the date of the Pricing Agreement for such Designated Securities and continuing to and including the later of (i) the termination of trading restrictions for such Designated Securities, as notified to the Company by the Representatives and (ii) the Time of Delivery for such Designated Securities, not to offer, sell, contract to sell or otherwise dispose of any debt securities of the Company which mature more than one year after the Time of Delivery and which are substantially similar to such Designated Securities, without the prior written consent of the Representatives; and (e) To make generally available to its security holders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158). 6. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Securities under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and all other amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing and producing any Agreement 8 among Underwriters, this Agreement, any Pricing Agreement, any Indenture, any Blue Sky and legal investment memoranda, closing documents (including any compilations thereof) and any other documents so long as such documents have been approved by the Company in connection with the offering, purchase, sale and delivery of the Securities; (iii) all expenses in connection with the qualification of the Securities for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of the Company's counsel in connection with such qualification and in connection with the Blue Sky and legal investment surveys; (iv) any fees charged by securities rating agencies for rating the Securities; (v) any filing fees incident to, and the reasonable fees and disbursements of the Company's counsel in connection with, any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Securities; (vi) the cost of preparing the Securities; (vii) the reasonable fees and expenses of any Trustee and any agent of any Trustee and any transfer or paying agent of the Company and the reasonable fees and disbursements of counsel for any Trustee or such agent in connection with any Indenture and the Securities; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section 6, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, transfer taxes on resale of any of the Securities by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters of any Designated Securities under the Pricing Agreement relating to such Designated Securities shall be subject, in the Representatives' discretion, to the condition that all representations and warranties and other statements of the Company included or incorporated by reference in the Pricing Agreement relating to such Designated Securities are true and correct at and as of the Time of Delivery for such Designated Securities and the condition that prior to such Time of Delivery the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) (i) The Prospectus in relation to the applicable Designated Securities shall have been filed with the Commission pursuant to Rule 424(b) under the Act within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; (ii) no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and (iii) all requests for additional information on the part of the Commission shall have been complied with to the reasonable satisfaction of the Representatives; (b) Counsel for the Underwriters shall have furnished to the Representatives such opinion or opinions, dated the Time of Delivery, with respect to the incorporation of the Company, the Indenture, the Securities, the Registration Statement, the Prospectus, and such other related matters as the Representatives may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; 9 (c) The General Counsel of the Company, or other counsel for the Company satisfactory to the Representatives, shall have furnished to the Representatives such counsel's written opinion (which may be limited to the laws of the State of Maryland and, with respect to clauses (viii), (ix), (xi) and (xii) below, the federal securities laws), dated the Time of Delivery in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Maryland, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; (ii) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non-assessable; (iii) The Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which the failure so to qualify and maintain good standing would have a material adverse effect on the Company and its subsidiaries, taken as a whole (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company); (iv) To the best of such counsel's knowledge and other than as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which is likely, individually or in the aggregate, to have a material adverse effect on the Company and its subsidiaries, taken as a whole, and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (v) This Agreement and the Pricing Agreement with respect to the Designated Securities have been duly authorized, executed and delivered by the Company; (vi) The Designated Securities have been duly authorized, executed and issued by the Company; (vii) The Indenture has been duly authorized, executed and delivered by the Company; (viii) To the best of such counsel's knowledge, the issue and sale of the Designated Securities, the compliance by the Company with all of the provisions of the Designated Securities, the Indenture, this Agreement and any Pricing Agreement, and the consummation of the transactions herein and therein contemplated 10 will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument known to such counsel to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject except for any such conflict, breach, violation or default which does not have a material adverse effect on the Company and its subsidiaries, taken as a whole, nor will such actions result in any violation of the provisions of the Articles of Incorporation, as then amended or supplemented, or Bylaws of the Company or any statute or any order, rule or regulation known to such counsel of any court or governmental agency or body having jurisdiction over the Company or any of its properties; (ix) To the best of such counsel's knowledge, no consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required for the issue and sale of the Designated Securities or the consummation by the Company of the other transactions contemplated by this Agreement, such Pricing Agreement or the Indenture, except such as have been obtained under the Act or the Trust Indenture Act and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Designated Securities by the Underwriters; (x) The Company is not an "investment company" or an entity "controlled" by an "investment company", as such terms are defined in the Investment Company Act; (xi) The documents incorporated by reference in the Prospectus (other than the financial statements and related notes and schedules therein and other financial data included therein or omitted therefrom, as to which such counsel need express no opinion), when they were filed with the Commission appeared on their face to be appropriately responsive, in all material respects, to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder; and nothing has come to such counsel's attention to cause such counsel to believe that any of such documents, when they were so filed contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such documents were so filed, not misleading; and (xii) Nothing has come to such counsel's attention to cause such counsel to believe that, as of its effective date, the Registration Statement or any further amendment or supplement thereto made by the Company prior to the Time of Delivery (other than the financial statements and related notes and schedules included therein or omitted therefrom and other financial data included therein or omitted therefrom and the Form T-1 included therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a 11 material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date and as of the date of such opinion, the Prospectus or any amendment or supplement thereto made by the Company prior to the Time of Delivery (other than the financial statements and related notes and schedules included therein or omitted therefrom and other financial data included therein or omitted therefrom and the Form T-1 included therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; and such counsel does not know of any amendment to the Registration Statement required to be filed or any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be incorporated by reference into the Prospectus or required to be described in the Registration Statement or the Prospectus which are not filed or incorporated by reference or described as required. (d) Fried, Frank, Harris, Shriver & Jacobson, counsel for the Company, or other counsel for the Company satisfactory to the Representatives, shall have furnished to the Representatives their written opinion (which will be limited to the laws of the State of New York and federal laws and may rely on an opinion of the General Counsel of the Company, or other counsel for the Company reasonably satisfactory to the Representatives, as to the laws of the State of Maryland), dated the Time of Delivery in form and substance reasonably satisfactory to the Representatives, to the following effect: (i) The Designated Securities have been duly executed and issued and, when duly authenticated by the Trustee and delivered by the Company, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms; (ii) The Indenture constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms; (iii) The Indenture has been qualified under the Trust Indenture Act; (iv) The Indenture conforms, and the Designated Securities will conform, in all material respects to the descriptions thereof contained in the Prospectus; (v) The Registration Statement has become effective under the Act, and any required filing of the Prospectus pursuant to Rule 424(b) under the Act has been made in the manner and within the time period required by Rule 424(b); (vi) The Registration Statement, at the time it was declared effective by the Commission, and the Prospectus, as of its date, appeared on their face to be responsive as to form in all material respects to the requirements of the Act and the Trust Indenture Act and the rules and regulations promulgated thereunder (other than (a) the financial statements, notes and schedules thereto included therein or omitted 12 therefrom, (b) other financial data included therein or omitted therefrom, (c) the documents incorporated by reference therein and (d) the Form T-1 included therein, as to which such counsel need not express an opinion); and (vii) The Company is not an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. The opinions set forth in paragraphs (i) and (ii) above are subject to: (i) applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other laws now or hereafter in effect affecting creditors' rights generally; and (ii) general principles of equity (including, without limitation, standards of materiality, good faith, fair dealing and reasonableness) whether such principles are considered in a proceeding in equity or at law; (e) On the date of the Pricing Agreement for such Designated Securities but prior to the execution of the Pricing Agreement with respect to such Designated Securities and at the Time of Delivery for such Designated Securities, the independent certified public accountants of the Company who have certified the financial statements of the Company and its subsidiaries included or incorporated by reference in the Registration Statement, or such other independent certified public accountants as are reasonably satisfactory to the Representatives, shall have furnished to the Representatives a "comfort" letter, substantially to the effect set forth in Annex II hereto, and as to such other matters as the Representatives may reasonably request and, in each case, in form and substance satisfactory to the Representatives; (f) (i) The Company and its subsidiaries, taken as a whole, have not sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus and (ii) since the respective dates as of which information is given in the Prospectus there shall not have been any change in the capital stock (other than issuances of capital stock pursuant to bonus stock awards granted in the ordinary course of business, upon exercise of options and stock appreciation rights or upon conversion of convertible securities in each case, except with respect to bonus stock awards granted in the ordinary course of business, which were outstanding as of the date of the latest audited financial statements included or incorporated by reference in the Prospectus or pursuant to the Contingent Stock Agreement) or any material adverse change in the long-term debt of the Company and its subsidiaries, taken as a whole (it being understood that, absent unusual circumstances, an increase in long-term debt of the Company and its subsidiaries, taken as a whole, of less than 5% would not be a material and adverse change to the Company and its subsidiaries, taken as a whole), or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, current value basis shareholders' equity or results of operations (based on Funds from Operations) of the Company and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (i) or (ii), is in the judgment of the Representatives so material and adverse as to make it 13 impracticable or inadvisable to proceed with the public offering or the delivery of the Designated Securities on the terms and in the manner contemplated in the Prospectus; (g) On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's debt securities by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities; (h) On or after the date of the Pricing Agreement relating to the Designated Securities there shall not have occurred any of the following: (i) a suspension or material limitation in trading in the Company's securities or in trading (other than a brief temporary suspension due to a Level 1 "circuit breaker" occurrence) in securities generally on the New York Stock Exchange; (ii) a general moratorium on commercial banking activities in New York declared by either federal or New York State authorities; or (iii) a material adverse change in the financial markets in the United States or the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in clause (i), (ii) or (iii) in the Representatives' reasonable judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Designated Securities on the terms and in the manner contemplated in the Prospectus as first amended or supplemented relating to the Designated Securities; and (i) The Company shall have furnished or caused to be furnished to the Representatives at the Time of Delivery for the Designated Securities a certificate or certificates of officers of the Company in such form and executed by such officers of the Company as shall be satisfactory to the Representatives, as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a), (f) and (g) of this Section, and as to such other matters as the Representatives may reasonably request. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement, the Prospectus and any other prospectus relating to the Securities, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged 14 untrue statement or omission or alleged omission made in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement, the Prospectus and any other prospectus relating to the Securities, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by any Underwriter of Designated Securities through the Representatives expressly for use in the Prospectus relating to such Securities. (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement, the Prospectus and any other prospectus relating to the Securities, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement, the Prospectus and any other prospectus relating to the Securities, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation. If however, the indemnifying party does not assume the defense of such action or any indemnified party or parties notify the indemnifying party that it or they have been advised by counsel that it would be inappropriate for the indemnifying party to assume the defense of such action as aforesaid due to actual or potential conflicting interests, then such indemnified party or parties shall be entitled to employ separate counsel at the expense of the Company (it being understood that the 15 indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to one separate firm of local attorneys in each such jurisdiction) at any time for all such indemnified parties, which firms shall be designated in writing by you, if the indemnified parties under this Section 8 consist of any Underwriter of Designated Securities or any of its respective controlling persons, or by the Company, if the indemnified parties under this Section 8 consist of the Company or any of its directors, officers, administrative trustees or controlling persons). The indemnifying party shall not be liable for any settlement of an action or claim for monetary damages which an indemnified party may effect without the consent of the indemnifying party, which consent shall not be unreasonably withheld. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim), unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act, by or on behalf of any indemnified party. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters of the Designated Securities on the other from the offering of the Designated Securities to which such loss, claim, damage or liability (or action in respect thereof) relates. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters of the Designated Securities on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and such Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from such offering (before deducting expenses) received by the Company bear to the total commissions or discounts received by such Underwriters in respect thereof. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading relates to information supplied by the Company on the one hand or by any such Underwriters on the other and the parties' relative intent, 16 knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total public offering price at which the applicable Designated Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Underwriters of Designated Securities in this subsection (d) to contribute are several in proportion to their respective underwriting obligations with respect to such Securities and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Designated Securities which it has agreed to purchase under the Pricing Agreement relating to such Designated Securities, the Representatives may in their discretion arrange for themselves or another party or other parties to purchase such Designated Securities on the terms contained herein. If within thirty-six hours after such default by any Underwriter the Representatives do not arrange for the purchase of such Designated Securities, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to the Representatives to purchase such Designated Securities on such terms. In the event that, within the respective prescribed period, the Representatives notify the Company that they have so arranged for the purchase of such Designated Securities, or the Company notifies the Representatives that it has so arranged for the purchase of such Designated Securities, the Representatives or the Company shall have the right to postpone the Time of Delivery for such Designated Securities for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments or supplements to the Registration Statement or the Prospectus which in the opinion of the Representatives may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person 17 substituted under this Section with like effect as if such person had originally been a party to the Pricing Agreement with respect to such Designated Securities. (b) If, after giving effect to any arrangements for the purchase of the Designated Securities of a defaulting Underwriter or Underwriters by the Representatives and the Company as provided in subsection (a) above, the aggregate principal amount of such Designated Securities which remains unpurchased does not exceed one-eleventh of the aggregate principal amount of the Designated Securities, then the Company shall have the right to require each non-defaulting Underwriter to purchase the principal amount of Designated Securities which such Underwriter agreed to purchase under the Pricing Agreement relating to such Designated Securities and, in addition, to require each non- defaulting Underwriter to purchase its pro-rata share (based on the principal amount of Designated Securities which such Underwriter agreed to purchase under such Pricing Agreement) of the Designated Securities of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Designated Securities of a defaulting Underwriter or Underwriters by the Representatives and the Company as provided in subsection (a) above, the aggregate principal amount of Designated Securities which remains unpurchased exceeds one-eleventh of the aggregate principal amount of the Designated Securities as referred to in subsection (b) above, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Designated Securities of a defaulting Underwriter or Underwriters, then the Pricing Agreement relating to such Designated Securities shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Securities. 11. If any Pricing Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Underwriter with respect to the Designated Securities covered by such Pricing Agreement except as provided in Sections 6 and 8 hereof; but, if for any other reason, Designated Securities are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through the Representatives for all out-of-pocket expenses approved in writing by the Representatives, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of such Designated 18 Securities, but the Company shall then be under no further liability to any Underwriter with respect to such Designated Securities except as provided in Sections 6 and 8 hereof. 19 12. In all dealings hereunder, the Representatives of the Underwriters of Designated Securities shall act on behalf of each of such Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by such Representatives jointly or by such of the Representatives, if any, as may be designated for such purpose in the Pricing Agreement. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to the address of the Representatives as set forth in the Pricing Agreement; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: General Counsel; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its underwriters' questionnaire, or telex constituting such questionnaire, which address will be supplied to the Company by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 13. This Agreement and each Pricing Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement or any such Pricing Agreement. No purchaser of any of the Securities from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of each Pricing Agreement. As used herein, "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT AND EACH PRICING AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. This Agreement and each Pricing Agreement may be executed by any one or more of the parties hereto and thereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. Very truly yours, THE ROUSE COMPANY By: /s/Patricia H. Dayton --------------------- Name: Patricia H. Dayton Title: Vice President and Treasurer 20 BT ALEX. BROWN INCORPORATED By: /s/Warren H. Spar ----------------- Name: Warren H. Spar Title: Managing Director MERRILL LYNCH, PIERCE FENNER & SMITH INCORPORATED By: /s/Alexander S. Rubin --------------------- Name: Alexander S. Rubin Title: Vice President On behalf of each of the Underwriters 21 ANNEX II Accountants' Letter ------------------- Pursuant to Section 7(e) of the Underwriting Agreement, the Company's independent certified public accountants shall furnish letters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable rules and regulations thereunder adopted by the Commission; (ii) In their opinion, the financial statements and any supplementary financial information and schedules (and, if applicable, financial forecasts and/or pro forma financial information) audited or examined by them and included or incorporated by reference in the Registration Statement or the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act or the Exchange Act, as applicable, and the related rules and regulations thereunder adopted by the Commission; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the consolidated interim financial statements, selected financial data, pro forma financial information, financial forecasts and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been separately furnished to the Representatives; (iii) If applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included in the Company's quarterly report on Form 10-Q incorporated by reference into the Prospectus as indicated in their reports thereon copies of which have been separately furnished to the Representatives; and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (vi)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published rules and regulations, nothing came to their attention that caused them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related rules and regulations adopted by the Commission; (iv) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus and included or incorporated by reference in Item 6 of the Company's Annual Report on Form 10-K for the most recent fiscal year agrees with the corresponding amounts (after restatement where applicable) in the audited consolidated financial statements for five such fiscal years which were included or incorporated by reference in the Company's Annual Reports on Form 10-K for such fiscal years; II-1 (v) They have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-K and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K; (vi) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included or incorporated by reference in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) (i) if applicable, the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included or incorporated by reference in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Exchange Act and the related published rules and regulations, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus or included in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Prospectus for them to be in conformity with generally accepted accounting principles; (B) if applicable, any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included or incorporated by reference in the Company's Annual Report on Form 10- K for the most recent fiscal year; (C) if applicable, the unaudited financial statements which were not included in the Prospectus but from which were derived the unaudited condensed financial statements referred to in clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in Clause (B) were not determined on a basis substantially consistent with the basis for the audited financial statements included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; II-2 (D) if applicable, any unaudited pro forma consolidated condensed financial statements included or incorporated by reference in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the rules and regulations thereunder adopted by the Commission or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date (where practicable not more than five days prior to the date of such letter), there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest balance sheet included or incorporated by reference in the Prospectus or issuance pursuant to the Contingent Stock Agreement) or any increase in excess of 1% in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated net current assets (defined for this purpose as all assets other than property and investments in and advances to unconsolidated real estate ventures less accounts payable, accrued expenses and other liabilities) or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included or incorporated by reference in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (F) for the period from the date of the latest financial statements included or incorporated by reference in the Prospectus to a specified date there were any decreases in Funds from Operations (as defined in "Selected Financial Data" in the Prospectus) or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (vii) In addition to the audit referred to in their report(s) included or incorporated by reference in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (vi) above, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus (excluding documents incorporated by reference), or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives or II-3 in documents incorporated by reference in the Prospectus specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. All references in this Annex II to the Prospectus shall be deemed to refer to the Prospectus (including the documents incorporated by reference therein) as defined in the Underwriting Agreement as of the date of the letter delivered on the date of the Pricing Agreement for purposes of such letter and to the Prospectus (including the documents incorporated by reference therein) in relation to the applicable Designated Securities for purposes of the letter delivered at the Time of Delivery for such Designated Securities. II-4 EX-4 3 EXHIBIT 4 Exhibit 4 Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the Company or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. Unless and until it is exchanged in whole or in part for Securities in definitive registered form, this Security may not be transferred except as a whole by the Depositary to the nominee of the Depositary or by a nominee of the Depositary to the Depositary or another Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. THE ROUSE COMPANY 8% Notes due 2009 No. 1 $200,000,000 ----- CUSIP No. 779273AE1 THE ROUSE COMPANY, a corporation duly organized and existing under the laws of the State of Maryland (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of Two Hundred Million United States Dollars (U.S. $200,000,000) on April 30, 2009 and to pay interest thereon from May 4, 1999 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on April 30 and October 30 of each year, commencing October 30, 1999, at the rate of 8% per annum, until the principal hereof is paid or made available for payment. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture (as defined on the reverse hereof), be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be April 15 or October 15 (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and any interest on this Security will be made at the Corporate Trust Office of the Trustee, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be signed manually or by facsimile by its duly authorized officers and its corporate seal to be affixed or imported thereon. Dated: May 4, 1999 THE ROUSE COMPANY By: /s/Jeffrey H. Donahue --------------------- Jeffrey H. Donahue Executive Vice President and Chief Financial Officer Attest: /s/David R. Schwiesow - --------------------- David R. Schwiesow Assistant Secretary 2 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: May 4, 1999 THE FIRST NATIONAL BANK OF CHICAGO, as Trustee By: /s/Sandra Caruba ------------------- Authorized Officer 3 [Reverse of Security] 1. Indenture. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of February 24, 1995 (herein called the "Indenture"), between the Company and The First National Bank of Chicago, as trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, initially limited in aggregate principal amount to $200,000,000. 2. Redemption. The Securities of this series are subject to redemption at the election of the Company at any time and from time to time, in whole or in part, at a Redemption Price equal to the Make-Whole Price. Unless the Company shall default in the payment of the Redemption Price from and after the Redemption Date interest will cease to accrue on the Securities or portion of Securities called for redemption. Notice of redemption shall be mailed to the registered holders of the Securities of this series designated for redemption at their addresses as the same shall appear on the Securities Register of this series not less than 30 days nor more than 60 days prior to the Redemption Date, subject to all the conditions and provisions of the Indenture. In the event of redemption of Securities of this series in part only, new Securities of this series for the amount of the unredeemed portion hereof shall be issued in the name of the Holder thereof upon the presentation and cancellation thereof. No sinking fund has been provided for the Securities. 3. Modifications to Existing Covenants and Additional Covenants. (a) The covenant set forth in Section 1008 of the Indenture shall be modified with respect to the Securities of this series as follows: (i) the Ratio Calculation shall be 1.7 to 1 (instead of 1.1 to 1); (ii) the Ratio Calculation shall be based on Total FFO and Total Interest Expense (instead of EBDT and Consolidated Interest Expense, respectively); and (iii) the Ratio Calculation and other covenant-related calculations with respect to the Securities of this series shall be based upon GAAP as reflected in the Financial Statements as prepared and provided in accordance with the Indenture. (b) All references in the Indenture to EBDT and Consolidated Interest Expense shall, with respect to the Securities of this series, be deemed to mean (and be replaced by) Total FFO and Total Interest Expense, respectively. 4 (c) The Ratio Calculation for the covenants set forth in Sections 801 and 1009 of the Indenture shall be 1.7 to 1 (instead of 1.1 to 1). (d) The Company will not, and will not permit any Subsidiary (as to which the Company owns, directly or indirectly, more than 50% of the voting stock therein) to, incur any Debt if, immediately after giving effect to the incurrence of such additional Debt, the aggregate principal amount of outstanding Total Debt would be greater than 70% of the sum of (i) the Gross Asset Value as of the end of the fiscal quarter prior to the incurrence of such additional Debt, plus (ii) any increase in the Gross Asset Value resulting from any acquisition completed after the end of such quarter, including, without limitation, any pro forma increase from the application of the proceeds of such additional Debt, less (iii) any decrease in the Gross Asset Value resulting from any disposition completed after the end of such quarter. (e) The Company will not, and will not permit any Subsidiary (as to which the Company owns, directly or indirectly, more than 50% of the voting stock therein) to, incur any Secured Debt if, immediately after giving effect to the incurrence of such additional Secured Debt, the aggregate principal amount of all outstanding Secured Debt would be greater than 60% of the sum of (i) the Gross Asset Value as of the end of the fiscal quarter prior to the incurrence of such additional Secured Debt, plus (ii) any increase in the Gross Asset Value resulting from any acquisition completed after the end of such quarter, including, without limitation, any pro forma increase from the application of the proceeds of such additional Secured Debt, less (iii) any decrease in the Gross Asset Value resulting from any disposition completed after the end of such quarter. 4. Defeasance. The Indenture contains provisions, which are hereby made applicable to the Securities of this series, for defeasance at any time of (1) the entire indebtedness of the Securities of this series or (2) certain restrictive covenants and Events of Default with respect to the Securities of this series, in each case, upon compliance with certain conditions set forth in the Indenture. In addition to the covenants specified in Section 1303 of the Indenture, the defeasance provided under such Section shall be equally applicable to paragraphs (d) and (e) of Section 3 of this Security. To the extent the covenants set forth in paragraphs (d) and (e) of Section 3 of this Security are defeased in accordance with the Indenture, the failure of the Company to comply with such covenants shall not be deemed to constitute or result in an Event of Default. 5. Events of Default. (a) If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. (b) With respect to the Securities of this series, Clause (5) of Section 501 of the Indenture shall be replaced with the following: (5) a default under any bond, debenture, note, mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company (or by any Subsidiary, the repayment of which the Company has guaranteed or for which the Company is directly responsible or liable as 5 obligor or guarantor) (including a default with respect to Securities of any series other than that series) having an aggregate principal amount outstanding of at least $10,000,000, whether such indebtedness now exists or shall hereafter be created, which default shall have resulted from the failure to pay such indebtedness at its maturity or shall have resulted in such indebtedness being declared due and payable prior to the date on which it would otherwise have become due and payable, without such acceleration having been rescinded or annulled, within a period of 10 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring the Company to cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (c) As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. 6. Modification and Waiver. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of a majority in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. 7. Certain Definitions. The following are definitions of certain terms applicable with respect to the Securities of this series: 6 "Adjusted Treasury Rate" means, with respect to any Determination Date, the rate per annum equal to the semi-annual yield to maturity of the ComparableTreasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Determination Date, plus 25 basis points. "Assets Under Development" means land and improvements owned by a member of the Consolidated Group or an Investment Affiliate being developed for retail, office, mixed-use or other rental-income producing purposes which meet all four of the following criteria: (i) such project (or phase) has not yet been substantially completed; (ii) no rental income has yet been received; (iii) no certificate of occupancy has yet been issued for such project (or phase); and (iv) such project (or phase) is classified as construction in progress in accordance with GAAP. "Business Day" means each Monday, Tuesday, Wednesday, Thursday or Friday which is not a legal holiday in New York, New York. "Capital Stock" means shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, equivalent ownership interests in a Person which is not a corporation, and warrants or options to purchase any of the foregoing. "Cash Equivalents" means (i) short-term obligations of, or fully guaranteed by, the United States of America, (ii) commercial paper rated A-1 or better by Standard & Poor's Rating Services (or any successor) or P-1 or better by Moody's Investors Service, Inc. (or any successor), or (iii) certificates of deposit issued by, and time deposits with, commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any replacement or successor statute, and the regulations promulgated thereunder from time to time. "Comparable Treasury Issue" means the United States Treasury security selected by the Independent Investment Banker as having a maturity comparable to the remaining term of the Notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities of this series. "Comparable Treasury Price" means, with respect to any Determination Date: (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its 7 principal amount) on the third Business Day preceding such Determination Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities," or (ii) if such release (or any successor release) is not published or does not contain such prices on such Business Day, (a) the average of the Reference Treasury Dealer Quotations for such date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if fewer than three such Reference Treasury Dealer Quotations are obtained, the average of all such Reference Treasury Dealer Quotations. "Consolidated Group" means the Company and its Subsidiaries that are consolidated with the Company for financial reporting purposes under GAAP, and any other Person whose financial results are consolidated using the proportionate share method under GAAP in the Financial Statements. "Consolidated Group's Pro Rata Share" means, with respect to any Investment Affiliate, the percentage of the total ownership and financial interests held by the Consolidated Group, in the aggregate, in such Investment Affiliate as determined in accordance with GAAP. "Determination Date" means, with respect to the calculation of the Make-Whole Price in connection with any redemption of the Securities of this series, the Redemption Date. "GAAP" means generally accepted accounting principles in the United States, consistent with the accounting principles utilized in preparing the Financial Statements in accordance with the Indenture. "Gross Asset Value" means, as of any determination date, the sum of the values of the following assets of the Consolidated Group, including the Consolidated Group's Pro Rata Share of the values of such assets of Investment Affiliates, based on the valuation methods set forth below: (a) with respect to all Retail Properties, the Net Operating Income attributable thereto for the most recent period of four full fiscal quarters for which financial results have been reported, divided by 0.0825; (b) with respect to all office, mixed-use and other income- producing properties other than Retail Properties, the Net Operating Income attributable thereto for the most recent period of four full fiscal quarters for which financial results have been reported, divided by 0.09; 8 (c) with respect to the Summerlin, Las Vegas and Columbia, Maryland properties and any other properties relating to additional master-planned communities developed or acquired after the date hereof, 100% of the most recent current value thereof (without deduction for the value of the interests of the Hughes heirs therein under the Hughes Agreement) as set forth in appraisals prepared by Landauer Associates, Inc. (or another nationally recognized appraisal firm selected by the Company), provided that the Company will obtain updated appraisals thereof at least once during each fiscal year and also when, during any four consecutive full fiscal quarters, any such properties having an aggregate value in excess of 5% of Gross Asset Value as of the end of the last full fiscal quarter are sold or transferred; (d) 100% of the GAAP book value of all other land, all Assets Under Development and other non-income-producing properties (less the portion of such value attributable to minority interest holders); (e) 100% of the GAAP book value of cash and Cash Equivalents held by the Consolidated Group; and (f) 100% of the GAAP book value of current accounts receivable, net held by the Consolidated Group. Notwithstanding the preceding sentence, the contribution to the Gross Asset Value of those assets acquired in any acquisition will be calculated prior to the date ending on or after four full fiscal quarters subsequent to any such acquisition using the actual acquisition cost of such assets excluding actual transaction costs (without regard to any adjustments which may be made in determining book value under GAAP). "Hughes Agreement" means the Contingent Stock Agreement, effective as of January 1, 1996, by the Company in favor of and for the benefit of the holders and the representatives named therein. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company. "Investment Affiliate" means any Person in which any member of the Consolidated Group, directly or indirectly, has an ownership interest, whose financial results are not consolidated using the proportionate share method under GAAP with the financial results of the Consolidated Group in the Financial Statements. 9 "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code on any property leased to any Person under a lease which is not in the nature of a conditional sale or title retention agreement, or any subordination agreement in favor of another Person). "Make-Whole Price" means, with respect to any Security of this series as of any Determination Date, an amount equal to the greater of: (i) 100% of the principal amount of such Security; and (ii) as determined by an Independent Investment Banker, the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the Determination Date) discounted to the Determination Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus, in each case, accrued and unpaid interest thereon to such Determination Date. "Net Operating Income" means, with respect to any Property, for any period, earnings from rental operations (computed in accordance with GAAP, but without deduction for reserves) attributable to such Property, plus depreciation, amortization, interest expense and deferred taxes with respect to such Property for such period, and, if such period is less than four full fiscal quarters, adjusted by straight lining ordinary operating expenses which are payable less frequently than once during every such period (e.g., real estate taxes and insurance). The amounts determined under the preceding sentence will be adjusted by adding back (i) the interests of the former Hughes owners pursuant to the Hughes Agreement that were excluded in determining such amounts and (ii) dividends or other distributions accrued with respect to such period on any preferred stock or other preferred security issued by the Company to the extent that such dividends or other distributions are treated as an operating expense under GAAP. "Net Operating Income" will be adjusted to include a pro forma amount thereof (as determined in good faith by the Company) for four full fiscal quarters for any Property placed in service during any quarter and to exclude any Net Operating Income for the prior four full fiscal quarters from any Property not owned as of the end of any quarter. "Person" means any individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Property" means each parcel of real property owned or operated by any member of the Consolidated Group or any Investment Affiliate. 10 "Reference Treasury Dealer" means each of BT Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc One Capital Markets, Inc., J.P. Morgan Securities Inc. and Deutsche Bank Securities Inc. and their respective successors; provided, however, that if any of the foregoing shall not be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Determination Date, the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing by such Reference Treasury Dealer at 5:00 p.m. on the third Business Day preceding such Determination Date. "Retail Property" means a shopping center or other retail development containing more than one retail tenant in which at least 90% of the Net Operating Income from such center or development is attributable to retail uses. "Secured Debt" means, as of any determination date, the sum of: (i) the aggregate principal amount of all Debt of the Consolidated Group then outstanding (including only the Company's proportionate interest, as determined under GAAP, in the Debt of any Person whose financial results are consolidated using the proportionate share method in the Financial Statements) which is secured by a Lien on any asset (including any Capital Stock) of any member of the Consolidated Group, including, without limitation, loans secured by mortgages, stock, or partnership interests, plus (ii) the Consolidated Group's Pro Rata Share of any Debt of an Investment Affiliate then outstanding which is secured by a Lien on any asset (including any Capital Stock) of such Investment Affiliate, without duplication of any such items. For purposes of the preceding sentence, "Debt" will (a) include, with respect to any Person, any loans where such Person is liable as a general partner or co-venturer less, in each case, the proportionate share of any other general or limited partners or co-venturers and (b) exclude any Debt due from any member of the Consolidated Group or any Investment Affiliate solely to one or more members of the Consolidated Group. "Subsidiary" means a Person more than 50% of the (1) outstanding voting stock or interest in which and/or (2) financial interest in which, is 11 owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For purposes of this definition, "voting stock" means stock or other interest which ordinarily has voting power for the election of directors or equivalent persons, whether at all times or only so long as no senior class of stock or other interest has such voting power by reason of any contingency. "Total Debt" means, as of any determination date, (i) all Debt of the Consolidated Group then outstanding (including only the Company's proportionate interest, as determined under GAAP, in the Debt of any Person whose financial results are consolidated using the proportionate share method in the Financial Statements), plus (ii) the Consolidated Group's Pro Rata Share of all Debt of Investment Affiliates then outstanding, without duplication of any such items. For purposes of the preceding sentence, "Debt" will (a) include, with respect to any Person, any loans where such Person is liable as a general partner or co-venturer less, in each case, the proportionate share of any other general or limited partners or co-venturers and (b) exclude any Debt due from any member of the Consolidated Group or any Investment Affiliate solely to one or more members of the Consolidated Group. "Total FFO" means, for any period, net earnings, as reported by the Consolidated Group in accordance with GAAP, excluding cumulative effects of changes in accounting principles, extraordinary or unusual items, gains or losses from debt restructurings and sales of properties, and deferred income taxes, plus depreciation and amortization and after adjustments for minority interests, and treating unconsolidated partnerships and joint ventures on the same basis, plus (i) distributions accrued with respect to such period of the 9-1/4% Cumulative Quarterly Income Preferred Securities (QUIPS) of Rouse Capital (Delaware statutory business trust), plus (ii) payments made and other amounts treated as an expense of the Company under GAAP with respect to such period pursuant to the Hughes Agreement (provided that no item of income or expense shall be included more than once in such calculation even if it falls within more than one of the above categories). "Total Interest Expense" means, for any period, the sum of (1) all interest expense of the Consolidated Group (less the proportionate share of interest expense of any minority interest holders), plus (2) the allocable portion (based on liability) of any interest expense on any obligation for which any member of the Consolidated Group is wholly or partially liable under repayment, interest carry or performance guarantees or other relevant liabilities, plus (3) the Consolidated Group's Pro Rata Share of 12 any interest expense on any Debt of any Investment Affiliate, whether recourse or non-recourse (provided that no expense shall be included more than once in such calculation even if it falls within more than one of the foregoing categories, and provided, further, that no interest expense on Debt due from one member of the Consolidated Group solely to another member of the Consolidated Group shall be included in determining Total Interest Expense). For purposes of the preceding sentence, interest expense will be determined in accordance with GAAP and will exclude any amortization of debt issuance costs. Except as otherwise provided herein, all terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture 8. Absolute Obligation. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. 9. Registration of Transfer and Exchange. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or its attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made to a Holder for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. 13 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS FINANCIAL DATA SCHEDULE SUBMITTED IN ACCORDANCE WITH REGULATION S-K ITEM 601(C)(2). THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 10-Q FOR THE ANNUAL PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1999 MAR-31-1999 29,470 4,076 113,114 21,548 0 143,878 4,216,752 540,345 4,523,063 544,403 3,440,147 0 41 723 636,893 4,523,063 180,042 180,042 0 111,545 (1,106) 1,312 63,624 28,000 74 26,820 0 0 0 27,926 .34 .34 CURRENT ASSETS INCLUDE CASH, UNRESTRICTED MARKETABLE SECURITIES, CURRENT PORTION OF ACCOUNTS AND NOTES RECEIVABLE AND PREPAID EXPENSES AND DEPOSITS. CURRENT LIABILITIES INCLUDE THE CURRENT PORTION OF LONG-TERM DEBT AND ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES.
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