-----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, QTLq5o9NktVgUTtc/+1WfKm5CQ/jHWK4kCXwL4u3mAlA9tcGjmmWKok4Vxuj8xvI JPO4dvNCsti+nNUM1ryBxQ== 0000928385-99-001074.txt : 19990402 0000928385-99-001074.hdr.sgml : 19990402 ACCESSION NUMBER: 0000928385-99-001074 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 001-11543 FILM NUMBER: 99582959 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITITES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year Ended December 31,1998 or (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) Commission File NO 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 INCORPORATION OR ORGANIZATION IDENTIFICATION NO.) 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 -------------- Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- --------------------- Common Stock (par value 1 cent per share) New York Stock Exchange - ---------------------------------------- 9 1/4% Cumulative Quarterly Income Preferred Securities New York Stock Exchange - ------------------------------------------------------- Series B Convertible Preferred Stock - ------------------------------------- (par value 1 cent per share) New York Stock Exchange - ------------------------------ Securities registered pursuant to Section 12(g) of the Act: NONE ---- 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 for (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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ------- As of March 17, 1999, there were outstanding 72,256,106 shares of the registrant's common stock, par value 1 cent, which is the only class of common or voting stock of the registrant. As of that date, the aggregate market value of the shares of common stock held by nonaffiliates of the registrant (based on the closing price as reported in The Wall Street Journal, Eastern Edition) was ---------------------------------------- approximately $1,634,126,080 Documents Incorporated by Reference The specified portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1998 are incorporated by reference into Parts I, II, and IV. Definitive Proxy Statement to be filed pursuant to Regulation 14A on or before April 12, 1999 is incorporated by reference into Part III. Part I ------ Item 1. Business. Item 1 (a). General Development of Business. The Rouse Company (the "Company") was incorporated as a business corporation under the laws of the State of Maryland in 1956. Its principal offices are located at The Rouse Company Building, Columbia, Maryland 21044. Its telephone number is (410) 992-6000. The Company, through its subsidiaries, affiliates and "Non-REIT Subsidiaries" (as defined below), is engaged or has a material financial interest in (i) the ownership, management, acquisition and development of income-producing and other real estate in the United States, including retail centers, office buildings, mixed-use projects and community retail centers, and the management of one retail center in Canada, and (ii) the development and sale of land in Maryland and the Las Vegas, Nevada metropolitan area for residential, commercial and industrial uses. "Non-REIT Subsidiaries" are companies as to which substantially all (at least 98%) of the financial interest is held by the Company, but in which The Rouse Company Incentive Compensation Statutory Trust, an entity that is neither owned nor controlled by the Company, owns 91% of the voting stock. In December 1997, the Company determined that it would elect to be taxed as a real estate investment trust (REIT) effective January 1, 1998. The Company believes that it met the qualifications for REIT status during 1998, and it intends to continue to meet the qualifications in the future and to distribute at least 100% of its REIT taxable income (determined after taking into account any net operating loss deduction) to stockholders. Accordingly, management does not believe that the Company will be liable for payment of income taxes (except, possibly, in certain states). Developments in 1998 and Early 1999 During the third and fourth quarters of 1998, subsidiaries of the Company purchased ownership interests in seven retail centers from TrizecHahn Centers Inc. for approximately $1.2 billion. The centers are Park Meadows Mall in suburban Denver, Colorado, Towson Town Center in suburban Baltimore, Maryland, The Fashion Show on "The Strip" in Las Vegas, Nevada (in which a Company subsidiary already held a 75% ownership interest), Fashion Place in Salt Lake City, Utah, Bridgewater Commons Mall in Bridgewater, New Jersey, Valley Fair in San Jose, California and Westdale Mall in Cedar Rapids, Iowa. Upon completion of the acquisitions, I-1 subsidiaries of the Company held 100% ownership interests in these centers, except that the subsidiaries held a 50% interest in Valley Fair and a 20.5% interest in Westdale Mall. At the time of the acquisitions, the Company decided to hold for sale its interests in Valley Fair and Westdale Mall. On November 30, 1998, a wholly owned subsidiary of the Company acquired for approximately $373 million, from Teachers Properties, Inc. ("Teachers") its interest in Rouse-Teachers Properties, Inc. ("RTPI"), an entity in which Teachers held a 95% ownership interest and the Company held a 5% ownership interest. The acquired assets of RTPI consisted of 22 office buildings in metropolitan Baltimore, Maryland containing approximately 1,034,000 square feet of leasable space, 26 industrial buildings in metropolitan Baltimore containing approximately 1,675,000 square feet of leasable space, 8 office buildings in Columbia, Maryland containing approximately 428,000 square feet of leasable space, 10 office buildings in metropolitan Washington, D.C. containing 1,227,000 square feet of leasable space, an office building in suburban Harrisburg, Pennsylvania containing approximately 231,000 square feet of leasable space and approximately 107 saleable acres of land in the Baltimore and Washington metropolitan areas. The Company sold three of the acquired buildings in metropolitan Washington, D.C. on December 1, 1998 for an aggregate price of approximately $91 million. On February 1, 1999, a wholly owned subsidiary of the Company completed the establishment of a joint venture (the "Four State Venture"), relating to four retail centers, with a venture (the "Morgan/NYSTRS Venture") consisting of the J.P. Morgan Strategic Property Fund and the New York State Teachers' Retirement System. The centers, all of which were acquired in 1998 from TrizecHahn Centers Inc., are Park Meadows Mall, Towson Town Center, Fashion Place and Bridgewater Commons Mall. The total cost of the retail center assets and related liabilities contributed to the Four State Venture was approximately $957 million and $542 million, respectively. The Morgan/NYSTRS Venture made a $271 million cash contribution to the Four State Venture, which is approximately 65% of the net cost. The Company subsidiary effectively has a 35% ownership interest in the Four State Venture, while the Morgan/NYSTRS Venture has a 65% ownership interest. I-2 Additional information regarding the above developments is contained in the Company's Current Report on Form 8-K/A, filed on November 16, 1998, the Company's Current Report on Form 8-K, filed on December 14, 1998, the Company's Current Report on Form 8-K, filed on February 10, 1999, and the Company's Current Report on Form 8-K/A, filed on February 16, 1999. Item 1(b). Financial Information About Industry Segments. Information required by Item 1(b) is incorporated herein by reference to note 9 of the notes to consolidated financial statements included in the 1998 Annual Report to Shareholders. As noted in Item 1(a), the Company is a real estate company engaged, through its subsidiaries, affiliates and having a material financial interest, through its Non-REIT Subsidiaries, in most aspects of the real estate industry, including the management, acquisition and development of income- producing and other properties, both retail and commercial, community development and management, and land development. These business segments are further described below. Item 1(c). Narrative Description of Business. Retail Centers: -------------- As set forth in Item 2, at December 31, 1998, the 49 regional retail centers owned, in whole or in part, or operated by subsidiaries or affiliates of the Company or by Non-REIT Subsidiaries, aggregated 44,006,000 square feet, including 26,147,000 square feet owned by or leased to department stores. The activities involved in operating and managing retail centers include: negotiating lease terms with present and prospective tenants, identifying and attracting desirable new tenants, conducting local market and consumer research, developing and implementing short- and long-term merchandising and leasing programs, assisting tenants in the presentation of their merchandise and the layout of their stores and store fronts, and maintaining the building and common areas. In conjunction with other partners or investors, the Company, through its subsidiaries and affiliates and Non-REIT subsidiaries, acquires interests in completed retail centers, with the Company (or, beginning December 31, 1997, its Non-REIT Subsidiaries) having management responsibility and earning incentive fees including, in some instances, equity interests in the centers. Affiliates of the Company (or, beginning December 31, 1997, Non-REIT Subsidiaries) I-3 also provide management services for centers developed and owned by others under management agreements that also provide for incentive fees and, in some instances, equity interests in the centers. As of December 31, 1998, Non-REIT Subsidiaries of the Company managed 9 such centers, which are included in the figures in the preceding paragraph and aggregated 8,778,000 square feet of leasable space, 5,098,000 square feet of which was department store space. The Howard Research And Development Corporation ("HRD", a Non-REIT Subsidiary of the Company) and its subsidiaries own and/or manage 12 community retail centers with 890,000 square feet of leasable space, The Mall in Columbia (which is included in the second preceding paragraph) and other properties in Columbia, Maryland. Howard Hughes Properties, Limited Partnership ("HHPLP", a majority owned affiliate of the Company) and its subsidiaries and affiliates own interests in 2 community retail centers with 238,000 square feet of leasable space in Summerlin, Nevada. Office, Mixed-Use and Other Properties: - -------------------------------------- HHPLP and its subsidiaries and affiliates own and/or manage 61 office and industrial buildings with 3,914,000 square feet of leasable space, and other properties in and around Las Vegas, Nevada and Los Angeles, California. HRD and its subsidiaries own and/or manage 12 office and industrial buildings with 1,188,000 square feet of leasable space and other properties in Columbia, Maryland. Other subsidiaries of the Company own and operate 5 mixed-use projects with a total of 691,000 square feet of leasable retail space, a 90,000 square foot cinema and 1,891,000 square feet of leasable office space. Other subsidiaries of the Company own, in whole or in part, 72 office and industrial buildings with a total of 4,909,000 square feet of leasable space. The activities involved in operating and managing office, mixed-use and other properties include: negotiating lease terms with present and prospective tenants, identifying and attracting desirable new tenants, conducting local market and consumer research, developing and implementing short- and long- term merchandising and leasing programs, assisting tenants in the presentation of their merchandise and the layout of their stores and store fronts, and maintaining the building and common areas. Development: - ----------- The Company, through its subsidiaries, affiliates and Non-REIT subsidiaries renovates and expands existing retail centers and develops suburban and downtown retail centers, mixed- I-4 use projects and master-planned business parks, primarily for ownership. In addition, the Company is capable of serving as the master developer for certain mixed-use projects, with the Company generally owning at least the retail component of such projects. The activities involved in the development, renovation and expansion of retail centers, mixed-use projects and master-planned business parks include: initial market and consumer research, evaluating and acquiring land sites, obtaining necessary public approvals, engaging architectural and engineering firms to design the project, estimating development costs, developing and testing pro forma operating statements, selecting a general contractor, arranging construction and permanent financing, identifying and obtaining department stores and other tenants, negotiating lease terms, negotiating partnership and joint venture agreements and promoting new, renovated or expanded retail centers, mixed-use projects and master-planned business parks. The Company and certain subsidiaries, affiliates and Non-REIT Subsidiaries are in the construction or development stage of announced projects, primarily the development of new retail centers, expansions of existing retail centers and mixed-use projects, and expansions of existing master-planned business parks in Las Vegas, Nevada. Land Sales Operations: - --------------------- HRD, a Non-REIT Subsidiary of the Company, is the developing entity of Columbia, Maryland, which is located in the Baltimore-Washington corridor. HRD owns approximately 1,600 salable acres of land in and around Columbia, and, through its subsidiaries and affiliates, develops and sells this land to builders and other developers for residential, commercial and industrial uses. The Hughes Corporation and Howard Hughes Properties, Inc. (collectively "Hughes", Non-REIT Subsidiaries of the Company) and their subsidiaries and affiliates are the developers of Summerlin, Nevada, which is located immediately north and west of Las Vegas, Nevada. Hughes owns approximately 8,700 salable acres of land in Summerlin, and develops and sells this land to builders and other developers for residential and commercial uses. Other affiliates or subsidiaries of the Company may also purchase some of this land for their own development purposes. Non-REIT Subsidiaries of the Company, directly or through affiliates, are also presently involved in community development and related land sales elsewhere in Maryland, and are developing or holding for sale parcels of land elsewhere in Nevada and California. In all aspects of the Company's business pertaining to the ownership, management, acquisition or development of income-producing and other real estate, the Company and its subsidiaries, affiliates and Non-REIT Subsidiaries operate I-5 in highly competitive markets. With respect to the leasing and operation or management of developed properties, each project faces market competition from existing and future developments in its geographical market area. The Company's affiliates and Non-REIT Subsidiaries also face competition in and around Columbia, Maryland and Las Vegas, Nevada with respect to the development and sale of land for residential, commercial and industrial uses. Neither the Company's business, taken as a whole, nor any of its operating segments, is seasonal in nature. Federal, state and local statutes and regulations relating to the protection of the environment have previously had no material effect on the Company's business. Future development opportunities of the Company may involve additional capital and other expenditures in order to comply with such statutes and regulations. It is impossible at this time to predict with any certainty the magnitude of any such expenditures or the long-range effect, if any, on the Company's operations. Compliance with such laws has had no material adverse effect on the operating results or competitive position of the Company in the past; the Company anticipates that they will have no material adverse effect on its future operating results or its competitive position in the industry. None of the Company's operating segments depends upon a single customer or a few customers, the loss of which would have a materially adverse effect on the segment. No customer accounts for 10 percent or more of the consolidated revenues of the Company. The Company, its subsidiaries and affiliates and Non-REIT Subsidiaries employed 4,126 full-time and part-time employees at December 31, 1998. I-6 Item 2. Properties. The Company leases its headquarters building (approximately 127,000 square feet) in Columbia, Maryland for an initial term of 30 years which expires in 2003 with options for two 15-year renewal periods. The lease on the headquarters building is accounted for as a capital lease. Information respecting the Company's operating properties is incorporated herein by reference to the "Projects of The Rouse Company" table in pages 50 through 53 of Exhibit 13 to this Form 10-K. The ownership of virtually all properties is subject to mortgage financing. The table of projects includes properties managed by Non-REIT Subsidiaries of the Company for a fee as identified in notes (c) and (d) to the table. Excluding such managed properties, certain of the remaining properties are subject to leases which provide an option to purchase (or repurchase) the property and/or to renew the leases for one or more renewal periods. The years of expiration indicated below assume all options to extend the terms of leases are exercised. The properties subject to such leases in whole or part (including properties owned by Non-REIT Subsidiaries) are as follows:
Nature of Year of expiration Property interest of lease -------- -------- -------- Arizona Center Leasehold Various dates from 2017 to 2050 Augusta Mall Leasehold 2068 Bayside Marketplace Leasehold by joint venture 2062 Columbia Mall, Inc. - Leasehold and fee 2000 American City Building Columbia Mall, Inc. - Leasehold and fee 2012 Exhibit Building Columbia Mall, Inc. - Leasehold 2062 Oakland Building Echelon Mall Leasehold 2008 Faneuil Hall Marketplace Leasehold 2074 Fashion Place Mall Leasehold 2059 First National Bank Plaza Leasehold 2013 Franklin Park Leasehold and fee by joint 2024 venture The Gallery at Market East Leasehold 2082
I-7 Item 2. Properties, continued.
Nature of Year of expiration Property interest of lease -------- -------- -------- Governor's Square Leasehold 2054 Harborplace Leasehold 2054 Highland Mall Leasehold and fee by joint 2070 venture The Jacksonville Landing Leasehold 2057 Mall St. Matthews Leasehold 2053 Midtown Square Leasehold 2055 Pioneer Place Leasehold 2076 Plymouth Meeting Leasehold 2063 Riverwalk Leasehold and fee by joint 2076 venture South Street Seaport Leasehold 2031 Tampa Bay Center Leasehold and fee by joint 2047 venture Westlake Center Leasehold by joint venture 2043
I-8 Item 3. Legal Proceedings. None. I-9 Item 4. Submission of Matters to a Vote of Security Holders. None. I-10 Executive Officers of the Registrant. The executive officers of the Company as of March 26, 1999 are:
Present office and Date of election Business or professional position with the or appointment to experience during the past Executive Officer Age Company present office five years - ----------------- --- ------------------ ----------------- --------------------------- Anthony W. Deering 54 Chairman of the Board, 2/25/97 Chairman of the Board, President and President and 2/25/93 Chief Executive Officer of the Company; Chief Executive Officer 2/23/95 formerly President and Chief Executive Officer of the Company; President and Chief Operating Officer of the Company Jeffrey H. Donahue 52 Executive Vice-President 12/3/98 Executive Vice-President and Chief Financial and Chief Financial Officer 9/23/93 Officer of the Company; formerly Senior Vice- President and Chief Financial Officer of the Company Duke S. Kassolis 47 Senior Vice-President 9/23/93 Senior Vice-President and Director of and Director of Office 8/17/93 Office and Mixed-Use Operations of the and Mixed-Use Operations Company Paul I. Latta, Jr. 55 Senior Vice-President 9/23/93 Senior Vice-President and Director of and Director of Retail 8/17/93 Retail Operations of the Company Operations Douglas A. McGregor 56 Vice Chairman and Chief 12/3/98 Vice Chairman and Chief Operating Officer; Operating Officer formerly Executive Vice-President for Development and Operations of the Company Robert Minutoli 48 Senior Vice-President 9/23/93 Senior Vice-President and Director of and Director of 8/17/93 New Business of the Company New Business
I-11 Executive Officers of the Registrant.
Present office and Date of election Business or professional position with the or appointment to experience during the past Executive Officer Age Company present office five years - ------------------ --- ------------------------- ----------------- -------------------------------- Robert D. Riedy 53 Senior Vice-President 9/23/93 Senior Vice-President and Director of and Director of Retail 8/17/93 Retail Leasing of the Company Leasing Alton J. Scavo 52 Senior Vice-President and 9/23/93 Senior Vice-President and Director of Director of the 8/17/93 the Community Development Division of Community Development the Company and General Manager of Division and General Columbia Manager of Columbia Jerome D. Smalley 49 Executive Vice-President 12/3/98 Executive Vice-President - Development; - Development formerly Senior Vice-President and Director of the Commercial and Office Development Division of the Company
The term of office of each officer is until election of a successor or otherwise at the pleasure of the Board of Directors. There is no arrangement or understanding between any of the above-listed officers and any other person pursuant to which any such officer was elected as an officer, except with respect to Anthony W. Deering. See Exhibit 10 to this Form 10-K. None of the above-listed officers has any family relationship with any director or other executive officer. I-12 Part II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Information required by Item 5 is incorporated herein by reference to page 35 of Exhibit 13. Item 6. Selected Financial Data. Information required by Item 6 is incorporated by reference to page 34 of Exhibit 13. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information required by Item 7 is incorporated herein by reference to pages 36 through 49 of Exhibit 13. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Information required by Item 7A is incorporated herein by reference to pages 45 and 46 of Exhibit 13. Item 8. Financial Statements and Supplementary Data. Financial Statements required by Item 8 are set forth in the Index to Financial Statements and Schedules on page IV-2. Supplementary data required by Item 8 are incorporated herein by reference to page 35 of Exhibit 13. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. II-1 Part III -------- The information required by Items 10, 11, 12 and 13 (except that information regarding executive officers called for by Item 10 that is contained in Part I) is incorporated herein by reference from the definitive proxy statement that the Company intends to file pursuant to Regulation 14A on or before April 12, 1999. III-1 Part IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. and 2. Financial Statements and Schedules: Reference is made to the Index to Financial Statements and Schedules on page IV-2. (b) Reports on Form 8-K: Current Report on Form 8-K/A filed October 9, 1998, 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 October 21, 1998, disclosing acquisition of assets. Current Report on Form 8-K filed November 5, 1998, disclosing acquisition of assets. Current Report on Form 8-K/A filed November 16, 1998, 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 December 14, 1998, disclosing acquisition of assets. Current Report on Form 8-K filed December 18, 1998, disclosing acquisition of assets. (c) Exhibits required by Item 601 of Regulation S-K. Exhibit Index Exhibit No. ----------- 3 Articles of Incorporation and Bylaws 10 Material Contracts 12.1 Ratio of earnings to fixed charges 12.2 Ratio of earnings to combined fixed charges and Preferred stock dividend requirements 13 Annual report to security holders 21 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP, Independent Auditors 23.2 Consent of KPMG LLP, Independent Auditors 24 Power of Attorney 27 Financial Data Schedule 99 Additional Exhibits: 99.1 Form 11-K Annual Report of The Rouse Company Savings Plan for the year ended December 31, 1998 99.2 Factors affecting future operating results (d) Separate Financial Statements and Schedules of Subsidiaries not consolidated: Reference is made to the Index to Financial Statements and Schedules on page IV-2. IV-1 The Rouse Company Index to Financial Statements and Schedules
Page ---- Independent Auditors' Report IV-3 Financial Statements: The Rouse Company and Subsidiaries included on pages 4 through 35 of Exhibit 13 incorporated herein by reference: Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Schedules: Real Estate Ventures Owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company: Independent Auditors' Report IV-4 Combined Consolidated Balance Sheet at December 31, 1998 IV-5 Combined Consolidated Statement of Operations for the Year Ended December 31, 1998 IV-6 Combined Consolidated Statement of Changes in Shareholders' Equity for the Year Ended December 31, 1998 IV-7 Combined Consolidated Statement of Cash Flows for the Year Ended December 31, 1998 IV-8 Notes to Combined Consolidated Financial Statements IV-10 The Rouse Company and Subsidiaries as of December 31, 1998 or for the years ended December 31, 1998, 1997 and 1996: Schedule II Valuation and Qualifying Accounts IV-19 Schedule III Real Estate and Accumulated Depreciation IV-20 Schedule IV Mortgage Loans on Real Estate IV-35 Real Estate Ventures Owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company as of December 31, 1998 or for the Year Ended December 31, 1998: Schedule II Valuation and Qualifying Accounts IV-37 Schedule III Real Estate and Accumulated Depreciation IV-38 All other schedules have been omitted as not applicable or not required, or because the required information is included in the related financial statements or notes thereto.
IV-2 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors and Shareholders The Rouse Company: We have audited the consolidated financial statements and the related financial statement schedules of The Rouse Company and subsidiaries as listed in the accompanying index except for those schedules relating to the Real Estate Venture owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Rouse Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Baltimore, Maryland February 24, 1999 IV-3 INDEPENDENT AUDITORS' REPORT The Board of Trustees The Rouse Company Incentive Compensation Statutory Trust and The Board of Directors The Rouse Company: We have audited the accompanying combined consolidated financial statements and the related financial statement schedules of Real Estate Ventures owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company as listed in the accompanying index. These combined consolidated financial statements and financial statement schedules are the responsibility of the Ventures' management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position of Real Estate Ventures owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic combined consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Baltimore, Maryland February 24, 1999 IV-4 Real Estate Ventures Owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company COMBINED CONSOLIDATED BALANCE SHEET December 31, 1998 (in thousands) Assets -------- Property (notes 2, 5, and 11): Operating properties: Property and deferred costs of projects.............. $326,860 Less accumulated depreciation and amortization....... 82,390 -------- 244,470 Properties in development............................... 66,442 Investment land and land held for development and sale.. 278,155 -------- Total property....................................... 589,067 Accounts and notes receivable, including advances to The Rouse Company of $112,310 (note 3)................... 187,046 Deferred income taxes (note 6)............................ 53,660 Prepaid expenses and other assets......................... 31,276 Investments in unconsolidated real estate ventures........ 32,765 -------- Total................................................... $893,814 ======== Liabilities and Shareholders' Equity (Deficit) ---------------------------------------------- Liabilities: Debt (note 5): Borrowings from The Rouse Company....................... $ 488,363 Other borrowings........................................ 332,945 --------- Total debt........................................... 821,308 --------- Bank overdraft............................................ 17,382 Deferred revenue.......................................... 79,576 Accounts payable, accrued expenses and other liabilities.. 19,286 Redeemable Series A Preferred stock (note 8).............. 50,000 Commitments and contingencies (notes 9, 11 and 12) Shareholders' equity (deficit) (note 1): Common stock.............................................. 5 Additional paid-in capital................................ 141,495 Accumulated deficit....................................... (235,238) --------- Net shareholders' deficit............................... (93,738) --------- Total................................................... $ 893,814 =========
The accompanying notes are an integral part of these statements. IV-5 Real Estate Ventures Owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company COMBINED CONSOLIDATED STATEMENT OF OPERATIONS Year ended December 31, 1998 (in thousands) Revenues: Land sales............................................... $165,461 Rentals and tenant services (note 9)..................... 73,811 Property management fees................................. 18,254 Golf club operations..................................... 14,938 Other (note 3)........................................... 9,546 -------- 282,010 Cost of land sales and related administration.............. 97,169 Other operating expenses, exclusive of provision for bad debts, depreciation and amortization (notes 4 and 10).... 63,822 Interest expense (note 5).................................. 68,146 Provision for bad debts.................................... 359 Depreciation and amortization (note 2)..................... 10,585 Equity in earnings of unconsolidated real estate ventures.. 811 Gain on dispositions of assets, net (note 7)............... 15,856 -------- Earnings before income taxes and extraordinary losses.... 58,596 -------- Income taxes, primarily federal (note 6): Current.................................................. 5,478 Deferred................................................. 16,582 -------- 22,060 -------- Earnings before extraordinary losses..................... 36,536 Extraordinary losses, net (note 5)......................... 1,127 -------- Net earnings............................................. $ 35,409 ========
The accompanying notes are an integral part of these statements. IV-6 Real Estate Ventures Owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company COMBINED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) Year ended December 31, 1998 (in thousands)
Additional Common paid-in Accumulated stock capital deficit Total ------ ---------- ------------ ---------- Balance at December 31, 1997...... $5 $141,495 $(265,797) $(124,297) Net earnings...................... -- -- 35,409 35,409 Dividends declared-common stock... -- -- (4,850) (4,850) ------ ---------- --------- --------- Balance at December 31, 1998 $5 $141,495 $(235,238) $(93,738) ====== ========== ========= =========
The accompanying notes are an integral part of these statements. IV-7 Real Estate Ventures Owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 1998 (in thousands) Cash flows from operating activities Rents and other revenues received............................... $ 107,533 Proceeds from land sales........................................ 124,152 Interest received............................................... 479 Land development expenditures................................... (82,917) Operating expenditures.......................................... (88,965) Interest paid................................................... (69,017) Income taxes paid............................................... (2,997) --------- Net cash used by operating activities......................... (11,732) --------- Cash flows from investing activities Expenditures for properties in development and improvements to existing properties funded by debt............................ (78,464) Expenditures for property acquisitions.......................... (10,054) Proceeds from sales of operating properties..................... 69,063 Other........................................................... (624) --------- Net cash used by investing activities......................... (20,079) --------- Cash flows from financing activities Proceeds from issuance of property debt......................... 97,005 Repayments of property debt: Scheduled principal payments.................................. (5,433) Other payments................................................ (23,834) Proceeds from issuance of other debt............................ 13,794 Repayments of other debt........................................ (47,483) Increase in bank overdraft...................................... 2,984 Dividends paid.................................................. (4,850) Other........................................................... (372) --------- Net cash provided by financing activities..................... 31,811 --------- Net change in cash and cash equivalents......................... --- Cash and cash equivalents at beginning of year.................. --- --------- Cash and cash equivalents at end of year........................ $ --- =========
The accompanying notes are an integral part of these statements. IV-8 Reconciliation of Net Earnings to Net Cash Used by Operating Activities Net earnings................................................. $ 35,409 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation and amortization.............................. 10,585 Gain on dispositions of assets, net........................ (15,856) Extraordinary losses, net.................................. 1,127 Provision for bad debts.................................... 359 Decrease (increase) in: Accounts and notes receivable........................... (42,950) Other assets............................................ 2,264 Increase in accounts payable, accrued expenses and other liabilities................................... 5,069 Deferred income taxes...................................... 16,582 Other, net................................................. (24,321) -------- Net cash used by operating activities $(11,732) ======== - ------------------------------------------------------------------------ Schedule of Noncash Investing and Financing Activities Debt assumed by purchasers of land $14,836 =======
IV-9 Real Estate Ventures Owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 (1) Summary of (a) Basis of presentation significant The combined consolidated financial statements include the accounts of the real accounting policies estate ventures (Ventures) owned by The Rouse Company Incentive Compensation Statutory Trust (Trust) and The Rouse Company (Company). These ventures include the following entities: . The Howard Research And Development Corporation and subsidiaries . The Hughes Corporation and subsidiaries . Howard Hughes Properties, Inc. . Rouse Property Management, Inc. . HRD Properties, Inc. and subsidiaries The combined consolidated financial statements also include the accounts of partnerships in which the Ventures have majority interest and control. Investments in other entities are accounted for using the equity method. Significant intercompany balances and transactions are eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Significant estimates are inherent in the preparation of the Ventures' financial statements. Actual results could differ from those estimates. The Ventures were initiated on December 31, 1997, when certain wholly owned subsidiaries of the Company issued 91% of their voting common stock to the Trust, an entity which is neither owned nor controlled by the Company, for an aggregate consideration of $1,400,000. These sales were made at fair value and as part of the Company's plan to meet the qualifications for status as a Real Estate Investment Trust (REIT). The Company retained the remaining voting stock of the Ventures and holds all outstanding shares of nonvoting common and/or preferred stock and, in certain cases, mortgage loans receivable from the Ventures which, taken together, comprise substantially all (at least 98%) of the financial interest in them. Due to the Company's continuing financial interest in the Ventures, the Ventures retained the Company's historical cost basis of the assets acquired and liabilities assumed on the date of sale of their voting common stock to the Trust. The condensed, combined consolidated balance sheet of the Ventures at December 31, 1997, is summarized as follows (in thousands): Assets: Operating properties, net................................................. $ 211,385 Properties in development................................................. 23,144 Investment land and land held for development and sale.................... 266,477 Properties held for sale.................................................. 46,289 Advances to the Company................................................... 131,832 Other..................................................................... 169,876 ---------- Total................................................................... $ 849,003 ========== Liabilities and shareholders' deficit: Borrowings from the Company............................................... $ 538,586 Other borrowings.......................................................... 280,595 Other liabilities......................................................... 104,119 Redeemable Series A Preferred stock....................................... 50,000 Shareholders' deficit..................................................... (124,297) ---------- Total................................................................... $ 849,003 ========== (b) Description of business Through their subsidiaries and affiliates, the Ventures acquire, develop and/or manage income-producing properties and develop and sell land for residential, commercial and other uses. The income-producing properties consist of retail centers and office and industrial properties. The retail centers include The Mall in Columbia, a regional shopping center in Columbia, Maryland, and several community shopping centers, in the Columbia area. The office and industrial properties are located in Columbia. Land development and sales operations are predominantly related to large-scale, long-term community development projects in Columbia and Summerlin, Nevada.
IV-10 (c) Property Properties to be developed or held and used in operations are carried at cost reduced for impairment losses, where appropriate. Properties held for sale are carried at cost reduced for valuation allowances, where appropriate. Acquisition, development and construction costs of properties in development and land development projects are capitalized including, where applicable, salaries and related costs, real estate taxes, interest and preconstruction costs. The preconstruction stage of development of an operating property (or an expansion of an existing property) includes efforts and related costs to secure land control and zoning, evaluate feasibility and complete other initial tasks which are essential to development. These costs are transferred to construction and development in progress when the preconstruction tasks are completed. Provision is made for potentially unsuccessful preconstruction efforts by charges to operations. Development and construction costs and costs of significant improvements, replacements and renovations at operating properties are capitalized, while costs of maintenance and repairs are expensed as incurred. Direct costs associated with financing and leasing of operating properties are capitalized as deferred costs and amortized over the periods benefited by the expenditures. Depreciation of operating properties is computed using the straight-line method. Properties are generally depreciated using composite lives ranging from 40 to 55 years producing effective annual rates of depreciation ranging from 1.6% to 2.5%. If events or circumstances indicate that the carrying value of an operating property to be held and used or a land development project may be impaired, a recoverability analysis is performed based on estimated nondiscounted future cash flows to be generated from the property or project. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property or project is written down to estimated fair value and an impairment loss is recognized. Properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. The net carrying values of operating properties are classified as properties held for sale when marketing of the properties for sale is authorized by management. Depreciation of these properties is discontinued at that time, but operating revenues, interest and other operating expenses continue to be recognized until the date of sale. (d) Sales of property Gains from sales of operating properties and revenues from land sales are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by the Ventures with the properties sold are met. Gains or revenues relating to transactions which do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. For land sale transactions under terms of which the Ventures are required to perform additional services and incur significant costs after title has passed, revenues and costs of sales are recognized proportionately on a percentage of completion basis. Cost of land sales is generally determined as a specified percentage of land sales revenues recognized for each land development project. The cost percentages used are based on estimates of development costs and sales revenues to completion of each project and are revised periodically for changes in estimates or development plans. The specific identification method is used to determine cost of sales of certain parcels of land.
IV-11 Certain of the land assets of the Ventures are the subject of a Contingent Stock Agreement (Agreement) between the Company and the former owners of the land or their successors (the beneficiaries). Under the Agreement, and subject to various terms and conditions, the Company is required to issue shares of its common stock (or, in certain circumstances, Increasing Rate Cumulative Preferred stock) to the beneficiaries based on the appraised values of the assets at specified "termination dates" from 2000 to 2009 and/or cash flows generated from the development and/or sale of the assets prior to the termination dates. The Company has retained full responsibility for its obligations under the Agreement. These obligations are unsecured and have not been guaranteed by the Ventures. Accordingly, the Agreement imposes no direct or contingent liabilities on the Ventures and all related costs or expenses are recognized by the Company. (e) Leases Leases which transfer substantially all the risks and benefits of ownership to tenants are considered finance leases and the present values of the minimum lease payments and the estimated residual values of the leased properties, if any, are accounted for as receivables. Leases which transfer substantially all the risks and benefits of ownership to the Ventures are considered capital leases and the present values of the minimum lease payments are accounted for as property and debt. In general, minimum rent revenues are recognized when due from tenants; however, estimated collectible minimum rent revenues under leases which provide for varying rents over their terms are averaged over the terms of the leases. (f) Income taxes Deferred income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors. (g) Cash and cash equivalents Short-term investments with maturities at dates of purchase of three months or less are classified as cash equivalents. (h) Information about financial instruments Fair values of financial instruments approximate their carrying values in the financial statements except for debt for which fair value information is provided in note 5. (2) Property Operating properties and deferred costs of projects at December 31, 1998 are summarized as follows (in thousands): Buildings and improvements................................................. $289,902 Land....................................................................... 26,023 Deferred costs............................................................. 10,472 Furniture and equipment.................................................... 463 Total................................................................... -------- $326,860 ======== Depreciation expense for 1998 was $9,668,000 and amortization expense was $917,000.
IV-12 Investment land and land held for development and sale at December 31, 1998 is summarized as follows (in thousands): Land under development..................................................... $131,663 Finished land.............................................................. 70,747 Raw land................................................................... 75,745 Total................................................................... -------- $278,155 ======== (3) Accounts and notes Accounts and notes receivable at December 31, 1998 are summarized as follows (in receivable thousands): Accounts receivable, primarily accrued rents and income under tenant leases............................................... $ 11,547 Notes receivable from sales of operating properties........................ 1,221 Notes receivable from sales of land........................................ 62,802 Interest bearing advances to the Company................................... 99,018 Noninterest bearing advances to the Company................................ 13,292 -------- 187,880 Less allowance for doubtful receivables.................................... 834 -------- Total................................................................... $187,046 ======== Accounts and notes receivable due after one year were $27,561,000 at December 31, 1998. Credit risk with respect to receivables from tenants is not highly concentrated due to the large number of tenants. The Ventures perform credit evaluations of prospective new tenants and require security deposits in certain circumstances. Tenants' compliance with the terms of their leases is monitored closely, and the allowance for doubtful receivables is established based on analyses of the risk of loss on specific tenant accounts, historical trends and other relevant information. Notes receivable from sales of land are primarily due from builders at the community development project in Summerlin. The Ventures perform credit evaluations of the builders and generally require substantial down payments (at least 20%) on all land sales that they finance. These notes and notes from sales of operating properties are generally secured by first liens on the related properties. Advances to the Company are unsecured and without a stated due date. Interest is charged (with limited exceptions) at the same rate that is charged on the Ventures' credit facilities borrowings described in note 5. Interest on these advances was $9,067,000 in 1998. (4) Pension and postre- Substantially all of the employees of the Ventures are eligible to participate in tirement plans a defined benefit pension plan (the "funded plan") sponsored by the Company. In addition, employees whose defined benefits exceed the limits of the funded plan are eligible to participate in separate, nonqualified unfunded plans sponsored by the Company. Benefits under the pension plans are based on the participants' years of service and compensation. The Ventures reimburse the Company for their share of the annual benefit cost under the plan. The Ventures' pension cost was $2,485,000 in 1998. Full-time employees of the Ventures who meet minimum age and service requirements are eligible to receive postretirement medical and life insurance benefits under a plan sponsored by the Company. The Ventures reimburse the Company for their share of the annual benefit costs under the plan, which include a portion of the cost of participants' life insurance coverage and contributions (based on years of service) to the cost of participants' medical insurance coverage, subject to a maximum annual contribution. The Ventures' postretirement benefit cost was $606,000 in 1998.
IV-13 (5) Debt Debt at December 31, 1998 is summarized as follows (in thousands): Borrowings from the Company: Deed of trust notes payable.............................................. $362,167 Credit lines............................................................. 61,855 Other loans.............................................................. 64,341 -------- 488,363 Mortgages payable - other lenders.......................................... 317,176 Other debt................................................................. 15,769 -------- Total................................................................... $821,308 ======== The deed of trust notes payable to the Company are secured by certain land and operating properties and general assignments of rents. These notes are due December 31, 2012, and minimum principal payments, based on a thirty-year amortization schedule, are due quarterly. Specified principal payments are also required when land is released from the deed of trust; however, payments made due to partial releases reduce or offset the required quarterly payments. Notes aggregating 348,112,000 bear interest at 12.25% through December 2000, and at the greater of the prime rate plus 3.75% or 10% thereafter to maturity or repayment. The remaining notes bear interest at 12.25% throughout their terms. Interest on the notes was $45,671,000 in 1998. The Ventures have five separate credit line facilities with the Company that provide for aggregate borrowings of up to $115,000,000. These facilities may be used for various purposes, including acquisitions, development and other corporate needs, subject to specified terms and conditions. The credit facilities are available to December 31, 2012. Borrowings are secured by deeds of trust on certain land assets. Borrowings under the credit facilities bear interest at 9% through December 2001, and at the greater of the prime rate plus 3.75% or 10% thereafter. Interest on the credit line facilities was $5,055,000 in 1998. Other loans payable to the Company are unsecured and are due in equal annual installments over periods to 2023. The notes bear interest at a variable rate (9% at December 31, 1998) which is based on the weighted-average interest rate of certain borrowings of the Company and subsidiaries. Interest on the other loans was $6,476,000 in 1998. The mortgages payable to other lenders are secured by deeds of trust or mortgages on properties and general assignments of rents. This debt matures at various dates through 2017 and, at December 31, 1998, bears interest at a weighted-average effective rate of 7.70%. At December 31, 1998, approximately $220,952,000 of the mortgages were payable to one lender. Other debt includes special improvement district bonds and construction loans. Other debt bears interest at a weighted-average effective rate of 7.26% at December 31, 1998. The annual maturities of debt at December 31, 1998 are summarized as follows (in thousands): Borrowings from the Other Company Borrowings Total ------------- ------------ ------------ 1999........................................ $ 7,424 $ 5,510 $ 12,934 2000........................................ 3,828 4,281 8,109 2001........................................ 4,024 5,944 9,968 2002........................................ 4,247 7,249 11,496 2003........................................ 4,499 6,126 10,625 Subsequent to 2003.......................... 464,341 303,835 768,176 -------- -------- ------------ Total.................................... $488,363 $332,945 $821,308 ======== ======== ============ Total interest costs were $83,411,000 in 1998, of which $15,265,000, were capitalized.
IV-14 During 1998, the Ventures incurred extraordinary losses related to extinguishments of debt prior to scheduled maturity of $1,863,000, less related deferred income tax benefits of $736,000. The sources of funds used to pay the debt and fund the prepayment penalties, where applicable, were refinancings of the related properties. The carrying amounts of the borrowings from the Company approximate fair value at December 31, 1998. The carrying amounts and estimated fair values of the Ventures' other debt at December 31, 1998 are summarized as follows (in thousands): Carrying Estimated Amount Fair Value ------------ ---------- Fixed rate debt.................................................. $326,060 $342,962 Variable rate debt............................................... 6,885 6,885 ------------ ---------- $332,945 $349,847 ============ ========== Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of the Ventures' debt obligations at fair value may not be possible and may not be a prudent management decision. (6) Income taxes Income tax expense is reconciled to the amount computed by applying the Federal corporate tax rate as follows for the year ended December 31, 1998 (in thousands): Tax at statutory rate on earnings before income taxes and extraordinary losses............................. $ 20,509 State income taxes, net of Federal income tax benefit....................................................... 1,551 -------- Income tax expense........................................... $ 22,060 ======== The net deferred tax asset at December 31, 1998 is summarized as follows (in thousands): Total deferred tax assets........................................... $ 75,027 Total deferred tax liabilities...................................... 21,367 -------- Net deferred tax asset............................................ $ 53,660 ======== The tax effects of temporary differences and loss carryforwards included in the net deferred tax asset at December 31, 1998 are summarized as follows (in thousands): Property, primarily differences in depreciation and amortization, the tax basis of land assets and treatment of interest and certain other costs.................... $ 41,740 Operating loss and tax credit carryforwards......................... 11,295 Other............................................................... 625 -------- Total............................................................ $ 53,660 ======== The net operating losses carried forward from December 31, 1998 for Federal income tax purposes aggregate approximately $27,645,000. The loss carryforward will begin to expire in 2005. As indicated above, the deferred tax assets relate primarily to differences in the book and tax bases of property (particularly land assets) and to operating loss carryforwards for Federal income tax purposes. Based on projections of future taxable income, management believes that it is more likely than not that the net deferred tax asset will be realized. The amount of the net
IV-15 deferred tax asset considered realizable could be reduced in the near term, however, if estimates of future taxable income are reduced. (7) Gain on Gain on dispositions of assets, net, is summarized as follows for the year ended dispositions December 31, 1998 (in thousands): of assets, net Net gain on operating properties.................................... $15,879 Other, net.......................................................... (23) ------- Total............................................................ $15,856 ======== The net gain on operating properties relates primarily to sales of a hotel property and two office/industrial buildings. (8) Series A Preferred Howard Hughes Properties, Inc. (HHPI) has issued 25,000 shares of Series A Stock Preferred stock to the Company. The shares have a liquidation preference of $2,000 per share and earn dividends at an annual rate of 9.9% of the liquidation preference. Dividends are cumulative, however, no dividends were paid during 1998 because HHPI incurred a tax loss. Dividends in arrears at December 31, 1998 aggregated $4,450,000. At the option of the Company, the shares are redeemable at any time to December 31, 2017 at a price of $2,000 per share. (9) Leases The Ventures, as lessee, have entered into operating leases expiring at various dates through 2076. Rents under such leases aggregated $448,600 in 1998. In addition, real estate taxes, insurance and maintenance expenses are obligations of the Ventures. Minimum rent payments due under operating leases in effect at December 31, 1998 are summarized as follows (in thousands): 1999................................................................ $ 449 2000................................................................ 449 2001................................................................ 449 2002................................................................ 449 2003................................................................ 278 Subsequent to 2003.................................................. 16,326 -------- Total............................................................ $ 18,400 ======== Space in the Ventures' operating properties is leased to approximately 700 tenants. In addition to minimum rents, the majority of the retail center leases provide for percentage rents when the tenants' sales volumes exceed stated amounts, and the majority of the retail center and office leases provide for other rents which reimburse the Ventures for certain of their operating expenses. Rents from tenants are summarized as follows (in thousands): Minimum rents....................................................... $ 47,977 Percentage rents.................................................... 996 Other rents......................................................... 24,838 ------------ Total............................................................ $ 73,811 ============
IV-16 The minimum rents to be received from tenants under operating leases in effect at December 31, 1998 are summarized as follows (in thousands): 1999........................................................... $ 44,419 2000........................................................... 39,630 2001........................................................... 34,477 2002........................................................... 26,663 2003........................................................... 20,235 Subsequent to 2003............................................. 63,877 -------- Total....................................................... $229,301 ======== (10) Other transactions with Under an informal agreement, the Company provides various services to the Ventures, including The Rouse Company accounting, data processing, legal, leasing, finance, and other administrative and support functions. The Ventures reimburse the Company for the cost of these services, determined in accordance with the Company's established cost accounting practices. Under terms of a license agreement, the Ventures paid the Company a fee of $1,000,000 in 1998 in consideration for the right to use the Company's name in their property management operations. The fee under the license agreement is determined annually based on various operating factors. Operating expenses for 1998 include license fees and service cost reimbursements to the Company of approximately $8,305,000. The Ventures also reimburse the Company for costs of any services it provides with respect to development of operating properties. These costs were approximately $2,198,000 in 1998 and related primarily to development of an expansion of a regional shopping center and new office buildings in Columbia and Summerlin. (11) Other commitments Commitments for the construction and development of properties in the ordinary course of and contingencies business and other commitments not set forth elsewhere amount to approximately $60,000,000 at December 31, 1998. Certain of the Ventures have guaranteed payment of the Company's obligations under its credit facilities with a group of lenders, subject to various terms and conditions. At December 31, 1998, outstanding borrowings under the facilities were $602,000,000. The Ventures 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 litigation matters, where appropriate, and the ultimate resolution of such litigation matters is not likely to have a material effect on the combined financial position of the Ventures. Due to the Ventures' 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 Ventures' combined net earnings (loss) and it is, therefore, possible that the resolution of these matters could have such an effect in a future period. (12) Year 2000 issue The year 2000 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 year 2000 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 information or fail. As described above, the Company provides the Ventures with various services. The Venture is dependent on the Company's IT systems being year 2000 compliant. The Company has adopted a plan to replace virtually all of its management information systems and accounting systems. In accordance with this plan, all mission critical IT systems have been or are being replaced with systems that are year 2000 compliant. 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 and test non-IT systems that are not year 2000 compliant by the third quarter of 1999. In addition, the Company is developing contingency plans in the event that any critical non-IT system fails as a result of a year 2000 issue. Costs to
IV-17 specifically remediate non-IT systems (e.g., escalators, elevators, security, heating, ventilating and cooling systems, etc.) are not expected to be material. Management of the Company and the Ventures do not believe that the year 2000 issue will pose significant problems in IT and non-IT systems, or that resolution of any potential problems with respect to these systems will have a material effect on the Ventures' financial condition or results of operations. The Company and management of the Ventures believe that the Ventures' exposure to the year 2000 issue is widespread with no known major direct exposure. The Company and management of the Ventures believe that their most likely worst-case exposure is at the indirect level, involving vendors, suppliers and tenants. While it is not possible at this time to determine the likely impact of these potential problems, the Company and management of the Ventures will continue to evaluate these areas and develop contingency plans, as appropriate. (13) New accounting In March 1998, the American Institute of Certified Public Accountants issued Statement of standards not yet Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for adopted Internal Use" (SOP 98-1) which is required to be adopted by the Ventures no later than January 1, 1999. SOP 98-1 provides guidance as to whether costs incurred relating to internal-use software should be expensed or capitalized. The guidance in SOP 98-1 is required to be applied to costs incurred subsequent to adoption and may not be applied to costs incurred prior to initial application. The Ventures intend to adopt SOP 98-1 effective January 1, 1999, and do not believe that adoption will have a material effect on their results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5) which is required to be adopted by the Ventures no later than January 1, 1999. SOP 98-5 requires that start-up costs and organization costs, not otherwise addressed in existing authoritative literature, be expensed as incurred. The Ventures intend to adopt SOP 98-5 effective January 1, 1999, and the initial application will be reported as the cumulative effect of a change in accounting principle. The Ventures do not believe that adoption will have a material effect on their results of operations in future periods.
IV-18 Schedule II ----------- THE ROUSE COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1998, 1997 and 1996 (in thousands)
Additions ------------------------- Balance at Charged to Charged to Balance at beginning Costs and other end of Descriptions of year expenses accounts Deductions year ------------ ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1998: Allowance for doubtful receivables $ 21,311 $ 7,735 $ --- $ 9,218 /(1)/ $ 19,828 ========= ========= ========= ========= ========= Valuation allowance - properties held for sale $ 37,952 $ --- $ --- $ 37,952 /(2)/ $ --- ========= ========= ========= ========= ========= Preconstruction reserve $ 17,351 $ 1,700 $ --- $ 3,143 /(3)/ $ 15,908 ========= ========= ========= ========= ========= Year ended December 31, 1997: Allowance for doubtful receivables $ 28,153 $ 5,766 $ --- $ 12,608 /(1)/ $ 21,311 ========= ========= ========= ========= ========= Valuation allowance - properties held for sale $ 35,671 $ 26,249 $ --- $ 23,968 /(2)/ $ 37,952 ========= ========= ========= ========= ========= Preconstruction reserve $ 16,317 $ 2,800 $ --- $ 1,766 /(3)/ $ 17,351 ========= ========= ========= ========= ========= Year ended December 31, 1996: Allowance for doubtful receivables $ 24,468 $ 3,688 $ 1,161 $ 1,164 /(1)/ $ 28,153 ========= ========= ========= ========= ========= Valuation allowance - properties held for sale $ 15,589 $ 25,825 $ --- $ 5,743 /(2)/ $ 35,671 ========= ========= ========= ========= ========= Preconstruction reserve $ 15,379 $ 2,700 $ --- $ 1,762 /(3)/ $ 16,317 ========= ========= ========= ========= =========
Notes: (1) Balances written off as uncollectible. (2) Allowance related to properties sold. (3) Costs of unsuccessful projects written off. IV-19 Schedule III ------------ THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Initial cost to Company to acquisition --------------------------- ---------------------------- Buildings and Encum- Improve Improve Carrying Description brances Land ments(Note 3) ments costs (note 2) ----------- --------- ---------- ------------- --------- --------------- Operating Properties: Park Meadows $175,337 $35,812 $265,031 $ 55 $ -- Retail Center Denver, CO Bridgewater Commons 150,000 24,715 242,660 -- -- Retail Center Bridgewater, NJ Towson Town Center 140,000 45,391 207,723 255 -- Retail Center Towson, MD Arizona Center 107,550 4,137 -- 151,391 -- Mixed-Use project Phoenix, AZ The Fashion Show 75,232 33,179 120,347 1,212 -- Retail Center Las Vegas, NV South Street Seaport 58,337 -- -- 146,274 -- Retail Center New York, NY Woodbridge Center 132,504 26,301 -- 119,126 -- Retail Center Woodbridge, NJ Beachwood Place 119,568 10,673 -- 129,893 -- Retail Center Beachwood, OH Fashion Place Mall 76,649 19,379 119,715 -- -- Retail Center Salt Lake City, UT. Owings Mills 61,000 17,006 -- 113,557 -- Retail Center Baltimore County, MD Gross amount at which carried at close of period Life on Buildings Accumulated Date of which depre- and depreciation completion ciation in latest Improve and of Date income state- Description Land ments Total amortization construction acquired ment is computed ----------- -------- --------- --------- ------------ ------------ -------- ---------------- Operating Properties: Park Meadows $35,812 $265,086 $300,898 $ 1,890 06/96 07/98 Note 9 Retail Center Denver, CO Bridgewater Commons 24,715 242,660 267,375 1,981 06/88 12/98 Note 9 Retail Center Bridgewater, NJ Towson Town Center 45,391 207,978 253,369 856 06/59 10/98 Note 9 Retail Center Towson, MD Arizona Center 4,137 151,391 155,528 31,081 07/83 N/A Note 9 Mixed-Use project Phoenix, AZ 33,179 121,559 154,738 6,870 03/81 06/96 Note 9 The Fashion Show Retail Center Las Vegas, NV South Street Seaport -- 146,274 146,274 29,924 07/83 N/A Note 9 Retail Center New York, NY Woodbridge Center 26,301 119,126 145,427 27,680 03/71 N/A Note 9 Retail Center Woodbridge, NJ 10,673 129,893 140,566 11,562 08/78 N/A Note 9 Beachwood Place Retail Center Beachwood, OH 19,379 119,715 139,094 490 03/72 10/98 Note 9 Fashion Place Mall Retail Center Salt Lake City, UT. Owings Mills 17,006 113,557 130,563 13,691 07/86 N/A Note 9 Retail Center Baltimore County, MD
IV-20 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Initial cost to Company to acquisition --------------------------- ----------------------------- Buildings and Encum- Improve Improve Carrying Description brances Land ments(Note 3) ments costs ----------- --------- --------- ------------- ------------- ----------- Pioneer Place $102,475 $ -- $ -- $122,687 $ -- Mixed-Use project Portland, OR Oviedo Marketplace 69,485 11,676 -- 108,374 -- Retail Center Orlando, FL. Westlake Center 93,175 10,582 -- 104,807 -- Mixed-Use project Seattle, WA The Gallery at Harborplace 106,562 6,648 -- 106,820 -- Mixed-Use project Baltimore, MD Mall St. Matthews 71,223 -- -- 102,124 -- Retail Center Louisville, KY Bayside Marketplace 76,838 -- -- 97,408 -- Retail Center Miami, FL Governor's Square 54,077 -- -- 85,379 -- Retail Center Tallahassee, FL Paramus Park 70,353 13,475 -- 82,935 -- Retail Center Paramus, NJ Moorestown Mall 42,000 13,577 65,596 -- -- Retail Center Burlington County, NJ Faneuil Hall Marketplace 53,362 -- -- 74,858 -- Retail Center Boston, MA Santa Monica Place -- 5,088 -- 69,762 -- Retail Center Santa Monica, CA Gross amount at which carried at close of period ---------------------------------- Life on Buildings Accumulated Date of which depre- and depreciation completion ciation in latest Improve and of Date income state- Description Land ments Total amortization construction acquired ment is computed ----------- ------- --------- ----- ------------ ------------ -------- ---------------- Pioneer Place $ -- $122,687 $ 122,687 $ 26,253 03/90 N/A Note 9 Mixed-Use project Portland, OR Oviedo Marketplace 11,676 108,374 120,050 2,183 03/98 N/A Note 9 Retail Center Orlando, FL. Westlake Center 10,582 104,807 115,389 28,911 10/88 N/A Note 9 Mixed-Use project Seattle, WA The Gallery at Harborplace 6,648 106,820 113,468 26,622 09/87 N/A Note 9 Mixed-Use project Baltimore, MD Mall St. Matthews -- 102,124 102,124 17,853 03/62 N/A Note 9 Retail Center Louisville, KY Bayside Marketplace -- 97,408 97,408 17,925 04/87 N/A Note 9 Retail Center Miami, FL Governor's Square -- 85,379 85,379 7,509 08/79 N/A Note 9 Retail Center Tallahassee, FL Paramus Park 13,475 82,935 96,410 10,714 03/74 N/A Note 9 Retail Center Paramus, NJ Moorestown Mall 13,577 65,596 79,173 2,189 03/63 12/97 Note 9 Retail Center Burlington County, NJ Faneuil Hall Marketplace -- 74,858 74,858 13,105 08/76 N/A Note 9 Retail Center Boston, MA Santa Monica Place 5,088 69,762 74,850 11,787 10/80 N/A Note 9 Retail Center Santa Monica, CA
IV-21 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Initial cost to Company to acquisition --------------------------- ----------------------------- Buildings and Encum- Improve Improve Carrying Description brances Land ments(Note 3) ments costs ----------- -------- ---------- ------------- ------------ ------------ Cherry Hill Mall $78,280 $14,767 $ -- $58,210 $ -- Retail Center Cherry Hill, NJ Riverwalk 10,833 -- -- 72,495 -- Retail Center New Orleans, LA Oakwood Center 53,615 14,750 -- 57,395 -- Retail Center Gretna, LA Augusta Mall 61,347 5,398 -- 66,130 -- Retail Center Augusta, GA Hulen Mall 64,102 5,064 -- 65,624 -- Retail Center Ft. Worth, TX Plymouth Meeting 34,785 702 -- 69,386 -- Retail Center Montgomery County, PA Echelon Mall 59,334 6,160 -- 63,317 -- Retail Center Voorhees, NJ Harborplace 36,611 -- -- 58,147 -- Retail Center Baltimore, MD Perimeter Mall -- -- -- 50,051 -- Retail Center Atlanta, GA Blue Cross & Blue Shield 31,400 1,000 -- 44,756 -- Building I Office Building Baltimore, MD Gross amount at which carried at close of period Life on Buildings Accumulated Date of which depre- and depreciation completion ciation in latest Improve and of Date income state- Description Land ments Total amortization construction acquired ment is computed ----------- -------- --------- ----- ------------ ------------ -------- ---------------- Cherry Hill Mall $14,767 $58,210 $ 72,977 $ 18,187 10/61 N/A Note 9 Retail Center Cherry Hill, NJ Riverwalk -- 72,495 72,495 11,648 08/86 N/A Note 9 Retail Center New Orleans, LA Oakwood Center 14,750 57,395 72,145 9,887 10/82 N/A Note 9 Retail Center Gretna, LA Augusta Mall 5,398 66,130 71,528 5,879 08/78 N/A Note 9 Retail Center Augusta, GA Hulen Mall 5,064 65,624 70,688 12,055 08/77 N/A Note 9 Retail Center Ft. Worth, TX Plymouth Meeting 702 69,386 70,088 13,474 02/66 N/A Note 9 Retail Center Montgomery County, PA Echelon Mall 6,160 63,317 69,477 12,888 09/70 N/A Note 9 Retail Center Voorhees, NJ Harborplace -- 58,147 58,147 12,456 07/80 N/A Note 9 Retail Center Baltimore, MD Perimeter Mall -- 50,051 50,051 7,597 08/71 N/A Note 9 Retail Center Atlanta, GA Blue Cross & Blue Shield 1,000 44,756 45,756 10,142 07/89 N/A Note 9 Building I Office Building Baltimore, MD
IV-22 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Initial cost to Company to acquisition --------------------------- ---------------------------- Buildings and Encum- Improve Improve Carrying Description brances Land ments(Note 3) ments costs ----------- -------- ---------- ------------- ------------ ------------ 3800 Howard Hughes Parkway $39,222 $3,622 $38,438 $ 1,806 $ -- Office Building Las Vegas, NV White Marsh 41,147 4,390 -- 33,549 -- Retail Center Baltimore, MD Exton Square 14,762 1,408 -- 34,220 -- Retail Center Exton, PA The Jacksonville Landing 12,911 -- -- 33,609 -- Retail Center Jacksonville, FL Tampa Bay Center 35,714 920 -- 31,391 -- Retail Center Tampa, FL Village of Cross Keys -- 925 -- 31,319 -- Mixed-Use project Baltimore, MD North Star -- 168 -- 30,629 -- Retail Center San Antonio, TX Willowbrook 38,435 853 -- 29,302 -- Retail Center Wayne, NJ 3773 Howard Hughes Parkway 22,406 1,738 22,625 3,338 -- Office Building Las Vegas, NV Two Owings Mills 18,174 1,000 -- 25,865 -- Corporate Center Office Building Baltimore, MD Gross amount at which carried at close of period ---------------------------------- Life on Buildings Accumulated Date of which depre- and depreciation completion ciation in latest Improve and of Date income state- Description Land ments Total amortization construction acquired ment is computed ----------- ------- --------- ----- ------------ ------------ -------- ---------------- 3800 Howard Hughes Parkway $3,622 $40,244 $ 43,866 $ 3,795 11/86 06/96 Note 9 Office Building Las Vegas, NV White Marsh 4,390 33,549 37,939 9,062 08/81 N/A Note 9 Retail Center Baltimore, MD Exton Square 1,408 34,220 35,628 9,850 03/73 N/A Note 9 Retail Center Exton, PA The Jacksonville Landing -- 33,609 33,609 11,663 06/87 N/A Note 9 Retail Center Jacksonville, FL Tampa Bay Center 920 31,391 32,311 10,534 08/79 N/A Note 9 Retail Center Tampa, FL Village of Cross Keys 925 31,319 32,244 10,786 09/65 N/A Note 9 Mixed-Use project Baltimore, MD North Star 168 30,629 30,797 8,740 09/60 N/A Note 9 Retail Center San Antonio, TX Willowbrook 853 29,302 30,155 7,301 09/69 N/A Note 9 Retail Center Wayne, NJ 3773 Howard Hughes Parkway 1,738 25,963 27,701 1,669 11/95 6/96 Note 9 Office Building Las Vegas, NV Two Owings Mills 1,000 25,865 26,865 6,466 09/87 N/A Note 9 Corporate Center Office Building Baltimore, MD
IV-23 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Initial cost to Company to acquisition --------------------------- ------------------------------ Buildings and Encum- Improve Improve Carrying Description brances Land ments(Note 3) ments costs ----------- ------- --------- ------------- ------------ ------------ The Gallery at Market East $ -- $ -- $ -- $24,166 $ -- Retail Center Philadelphia, PA Senate Plaza 16,067 3,488 20,379 -- -- Office Building Camp Hill, PA. 3960 Howard Hughes Parkway -- 800 -- 22,364 -- Office Building Las Vegas, NV Franklin Park 25,498 653 -- 21,097 -- Retail Center Toledo, OH Hunt Valley 75 17,265 6,659 14,187 410 -- Office Building Hunt Valley, MD. The Grand Avenue -- -- -- 21,218 -- Retail Center Milwaukee, WI Mondawmin Mall 4,151 2,251 -- 18,327 -- Retail Center Baltimore, MD Highland Mall 5,426 13 -- 18,238 -- Retail Center Austin, TX One Owings Mills 11,385 650 -- 17,045 -- Corporate Center Office Building Baltimore, MD Blue Cross & Blue Shield 11,453 1,000 -- 16,591 -- Building II Office Building Baltimore, MD Gross amount at which carried at close of period ----------------------------------- Life on Buildings Accumulated Date of which depre- and depreciation completion ciation in latest Improve and of Date income state- Description Land ments Total amortization construction acquired ment is computed ----------- ------ --------- ----- ------------ ------------ -------- ---------------- The Gallery at Market East $ -- $24,166 $ 24,166 $ 7,393 08/77 N/A Note 9 Retail Center Philadelphia, PA Senate Plaza 3,488 20,379 23,867 42 07/72 12/98 Note 9 Office Building Camp Hill, PA. 3960 Howard Hughes Parkway 800 22,364 23,164 354 4/98 6/96 Note 9 Office Building Las Vegas, NV Franklin Park 653 21,097 21,750 5,306 07/71 N/A Note 9 Retail Center Toledo, OH Hunt Valley 75 6,659 14,597 21,256 54 07/84 12/98 Note 9 Office Building Hunt Valley, MD. The Grand Avenue -- 21,218 21,218 10,824 08/82 N/A Note 9 Retail Center Milwaukee, WI Mondawmin Mall 2,251 18,327 20,578 7,425 01/78 N/A Note 9 Retail Center Baltimore, MD Highland Mall 13 18,238 18,251 6,236 08/71 N/A Note 9 Retail Center Austin, TX One Owings Mills 650 17,045 17,695 6,232 11/88 N/A Note 9 Corporate Center Office Building Baltimore, MD Blue Cross & Blue Shield 1,000 16,591 17,591 3,379 08/90 N/A Note 9 Building II Office Building Baltimore, MD
IV-24 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which carried Initial cost to Company to acquisition at close of period ----------------------- ---------------------------- ----------------------------- Buildings Buildings and and Encum- Improve Improve Carrying Improve Description brances Land ments(Note 3) ments costs Land ments Total ----------- ------- ---- ------------- ----- ----- ---- ----- ----- 3753 / 3763 Howard Hughes Parkway $10,985 $3,844 $12,018 $ 687 $ -- $3,844 $12,705 $ 16,549 Office Building Las Vegas, NV Centerpointe 7,006 4,012 11,302 -- -- 4,012 11,302 15,314 Office Building Hunt Valley, MD Canyon Center 12,597 2,081 7,161 5,391 -- 2,081 12,552 14,633 Office Building Las Vegas, NV Midtown Square -- -- -- 14,620 -- -- 14,620 14,620 Retail Center Charlotte, NC 3930 Howard Hughes Parkway 6,750 3,108 11,279 27 -- 3,108 11,306 14,414 Office Building Las Vegas, NV Shilling Plaza South 6,206 5,437 7,402 14 -- 5,437 7,416 12,853 Office Building Hunt Valley, MD 3980 Howard Hughes 10,586 879 5,583 6,113 -- 879 11,696 12,575 Office Building Las Vegas, NV Crossing Business 8,509 2,842 1,416 8,287 -- 2,842 9,703 12,545 Center Phase III Office Building Las Vegas, NV Shilling Plaza North 7,932 4,024 8,059 -- -- 4,024 8,059 12,083 Office Building Hunt Valley, MD Canyon Center -- 1,723 -- 10,129 -- 1,723 10,129 11,852 Office Building Las Vegas, NV Life on Accumulated Date of which depre- depreciation completion ciation in latest and of Date income state- Description amortization construction acquired ment is computed ----------- ------------ ------------ -------- ---------------- 3753 / 3763 Howard Hughes Parkway $ 1,003 10/91 6/96 Note 9 Office Building Las Vegas, NV Centerpointe 24 07/87 12/98 Note 9 Office Building Hunt Valley, MD Canyon Center 638 03/98 06/96 Note 9 Office Building Las Vegas, NV Midtown Square 10,396 10/59 N/A Note 9 Retail Center Charlotte, NC 3930 Howard Hughes Parkway 1,196 12/94 06/96 Note 9 Office Building Las Vegas, NV Shilling Plaza South 15 07/87 12/98 Note 9 Office Building Hunt Valley, MD 3980 Howard Hughes 526 04/97 06/96 Note 9 Office Building Las Vegas, NV Crossing Business 798 09/96 06/96 Note 9 Center Phase III Office Building Las Vegas, NV Shilling Plaza North 17 02/80 12/98 Note 9 Office Building Hunt Valley, MD Canyon Center 133 06/98 06/96 Note 9 Office Building Las Vegas, NV
IV-25 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which carried Initial cost to Company to acquisition at close of period ----------------------- ---------------------------- ----------------------------- Buildings Buildings and and Encum- Improve Improve Carrying Improve Description brances Land ments(Note 3) ments costs Land ments Total ----------- ------- ---- ------------- ------- -------- ----- ------- ----- Riverspark 2/Building 2 $ 1,504 $ 3,358 $ 7,955 $ -- $ -- $ 3,358 $ 7,955 $ 11,313 Office Building/Industrial Columbia, MD Trails Village Center 9,948 3,082 -- 6,804 -- 3,082 6,804 9,886 Community Retail Center Las Vegas, NV Crossing Business 7,679 1,326 7,951 507 -- 1,326 8,458 9,784 Center Phase I Office Building Las Vegas, NV Inglewood Office II 6,279 2,261 7,304 -- -- 2,261 7,304 9,565 Office Building Landover, MD 3770 Howard Hughes Parkway 5,530 691 8,010 484 -- 691 8,494 9,185 Office Building Las Vegas, NV 201 International Circle 4,097 5,168 3,763 172 -- 5,168 3,935 9,103 Office Building Hunt Valley, MD Metro Plaza 423 202 -- 8,240 -- 202 8,240 8,442 Retail Center Baltimore, MD Equinox @ CBC 7,052 1,257 398 6,631 -- 1,257 7,029 8,286 Office Building Las Vegas, NV Montgomery Ward 7,679 607 7,213 37 -- 607 7,250 7,857 Office Building / Industrial Las Vegas, NV Inglewood Office Center I 5,145 1,940 5,867 -- -- 1,940 5,867 7,807 Office Building Landover, MD Life on Accumulated Date of which depre- depreciation completion ciation in latest and of Date income state- Description amortization construction acquired ment is computed ----------- ------------ ------------ -------- ---------------- Riverspark 2/Building 2 $ 17 07/87 12/98 Note 9 Office Building/Industrial Columbia, MD Trails Village Center 108 05/98 06/96 Note 9 Community Retail Center Las Vegas, NV Crossing Business 591 12/94 06/96 Note 9 Center Phase I Office Building Las Vegas, NV Inglewood Office II 15 07/26 12/98 Note 9 Office Building Landover, MD 3770 Howard Hughes Parkway 901 10/90 06/96 Note 9 Office Building Las Vegas, NV 201 International Circle 20 07/82 12/98 Note 9 Office Building Hunt Valley, MD Metro Plaza 3,696 N/A 12/82 Note 9 Retail Center Baltimore, MD Equinox @ CBC 233 12/97 06/96 Note 9 Office Building Las Vegas, NV Montgomery Ward 519 10/95 06/96 Note 9 Office Building / Industrial Las Vegas, NV Inglewood Office Center I 12 07/82 12/98 Note 9 Office Building Landover, MD
IV-26 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized Gross amount at which carried Initial cost to Company subsequent to acquisition at close of period ----------------------- -------------------------- ------------------------- Buildings Buildings and and Encum- Improve Improve Carrying Improve Description brances Land ments(Note 3) ments costs Land ments Total ----------- ------- --------- ------------- ------------ ------------ ------ --------- ----- Crossing Business $5,583 $ 357 $7,097 $ -- $ -- $ 357 $7,097 $7,454 Center Phase II Office Building Las Vegas, NV 840 Grier 6,096 963 1,430 4,854 -- 963 6,284 7,247 Office Building / Industrial Las Vegas, NV Ambassador Center 4,377 1,385 5,282 -- -- 1,385 5,282 6,667 Office Building Woodlawn, MD Raytheon -- 422 6,133 -- -- 422 6,133 6,555 Office Building / Industrial Las Vegas, NV Inglewood Tech V 4,295 2,889 3,654 -- -- 2,889 3,654 6,543 Industrial Building Landover, MD First National Bank Plaza 5,117 -- -- 6,330 -- -- 6,330 6,330 Office Building Mt. Prospect, IL Plaza East 4,604 911 5,299 -- -- 911 5,299 6,210 Office Building / Industrial Las Vegas, NV 420 Pilot 4,102 1,066 (140) 5,242 -- 1,066 5,102 6,168 Office Building / Industrial Las Vegas, NV USA Group 7,000 1,196 4,880 -- -- 1,196 4,880 6,076 Office Building / Industrial Las Vegas, NV Pulaski 11 3,909 1,099 4,708 -- -- 1,099 4,708 5,807 Industrial Building Baltimore, MD Life on Accumulated Date of which depre- depreciation completion ciation in latest and of Date income state- Description amortization construction acquired ment is computed ----------- ----------- ------------ --------- ----------------- Crossing Business $ 456 12/95 06/96 Note 9 Center Phase II Office Building Las Vegas, NV 840 Grier 300 03/97 06/96 Note 9 Office Building / Industrial Las Vegas, NV Ambassador Center 11 07/85 12/98 Note 9 Office Building Woodlawn, MD Raytheon 398 11/92 06/96 Note 9 Office Building / Industrial Las Vegas, NV Inglewood Tech V 8 07/86 12/98 Note 9 Industrial Building Landover, MD First National Bank Plaza 1,913 07/81 N/A Note 9 Office Building Mt. Prospect, IL Plaza East 395 12/93 06/96 Note 9 Office Building / Industrial Las Vegas, NV 420 Pilot 403 09/96 06/96 Note 9 Office Building / Industrial Las Vegas, NV USA Group 8 11/98 06/96 Note 9 Office Building / Industrial Las Vegas, NV Pulaski 11 10 07/69 12/98 Note 9 Industrial Building Baltimore, MD
IV-27 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized Gross amount at which Initial cost to Company subsequent to acquisition carried at close of period ----------------------- ------------------------- -------------------------- Buildings Buildings and and Encum- Improve Improve Carrying Improve Description brances Land ments(Note 3) ments costs Land ments Total - ---------------------------- ------- --------- ------------- ------------ ------------ ------ --------- ------ Rutherford 5 $ 2,280 $ 614 $ 5,123 $ -- $ -- $ 614 $ 5,123 $5,737 Industrial Building Woodlawn, MD Rutherford 60 3,834 1,250 4,445 -- -- 1,250 4,445 5,695 Industrial Building Woodlawn, MD Plaza West 4,395 195 5,360 103 195 5,463 5,658 Office Building / Industrial Las Vegas, NV 980 Kelley Johnson 3,278 815 4,772 -- -- 815 4,772 5,587 Office Building / Industrial Las Vegas, NV Canyon Business Center -- 1,188 -- 4,432 -- 1,188 4,432 5,620 Phase V Office Building / Industrial Las Vegas, NV 975 Kelley Johnson 3,458 378 5,211 -- -- 378 5,211 5,589 Office Building / Industrial Las Vegas, NV Inglewood Tech IV 1,618 2,222 3,365 -- -- 2,222 3,365 5,587 Industrial Building Landover, MD Riverspark Building A 3,620 1,461 4,053 -- -- 1,461 4,053 5,514 Industrial Building Columbia, MD Hunt Valley 49 3,589 1,575 3,892 -- -- 1,575 3,892 5,467 Industrial Building Hunt Valley, MD 3960/3980 Parking Garage -- 576 -- 4,678 -- 576 4,678 5,254 Parking Garage Las Vegas, NV Life on Accumulated Date of which depre- depreciation completion ciation in latest and of Date income state- Description amortization construction acquired ment is computed - ---------------------------- ------------ ------------ -------- ---------------- Rutherford 5 11 07/72 12/98 Note 9 Industrial Building Woodlawn, MD Rutherford 60 9 07/72 12/98 Note 9 Industrial Building Woodlawn, MD Plaza West 388 11/95 06/96 Note 9 Office Building / Industrial Las Vegas, NV 980 Kelley Johnson 358 05/92 06/96 Note 9 Office Building / Industrial Las Vegas, NV Canyon Business Center 79 05/98 06/96 Note 9 Phase V Office Building / Industrial Las Vegas, NV 975 Kelley Johnson 399 11/90 06/96 Note 9 Office Building / Industrial Las Vegas, NV Inglewood Tech IV 7 07/86 12/98 Note 9 Industrial Building Landover, MD Riverspark Building A 8 09/85 12/98 Note 9 Industrial Building Columbia, MD Hunt Valley 49 8 02/82 12/98 Note 9 Industrial Building Hunt Valley, MD 3960/3980 Parking Garage 198 05/97 06/97 Note 9 Parking Garage Las Vegas, NV
IV-28 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Initial cost to Company to acquisition ----------------------------- ----------------------------- Buildings and Encum- Improve Improve Carrying Description brances Land ments(Note 3) ments costs Land ----------- ------- ---- ------------- ----- ----- ---- Hunt Valley 36 $ 3,409 $ 1,239 $ 3,954 $ -- -- $ 1,239 Industrial Building Hunt Valley, MD 950 Pilot 2,167 769 -- 4,185 -- 769 OfficeBuilding/Industrial Las Vegas, NV 731 Pilot 4,016 862 -- 3,999 -- 862 OfficeBuilding/Industrial Las Vegas, NV 711 Pilot 3,192 463 -- 4,362 -- 463 OfficeBuilding/Industrial Las Vegas, NV Rutherford 46 3,215 1,079 3,697 -- -- 1,079 Industrial Building Woodlawn, MD Other properties and related investments less than 5% of total 112,229 59,280 76,778 98,998 -- 59,280 ---------------------------------------------------------------------------------------- Total Operating Properties 2,905,340 488,114 1,388,375 2,842,238 -- 488,114 ---------------------------------------------------------------------------------------- Gross amount at which carried at close of period ---------------------------- Life on Buildings Accumulated Date of which depre- and depreciation completion ciation in Improve and of Date income state- Description ments Total amortization construction acquired ment is computed - ---------------------------- ----- ----- ------------ ------------ -------- ---------------- Hunt Valley 36 $ 3,954 $ 5,193 $ 8 02/76 12/98 Note 9 Industrial Building Hunt Valley, MD 950 Pilot 4,185 4,954 364 08/90 06/96 Note 9 OfficeBuilding/Industrial Las Vegas, NV 731 Pilot 3,999 4,861 245 10/95 06/96 Note 9 OfficeBuilding/Industrial Las Vegas, NV 711 Pilot 4,362 4,825 229 11/95 06/96 Note 9 OfficeBuilding/Industrial Las Vegas, NV Rutherford 46 3,697 4,776 8 02/88 12/98 Note 9 Industrial Building Woodlawn, MD Other properties and related investments less than 5% of total 175,776 235,056 18,832 --------------------------------------------- Total Operating Properties 4,230,613 4,718,727 578,309 -----------------------------------------------
IV-29 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which carried Initial cost to Company to acquisition at close of period -------------------------- ------------------------------ --------------------------- Buildings and Encum- Improve Improve Carrying Description Brances Land ments(Note 3) ments costs Land ----------- ------- ---- ------------- ----- ----- ----- Properties in Development: Exton Square Expansion $ -- $ 3,340 $ -- $ 42,643 $ -- $ 3, 340 Expansion of retail center Exton, PA The Fashion Show Expansion -- 24,796 -- -- -- 24,796 Expansion of retail center Las Vegas, NV Pioneer Place Expansion -- 2,813 -- 15,971 -- 2,813 Expansion of mixed-use project Portland, OR Arizona Center -- -- -- 12,992 -- -- Developed/developable land under master lease Phoenix, AZ Rouse Commercial Properties, Inc -- 6,955 -- -- -- 6,955 Developed/developable land Primarily Baltimore and Landover, MD Owings Mills Expansion -- 4,665 -- 1,890 -- 4,665 Expansion of retail center Baltimore County, MD Plymouth Meeting Expansion -- -- -- 6,225 -- -- Expansion of retail center Montgomery County, PA Gross amount at which carried at close of period ---------------------------- Life on Buildings Accumulated Date of which depre- and depreciation completion ciation in late Improve and of Date income state- Description ments Total amortization construction acquired ment is computed ----------- ----- ----- ------------ ------------ -------- ---------------- Properties in Development: Exton Square Expansion $ 42, 643 $ 45,983 $ -- N/A N/A N/A Expansion of retail center Exton, PAN The Fashion Show Expansion -- 24,796 -- N/A N/A N/A Expansion of retail center Las Vegas, NV Pioneer Place Expansion 15,971 18,784 -- N/A N/A N/A Expansion of mixed-use project Portland, OR Arizona Center 12,992 12,992 -- N/A N/A N/A Developed/developable land under master lease Phoenix, AZ Rouse Commercial Properties, -- 6,955 -- N/A N/A N/A Inc Developed/developable land Primarily Baltimore and Landover, MD Owings Mills Expansion 1,890 6,555 -- N/A N/A N/A Expansion of retail center Baltimore County, MD Plymouth Meeting Expansion 6,225 6,225 -- N/A N/A N/A Expansion of retail center Montgomery County, PA
IV-30 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized Gross amount Initial cost subsequent at which carried to Company to acquisition at close of period ----------------------- -------------------- ------------------------ Buildings Buildings Accumulated and and Depreciation Encum- Improve Improve Carrying Improve and Description brances Land ments ments costs Land ments Total amortization ----------- ------- ------ --------- ------ ---------- ------ --------- ------- ------------ Moorestown Mall Expansion $ -- $ -- $ -- $ 4,861 $ -- $ -- $ 4,861 $ 4,861 $ -- Expansion of retail center Morrestown, NJ Perimeter Mall Expansion -- -- -- 4,857 -- -- 4,857 4,857 -- Expansion of retail center Atlanta, GA Oviedo Marketplace Expansion -- -- -- 3,974 -- -- 3,974 3,974 -- Expansion of retail center Orlando, FL Oakwood Center Expansion -- 1,188 -- 2,620 -- 1,188 2,620 3,808 -- Expansion of retail center Gretna, LA Mall St. Matthews Expansion -- -- -- 2,969 -- -- 2,969 2,969 -- Expansion of retail center Louisville, KY Airport Center Bldgs 40 & 51 -- -- -- 816 -- -- 816 816 -- Office Building in development Las Vegas, NV Airport Center Bldg 50 -- -- -- 480 -- -- 480 480 -- Office Building in development Las Vegas, NV 3993 Howard Hughes Parkway -- -- -- 776 -- -- 776 776 -- Office Building in development Las Vegas, NV Life on Date of which depreciation completion in latest of Date income state- Description construction acquired ment is computed ----------- ------------ -------- ------------------ Moorestown Mall Expansion N/A N/A N/A Expansion of retail center Morrestown, NJ Perimeter Mall Expansion N/A N/A N/A Expansion of retail center Atlanta, GA Oviedo Marketplace Expansion N/A N/A N/A Expansion of retail center Orlando, FL Oakwood Center Expansion N/A N/A N/A Expansion of retail center Gretna, LA Mall St. Matthews Expansion N/A N/A N/A Expansion of retail center Louisville, KY Airport Center Bldgs 40 & 51 N/A 06/96 N/A Office Building in development Las Vegas, NV Airport Center Bldg 50 N/A 06/96 N/A Office Building in development Las Vegas, NV 3993 Howard Hughes Parkway N/A 06/96 N/A Office Building in development Las Vegas, NV
IV - 31 THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which carried Initial cost to Company to acquisition at close of period -------------------------- ----------------------- ----------------------------- Buildings Buildings and and Encum- Improve Improve Carrying Improve Description brances Land ments ments costs Land ments Total ----------- -------- -------- ---------- ----------- ---------- --------- ---------- ----------- Pre-construction costs - $ -- $ -- $ -- $ 30,098 $ -- $ -- $ 30,098 $ 30,098 various projects Pre-construction reserve -- -- -- (15,908) -- -- (15,908) (15,908) Other projects less than 5% -- 6,987 -- 1,352 -- 6,987 1,352 8,339 of total ------------------------------ ---------------------- --------------------------------- Total Properties in Development -- 50,744 -- 116,616 -- 50,744 116,616 167,360 ------------------------------ ---------------------- --------------------------------- Properties held for sale : Valley Fair Mall 40,000 39,504 109,888 (55) -- 39,504 109,833 149,337 Retail Center San Jose, CA Westdale Mall -- -- 13,664 306 -- -- 13,970 13,970 Investment in unconsolidated real estate venture Cedar Rapids, IO Other properties held for sale, less than 5% of total 2,984 1,003 1,608 (24) -- 1,003 1,584 2,587 ------------------------------------- ---------------------- --------------------------------- 42,984 40,507 125,160 227 -- 40,507 125,387 165,894 ------------------------------------- ---------------------- --------------------------------- Total Property $2,948,324 $579,365 $1,513,535 $2,959,081 $ -- $ 579,365 $4,472,616 $5,051,981 ===================================== ====================== ================================= Life on Accumulated which depreciation depreciation Date of in latest and completion of Date income statement Description amortization construction acquired is computed ----------- --------------- -------------- ------------- ------------------- Pre-construction costs - N/A N/A N/A N/A various projects Pre-construction reserve N/A N/A N/A N/A Other projects less than 5% N/A N/A N/A N/A of total Total Properties in Development Properties held for sale : Valley Fair Mall -- 06/86 07/98 N/A Retail Center San Jose, CA Westdale Mall -- 07/79 10/98 N/A Investment in unconsolidated real estate venture Cedar Rapids, IO Other properties held for sale, less than 5% of total -- --------------- -- =============== Total Property $578,311 ===============
IV - 32 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 Notes: (1) Reference is made to notes 1, 4 and 7 to the consolidated financial statements. (2) The determination of these amounts is not practicable and, accordingly, they are included in improvements. (3) Buildings and improvements include deferred costs of $106,388,000 at December 31, 1998. (4) The changes in total cost of properties for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996 ---------- ---------- ---------- Balance at beginning of year $3,332,363 $3,691,600 $3,052,873 Additions, at cost 336,002 317,705 158,205 Cost of properties acquired 1,593,062 84,743 602,944 Additions to land held for development and sale --- 134,447 48,474 Cost of land sales (21,885) (131,310) (57,204) Retirements, sales and other dispositions (185,861) (114,435) (85,167) Property of subsidiaries in which a majority voting interest was sold to an affiliate --- (621,338) --- Additions to preconstruction reserve (1,700) (2,800) (2,700) Provision for loss on operating properties --- (26,249) (25,825) ---------- ---------- ---------- Balance at end of year $5,051,981 $3,332,363 $3,691,600 ========== ========== ==========
(5) Reference is made to the consolidated statements of cash flows for explanation of noncash consideration included in property additions. (6) Reference is made to note 3 to the consolidated financial statements for explanation of transactions with affiliates. IV-33 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1998 Notes: (7) The changes in accumulated depreciation and amortization for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996 ---------- ---------- ---------- Balance at beginning of year $ 515,229 $ 552,201 $ 519,319 Depreciation and amortization charged to operations 84,068 86,009 79,990 Retirements, sales and other, net (20,986) (50,814) (47,108) Accumulated depreciation on properties of subsidiaries in which a majority voting interest was sold to an affiliate --- (72,167) --- --------- --------- --------- Balance at end of year $ 578,311 $ 515,229 $ 552,201 ========= ========= =========
(8) The aggregate cost of properties for Federal income tax purposes is approximately $4,579,728,000 at December 31, 1998. (9) Reference is made to note 1(c) to the consolidated financial statements for information related to depreciation. (10) Reference is made to note 11 to the consolidated financial statements for information related to provisions for losses on real estate assets. (11) Certain amounts for prior years have been reclassified to conform to the presentation for 1998. IV-34 Schedule IV THE ROUSE COMPANY AND SUBSIDIARIES Mortgage Loans On Real Estate December 31, 1998 (in thousands)
Principal amount of loans subject to Final Carrying delinquent maturity date Periodic Face amount amount of principal or Description (Note 1) Interest rate (Note 1) payment terms Prior leins of mortgages mortgages interest - ------------------------- ------------- -------------- ------------- ----------- ------------ -------------- --------------- Howard Research And Development Corporation and Subsidiaries Note 2 Dec. 31, 2012 Note 1 N/A $ 179,422 $ 179,422 None Howard Hughes Properties, Inc. Note 2 Dec. 31, 2012 Note 1 N/A 168,690 168,690 None HRD Properties, Inc. and Subsidiaries Note 3 Dec. 31, 2012 Note 1 N/A 14,055 14,055 None -------- -------- $ 362,167 $ 362,167 ======== ========
IV-35 Schedule IV continued THE ROUSE COMPANY AND SUBSIDIARIES MORTGAGE LOANS ON REAL ESTATE December 31, 1998 Notes: (1) The deed of trust notes receivable of the Company are secured by certain land and operating properties and general assignments of rents of the Real Estate Ventures owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company. These notes are due December 31, 2012 and minimum principal payments, based on a thirty-year amortization schedule, are due quarterly. Specified principal payments are also required when land is released from the deed of trust; however, payments made due to partial releases reduce or offset the required quarterly payments. (2) The notes bear interest at 12.25% through December 2000, and at the greater of the prime rate plus 3.75% or 10% thereafter to maturity or repayment. (3) The note bears interest at 12.25% throughout the term. (4) Balance at beginning of year $ 380,232,000 Collections of principal (18,065,000) ------------- Balance at end of year $ 362,167,000 ============= (5) The deed of trust notes are carried in investments in and advances to unconsolidated real estate ventures on the Company's balance sheets at December 31, 1998 and 1997. See note 3 to the consolidated financial statements regarding the transactions that gave rise to the deed of trust notes. IV-36 Schedule II ----------- REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Valuation and Qualifying Accounts Year ended December 31, 1998 (in thousands)
Additions ---------------------- Balance at Charged to Charged to Balance at beginning Costs and other end of Descriptions of year expenses accounts Deductions year ------------ ---------- ---------- ---------- ---------- ------------ Year ended December 31, 1998: Allowance for doubtful receivables $ 830 $ 359 $ --- $ 355(1) $ 834 ========== ========== ========== ========== ==========
Note: (1) Balances written off as uncollectible. IV-37 Schedule III ------------ REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which Initial cost to Company to acquisition carried at close of period ---------------------------- ---------------------------- --------------------------- Buildings Buildings and and Carrying Improve Emcum- Improve Improve costs ments Description brances Land ments ments (notes 2) Land (note 3) Total - ------------------------- ------- ---- ----- -------- --------- ---- -------- ----- Operating Properties: The Mall in Columbia $204,185 $4,788 $ - $ 69,946 $ - $ 4,788 $ 69,946 $74,734 Retail center Columbia, MD White Marsh 41,147 6,392 - 43,020 - 6,392 43,020 49,412 Retail center Baltimore, MD Seventy Columbia Corp Ctr 28,677 856 - 24,246 - 856 24,246 25,102 Office building Columbia, MD Forty Columbia Corp Ctr 3,919 636 - 15,606 - 636 15,606 16,242 Office building Columbia, MD Fifty Columbia Corp Ctr 3,522 463 - 15,280 - 463 15,280 15,743 Office building Columbia, MD Thirty Columbia Corp Ctr 3,421 1,160 - 10,988 - 1,160 10,988 12,148 Office building Columbia, MD Hickory Ridge Village Ctr 13,754 907 - 10,186 - 907 10,186 11,093 Community retail center Columbia, MD Dorsey Search Village Ctr 14,881 911 - 9,752 - 911 9,752 10,663 Community retail center Columbia, MD Accumulated Life on depreciation Date of which depreciation and completion of Date in latest income Description amortization construction acquired statement is computed - ------------------------- ------------ ------------ -------- --------------------- Operating Properties: The Mall in Columbia $ 13,026 8/71 12/97 Note 7 Retail center Columbia, MD White Marsh 5,208 8/81 12/97 Note 7 Retail center Baltimore, MD Seventy Columbia Corp Ctr 5,244 6/92 12/97 Note 7 Office building Columbia, MD Forty Columbia Corp Ctr 5,274 6/87 12/97 Note 7 Office building Columbia, MD Fifty Columbia Corp Ctr 4,185 11/89 12/97 Note 7 Office building Columbia, MD Thirty Columbia Corp Ctr 4,438 4/86 12/97 Note 7 Office building Columbia, MD Hickory Ridge Village Ctr 1,817 6/92 12/97 Note 7 Community retail center Columbia, MD Dorsey Search Village Ctr 2,264 9/89 12/97 Note 7 Community retail center Columbia, MD
IV-38 REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which Initial cost to Company to acquisition carried at close of period ------------------------ ------------------------ ---------------------------------- Buildings Builidngs and and Carrying Improve Encum- Improve Improve costs ments Description brances Land ments ments (note 2) Land (note 3) Total ----------- ------- ---- -------- ------- --------- ---- --------- ----- Twenty Columbia Corp Ctr $ 2,405 $ 927 $ -- $ 9,619 $ -- $ 927 $ 9,619 $ 10,546 Office building Columbia, MD Harper's Choice 9,233 546 -- 9,323 -- 546 9,323 9,869 Community retail center Columbia, MD American City Building 2,812 -- -- 9,346 -- -- 9,346 9,346 Office building Columbia, MD Kings Contrivance 22,724 1,072 -- 7,187 -- 1,072 7,187 8,259 Community retail center Columbia, MD Ten Columbia Corp Ctr 2,732 733 -- 7,440 -- 733 7,440 8,173 Office building Columbia, MD Wilde Lake 20,252 1,486 -- 6,525 -- 1,486 6,525 8,011 Community retail center Columbia, MD Oakland Mills 1,141 447 -- 5,842 -- 447 5,842 6,289 Community retail center Columbia, MD Long Reach Village Ctr 4,693 1,009 -- 5,167 -- 1,009 5,167 6,176 Community retail center Columbia, MD Accumulated Life on depreciation Date of which depreciation and completion of Date in latest income Description amoritization construction required statement is computed ----------- ------------- ------------- -------- --------------------- Twenty Columbia Corp Ctr $ 3,912 6/81 12/97 Note 7 Office building Columbia, MD Harper's Choice 2,512 6/71 12/97 Note 7 Community retail center Columbia, MD American City Building 7,802 6/69 12/97 Note 7 Office building Columbia, MD Kings Contrivance 2,435 6/86 12/97 Note 7 Community retail center Columbia, MD Ten Columbia Corp Ctr 2,797 9/81 12/97 Note 7 Office building Columbia, MD Wilde Lake 3,294 7/67 12/97 Note 7 Community retail center Columbia, MD Oakland Mills 1,510 6/69 12/97 Note 7 Community retail center Columbia, MD Long Reach Village Ctr 1,090 6/74 12/97 Note 7 Community retail center Columbia, MD
IV-39 REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which Initial cost to Company to acquisition carried at close of period ------------------------ ------------------------ ---------------------------------- Buildings Builidngs and and Carrying Improve Encum- Improve Improve costs ments Description brances Land ments ments (note 2) Land (note 3) Total ----------- ------- ---- -------- ------- --------- ---- --------- ----- Dobbin Road $ 3,724 $ 426 $ -- $ 4,848 $ -- $ 426 $ 4,848 $ 5,274 Community retail center Columbia, MD Columbia Crossing 5,973 945 -- 3,794 -- 945 3,794 4,739 Community retail center Columbia, MD Ridgley Building 11,334 670 -- 3,881 -- 670 3,881 4,551 Office building Columbia, MD Oakland Building 695 -- -- 4,150 -- -- 4,150 4,150 Office building Columbia, MD Sterrett Building 1,212 308 -- 3,689 -- 308 3,689 3,997 Office building Columbia, MD Teachers Building 8,679 -- -- 3,100 -- -- 3,100 3,100 Office building Columbia, MD Lynx Lane 8,123 150 -- 2,827 -- 150 2,827 2,977 Community retail center Columbia, MD Other properties and related investments less than 5% of total 2,582 1,191 -- 15,075 -- 1,191 15,075 16,266 ---------------------------------- ---------------------- ---------------------------------- Total Operating Properties 421,820 26,023 -- 300,837 -- 26,023 300,837 326,860 ---------------------------------- ---------------------- ---------------------------------- Accumulated Life on depreciation Date of which depreciation and completion of Date in latest income Description amoritization construction required statement is computed ----------- ------------- ------------- -------- --------------------- Dobbin Road $ 1,545 6/83 12/97 Note 7 Community retail center Columbia, MD Columbia Crossing 235 11/98 12/97 Note 7 Community retail center Columbia, MD Ridgley Building 2,296 6/72 12/97 Note 7 Office building Columbia, MD Oakland Building 2,359 6/71 12/97 Note 7 Office building Columbia, MD Sterrett Building 2,172 6/72 12/97 Note 7 Office building Columbia, MD Teachers Building 1,021 6/69 12/97 Note 7 Office building Columbia, MD Lynx Lane 1,199 6/73 12/97 Note 7 Community retail center Columbia, MD Other properties and related investments less than 5% of total 4,755 -------------- Total Operating Properties 82,390 --------------
IV-40 REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which Initial cost to Company to acquisition carried at close of period ----------------------- ----------------------------- -------------------------- Buildings Buildings and and Carrying Improve Encum- Improve Improve costs ments Description brances Land ments ments (note 2) Land (note 3) Total ----------- ------- ---- ----- ------- -------- ---- -------- ----- Properties in Development: Columbia Mall $ -- $ 2,000 $ -- $ 38,352 $ -- $ 2,000 $ 38,352 $ 40,352 Expansion of retail center Columbia, MD 60 Columbia Corporate Center 4,641 1,050 -- 8,356 -- 1,050 8,356 9,406 New Office Building Columbia, MD 3993 Howard Hughes Parkway -- 332 -- 4,862 -- 332 4,862 5,194 New Office Building Las Vegas, NV Village 12 Arbors East 1 ,451 535 -- 4,068 -- 535 4,068 4,603 New Office Building Las Vegas, NV Airport Center 40/51 -- 547 -- 1,944 -- 547 1,944 2,491 New Office Building Las Vegas, NV Airport Center 50 -- 754 -- 1,504 -- 754 1,504 2,258 New Office Building Las Vegas, NV Other properties less than 5% of total -- -- 2,138 -- -- 2,138 2,138 -------------------------- -------------------- --------------------------------- Total Properties in Development 6,092 5,218 -- 61,224 -- 5,218 61,224 66,442 -------------------------- -------------------- --------------------------------- Accumulated Life on depreciation Date of which depreciation and completion of Date in latest income Description amortization construction acquired statement is computed ----------- -------------- ------------ --------- ---------------------- Properties in Development: $ -- N/A 12/97 N/A Columbia Mall -- N/A 12/97 N/A Expansion of retail center Columbia, MD 60 Columbia Corporate Center -- N/A 12/97 N/A New Office Building Columbia, MD 3993 Howard Hughes Parkway -- N/A 12/97 N/A New Office Building Las Vegas, NV Village 12 Arbors East -- N/A 12/97 N/A New Office Building Las Vegas, NV Airport Center 40/51 -- N/A 12/97 N/A New Office Building Las Vegas, NV Airport Center 50 -- N/A 12/97 N/A New Office Building Las Vegas, NV Other projects less than 5% of total -- N/A 12/97 N/A
IV-41 REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Real Estate and Accumulated Depreciation (note 1) December 31, 1998 (in thousands)
Costs capitalized subsequent Gross amount at which Initial cost to Company to acquisition carried at close of period ----------------------- ----------------------------- -------------------------- Buildings Buildings and and Carrying Improve Encum- Improve Improve costs ments Description brances Land ments ments (note 2) Land (note 3) Total ----------- --------- ---- ----- ----- -------- ---- -------- ----- Investment land and land held for development and sale: Columbia $ 33,369 $ 53,000 $ -- $ 53,564 $ -- $106,564 $ -- $106,564 Land in various stages of development Columbia, MD Summerlin 174,422 89,076 -- 6,421 -- 95,497 -- 95,497 Land in various stages of development Las Vegas, NV Nevada Investment Land 38,149 20,631 -- 20,525 -- 41,156 -- 41,156 Canyon Springs 14,959 12,872 -- 11,898 -- 24,770 -- 24,770 Land held for development Riverside County, CA Bridgewater Commons -- 10,054 -- 59 -- 10,113 -- 10,113 Land held for sale Bridgewater, NJ Other less than 5% of total -- 55 -- -- 55 -- 55 ---------------------------------- --------------------------- ------------------------------------ Total investment land and land held for development and sale 260,899 185,688 -- 92,467 -- 278,155 -- 278,155 ----------------------------------- --------------------------- ------------------------------------ Total Property $688,811 $216,929 $ -- $ 454,528 $ -- $309,396 $362,061 $671,457 =================================== =========================== ==================================== Accumulated Life on depreciation Date of which depreciation and completion of Date in latest income Description amortization construction acquired statement is computed ----------- ------------ ------------ --------- ---------------------- Land held for development and sale: Columbia N/A N/A 12/97 N/A Land in various stages of development Columbia, MD Summerlin N/A N/A 12/97 N/A Land in various stages of development Las Vegas, NV Nevada Investment Land N/A N/A 12/97 N/A Canyon Springs N/A N/A 12/97 N/A Land held for development Riverside County, CA Bridgewater Commons N/A N/A 12/97 N/A Land held for sale Bridgewater, NJ Other properties held for sale, less than 5% of total -- ---------- -- ---------- Total Property $ 82,390 ==========
IV-42 Schedule III continued REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Real Estate and Accumulated Depreciation (note 1) December 31, 1998 Notes: (1) Reference is made to notes 1, 2 and 5 to the combined consolidated financial statements. As indicated in note 1, the Ventures retained The Rouse Company's historical cost basis in the assets acquired and liabilities assumed on December 31, 1997. Accordingly, historical data have been presented with respect to the allocation of the gross historical cost of properties at December 31, 1998 between initial cost and costs capitalized subsequent to acquisition. (2) The determination of these amounts is not practicable and, accordingly, they are included in improvements. (3) Buildings and improvements include deferred costs of $10,472,000 at December 31, 1998. (4) The changes in total cost of properties for the years ended December 31, 1998 is as follows (in thousands): Balance at beginning of year $ 619,295 Additions, at cost 82,289 Cost of properties acquired 10,054 Additions to land held for development and sale 82,656 Cost of land sales (77,771) Retirements, sales and other dispositions (45,066) ---------- Balance at end of year $ 671,457 ==========
IV-43 Schedule III continued ---------------------- REAL ESTATE VENTURES OWNED BY THE ROUSE COMPANY INCENTIVE COMPENSATION STATUTORY TRUST AND THE ROUSE COMPANY Real Estate and Accumulated Depreciation (note 1) December 31, 1998 Notes: (5) The changes in accumulated depreciation and amortization for the year ended December 31, 1998 is as follows (in thousands):
Balance at beginning of year $ 72,000 Depreciation and amortization charged to operations 10,585 Retirements, sales and other, net (195) ---------- Balance at end of year $ 82,390 ==========
(6) The aggregate cost of properties for Federal income tax purposes is approximately $1,071,814,000 at December 31, 1998. (7) Reference is made to note 1(c) to the combined consolidated financial statements for information related to depreciation. IV-44 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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. The Rouse Company By: /s/Anthony W. Deering --------------------------------------- Anthony W. Deering March 30, 1999 Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Principal Executive Officer: /s/Anthony W. Deering --------------------------------------- Anthony W. Deering March 30, 1999 Chairman of the Board, President and Chief Executive Officer Principal Financial Officer: /s/Jeffrey H. Donahue --------------------------------------- Jeffrey H. Donahue March 30, 1999 Executive Vice President and Chief Financial Officer Principal Accounting Officer: /s/George L. Yungmann --------------------------------------- George L. Yungmann March 30, 1999 Senior Vice President and Controller IV-45 Board of Directors: David H. Benson, Jeremiah E. Casey, Anthony W. Deering, Rohit M. Desai, Mathias J. DeVito, Juanita T. James, William R. Lummis, Thomas J. McHugh, Hanne M. Merriman, Roger W. Schipke, Alexander B. Trowbridge and Gerard J. M. Vlak. By: /s/Anthony W. Deering --------------------------------------- Anthony W. Deering March 30, 1999 For himself and as Attorney-in-fact for the above-named persons IV-46 EX-3 2 EXHIBIT 3 Exhibit 3. Articles of Incorporation and Bylaws. The Amendments to the Articles of Incorporation of The Rouse Company adopted May 26, 1988 and the Amended and Restated Articles of Incorporation of The Rouse Company, dated May 27, 1988, are incorporated by reference from the Exhibits to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1988. The Articles of Amendment to the Amended and Restated Articles of Incorporation of The Rouse Company, which Articles of Amendment were effective January 10, 1991, are incorporated by reference from the Exhibits to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1990. The Articles Supplementary to the Charter of The Rouse Company, dated February 17, 1993, are incorporated by reference from the Exhibits to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1992. The Articles Supplementary to the Charter of The Rouse Company, dated September 26, 1994, are incorporated by reference from the Exhibits to the Company's S-3 Registration Statement (No. 33-57707). The Articles Supplementary to the Charter of The Rouse Company, dated December 27, 1994, are incorporated by reference from the Exhibits to the Company's S-3 Registration Statement (No. 33-57707). The Articles Supplementary to the Charter of The Rouse Company, dated June 5, 1996, are incorporated by reference from the Exhibits to the Company's S-3 Registration Statement (No. 333-20781). The Articles Supplementary to the Charter of The Rouse Company, dated June 11, 1996, are incorporated by reference from the Exhibits to the Company's Form S-3 Registration Statement (No. 333-20781). The Articles Supplementary to the Charter of The Rouse Company, dated February 21, 1997, are incorporated by reference from the Exhibit to the Company's Current Report on Form 8-K, dated February 26, 1997. The Bylaws of The Rouse Company, as amended November 19, 1996 and January 30, 1997, are incorporated by reference from the Exhibits to the Company's Form S-3 Registration Statement (No. 333-20781). All documents referred to above may be found in Commission file number 0-1743. EX-10 3 EXHIBIT 10 Exhibit 10. Material Contracts. The Company's 1990 Stock Option Plan and 1990 Stock Bonus Plan are incorporated by reference from the Company's definitive proxy statement filed pursuant to Regulation 14A on April 12, 1990, and the Amendment to The Rouse Company 1990 Stock Option Plan, effective as of May 12, 1994, is incorporated by reference from the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1994. The Company's 1994 Stock Incentive Plan is incorporated by reference from the Company's definitive proxy statement filed pursuant to Regulation 14A on April 5, 1994. The Amended and Restated Supplemental Retirement Benefit Plan of The Rouse Company, made as of January 1, 1985 and further amended and restated as of September 24, 1992, March 4, 1994, and May 10, 1995, is incorporated by reference from the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1996. The Contingent Stock Agreement, effective as of January 1, 1996, by the Company in favor of and for the benefit of the Holders and Representatives named therein is incorporated by reference from the Exhibits to the Company's Form S-4 Registration Statement (No. 333-1693). The Rouse Company Deferred Compensation Plan for Outside Directors (Amended and Restated), dated as of May 23, 1996, is incorporated by reference from the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1996. The memorandum of agreement, dated December 19, 1996, between the Company and Mathias J. DeVito, then Chairman of the Board of the Company, is incorporated by reference from the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1996. The employment agreement, dated May 1, 1996, between John L. Goolsby, The Rouse Company and TRC Acquisition Company I is incorporated by reference from the Company's 10-K Annual Report for the fiscal year ended December 31, 1997. The Company's 1997 Stock Incentive Plan is incorporated by reference from the Company's definitive proxy statement filed pursuant to Regulation 14A on April 4, 1997. The Rouse Company Special Option Plan, effective January 1, 1998, is incorporated by reference from the Company's Form 10-K Annual Report for the year ended December 31, 1997. The Asset Purchase Agreement, dated as of April 6, 1998, between TrizecHahn Centers, Inc., and The Rouse Company and Westfield America, Inc. is incorporated by reference from the Company's Current Report on Form 8-K dated August 14, 1998. The letter agreement, dated as of June 30, 1998, between The Rouse Company and Teachers Properties, Inc. relating to the purchase of certain of the interests in Rouse-Teachers Properties, Inc. is incorporated by reference from the Company's Form 10-Q Quarterly Report for the quarterly period ended September 30, 1998. The Contribution Agreement, dated as of February 1, 1999, among The Rouse Company of Nevada, Inc., HRD Properties, Inc., Rouse-Bridgewater Commons, LLC, Rouse-Park Meadows Holding, LLC, Rouse-Towson Town Center LLC, Bridgewater Commons Mall, LLC, Rouse-Fashion Place, LLC, Rouse-Park Meadows LLC, Towson TC, LLC, TTC SPE, LLC and Fourmall Acquisition, LLC is incorporated by reference from the Company's Current Report on Form 8-K dated February 10, 1999. The employment agreement, dated September 24, 1998, between the Company and Anthony W. Deering is attached. All documents referred to above may be found in Commission file number 0-1743. EMPLOYMENT AGREEMENT -------------------- This employment agreement ("Agreement") is entered into the 24th day of September, 1998 (the "Effective Date"), by and between THE ROUSE COMPANY (the "Company") and ANTHONY W. DEERING (the "Executive"). EXPLANATORY STATEMENT --------------------- The Executive is currently employed by the Company and serves as the Company's Chief Executive Officer. The Company recognizing the unique skills and abilities of the Executive wishes to insure that the Executive will continue to be employed by the Company until the Executive reaches age 60. The Executive desires to continue in the employment of the Company as Chief Executive Officer until age 60. Accordingly the parties desire to enter into this employment agreement. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties agree as follows: 1. Employment, Term and Duties. --------------------------- 1.1 Employment. The Company hereby employs the Executive and the ---------- Executive hereby accepts employment by the Company on the terms and conditions set forth in this Agreement. 1.2 Term. The Executive's employment under this Agreement shall ---- commence on the Effective Date and shall terminate on January 31, 2005, unless earlier terminated as provided in Section 4 below (the "Term"). 1.3 Duties. During the Term, the Executive shall serve as ------ the Chief Executive Officer of the Company, with such customary duties and responsibilities as are incident to such position, including such authority, duties, and responsibilities as are set forth with respect to such office in the Company's articles and bylaws. The parties acknowledge that the Executive currently also holds the titles of Chairman of the Board and of President. The Company reserves the right to elect another individual(s) to such positions and such election shall not constitute "Good Reason" as hereinafter defined, provided the Executive consents to such election. The Executive shall report directly to the Board of Directors of the Company (the "Board"). The Executive agrees to devote substantially all his attention and time during normal business hours to the business and affairs of the Company and to use his reasonable best efforts to perform faithfully and efficiently the duties and responsibilities of his positions and to accomplish the goals and objectives of the Company as may be established by the Board. Notwithstanding the foregoing, the Executive may engage in the following activities (and shall be entitled to retain all economic benefits thereof including fees paid in connection therewith) as long as they do not interfere in any material respect with the performance of the Executive s duties and responsibilities hereunder: (i) serve on corporate, civic, religious, educational and/or charitable boards or committees, provided that the Executive shall not serve on any board or committee of any corporation or other business which competes with the Business (as defined in Section 3.1 below), (ii) deliver lectures, fulfill speaking engagements or teach on a part-time basis at educational institutions and (iii) make investments in businesses or enterprises and manage his personal investments; provided that with respect to such activities Executive shall comply with Business Conduct and Ethics Policy applicable to employees of the Company and subsidiaries. The parties acknowledge that the Executives participation as a director of the organizations listed on Exhibit A attached hereto are acceptable. 2. Compensation and Other Benefits. ------------------------------- 2.1 Base Compensation. As compensation for services rendered ----------------- during the Term, the Company shall pay to the Executive an annual salary of $800,000 (the "Base Salary"). The Personnel Committee of the Board of Directors of The Company (the "Committee") shall conduct a review of the Base Salary in February, 1999, and thereafter at such time or times as the Committee reviews the annual compensation of the executives of the Company in general, and the Executive shall be entitled at such time or times to such annual increase in the Base Salary as is in accordance with the then prevailing policy of The Company with respect to executive compensation in general; provided, that such salary may not be reduced at any time. The Base Salary shall be payable in accordance with the payroll policies of The Company as from time to time in effect, less such amounts as shall be required to be deducted or withheld therefrom by applicable law and regulations. 2.2 Annual Bonus. In addition to the Base Salary, the Executive ------------ shall continue to be eligible to receive, for each calendar year or portion thereof occurring during the Term, an annual bonus (the "Annual Bonus") in an amount annually determined by the Committee in accordance with the standard practice of such Committee relating to the incentive compensation program of The Company. The Annual Bonus shall be paid to the Executive, less such amounts as shall be required to be deducted or withheld therefrom by applicable law and regulations, at such time or times as is in accordance with the then prevailing policy of The Company relating to incentive compensation payments. 2.3 Stock Grant and Stock Options. ----------------------------- (a) Stock Grant and Gross-Up; Repayment of Gross Up. Pursuant ----------------------------------------------- to the resolutions adopted by the Board at its meeting on -2- September 24, 1998, the Company hereby grants Executive a stock grant of 109,850 shares of The Company's Common Stock pursuant to The Company's 1997 Stock Incentive Plan. The terms, conditions and restrictions with regard to such stock grant shall be evidenced by a letter agreement between the Company and the Executive in the form of Exhibit B attached hereto which shall be incorporated --------- herein by reference and its terms, conditions and notifications shall be considered a part of this Agreement. In the event the Executive elects to be taxed in accordance with the provisions of Section 83(b) of the Internal Revenue Code of 1986 (the "Code") with regard to said stock grant, then Executive shall also receive a cash payment (the "Gross-Up Payment") on or before December 31, 1998, in an amount sufficient to pay all state and federal income taxes payable by Executive with respect to the stock grant, including any tax payable with regard to the Gross- Up Payment. The Gross-Up Payment shall be calculated based on the Executive's actual items of income, expense and deductions for the year in which the Section 83(b) election is made and shall compensate the Executive for all additional taxes payable by the Executive on account of his receipt of the Stock Grant and the Gross-Up Payment. In the event that, prior to January 31, 2005, the Executive's employment is terminated for Cause pursuant to Section 4.2 hereof or the Executive effects a Voluntary Termination of his employment under Section 4.4 hereof, then the Executive shall be obligated to repay to the Company the entire amount of the Gross-Up Payment, such payment to be made in its entirety within thirty (30) days of the date of termination. If the Executive is required to repay the amount of the Gross Payment, the Company shall have the right to set off such amount against any payments due by the Company to the Executive. b. 1998 Stock Options. Pursuant to the resolutions adopted by the ------------------ Board of Directors at its meeting on September 24, 1998, the Company grants Executive effective as of September 24, 1998 a stock option for 300,000 shares of the Company's Common Stock pursuant to The Company's 1997 Stock Incentive Plan. The option price with respect to such stock option shall be $27.31 per share. The maximum number of such options which qualify as "qualified stock options" shall be granted as "qualified stock options" and the remainder of such options shall be non-qualified stock options. The terms, conditions and restrictions with regard to said stock options shall be evidenced by an Incentive Stock Option Agreement (as to the qualified stock options) and a Nonqualified Stock Option Agreement (as to the non-qualified stock options), substantially in the forms attached hereto as Exhibit C-1 and Exhibit C-2 ----------- ----------- respectively which shall be incorporated herein by reference and their terms, conditions and restrictions shall be considered a part of this Agreement. -3- c. Accelerated Stock Options. The Executive and the Company ------------------------- acknowledge that the Executive would have been eligible, pursuant to the Company's current policy, to receive a stock option grant in February 1999. The parties wish to provide for the acceleration of such grant. Accordingly, pursuant to the resolutions adopted by the Board at its meeting on September 24, 1998, the Company hereby grants the Executive a stock option for 300,000 shares of the Company's Common Stock pursuant to the Company's 1997 Stock Incentive Plan. The option price with respect to such stock options shall be $32.77 per share. The maximum number of such options which qualify as "qualified stock options" shall be granted as "qualified stock options" and the remainder of such options shall be non-qualified stock options. The terms, conditions and restrictions with regard to said stock options shall be evidenced by an Incentive Stock Option Agreement (as to the qualified stock options) and a Non-Qualified Stock Option Agreement (as to the non-qualified stock options), substantially in the forms attached hereto as Exhibit D-1 and D- 2, which are incorporated by reference and their terms, conditions and restrictions shall be considered a part of this Agreement. 2.4 Retirement Supplement. a. Retirement at 62 or thereafter. If the Executive fulfills ------------------------------ all the terms and conditions of this Agreement and the Executive retires from the Company at age 62 or thereafter then the Executive's combined annual benefit under The Rouse Company Pension Plan and the Supplemental Benefit Retirement Plan shall be increased to an amount not less than fifty-five percent (55%) of his Cash Compensation (as defined in The Rouse Company Pension Plan). b. Retirement Before Age 62. If (i) the Executive is not then ------------------------ in default under this Agreement and this Agreement is terminated pursuant to the provisions of Section 4.1 or Section 4.3 hereof, (ii) the Executive retires upon the expiration of this Agreement, or (iii) the Executive retires after age 60 but before age 62 under circumstances that would constitute a "Voluntary Termination" under Section 4.4, then the Executive's combined annual benefit (at age 62) under The Rouse Company Pension Plan and the Supplemental Retirement Benefit Plan shall be increased to an amount not less than fifty-five percent (55%) of the Executive's Cash Compensation (as defined in The Rouse Company Pension Plan) computed for the 12 months immediately preceding such date of termination. The amounts which may be paid to the Executive under this Section 2.4 are herein referred to as the "Retirement Supplement." 2.5 Participation in Employee Benefit Plans. The Company agrees to --------------------------------------- permit the Executive during the Term to continue to participate in any group life, hospitalization and/or disability insurance plan, health program, -4- supplemental executive retirement plan, nonqualified compensation plan, pension and/or savings plans, long-term incentive plan, receive "fringe benefits," e.g., ---- club memberships and automobile allowance, and participate in such other benefit plans or programs as may be maintained by the Company (collectively "Benefits"). The Company also agrees to implement such other benefit plans (the Other Benefit Plans) for the benefit of Executive to the extent the Company offers its other senior executives benefits that are not currently offered by the Company. The Other Benefit Plans shall provide Executive benefits that are no less favorable than those benefits which are available to the most senior executives of The Company or its subsidiaries. For so long as the Company owns or leases a corporate aircraft, Executive shall be entitled to use such aircraft for personal use on terms and conditions no less favorable to Executive (exclusive of tax effects) as those in existence on the Effective Date. 2.6 General Business Expenses. The Company shall pay or reimburse ------------------------- the Executive for all expenses that are consistent with the Company policy and reasonably and necessarily incurred by the Executive during the Term in the performance of the Executive's duties under this Agreement. Such payment shall be made upon presentation of such documentation as The Company customarily requires of its executive employees prior to making such payments or reimbursements. 3. Non-Competition. --------------- 3.1 Covenants Against Competition. The Executive acknowledges that ----------------------------- as of the execution of this Employment Agreement (i) the Company is engaged in the business of commercial and community real estate development and management and office and industrial building development and management and other related activities (the "Business"); (ii) the Company's Business is conducted currently throughout the United States and in Canada and may be expanded to other locations; (iii) his employment with the Company will have given him access to confidential information concerning the Company; and (iv) the agreements and covenants contained in this Agreement are essential to protect the business and goodwill of the Company. Accordingly, the Executive covenants and agrees as follows: (a) Non-Compete. Without the prior written consent of the Board of ------------ Directors of the Company, the Executive shall not during the Restricted Period (as defined below) within the Restricted Area (as defined below) (except in the Executive's capacity as an officer of the Company or any of its affiliates), (i) engage or participate in the Business; (ii) enter the employ of, or render any services (whether or not for a fee or other compensation) to, any person engaged in the Business; or (iii) acquire an equity interest in any such person; provided, that the foregoing restrictions shall not apply at any time if the Executive s employment is terminated during the Term by the Executive -5- for Good Reason (as defined in Section 4.3 below) or by the Company other than for "Cause"; provided, further, that during the Restricted Period the -------- ------- Executive may own, directly or indirectly, solely as a passive investment, securities of any company traded on any national securities exchange or on the National Association of Securities Dealers Automated Quotation System. As used herein, "Restricted Period" shall mean the period commencing on the Effective Date and ending on the earlier of (i) the third anniversary of the Executive's termination of employment or (ii) January 31, 2006. "Restricted Area" shall mean any place within the United States, Canada and any other country in which the Company is then actively considering conducting Business. (b) Confidential Information; Personal Relationships. The Executive ------------------------------------------------ acknowledges that the Company has a legitimate and continuing proprietary interest in the protection of its confidential information and has invested substantial sums and will continue to invest substantial sums to develop, maintain and protect confidential information. The Executive agrees that, during and after the Restricted Period, without the prior written consent of the Board, the Executive shall keep secret and retain in strictest confidence, and shall not knowingly use for the benefit of himself or others all confidential matters relating to the Company's Business including, without limitation, operational methods, marketing or development plans or strategies, business acquisition plans, joint venture proposals or plans, and new personnel acquisition plans, learned by the Executive heretofore or hereafter (such information shall be referred to herein collectively as Confidential Information ); provided, that nothing in this Agreement shall prohibit the Executive from disclosing or using any Confidential Information (A) in the performance of his duties hereunder, (B) as required by applicable law, (C) in connection with the enforcement of his rights under this Agreement or any other agreement with the Company, or (D) in connection with the defense or settlement of any claim, suit or action brought or threatened against the Executive by or in the right of the Company. Notwithstanding any provision contained herein to the contrary, the term Confidential Information shall not be deemed to include any general knowledge, skills or experience acquired by the Executive or any knowledge or information known or available to the public in general. Moreover, the Executive shall be permitted to retain copies of, or have access to, all such Confidential Information relating to any disagreement, dispute or litigation (pending or threatened) involving the Executive. (c) Employees of the Company and its Affiliates. During the Restricted ------------------------------------------- Period, without the prior written consent of the Board of Directors of the Company, the Executive shall not, directly or indirectly, hire or solicit, or cause others to hire or solicit, for employment by any person other than the Company or any affiliate or successor thereof, any employee of, or -6- person employed within the two years preceding the Executive's hiring or solicitation of such person by, the Company and its affiliates or successors or encourage any such employee to leave his employment. For this purpose, any person whose employment has been terminated involuntarily by The Company or the Company shall be excluded from those persons protected by this Section 3.1(c) for the benefit of the Company. (d) Business Relationships. During the Restricted Period, the ---------------------- Executive shall not, directly or indirectly, request or advise a person that has a business relationship with the Company to curtail or cancel such person's business relationship with the Company. 3.2 Rights and Remedies Upon Breach. If the Executive breaches, ------------------------------- or threatens to commit a breach of, any of the provisions contained in Section 3.1 of this Agreement (the "Restrictive Covenants"), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. (a) Specific Performance. The right and remedy to have the -------------------- Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company. (b) Accounting. The right and remedy to require the Executive to ---------- account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by the Executive as the result of any action constituting a breach of Restrictive Covenants. 3.3 Severability of Covenants. The Executive acknowledges and agrees ------------------------- that the Restrictive Covenants are reasonable and valid in duration and geographical scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect without regard to the invalid portions. The provisions set forth in Section 3.1 above shall be in addition to any other provisions of the Business Conduct and Ethics Policy applicable to employees of The Company and its subsidiaries during the term of Executive s employment. 4. Termination. ----------- -7- 4.1 Termination upon Death or Disability. If the Executive either ------------------------------------ dies or becomes entitled to benefits under a Company long-term disability plan or program during the Term, the Term shall automatically terminate thereupon, and the Executive or the Executive's estate, as the case may be, shall be entitled to receive, in addition to any life insurance or disability benefits which are payable after the separate determinations thereof, (a) Base Salary at the rate in effect at the time of such termination through the date of termination; (b) any, otherwise payable with respect to the year in which the Term is terminated, multiplied by (ii) a fraction, the numerator of which is the number of days elapsed in such year as of the termination date and the denominator of which is 365 (the "Accrued Annual Bonus"); (c) an amount equal to the product of (x) the lesser of 36 or the number of months from the termination date until the end of the month in which the Executive's 62nd birthday would have occurred (rounded to the next highest whole month) times (y) the Monthly Salary Amount; (d) any deferred compensation (including, without limitation, interest or other credits in the deferred amounts) and any accrued vacation pay, provided that any deferred compensation under the Supplemental Retirement Benefit Plan of the Company (the "SERP") shall be paid in accordance with the terms of the SERP; (e) the Retirement Supplement; (f) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans or programs of the Company. As used herein the term "Monthly Salary Amount" shall mean an amount equal to one-twelfth of the sum of (w) the Executive's then current Base Salary plus (z) the average Annual Bonus paid to the Executive during the three years immediately preceding the termination date. The amounts set forth above are in addition to and shall not reduce any other benefits to which the Executive or his estate may be entitled (such as the stock grant and the stock options). 4.2 Termination by the Company for Cause. The Company may ------------------------------------ terminate the Executive's employment hereunder for "Cause" (as defined -8- below). If the Company terminates the Executive's employment hereunder for Cause, the Executive shall be entitled to: (a) Base Salary at the rate in effect at the time of such termination through the date of termination; (b) any deferred compensation (including, without limitation, interest or other credits on such deferred amounts) and any accrued vacation pay, provided that any deferred compensation under the SERP shall be paid in accordance with the terms of the SERP; (c) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Company. In any case described in this Section 4.2, the Executive shall be given written notice authorized by a vote of at least a majority of the members of the Board of Directors that the Company intends to terminate the Executive's employment for Cause. Such written notice shall specify the particular act or acts, or failure to act, which is or are the basis for the decision to so terminate the Executive's employment for Cause. The Executive shall be given the opportunity within 30 calendar days of the receipt of such notice to meet with the Board of Directors to defend such act or acts, or failure to act, and the Executive shall be given 15 business days after such meeting to correct such act or failure to act. Upon failure of the Executive, within such latter 15 day period, to correct such act or failure to act, the Executive's employment by the Company shall automatically be terminated under this Section 4.2 for Cause. Anything herein to the contrary notwithstanding, if, following a termination of the Executive's employment by the Company for Cause based upon the conviction of the Executive for a felony involving actual dishonesty as against the Company, such conviction is overturned on appeal, the Executive shall be entitled to the payments and the economic equivalent of the benefits that the Executive would have received as a result of a termination of the Executive's employment by the Company without Cause. For purposes of this Section 4.2, a termination of the Executive's employment by the Company shall be for "Cause" if the Executive is discharged (i) due solely to an act or acts of gross or willful negligence or of intentional wrongdoing or misconduct, which has a material adverse effect on the Executive's ability to perform the duties of his position or on the good standing, financial condition or profitability of the Company or (ii) as the result of a material breach of this Agreement. 4.3 Termination Without Cause or Termination For Good Reason. The -------------------------------------------------------- Company may terminate the Executive's employment hereunder -9- without Cause and the Executive may terminate his employment hereunder for Good Reason (defined below). If the Company terminates the Executive's employment hereunder without Cause, other than due to death or Disability, or if the Executive terminates his employment for Good Reason, the Executive shall be entitled to: (a) Base Salary at the rate in effect at the time of termination through the date of Termination; (b) the Accrued Annual Bonus, if any; (c) a lump sum payment equal to the product of thirty-six (36) times the Monthly Salary Amount (as defined in Section 4.2 hereof); (d) any deferred compensation (including, without limitation, interest or other credits on the deferred amounts) and any accrued vacation pay; (e) the Retirement Supplement; (f) continuation until the Executive attains age 60, of the health and welfare benefits of the Executive and any long-term disability insurance generally provided to senior executives of the Company (as provided for by Section 2.5 of this Agreement) (or the Company shall provide the economic equivalent thereof); provided, however if the Executive obtains new employment and such employment makes the Executive eligible for health and welfare or long-term disability benefits which are equal to or greater in scope then the benefits then being offered by the Company, then the Company shall no longer be required to provide such benefits to the Executive; and (g) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans or programs of the Company. As used herein, "Good Reason" means and shall be deemed to exist if, without the prior express written consent of the Executive, (a) the Executive is assigned any duties or responsibilities inconsistent in any material respect with the scope of the duties or responsibilities associated with the Executive's position as Chief Executive Officer, as set forth and described in Section 1 of this Agreement; (b) the Executive suffers a reduction in the duties, responsibilities or effective authority associated with his position as Chief Executive Officer, as set forth and described in Section 1 of this Agreement; (c) the Executive is not appointed to, or is removed from, his position as Chief Executive Officer; (d) the Company breaches this Agreement in any material respect; (e) the Company fails to obtain the full -10- assumption of this Agreement by a successor entity in accordance with Section 6.4 of this Agreement; (f) the Company fails to use its reasonable best efforts to maintain, or cause to be maintained, adequate directors and officers liability insurance coverage for the Executive; (g) the Company purports to terminate the Executive's employment for Cause and such purported termination of employment is not effected in accordance with the requirements of this Agreement. or (h) a Change in Control shall have occurred. For purposes of this Agreement, a "Change of Control" shall mean (1) any merger by the Company with or into another corporation or corporations; (2) any acquisition (by purchase, lease or otherwise) of all or substantially all of the assets of the Company by any person, corporation or other entity or group thereof acting jointly; (3) the acquisition of beneficial ownership, directly or indirectly, of voting securities of the Company (defined as Common Stock of the Company or any securities having voting rights that the Company may issue in the future) and rights to acquire voting securities of the Company (defined as including, without limitation, securities that are convertible into voting securities of the Company (as defined above) and rights, options warrants and other agreements or arrangements to acquire such voting securities) by any person, corporation or other entity or group thereof acting jointly, in such amount or amounts as would permit such person, corporation or other entity or group thereof acting jointly to elect a majority of the members of the Board of Directors of the Company, as then constituted; or (4) the acquisition of beneficial ownership, directly or indirectly, of voting securities and rights to acquire voting securities having voting power equal to 20% or more of the combined voting power of the Company's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly unless such acquisition as is described in this part (4) is expressly approved by resolution of the Board of Directors of the Company passed upon affirmative vote of not less than a majority thereof and adopted at a meeting of the Board held not later than the date of the next regularly scheduled or special meeting held following the date the Company obtains actual knowledge of such acquisition (which approval may be limited in purpose and effect solely to affecting the rights of Employee under this Agreement). Notwithstanding the preceding sentence, (i) any transaction that involves a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, or a transaction of similar effect, shall not constitute a "Change in Control." 4.4 Voluntary Termination. The Executive may effect a Voluntary --------------------- Termination of his employment hereunder. A "Voluntary Termination" shall mean a termination of employment by the Executive on his own initiative other than (a) a termination due to death or disability, or (b) a termination for Good Reason. A Voluntary Termination shall not be, nor shall it be deemed to be, a breach of this Agreement and shall entitle the Executive to all of the rights and -11- benefits which the Executive would be entitled in the event of a termination of his employment by the Company for Cause. 4.5 Non-exclusivity of Rights. Nothing in this Agreement shall -------------------------- prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided or maintained by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other existing or future agreements with the Company. Except as otherwise expressly provided for in this Agreement, amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plans or programs of the Company at or subsequent to the date of termination shall be payable in accordance with such plans or programs. 4.6 Vesting of Stock Grants and Stock Options. In the event of any ----------------------------------------- termination described in Sections 4.1, 4.2, 4.3 and 4.4 above, Executive's rights with regard to any stock grants, loan agreements or stock options shall be as set forth in the respective agreement containing the terms and conditions pertaining thereto. 4.7 Certain Additional Payments by the Company. Anything in this ------------------------------------------ Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (an "Excise Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Excise Gross- Up Payment, the Executive retains an amount of the Excise Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Subject to the provisions of this Section 4.8, all determinations required to be made hereunder, including whether an Excise Gross-Up Payment is required and the amount of such Excise Gross-Up Payment, shall be made by KPMG Peat Marwick or such other accounting firm which at the time audits the financial statements of the Company (the "Accounting Firm") at the sole expense of the Company, which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the date of termination of the Executive's employment under this Agreement, if applicable, or such earlier time as is requested by the Company. If the Accounting Firm determines that no Excise Tax is payable by the Executive, the Accounting Firm shall furnish the Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal income tax return. Any determination by the Accounting Firm shall be -12- binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Excise Gross-Up Payments, which will not have been made by the Company should have been made (an "Underpayment") , consistent with the calculations required to be made hereunder. If the Company exhausts its remedies pursuant hereto and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Excise Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due) If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including (without limitation) accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith to contest effectively such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided that the Company shall bear and pay directly all costs and expenses - -------- (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions hereof the Company shall control all proceedings taken in connection with such contest and, at its sole option, may -13- pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided that if the Company directs the Executive to -------- pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance, and further provided that any extension of the statute of ------- --------- limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which an Excise Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. If, after the receipt by the Executive of an amount advanced by the Company pursuant hereto, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant hereto, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Excise Gross-Up Payment required to be paid. 4.8 Payment. Except as otherwise provided in this Agreement, any ------- payments to which the Executive shall be entitled under this Section 4, including, without limitation, any economic equivalent of any benefit, shall be made as promptly as possible following the date of termination. If the amount of any payment due to the Executive cannot be finally determined with 90 days after the Date of Termination, such amount shall be estimated on a good faith basis by the Company and the estimated amount shall be paid no later than 90 days after such Date of Termination. As soon as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Executive shall be made as promptly as practicable. -14- 5. Indemnification. ---------------- 5.1 General. The Company agrees that if the Executive is made a -------- party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a director, officer, member, employee or agent while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by applicable law (in accordance with the Articles of Incorporation and/or bylaws of the Company), as the same exists or may hereafter be amended, against all Expenses incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if the Executive has ceased to be an officer, director or agent, or is no longer employed by the Company and shall inure to the benefit of his heirs, executors and administrators. 5.2 Expenses. As used in this Agreement, the term "Expenses" shall -------- include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. 5.3 Enforcement. If a claim or request under this Agreement is not ----------- paid by the Company, or on their behalf, within fifteen days after a written claim or request has been received by the Company, the Executive may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or request and if successful in whole or in part, the Executive shall be entitled to be paid also the expenses of prosecuting such suit. The burden of proving that the Executive is not entitled to indemnification for any reason shall be upon the Company. 5.4 Subrogation. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Executive. 5.5 Partial Indemnification. If the Executive is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of any Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify the Executive for the portion of such Expenses to which the Executive is entitled. -15- 5.6 Advances of Expenses. Expenses incurred by the Executive in -------------------- connection with any Proceeding shall be paid by the Company in advance upon request of the Executive that the Company pay such Expenses. 5.7 Notice of Claim. The Executive shall give to the Company notice --------------- of any claim made against his for which indemnity will or could be sought under this Agreement. In addition, the Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within the Executive's power and at such times and places as are convenient for the Executive. 5.8 Defense of Claim. With respect to any Proceeding as to which the ---------------- Executive notifies the Company of the commencement thereof: 5.8.1 The Company will be entitled to participate therein at its own expense; and 5.8.2 Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to the Executive. The Executive also shall have the right to employ his own counsel in such action, suit or proceeding and the fees and expenses of such counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which the Executive shall have reasonably concluded that there may be a conflict of interest between the Company and the Executive in the conduct of the defense of such action. 5.8.3 The Company shall not be liable to indemnify the Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on the Executive without Executive's written consent. Neither the Company nor the Executive shall unreasonably withhold or delay their consent to any proposed settlement. 5.9 Non-exclusivity. The right to indemnification and the payment ---------------- of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 5 shall not be exclusive of any other right which the Executive may have or hereafter may acquire under any statute, provision of the certificate of incorporation or by-laws of the Company, agreement, vote of stockholders or disinterested directors or otherwise. 5.10 Directors and Officers Liability Policy. The Company agrees to ---------------------------------------- use reasonable efforts to obtain a directors and officers liability insurance -16- policy covering the Executive. The Company shall use its reasonable efforts to maintain during the Term (and for so long thereafter as is practicable in the circumstances taking account of prevailing conditions as to availability of such insurance) coverage to the Executive in a reasonable and adequate amount. 6. Other Provisions. ---------------- 6.1 Notices. Any notice or other communication required or ------- permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, on the date of actual receipt thereof, as follows: (i) If to the Company to: The Rouse Company 10275 Little Patuxent Parkway Columbia, MD 21044 Attn: General Counsel (ii) If to the Executive, to: Anthony W. Deering 6011 Charlesmeade Baltimore, MD 21212 Any party may change its address for notice hereunder by notice to the other party hereto. 6.2 Entire Agreement. This Agreement, including the attached ---------------- Schedules which are a part hereof for all purposes, contains the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto. 6.3 Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of Maryland. 6.4 Assignment. The obligations of the Executive hereunder are ---------- personal and may not be assigned or delegated by him or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment or transfer. The Company shall have the right to assign this Agreement and to delegate all rights, duties and obligations hereunder, either in whole or in part, to any parent, affiliate, successor or subsidiary organization or company of the -17- Company, so long as the obligations of the Company under this Agreement remain the obligations of the Company, provided, that the Company will require any -------- successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably acceptable to the Executive, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Nothing contained in this Section 6.4 is intended to affect the Executive's rights under this Agreement if a Change of Control shall occur. 7. Resolution of Disputes. ---------------------- 7.1 Negotiation. The parties shall attempt in good faith to ----------- resolve any dispute arising out of or relating to this Agreement promptly by negotiations between the Executive and an executive officer of the Company or member of the Board of Directors of the Company as may be designated by the Board of Directors who has authority to settle the controversy. Any party may give the other party written notice of any dispute not resolved in the normal course of business. Within 10 days after the effective date of such notice, the Executive and an executive officer of the Company shall meet at a mutually acceptable time and place within the Baltimore-Washington metropolitan area, and thereafter as often as they reasonably deem necessary, to exchange relevant information and to attempt to resolve the dispute. If the matter has not been resolved within 30 days of the disputing party's notice, or if the parties fail to meet within 10 days, either party may initiate arbitration of the controversy or claim as provided hereinafter. If a negotiator intends to be accompanied at a meeting by an attorney, the other negotiator shall be given at least three business days, notice of such intention and may also be accompanied by an attorney. All negotiations pursuant to this Section 7.1 shall be treated as compromise and settlement negotiations for the purposes of the federal and state rules of evidence and procedure. 7.2 Arbitration. Any dispute arising out of or relating to ----------- this Agreement or the breach, termination or validity thereof, which has not been resolved by nonbinding means as provided in Section 7.1 within 60 days of the initiation of such procedure, shall be finally settled by arbitration conducted expeditiously in accordance with the Center for Public Resources, Inc. ("CPR") Rules for Non-Administered Arbitration of Business Disputes by three independent and impartial arbitrators, of whom each party shall appoint one, provided that if one party has requested the other to participate in a non- binding procedure and the other has failed to participate, the requesting party may initiate arbitration before the expiration of such period. Any such party shall be appointed from the CPR Panels of Neutrals. The arbitration shall be governed by the United States Arbitration Act and any judgment upon the award decided upon the arbitrators may be entered by any court having jurisdiction thereof. The arbitrators are not -18- empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any damages in excess of compensatory damages. Each party hereby acknowledges that compensatory damages include (without limitation) any benefit or right of indemnification given by another party to the other under this Agreement. 7.3 Expenses. The Company shall promptly pay or reimburse the -------- Executive for all costs and expenses, including, without limitation, court costs and attorneys, fees, incurred by the Executive as a result of any claim, action or proceeding (including, without limitation a claim action or proceeding by the Executive against the Company) arising out of, or challenging the validity or enforceability of, this Agreement or any provision hereof or any other agreement or entitlement referred to herein. 8. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of the Executive and his heirs, executors, administrators and legal representatives. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns. 9. No Mitigation or Set-Off. The provisions of this Agreement are ------------------------ not intended to, nor shall they be construed to, require that the Executive mitigate the amount of any payment provided for in this Agreement by seeking or accepting other employment, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by the Executive as a result of his employment by another employer or otherwise. The Company's obligations to make the payments to the Executive required under this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set off, counterclaim, recoupment, defense or other claim, right or action that the Company may have against the Executive. 10. Amendment. This Agreement may be amended or modified only by an --------- agreement in writing executed by all of the parties hereto. 11. Beneficiaries/References. The Executive shall be entitled to ------------------------- select (and change) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death, and may change such election, in either case by giving the Company written notice thereof. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or other legal representative(s), as the case may be. 12. Representation. The Company represents and warrants that it is --------------- fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement -19- between the Company and any other person, firm or organization or any applicable laws or regulations. 13. Survivorship. The respective rights and obligations of the ------------- parties hereunder shall survive any termination of this Agreement or the Executive's employment hereunder to the extent necessary to the intended preservation of such rights and obligations. IN WITNESS WHEREOF, the parties have executed this Agreement effective for all purposes as of the date first above written. THE ROUSE COMPANY By: /s/ Mathias J. DeVito ------------------------------------ Name: Mathias J. DeVito Title: Chairman of the Executive Committee of the Board of Directors ANTHONY W. DEERING /s/ Anthony W. Deering -------------------------------------- -20- Exhibit A List of Current Board Positions 1. T. Rowe Price 2. Baltimore Museum of Art 3. Mayor's Business Advisory Council 4. Greater Baltimore Committee 5. NAREIT 6. Parks and People EXHIBIT B March 24, 1999 Mr. Anthony W. Deering The Rouse Company 10275 Little Patuxent Parkway Columbia, MD 21044 Dear Mr. Deering: On September 24, 1998, the Board of Directors granted you a stock bonus under the 1997 Stock Incentive Plan for 109,850 shares of the Company's Common Stock (the "Bonus Shares"). This stock bonus is granted to you in connection with the execution by you of an Employment Agreement of even date herewith (the "Employment Agreement"). The Bonus Shares are granted subject to the restriction that you may not sell, assign, transfer, pledge, hypothecate, encumber or otherwise dispose of the Bonus Shares until January 31, 2005; provided, however, that this restriction shall be of no force and effect if your Employment Agreement is terminated pursuant to the provisions of Section 4.1 or 4.3 thereof. However, if your Employment Agreement is terminated pursuant to the provisions of Section 4.2 or Section 4.4 thereof, prior to January 31, 2005, all of the Bonus Shares will be forfeited to the Company without payment therefor. One certificate for 109,850 shares of the Company's Common Stock is simultaneously being delivered to you. The legend on the reverse side of the certificate describes the restrictions to which the stock is subject. To acknowledge your agreement to the terms and restrictions to which the Bonus Shares are subject, please sign and date the original of this letter and return it to Bruce I. Rothschild. Page 2 October 19, 1998 If you have any questions concerning your stock bonus, please feel free to contact me. Sincerely yours, THE ROUSE COMPANY By /s/ Mathias J. Devito --------------------- Mathias J. DeVito Chairman of the Executive Committee of the Board of Directors The undersigned agrees to the above-described restrictions to which the Bonus Shares are subject. Signature: /s/ Anthony W. Deering ---------------------- Date: October 22, 1998 ---------------- EXHIBIT C-1 1998 GRANT THE ROUSE COMPANY 1997 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT -------------------------------- THIS INCENTIVE STOCK OPTION AGREEMENT, effective the 24th day of ---- September, 1998, by and between THE ROUSE COMPANY, a Maryland corporation (the - --------- "Company"), and Anthony W. Deering ("Employee"). BACKGROUND ---------- By action of its Board of Directors and Stockholders, the Company has adopted The Rouse Company 1997 Stock Incentive Plan (the "Plan"), under which the Company may grant stock options and other stock awards to employees of the Company. The Board of Directors has authority (i) to grant stock options to officers and other key employees of the Company and, subject to the provisions of the Plan, to determine the employees to whom and the time or times at which options will be granted, the number of shares to be covered by each option, the period of time and requisite conditions for exercising an option and the terms and provisions of the option agreements and (ii) to determine the fair market value, from time to time, of a share of Common Stock of the Company. THE OPTION ---------- The Board of Directors has determined to grant a stock option to Employee, and Employee, by his execution of this Agreement, agrees to accept the stock option, subject to the provisions of the Plan and the following terms and conditions: SECTION 1. Grant of Option. --------------- a. Number of Shares. The Company grants to Employee the right and ---------------- option to purchase, subject to the terms and conditions of this Agreement and the Plan, a total of 3,661 shares of Common Stock of the Company, par value one cent ($.01) per share ("Common Stock"), which shares are designated as shares granted under an incentive stock option (as that term is described in Section 1(d) below). b. Option Price. The purchase price of all such shares of Common ------------ Stock shall be $27.3125 per share, which price is equal to the last sale price, regular way, for Common Stock on September 23, 1998, the business day immediately preceding the date such option was granted, as reported on the New York Stock Exchange. c. "Option" Defined. The option granted hereby and all of Employee's ---------------- rights under this Agreement and the Plan are referred to collectively as the "Option." d. Tax Status of Option. The option is designated as constituting an -------------------- "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended. SECTION 2. Vesting of Option. The Option vests as to all 3,661 ----------------- shares of Common Stock on September 23, 2003. In addition, the Option immediately vests as to all of the shares of Common Stock in the event of Employee's death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 below). SECTION 3. "Discharge Without Good Cause" and "Change of Control" ----------------------------------------------------- Defined. - ------- a. "Discharge Without Good Cause." For purposes of this Agreement, ---------------------------- "discharge without good cause" shall mean (i) any discharge other than discharge due solely to an act or acts of gross or willful negligence or of intentional wrongdoing or misconduct, which has or have a material adverse effect on Employee's ability to perform the duties of his position or on the good standing, financial condition or profitability of the Company or (ii) any change of control of the Company (as hereinafter defined). b. "Change of Control." For purposes of this Agreement, a "change of ----------------- control" shall mean (1) any merger by the Company with or into another corporation or corporations; (2) any acquisition (by purchase, lease or otherwise) of all or substantially all of the assets of the Company by any person, corporation or other entity or group thereof acting jointly; (3) the acquisition of beneficial ownership, directly or indirectly, of voting securities of the Company (defined as Common Stock of -2- the Company or any securities having voting rights that the Company may issue in the future) and rights to acquire voting securities of the Company (defined as including, without limitation, securities that are convertible into voting securities of the Company (as defined above) and rights, options, warrants and other agreements or arrangements to acquire such voting securities) by any person, corporation or other entity or group thereof acting jointly, in such amount or amounts as would permit such person, corporation or other entity or group thereof acting jointly to elect a majority of the members of the Board of Directors of the Company, as then constituted; or (4) the acquisition of beneficial ownership, directly or indirectly, of voting securities and rights to acquire voting securities having voting power equal to 20% or more of the combined voting power of the Company's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly unless such acquisition as is described in this part (4) is expressly approved by resolution of the Board of Directors of the Company passed upon affirmative vote of not less than a majority thereof and adopted at a meeting of the Board held not later than the date of the next regularly scheduled or special meeting held following the date the Company obtains actual knowledge of such acquisition (which approval may be limited in purpose and effect solely to affecting the rights of Employee under this Agreement). Notwithstanding the preceding sentence, (i) any transaction that involves a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, or a transaction of similar effect, and (ii) any business combination involving solely the Company and Corporate Property Investors which is approved by the Company's Board of Directors shall not constitute a "change of control." SECTION 4. Termination of Option. --------------------- a. Termination for Cause. If Employee's employment is terminated by --------------------- the Company for Cause (as defined in Section 4.2 of the Employee's Employment Agreement of even date herewith), all unexercised rights under the Option shall expire on the date of such termination. b. Other Termination. If, before the Option vests as provided in ----------------- Section 2 above, Employee's employment with the Company terminates for any reason other than death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 above), the Option -3- shall terminate on the date of such termination, and Employee shall have no rights under the Option or this Agreement. SECTION 5. Exercise of Option. ------------------ a. Exercise Period. Employee may exercise the Option to purchase the --------------- vested shares at any time (whether while serving as an employee of the Company or after ceasing to be an employee of the Company), and from time to time (but not as to less than 10 shares at any one time), on and after the date such shares have vested as provided in Section 2 above through and including September 23, 2008 (the "Expiration Date"), notwithstanding that Employee may forfeit the favorable tax treatment afforded the Option if Employee exercises the Option later than three (3) months after such termination. b. Exercise Period - Death or Total Disability. If Employee becomes ------------------------------------------- totally disabled (as defined in Section 5(c) below) or dies either while serving as an employee of the Company or after ceasing to be an employee of the Company, the Option may be exercised with respect to the vested shares by Employee or by the executor, administrator or personal representative of Employee's estate or other person entitled by law to Employee's rights under the Option at any time through and including the Expiration Date. c. "Total Disability" Defined. "Total disability" shall mean a ------------------------- disability that has continued for a period of more than 180 days and has prevented Employee from performing in a usual and proper manner the functions of his position. d. Exercise before the Expiration Date. Notwithstanding any other ----------------------------------- provision of this Agreement, in no event may the Option or any portion of the Option be exercised after September 23, 2008. SECTION 6. Manner of Exercise; Notices. The Option shall be --------------------------- exercised by sending to the Secretary of the Company a written notice of Employee's intention to purchase such shares, specifying the number of shares (but not less than 10 shares at any one time) and the date that the purchase is to occur. Payment of the option price may be made (i) in U.S. dollars in cash or by wire transfer, check, bank draft or money order payable to the Company, (ii) through the delivery of Common Stock or other securities issued by the Company that have a fair market -4- value equal to the option price, or (iii) by a combination of the foregoing. Full payment must be made for all shares to be purchased before the shares will be released to Employee. The exercise notice shall be addressed to the Secretary of the Company at The Rouse Company Building, 10275 Little Patuxent Parkway, Columbia, Maryland 21044, or at such other address as the Company designates in writing to Employee. Any notice to Employee shall be sent to his address as shown in the records of the Company or at such other address as Employee designates in writing to the Company. Any such notice shall be deemed to have been duly given if it is personally delivered or registered and deposited, postage and registry fee prepaid, in a United States Post Office. For purposes of this Section 6, the "fair market value" of any Company securities that are delivered in payment of the option price shall be equal to (i) the last sale price for Company Common Stock or Preferred Stock for the business day immediately preceding the date on which any portion of the Option is exercised as reported on the New York Stock Exchange, or, if Company Common Stock or Preferred Stock is not traded on the New York Stock Exchange, on the exchange on which such Common Stock or Preferred Stock is principally traded, or, if no sale price is reported for such day, the first preceding business day for which a sale price for Common Stock or Preferred Stock is reported, or (ii) the value of any other Company security, as determined by the Chief Financial Officer of the Company in a manner consistent, to the extent possible, with the determination of fair market value of Company Common Stock or Preferred Stock as provided in clause (i). SECTION 7. Reload Option. If, while Employee is employed by the ------------- Company, Employee delivers shares of Common Stock in payment of the option price of the Option, Employee shall be issued a new stock option (the "Reload Option"), under any of The Rouse Company 1997 Stock Incentive Plan, The Rouse Company 1994 Stock Incentive Plan, The Rouse Company 1990 Stock Option Plan or any subsequently adopted Company Stock Incentive or Stock Option Plan (collectively, the "Plans") that has Common Stock available for option grant, upon the following terms: (i) the number of option shares of Common Stock granted under the Reload Option shall be equal to the number of shares of Common Stock that were delivered in payment of the option price of the Option; (ii) the option exercise price of the Reload Option shall be equal to the last sale price, regular way, for Common Stock on the New York Stock Exchange on the day on which the Option was exercised, or, if Common Stock is not then traded on the New York Stock Exchange, on the exchange on which such Common Stock is -5- principally traded; (iii) the Reload Option shall have a term equal to the remaining term of the Option; (iv) the Reload Option shall vest immediately, except that Employee may, in Employee's discretion, specify that a later vesting date shall be included in the stock option agreement for the Reload Option, and (v) the other terms of the Reload Option shall be consistent with the terms of the most recent stock options granted by the Committee. SECTION 8. Tax Provisions. At the request of Employee, the Company -------------- shall retain or accept a sufficient number of shares in connection with the receipt or exercise of the Option or a sale of the underlying shares to satisfy the Company's tax withholding obligations, if any, or Employee's tax liabilities with respect to such transactions. SECTION 9. Adjustments upon Certain Changes in the Common Stock. If, ---------------------------------------------------- after the date of this Agreement and prior to the full exercise of the Option, the Company (without receiving compensation therefor) effects one or more stock splits, stock dividends, recapitalizations or other increases or reductions in the number of shares of its outstanding Common Stock, then, unless the Board of Directors expressly determines otherwise, the number of shares with respect to the unexercised portion of the Option and the per share purchase price shall be adjusted as follows: a. in the event of a net increase in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately increased, and the per share purchase price shall be proportionately reduced; or b. in the event of a net reduction in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately reduced, and the per share purchase price shall be proportionately increased. SECTION 10. Employee's Rights Prior to Issuance of Shares. Employee --------------------------------------------- shall not be, nor shall Employee have any of the rights or privileges of, a stockholder of the Company with regard to any of the shares issuable upon exercise of the Option unless and until a physical stock certificate for such shares has been issued or such shares have been credited to Employee's account under a book entry or comparable system. SECTION 11. Assignment or Transfer. Except for transfer by ---------------------- testamentary instrument or the laws of inheritance, -6- descent and distribution, the Option may not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. SECTION 12. Continued Employment. Employee shall have no duty or -------------------- obligation to remain in the employ of the Company. Nothing in this Agreement shall be deemed to confer upon Employee any right to continue in the employ of the Company or to interfere in any way with the right of the Company to terminate the employment of Employee, which is at will, at any time. SECTION 13. Binding on Successors. This Agreement shall be binding --------------------- upon and inure to the benefit of the Company and Employee and their respective successors, representatives and assigns. SECTION 14. Captions. The captions of this Agreement are for -------- convenience and reference only and in no way define, describe, extend or limit the scope or intent of any of its provisions. SECTION 15. Amendments. This Agreement may only be amended in ---------- writing and with the mutual consent of the Company and Employee. SECTION 16. Applicable Law. This Agreement and any disputes arising -------------- under this Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland and any applicable laws of the United States of America. -7- IN WITNESS WHEREOF the Company and Employee have executed this Agreement as of the day and year first above written. ATTEST: THE ROUSE COMPANY /s/ Bruce I. Rothschild By /s/ Mathias J. DeVito - ------------------------ --------------------------- Bruce I. Rothschild Mathias J. DeVito Secretary Chairman of the Executive Committee of the Board of Directors /s/ Anthony W. Deering ----------------------------- Anthony W. Deering -8- EXHIBIT C-2 1998 GRANT THE ROUSE COMPANY 1997 STOCK INCENTIVE PLAN NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- THIS NONQUALIFIED STOCK OPTION AGREEMENT, effective the 24th day of ---- September, 1998, by and between THE ROUSE COMPANY, a Maryland corporation (the - --------- ---- "Company"), and Anthony W. Deering ("Employee"). BACKGROUND ---------- By action of its Board of Directors and Stockholders, the Company has adopted The Rouse Company 1997 Stock Incentive Plan (the "Plan"), under which the Company may grant stock options and other stock awards to employees of the Company. The Board of Directors has authority (i) to grant stock options to officers and other key employees of the Company and, subject to the provisions of the Plan, to determine the employees to whom and the time or times at which options will be granted, the number of shares to be covered by each option, the period of time and requisite conditions for exercising an option and the terms and provisions of the option agreements and (ii) to determine the fair market value, from time to time, of a share of Common Stock of the Company. THE OPTION ---------- The Board of Directors has determined to grant a nonqualified stock option to Employee, and Employee, by his execution of this Agreement, agrees to accept the nonqualified stock option, subject to the provisions of the Plan and the following terms and conditions: SECTION 1. Grant of Option. --------------- a. Number of Shares. The Company grants to Employee the right and ---------------- option to purchase, subject to the terms and conditions of this Agreement and the Plan, a total of 296,339 -1- shares of Common Stock of the Company, par value one cent ($.01) per share ("Common Stock"). b. Option Price. The purchase price of all such shares of Common ------------ Stock shall be $27.3125 per share, which price is equal to the last sale price, regular way, for Common Stock on September 23, 1998, the business day immediately preceding the date such option was granted, as reported on the New York Stock Exchange. c. "Option" Defined. The option granted hereby and all of Employee's ---------------- rights under this Agreement and the Plan are referred to collectively as the "Option." d. Tax Status of Option. This option is designated as not -------------------- constituting an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended. If, however, there is a change in law that permits all or any portion of the shares granted under this Agreement to be treated as shares granted under an "incentive stock option," the Company (by the Chairman of the Board or Chief Executive Officer of the Company) and Employee may mutually agree that such shares shall be treated as shares granted under an "incentive stock option," and the Company and Employee may amend this Agreement or enter into such other agreements as may be necessary or desirable to provide that such shares shall be treated as shares granted under an "incentive stock option." SECTION 2. Vesting of Option. The Option vests as to 150,000 shares ----------------- of Common Stock on September 23, 2002 and 146,339 shares of Common Stock on September 23, 2003. In addition, the Option immediately vests as to all of the shares of Common Stock in the event of Employee's death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 below). SECTION 3. "Discharge Without Good Cause" and "Change of Control" ----------------------------------------------------- Defined. - ------- a. "Discharge Without Good Cause." For purposes of this Agreement, ---------------------------- "discharge without good cause" shall mean (i) any discharge other than discharge due solely to an act or acts of gross or willful negligence or of intentional wrongdoing or misconduct, which has or have a material adverse effect on Employee's ability to perform the duties of his position or on the good standing, financial condition or profitability of the -2- Company or (ii) any change of control of the Company (as hereinafter defined). b. "Change of Control." For purposes of this Agreement, a "change of ----------------- control" shall mean (1) any merger by the Company with or into another corporation or corporations; (2) any acquisition (by purchase, lease or otherwise) of all or substantially all of the assets of the Company by any person, corporation or other entity or group thereof acting jointly; (3) the acquisition of beneficial ownership, directly or indirectly, of voting securities of the Company (defined as Common Stock of the Company or any securities having voting rights that the Company may issue in the future) and rights to acquire voting securities of the Company (defined as including, without limitation, securities that are convertible into voting securities of the Company (as defined above) and rights, options, warrants and other agreements or arrangements to acquire such voting securities) by any person, corporation or other entity or group thereof acting jointly, in such amount or amounts as would permit such person, corporation or other entity or group thereof acting jointly to elect a majority of the members of the Board of Directors of the Company, as then constituted; or (4) the acquisition of beneficial ownership, directly or indirectly, of voting securities and rights to acquire voting securities having voting power equal to 20% or more of the combined voting power of the Company's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly unless such acquisition as is described in this part (4) is expressly approved by resolution of the Board of Directors of the Company passed upon affirmative vote of not less than a majority thereof and adopted at a meeting of the Board held not later than the date of the next regularly scheduled or special meeting held following the date the Company obtains actual knowledge of such acquisition (which approval may be limited in purpose and effect solely to affecting the rights of Employee under this Agreement). Notwithstanding the preceding sentence, (i) any transaction that involves a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, or a transaction of similar effect, and (ii) any business combination involving solely the Company and Corporate Property Investors which is approved by the Company's Board of Directors shall not constitute a "change of control." SECTION 4. Termination of Option. --------------------- -3- a. Termination for Cause. If Employee's employment is terminated by --------------------- the Company for Cause (as defined in Section 4.2 of the Employee's Employment Agreement of even date herewith), all unexercised rights under the Option shall expire on the date of such termination. b. Other Termination. If, before the Option vests as provided in ----------------- Section 2 above, Employee's employment with the Company terminates for any reason other than death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 above), the Option shall terminate on the date of such termination, and Employee shall have no rights under the Option or this Agreement. SECTION 5. Exercise of Option. ------------------ a. Exercise Period - General. Employee may exercise the Option to ------------------------- purchase the vested shares at any time (whether while serving as an employee of the Company or after ceasing to be an employee of the Company), and from time to time (but not as to less than 10 shares at any one time), on and after the date such shares have vested as provided in Section 2 above through and including September 23, 2008 (the "Expiration Date"). b. Exercise Period - Death or Total Disability. If Employee becomes ------------------------------------------- totally disabled (as defined in Section 5(c) below) or dies either while serving as an employee of the Company or after ceasing to be an employee of the Company, the Option may be exercised with respect to the vested shares by Employee or by the executor, administrator or personal representative of Employee's estate or other person entitled by law to Employee's rights under the Option at any time through and including the Expiration Date. c. "Total Disability" Defined. "Total disability" shall mean a ------------------------- disability that has continued for a period of more than 180 days and has prevented Employee from performing in a usual and proper manner the functions of his position. d. Exercise before the Expiration Date. Notwithstanding any other ----------------------------------- provision of this Agreement, in no event may the Option or any portion of the Option be exercised after September 23, 2008. SECTION 6. Manner of Exercise; Notices. The Option shall be --------------------------- exercised by sending to the Secretary of the Company a -4- written notice of Employee's intention to purchase such shares, specifying the number of shares (but not less than 10 shares at any one time) and the date that the purchase is to occur. Payment of the option price may be made (i) in U.S. dollars in cash or by wire transfer, check, bank draft or money order payable to the Company, (ii) through the delivery of Common Stock or other securities issued by the Company that have a fair market value equal to the option price, or (iii) by a combination of the foregoing. Full payment must be made for all shares to be purchased before the shares will be released to Employee. The exercise notice shall be addressed to the Secretary of the Company at The Rouse Company Building, 10275 Little Patuxent Parkway, Columbia, Maryland 21044, or at such other address as the Company designates in writing to Employee. Any notice to Employee shall be sent to his address as shown in the records of the Company or at such other address as Employee designates in writing to the Company. Any such notice shall be deemed to have been duly given if it is personally delivered or registered and deposited, postage and registry fee prepaid, in a United States Post Office. For purposes of this Section 6, the "fair market value" of any Company securities that are delivered in payment of the option price shall be equal to (i) the last sale price for Company Common Stock or Preferred Stock for the business day immediately preceding the date on which any portion of the Option is exercised as reported on the New York Stock Exchange, or, if Company Common Stock or Preferred Stock is not traded on the New York Stock Exchange, on the exchange on which such Common Stock or Preferred Stock is principally traded, or, if no sale price is reported for such day, the first preceding business day for which a sale price for Common Stock or Preferred Stock is reported, or (ii) the value of any other Company security, as determined by the Chief Financial Officer of the Company in a manner consistent, to the extent possible, with the determination of fair market value of Company Common Stock or Preferred Stock as provided in clause (i). SECTION 7. Reload Option. If, while Employee is employed by the ------------- Company, Employee delivers shares of Common Stock in payment of the option price of the Option, Employee shall be issued a new stock option (the "Reload Option"), under any of The Rouse Company 1997 Stock Incentive Plan, The Rouse Company 1994 Stock Incentive Plan, The Rouse Company 1990 Stock Option Plan or any subsequently adopted Company Stock Incentive or Stock Option Plan (collectively, the "Plans") that has Common Stock available for option grant, upon the following terms: (i) the number of option shares of Common Stock granted under the Reload Option -5- shall be equal to the number of shares of Common Stock that were delivered in payment of the option price of the Option; (ii) the option exercise price of the Reload Option shall be equal to the last sale price, regular way, for Common Stock on the New York Stock Exchange on the day on which the Option was exercised, or, if Common Stock is not then traded on the New York Stock Exchange, on the exchange on which such Common Stock is principally traded; (iii) the Reload Option shall have a term equal to the remaining term of the Option; (iv) the Reload Option shall vest immediately, except that Employee may, in Employee's discretion, specify that a later vesting date shall be included in the stock option agreement for the Reload Option, and (v) the other terms of the Reload Option shall be consistent with the terms of the most recent stock options granted by the Committee. SECTION 8. Tax Provisions. At the request of Employee, the Company -------------- shall retain or accept a sufficient number of shares in connection with the receipt or exercise of the Option or a sale of the underlying shares to satisfy the Company's tax withholding obligations, if any, or Employee's tax liabilities with respect to such transactions. SECTION 9. Adjustments upon Certain Changes in the Common Stock. If, ---------------------------------------------------- after the date of this Agreement and prior to the full exercise of the Option, the Company (without receiving compensation therefor) effects one or more stock splits, stock dividends, recapitalizations or other increases or reductions in the number of shares of its outstanding Common Stock, then, unless the Board of Directors expressly determines otherwise, the number of shares with respect to the unexercised portion of the Option and the per share purchase price shall be adjusted as follows: a. in the event of a net increase in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately increased, and the per share purchase price shall be proportionately reduced; or b. in the event of a net reduction in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately reduced, and the per share purchase price shall be proportionately increased. SECTION 10. Employee's Rights Prior to Issuance of Shares. Employee --------------------------------------------- shall not be, nor shall Employee have any of the rights or privileges of, a stockholder of the Company with -6- regard to any of the shares issuable upon exercise of the Option unless and until a physical stock certificate for such shares has been issued or such shares have been credited to Employee's account under a book entry or comparable system. SECTION 11. Assignment or Transfer. The Option may not be ---------------------- transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) (i) except that the Option may be transferred, assigned, pledged or hypothecated, in whole or in part to any member of the immediate family of Employee (i.e., any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including any adoptive relationships) or to any trust, partnership, corporation or other entity for the benefit of any member of the immediate family of Employee and (ii) except for transfer by testamentary instrument or the laws of inheritance, descent and distribution. The Option shall not be subject to execution, attachment or similar process. SECTION 12. Continued Employment. Employee shall have no duty or -------------------- obligation to remain in the employ of the Company. Nothing in this Agreement shall be deemed to confer upon Employee any right to continue in the employ of the Company or to interfere in any way with the right of the Company to terminate the employment of Employee, which is at will, at any time. SECTION 13. Binding on Successors. This Agreement shall be binding --------------------- upon and inure to the benefit of the Company and Employee and their respective successors, representatives and assigns. SECTION 14. Captions. The captions of this Agreement are for -------- convenience and reference only and in no way define, describe, extend or limit the scope or intent of any of its provisions. SECTION 15. Amendments. This Agreement may only be amended in ---------- writing and with the mutual consent of the Company and Employee. SECTION 16. Applicable Law. This Agreement and any disputes arising -------------- under this Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland and any applicable laws of the United States of America. -7- IN WITNESS WHEREOF the Company and Employee have executed this Agreement as of the day and year first above written. ATTEST: THE ROUSE COMPANY /s/ Bruce I. Rothschil By /s/ Mathias J. DeVito - ----------------------------- ---------------------------- Bruce I. Rothschild Mathias J. DeVito Secretary Chairman of the Executive Committee of the Board of Directors /s/ Anthony W. Deering ------------------------------ Anthony W. Deering -8- EXHIBIT D-1 ACCELERATED GRANT-- REVISED THE ROUSE COMPANY 1997 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT -------------------------------- THIS INCENTIVE STOCK OPTION AGREEMENT, effective the 24th day of September, 1998, by and between THE ROUSE COMPANY, a Maryland corporation (the "Company"), and Anthony W. Deering ("Employee"). BACKGROUND ---------- By action of its Board of Directors and Stockholders, the Company has adopted The Rouse Company 1997 Stock Incentive Plan (the "Plan"), under which the Company may grant stock options and other stock awards to employees of the Company. The Board of Directors has authority (i) to grant stock options to officers and other key employees of the Company and, subject to the provisions of the Plan, to determine the employees to whom and the time or times at which options will be granted, the number of shares to be covered by each option, the period of time and requisite conditions for exercising an option and the terms and provisions of the option agreements and (ii) to determine the fair market value, from time to time, of a share of Common Stock of the Company. THE OPTION ---------- The Board of Directors has determined to grant a stock option to Employee, and Employee, by his execution of this Agreement, agrees to accept the stock option, subject to the provisions of the Plan and the following terms and conditions: SECTION 1. Grant of Option. --------------- a. Number of Shares. The Company grants to Employee the right and ---------------- option to purchase, subject to the terms and conditions of this Agreement and the Plan, a total of 3,051 shares of Common Stock of the Company, par value one cent ($.01) per share ("Common Stock"), which shares are designated as shares granted under an incentive stock option (as that term is described in Section 1(d) below). b. Option Price. The purchase price of all such shares of Common ------------ Stock shall be $32.77 per share. c. "Option" Defined. The option granted hereby and all of Employee's ---------------- rights under this Agreement and the Plan are referred to collectively as the "Option." d. Tax Status of Option. The option is designated as constituting an -------------------- "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended. SECTION 2. Vesting of Option. The Option vests as to all 3,051 ----------------- shares of Common Stock on February 25, 2004. In addition, the Option immediately vests as to all of the shares of Common Stock in the event of Employee's death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 below). SECTION 3. "Discharge Without Good Cause" and "Change of Control" ----------------------------------------------------- Defined. - ------- a. "Discharge Without Good Cause." For purposes of this Agreement, ---------------------------- "discharge without good cause" shall mean (i) any discharge other than discharge due solely to an act or acts of gross or willful negligence or of intentional wrongdoing or misconduct, which has or have a material adverse effect on Employee's ability to perform the duties of his position or on the good standing, financial condition or profitability of the Company or (ii) any change of control of the Company (as hereinafter defined). b. "Change of Control." For purposes of this Agreement, a "change of ----------------- control" shall mean (1) any merger by the Company with or into another corporation or corporations; (2) any acquisition (by purchase, lease or otherwise) of all or substantially all of the assets of the Company by any person, corporation or other entity or group thereof acting jointly; (3) the acquisition of beneficial ownership, directly or indirectly, of voting securities of the Company (defined as Common Stock of the Company or any securities having voting rights that the Company may issue in the future) and rights to acquire voting securities of the Company (defined as including, without -2- limitation, securities that are convertible into voting securities of the Company (as defined above) and rights, options, warrants and other agreements or arrangements to acquire such voting securities) by any person, corporation or other entity or group thereof acting jointly, in such amount or amounts as would permit such person, corporation or other entity or group thereof acting jointly to elect a majority of the members of the Board of Directors of the Company, as then constituted; or (4) the acquisition of beneficial ownership, directly or indirectly, of voting securities and rights to acquire voting securities having voting power equal to 20% or more of the combined voting power of the Company's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly unless such acquisition as is described in this part (4) is expressly approved by resolution of the Board of Directors of the Company passed upon affirmative vote of not less than a majority thereof and adopted at a meeting of the Board held not later than the date of the next regularly scheduled or special meeting held following the date the Company obtains actual knowledge of such acquisition (which approval may be limited in purpose and effect solely to affecting the rights of Employee under this Agreement). Notwithstanding the preceding sentence, (i) any transaction that involves a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, or a transaction of similar effect, and (ii) any business combination involving solely the Company and Corporate Property Investors which is approved by the Company's Board of Directors shall not constitute a "change of control." SECTION 4. Termination of Option. --------------------- a. Termination for Cause. If Employee's employment is terminated by --------------------- the Company for Cause (as defined in Section 4.2 of the Employee's Employment Agreement of even date herewith), all unexercised rights under the Option shall expire on the date of such termination. b. Other Termination. If, before the Option vests as provided in ----------------- Section 2 above, Employee's employment with the Company terminates for any reason other than death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 above), the Option shall terminate on the date of such termination, and Employee shall have no rights under the Option or this Agreement. -3- SECTION 5. Exercise of Option. ------------------ a. Exercise Period. Employee may exercise the Option to purchase the --------------- vested shares at any time (whether while serving as an employee of the Company or after ceasing to be an employee of the Company), and from time to time (but not as to less than 10 shares at any one time), on and after the date such shares have vested as provided in Section 2 above through and including September 23, 2008 (the "Expiration Date"), notwithstanding that Employee may forfeit the favorable tax treatment afforded the Option if Employee exercises the Option later than three (3) months after such termination. b. Exercise Period - Death or Total Disability. If Employee becomes ------------------------------------------- totally disabled (as defined in Section 5(c) below) or dies either while serving as an employee of the Company or after ceasing to be an employee of the Company, the Option may be exercised with respect to the vested shares by Employee or by the executor, administrator or personal representative of Employee's estate or other person entitled by law to Employee's rights under the Option at any time through and including the Expiration Date. c. "Total Disability" Defined. "Total disability" shall mean a ------------------------- disability that has continued for a period of more than 180 days and has prevented Employee from performing in a usual and proper manner the functions of his position. d. Exercise before the Expiration Date. Notwithstanding any other ----------------------------------- provision of this Agreement, in no event may the Option or any portion of the Option be exercised after September 23, 2008. SECTION 6. Manner of Exercise; Notices. The Option shall be --------------------------- exercised by sending to the Secretary of the Company a written notice of Employee's intention to purchase such shares, specifying the number of shares (but not less than 10 shares at any one time) and the date that the purchase is to occur. Payment of the option price may be made (i) in U.S. dollars in cash or by wire transfer, check, bank draft or money order payable to the Company, (ii) through the delivery of Common Stock or other securities issued by the Company that have a fair market value equal to the option price, or (iii) by a combination of the foregoing. Full payment must be made for all shares to be purchased before the shares will be released to Employee. The -4- exercise notice shall be addressed to the Secretary of the Company at The Rouse Company Building, 10275 Little Patuxent Parkway, Columbia, Maryland 21044, or at such other address as the Company designates in writing to Employee. Any notice to Employee shall be sent to his address as shown in the records of the Company or at such other address as Employee designates in writing to the Company. Any such notice shall be deemed to have been duly given if it is personally delivered or registered and deposited, postage and registry fee prepaid, in a United States Post Office. For purposes of this Section 6, the "fair market value" of any Company securities that are delivered in payment of the option price shall be equal to (i) the last sale price for Company Common Stock or Preferred Stock for the business day immediately preceding the date on which any portion of the Option is exercised as reported on the New York Stock Exchange, or, if Company Common Stock or Preferred Stock is not traded on the New York Stock Exchange, on the exchange on which such Common Stock or Preferred Stock is principally traded, or, if no sale price is reported for such day, the first preceding business day for which a sale price for Common Stock or Preferred Stock is reported, or (ii) the value of any other Company security, as determined by the Chief Financial Officer of the Company in a manner consistent, to the extent possible, with the determination of fair market value of Company Common Stock or Preferred Stock as provided in clause (i). SECTION 7. Reload Option. If, while Employee is employed by the ------------- Company, Employee delivers shares of Common Stock in payment of the option price of the Option, Employee shall be issued a new stock option (the "Reload Option"), under any of The Rouse Company 1997 Stock Incentive Plan, The Rouse Company 1994 Stock Incentive Plan, The Rouse Company 1990 Stock Option Plan or any subsequently adopted Company Stock Incentive or Stock Option Plan (collectively, the "Plans") that has Common Stock available for option grant, upon the following terms: (i) the number of option shares of Common Stock granted under the Reload Option shall be equal to the number of shares of Common Stock that were delivered in payment of the option price of the Option; (ii) the option exercise price of the Reload Option shall be equal to the last sale price, regular way, for Common Stock on the New York Stock Exchange on the day on which the Option was exercised, or, if Common Stock is not then traded on the New York Stock Exchange, on the exchange on which such Common Stock is principally traded; (iii) the Reload Option shall have a term equal to the remaining term of the Option; (iv) the Reload Option shall vest immediately, except that Employee may, in Employee's -5- discretion, specify that a later vesting date shall be included in the stock option agreement for the Reload Option, and (v) the other terms of the Reload Option shall be consistent with the terms of the most recent stock options granted by the Committee. SECTION 8. Tax Provisions. At the request of Employee, the Company -------------- shall retain or accept a sufficient number of shares in connection with the receipt or exercise of the Option or a sale of the underlying shares to satisfy the Company's tax withholding obligations, if any, or Employee's tax liabilities with respect to such transactions. SECTION 9. Adjustments upon Certain Changes in the Common Stock. If, ---------------------------------------------------- after the date of this Agreement and prior to the full exercise of the Option, the Company (without receiving compensation therefor) effects one or more stock splits, stock dividends, recapitalizations or other increases or reductions in the number of shares of its outstanding Common Stock, then, unless the Board of Directors expressly determines otherwise, the number of shares with respect to the unexercised portion of the Option and the per share purchase price shall be adjusted as follows: a. in the event of a net increase in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately increased, and the per share purchase price shall be proportionately reduced; or b. in the event of a net reduction in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately reduced, and the per share purchase price shall be proportionately increased. SECTION 10. Employee's Rights Prior to Issuance of Shares. Employee --------------------------------------------- shall not be, nor shall Employee have any of the rights or privileges of, a stockholder of the Company with regard to any of the shares issuable upon exercise of the Option unless and until a physical stock certificate for such shares has been issued or such shares have been credited to Employee's account under a book entry or comparable system. SECTION 11. Assignment or Transfer. Except for transfer by ---------------------- testamentary instrument or the laws of inheritance, descent and distribution, the Option may not be transferred, assigned, pledged or hypothecated in any way (whether by -6- operation of law or otherwise) and shall not be subject to execution, attachment or similar process. SECTION 12. Continued Employment. Employee shall have no duty or -------------------- obligation to remain in the employ of the Company. Nothing in this Agreement shall be deemed to confer upon Employee any right to continue in the employ of the Company or to interfere in any way with the right of the Company to terminate the employment of Employee, which is at will, at any time. SECTION 13. Binding on Successors. This Agreement shall be binding --------------------- upon and inure to the benefit of the Company and Employee and their respective successors, representatives and assigns. SECTION 14. Captions. The captions of this Agreement are for -------- convenience and reference only and in no way define, describe, extend or limit the scope or intent of any of its provisions. SECTION 15. Amendments. This Agreement may only be amended in ---------- writing and with the mutual consent of the Company and Employee. SECTION 16. Applicable Law. This Agreement and any disputes arising -------------- under this Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland and any applicable laws of the United States of America. -7- IN WITNESS WHEREOF the Company and Employee have executed this Agreement as of the day and year first above written. ATTEST: THE ROUSE COMPANY /s/ Bruce I. Rothschild By /s/ Mathias J. DeVito ---------------------------- ------------------------- Bruce I. Rothschild Mathias J. DeVito Secretary Chairman of the Executive Committee of the Board of Directors /s/ Anthony W. Deering ---------------------------- Anthony W. Deering -8- EXHIBIT D-2 ACCELERATED GRANT-- REVISED THE ROUSE COMPANY 1997 STOCK INCENTIVE PLAN NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- THIS NONQUALIFIED STOCK OPTION AGREEMENT, effective the 24th day of September, 1998, by and between THE ROUSE COMPANY, a Maryland corporation (the "Company"), and Anthony W. Deering ("Employee"). BACKGROUND ---------- By action of its Board of Directors and Stockholders, the Company has adopted The Rouse Company 1997 Stock Incentive Plan (the "Plan"), under which the Company may grant stock options and other stock awards to employees of the Company. The Board of Directors has authority (i) to grant stock options to officers and other key employees of the Company and, subject to the provisions of the Plan, to determine the employees to whom and the time or times at which options will be granted, the number of shares to be covered by each option, the period of time and requisite conditions for exercising an option and the terms and provisions of the option agreements and (ii) to determine the fair market value, from time to time, of a share of Common Stock of the Company. THE OPTION ---------- The Board of Directors has determined to grant a nonqualified stock option to Employee, and Employee, by his execution of this Agreement, agrees to accept the nonqualified stock option, subject to the provisions of the Plan and the following terms and conditions: SECTION 1. Grant of Option. --------------- a. Number of Shares. The Company grants to Employee the right and ---------------- option to purchase, subject to the terms and conditions of this Agreement and the Plan, a total of 296,949 shares of Common Stock of the Company, par value one cent ($.01) per share ("Common Stock"). b. Option Price. The purchase price of all such shares of Common ------------ Stock shall be $32.77 per share. c. "Option" Defined. The option granted hereby and all of Employee's ---------------- rights under this Agreement and the Plan are referred to collectively as the "Option." d. Tax Status of Option. This option is designated as not -------------------- constituting an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended. If, however, there is a change in law that permits all or any portion of the shares granted under this Agreement to be treated as shares granted under an "incentive stock option," the Company (by the Chairman of the Board or Chief Executive Officer of the Company) and Employee may mutually agree that such shares shall be treated as shares granted under an "incentive stock option," and the Company and Employee may amend this Agreement or enter into such other agreements as may be necessary or desirable to provide that such shares shall be treated as shares granted under an "incentive stock option." SECTION 2. Vesting of Option. The Option vests as to 75,000 shares ----------------- of Common Stock on February 25, 2001, February 25, 2002 and February 25, 2003 and as to 71,949 shares on February 25, 2004. In addition, the Option immediately vests as to all of the shares of Common Stock in the event of Employee's death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 below). SECTION 3. "Discharge Without Good Cause" and "Change of Control" ----------------------------------------------------- Defined. - ------- a. "Discharge Without Good Cause." For purposes of this Agreement, ---------------------------- "discharge without good cause" shall mean (i) any discharge other than discharge due solely to an act or acts of gross or willful negligence or of intentional wrongdoing or misconduct, which has or have a material adverse effect on Employee's ability to perform the duties of his position or on the good standing, financial condition or profitability of the Company or (ii) any change of control of the Company (as hereinafter defined). -2- b. "Change of Control." For purposes of this Agreement, a "change of ----------------- control" shall mean (1) any merger by the Company with or into another corporation or corporations; (2) any acquisition (by purchase, lease or otherwise) of all or substantially all of the assets of the Company by any person, corporation or other entity or group thereof acting jointly; (3) the acquisition of beneficial ownership, directly or indirectly, of voting securities of the Company (defined as Common Stock of the Company or any securities having voting rights that the Company may issue in the future) and rights to acquire voting securities of the Company (defined as including, without limitation, securities that are convertible into voting securities of the Company (as defined above) and rights, options, warrants and other agreements or arrangements to acquire such voting securities) by any person, corporation or other entity or group thereof acting jointly, in such amount or amounts as would permit such person, corporation or other entity or group thereof acting jointly to elect a majority of the members of the Board of Directors of the Company, as then constituted; or (4) the acquisition of beneficial ownership, directly or indirectly, of voting securities and rights to acquire voting securities having voting power equal to 20% or more of the combined voting power of the Company's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly unless such acquisition as is described in this part (4) is expressly approved by resolution of the Board of Directors of the Company passed upon affirmative vote of not less than a majority thereof and adopted at a meeting of the Board held not later than the date of the next regularly scheduled or special meeting held following the date the Company obtains actual knowledge of such acquisition (which approval may be limited in purpose and effect solely to affecting the rights of Employee under this Agreement). Notwithstanding the preceding sentence, (i) any transaction that involves a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended, or a transaction of similar effect, and (ii) any business combination involving solely the Company and Corporate Property Investors which is approved by the Company's Board of Directors shall not constitute a "change of control." SECTION 4. Termination of Option. --------------------- a. Termination for Cause. If Employee's employment is terminated by --------------------- the Company for Cause (as defined in Section 4.2 of -3- the Employee's Employment Agreement of even date herewith), all unexercised rights under the Option shall expire on the date of such termination. b. Other Termination. If, before the Option vests as provided in ----------------- Section 2 above, Employee's employment with the Company terminates for any reason other than death, total disability (as defined in Section 5(c) below) or discharge without good cause (as defined in Section 3 above), the Option shall terminate on the date of such termination, and Employee shall have no rights under the Option or this Agreement. SECTION 5. Exercise of Option. ------------------ a. Exercise Period - General. Employee may exercise the Option to ------------------------- purchase the vested shares at any time (whether while serving as an employee of the Company or after ceasing to be an employee of the Company), and from time to time (but not as to less than 10 shares at any one time), on and after the date such shares have vested as provided in Section 2 above through and including September 23, 2008 (the "Expiration Date"). b. Exercise Period - Death or Total Disability. If Employee becomes ------------------------------------------- totally disabled (as defined in Section 5(c) below) or dies either while serving as an employee of the Company or after ceasing to be an employee of the Company, the Option may be exercised with respect to the vested shares by Employee or by the executor, administrator or personal representative of Employee's estate or other person entitled by law to Employee's rights under the Option at any time through and including the Expiration Date. c. "Total Disability" Defined. "Total disability" shall mean a ------------------------- disability that has continued for a period of more than 180 days and has prevented Employee from performing in a usual and proper manner the functions of his position. d. Exercise before the Expiration Date. Notwithstanding any other ----------------------------------- provision of this Agreement, in no event may the Option or any portion of the Option be exercised after September 23, 2008. SECTION 6. Manner of Exercise; Notices. The Option shall be --------------------------- exercised by sending to the Secretary of the Company a written notice of Employee's intention to purchase such shares, -4- specifying the number of shares (but not less than 10 shares at any one time) and the date that the purchase is to occur. Payment of the option price may be made (i) in U.S. dollars in cash or by wire transfer, check, bank draft or money order payable to the Company, (ii) through the delivery of Common Stock or other securities issued by the Company that have a fair market value equal to the option price, or (iii) by a combination of the foregoing. Full payment must be made for all shares to be purchased before the shares will be released to Employee. The exercise notice shall be addressed to the Secretary of the Company at The Rouse Company Building, 10275 Little Patuxent Parkway, Columbia, Maryland 21044, or at such other address as the Company designates in writing to Employee. Any notice to Employee shall be sent to his address as shown in the records of the Company or at such other address as Employee designates in writing to the Company. Any such notice shall be deemed to have been duly given if it is personally delivered or registered and deposited, postage and registry fee prepaid, in a United States Post Office. For purposes of this Section 6, the "fair market value" of any Company securities that are delivered in payment of the option price shall be equal to (i) the last sale price for Company Common Stock or Preferred Stock for the business day immediately preceding the date on which any portion of the Option is exercised as reported on the New York Stock Exchange, or, if Company Common Stock or Preferred Stock is not traded on the New York Stock Exchange, on the exchange on which such Common Stock or Preferred Stock is principally traded, or, if no sale price is reported for such day, the first preceding business day for which a sale price for Common Stock or Preferred Stock is reported, or (ii) the value of any other Company security, as determined by the Chief Financial Officer of the Company in a manner consistent, to the extent possible, with the determination of fair market value of Company Common Stock or Preferred Stock as provided in clause (i). SECTION 7. Reload Option. If, while Employee is employed by the ------------- Company, Employee delivers shares of Common Stock in payment of the option price of the Option, Employee shall be issued a new stock option (the "Reload Option"), under any of The Rouse Company 1997 Stock Incentive Plan, The Rouse Company 1994 Stock Incentive Plan, The Rouse Company 1990 Stock Option Plan or any subsequently adopted Company Stock Incentive or Stock Option Plan (collectively, the "Plans") that has Common Stock available for option grant, upon the following terms: (i) the number of option shares of Common Stock granted under the Reload Option -5- shall be equal to the number of shares of Common Stock that were delivered in payment of the option price of the Option; (ii) the option exercise price of the Reload Option shall be equal to the last sale price, regular way, for Common Stock on the New York Stock Exchange on the day on which the Option was exercised, or, if Common Stock is not then traded on the New York Stock Exchange, on the exchange on which such Common Stock is principally traded; (iii) the Reload Option shall have a term equal to the remaining term of the Option; (iv) the Reload Option shall vest immediately, except that Employee may, in Employee's discretion, specify that a later vesting date shall be included in the stock option agreement for the Reload Option, and (v) the other terms of the Reload Option shall be consistent with the terms of the most recent stock options granted by the Committee. SECTION 8. Tax Provisions. At the request of Employee, the Company -------------- shall retain or accept a sufficient number of shares in connection with the receipt or exercise of the Option or a sale of the underlying shares to satisfy the Company's tax withholding obligations, if any, or Employee's tax liabilities with respect to such transactions. SECTION 9. Adjustments upon Certain Changes in the Common Stock. If, ---------------------------------------------------- after the date of this Agreement and prior to the full exercise of the Option, the Company (without receiving compensation therefor) effects one or more stock splits, stock dividends, recapitalizations or other increases or reductions in the number of shares of its outstanding Common Stock, then, unless the Board of Directors expressly determines otherwise, the number of shares with respect to the unexercised portion of the Option and the per share purchase price shall be adjusted as follows: a. in the event of a net increase in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately increased, and the per share purchase price shall be proportionately reduced; or b. in the event of a net reduction in the number of shares of its outstanding Common Stock, the number of shares shall be proportionately reduced, and the per share purchase price shall be proportionately increased. SECTION 10. Employee's Rights Prior to Issuance of Shares. Employee --------------------------------------------- shall not be, nor shall Employee have any of -6- the rights or privileges of, a stockholder of the Company with regard to any of the shares issuable upon exercise of the Option unless and until a physical stock certificate for such shares has been issued or such shares have been credited to Employee's account under a book entry or comparable system. SECTION 11. Assignment or Transfer. The Option may not be ---------------------- transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) (i) except that the Option may be transferred, assigned, pledged or hypothecated, in whole or in part to any member of the immediate family of Employee (i.e., any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including any adoptive relationships) or to any trust, partnership, corporation or other entity for the benefit of any member of the immediate family of Employee and (ii) except for transfer by testamentary instrument or the laws of inheritance, descent and distribution. The Option shall not be subject to execution, attachment or similar process. SECTION 12. Continued Employment. Employee shall have no duty or -------------------- obligation to remain in the employ of the Company. Nothing in this Agreement shall be deemed to confer upon Employee any right to continue in the employ of the Company or to interfere in any way with the right of the Company to terminate the employment of Employee, which is at will, at any time. SECTION 13. Binding on Successors. This Agreement shall be binding --------------------- upon and inure to the benefit of the Company and Employee and their respective successors, representatives and assigns. SECTION 14. Captions. The captions of this Agreement are for -------- convenience and reference only and in no way define, describe, extend or limit the scope or intent of any of its provisions. SECTION 15. Amendments. This Agreement may only be amended in ---------- writing and with the mutual consent of the Company and Employee. SECTION 16. Applicable Law. This Agreement and any disputes arising -------------- under this Agreement shall be governed by, and -7- construed in accordance with, the laws of the State of Maryland and any applicable laws of the United States of America. IN WITNESS WHEREOF the Company and Employee have executed this Agreement as of the day and year first above written. ATTEST: THE ROUSE COMPANY /s/ Bruce I. Rothschild By /s/ Mathias J. DeVito ----------------------- ---------------------------- Bruce I. Rothschild Mathias J. DeVito Secretary Chairman of the Executive Committee of the Board of Directors /s/ Anthony W. Deering ------------------------------ Anthony W. Deering -8- EX-12.1 4 EXHIBIT 12.1 Exhibit 12.1 The Rouse Company and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (dollars in thousands)
Year ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Earnings before income taxes, extraordinary items and cumulative effect of change in accounting principle $105,152 $ 73,826 $ 43,605 $ 10,169 $ 13,336 Fixed charges: Interest costs 229,478 231,098 230,960 219,838 220,971 Capitalized interest (19,914) (23,608) (10,579) (6,875) (7,388) Amortization of debt issuance costs 1,424 1,645 2,066 2,527 2,146 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 12,719 1,204 -- Portion of rental expense representative of interest factor (1) 6,943 7,949 8,487 8,266 10,788 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- -- Adjustments to earnings: Minority interest in earnings of majority-owned subsidiaries having fixed charges 2,270 3,178 1,164 2,026 2,234 Undistributed earnings of less than 50%-owned subsidiaries (2) (41,881) (34) (88) (189) (564) Previously capitalized interest amortized into earnings: Depreciation of operating properties (3) 4,192 3,962 3,866 3,764 3,670 Cost of land sales (4) -- 5,025 1,778 1,421 1,580 -------- -------- -------- -------- -------- Earnings available for fixed charges $300,383 $315,760 $293,978 $242,151 $246,773 ======== ======== ======== ======== ======== Fixed charges: Interest costs $229,478 $231,098 $230,960 $219,838 $220,971 Amortization of debt issuance costs 1,424 1,645 2,066 2,527 2,146 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 12,719 1,204 -- Portion of rental expense representative of interest factor (1) 6,943 7,949 8,487 8,266 10,788 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- -- -------- -------- -------- -------- -------- Total fixed charges $250,564 $253,411 $254,232 $231,835 $233,905 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.20 1.25 1.16 1.04 1.06 ======== ======== ======== ======== ========
(1) Includes (a) 80% of minimum rentals, the portion of such rentals considered to be a reasonable estimate of the interest factor and (b) 100% of contingent rentals of $2,330,000, $3,158,000, $3,844,000, $3,644,000, and $6,232,000 for the years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (2) Includes undistributed earnings of certain unconsolidated real estate ventures, formed December 31, 1997, in which the Company holds substantially all (at least 98%) of the financial interest but does not own a majority voting interest. The Company's share of undistributed earnings of these ventures was $41,720,000 in 1998. (3) Represents an estimate of depreciation of capitalized interest costs based on the Company's established depreciation policy and an analysis of interest costs capitalized since 1971. Exhibit 12.1, continued The Rouse Company and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (4) Represents 10% of the cost of Columbia land sales and 5% of the cost of Summerlin land sales, the portions of such costs considered to be reasonable estimates of the interest factor prior to 1998. On December 31, 1997 certain wholly owned subsidiaries, including those that conducted substantially all of the Company's land sales and community development activities, issued 91% of their voting common stock to The Rouse Company Incentive Compensation Statutory Trust. These sales were made at fair value and as part of the Company's plan to meet the qualifications for REIT status. The Company retained the remaining voting stock of the ventures and holds shares of nonvoting common and/or preferred stock which, taken together, comprise substantially all (at least 98%) of the financial interest in them. As a result of its disposition of the majority voting interests in the ventures, the Company began accounting for its investment in them using the equity method effective December 31, 1997. Accordingly, the period after December 31, 1997 includes no adjustment for the interest portion of the cost of land sales. EX-12.2 5 EXHIBIT 12.2 Exhibit 12.2 The Rouse Company and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (dollars in thousands)
Year ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Earnings before income taxes, extraordinary items and cumulative effect of change in accounting principle $105,152 $ 73,826 $ 43,605 $ 10,169 $ 13,336 Fixed charges: Interest costs 229,478 231,098 230,960 219,838 220,971 Capitalized interest (19,914) (23,608) (10,579) (6,875) (7,388) Amortization of debt issuance costs 1,424 1,645 2,066 2,527 2,146 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 12,719 1,204 -- Portion of rental expense representative of interest factor (1) 6,943 7,949 8,487 8,266 10,788 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- -- Adjustments to earnings: Minority interest in earnings of majority-owned subsidiaries having fixed charges 2,270 3,178 1,164 2,026 2,234 Undistributed earnings of less than 50%-owned subsidiaries (2) (41,881) (34) (88) (189) (564) Previously capitalized interest amortized into earnings: Depreciation of operating properties (3) 4,192 3,962 3,866 3,764 3,670 Cost of land sales (4) -- 5,025 1,778 1,421 1,580 -------- -------- -------- -------- -------- Earnings available for fixed charges and Preferred Stock dividend requirements $300,383 $315,760 $293,978 $242,151 $246,773 ======== ======== ======== ======== ======== Combined fixed charges and Preferred Stock dividend requirements: Interest costs $229,478 $231,098 $230,960 $219,838 $220,971 Amortization of debt expense 1,424 1,645 2,066 2,527 2,146 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 12,719 1,204 -- Portion of rental expense representative of interest factor (1) 6,943 7,949 8,487 8,266 10,788 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- -- Preferred Stock dividend requirements (5) 12,152 10,313 17,555 24,402 21,802 -------- -------- -------- -------- -------- Total combined fixed charges and Preferred stock dividend requirements $262,716 $263,724 $271,787 $256,237 $255,707 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and Preferred stock dividend requirements (6) 1.14 1.20 1.08 -- -- ======== ======== ======== ======== ========
(1) Includes (a) 80% of minimum rentals, the portion of such rentals considered to be a reasonable estimate of the interest factor and (b) 100% of contingent rentals of $2,330,000, $3,158,000, $3,844,000, $3,644,000, and $6,232,000 for the years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively. (2) Includes undistributed earnings of certain unconsolidated real estate ventures, formed December 31, 1997, in which the Company holds substantially all (at least 98%) of the financial interest but does not own a majority voting interest. The Company's share of undistributed earnings of these ventures was $41,720,000 in 1998. Exhibit 12.2, continued The Rouse Company and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (3) Represents an estimate of depreciation of capitalized interest costs based on the Company's established depreciation policy and an analysis of interest costs capitalized since 1971. (4) Represents 10% of the cost of Columbia land sales and 5% of cost of Summerlin land sales, the portions of such costs considered to be reasonable estimates of the interest factor prior to 1998. On December 31, 1997 certain wholly owned subsidiaries, including those that conducted substantially all of the Company's land sales and community development activities, issued 91% of their voting common stock to The Rouse Company Incentive Compensation Statutory Trust. These sales were made at fair value and as part of the Company's plan to meet the qualifications for REIT status. The Company retained the remaining voting stock of the ventures and holds shares of nonvoting common and/or preferred stock which, taken together, comprise substantially all (at least 98%) of the financial interest in them. As a result of its disposition of the majority voting interests in the ventures, the Company began accounting for its investment in them using the equity method effective December 31, 1997. Accordingly, the period after December 31, 1997 includes no adjustment for the interest portion of the cost of land sales. (5) Represents estimated pre-tax earnings required to cover Preferred stock dividend requirements. Amounts are calculated based on actual Preferred stock dividends and an estimated effective tax rate of 0% for the years ended December 31, 1998 and 1997. Amounts are calculated based on actual Preferred stock dividends and an estimated effective tax rate of 40% for the years ended December 31, 1996, 1995 and 1994. The Company will elect to be taxed as a REIT beginning in 1998. Management believes that the Company met the qualifications for REIT status as of December 31, 1998, intends for it to continue to meet the qualifications in the future and does not expect the Company will be liable for income taxes or significant taxes on "built- in gains" on its assets at the Federal level or in most states in future years. Accordingly, the Company eliminated substantially all of its existing deferred tax assets and liabilities at December 31, 1997 and does not expect to provide for Federal or most state deferred income taxes in 1998 or future years. (6) Total combined fixed charges and Preferred stock dividend requirements exceeded the Company's earnings available for combined fixed charges and Preferred stock dividend requirements by $14,086,000, and $8,934,000 for the years ended December 31, 1995 and 1994, respectively. EX-13 6 EXHIBIT 13 The Rouse Company and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (in thousands, except share data)
1998 1997 ----------- ----------- ASSETS Property (notes 4 and 7): Operating properties: Property and deferred costs of projects............................. $ 4,718,727 $ 3,079,962 Less accumulated depreciation and amortization...................... 578,311 515,229 ---------- ---------- 4,140,416 2,564,733 Properties in development............................................... 167,360 232,349 Properties held for sale................................................ 165,894 20,052 ---------- ---------- Total property...................................................... 4,473,670 2,817,134 Investments in and advances to unconsolidated real estate ventures (notes 3 and 7).................................... 322,066 338,692 Prepaid expenses, receivables under finance leases and other assets (note 15).................................................. 241,040 228,956 Accounts and notes receivable (note 5)....................................... 75,917 114,300 Investments in marketable securities......................................... 4,256 3,586 Cash and cash equivalents.................................................... 37,694 87,100 ----------- ----------- TOTAL................................................................... $ 5,154,643 $ 3,589,768 =========== ===========
The accompanying notes are an integral part of these statements. 4
1998 1997 ------------ ----------- LIABILITIES Debt (note 7): Property debt not carrying a Parent Company guarantee of repayment................. $2,923,119 $ 2,085,456 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt.................................................................. 161,986 158,093 Convertible subordinated debentures............................................ 128,515 130,000 Other debt..................................................................... 845,200 256,000 ----------- ---------- 1,135,701 544,093 ----------- ---------- Total debt..................................................................... 4,058,820 2,629,549 ----------- --------- Obligations under capital leases........................................................ 9,639 54,591 Accounts payable, accrued expenses and other liabilities................................ 320,293 302,613 Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities (note 8)................ 136,965 137,500 Commitments and contingencies (notes 15 and 16) SHAREHOLDERS' EQUITY (notes 12 and 13) 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; issued 72,225,223 shares in 1998 and 66,910,901 shares in 1997..................... 723 669 Additional paid-in capital.............................................................. 836,508 686,976 Accumulated deficit..................................................................... (206,520) (222,171) Accumulated other comprehensive income.................................................. (1,826) --- ----------- ---------- Net shareholders' equity........................................................... 628,926 465,515 ----------- ---------- TOTAL.............................................................................. $ 5,154,643 $ 3,589,768 =========== ===========
5 The Rouse Company and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Years ended December 31, 1998, 1997 and 1996 (in thousands, except per share data)
1998 1997 1996 ----------- ----------- ----------- Revenues .............................................................. $ 692,571 $ 916,771 $ 821,036 Operating expenses, exclusive of provision for bad debts, depreciation and amortization..................................... 350,647 530,076 468,366 Interest expense (note 7).............................................. 209,564 207,490 220,381 Provision for bad debts................................................ 7,735 5,766 3,688 Depreciation and amortization (note 4)................................. 84,068 82,944 77,414 Equity in earnings of unconsolidated real estate ventures (note 3)..... 75,769 6,815 8,917 Loss on dispositions of assets and other provisions, net (note 11)..... 11,174 23,484 16,499 ----------- ----------- ----------- Earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principle.......... 105,152 73,826 43,605 ----------- ----------- ----------- Income tax provision (benefit) (note 10): Current........................................................... (24) 8,137 123 Deferred---primarily Federal...................................... --- (124,203) 25,596 ----------- ----------- ----------- (24) (116,066) 25,719 ----------- ----------- ----------- Earnings before extraordinary items and cumulative effect of changes in accounting principle............................ 105,176 189,892 17,886 Extraordinary gain (loss), net (note 7)................................ 4,355 (21,342) (1,453) Cumulative effect at January 1, 1998 of change in accounting for participating mortgages (note 1).............................. (4,629) --- --- Cumulative effect at October 1, 1997 of change in accounting for business process reengineering costs, net (note 1)............ --- (1,214) --- ----------- ----------- ----------- NET EARNINGS...................................................... 104,902 167,336 16,433 Other items of comprehensive income - minimum pension liability adjustment...................................... (1,826) --- -- ----------- ----------- ----------- COMPREHENSIVE INCOME.............................................. $ 103,076 $ 167,336 $ 16,433 =========== =========== =========== NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS.................... $ 92,750 $ 157,023 $ 5,900 =========== =========== =========== EARNINGS PER SHARE OF COMMON STOCK (NOTE 14): Basic: Earnings before extraordinary items and cumulative effect of changes in accounting principle........................ $ 1.36 $ 2.70 $ .13 Extraordinary items........................................... .07 (.32) (.03) Cumulative effect of changes in accounting principle.......... (.07) (.02) --- ----------- ----------- ----------- Total..................................................... $ 1.36 $ 2.36 $ .10 =========== =========== =========== Diluted: Earnings before extraordinary items and cumulative effect of changes in accounting principle........................ $ 1.34 $ 2.59 $ .12 Extraordinary items........................................... .07 (.28) (.03) Cumulative effect of changes in accounting principle.......... (.07) (.02) --- ----------- ----------- ----------- Total..................................................... $ 1.34 $ 2.29 $ .09 =========== =========== ===========
The accompanying notes are an integral part of these statements. 6 The Rouse Company and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1998, 1997 and 1996 (in thousands, except per share amounts)
Accumulated Series A Series B Additional other Preferred Preferred Common paid-in Accumulated comprehensive stock stock stock capital deficit income --------- --------- ------ ---------- ----------- ------------- BALANCE AT DECEMBER 31, 1995........................ $ 45 $ --- $ 479 $ 309,943 $ (267,883) $ --- Net earnings ....................................... --- --- --- --- 16,433 --- Dividends declared: .. Common stock -- $.88 per share................. --- --- --- --- (50,384) --- Preferred stock -- $2.44 per share............. --- --- --- --- (10,533) --- Conversion of Series A Preferred stock (note 12) (45) --- 106 (61) --- --- Purchases of common stock........................... --- --- (2) (7,005) --- --- Common stock issued in acquisition of The Hughes Corporation (note 2)................ --- --- 78 178,008 --- --- Common stock issued pursuant to Contingent Stock Agreement (note 13)...................... --- --- 2 5,023 --- --- Proceeds from exercise of stock options, net........ --- --- 4 1,038 --- --- Lapse of restrictions on common stock awards........ --- --- --- 1,903 --- --- ------ ------ ------- --------- ---------- --------- BALANCE AT DECEMBER 31, 1996........................ --- --- 667 488,849 (312,367) --- Net earnings........................................ --- --- --- --- 167,336 --- Dividends declared: Common stock -- $1.00 per share................ --- --- --- --- (66,827) --- Preferred stock -- $2.65 per share............. --- --- --- --- (10,313) --- Issuance of Series B Preferred stock (note 12)...... --- 41 --- 196,787 --- --- Purchases of common stock........................... --- --- (8) (26,357) --- --- Common stock issued pursuant to Contingent Stock Agreement (note 13)...................... --- --- 8 23,305 --- --- Proceeds from exercise of stock options, net........ --- --- 2 2,077 --- --- Lapse of restrictions on common stock awards........ --- --- --- 2,315 --- --- ------ ------ ------- --------- ---------- --------- BALANCE AT DECEMBER 31, 1997........................ --- 41 669 686,976 (222,171) --- Net earnings........................................ --- --- --- --- 104,902 --- Other comprehensive income.......................... --- --- --- --- --- (1,826) Dividends declared: Common stock -- $1.12 per share................ --- --- --- --- (77,099) --- Preferred stock -- $3.00 per share............. --- --- --- --- (12,152) --- Purchases of common stock........................... --- --- (21) (65,412) --- --- Conversion of convertible subordinated debentures --- --- 1 1,484 --- --- Common stock issued pursuant to Contingent Stock Agreement (note 13)...................... --- --- 21 65,002 --- --- Other common stock issued........................... --- --- 50 143,378 --- --- Proceeds from exercise of stock options, net........ --- --- 3 484 --- --- Lapse of restrictions on common stock awards........ --- --- --- 4,596 --- --- ------ ------ ------- --------- ---------- --------- BALANCE AT DECEMBER 31, 1998........................ $ --- $ 41 $ 723 $ 836,508 $ (206,520) $ (1,826) ====== ====== ======= ========= ========== =========
The accompanying notes are an integral part of these statements. 7 The Rouse Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 (in thousands)
1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Rents and other revenues received................................. $ 666,080 $ 714,784 $ 685,990 Proceeds from land sales and on notes receivable from land sales.......................................................... 80,017 159,932 122,245 Interest received................................................. 14,038 11,877 11,939 Land development expenditures..................................... --- (97,868) (54,343) Operating expenditures............................................ (339,962) (395,528) (381,061) Interest paid..................................................... (204,897) (207,681) (216,644) Dividends, interest and other operating distributions from unconsolidated majority financial interest ventures, net....... 45,907 --- --- ----------- ----------- ----------- Net cash provided by operating activities.................... 261,183 185,516 168,126 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for properties in development and improvements to existing properties funded by debt........................... (306,950) (283,401) (123,985) Expenditures for acquisition of The Hughes Corporation, net of acquired cash......................................... --- --- (36,331) Expenditures for property acquisitions............................ (882,404) (79,420) (18,152) Expenditures for improvements to existing properties funded by cash provided by operating activities: Tenant leasing and remerchandising....................... (7,955) (5,964) (8,095) Building and equipment................................... (13,873) (15,933) (12,691) Proceeds from sales of operating properties....................... 130,070 81,281 26,345 Payments received on loans and advances to unconsolidated majority financial interest ventures........................... 47,483 --- --- Other............................................................. 1,429 (19,042) (10,086) ----------- ----------- ----------- Net cash used by investing activities........................ (1,032,200) (322,479) (182,995) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of property debt........................... 650,987 693,525 291,373 Repayments of property debt: Scheduled principal payments................................. (50,689) (46,282) (39,048) Other payments............................................... (347,725) (572,139) (251,807) Proceeds from issuance of other debt.............................. 602,000 11,868 31,652 Repayments of other debt.......................................... (15,287) (1,520) --- Proceeds from issuance of Series B Preferred stock................ --- 196,828 --- Proceeds from issuance of common stock............................ 43,428 --- --- Purchases of common stock......................................... (65,433) (26,365) (7,007) Dividends paid.................................................... (89,251) (77,140) (60,917) Other............................................................. (6,419) 1,522 (533) ----------- ----------- ----------- Net cash provided (used) by financing activities............. 721,611 180,297 (36,287) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.............. (49,406) 43,334 (51,156) Cash and cash equivalents at beginning of year.................... 87,100 43,766 94,922 ----------- ----------- ----------- Cash and cash equivalents at end of year.......................... $ 37,694 $ 87,100 $ 43,766 =========== =========== ===========
The accompanying notes are an integral part of these statements. 8 RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
1998 1997 1996 ----------- ----------- ----------- NET EARNINGS...................................................... $ 104,902 $ 167,336 $ 16,433 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................................ 84,068 82,944 77,414 Undistributed earnings of majority financial interest ventures................................................. (41,720) --- --- Loss on dispositions of assets and other provisions, net..... 11,174 23,484 16,499 Extraordinary (gain) loss, net............................... (4,355) 21,342 1,453 Cumulative effect of change in accounting principle, net..... 4,629 1,214 --- Additions to preconstruction reserve......................... 1,700 2,800 2,700 Participation expense pursuant to Contingent Stock Agreement. 44,075 35,832 28,844 Provision for bad debts...................................... 7,735 5,766 3,688 Decrease (increase) in: Accounts and notes receivable............................ 32,507 (70,045) (26,862) Other assets............................................. 1,845 (2,312) (5,694) Increase in accounts payable, accrued expenses and other liabilities.................................... 8,852 48,783 25,885 Deferred income taxes........................................ --- (124,203) 25,596 Other, net................................................... 5,771 (7,425) 2,170 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................... $ 261,183 $ 185,516 $ 168,126 =========== =========== =========== - ----------------------------------------------------------------------------------------------------------------------------- SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES 1998 1997 1996 ----------- ----------- ----------- Common stock issued pursuant to Contingent Stock Agreement (note 13).......................................... $ 65,023 $ 23,313 $ 5,025 Common stock and other noncash consideration issued in acquisitions of property interests (note 4)............... 100,000 5,323 13,520 Mortgage and other debt assumed or issued in acquisitions of property interests........................................... 599,795 --- 21,090 Mortgage debt extinguished on dispositions of interests in properties................................... 19,875 --- --- Termination of capital lease obligation........................... 46,387 --- --- Common stock issued on conversion of convertible subordinated debentures........................................ 1,485 --- --- Capital lease obligations incurred................................ 2,743 1,101 3,789 Debt assumed by purchasers of land................................ 2 21,928 16,991 Mortgage and other debt of subsidiaries in which a majority voting interest was sold to an affiliate (note 3)..................................... --- 280,595 --- Property of subsidiaries in which a majority voting interest was sold to an affiliate (note 3)................... --- 547,295 --- Debt and other liabilities assumed in acquisition of The Hughes Corporation, net (note 2).................................... --- --- 334,155 Common stock issued in acquisition of The Hughes Corporation (note 2)......................................... --- --- 178,086 Notes received from sales of operating properties................. --- --- 8,440 =========== =========== ===========
9 The Rouse Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 (1) SUMMARY OF SIGNIFICANT (A) DESCRIPTION OF BUSINESS ACCOUNTING POLICIES Through its subsidiaries and affiliates, the Company acquires, develops and/or manages income- producing properties located throughout the United States and develops and sells land for residential, commercial and other uses. The income-producing properties consist of retail centers, office and industrial buildings and mixed-use and other properties. The retail centers are primarily regional shopping centers in suburban market areas, but also include specialty marketplaces in certain downtown areas and several village centers, primarily in Columbia, Maryland. The office and industrial properties are located primarily in the Columbia, Baltimore and Las Vegas market areas or are components of large-scale mixed-use properties (which include retail, parking and other uses) located in other urban markets. Land development and sales operations are predominantly related to large-scale, long-term community development projects in Columbia and Summerlin, Nevada. (B) BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Rouse Company, all subsidiaries and partnerships in which it has a majority voting interest and control and the Company's proportionate share of the assets, liabilities, revenues and expenses of unconsolidated real estate ventures in which it has joint interest and control with other venturers. Investments in other ventures are accounted for using the equity or cost methods as appropriate in the circumstances. Significant intercompany balances and transactions are eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Significant estimates are inherent in the preparation of the Company's financial statements in a number of areas, including evaluation of impairment of long-lived assets (including operating properties and properties held for development or sale), determination of useful lives of assets subject to depreciation or amortization, evaluation of collectibility of accounts and notes receivable and measurement of pension and postretirement obligations. Actual results could differ from those and other estimates. Certain amounts for prior years have been reclassified to conform to the presentation for 1998. (C) PROPERTY Properties to be developed or held and used in operations are carried at cost reduced for impairment losses, where appropriate. Properties held for sale are carried at cost reduced for valuation allowances, where appropriate. Acquisition, development and construction costs of properties in development are capitalized including, where applicable, salaries and related costs, real estate taxes, interest and preconstruction costs. The preconstruction stage of development of an operating property (or an expansion of an existing property) includes efforts and related costs to secure land control and zoning, evaluate feasibility and complete other initial tasks which are essential to development. Provision is made for potentially unsuccessful preconstruction efforts by charges to operations. Development and construction costs and costs of significant improvements, replacements and renovations at operating properties are capitalized, while costs of maintenance and repairs are expensed as incurred. Direct costs associated with financing and leasing of operating properties are capitalized as deferred costs and amortized over the periods benefited by the expenditures. Effective March 19, 1998, the Company adopted a policy of charging internal staff costs associated with acquisitions of operating properties to expense as incurred as required by a consensus of the Emerging Issues Task Force of the Financial Accounting Standards Board. Prior to that date, such costs were capitalized as part of the cost of properties acquired. This change did not have a material effect on net earnings for 1998. 10 Depreciation of operating properties is computed using the straight-line method. The annual rate of depreciation for most of the Company's retail centers is based on a 55-year composite life and a salvage value of approximately 10%, producing an effective annual rate of depreciation for new properties of 1.6%. The other retail centers, all office buildings and other properties are generally depreciated using composite lives of 40 years producing an effective annual rate of depreciation for such properties of 2.5%. If events or circumstances indicate that the carrying value of an operating property to be held and used may be impaired, a recoverability analysis is performed based on estimated nondiscounted future cash flows to be generated from the property. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. Properties held for sale are carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. The net carrying values of operating properties are classified as properties held for sale when marketing of the properties for sale is authorized by management. Depreciation of these properties is discontinued at that time, but operating revenues, interest and other operating expenses continue to be recognized until the date of sale. Revenues and expenses related to property interests acquired with the intention to resell are not recognized. (D) SALES OF PROPERTY Gains from sales of operating properties and revenues from land sales are recognized using the full accrual method provided that various criteria relating to the terms of the transactions and any subsequent involvement by the Company with the properties sold are met. Gains or revenues relating to transactions that do not meet the established criteria are deferred and recognized when the criteria are met or using the installment or cost recovery methods, as appropriate in the circumstances. For land sale transactions under the terms of which the Company is required to perform additional services and incur significant costs after title has passed, revenues and cost of sales are recognized on a percentage of completion basis. Cost of land sales is generally determined as a specified percentage of land sales revenues recognized for each land development project. The cost percentages used are based on estimates of development costs and sales revenues to completion of each project and are revised periodically for changes in estimates or development plans. The specific identification method is used to determine cost of sales of certain parcels of land. (E) LEASES Leases which transfer substantially all the risks and benefits of ownership to tenants are considered finance leases and the present values of the minimum lease payments and the estimated residual values of the leased properties, if any, are accounted for as receivables. Leases which transfer substantially all the risks and benefits of ownership to the Company are considered capital leases and the present values of the minimum lease payments are accounted for as property and debt. In general, minimum rent revenues are recognized when due from tenants; however, estimated collectible minimum rent revenues under leases which provide for varying rents over their terms are averaged over the terms of the leases. (F) INCOME TAXES In December 1997, the Company determined that it would elect to be taxed as a real estate investment trust (REIT) pursuant to the Internal Revenue Code of 1986, as amended, effective January 1, 1998. In general, a corporation that distributes at least 95% of its REIT taxable income to shareholders in any taxable year and complies with certain other requirements (relating primarily to the nature of its assets and the sources of its revenues) is not subject to Federal income taxation to the extent of the income which it distributes. Management believes that the Company met the qualifications for REIT status as of December 31, 1998 and intends for it to continue to meet the qualifications in the future and to distribute at least 100% of its REIT taxable income (determined after taking into account any net operating loss deduction) to shareholders in 1999 and subsequent years. As discussed more fully in note 10, management also does not expect that the Company will pay taxes on "built-in gains" on its assets. Based on these considerations, management does not believe that the Company will be liable for income taxes at the 11 Federal level or in most of the states in which it operates in 1998 and future years. Accordingly, the Company eliminated substantially all of its existing deferred tax assets and liabilities at December 31, 1997, and does not expect to provide for deferred income taxes in future periods except in certain states. Where required, deferred income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors. (G) INVESTMENTS IN MARKETABLE SECURITIES AND CASH AND CASH EQUIVALENTS The Company's investment policy defines authorized investments and establishes various limitations on the maturities, credit quality and amounts of investments held. Authorized investments include U.S. government and agency obligations, certificates of deposit, bankers acceptances, repurchase agreements, commercial paper, money market mutual funds and corporate debt and equity securities. Investments with maturities at dates of purchase in excess of three months are classified as marketable securities and carried at amortized cost as it is the Company's intention to hold these investments until maturity. Short-term investments with maturities at dates of purchase of three months or less are classified as cash equivalents, except that any such investments purchased with the proceeds of loans which may be expended only for specified purposes are classified as investments in marketable securities. At December 31, 1998 and 1997, investments in marketable securities consist primarily of U.S. government and agency obligations with maturities of less than one year which are held for restricted uses. (H) DERIVATIVE FINANCIAL INSTRUMENTS The Company makes limited use of interest rate exchange agreements, including interest rate caps and swaps, to manage interest rate risk associated with variable rate debt. The Company may also use other types of agreements to hedge interest rate risk associated with anticipated project financing transactions. These instruments are designated as hedges and, accordingly, changes in their fair values are not recognized in the financial statements, provided that they meet defined correlation and effectiveness criteria at inception and thereafter. Instruments that cease to qualify for hedge accounting are marked-to- market with gains or losses recognized in income. Under interest rate cap agreements, the Company makes initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates on the related variable rate debt exceed specified levels during the agreement period. Premiums paid are amortized to interest expense over the terms of the agreements using the interest method and payments receivable from the counterparties are accrued as reductions of interest expense. Under interest rate swap agreements, the Company and the counterparties agree to exchange the difference between fixed rate and variable rate interest amounts calculated by reference to specified notional principal amounts during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less. Amounts receivable or payable under swap agreements are accounted for as adjustments to interest expense on the related debt. Parties to interest rate exchange agreements are subject to market risk for changes in interest rates and risk of credit loss in the event of nonperformance by the counterparty. The Company does not require any collateral under these agreements, but deals only with highly rated financial institution counterparties (which, in certain cases, are also the lenders on the related debt) and does not expect that any counterparties will fail to meet their obligations. (I) OTHER INFORMATION ABOUT FINANCIAL INSTRUMENTS Fair values of financial instruments approximate their carrying values in the financial statements except for debt and related interest rate exchange agreements for which fair value information is provided in note 7. 12 (J) EARNINGS PER SHARE OF COMMON STOCK Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of all dilutive potential common shares outstanding during the period. The dilutive effects of convertible securities are computed using the "if- converted" method and the dilutive effects of options, warrants and their equivalents (including fixed awards and nonvested stock issued under stock-based compensation plans) are computed using the "treasury stock" method. (K) STOCK-BASED COMPENSATION The Company uses the intrinsic value method to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock or stock options to employees only if the quoted market price of the stock at the grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. Information concerning the pro forma effects on net earnings and earnings per share of common stock of using an optional fair value-based method, rather than the intrinsic value method, to account for stock-based compensation plans is provided in note 13. (L) BUSINESS PROCESS REENGINEERING COSTS Effective October 1, 1997, the Company adopted a policy of charging costs of business process reengineering activities to expense as incurred as required by a consensus of the Emerging Issues Task Force of the Financial Accounting Standards Board. Prior to that date, such costs were deferred and amortized over the period benefited by the expenditures. The cumulative effect at October 1, 1997 of this accounting change was to reduce net earnings for 1997 by $1,214,000 ($.02 per share), net of related income tax benefits of $654,000. The effect of this change on earnings before extraordinary losses and net earnings for 1997, excluding the cumulative effect of the change, was not material and application of the new policy in 1996 would not have had a material effect on reported earnings before extraordinary losses, net earnings or related per share amounts. (M) PARTICIPATING MORTGAGES Effective January 1, 1998, the Company adopted the American Institute of Certified Public Accountants' Statement of Position 97-1 "Accounting by Participating Mortgage Loan Borrowers." This Statement prescribes borrowers' accounting for participating mortgage loans and requires, among other things, that borrowers recognize liabilities for the estimated fair value of lenders' participations in the appreciation in value (if any) of mortgaged real estate projects and record such participations as interest over the terms of the related loans. The Company had not previously recognized lenders' participations in the appreciation in value of mortgaged properties. The cumulative effect of this accounting change at January 1, 1998 was to reduce net earnings by approximately $4,629,000 ($.07 per share basic and diluted). The effect of this change, excluding the cumulative effect of initial adoption, was not material (approximately $.01 per share basic and diluted) in 1998. (N) COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and presentation of comprehensive income and its components in financial statements. Comprehensive income includes all changes in shareholders' equity during a period, except those relating to investments by and distributions to shareholders. The Company's comprehensive income consists of net earnings and adjustments to minimum pension liability and is presented in the statements of operations and comprehensive income. Accumulated other comprehensive income is displayed as a separate component of shareholders' equity. No amounts were required to be reclassified to other comprehensive income for 1997 and 1996. (O) PENSION AND OTHER POSTRETIREMENT PLANS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits." This 13 Statement revises disclosure requirements about pension and other postretirement benefit plans, but does not change the method of accounting for them. (2) THE HUGHES CORPORATION On June 12, 1996, the Company acquired all of the ACQUISITION AND RELATED outstanding equity interests in The Hughes MATTERS Corporation and its affiliated partnership, Howard Hughes Properties, Limited Partnership (together, "Hughes"). In connection with the acquisition, the Company issued 7,742,884 shares of common stock valued at $178,086,000 and incurred or assumed debt and other liabilities of $370,486,000 (net of certain receivables and other current assets acquired). As discussed in note 13, additional shares of common stock (or, in certain circumstances, Increasing Rate Cumulative Preferred stock) have been and may continue to be issued to the former Hughes owners or their successors pursuant to terms of a Contingent Stock Agreement. The acquisition was accounted for using the purchase method. The total purchase cost approximated the aggregate fair values of the assets acquired which consisted primarily of a regional shopping center in Las Vegas, a large- scale, master-planned community in Summerlin, Nevada, and four large-scale, master-planned business parks and various other properties in Nevada and Southern California. The consolidated statement of operations and comprehensive income for the year ended December 31, 1996 includes revenues and costs and expenses from the date of acquisition. The Company's unaudited pro forma consolidated results of operations for the year ended December 31, 1996, assuming the acquisition of Hughes occurred on January 1, 1996, are summarized as follows (in thousands, except per share data): Revenues................................................ $ 872,805 Earnings before extraordinary items..................... 20,990 Net earnings............................................ 19,537 Earnings per share of common stock: Basic: Earnings before extraordinary items................... .16 Net earnings.......................................... .14 Diluted: Earnings before extraordinary items................... .16 Net earnings.......................................... .14 ==========
The unaudited pro forma revenues and earnings summarized above are not necessarily indicative of the results that would have occurred if the acquisition had been consummated on January 1, 1996. (3) UNCONSOLIDATED REAL Investments in and advances to unconsolidated real ESTATE VENTURES estate ventures at December 31, 1998 and 1997 are summarized, based on the level of the Company's financial interest, as follows (in thousands):
1998 1997 ---------- ---------- Majority interest ventures................. $ 270,085 $ 259,320 Joint interest and control ventures........ 1,140 3,412 Minority interest ventures................. 50,841 75,960 ---------- ---------- Total.................................. $ 322,066 $ 338,692 ========== ==========
The equity in earnings of unconsolidated real estate ventures for the years ended December 31, 1998, 1997 and 1996 is summarized, based upon the level of the Company's financial interest, as follows (in thousands):
1998 1997 1996 -------- --------- -------- Majority interest ventures.......... $ 63,475 $ --- $ --- Minority interest ventures.......... 12,294 6,815 8,917 -------- --------- -------- Total........................... $ 75,769 $ 6,815 $ 8,917 ========= ========= ========
14 The ventures in which the Company has majority financial interests were initiated on December 31, 1997, when certain wholly owned subsidiaries issued 91% of their voting common stock to The Rouse Company Incentive Compensation Statutory Trust, an entity which is neither owned nor controlled by the Company, for an aggregate consideration of $1,400,000. These sales were made at fair value and as part of the Company's plan to meet the qualifications for REIT status. The Company retained the remaining voting stock of the ventures and holds shares of nonvoting common and/or preferred stock and, in certain cases, mortgage loans receivable from the ventures which, taken together, comprise substantially all (at least 98%) of the financial interest in them. As a result of its disposition of the majority voting interest in the ventures, the Company began accounting for its investment in them using the equity method effective December 31, 1997. Due to the Company's continuing financial interest in the ventures, it recognized no gain on the sales of stock for financial reporting purposes and the ventures retained the Company's cost basis of the assets acquired and liabilities assumed. The assets of the ventures consist primarily of land to be developed and sold as part of community development projects in Columbia and Summerlin, other investment land, primarily in Nevada, certain office and retail properties in Columbia and contracts to manage various operating properties. The condensed, combined balance sheets of these ventures at December 31, 1998 and 1997 are summarized as follows (in thousands):
1998 1997 ---------- ---------- Assets: Operating properties, net........................ $ 244,470 $ 211,385 Properties in development........................ 66,442 23,144 Land held for development and sale............... 236,999 231,530 Investment land.................................. 41,156 34,947 Properties held for sale......................... --- 46,289 Advances to the Company.......................... 112,310 131,832 Other............................................ 192,437 169,876 ---------- ---------- Total....................................... $ 893,814 $ 849,003 ========== ========== Liabilities and shareholders' deficit: Loans and advances from the Company.............. $ 488,363 $ 538,586 Mortgages payable and other long-term debt....... 332,945 280,595 Other liabilities................................ 116,244 104,119 Redeemable Series A Preferred stock.............. 50,000 50,000 Shareholders' deficit............................ (93,738) (124,297) ---------- ---------- Total....................................... $ 893,814 $ 849,003 ========== ==========
The condensed combined statement of operations of these ventures for 1998 is summarized as follows (in thousands): Revenues, including interest on loans to the Company of $9,067................................ $ 282,010 Operating expenses.................................... (161,350) Interest expense, including interest on loans from the Company of $53,340........................... (68,146) Depreciation and amortization......................... (10,585) Equity in earnings of unconsolidated real estate ventures.................................. 811 Gain on dispositions of assets, net................... 15,856 Income taxes.......................................... (22,060) Extraordinary losses, net............................. (1,127) ---------- Net earnings................................ $ 35,409 ==========
15 The Company's share of the net earnings before extraordinary losses of these ventures for 1998 is summarized as follows (in thousands): Share of net earnings based on ownership interest...... $ 35,055 Share of extraordinary losses.......................... 1,116 Participation by others in the Company's share of earnings.......................................... (24,152) Interest on loans and advances, net.................... 44,273 Eliminations and other, net............................ 7,183 ---------- $ 63,475 ==========
The ventures in which the Company has joint interest and control are accounted for using the proportionate share method. These ventures are partnerships that own various retail centers which are managed by affiliates of the Company. The consolidated financial statements include the Company's proportionate share of its historical cost of these properties and depreciation based on the Company's depreciation policies which differ, in certain cases, from those of the ventures. The condensed, combined balance sheets of these ventures and the Company's proportionate share of their assets, liabilities and equity at December 31, 1998 and 1997 and the condensed, combined statements of earnings of these ventures and the Company's proportionate share of their revenues and expenses for 1998, 1997 and 1996 are summarized as follows (in thousands):
Combined Proportionate Share ---------------------- ---------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Total assets, primarily property................ $ 315,576 $ 353,132 $ 140,983 $ 153,399 ========= ========= ========= ========= Liabilities, primarily long-term debt........... $ 207,386 $ 247,949 $ 90,034 $ 109,852 Venturers' equity............................... 108,190 105,183 50,949 43,547 --------- --------- --------- --------- Total liabilities and venturers' equity...... $ 315,576 $ 353,132 $ 140,983 $ 153,399 ========= ========= ========= =========
Combined Proportionate Share ----------------------------------- ---------------------------------- 1998 1997 1996 1998 1997 1996 --------- --------- --------- --------- --------- --------- Revenues......................... $ 119,023 $ 123,802 $ 118,360 $ 52,390 $ 55,477 $ 56,105 Operating and interest expenses.. 58,311 69,825 65,862 25,621 31,528 29,535 Depreciation and amortization.... 11,915 12,013 11,257 3,876 3,657 2,588 --------- --------- --------- --------- --------- --------- Net earnings.................. $ 48,797 $ 41,964 $ 41,241 $ 22,893 $ 20,292 $ 23,982 ========= ========= ========= ========= ========= =========
The ventures in which the Company holds minority interests are accounted for using the equity or cost methods, as appropriate. Most of these properties are managed by affiliates of the Company and the agreements relating to them generally provide for preference returns to the Company when operating results or sale or refinancing proceeds exceed specified levels. At December 31, 1998, these ventures are primarily partnerships and corporations which own retail centers. Prior to December 1998, these ventures also included a corporate joint venture which owned various office and industrial properties. The Company acquired the interest of the other venturer in the corporate joint venture on November 30, 1998. 16 The condensed, combined balance sheets of these ventures at December 31, 1998 and 1997 and their condensed, combined statements of earnings for 1998, 1997 and 1996 are summarized as follows (in thousands):
1998 1997 ---------- ---------- Total assets, primarily property.................... $ 546,130 $1,101,163 ========== ========== Liabilities, primarily long-term debt............... $ 369,847 $ 491,436 Venturers' equity................................... 176,283 609,727 ---------- ---------- Total liabilities and venturers' equity.......... $ 546,130 $1,101,163 ========== ==========
1998 1997 1996 ---------- ---------- ---------- Revenues............................................ $ 189,361 $ 212,614 $ 201,769 Operating and interest expenses..................... 134,411 148,065 138,460 Depreciation and amortization....................... 32,041 37,423 35,634 Gain (loss) on dispositions of assets............... 38,915 (11,097) 1,110 ---------- ---------- ---------- Net earnings..................................... $ 61,824 $ 16,029 $ 28,785 ========== ========== ==========
The Company's share of net earnings of these ventures was $12,294,000, $6,815,000, and $8,917,000 in 1998, 1997 and 1996, respectively. (4) PROPERTY Operating properties and deferred costs of projects at December 31, 1998 and 1997 are summarized as follows (in thousands):
1998 1997 ---------- ---------- Buildings and improvements.......................... $4,113,654 $2,729,908 Land................................................ 488,114 231,935 Deferred costs...................................... 106,385 111,455 Furniture and equipment............................. 10,574 6,664 ---------- ---------- Total............................................ $4,718,727 $3,079,962 ========== ==========
Depreciation expense for 1998, 1997 and 1996 was $73,646,000, $70,751,000, and $64,113,000, respectively. Amortization expense for 1998, 1997 and 1996 was $10,422,000, $12,193,000, and $13,301,000, respectively. On April 6, 1998, the Company and Westfield America, Inc. agreed to purchase a portfolio of interests in retail centers from TrizecHahn Centers Inc. (TrizecHahn). Under terms of the agreement, the Company purchased ownership interests in seven retail centers in a series of transactions completed in the third and fourth quarters of 1998. The aggregate purchase price of the interests in the retail centers was approximately $1,154,981,000, including $352,529,000 in mortgage and other debt assumed. The net purchase price was funded primarily by new mortgage debt secured by the properties and borrowings under the Company's revolving credit and bridge loan facilities. In February 1999, the Company contributed its ownership interests in four of the retail centers to a joint venture and received a 35% ownership interest in the joint venture. The joint venture assumed obligations under the bridge loan facility of $271,000,000 which were subsequently repaid using cash contributed by other venturers. On November 30, 1998, the Company purchased a portfolio of office and industrial properties and certain land parcels from a corporate joint venture in which the Company held a 5% ownership interest. The portfolio consisted of 41 office buildings and 26 industrial buildings. The purchase price of the properties was approximately $373,000,000, including approximately $112,000,000 of mortgage debt assumed. The net purchase price was funded by issuing $100,000,000 of common stock (3,525,782 shares), a $50,000,000 note secured by certain of the properties, a $58,000,000 unsecured note and by borrowings under the Company's revolving credit facility. In December 1998, the Company sold three of the office buildings to TrizecHahn for approximately $91,000,000. Properties in development include construction and development in progress and preconstruction costs, net. Construction and development in progress includes land and land improvements of $63,737,000 and $41,951,000 at December 31, 1998 and 1997, respectively. 17 Properties held for sale are generally those that, for various reasons, management has determined do not meet the Company's investment criteria or that the Company acquired with the intention to sell. Properties held for sale at December 31, 1998 and 1997 are summarized as follows (in thousands):
1998 1997 ---------- ---------- Retails centers (two properties in 1998 and three properties in 1997)................... $ 163,307 $ 10,499 Office and other properties.................... 2,587 9,553 ---------- ---------- Total....................................... $ 165,894 $ 20,052 ========== ==========
In 1998, the Company acquired interests in the retail centers held for sale at December 31, 1998, with the intention of selling them. Accordingly, revenues of $6,395,000 and operating losses of $723,000 relating to them are not included in the consolidated statement of operations and comprehensive income. Revenues relating to other properties held for sale were $1,405,000 in 1998, $17,642,000 in 1997 and $29,600,000 in 1996 and these properties had operating income of $859,000 in 1998 and incurred operating losses of $3,558,000 in 1997 and $811,000 in 1996. All of the properties held for sale at December 31, 1998 are expected to be sold in 1999. (5) ACCOUNTS AND NOTES Accounts and notes receivable at December 31, 1998 RECEIVABLE and 1997 are summarized as follows (in thousands):
1998 1997 ---------- ---------- Accounts receivable, primarily accrued rents and income under tenant leases....................... $ 54,261 $ 49,424 Notes receivable from sales of properties........... 5,497 10,154 Notes receivable from sales of land................. 35,987 76,033 ---------- ---------- 95,745 135,611 Less allowance for doubtful receivables............. 19,828 21,311 ---------- ---------- Total............................................ $ 75,917 $ 114,300 ========== ==========
Accounts and notes receivable due after one year were $23,197,000 and $54,180,000 at December 31, 1998 and 1997, respectively. Credit risk with respect to receivables from tenants is not highly concentrated due to the large number of tenants and the geographic diversification of the Company's operating properties. The Company performs credit evaluations of prospective new tenants and requires security deposits in certain circumstances. Tenants' compliance with the terms of their leases is monitored closely, and the allowance for doubtful receivables is established based on analyses of the risk of loss on specific tenant accounts, historical trends and other relevant information. Notes receivable from sales of land are primarily due from builders at the community development project in Summerlin. The Company stopped financing land sales in 1998 and does not anticipate financing any future land sales. The Company performed credit evaluations of the builders and generally required substantial down payments (at least 20%) on all land sales that it financed. These notes and notes from sales of operating properties are generally secured by first liens on the related properties. (6) PENSION, POSTRETIREMENT The Company has a defined benefit pension plan AND DEFERRED COMPENSA- (the "funded plan") covering substantially all TION PLANS employees and employees of certain affiliates and separate, nonqualified unfunded retirement plans (the "unfunded plans") covering directors and participants in the funded plan whose defined benefits exceed the plan's limits. Benefits under the pension plans are based on the participants' years of service and compensation. The Company also has a retiree benefits plan that provides postretirement medical and life insurance benefits to full-time employees and employees of certain affiliates who meet minimum age and service requirements. The Company pays a portion of the cost of participants' life insurance coverage and makes contributions to the cost of participants' medical insurance coverage based on years of service, subject to a maximum annual contribution. 18 Information relating to the obligations, assets and funded status of the plans at December 31, 1998 and 1997 and for the years then ended is summarized as follows:
Pension Postretirement Plans Plan ---------------------- ---------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Change in benefit obligations: Benefit obligations at beginning of year $ 57,440 $ 42,890 $ 14,668 $ 13,202 Service cost 4,609 3,373 718 578 Interest cost 4,549 3,702 1,024 990 Amendment - revision to benefit formula - 6,504 - - Actuarial loss 17,194 8,515 282 539 Benefits paid (11,448) (7,544) (805) (641) -------- -------- -------- -------- Benefit obligations at end of year 72,344 57,440 15,887 14,668 -------- -------- -------- -------- Change in plan assets: Fair value of plan assets at beginning of year 47,083 38,991 - - Actual return on plan assets 7,900 7,870 - - Employer contribution 11,449 7,766 805 641 Benefits paid (11,448) (7,544) (805) (641) -------- -------- -------- -------- Fair value of plan assets at end of year 54,984 47,083 - - -------- -------- -------- -------- Funded status (17,360) (10,357) (15,887) (14,668) Unrecognized net actuarial (gain) loss 23,784 12,292 83 (199) Unamortized prior service cost 7,652 9,062 - - Unrecognized transition obligation 870 1,071 4,664 4,998 -------- -------- -------- -------- Net amount recognized $ 14,946 $ 12,068 $(11,140) $ (9,869) ======== ======== ======== ======== Amounts recognized in the balance sheets consist of: $ 20,189 $ 15,378 $ - $ - Prepaid benefit cost Accrued benefit liability (11,382) (8,818) (11,140) (9,869) Intangible asset 4,313 5,508 - - Accumulated other comprehensive income items 1,826 - - - -------- -------- -------- -------- Net amount recognized $ 14,946 $ 12,068 $(11,140) $ (9,869) ======== ======== ======== ======== Weighted-average assumptions as of December 31: Discount rate 7.00% 7.25% 7.00% 7.25% Expected rate of return on plan assets 7.25 8.00 - - Rate of compensation increase 4.50 4.50 - - ======== ======== ======== ========
The assets of the funded plan consist primarily of pooled separate accounts with an insurance company and marketable equity securities. Because the Company's contributions to the cost of participants' medical insurance coverage are fixed, health care cost trend rates do not affect the benefit obligation under the postretirement plan. 19 The net pension cost includes the following components (in thousands):
1998 1997 1996 --------- --------- --------- Service cost.................................... $ 4,609 $ 3,373 $ 2,989 Interest cost on projected benefit obligations.. 4,549 3,702 3,107 Expected return on funded plan assets........... (3,479) (3,239) (2,807) Prior service cost recognized................... 1,410 1,410 756 Net loss recognized............................. 1,281 436 875 Amortization of transition obligation........... 201 201 201 --------- --------- --------- Net pension cost........................... $ 8,571 $ 5,883 $ 5,121 ========= ========= =========
The net postretirement benefit cost includes the following components (in thousands):
1998 1997 1996 --------- --------- --------- Service cost...................................... $ 718 $ 578 $ 640 Interest cost on accumulated benefit obligations.. 1,024 990 932 Amortization of transition obligation............. 333 333 333 --------- --------- --------- Net postretirement benefit cost.............. $ 2,075 $ 1,901 $ 1,905 ========= ========= =========
Affiliates that participate in the pension and postretirement plans reimburse the Company for their share of the annual benefit cost of the plans. The affiliates' share of the benefit cost for 1998 was $3,091,000. The Company also has a deferred compensation program which permits directors and certain management employees of the Company and certain affiliates to defer portions of their compensation on a pretax basis. The participants designate the investment of the deferred funds based on various alternatives and, under certain of the plans, the Company's contributions are made in common stock. The Company recognized deferred compensation expense related to this program of $189,000, $73,000 and $84,000 in 1998, 1997 and 1996, respectively. (7) DEBT In recognition of the various characteristics of real estate financing, debt is classified as follows: (a) "Property debt not carrying a Parent Company guarantee of repayment" which is subsidiary company debt having no express written obligation which would require the Company to repay the principal amount of such debt during the full term of the loan (nonrecourse loans); and (b) "Parent Company debt and debt carrying a Parent Company guarantee of repayment" which is debt of the Company and subsidiary company debt with an express written obligation of the Company to repay the principal amount of such debt during the full term of the loan (Company and recourse loans). With respect to nonrecourse loans, the Company has in the past and may in the future, under some circumstances, support those subsidiary companies whose annual obligations, including debt service, exceed their operating revenues. At December 31, 1998 and 1997, nonrecourse loans include $185,574,000 and $416,335,000, respectively, of subsidiary companies' mortgages and bonds which are subject to agreements with lenders requiring the Company to provide support for operating and debt service costs, where necessary, for defined periods or until specified conditions relating to the operating results of the related properties are met. 20 Debt at December 31, 1998 and 1997 is summarized as follows (in thousands):
1998 1997 ----------- ----------- Mortgages and bonds....................... $ 2,948,324 $ 2,159,418 Convertible subordinated debentures....... 128,515 130,000 Medium-term notes......................... 97,500 110,300 Bank credit facility borrowings: Bridge facility......................... 304,000 --- Revolving credit facility............... 298,000 --- Other loans............................... 282,481 229,831 ----------- ----------- Total................................ $ 4,058,820 $ 2,629,549 =========== ===========
Mortgages and bonds are secured by deeds of trust or mortgages on properties and general assignments of rents. This debt matures at various dates through 2024 and, at December 31, 1998, bears interest at a weighted-average effective rate of 7.65%, including lender participations in operations. At December 31, 1998, approximately $312,008,000 of this debt provides for payments of additional interest based on operating results of the related properties in excess of stated levels. The convertible subordinated debentures bear interest at 5.75% and mature in 2002. The debentures are convertible at the option of holders into one share of common stock for each $28.63 of par value and are redeemable at the option of the Company at any time at a price equal to par value plus accrued interest. The Company has registered $150,000,000 of unsecured, medium-term notes which may be issued to the public from time to time. The notes may be issued, subject to market conditions, for varying terms (nine months to 30 years) and at fixed or variable interest rates based on market indices at the time of issuance. The notes outstanding at December 31, 1998, mature at various dates from 1999 to 2015, bear interest at a weighted-average effective rate of 7.6% (including an average rate of 6.01% on $26,000,000 of variable rate notes) and have a weighted average maturity of 4.5 years. The Company has credit facilities with a group of lenders that provide for aggregate unsecured borrowings of up to $800,000,000, including $450,000,000 under a revolving credit facility and $350,000,000 under a bridge facility. Advances under the facilities bear interest at a variable rate based on LIBOR (6.52% on the revolving credit facility and 6.61% on the bridge facility at December 31, 1998). The revolving credit facility is available to July 2001, subject to a one-year renewal option. The bridge facility was available solely for specified property acquisitions that were completed in 1998 and related borrowings are due on or before July 30, 1999. In February 1999, approximately $271,000,000 of the outstanding borrowings under the bridge facility were repaid by a joint venture formed to own four of the acquired retail centers. At December 31, 1998, availability under the bridge loan facility had been fully utilized, and until it is repaid in full, the net proceeds of any equity transactions and project refinancings must be applied to reduce the balance. Payment of borrowings under the credit facilities is guaranteed by certain of the unconsolidated real estate ventures in which the Company has a majority financial interest, and the Company has pledged its stock in the ventures to the lenders under the credit facilities. Other loans include $120,000,000 of 8.5% unsecured notes due in 2003, various property acquisition loans and certain other borrowings. These loans include aggregate unsecured borrowings of $258,213,000 and $208,019,000 at December 31, 1998 and 1997, respectively, and at December 31, 1998, bear interest at a weighted-average effective rate of 8.28%. At December 31, 1998, approximately $1,376,844,000 of the mortgages and bonds and $58,000,000 of the other loans were payable to one lender. The agreements relating to various loans impose limitations on the Company. The most restrictive of these limit the levels and types of debt the Company and its affiliates may incur and require the Company and its affiliates to maintain specified minimum levels of debt service coverage and net worth. The agreements also impose restrictions on the dividend payout ratio, and on sale, lease and certain other transactions, subject to various exclusions and limitations. These restrictions have not limited the Company's normal business activities. 21 The annual maturities of debt at December 31, 1998 are summarized as follows (in thousands):
Nonrecourse Company and Loans Recourse Loans Total ------------- ---------------- ------------- 1999......................... $ 159,407 $ 337,058 $ 496,465 2000......................... 57,080 104,622 161,702 2001......................... 171,241 358,189 529,430 2002......................... 121,051 163,440 284,491 2003......................... 439,696 120,092 559,788 Subsequent to 2003........... 1,974,644 52,300 2,026,944 ----------- ------------ ----------- Total................... $ 2,923,119 $ 1,135,701 $ 4,058,820 =========== ============ ===========
At December 31, 1998, the Company had interest rate cap agreements which effectively limit the average interest rate on $70,538,000 of mortgages to 8.9% through May 2002. The interest rate swap agreements outstanding at December 31, 1998 were not material. Interest rate exchange agreements did not have a material effect on the weighted-average effective interest rates on debt at December 31, 1998 and 1997 or interest expense for 1998, 1997 and 1996. Total interest costs were $229,478,000 in 1998, $231,098,000 in 1997, and $230,960,000 in 1996, of which $19,914,000, $23,608,000, and $10,579,000 were capitalized, respectively. In 1998, the Company recognized net extraordinary gains related to extinguishments of debt prior to scheduled maturity of $3,626,000, and in 1997 and 1996 incurred extraordinary losses on such transactions of $32,834,000, and $2,236,000, respectively, before deferred income tax benefits of $729,000, $11,492,000 and $783,000, respectively. The sources of funds used to pay the debt and fund the prepayment penalties, where applicable, were refinancings of properties, the Series B Preferred stock issued in 1997, the medium-term notes and the Company-obligated mandatorily redeemable preferred securities issued in 1995. The estimated fair value of debt is determined based on quoted market prices for publicly-traded debt and on the discounted estimated future cash payments to be made for other debt. The discount rates used approximate current market rates for loans or groups of loans with similar maturities and credit quality. The estimated future payments include scheduled principal and interest payments, and lenders' participations in operating results and residual values of the related properties, where applicable. The carrying amount and estimated fair value of the Company's debt at December 31, 1998 and 1997 are summarized as follows (in thousands):
1998 1997 ------------------------ ------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- Fixed rate debt........ $3,099,949 $3,198,641 $2,390,590 $2,528,215 Variable rate debt..... 958,871 958,871 238,959 238,959 ---------- ---------- ---------- ---------- $4,058,820 $4,157,512 $2,629,549 $2,767,174 ========== ========== ========== ==========
Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of the Company's debt obligations at fair value may not be possible and may not be a prudent management decision. (8) COMPANY-OBLIGATED The redeemable preferred securities consist of MANDATORILY REDEEMABLE 5,500,000 Cumulative Quarterly Income Preferred PREFERRED SECURITIES Securities (preferred securities), with a liquidation amount of $25 per security, which were issued in November 1995 by a statutory business trust. The trust used the proceeds of the preferred securities and other assets to purchase at par $141,753,000 of junior subordinated debentures (debentures) of the Company due in November 2025, which are the sole assets of the trust. Payments to be made by the trust on the preferred securities are dependent on payments that the Company has undertaken to make, particularly the payments to be made by the Company on 22 the debentures. Compliance by the Company with its undertakings, taken together, would have the effect of providing a full, irrevocable and unconditional guarantee of the trust's obligations under the preferred securities. Distributions on the preferred securities are payable from interest payments received on the debentures and are due quarterly at an annual rate of 9.25% of the liquidation amount, subject to deferral for up to five years under certain conditions. Distributions payable are included in operating expenses. Redemptions of the preferred securities are payable at the liquidation amount from redemption payments received on the debentures. The Company may redeem the debentures at par at any time after November 27, 2000, but redemptions at or prior to maturity are payable only from the proceeds of issuance of capital stock of the Company or of securities substantially comparable in economic effect to the preferred securities. During 1998, the Company repurchased 21,400 of the preferred securities for approximately $535,000. (9) 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. The retail centers segment includes the operation and management of retail centers, including regional shopping centers, downtown specialty marketplaces and village centers. The office, mixed-use and other properties segment includes the operation and management of office, industrial and mixed-use properties. The land sales operations segment includes the development and sale of land, primarily in large-scale, long- term community development projects in Columbia and Summerlin. The development segment includes the evaluation of all potential new projects (including expansions of existing properties) and acquisition opportunities and the management of them through the development or acquisition process. The corporate segment is responsible for cash and investment management and certain other general and support functions. The Company's reportable segments offer different products or services and are managed separately because each requires different operating strategies and management expertise. 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 described in note 1, 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. 23 Operating results for the segments are summarized as follows (in thousands):
Office, Mixed- Retail use and Other Land Centers Properties Sales Operations Development Corporate Total ---------- -------------- ---------------- ----------- --------- ----- 1998 - ---- Revenues..................... $ 559,821 $ 215,919 $ 197,706 $ --- $ 3,797 $ 977,243 Operating expenses, exclusive of deprecia- tion and amortization, and current income taxes... 268,851 102,956 144,732 7,383 24,109 548,031 Interest expense............. 150,889 77,894 4,201 --- (8,614) 224,370 ---------- ----------- ------------ --------- --------- ---------- FFO...................... $ 140,081 $ 35,069 $ 48,773 $ (7,383) $ (11,698) $ 204,842 ========== =========== ============ ========= ========= ========== 1997 - ---- Revenues..................... $ 503,655 $ 216,571 $ 203,219 $ --- $ 4,485 $ 927,930 Operating expenses, exclusive of deprecia- tion and amortization, and current income taxes... 258,229 108,104 151,842 4,747 16,128 539,050 Interest expense............. 122,325 81,905 4,287 --- (1,027) 207,490 ---------- ----------- ------------ --------- --------- ---------- FFO...................... $ 123,101 $ 26,562 $ 47,090 $ (4,747) $ (10,616) $ 181,390 ========== =========== ============ ========= ========= ========== 1996 - ---- Revenues..................... $ 508,415 $ 182,154 $ 137,853 $ --- $ 3,495 $ 831,917 Operating expenses, exclusive of deprecia- tion and amortization, and current income taxes... 260,027 89,643 107,791 4,964 9,752 472,177 Interest expense............. 129,091 76,659 1,658 361 12,612 220,381 ---------- ----------- ------------ --------- --------- ---------- FFO...................... $ 119,297 $ 15,852 $ 28,404 $ (5,325) $ (18,869) $ 139,359 ========== =========== ============ ========= ========= ==========
24 Reconciliations of the total revenues and expenses reported above to the related amounts in the financial statements and of FFO reported above to earnings before income taxes, extraordinary losses and cumulative effect of changes in accounting principle in the financial statements are summarized as follows:
1998 1997 1996 ---------- ---------- ---------- Revenues: Total reported above..................... $ 977,243 $ 927,930 $ 831,917 Revenues of majority financial interest ventures excluding interest on advances to the Company............... (272,943) --- --- Revenues representing the Company's share of FFO of minority financial interest ventures .................... (12,753) (11,159) (10,881) Other.................................... 1,024 --- --- ---------- ---------- ---------- Total in financial statements......... $ 692,571 $ 916,771 $ 821,036 ========== ========== ========== Operating expenses, exclusive of depreciation and amortization: Total reported above....................... $ 548,031 $ 539,050 $ 472,177 Operating expenses of majority financial interest ventures........... (161,350) --- --- Current income taxes applicable to operations............................ 24 (3,208) (123) Participation by others in the Company's share of earnings of majority financial interest ventures........... (24,152) --- --- Other.................................. (4,171) --- --- ---------- ---------- ---------- Total in financial statements......... $ 358,382 $ 535,842 $ 472,054 ========== ========== ========== Interest expense: Total reported above..................... $ 224,370 $ 207,490 $ 220,381 Interest expense of majority financial interest ventures excluding interest on borrowings from the Company........ (14,806) --- --- ---------- ---------- ---------- Total in financial statements......... $ 209,564 $ 207,490 $ 220,381 ========== ========== ========== Operating results: FFO reported above....................... $ 204,842 $ 181,390 $ 139,359 Depreciation and amortization............ (84,068) (82,944) (77,414) Loss on dispositions of assets and other provisions, net................. (11,174) (23,484) (16,499) Depreciation and amortization, gain on disposition of assets and deferred income taxes of unconsolidated real estate ventures, net......................... (4,380) (4,344) (1,964) Current income taxes (benefit) applicable to operations.............. (24) 3,208 123 Other.................................... (44) --- --- ---------- ---------- ---------- Earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principle........................... $ 105,152 $ 73,826 $ 43,605 ========== ========== ==========
25 The assets by segment at December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996 ------------ ------------ ------------ Retail centers........................ $ 3,636,874 $ 2,144,334 $ 2,374,162 Office, mixed-use and other properties........................ 1,417,622 1,127,640 796,329 Land sales operations................. 609,701 615,887 308,014 Development........................... 61,166 165,101 92,030 Corporate............................. 57,933 126,593 72,917 ------------ ------------ ------------ Total............................. $ 5,783,296 $ 4,179,555 $ 3,643,452 =========== =========== ============
Total segment assets exceeds total assets reported in the financial statements primarily because of the consolidation of the majority financial interest ventures for segment reporting purposes. Additions to long-lived assets of the segments are summarized as follows (in thousands):
1998 1997 1996 ------------ ------------ ------------- Retail centers: Acquisitions...................... $ 1,042,846 $ 83,985 $ 191,564 Expansions and renovations........ 231,607 139,608 47,449 Improvements for tenants and other 18,105 15,960 13,796 ------------- ------------- ------------- 1,292,558 239,553 252,809 ------------- ------------- ------------- Office, mixed-use and other properties: Acquisitions...................... 288,694 550 302,773 Expansions and renovations........ 24,390 975 6,176 Improvements for tenants and other 10,688 7,667 7,421 ------------- ------------- ------------- 323,772 9,192 316,370 ------------- ------------- ------------- Land sales operations: Acquisitions...................... 16,993 --- 118,764 Development expenditures.......... 82,656 131,310 48,474 ------------- ------------- ------------- 99,649 131,310 167,238 ------------- ------------- ------------- Development: Construction and development costs of new projects......... 112,184 153,620 58,581 ------------- ------------- ------------- Total................. $ 1,828,163 $ 533,675 $ 794,998 ============= ============= =============
Approximately $169,860,000 of the additions in 1998 relate to property owned by the majority financial interest ventures. (10) INCOME TAXES Income tax expense (benefit) for 1997 and 1996 is reconciled to the amount computed by applying the Federal corporate tax rate as follows (in thousands):
1997 1996 ----------- ----------- Tax at statutory rate on earnings before income taxes, extraordinary items and cumulative effect of changes in accounting principle............................ $ 25,839 $ 15,262 State income taxes, net of Federal income tax benefit..................................... 3,147 1,023 Nondeductible portion of distributions under Contingent Stock Agreement................ 13,381 9,434 Reduction of net deferred tax liabilities........... (158,433) --- ----------- ---------- Income tax expense (benefit)...................... $ (116,066) $ 25,719 =========== ==========
26 As discussed in note 1, the Company qualified to be taxed as a REIT beginning in 1998. Management believes that the Company continued to meet the qualifications for REIT status as of December 31, 1998, and intends for it to continue to meet the qualifications in the future. Management does not expect the Company will be liable for significant income taxes at the Federal level or in most states in 1998 and future years. Accordingly, the Company eliminated substantially all of its existing deferred tax assets and liabilities at December 31, 1997 and no longer provides for Federal or most state deferred income taxes. At December 31, 1998, the income tax bases of the Company's assets and liabilities were approximately $4,338,000,000 and $4,422,000,000, respectively. The net operating losses carried forward from December 31, 1998 for Federal income tax purposes aggregate approximately $281,000,000, and will expire from 2005 to 2011. 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. Management believes that the Company will not be required to make significant payments of taxes on built-in gains throughout the ten-year period due to the availability of its net operating loss carryforward to offset built-in gains which might be recognized, and the potential for the Company to make nontaxable dispositions, if necessary (e.g., like-kind exchanges of properties). At December 31, 1998, the net regular tax 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 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. (11) LOSS ON DISPOSITIONS Loss on dispositions of assets and other OF ASSETS AND OTHER provisions, net, is summarized as follows PROVISIONS, NET (in thousands):
1998 1997 1996 ------------ ----------- ---------- Net loss on operating properties........ $ (6,109) $ (22,426) $ (26,515) Litigation judgment..................... --- --- 8,716 Other, net.............................. (5,065) (1,058) 1,300 ------------ ----------- ---------- Total............................... $ (11,174) $ (23,484) $ (16,499) ============ =========== ==========
The net loss on operating properties in 1998 relates primarily to a loss on disposal of a retail center. The other net loss for 1998 includes a fourth quarter loss of $6,396,000 related to a treasury lock contract that no longer qualified for hedge accounting because the Company determined that the related anticipated financing transaction will not occur under the terms and timing originally expected. The net loss on operating properties in 1997 relates primarily to provisions for losses recognized on several retail centers, an industrial property and a hotel the Company decided to sell, including additional provisions of $3,653,000 related to retail centers held for disposition prior to 1997. These provisions were partially offset by gains on dispositions of five office buildings ($4,704,000). The net loss on operating properties in 1996 relates primarily to provisions for losses recognized on five retail centers the Company decided to sell. The litigation judgment relates to a matter involving a former tenant at the Riverwalk Shopping Center. In 1995, an appellate court substantially affirmed a trial court judgment against the Company and certain of its affiliates in an action in which the former tenant alleged various breaches of its lease agreement and claimed damages for lost future profits. The Company recorded a provision for the full amount of the appellate award ($12,321,000) at that time. In 1996, a portion of the provision recorded in 1995 was reversed following a negotiated settlement of the matter. 27 (12) PREFERRED STOCK The Company has authorized 50,000,000 shares of Preferred stock of 1(cent)par value per share of which (a) 4,505,168 shares have been classified as Series A Convertible Preferred; (b) 4,600,000 shares have been classified as Series B Convertible Preferred, (c) 10,000,000 shares have been classified as Increasing Rate Cumulative Preferred; and (d) 37,362 shares have been classified as 10.25% Junior Preferred, Series 1996. The Company sold 4,050,000 shares of the Series B Convertible Preferred stock in a public offering in the first quarter of 1997. The shares have a liquidation preference of $50 per share and earn dividends at an annual rate of 6% of the liquidation preference. At the option of the holders, each share of the Series B Convertible Preferred stock is convertible into shares of the Company's common stock at a conversion rate of approximately 1.311 shares of common stock for each share of Preferred stock, subject to adjustment in certain circumstances. In addition, beginning April 1, 2000, the shares of Preferred stock are redeemable for shares of common stock at the option of the Company, subject to certain conditions. The Company sold 4,025,000 shares of the Series A Convertible Preferred stock in a public offering in 1993 and issued 480,168 shares in 1994 in connection with a modification of terms of a debt agreement related to a retail center. The shares of Series A Convertible Preferred stock had a liquidation preference of $50 per share and earned dividends at an annual rate of 6.5% of the liquidation preference. Each share was convertible into shares of the Company's common stock at a conversion rate of approximately 2.35 shares of common stock for each share of Preferred stock, subject to certain conditions. On September 30, 1996, the Company redeemed all of the then outstanding shares of Series A Convertible Preferred stock. In 1996, the Company issued 10,598,721 shares of common stock in exchange for 4,504,579 shares of Series A Convertible Preferred stock. Shares of the Increasing Rate Cumulative Preferred stock are issuable only to former Hughes owners or their successors pursuant to the Contingent Stock Agreement described in note 13. These shares are issuable only in limited circumstances and no shares have been issued. There were also no shares of 10.25% Junior Preferred stock, Series 1996, outstanding at December 31, 1998 and 1997. (13) COMMON STOCK At December 31, 1998, shares of authorized and unissued common stock are reserved as follows: (a) 16,843,281 shares for issuance under the Contingent Stock Agreement discussed below; (b) 7,678,776 shares for issuance under the Company's stock option and stock bonus plans; (c) 4,489,607 shares for conversion of the convertible subordinated debentures; and (d) 5,309,955 shares for conversion of the Series B Convertible Preferred stock. In connection with the acquisition of Hughes, the Company entered into a Contingent Stock Agreement ("Agreement") for the benefit of the former Hughes owners or their successors (the beneficiaries). Under terms of the agreement, additional shares of common stock (or in certain circumstances, Increasing Rate Cumulative Preferred stock) are issuable to the beneficiaries based on the appraised values of four defined groups of acquired assets at specified "termination dates" from 2000 to 2009 and/or cash flows generated from the development and/or sale of those assets prior to the termination dates (the "earnout periods"). The distributions of additional shares, based on cash flows, are payable semiannually as of June 30 and December 31. At December 31, 1998, a distribution of approximately 589,000 shares ($16,207,000) was payable to the beneficiaries. The Agreement is, in substance, an arrangement under which the Company and the beneficiaries will share in cash flows from development and/or sale of the defined assets during their respective earnout periods and the Company will issue additional shares of common stock to the beneficiaries based on the value, if any, of the defined asset groups at the termination dates. Substantially all of the remaining assets in the four defined asset groups were owned by subsidiaries in which the Company sold a majority voting interest to The Rouse Company Incentive Compensation Statutory Trust on December 31, 1997. However, the Company retained full responsibility for its obligations under the Agreement and, accordingly, it accounts for the beneficiaries' share of earnings from the assets as a reduction of its equity in the earnings of the related ventures. Prior to 1998, the Company accounted for the beneficiaries' share of earnings from the assets as an operating expense. The Company will account for any distributions to the beneficiaries as of the termination dates as an additional investment in the related ventures (i.e., contingent consideration). At the time of acquisition of Hughes, the Company reserved 20,000,000 shares of com- 28 mon stock for possible issuance under the Agreement. The number of shares reserved was determined based on conservative estimates in accordance with the provisions of the Agreement. The actual number of shares issuable will be determined only from events occurring over the term of the Agreement and could differ significantly from the number of shares reserved. Under the Company's stock option plans, options to purchase shares of common stock and stock appreciation rights may be awarded to directors, officers and employees. Stock options are generally granted with an exercise price equal to the market price of the common stock on the date of grant, typically vest over a three- to five-year period, subject to certain conditions, and have a maximum term of ten years. The Company has not granted any stock appreciation rights. Changes in options outstanding under the plans are summarized as follows:
1998 1997 1996 ---------------------- -------------------- --------------------- Weighted- Weighted- Weighted- average average average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- -------- --------- -------- --------- -------- Balance at beginning of year............. 4,670,138 $ 24.90 2,765,779 $ 20.18 2,227,400 $ 19.89 Options granted.... 1,210,402 29.06 2,155,901 30.45 654,000 21.09 Options exercised........ (263,076) 19.48 (239,942) 20.16 (87,371) 18.61 Options expired or cancelled........ (183,250) 30.36 (11,600) 28.76 (28,250) 22.82 ---------- -------- ---------- -------- --------- -------- Balance at end of year... 5,434,214 $ 25.91 4,670,138 $ 24.90 2,765,779 $ 20.18 ========== ======== ========== ======= ========= ========
Information about stock options outstanding at December 31, 1998 is summarized as follows:
Options Outstanding Options Exercisable ----------------------------------------------------------------- --------------------------- Weighted- Range of average Weighted- Weighted- Exercise Remaining average average Prices Shares Life (Years) Exercise Price Shares Exercise Price ----------------- ---------- ------------ -------------- ---------- -------------- $13.50 to $19.875 1,645,961 5.6 $18.68 1,130,995 $18.37 $23.75 to $32.875 3,788,253 7.7 29.04 799,923 26.08 ---------- --- ------ ---------- ------ 5,434,214 7.0 $25.91 1,930,918 $21.56 ========== === ====== ========== ======
At December 31, 1997 and 1996, options to purchase 1,594,705 and 1,449,844 shares, respectively, were exercisable at per share weighted-average prices of $21.07 and $20.84, respectively. The per share weighted-average estimated fair values of options granted during 1998, 1997 and 1996 were $3.17, $8.34, and $5.44, respectively. These fair values were estimated on the dates of each grant using the Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996 ---- ---- ---- Risk-free interest rate......... 4.6% 6.0% 6.0% Dividend yield.................. 6.0 3.5 4.0 Volatility factor............... 21.8 28.0 28.0 Expected life in years.......... 6.6 6.9 7.0 ===== ==== ====
The option prices were greater than or equal to the market prices at the date of grant for all of the options granted in 1998, 1997 and 1996 and, accordingly, no compensation cost has been recognized for stock options in the financial statements. 29 If the Company had applied a fair value-based method to recognize compensation cost for stock options, net earnings and earnings per share of common stock would have been adjusted as indicated below (in thousands):
1998 1997 1996 ---- ---- ---- Net earnings: As reported.................................. $ 104,902 $ 167,336 $ 16,433 Pro forma.................................... 99,653 164,445 15,397 Earnings per share of common stock: Basic: As reported............................... 1.36 2.36 .10 Pro forma................................. 1.28 2.32 .08 Diluted: As reported............................... 1.34 2.29 .09 Pro forma................................. 1.27 2.25 .08 ======== ======== =======
The pro forma amounts reflect only options granted after 1994. Therefore, the full impact of calculating compensation cost for stock options under a fair value-based method is not reflected in the pro forma amounts because compensation cost is reflected over the options' vesting periods and compensation cost for options granted prior to January 1, 1995 is not required to be considered. Under the Company's stock bonus plans, shares of common stock may be awarded to officers and employees. Shares awarded under the plans are typically subject to forfeiture restrictions which lapse at defined annual rates. Awards granted in 1998, 1997 and 1996 aggregated 164,850, 49,000 and 415,000 shares, respectively, with a weighted-average market value per share of $27.54, $31.25 and $20.99, respectively. In connection with the stock bonus plan awards, the Company typically makes loans to the recipients for the payment of related income taxes, which loans are forgiven in installments subject to the recipients' continued employment. The total loans outstanding at December 31, 1998, 1997 and 1996 were $4,012,000, $5,710,000, and $6,565,000, respectively. The Company recognizes amortization of the fair value of the stock awarded, any forgiven loan installments and certain related costs as compensation costs on a straight-line basis over the terms of the awards. Such costs amounted to $5,572,000 in 1998, $5,807,000 in 1997, and $4,923,000 in 1996. 30 (14) EARNINGS PER SHARE Information relating to the calculations of earnings per share of common stock for 1998, 1997 and 1996 is summarized as follows (in thousands):
1998 1997 1996 ------------------- ------------------- ---------------- Basic Diluted Basic Diluted Basic Diluted ----- ------- ----- ------- ----- ------- Earnings before extraordinary items and cumulative effect of changes in accounting principle................. $105,176 $ 105,176 $ 189,892 $ 189,892 $ 17,886 $ 17,886 Dividends on Preferred stock.. (12,152) (12,152) (10,313) --- (10,533) (10,533) Dividends on unvested common stock awards....... (620) (425) (632) (552) (659) (659) Interest on convertible subordinated debentures... --- --- --- 7,475 --- --- --------- --------- --------- -------- -------- -------- Adjusted earnings before extraordinary items and cumulative effect of changes in accounting principle used in EPS computation........ $ 92,404 $ 92,599 $ 178,947 $ 196,815 $ 6,694 $ 6,694 ========= ========== ========= ========= ======== ======== Weighted-average shares outstanding............... 67,874 67,874 66,201 66,201 54,913 54,913 Dilutive securities: Convertible subordinated debentures.............. --- --- --- 4,542 --- --- Convertible Preferred stock --- --- --- 4,509 --- --- Options, warrants and unvested common stock awards.................. --- 985 --- 753 --- 398 --------- --------- --------- --------- -------- -------- Adjusted weighted-average shares used in EPS computation............... 67,874 68,859 66,201 76,005 54,913 55,311 ========= ========== ========= ========= ======== ========
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. (15) LEASES The Company, as lessee, has entered into operating leases expiring at various dates through 2076. Rents under such leases aggregated $8,096,000 in 1998, $9,147,000 in 1997, and $9,648,000 in 1996, including contingent rents, based on the operating performance of the related properties, of $2,330,000, $3,158,000, and $3,844,000, respectively. In addition, real estate taxes, insurance and maintenance expenses are obligations of the Company. Minimum rent payments due under operating leases in effect at December 31, 1998 are summarized as follows (in thousands): 1999................................................................. $ 6,114 2000................................................................. 5,962 2001................................................................. 5,996 2002................................................................. 6,015 2003................................................................. 5,984 Subsequent to 2003................................................... 218,799 --------- Total............................................................ $ 248,870 =========
31 Space in the Company's operating properties is leased to approximately 6,000 tenants. In addition to minimum rents, the majority of the retail center leases provide for percentage rents when the tenants' sales volumes exceed stated amounts, and the majority of the retail center and office leases provide for other rents which reimburse the Company for certain of its operating expenses. Rents from tenants are summarized as follows (in thousands):
1998 1997 1996 ------------- ------------- ------------ Minimum rents......................... $ 383,974 $ 387,488 $ 348,296 Percentage rents...................... 13,071 14,999 14,830 Other rents........................... 204,862 213,005 223,949 ----------- ----------- ----------- Total............................. $ 601,907 $ 615,492 $ 587,075 ========== ========== ==========
The minimum rents to be received from tenants under operating leases in effect at December 31, 1998, excluding leases of properties held for sale and of retail centers contributed to a joint venture in February 1999, are summarized as follows (in thousands): 1999..................................................................... $ 393,882 2000..................................................................... 358,232 2001..................................................................... 313,208 2002..................................................................... 271,192 2003 .................................................................... 220,097 Subsequent to 2003....................................................... 708,453 ----------- Total................................................................ $ 2,265,064 ===========
Rents under finance leases aggregated $9,332,000 in 1998, $9,316,000 in 1997, and $9,645,000 in 1996. The net investment in finance leases at December 31, 1998 and 1997 is summarized as follows (in thousands):
1998 1997 ------------ ----------- Total minimum rent payments to be received over lease terms................................... $ 157,374 $ 166,706 Estimated residual values of leased properties......... 5,695 5,695 Unearned income........................................ (75,717) (83,237) ------------ ------------ Net investment in finance leases................... $ 87,352 $ 89,164 =========== ===========
Minimum rent payments to be received from tenants under finance leases in effect at December 31, 1998 are $9,304,000, $9,365,000, $10,190,000, $10,164,000, and $10,261,000 for 1999, 2000, 2001, 2002 and 2003, respectively. 32 (16) OTHER COMMITMENTS Commitments for the construction and AND CONTINGENCIES development of properties in the ordinary course of business and other commitments not set forth elsewhere amount to approximately $129,000,000 at December 31, 1998. At December 31, 1998, subsidiaries of the Company have contingent liabilities of approximately $17,791,000 with respect to future minimum rents under long-term lease obligations of certain unconsolidated real estate ventures and approximately $10,795,000 with respect to bank letters of credit issued to secure their obligations under certain agreements. At December 31, 1998, 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. Securities may be issued pursuant to this registration statement in amounts and on terms to be determined at the time of offering. 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 litigation matters, where appropriate, and the ultimate resolution of 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, it is not possible to predict whether the resolution of these matters is likely to have a material effect on the Company's net earnings and it is, therefore, possible that the resolution of these matters could have such an effect in any future quarter or year. (17) NEW ACCOUNTING In March 1998, the American Institute of STANDARDS NOT YET Certified Public Accountants issued ADOPTED Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) which is required to be adopted by the Company no later than January 1, 1999. SOP 98-1 provides guidance as to whether costs incurred relating to internal-use software should be expensed or capitalized. The guidance in SOP 98-1 is required to be applied to costs incurred subsequent to adoption and may not be applied to costs incurred prior to initial application. The Company intends to adopt SOP 98-1 effective January 1, 1999, and does not believe that adoption will have a material effect on its results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5) which is required to be adopted by the Company no later than January 1, 1999. SOP 98-5 requires that start-up costs and organization costs, not otherwise addressed in existing authoritative literature, be expensed as incurred. The Company intends to adopt SOP 98-5 effective January 1, 1999, and the initial application will be reported as the cumulative effect of a change in accounting principle. The Company does not believe that adoption will have a material effect on its results of operations in future periods. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (Statement 133) which is required to be adopted by the Company no later than January 1, 2000. The Company's use of derivative instruments has consisted primarily of interest rate swap and cap agreements related to specific debt financings. While the Company has not completed its analysis of Statement 133 and has not made a decision regarding the timing of adoption, it does not believe that adoption will have a material effect on its financial position and results of operations based on its current use of derivative instruments. 33
- ---------------------------------------------------------------------------------------------------------------------------------- FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA Year ended December 31 (in thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ---------- Operating results data: Revenues from continuing operations............. $ 692,571 $ 916,771 $ 821,036 $ 672,821 $ 671,171 Earnings from continuing operations............. 105,176 189,892 17,886 5,850 6,606 Basic earnings (loss) from continuing operations applicable to common shareholders per share of common stock..................... 1.36 2.70 .13 (.19) (.14) Diluted earnings (loss) from continuing operations applicable to common shareholders per share of common stock............................... 1.34 2.59 .12 (.19) (.14) Balance sheet data: Total assets.................................... 5,154,643 3,589,768 3,643,452 2,985,609 2,915,860 Debt and capital leases......................... 4,068,459 2,684,140 2,895,447 2,538,315 2,532,920 Shareholders' equity ........................... 628,926 465,515 177,149 42,584 95,026 Shareholders' equity per share of common stock (note 1) ........................ 8.11 6.45 2.65 .73 1.63 Other selected data: Funds from Operations (note 2).................. 204,842 181,390 139,359 108,360 94,710 Net cash provided (used) by: Operating activities.......................... 261,183 185,516 168,126 107,001 113,775 Investing activities.......................... (1,032,200) (322,479) (182,995) (64,995) (178,551) Financing activities.......................... 721,611 180,297 (36,287) 3,518 40,618 Dividends per share of common stock............. 1.12 1.00 .88 .80 .68 Dividends per share of convertible Preferred stock............................... 3.00 2.65 2.44 3.25 3.25 Market price per share of common stock at year end................................... 27.50 32.75 31.75 20.13 19.25 Market price per share of convertible Preferred stock at year end................... 43.38 50.50 --- 51.63 48.50 Weighted-average common shares outstanding (basic)........................... 67,874 66,201 54,913 47,375 47,258 Weighted-average common shares outstanding (diluted)......................... 68,859 76,005 55,311 47,375 47,258
NOTES: (1)---For 1998 and 1997, shareholders' equity per share of common stock assumes conversion of the Series B Convertible Preferred stock issued in 1997. For 1995 and 1994, shareholders' equity per share of common stock assumes the conversion of the Series A Convertible Preferred stock. The Series A Convertible Preferred Stock was issued in 1993 and redeemed for common stock in 1996. (2)---Funds from Operations (FFO) is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles. Additionally, FFO is not necessarily indicative of cash available to fund cash needs, including the payment of dividends, and should not be considered as an alternative to cash flows as a measure of liquidity. See the "Funds from Operations" section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 42 for a full discussion of FFO. 34
- --------------------------------------------------------------------------------------------------------------------------------- INTERIM FINANCIAL INFORMATION (UNAUDITED) Interim consolidated results of operations are summarized as follows (in thousands, except per share data): - --------------------------------------------------------------------------------------------------------------------------------- Quarter ended --------------------------------------------------------------------------------------------- December September June March December September June March 31, 1998 30, 1998 30, 1998 31, 1998 31, 1997 30, 1997 30, 1997 31, 1997 -------- -------- -------- -------- -------- -------- --------- -------- Revenues...................... $193,714 $164,318 $155,377 $179,162 $240,096 $229,331 $239,602 $207,742 Operating income.............. 25,562 28,938 29,123 32,703 29,103 27,781 22,886 16,288 Earnings before extraordinary items....................... 19,868 21,512 29,264 34,532 162,086 16,271 3,125 8,410 NET EARNINGS (LOSS)........... 19,549 19,611 36,755 28,987 151,852 16,164 (6,961) 6,281 ======= ======= ======= ======== ======== ======== ========= ===== EARNINGS (LOSS) PER COMMON SHARE: Basic: Earnings before extraordinary items.................... $ .24 $ .27 $ .38 $ .47 $ 2.40 $ .20 $ --- $ .10 Extraordinary gains (losses) -- (.03) .11 (.01) (.14) --- (.15) (.03) Cumulative effect of accounting change................... -- --- --- (.07) (.02) --- --- --- ------- ------- ------- -------- -------- -------- --------- ----- $ .24 $ .24 $ .49 $ .39 $ 2.24 $ .20 $ (.15) $ .07 ======= ======= ======= ======== ======== ======== ========= ===== Diluted: Earnings before extraordinary items.................... $ .24 $ .27 $ .37 $ .46 $ 2.12 $ .20 $ --- $ .10 Extraordinary gains (losses) -- (.03) .11 (.01) (.11) --- (.15) (.03) Cumulative effect of accounting change................... -- --- --- (.07) (.02) --- --- --- ------- ------- ------ ------- -------- ------- ------- ------- TOTAL...................... $ .24 $ .24 $ .48 $ .38 $ 1.99 $ .20 $ (.15) $ .07 ======= ======= ====== ======= ======== ======= ======= =======
NOTE---Extraordinary gains (losses) relate to early extinguishments of debt. Net earnings for the fourth quarter of 1998 includes a loss of $6,396,000 ($.09 per share) related to a treasury lock contract that no longer qualified for hedge accounting. Net earnings for the third quarter of 1998 includes a loss of $7,653,000 ($.11 per share) on disposal of a retail center. Net earnings for the first quarter of 1998 includes the Company's equity in gains on disposition of operating properties of an unconsolidated real estate venture of $12,315,000 ($.18 per share). Net earnings for the fourth quarter of 1997 includes the effect of eliminating substantially all ($158,433,000) of the net deferred income tax liability ($2.39 per share basic, $2.05 per share diluted) due to the Company's determination to elect to be taxed as a REIT. Net earnings (loss) for the second and fourth quarters of 1997 include provisions for losses on operating properties of $8,964,000 ($.14 per share) and $8,229,000 ($.13 per share basic, $.10 per share diluted), respectively.
- --------------------------------------------------------------------------------------------------------------------------------- PRICE OF COMMON STOCK AND DIVIDENDS The Company's common stock is traded on the New York Stock Exchange. The prices and dividends per share were as follows: - --------------------------------------------------------------------------------------------------------------------------------- Quarter ended ----------------------------------------------------------------------------- December September June March December September June March 31, 1998 30, 1998 30, 1998 31, 1998 31, 1997 30, 1997 30, 1997 31, 1997 -------- --------- -------- -------- -------- -------- -------- -------- High.......................... $ 28.88 $ 32.19 $32.81 $34.69 $ 33.00 $31.50 $ 29.50 $ 32.00 Low........................... 23.63 24.81 28.88 29.75 27.25 28.44 25.75 28.88 Dividends..................... .28 .28 .28 .28 .25 .25 .25 .25 - ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF HOLDERS OF COMMON STOCK The number of holders of record of the Company's common stock as of February 18, 1999 was 2,105. 35 The Rouse Company and Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. In December 1997, the Company determined that it would elect to be taxed as a real estate investment trust ("REIT") effective January 1, 1998 and, on December 31, 1997, completed certain transactions that enabled it to meet the qualifications for REIT status. As a REIT, the Company has greater flexibility in acquisition and merger opportunities and its corporate income taxes will be substantially lower in future periods. 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 continually 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 its 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 space and/or add new department stores to its existing properties to meet its objectives. 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. 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. 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, Greengate Mall, Salem Mall and St. Louis Union Station) and its 5% ownership interests in six retail centers. In the fourth quarter, the Company also acquired a 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. The Company has continued to achieve strong financial results in recent years, despite the rapidly changing environment for retail businesses. Funds from Operations ("FFO"), which is defined and discussed in detail below, increased 13% in 1998 and 30% in 1997, including increases of 14% and 3%, respectively, from retail centers, 32% and 68%, respectively, from office/mixed use properties and 4% and 66%, respectively, from land sales. These results are attributable to several factors, including: . the acquisition of The Hughes Corporation and its affiliated partnership, Howard Hughes Properties, Limited Partnership (together "Hughes") in June 1996, . other changes in the Company's portfolio of properties, . expansions of certain retail properties, . openings of new retail centers and office buildings, 36 . higher occupancy levels in retail and office properties, . refinancings of project-related debt at lower interest rates and, . repayments of certain project-related and corporate debt. Management believes the outlook is for continued solid growth in FFO in 1999. The Company will continue to focus considerable effort and resources on leasing and remerchandising existing retail centers. The prospects for growth from retail centers and office/mixed-use properties are excellent as the Company should benefit from a full year of operations of properties acquired and/or opened in 1998 and continued strong occupancy levels in existing projects. FFO from land sales should also remain strong in 1999, assuming continued good market conditions in Columbia and Summerlin. OPERATING This discussion and analysis of operating results covers each of RESULTS the Company's five business segments as management believes that a segment analysis provides the most effective means of understanding the business. Note 9 to the consolidated financial statements and the information relating to revenues and expenses in the Five Year Summary of Funds from Operations and Net Earnings (Loss) on page 48, should be referred to when reading this discussion and analysis. As discussed in note 9, 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 interest, but does not own a majority voting interest, are reported 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. These differences affect only the reported revenues and operating and interest expenses 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 9. OPERATING PROPERTIES: The Company reports the results of its operating properties in two segments: retail centers and office/mixed-use properties. The Company's tenant leases provide the foundation for the performance of its retail centers and office/mixed-use properties. In addition to minimum rents, the majority of retail and office tenant leases provide for other rents which reimburse the Company for most of its operating expenses. Substantially all of the Company's retail leases also provide for additional rent (percentage rent) based on tenant sales in excess of stated levels. As leases expire, space is released, minimum rents are generally adjusted to market rates, expense reimbursement provisions are updated and new percentage rent levels are established for retail leases. Most of the Company's operating properties are financed with long-term, fixed rate, nonrecourse debt and, accordingly, their operating results are not directly affected by changes in interest rates. Although the interest rates on this debt do not fluctuate, certain loans provide for additional payments to the lenders based on operating results of the related properties in excess of stated levels. 37 RETAIL CENTERS: Operating results of retail centers are summarized as follows (in millions):
1998 ------------------------------------------------ Majority Minority Consolidated Interest Interest Properties Ventures Ventures Total 1997 1996 ------------ -------- -------- --------- ---------- ----------- Revenues.......................... $ 489.3 $ 58.7 $ 11.8 $ 559.8 $ 503.6 $ 508.4 Operating expenses, exclusive of depreciation and amortization.... 237.7 31.1 - 268.8 258.2 260.0 Interest expense.................. 138.3 12.6 - 150.9 122.3 129.1 --------- -------- -------- -------- -------- -------- 113.3 15.0 11.8 140.1 123.1 119.3 Depreciation and amortization..... 55.8 4.9 2.4 63.1 51.2 50.1 --------- -------- -------- -------- -------- -------- Operating income.................. $ 57.5 $ 10.1 $ 9.4 $ 77.0 $ 71.9 $ 69.2 ========= ======== ======== ======== ======== ========
Revenues from retail centers increased $56.2 million in 1998 and decreased $4.8 million in 1997. The increase in 1998 was attributable primarily to properties opened or expanded (approximately $25 million) or acquired (approximately $38 million) in 1998 and 1997, higher average occupancy levels (92.5% in 1998 as compared to 90.8% in 1997) and higher rents on re- leased space. These increases were partially offset by dispositions of interests in properties in 1998 and 1997 (approximately $25 million), and lower tenant lease termination payments. The decrease in 1997 was attributable primarily to dispositions of interests in properties in 1997 and 1996 and lower tenant lease termination payments. This decrease was partially offset by the effects of slightly higher average occupancy (90.8% in 1997 as compared to 90.2% in 1996), the operations of two properties which were opened or expanded in 1997 and a full year of operations of two properties in which the Company acquired interests in 1996. Total operating and interest expenses (exclusive of depreciation and amortization) for retail properties increased $39.2 million in 1998 and decreased $8.6 million in 1997. The increase in 1998 was attributable primarily to the properties opened or expanded (approximately $19 million) or acquired (approximately $37 million) in 1998 and 1997. These increases were partially offset by dispositions of interests in properties in 1998 and 1997 (approximately $24 million). The decrease in 1997 was attributable primarily to the dispositions of interests in properties referred to above and refinancings and repayments of project-related debt. These decreases were partially offset by the effects of a full year of operations of the properties in which the Company acquired interests in 1996. Depreciation and amortization expense for retail properties increased $11.9 million in 1998 and $1.1 million in 1997. These changes were due primarily to the net effect of changes in the Company's portfolio of retail properties referred to above. 38 OFFICE, MIXED-USE AND OTHER PROPERTIES: Operating results of office/mixed-use properties are summarized as follows (in millions):
1998 ------------------------------------------------- Majority Minority Consolidated Interest Interest Properties Ventures Ventures Total 1997 1996 ------------ -------- -------- --------- ---------- ----------- Revenues........................... $ 166.6 $ 48.2 $ 1.1 $ 215.9 $ 216.6 $ 182.2 Operating expenses, exclusive of depreciation and amortization..... 70.5 32.4 - 102.9 108.1 89.6 Interest expense................... 68.6 9.3 - 77.9 81.9 76.7 --------- -------- -------- --------- --------- --------- 27.5 6.5 1.1 35.1 26.6 15.9 Depreciation and amortization...... 27.9 5.5 .8 34.2 34.8 29.9 --------- -------- -------- --------- --------- --------- Operating income................... $ (.4) $ 1.0 $ .3 $ .9 $ (8.2) $ (14.0) ========= ======== ======== ========= ========= =========
Revenues from office/mixed-use properties decreased $0.7 million in 1998 and increased $34.4 million in 1997. The decrease in 1998 was attributable primarily to dispositions of certain properties in Los Angeles and Las Vegas, and certain industrial and hotel properties in Baltimore and Columbia (approximately $21 million). These decreases were substantially offset by the acquisition of the 64 office and industrial buildings referred to above (approximately $5 million), the openings of new office properties in Las Vegas in 1998 and 1997 (approximately $7 million), the addition of a cinema to Arizona Center in 1998 (approximately $2 million) and higher occupancy levels (96.3% in 1998 and 93.4% in 1997) at comparable properties. The increase in 1997 was attributable primarily to a full year of operations of the properties acquired in the Hughes transaction, openings of new office and other properties in Las Vegas and higher occupancy levels at hotel and Columbia office properties. Total operating and interest expenses (exclusive of depreciation and amortization) for office/mixed-use properties decreased $9.2 million in 1998 and increased $23.7 million in 1997. The decrease in 1998 was attributable primarily to the dispositions of properties referred to above (approximately $18 million) and to the repayment and refinancing of certain property debt. These decreases were partially offset by the project openings (approximately $5 million) and the acquisitions (approximately $4 million) referred to above. The increase in 1997 was attributable primarily to a full year of operations of the properties acquired in the Hughes transaction, the effects of higher occupancy levels and the openings of new properties referred to above. 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 salable land for particular uses and decisions to sell, develop or retain land. 39 Operating results from land sales operations are summarized as follows (in millions):
1998 ------------------------------------- Majority Consolidated Interest Hughes Land Operations: Properties Ventures Total 1997 1996 ------------ -------- --------- ---------- --------- Revenues............................. $ 33.7 $ 118.5 $ 152.2 $ 163.2 $ 98.4 Operating costs and expenses........................... 24.2 96.3 120.5 130.0 83.4 Interest expense..................... .2 .1 .3 .5 .7 --------- -------- --------- --------- -------- Operating income..................... $ 9.3 $ 22.1 $ 31.4 $ 32.7 $ 14.3 ========= ======== ========= ========= ======== Columbia and Other: Revenues............................. $ -- $ 45.5 $ 45.5 $ 40.0 $ 39.5 Operating costs and expenses........................... -- 24.2 24.2 21.8 24.4 Interest expense..................... .8 3.1 3.9 3.8 1.0 --------- -------- --------- --------- -------- Operating income (loss).............. (.8) $ 18.2 $ 17.4 $ 14.4 $ 14.1 ========= ======== ========= ========= ======== Total Land Sales Operations: Revenues............................. $ 33.7 $ 164.0 $ 197.7 $ 203.2 $ 137.9 Operating costs and expenses........................... 24.2 120.5 144.7 151.8 107.8 Interest expense..................... 1.0 3.2 4.2 4.3 1.7 --------- -------- --------- --------- -------- Operating income..................... $ 8.5 $ 40.3 $ 48.8 $ 47.1 $ 28.4 ========= ======== ========= ========= ========
Revenues and operating income from Hughes land operations for 1998 include $99.6 million and $20.7 million, respectively, relating to Summerlin and $52.6 million and $10.7 million, respectively, relating to other land holdings. Revenues and operating income from Hughes land operations for 1997 include $128.8 million and $27.1 million, respectively, relating to Summerlin and $34.4 million and $5.6 million, respectively, relating to other land holdings. Revenues and operating income from Hughes land operations for 1996 include $93.1 million and $14.2 million, respectively, relating to Summerlin and $5.3 million and $.1 million, respectively, relating to other land holdings. The decreases in revenues and operating income in 1998 relating to Summerlin were attributable primarily to lower levels of land sold for residential purposes. The increases in revenues and operating income in 1997 relating to Summerlin were attributable primarily to a full year of Hughes land operations. The increase in operating income in 1997 also reflects higher margins on sales, primarily because land on which development was completed or in progress at the time of the acquisition of Hughes (which carried lower profit margins) comprised a smaller proportion of sales in 1997 than in 1996. The increases in revenues and operating income relating to other land holdings in 1998 were attributable to higher levels of land sales at the Company's master planned business parks, including all of the remaining land at Howard Hughes Center in Los Angeles, California. These increases were partially offset by lower levels of sales of investment land. The increases in revenues and operating income in 1997 relating to other land holdings were attributable primarily to sales of various investment land parcels, particularly holdings in Nevada. Revenues and operating income from land sales in Columbia increased $5.5 million and $3.0 million, respectively, in 1998 and $.5 million and $1.3 million, respectively, in 1997. The increases in revenues and operating income in 1998 were attributable primarily to higher levels of land sales for commercial purposes. 40 DEVELOPMENT: Development expenses were $7.4 million in 1998, $4.7 million in 1997 and $5.3 million in 1996. These costs consist primarily of additions to the preconstruction reserve and new business costs. The preconstruction reserve is determined on a project-by- project basis and is maintained to provide for costs of projects in the preconstruction phase of development, including retail and mixed-use property renovation and expansion opportunities, which may not go forward to completion. Additions to the preconstruction reserve were $1.7 million in 1998, $2.8 million in 1997 and $2.7 million in 1996. New business costs relate primarily to the initial evaluation of potential acquisition and development opportunities. These costs were $5.7 million in 1998, $1.9 million in 1997 and $1.8 million in 1996. The lower level of preconstruction reserve additions in 1998 was due to the progress of several significant retail center projects. The higher level of new business costs in 1998 was attributable to the Company's focus on acquisition efforts. CORPORATE: Corporate revenues consist primarily of interest income earned on short-term investments, including investments of unallocated proceeds from refinancings of certain properties. Corporate interest income was $3.8 million in 1998, $4.5 million in 1997 and $3.5 million in 1996. The changes in income during these years were attributable primarily to changes in the average investment balances, including in 1997, temporary investment of the unused proceeds of the Series B Convertible Preferred stock issued in the first quarter. Corporate expenses consist of certain interest and operating expenses, as discussed below, reduced by costs capitalized or allocated to other business segments. Interest is capitalized on corporate funds invested in projects under development, and interest on 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, credit facility borrowings 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. Corporate interest costs were $6.3 million in 1998, $13.9 million in 1997 and $18 million in 1996. Interest of $14.9 million, $14.9 million and $5.4 million was capitalized in 1998, 1997 and 1996, respectively, on funds invested in development projects. The decreases in corporate interest costs in 1998 and 1997 were attributable primarily to allocations of debt to other segments to fund property acquisitions and certain capital expenditures. The higher level of interest capitalized in 1998 and 1997 reflects the higher level of corporate funds invested in projects in development. GAIN (LOSS) ON DISPOSITIONS OF ASSETS AND OTHER PROVISIONS, NET: The loss on dispositions of assets and other provisions, net, for 1998 consisted primarily of a loss on the disposal of a retail property ($7.7 million) and a loss related to a treasury lock contract ($6.4 million) that no longer qualified for hedge accounting because the related anticipated financing transaction will not occur under the terms and timing originally expected. Unconsolidated real estate ventures in which the company holds substantially all of the financial interest recorded a net gain on disposition of assets of $19 million relating primarily to the sale of a hotel in Columbia. The loss on dispositions of assets and other provisions, net, for 1997 consisted primarily of provisions for losses recognized on several retail properties, an industrial property, and a hotel the Company decided to sell, including additional provisions of $3.7 million related to retail properties held for disposition prior to 1997. These provisions were partially offset by gains on dispositions of five office properties ($4.7 million). The loss on dispositions of assets and other provisions, net, for 1996 consisted primarily of provisions for losses totaling $25.9 million recognized on five retail properties the Company decided to sell. These losses were partially offset by the reversal of a portion ($8.7 mil- 41 lion) of a 1995 provision for loss on a tenant litigation judgment following a negotiated settlement of the matter. EXTRAORDINARY ITEMS, NET OF RELATED INCOME TAX BENEFITS: The net extraordinary gains in 1998, and extraordinary losses in 1997 and 1996 resulted from early extinguishments of debt and aggregated $3.6 million, $32.8 million and $2.2 million, respectively, before deferred income tax benefits of $.7 million, $11.5 million and $.8 million, respectively. NET EARNINGS: The Company had net earnings of $104.9 million in 1998, $167.3 million in 1997 and $16.4 million in 1996. The Company's operating income (after depreciation and amortization) was $116.3 million in 1998, $97.3 million in 1997 and $60.1 million in 1996. The improvements in operating income were due primarily to the factors described above. Net earnings for each year was affected by unusual and/or nonrecurring items discussed above in gain (loss) on dispositions of assets and other provisions, net, and extraordinary items, net of related income tax benefits. In addition, net earnings for 1997 was affected by the reversal of substantially all ($158.3 million) of the recorded deferred income tax assets and liabilities at December 31, 1997 as a result of the Company's decision to be taxed as a REIT effective January 1, 1998. The deferred income taxes were reversed because management believes that the Company met the qualifications for REIT status as of December 31, 1997, intends for it to continue to meet the qualifications in the future and does not expect that the Company will be liable for income taxes or taxes on "built-in gains" on its assets at the Federal level or in most states in future years. The Company's effective tax rate was (157.2)% in 1997 and 58.9% in 1996. The effective rate in 1997 was affected by the reversal of deferred tax assets and liabilities discussed above. Excluding the effect of the reversal, the effective rate for 1997 was 57.4%. The effective rates were high in 1997 and 1996 because a portion of the distributions payable to the former Hughes owners (or their successors) under the Contingent Stock Agreement was not deductible for income tax purposes. FUNDS FROM OPERATIONS: The Company uses a supplemental performance measure along with net earnings (loss) to report its operating results. This measure is referred to as Funds from Operations ("FFO"). The National Association of Real Estate Investment Trusts defines FFO as net earnings (loss) (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 defined by generally accepted accounting principles. Additionally, FFO is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to cash flows as a measure of liquidity. However, the Company believes that FFO provides relevant information about its operations and is necessary, along with net earnings, for an understanding of its operating results. The Company excludes deferred income taxes from FFO because payments of income taxes have not been significant and are not anticipated to become significant in the future. Current Federal and state income taxes are included as reductions of FFO; however, in 1997, current income taxes incurred as a result of transactions completed to enable the Company to meet the qualifications for REIT status are excluded. Management believes this exclusion is appropriate as these taxes were nonrecurring and were not related to operations. Gain (loss) on dispositions of assets and other provisions, net, and extraordinary losses, net of related income tax benefits, represent unusual and/or nonrecurring items and are therefore excluded from FFO. FFO is reconciled to net earnings (loss) in the Five Year Summary of Funds from Operations and Net Earnings (Loss) on page 49. 42 FFO was $204.8 million in 1998, $181.4 million in 1997 and $139.4 million in 1996. The increase in FFO in 1998 was due primarily to property acquisitions, expansions and dispositions in 1998 and 1997, higher occupancy levels, and higher rents from re-leased space. The increase in FFO in 1997 was due primarily to the acquisition of Hughes. The results in 1997 were also affected by refinancings of project debt at lower interest rates, debt repayments from proceeds of the Series B Convertible Preferred stock offering in the first quarter and openings and dispositions of projects in both 1997 and 1996. The reasons for significant changes in revenues and expenses comprising FFO by segment are described above. FINANCIAL Management believes that the Company's financial position is CONDITION, sound and that its liquidity and capital resources are adequate LIQUIDITY AND for near-term and longer-term requirements. Shareholders' equity CAPITAL increased to $628.9 million at December 31, 1998 from $465.5 RESOURCES million at December 31, 1997. The increase was due primarily to the issuance of common stock, including $43 million to a unit investment trust and $100 million issued in the acquisition of the 64 office and industrial properties in the fourth quarter of 1998, and net earnings for the year, partially offset by the payment of regular quarterly dividends on the common and Preferred stocks. The Company had cash and cash equivalents and investments in marketable securities totaling $41.9 million and $90.6 million at December 31, 1998 and 1997, respectively. Net cash provided by operating activities was $261.2 million, $185.5 million and $168.1 million in 1998, 1997 and 1996, respectively. The changes in cash provided by operating activities were due primarily to the factors discussed above in the analysis of operating results. The level of net cash provided by operating activities is also affected by the timing of receipt of revenues (including proceeds of land sales financed by the Company) and the payment of operating and interest expenses and land development costs. The Company relies primarily on fixed rate nonrecourse loans from private institutional lenders to finance its operating properties and expects that it will continue to do so in the future. The Company has also made use of the public equity and debt markets to meet its capital resource needs principally to repay or refinance corporate and project related debt and to provide funds for project development and acquisition costs and other corporate purposes. In 1998, the Company obtained a $450 million revolving credit facility, which is available until July 2001, subject to a one year renewal option, and a $350 million bridge loan facility from a group of lenders. The revolving credit facility replaced a $250 million line of credit facility previously maintained by the Company. The bridge loan facility was available to fund certain property acquisitions made in the third and fourth quarters of 1998. The Company is continually evaluating sources of capital and management believes that there are satisfactory sources available for all requirements without necessitating sales of operating properties. However, selective dispositions of properties are expected to provide capital resources in 1999 and may also provide them in subsequent years. Most of the Company's debt consists of mortgages collateralized by operating properties. Scheduled principal payments on property debt were $50.7 million, $46.3 million and $39.0 million in 1998, 1997 and 1996, respectively. The increase in 1997 was attributable primarily to principal payments on debt assumed in the Hughes transaction. The annual maturities of debt for the next five years are as follows (in millions):
Scheduled Balloon Payments Payments Total --------- -------- --------- 1999.............. $ 49 $ 447 $ 496 2000.............. 57 105 162 2001.............. 62 467 529 2002.............. 64 220 284 2003.............. 73 487 560 --------- -------- --------- $ 305 $ 1,726 $ 2,031 ========= ======== =========
43 Balloon payments due in 1999 include $304 million of borrowings under the bridge loan credit facility which is due on or before July 30, 1999. In February 1999, the Company contributed to a joint venture four of the retail centers acquired in 1998. These acquisitions were financed, in part, by borrowings under the bridge loan credit facility. The Company retained a 35% interest in the joint venture, and, in connection with this transaction, the joint venture repaid approximately $271 million of outstanding borrowings under the bridge loan facility. Balloon payments due in 1999 also include $40 million due on a mortgage securing a property the Company expects to sell in the second quarter of 1999. The Company expects the buyer to assume the mortgage. The remaining balloon payments, including payments under the bridge loan credit facility, due in 1999 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, property refinancings or credit facilities or other available corporate funds. Cash expenditures for properties in development and improvements to existing properties funded by debt were $306.9 million, $283.4 million and $124 million in 1998, 1997 and 1996, respectively. The increases in 1998 and 1997 were due to increased project development activity, primarily new retail properties, retail property expansions and development of new office and industrial properties in Las Vegas. A substantial portion of the costs of properties in development is financed with construction or similar loans and/or credit line borrowings. Typically, long-term fixed rate debt financing is arranged concurrently with the construction financing or before completion of construction. Improvements to existing properties funded by debt consist primarily of costs of renovation and remerchandising programs and other capital improvement costs. The Company's share of these costs has been financed primarily from proceeds of refinancings of the related properties or other properties and credit line borrowings. Due to the large number of projects under construction or in development, the Company anticipates that the level of capital expenditures for new development (excluding land development) and improvements to existing properties will be over $300 million in 1999. A substantial portion of these expenditures relates to new properties or retail center expansions and it is expected that most of these costs will be financed by debt, including property- specific construction loans and/or credit line borrowings. Cash expenditures for acquisitions of interests in properties were $882.4 million in 1998, $79.4 million in 1997 and $18.1 million in 1996. The acquisitions in 1998, consisting of interests in the eight retail centers, 67 office and industrial buildings and the land assets referred to above, had combined purchase prices of approximately $1.58 billion, including approximately $492 million of mortgage debt secured by the acquired properties and assumed by the Company. The Company issued $100 million of common stock, $108 million of mortgage and other debt and $882.4 million of cash to the sellers as payment. The required cash payments were funded by approximately $234 million of additional mortgage debt secured by the acquired properties, proceeds of $91 million from the sale of three of the acquired office buildings and by borrowings under the Company's bridge loan and revolving credit facilities. The acquisitions in 1997 consisted primarily of a purchase of a retail center. The acquisitions in 1996 consisted of purchases of partners' interests in two retail centers, one of which was financed in part by the seller. Acquisition cash requirements in 1997 and 1996 were financed primarily by nonrecourse debt. Cash expenditures for the acquisition of Hughes were $36.3 million in 1996 and were financed primarily by credit line borrowings. In addition to its unrestricted cash and cash equivalents and investments in marketable securities, the Company has other available sources of capital. The Company has a line of credit with a group of lenders that provides for aggregate unsecured borrowings of up to $450 million, of which $152 million was available at December 31, 1998. This line of credit can be used for various purposes, including land and project development costs, property acquisitions, liquidity and other corporate needs. In addition, under an effective registration statement, the Company may issue additional medium-term notes of up to $29.7 million. Also, 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 December 31, 1998, the Company had issued approximately $158 million of common stock and debt securities under the shelf registration statement, with a remaining availability of approximately $2.1 billion. 44 The agreements relating to various loans impose limitations on the Company. The most restrictive of these limit the levels and types of debt the Company and its affiliates may incur and require the Company and its affiliates to maintain specified minimum levels of debt service coverage and net worth. The agreements also impose restrictions on the dividend payout ratio, and on sale, lease and certain other transactions, subject to various exclusions and limitations. These restrictions have not limited the Company's normal business activities and are not expected to do so in the foreseeable future. MARKET RISK The market risk associated with financial instruments and INFORMATION 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 December 31, 1998. The Company's interest rate risk is monitored closely by management. The table below presents the principal amounts, weighted-average interest rates and fair values required to evaluate the expected cash flows of the Company under debt and related agreements and its sensitivity to interest rate changes at December 31, 1998. The information relating to debt maturities (in millions) is based on expected maturity dates which consider anticipated refinancing or other transactions:
Fair 1999 2000 2001 2002 2003 Thereafter Total Value ----- ----- ----- ----- ----- ----------- --------- --------- Fixed rate debt $ 145 $ 54 $ 160 $ 215 $ 554 $ 1,972 $ 3,100 $ 3,199 Average interest rate 7.8% 7.8% 7.9% 8.0% 8.0% 8.0% 7.8% Variable rate LIBOR debt $ 351 $ 108 $ 369 $ 69 $ 6 $ 56 $ 959 $ 959 Average interest rate 6.4% 6.4% 5.6% 5.3% 5.1% 5.1% 6.6%
At December 31, 1998, approximately $304 million of the Company's variable rate debt relates to borrowings under its acquisition bridge loan facility and approximately $84.2 million relates to borrowings under project construction loans. Approximately $271 million of the borrowings under the bridge loan credit facility were repaid in February 1999 as discussed above. The borrowings under project construction loans are expected to be repaid from proceeds of long-term fixed rate loans at dates from 1999 to 2001 when construction of the related projects is scheduled to be completed. At December 31, 1998, 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 December 31, 1998, 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 December 31, 1998, the Company's hedging strategies during that period and interest rates. 45 THE YEAR 2000 The year 2000 issue relates to whether computer systems will ISSUE properly recognize date sensitive information to allow accurate processing of transactions and data relating to the year 2000 and beyond. In addition, the year 2000 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. 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 year 2000 compliant. The Company has implemented new financial accounting, accounts payable, property management, human resources, payroll and leasing management systems that are year 2000 compliant except for certain legacy systems that are still in use by Hughes. The Company is in the process of migrating Hughes 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. 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 year 2000 compliant. Also, the Company has commenced testing of its new IT systems for year 2000 compliance and expects testing and analysis of the results to be completed in the second quarter of 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. As a result, the Company expects that the costs to specifically remediate year 2000 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 is evaluating these risks based on public disclosures and, if desirable, direct contacts with certain major vendors, suppliers and tenants of key Company properties. Based on this evaluation, the Company will determine during the second quarter of 1999 whether specific contingency plans should be developed. NEW ACCOUNTING In March 1998, the American Institute of Certified Public STANDARDS Accountants issued Statement of Position 98-1, "Accounting for NOT YET the Costs of Computer Software Developed or Obtained for Internal ADOPTED Use" (SOP 98-1) which is required to be adopted by the Company no later than January 1, 1999. SOP 98-1 provides guidance as to whether costs incurred relating to internal-use software should be expensed or capitalized. The guidance in SOP 98-1 is required to be applied to costs incurred subsequent to adoption and may not be applied to costs incurred prior to initial application. The Company intends to adopt SOP 98-1 effective January 1, 1999, and does not believe that adoption will have a material effect on its results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP 98-5) which is required to be adopted by the Company no later than January 1, 1999. SOP 98-5 requires that start-up costs and organization costs, not otherwise addressed in existing authoritative literature, be expensed as incurred. The Company intends to adopt SOP 98-5 effective January 1, 1999, and the initial application will be reported as the cumulative effect of a change in accounting principle. The Company does not believe that adoption will have a material effect on its results of operations in future periods. 46 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," (Statement 133) which is required to be adopted by the Company no later than January 1, 2000. The Company's use of derivative instruments has consisted primarily of interest rate swap and cap agreements related to specific debt financings. While the Company has not completed its analysis of Statement 133 and has not made a decision regarding the timing of adoption, it does not believe that adoption will have a material effect on its financial position and results of operations based on its current use of derivative instruments. IMPACT OF The major portion of the Company's operating properties, its INFLATION retail centers, is substantially protected from declines in the purchasing power of the dollar. Retail leases generally provide for minimum rents plus percentage rents based on sales over a minimum base. In many cases, increases in tenant sales (whether due to increased unit sales or increased prices from demand or general inflation) will result in increased rental revenue to the Company. A substantial portion of the tenant leases (retail and office) also provide for other rents which reimburse the Company for certain of its operating expenses; consequently, increases in these costs do not have a significant impact on the Company's operating results. The Company has a significant amount of debt which, in a period of inflation, will result in a holding gain since debt will be paid off with dollars having less purchasing power. INFORMATION This Annual Report to Shareholders of the Company includes RELATING forward-looking statements which reflect the Company's current TO FORWARD- views with respect to future events and financial performance. LOOKING These forward-looking statements are subject to certain risks and STATEMENTS 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 are among the factors that could cause actual results to differ materially from historical results or those anticipated: (1) real estate investment trust risks; (2) real estate development and investment risks; (3) liquidity of real estate investments; (4) dependence on rental income from real property; (5) effect of uninsured loss; (6) lack of geographical diversification; (7) possible environmental liabilities; (8) difficulties of compliance with Americans with Disabilities Act; (9) competition; (10) changes in the economic climate; and (11) changes in tax laws or regulations. For a more detailed discussion of these and other factors, see Exhibit 99.2 of the Company's Form 10-K for the fiscal year ended December 31, 1998. 47 The Rouse Company and Subsidiaries Five Year Summary of Funds From Operations and Net Earnings (loss) (Note 1) (in thousands)
Year ended December 31 -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ----------- REVENUES: Retail centers: Minimum and percentage rents..................... $ 308,900 $ 271,743 $ 256,880 $ 245,192 $ 238,222 Other rents and other revenues................... 250,921 231,912 251,535 246,488 248,253 ---------- ---------- ---------- ---------- ---------- 559,821 503,655 508,415 491,680 486,475 ---------- ---------- ---------- ---------- ---------- Office, mixed-use and other: Minimum and percentage rents..................... 137,118 130,744 106,246 80,319 82,347 Other rents and other revenues................... 78,801 85,827 75,908 64,647 64,225 ---------- ---------- ---------- ---------- ---------- 215,919 216,571 182,154 144,966 146,572 ---------- ---------- ---------- ---------- ---------- Land sales.......................................... 197,706 203,219 137,853 33,403 35,232 Corporate interest income........................... 3,797 4,485 3,495 2,772 2,892 ---------- ---------- ---------- ---------- ---------- 977,243 927,930 831,917 672,821 671,171 ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES, EXCLUSIVE OF DEPRECIATION AND AMORTIZATION: Retail centers...................................... 268,786 257,848 260,027 246,747 253,095 Office, mixed-use and other......................... 102,945 108,063 89,524 70,096 74,368 Land sales.......................................... 144,709 151,800 107,787 17,827 19,877 Development......................................... 7,383 4,747 4,964 7,288 6,494 Corporate........................................... 18,813 13,384 9,752 8,920 8,309 ---------- ---------- ---------- ---------- ---------- 542,636 535,842 472,054 350,878 362,143 ---------- ---------- ---------- ---------- ---------- INTEREST EXPENSE: Retail centers...................................... 150,889 122,325 129,091 128,215 128,798 Office, mixed-use and other......................... 77,894 81,905 76,659 69,034 67,892 Land sales.......................................... 4,201 4,287 1,658 5,071 5,028 Development......................................... --- --- 361 358 495 Corporate........................................... (8,614) (1,027) 12,612 10,285 11,370 ---------- ---------- ---------- ---------- ---------- 224,370 207,490 220,381 212,963 213,583 ---------- ---------- ---------- ---------- ---------- CURRENT INCOME TAXES APPLICABLE TO OPERATIONS (NOTE 3)......................................... 5,395 3,208 123 620 735 ---------- ---------- ---------- ---------- ---------- 722,401 746,540 692,558 564,461 576,461 ---------- ---------- ---------- ---------- ---------- FUNDS FROM OPERATIONS (NOTE 2)...................... $ 204,842 $ 181,390 $ 139,359 $ 108,360 $ 94,710 ========== ========== ========== ========== ==========
48
Year ended December 31 -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ----------- FUNDS FROM OPERATIONS BY SEGMENT: Retail centers...................................... $ 140,081 $ 123,101 $ 119,297 $ 116,135 $ 103,978 Office, mixed-use and other......................... 35,069 26,562 15,852 5,839 4,273 Land sales.......................................... 48,773 47,090 28,404 10,502 10,330 Development......................................... (7,383) (4,747) (5,325) (7,646) (6,989) Corporate........................................... (11,698) (10,616) (18,869) (16,470) (16,882) ---------- ---------- ---------- ---------- ---------- FUNDS FROM OPERATIONS............................... $ 204,842 $ 181,390 $ 139,359 $ 108,360 $ 94,710 ========== ========== ========== ========== ========== RECONCILIATION TO NET EARNINGS (LOSS): Funds from Operations............................... $ 204,842 $ 181,390 $ 139,359 $ 108,360 $ 94,710 Depreciation and amortization....................... (84,068) (82,944) (77,414) (73,062) (74,186) Deferred income taxes applicable to operations...... --- 124,203 (25,596) (3,699) (5,995) Certain current income taxes (note 3)............... --- (4,929) --- --- --- Loss on dispositions of assets and other provisions, net............................ (11,174) (23,484) (16,499) (25,749) (7,923) Depreciation and amortization, gain on disposition of assets and deferred income taxes of unconsolidated real estate ventures, net......... (4,380) (4,344) (1,964) --- --- Extraordinary gain (loss), net...................... 4,355 (21,342) (1,453) (8,631) (4,447) Cumulative effect at January 1, 1998 of change in accounting for participating mortgages ....................................... (4,629) --- --- --- --- Cumulative effect at October 1, 1997 of change in accounting for business process reengineering costs...................... --- (1,214) --- --- --- Other............................................... (44) --- --- --- --- ---------- ---------- ---------- ---------- ---------- NET EARNINGS (LOSS)................................. $ 104,902 $ 167,336 $ 16,433 $ (2,781) $ 2,159 ========== ========== ========== ========== ==========
NOTES: (1) Operating and Funds from Operations (FFO) data included in this five-year summary are presented by segment. Consistent with the requirements of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," segment data are reported using the accounting policies followed by the Company for internal reporting to management. These policies are the same as those used for external reporting, except that real estate ventures in which the Company holds a majority financial interest but does not own a majority voting interest are reported 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. These differences affect the revenues and expenses reported in the summary of FFO to net earnings (loss), however, they have no effect on the Company's net earnings or FFO. (2) FFO is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles. Additionally, FFO is not necessarily indicative of cash available to fund cash needs, including the payment of dividends and should not be considered as an alternative to cash flows as a measure of liquidity. See the "Funds from Operations" section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 42 for a full discussion of FFO. (3) FFO for 1997 excludes current income taxes arising from transactions completed by the Company in connection with its determination to elect to be taxed as a REIT. 49 PROJECTS OF THE ROUSE COMPANY
- ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers in Operation - ------------------------------------------------------------------------------------------------------------------------------------ Date of Opening Retail Square Footage Consolidated Centers (note 1) or Acquisition Department Stores/Anchor Tenants Total Center Mall Only - ------------------------------------------------------------------------------------------------------------------------------------ Augusta Mall, 8/78 Rich's; Macy's; JCPenney; Sears; 1,081,000 332,000 Augusta, GA (a) Dillard's - ------------------------------------------------------------------------------------------------------------------------------------ Bayside Marketplace, 4/87 --- 223,000 223,000 Miami, FL (b) - ------------------------------------------------------------------------------------------------------------------------------------ Beachwood Place, 8/78 Saks Fifth Avenue; Dillard's; 912,000 348,000 Cleveland, OH (a) Nordstrom - ------------------------------------------------------------------------------------------------------------------------------------ Bridgewater Commons, 12/98 Lord & Taylor; Macy's; Stern's 875,000 372,000 Bridgewater, NJ (f) - ------------------------------------------------------------------------------------------------------------------------------------ Cherry Hill Mall, 10/61 Strawbridge's, Macy's; JCPenney 1,292,000 543,000 Cherry Hill, NJ (a) - ------------------------------------------------------------------------------------------------------------------------------------ The Mall in Columbia, 8/71 Hecht's; JCPenney; Sears; 1,235,000 423,000 Columbia, MD (e) Lord & Taylor - ------------------------------------------------------------------------------------------------------------------------------------ Echelon Mall, 9/70 Strawbridge's; JCPenney; Boscov's; 1,140,000 429,000 Voorhees, NJ (a) Sears - ------------------------------------------------------------------------------------------------------------------------------------ Exton Square, 3/73 Strawbridge's 434,000 253,000 Exton, PA (a) - ------------------------------------------------------------------------------------------------------------------------------------ Faneuil Hall Marketplace, 8/76 --- 215,000 215,000 Boston, MA (a) - ------------------------------------------------------------------------------------------------------------------------------------ Fashion Place Mall, 10/98 Dillard's; Nordstrom; Sears 966,000 400,000 Salt Lake City, UT (f) - ------------------------------------------------------------------------------------------------------------------------------------ The Fashion Show, 6/96 Neiman Marcus; Saks Fifth Avenue; 840,000 308,000 Las Vegas, NV (a) Macy's; Dillard's; Robinsons-May - ------------------------------------------------------------------------------------------------------------------------------------ Franklin Park, 7/71 Marshall Fields; JCPenney; Jacobson's; 1,099,000 313,000 Toledo, OH (b) Lion (Dillard's) - ------------------------------------------------------------------------------------------------------------------------------------ The Gallery at Market East, 8/77 Strawbridge's; JCPenney; KMart 1,179,000 363,000 Philadelphia, PA(a)(c) - ------------------------------------------------------------------------------------------------------------------------------------ Governor's Square, 8/79 Burdines; Dillard's; Sears; JCPenney 1,044,000 340,000 Tallahassee, FL (a) - ------------------------------------------------------------------------------------------------------------------------------------ The Grand Avenue, 8/82 The Boston Store 492,000 242,000 Milwaukee, WI (a) - ------------------------------------------------------------------------------------------------------------------------------------ Harborplace, 7/80 --- 136,000 136,000 Baltimore, MD (a) - ------------------------------------------------------------------------------------------------------------------------------------ Highland Mall, 8/71 Dillard's; Foley's; JCPenney 1,085,000 367,000 Austin, TX (b) - ------------------------------------------------------------------------------------------------------------------------------------ Hulen Mall, Ft. 8/77 Foley's; Ward's; Dillard's 938,000 327,000 Worth, TX (a) - ------------------------------------------------------------------------------------------------------------------------------------ The Jacksonville Landing, 6/87 --- 128,000 128,000 Jacksonville, FL (a) - ------------------------------------------------------------------------------------------------------------------------------------ Mall St. Matthews, 3/62 Dillard's; JCPenney; Bacon; 1,102,000 363,000 Louisville, KY (a) Lord & Taylor - ------------------------------------------------------------------------------------------------------------------------------------ Midtown Square, 10/59 Burlington Coat Factory 235,000 190,000 Charlotte, NC (a) - ------------------------------------------------------------------------------------------------------------------------------------ Mondawmin Mall (a)/Metro Plaza (b), 1/78; --- 496,000 496,000 Baltimore, MD 12/82 - ------------------------------------------------------------------------------------------------------------------------------------ Moorestown Mall, 12/97 Strawbridge's; Boscov's; Sears 823,000 264,000 Moorestown, NJ (a) - ------------------------------------------------------------------------------------------------------------------------------------ North Star, 9/60 Dillard's; Foley's; Saks Fifth 1,251,000 462,000 San Antonio, TX (b) Avenue; Macy's; Mervyn's California - ------------------------------------------------------------------------------------------------------------------------------------ Oakwood Center, 10/82 Sears; Dillard's; Mervyn's California; 991,000 362,000 Gretna, LA (a) Maison Blanche (JCPenney) - ------------------------------------------------------------------------------------------------------------------------------------ Oviedo Marketplace, 3/98 Dillard's; Parisian 820,000 340,000 Orlando, FL (a) - ------------------------------------------------------------------------------------------------------------------------------------ Owings Mills, 7/86 Macy's; Hecht's; JCPenney; Lord & 1,165,000 352,000 Baltimore, MD (a) Taylor; Sears; General Cinema 17 - ------------------------------------------------------------------------------------------------------------------------------------ Paramus Park, 3/74 Macy's; Sears 761,000 382,000 Paramus, NJ (a) - ------------------------------------------------------------------------------------------------------------------------------------ Park Meadows, 7/98 Dillard's; Foley's; Joslins (Lord & 1,640,000 594,000 Denver, CO (f) Taylor); Nordstrom; JCPenney - ------------------------------------------------------------------------------------------------------------------------------------ Perimeter Mall, 8/71 Rich's; JCPenney; Macy's; Nordstrom 1,424,000 444,000 Atlanta, GA (b) - ------------------------------------------------------------------------------------------------------------------------------------ Plymouth Meeting, 2/66 Strawbridge's; Boscov's; IKEA; 944,000 390,000 Plymouth Meeting, PA (a) General Cinema 12 - ------------------------------------------------------------------------------------------------------------------------------------ Riverwalk, 8/86 --- 179,000 179,000 New Orleans, LA (a) - ------------------------------------------------------------------------------------------------------------------------------------ Santa Monica Place, 10/80 Macy's; Robinsons-May 570,000 287,000 Santa Monica, CA (a) - ------------------------------------------------------------------------------------------------------------------------------------ South Street Seaport, 7/83 --- 259,000 259,000 New York, NY (a) - ------------------------------------------------------------------------------------------------------------------------------------ Tampa Bay Center, 8/76 Burdines; Sears; Ward's 895,000 325,000 Tampa, FL (b) - ------------------------------------------------------------------------------------------------------------------------------------
50
- ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers in Operation - ------------------------------------------------------------------------------------------------------------------------------------ Date of Opening Retail Square Footage Consolidated Centers (note 1) or Acquisition Department Stores/Anchor Tenants Total Center Mall Only - ------------------------------------------------------------------------------------------------------------------------------------ Towson Town Center, 10/98 Hecht's; Nordstrom; Nordstrom Rack 997,000 538,000 Baltimore, MD (f) - ------------------------------------------------------------------------------------------------------------------------------------ White Marsh, 8/81 Macy's; JCPenney; Hecht's; Sears; IKEA; 1,148,000 359,000 Baltimore, MD (b) Lord & Taylor - ------------------------------------------------------------------------------------------------------------------------------------ Willowbrook, 9/69 Lord & Taylor; Macy's; Stern's; Sears 1,530,000 502,000 Wayne, NJ (b) - ------------------------------------------------------------------------------------------------------------------------------------ Woodbridge Center, 3/71 Lord & Taylor; Sears; Stern's; 1,546,000 560,000 Woodbridge, NJ (a) Fortunoff; JCPenney - ------------------------------------------------------------------------------------------------------------------------------------ Community Centers in --- --- 890,000 890,000 Columbia, MD (12) (e) - ------------------------------------------------------------------------------------------------------------------------------------ Community Centers in --- --- 238,000 238,000 Summerlin, NV (2) (b) - ------------------------------------------------------------------------------------------------------------------------------------ Total Consolidated Centers in Operation* 35,218,000 14,838,000 - ------------------------------------------------------------------------------------------------------------------------------------ Nonconsolidated/Managed Centers - ------------------------------------------------------------------------------------------------------------------------------------ Burlington Center, 8/82 Strawbridge's; Sears; JCPenney 666,000 242,000 Burlington Township, NJ (d) - ------------------------------------------------------------------------------------------------------------------------------------ Collin Creek, 9/95 Dillard's; Foley's; JCPenney; Sears; 1,123,000 333,000 Plano, TX (d) Mervyn's California - ------------------------------------------------------------------------------------------------------------------------------------ Randhurst, Mt. 7/81 Carson, Pirie, Scott; JCPenney; 1,304,000 581,000 Prospect, IL (d) Ward's; Kohl's - ------------------------------------------------------------------------------------------------------------------------------------ Ridgedale Center, 1/89 Dayton's; JCPenney; Sears; Dayton's 1,027,000 334,000 Minneapolis, MN (d) Men & Home - ------------------------------------------------------------------------------------------------------------------------------------ Sherway Gardens, 12/78 Eaton's; The Bay; Holt Renfrew; 972,000 444,000 Toronto, ONT (c) Sporting Life - ------------------------------------------------------------------------------------------------------------------------------------ Southland Center, 1/89 Hudson's; Mervyn's California; JCPenney 903,000 320,000 Taylor, MI (d) - ------------------------------------------------------------------------------------------------------------------------------------ Staten Island Mall, 11/80 Sears; Macy's; JCPenney 1,229,000 622,000 Staten Island, NY (d) - ------------------------------------------------------------------------------------------------------------------------------------ Town & Country Center, 2/88 Sears; Marshalls 642,000 421,000 Miami, FL (c) - ------------------------------------------------------------------------------------------------------------------------------------ Total Nonconsolidated/Managed Centers 7,866,000 3,297,000 in Operation - ------------------------------------------------------------------------------------------------------------------------------------ Total Retail Centers in Operation* 43,084,000 18,135,000 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Date of Opening Retail Square Footage Properties Held for Sale or Acquisition Department Stores/Anchor Tenants Total Center Mall Only - ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers - ------------------------------------------------------------------------------------------------------------------------------------ Valley Fair Mall, 7/98 Macy's (2); Nordstrom 1,138,000 469,000 San Jose, CA (b) - ------------------------------------------------------------------------------------------------------------------------------------ Westdale Mall, 10/98 JCPenney; Von Maur; Younkers; Ward's 912,000 383,000 Cedar Rapids, IA (d) - ------------------------------------------------------------------------------------------------------------------------------------ Total Retail Centers Held for Sale 2,050,000 852,000 - ------------------------------------------------------------------------------------------------------------------------------------ Office/Mixed-Use Properties - ------------------------------------------------------------------------------------------------------------------------------------ Lucky's Center, 6/96 --- 142,000 142,000 Los Angeles, CA (a) - ------------------------------------------------------------------------------------------------------------------------------------ Total Properties Held for Sale 2,192,000 994,000 - ------------------------------------------------------------------------------------------------------------------------------------ *Not including 691,000 square feet of retail space in five mixed-use properties listed on the following page. - ------------------------------------------------------------------------------------------------------------------------------------
51
- ------------------------------------------------------------------------------------------------------------------------------------ Office, Mixed-Use and Other Properties in Operation - ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Mixed-Use Properties Location Square Feet - ------------------------------------------------------------------------------------------------------------------------------------ Arizona Center (a) Phoenix, AZ The Shops at Arizona Center 151,000 Garden Office Pavilion 33,000 One Arizona Center Office Tower 330,000 Two Arizona Center Office Tower 449,000 AMC Cinemas 90,000 - ------------------------------------------------------------------------------------------------------------------------------------ The Gallery at Harborplace (a) Baltimore, MD The Gallery 141,000 Office Tower 265,000 Renaissance Hotel 622 rooms - ------------------------------------------------------------------------------------------------------------------------------------ Pioneer Place (a) Portland, OR Saks Fifth Avenue 60,000 Retail Pavillion 147,000 Office Tower 283,000 - ------------------------------------------------------------------------------------------------------------------------------------ Village of Cross Keys (a) Baltimore, MD Village Shops 74,000 Village Square Offices 79,000 Quadrangle Offices 110,000 - ------------------------------------------------------------------------------------------------------------------------------------ Westlake Center (b) Seattle, WA Retail Pavillion 118,000 Office Tower 342,000 - ------------------------------------------------------------------------------------------------------------------------------------ Consolidated Office and Other Properties (note 1) - ------------------------------------------------------------------------------------------------------------------------------------ Columbia Office (11 buildings) (a) (e) Columbia, MD 993,000 - ------------------------------------------------------------------------------------------------------------------------------------ Columbia Industrial (9 buildings) (e) Columbia, MD 623,000 - ------------------------------------------------------------------------------------------------------------------------------------ Hughes Center (13 buildings) (a) Las Vegas, NV 1,005,000 - ------------------------------------------------------------------------------------------------------------------------------------ Hughes Airport Center (31 buildings) (a) Las Vegas, NV 1,575,000 - ------------------------------------------------------------------------------------------------------------------------------------ Hughes Cheyenne Center (3 buildings) (a) Las Vegas, NV 377,000 - ------------------------------------------------------------------------------------------------------------------------------------ Summerlin Commercial (13 buildings) (a) Summerlin, NV 815,000 - ------------------------------------------------------------------------------------------------------------------------------------ Inglewood Business Center (7 buildings) (a) Prince Georges County, MD 538,000 - ------------------------------------------------------------------------------------------------------------------------------------ Owings Mills Town Center (4 buildings) (b) Baltimore, MD 731,000 - ------------------------------------------------------------------------------------------------------------------------------------ Hunt Valley Business Center (24 buildings) (a) Baltimore, MD 1,834,000 - ------------------------------------------------------------------------------------------------------------------------------------ Rutherford Business Center (24 buildings) (a) Baltimore, MD 877,000 - ------------------------------------------------------------------------------------------------------------------------------------ Other Office Projects (5 buildings) (a) Various 501,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Consolidated Office, Mixed-Use and Other Properties** 12,541,000 - ------------------------------------------------------------------------------------------------------------------------------------ **Including 691,000 square feet of retail space in the mixed-use properties. - ------------------------------------------------------------------------------------------------------------------------------------
52
- ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers Under Construction Retail Square Footage or in Development Department Stores/Anchor Tenants Total Center Mall Only - ------------------------------------------------------------------------------------------------------------------------------------ The Mall in Columbia Expansion, Columbia, MD Nordstrom 270,000 110,000 - ------------------------------------------------------------------------------------------------------------------------------------ Exton Square Expansion, Exton, PA Sears; Boscov's; JCPenney 569,000 120,000 - ------------------------------------------------------------------------------------------------------------------------------------ Oviedo Marketplace Expansion, Orlando, FL Sears 125,000 --- - ------------------------------------------------------------------------------------------------------------------------------------ Moorestown Mall Expansion, Moorestown, NJ Strawbridges; Lord & Taylor 321,000 --- - ------------------------------------------------------------------------------------------------------------------------------------ Perimeter Mall Expansion, Atlanta, GA --- 75,000 75,000 - ------------------------------------------------------------------------------------------------------------------------------------ The Fashion Show Expansion, Las Vegas, NV Neiman Marcus; Saks Fifth Avenue; Macy's; Robinsons-May; Lord & Taylor; Dillard's; Bloomingdales 800,000 250,000 - ------------------------------------------------------------------------------------------------------------------------------------ Ft. Myers, Ft. Myers, FL Dillard's; Sears 900,000 350,000 - ------------------------------------------------------------------------------------------------------------------------------------ Bridgewater Commons Expansion, Bridgewater, NJ Bloomingdale's 400,000 150,000 - ------------------------------------------------------------------------------------------------------------------------------------ Fashion Place Expansion, Salt Lake City, UT Nordstrom; Dillard's; ZCMI 300,000 70,000 - ------------------------------------------------------------------------------------------------------------------------------------ Summerlin Town Center, Summerlin, NV Robinsons-May; Lord & Taylor; Dillard's; Sears 1,050,000 350,000 - ------------------------------------------------------------------------------------------------------------------------------------ West Kendall, Dade County, FL Dillard's; Sears; Burdines 1,200,000 350,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Retail Centers Under Construction or in Development 6,010,000 1,825,000 - ------------------------------------------------------------------------------------------------------------------------------------ Office, Mixed-Use and Other Properties Under Construction or in Development Type of Space Square Feet - ------------------------------------------------------------------------------------------------------------------------------------ Pioneer Place Expansion, Portland, OR Saks Fifth Avenue; Sundance Cinema 150,000 - ------------------------------------------------------------------------------------------------------------------------------------ Arizona Center Expansion, Phoenix, AZ Embassy Suites 350 rooms - ------------------------------------------------------------------------------------------------------------------------------------ The Village of Merrick Park, Coral Gables, FL Neiman Marcus, Nordstrom 360,000 Specialty retail shops 424,000 Office 80,000 - ------------------------------------------------------------------------------------------------------------------------------------ Hughes Center (1 building), Las Vegas, NV Office 171,000 - ------------------------------------------------------------------------------------------------------------------------------------ Hughes Airport Center (3 buildings), Las Vegas, NV Industrial 168,000 - ------------------------------------------------------------------------------------------------------------------------------------ Park Square, Columbia, MD Office 100,000 - ------------------------------------------------------------------------------------------------------------------------------------ Summerlin Commercial (1 building), Summerlin, NV Office 71,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Office, Mixed-Use and Other Properties Under Construction or in Development 1,524,000 - ------------------------------------------------------------------------------------------------------------------------------------
Note 1 Includes projects wholly owned by subsidiaries of the Company, projects in which the Company has joint interest and control and projects owned by affiliates in which the Company holds substantially all (at least 98%) of the financial interest, but does not own a majority voting interest. Additional Notes: (a) Projects are wholly owned by subsidiaries of the Company. (b) Projects are owned by joint ventures or partnerships and are managed by affiliates of the Company for a fee. The Company's ownership interest, through its subsidiaries, is at least 50% (except for North Star and Willowbrook, in which the Company has 37 1/2% interests). (c) Projects are managed by affiliates of the Company for a fee plus a share of cash flow. (d) Projects are owned by partnerships or by subsidiaries of the Company (Burlington Center, Randhurst and Staten Island Mall) and are managed by affiliates of the Company for a fee plus a share of cash flow and a share of proceeds from sales or refinancings. The Company's ownership interest in the partnerships is less than 20%, except for Collin Creek Mall in which the Company has a 30% interest. (e) Projects are owned and managed by affiliates in which the Company holds substantially all (at least 98%) of the financial interest, but does not own a majority voting interest. (f) Projects were wholly owned by subsidiaries of the Company as of December 31, 1998, and contributed to a joint venture in February 1999. The Company retains a 35% interest in the joint venture. 53 EX-21 7 EXHIBIT 21 EXHIBIT 21 Exhibit 21. Subsidiaries of the Registrant. The Registrant had no parent at December 31, 1998. As of December 31, 1998, The Rouse Company owned 100% of the voting securities of the following domestic and foreign corporations included in the consolidated financial statements:
State of Subsidiary Incorporation ---------- ------------- Directly owned subsidiaries of the Company. All shares are Common Stock unless otherwise noted. American City Corporation, The Maryland Baltimore Center, Inc. Maryland Beachwood Property Holdings, Inc. Maryland Charlottetown, Inc. Maryland Charlottetown North, Inc. Maryland Chesapeake Investors, Inc. (Note 1) Delaware Community Research and Development, Inc. Maryland Cuyahoga Land Company, Inc. Maryland Exton Acquisition, Inc. Pennsylvania Exton Shopping, Inc. Maryland Exton Square, Inc. Pennsylvania Four Owings Mills Corporate Center, Inc. Maryland Gallery Maintenance, Inc. (Note 2) Maryland Gallery II Trustee, Inc. Maryland Harbor Overlook Investments, Inc. Maryland Harborplace Management Corporation Maryland Harundale Mall, Inc. Maryland Hermes Incorporated Maryland Huntington Properties, Inc. (Note 3) Maryland It's Showtime of Maryland, Inc. Maryland Kalimba Marketplace, Inc. Maryland Louisville Shopping Center, Inc. Kentucky Mondawmin Corporation Maryland O. M. Guaranty, Inc. Maryland O. M. Land Development, Inc. Maryland O. M. Mall Corporation Maryland O. M. Management Company, Inc. Maryland One Owings Mills Corporate Center, Inc. Maryland Owings Mills Finance Corporation Maryland Plymouth Meeting Food Court, Inc. Maryland Plymouth Meeting Mall, Inc. (Note 4) Pennsylvania PT Funding, Inc. Maryland
Rouse-Brandywood, Inc. Maryland Rouse-Camden Warehouse, Inc. Maryland Rouse Capital (Note 5) Delaware Rouse-Columbus, Inc. Maryland Rouse-Commerce, Inc. Maryland Rouse Company at Owings Mills, The Maryland Rouse Company Financial Services, Inc., The Maryland Rouse Company of Alabama, Inc., The (Note 6) Alabama Rouse Company of Alaska, Inc., The Maryland Rouse Company of Arkansas, Inc., The Maryland Rouse Company of California, Inc., The (Note 7) Maryland Rouse Company of Colorado, Inc., The (Note 8) Maryland Rouse Company of Connecticut, Inc., The (Note 9) Connecticut Rouse Company of Florida, Inc., The (Note 10) Florida Rouse Company of Georgia, Inc., The (Note 11) Georgia Rouse Company of Idaho, Inc., The Maryland Rouse Company of Illinois, Inc., The Maryland Rouse Company of Iowa, Inc., The (Note 12) Maryland Rouse Company of Louisiana, The (Note 13) Maryland Rouse Company of Maine, Inc., The Maryland Rouse Company of Massachusetts, Inc., The (Note 14) Maryland Rouse Company of Michigan, Inc., The (Note 15) Maryland Rouse Company of Minnesota, Inc., The (Note 16) Maryland Rouse Company of Mississippi, Inc., The Maryland Rouse Company of Montana, Inc., The Maryland Rouse Company of Nevada, Inc., The (Note 17) Nevada Rouse Company of New Hampshire, Inc., The Maryland Rouse Company of New Jersey, Inc., The (Note 18) New Jersey Rouse Company of New Mexico, Inc., The Maryland Rouse Company of New York, Inc., The (Note 19) New York Rouse Company of North Carolina, Inc., The (Note 20) Maryland Rouse Company of North Dakota, Inc., The Maryland Rouse Company of Ohio, Inc., The (Note 21) Ohio Rouse Company of Oklahoma, Inc., The Maryland Rouse Company of Oregon, Inc., The (Note 22) Maryland Rouse Company of Pennsylvania, Inc., The (Note 23) Pennsylvania Rouse Company of Rhode Island, Inc., The Maryland Rouse Company of South Carolina, Inc., The Maryland Rouse Company of South Dakota, Inc., The Maryland Rouse Company of Tennessee, Inc., The Maryland Rouse Company of Texas, Inc., The (Note 24) Texas Rouse Company of the District of Columbia, The Maryland Rouse Company of Utah, Inc., The Maryland Rouse Company of Vermont, Inc., The Maryland Rouse Company of Virginia, Inc., The (Note 25) Maryland
2 Rouse Company of Washington, Inc., The (Note 26) Maryland Rouse Company of West Virginia, Inc., The Maryland Rouse Company of Wisconsin, Inc., The Maryland Rouse Company of Wyoming, Inc., The Maryland Rouse-Consulting, Inc. Maryland Rouse Development Company of California, Inc., The Maryland Rouse-Fairwood Development Corporation Maryland Rouse Fashion Show Management, Inc. Maryland Rouse Gallery II Management, Inc. Maryland Rouse-Hagerstown, Inc. Maryland Rouse-Harford County, Inc. Maryland Rouse Holding Company, The Maryland Rouse Holding Company of Arizona, Inc., The (Note 27) Maryland Rouse-Inglewood, Inc. Maryland Rouse Investing Company (Note 28) Maryland Rouse Management, Inc. Maryland Rouse Management Services Corporation Maryland Rouse Management Services Corporation of Arkansas, Inc. Maryland Rouse Management Services Corporation of Louisiana, Inc. Maryland Rouse Metro Plaza, Inc. Maryland Rouse-Metro Shopping Center, Inc. Maryland Rouse-Milwaukee, Inc. Maryland Rouse-Milwaukee Garage Maintenance, Inc. Maryland Rouse Missouri Holding Company (Note 29) Maryland Rouse-Oakwood Two, Inc. Maryland Rouse Office Management, Inc. Maryland Rouse Office Management of Pennsylvania, Inc. Maryland Rouse-Owings Mills, Inc. Maryland Rouse Owings Mills Management Corporation Maryland Rouse Philadelphia, Inc. Maryland Rouse Philadelphia Three, Inc. Maryland Rouse-Phoenix Cinema, Inc. Maryland Rouse-Randhurst Shopping Center, Inc. Maryland Rouse-Santa Monica, Inc. Delaware Rouse Service Company, The Maryland Rouse SI Shopping Center, Inc. Maryland Rouse Transportation, Inc. Maryland Rouse Tristate Venture, Inc. Texas Rouse Venture Capital, Inc. Maryland Rouse-Wates, Incorporated (Note 30) Delaware RREF Holding, Inc. (Note 31) Texas Salem Mall, Incorporated Maryland Santa Monica Place, Inc. Maryland
3 Six Owings Mills Corporate Center, Inc. Maryland SMPL Management, Inc. Maryland Stansfield-Laurel, Inc. Maryland Three Owings Mills Corporate Center, Inc. Maryland TRC Central, Inc. Maryland TRCD, Inc. (Note 32) Delaware TRC Holding Company of Washington, D.C. (Note 33) Maryland TRC Property Management, Inc. Maryland TRC Purchasing, Inc. Maryland Two Owings Mills Corporate Center, Inc. Maryland White Marsh Equities Corporation Maryland Foreign subsidiaries: - -------------------- Rouse Service (Canada) Limited Canada
4 Notes: - ----- 1. Chesapeake Investors, Inc. owns all of the outstanding capital stock of Rouse Commercial Properties, Inc., a Maryland corporation: Rouse Commercial Properties, Inc. owns all of the outstanding capital stock of the following Maryland entities: HRD Commercial Properties, Inc. Hunt Valley Title Holding Corporation Rouse Acquisition Finance, Inc. Hunt Valley Title Holding Corporation owns 5% of the outstanding stock of Rouse-Teachers Holding Company (a Nevada corporation). 2. Gallery Maintenance, Inc. owns all of the outstanding capital stock of Rouse Gallery Management, Inc., a Maryland corporation. 3. Huntington Properties, Inc. owns all of the outstanding capital stock of Huntington Realty Interests, Ltd., a Maryland corporation. Huntington Realty Interests, Ltd. owns all of the outstanding capital stock of the following Maryland corporations: HRIL, Inc. Huntington Capital Investors, Ltd. 4. Plymouth Meeting Mall, Inc. owns all of the outstanding common stock of 1150 Plymouth Associates, Inc., a Maryland corporation. 5. Rouse Capital is a statutory business trust formed under Delaware law. All of the Common Securities of Rouse Capital are owned by the Company. The Preferred Securities of Rouse Capital were sold in a public registered offering in 1995. 6. The Rouse Company of Alabama, Inc. owns all of the outstanding capital stock of Rouse-Liberty Park, Inc., a Maryland Corporation. 7. The Rouse Company of California, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse-Canyon Springs, Inc. Rouse-Palm Springs II, Inc. Rouse-Sacramento, Inc. 8. The Rouse Company of Colorado, Inc. owns all of the outstanding capital stock of Rouse Management Services Corporation of Colorado, Inc., a Maryland corporation. 5 9. The Rouse Company of Connecticut, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse Chapel Square Finance, Inc. Rouse New Haven Parking Management, Inc. 10. The Rouse Company of Florida, Inc. owns all of the outstanding common stock of each of the following corporations: Bayside Entertainment Company, a Maryland corporation Governor's Square, Inc., a Florida corporation Howard Retail Investment Corporation, a Maryland corporation New River Center, Inc., a Florida corporation Rouse-Bayside, Inc., a Maryland corporation Rouse-Coral Gables, Inc., a Maryland corporation Rouse-Fort Myers, Inc., a Maryland corporation Rouse-Governor's Square, Inc., a Maryland corporation Rouse-Jacksonville, Inc., a Maryland corporation Rouse Kendall Management Corporation, a Maryland corporation Rouse-Miami, Inc., a Maryland corporation Rouse Office Management of Florida, Inc., a Maryland corporation Rouse-Orlando, Inc., a Maryland corporation Rouse-Osceola, Inc., a Maryland corporation Rouse-Sunrise, Inc., a Maryland corporation Rouse-Tampa, Inc., a Florida corporation 11. The Rouse Company of Georgia, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Augusta Mall, Inc. Outlet Square of Atlanta, Inc. Perimeter Center, Inc. Perimeter Mall, Inc. Perimeter Mall Management Corporation Rouse-Atlanta, Inc. Rouse Columbus Square, Inc. Rouse Columbus Square Management Corporation Rouse Development Management Company, Inc. Rouse South DeKalb, Inc. South DeKalb Mall Management Corporation 12. The Rouse Company of Iowa, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse Management Services Corporation of Iowa, Inc. Rouse Management Services Corporation Two of Iowa, Inc. 6 13. The Rouse Company of Louisiana owns all of the outstanding capital stock of Rouse-New Orleans, Inc., a Maryland corporation 14. The Rouse Company of Massachusetts, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Faneuil Hall Marketplace, Inc. Marketplace Grasshopper, Inc. Rouse-Eastfield, Inc. 15. The Rouse Company of Michigan, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse Southland, Inc. Rouse Southland Management Corporation Southland Security, Inc. Southland Shopping Center, Inc. 16. The Rouse Company of Minnesota, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Ridgedale Shopping Center, Inc. Rouse-Maple Grove, Inc. Rouse Ridgedale, Inc. Rouse Ridgedale Management Corporation 17. The Rouse Company of Nevada, Inc. owns all of the outstanding capital stock or units of ownership interest of each of the following entities: 250 Pilot Road, LLC, a Nevada limited liability company 585 Pilot Road, LLC, a Nevada limited liability company 625 Pilot Road, LLC, a Nevada limited liability company 10000 West Charleston Boulevard, LLC, a Nevada limited liability company 10450 West Charleston Boulevard, LLC, a Nevada limited liability company Cherry Hill Center, Inc., a Maryland corporation Echelon Holding Company, Inc., a Delaware corporation Echelon Mall, Inc., a Maryland corporation Harborplace, Inc., a Maryland corporation One Willow Corporation, a Delaware corporation Paramus Equities, Inc., a Texas corporation Paramus Park, Inc., a Maryland corporation Rouse-Bridgewater Commons, LLC, a Maryland limited liability company Rouse F.S., LLC, a Maryland limited liability company Rouse-Fashion Outlet, LLC, a Maryland limited liability company Rouse-Fashion Place, LLC, a Maryland limited liability company Rouse Fashion Show, Inc., a Nevada corporation 7 Rouse-Las Vegas, LLC, a Nevada limited liability company Rouse-Moorestown, Inc., a Maryland corporation Rouse-Moorestown II, Inc., a Maryland corporation Rouse-Park Meadows Holding, LLC, a Maryland limited liability company Rouse-Towson Town Center, LLC, A Maryland limited liability company Rouse-Valley Fair, LLC, a Maryland limited liability company Rouse-Westdale, LLC, a Maryland limited liability company Rouse-Wincopin, Inc., a Maryland corporation Two Willow Corporation, a Delaware corporation The Village of Cross Keys, Incorporated, a Maryland corporation TTC Member, Inc., a Maryland corporation White Marsh Mall, Inc., a Maryland corporation Woodbridge Center, Inc., a Maryland corporation One Willow Corporation owns all of the outstanding capital stock of Three Willow Corporation, a Delaware corporation. Rouse-Park Meadows Holding, LLC owns all of the outstanding units of Rouse- Park Meadows, LLC, a Maryland limited liability company. Rouse-Towson Town Center, LLC owns 99.5% of the outstanding units of Towson Town Center, LLC, a Maryland limited liability company. Towson Town Center, LLC owns all of the outstanding units of Route-TTC Funding, LLC, a Maryland limited liability company TTC Member, Inc. owns all of the outstanding units of TTC SPE, LLC and .5% of the outstanding units of Towson Town Center, LLC. The Village of Cross Keys, Incorporated owns all of the outstanding capital stock of The Roost, Inc., a Maryland corporation. 18. The Rouse Company of New Jersey, Inc. owns all of the outstanding Series A Preferred Stock of Rouse Woodbridge Funding, Inc., a Delaware corporation, and all of the outstanding common stock of each of the following Maryland corporations: Echelon Urban Center, Inc. Paramus Equities II, Inc. Paramus Mall Management Company, Inc. Rouse-Atlantic Gateway, Inc. Rouse-Burlington, Inc. The Willowbrook Corporation Willmall Holdings, Inc. Willowbrook Management Corporation 8 19. The Rouse Company of New York, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: DM Shopping Center, Inc. Rouse-Seaport Retail Venture, Inc. Rouse SI Shopping Management, Inc. Seaport Marketplace, Inc. Seaport Marketplace Theatre, Inc. Seaport Theatre Management Corporation 20. The Rouse Company of North Carolina, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse-Charlotte, Inc. Rouse-Durham, Inc. Rouse Office Management of North Carolina, Inc. 21. The Rouse Company of Ohio, Inc. owns all of the outstanding common stock of each of the following corporations: Beachwood Place, Inc., a Maryland corporation Cuyahoga Development Corporation, a Maryland corporation Franklin Park Mall, Inc., a Maryland corporation Franklin Park Mall Management Corporation, a Maryland corporation Plaza Holding Corporation, an Ohio corporation 22. The Rouse Company of Oregon, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse Office Management of Oregon, Inc. Rouse-Portland, Inc. Rouse Salem Centre, Inc. Rouse Salem Centre Management Corporation 23. The Rouse Company of Pennsylvania, Inc. owns all of the outstanding capital stock of Whiteland I, Inc. and Whiteland II, Inc., both Maryland corporations. 24. The Rouse Company of Texas, Inc. owns all of the outstanding capital stock of each of the following corporations: Almeda Mall, Inc., a Maryland corporation AU Management Corporation, a Texas corporation Austin Mall, Inc., a Maryland corporation Collin Creek, Inc., a Maryland corporation Collin Creek Mall Management Company, Inc., a Maryland corporation 9 DK Management Corporation, a Texas corporation DK Shopping Center, Inc., a Texas corporation Greengate Mall, Inc., a Pennsylvania corporation North Star Mall, Inc., a Texas corporation Northwest Mall, Inc., a Maryland corporation NS Management Corporation, a Texas corporation Rouse-Air Cargo, Inc., a Maryland corporation Rouse-Air Cargo (DFW), Inc., a Maryland corporation Rouse-Almeda, Inc., a Maryland corporation Rouse-Carillon Management Company, Inc., a Maryland corporation Rouse-Carillon Shopping Center, Inc., a Maryland corporation Rouse Central Park Shopping Center, Inc., a Maryland corporation Rouse Fort Worth, Inc., a Maryland corporation Rouse Holding Company of Texas, Inc., a Texas corporation Rouse Management Services Corporation of Texas, Inc., a Maryland corporation Rouse-Northwest, Inc., a Maryland corporation Rouse-San Antonio, Inc., a Maryland corporation Rouse-Southlake, Inc., a Maryland corporation Rouse-Tarrant, Inc., a Maryland corporation SDK Mall, Inc., a Texas corporation South DeKalb Mall, Inc., a Texas corporation 25. The Rouse Company of Virginia, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse Airport Retail, Inc. Rouse-Military Circle, Inc. Rouse-Richmond, Inc. Rouse-Military Circle, Inc. owns all of the outstanding capital stock of Rouse Hotel Management of Virginia, Inc., a Maryland corporation. 26. The Rouse Company of Washington, Inc. owns all of the outstanding capital stock of Rouse-Seattle, Inc., a Maryland corporation. 27. The Rouse Holding Company of Arizona, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Rouse-Arizona Center, Inc. Rouse Office Management of Arizona, Inc. Rouse-Phoenix Development Corporation Rouse-Phoenix Parking, Inc. Rouse-Phoenix Parking Two, Inc. Rouse-Phoenix Two Corporate Center, Inc. 10 28. Rouse Investing Company owns all of the outstanding capital stock of each of the following corporations: Deerfield Homes, Inc., a Florida corporation 306 Corporation, a Texas corporation Wilmington Homes, Inc., a North Carolina corporation 29. Rouse Missouri Holding Company owns all of the outstanding capital stock of each of the following Maryland corporations: The Rouse Company of Missouri, Inc. Rouse Missouri Management Corporation St. Louis Union Station Beergarten, Inc. The Rouse Company of Missouri, Inc. owns all of the outstanding capital stock of The Rouse Company of St. Louis, Inc., a Maryland corporation. 30. Rouse-Wates, Incorporated ("Rouse-Wates") and its consolidated subsidiaries are accounted for as a discontinued operation in the consolidated financial statements. Rouse-Wates owns all of the outstanding capital stock of Owen Brown B Development Company, a Maryland corporation 31. RREF Holding, Inc. owns all of the outstanding capital stock of RII Holding, Inc., a Texas corporation. 32. TRCD, Inc. owns all of the outstanding common stock of the following Delaware corporations: Austin Mall Corporation Collin Creek Property, Inc. The Franklin Park Corporation Mall St. Matthews Corporation North Star Mall Corporation One Franklin Park Corporation One Gallery Corporation Rouse Funding Corporation Rouse Funding Two, Inc. Rouse-MTN, Inc. TRCDE, Inc. TRCDE Two, Inc. TRCDF, Inc. Two Franklin Park Corporation Two Gallery Corporation Willowbrook Mall, Inc. 11 The Franklin Park Corporation owns 90 shares of the outstanding capital stock of Franklin Park Finance, Inc., a Delaware corporation, and Rodamco U.S.A., Inc. owns the remaining 910 shares. Franklin Park Finance, Inc. has 3,000 shares of capital stock authorized, of which 1000 shares are issued and outstanding as described above. Willowbrook Mall, Inc. owns 90 shares of the outstanding capital stock of Willowbrook Finance Corporation, a Delaware corporation, and Rodamco U.S.A., Inc. owns the remaining 910 shares. Willowbrook Finance Corporation has 3,000 shares of capital stock authorized, of which 1000 shares are issued and outstanding as described above. 33. TRC Holding Company of Washington, D.C. owns all of the outstanding capital stock of Rouse-National Press Management, Inc., a Maryland corporation 12 EX-23.1 8 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors The Rouse Company: We consent to the incorporation by reference in the Registration Statements of The Rouse Company on Form S-3 (File Nos. 2-78898, 2-95596, 33-52458, 33-57707 and 333-67137), Form S-8 (File Nos. 2-83612, 33-56231, 33-56233, 33-56235 and 333-32277) and Form S-4 (File No. 333-01693) of our report dated February 24, 1999, relating to the consolidated financial statements and related schedules of The Rouse Company and subsidiaries as of December 31, 1998 and 1997 and for each of the years in the three-year period ended December 31, 1998, which report appears in the Annual Report on Form 10-K of The Rouse Company for the year ended December 31, 1998. KPMG LLP Baltimore, Maryland March 30, 1999 EX-23.2 9 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Trustees The Rouse Company Incentive Compensation Statutory Trust and The Board of Directors The Rouse Company: We consent to the incorporation by reference in the Registration Statements of The Rouse Company on Form S-3 (File Nos. 2-78898, 2-95596, 33-52458, 33-57707 and 333-67137), Form S-8 (File Nos. 2-83612, 33-56231, 33-56233, 33-56235 and 333-32277) and Form S-4 (File No. 333-01693) of our report dated February 24, 1999, relating to the combined consolidated financial statements and related schedules of Real Estate Ventures owned by The Rouse Company Incentive Compensation Statutory Trust and The Rouse Company as of and for the year ended December 31, 1998, which report appears in the Annual Report on Form 10-K of The Rouse Company for the year ended December 31, 1998. KPMG LLP Baltimore, Maryland March 30, 1999 EX-24 10 EXHIBIT 24 Exhibit 24. Power of Attorney. The Power of Attorney, dated February 25, 1999, is attached. THE ROUSE COMPANY POWER OF ATTORNEY ----------------- KNOW ALL PERSONS BY THESE PRESENTS, that the under- signed directors of THE ROUSE COMPANY, a Maryland corporation, constitute and appoint ANTHONY W. DEERING, JEFFREY H. DONAHUE and BRUCE I. ROTHSCHILD, or any one of them, the true and lawful agents and attorneys-in-fact of the undersigned, with full power of substitution and resubstitution, and with full power and authority (i) to sign for the undersigned, and in their respective names as directors of the Company, the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1998 that is to be filed with the Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder, and any amendment or amendments to such Annual Report on Form 10-K, and (ii) to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact, as herein authorized. Dated: February 25, 1999 /s/ David H. Benson (SEAL) -------------------------- David H. Benson /s/ Jeremiah E. Casey (SEAL) -------------------------- Jeremiah E. Casey /s/ Mathias J. DeVito (SEAL) -------------------------- Mathias J. DeVito /s/ Anthony W. Deering (SEAL) -------------------------- Anthony W. Deering /s/ Rohit M. Desai (SEAL) -------------------------- Rohit M. Desai /s/ Juanita T. James (SEAL) -------------------------- Juanita T. James /s/ William R. Lummis (SEAL) -------------------------- William R. Lummis /s/ Thomas J. McHugh (SEAL) -------------------------- Thomas J. McHugh /s/ Hanne M. Merriman (SEAL) -------------------------- Hanne M. Merriman /s/ Roger W. Schipke (SEAL) -------------------------- Roger W. Schipke /s/ Alexander B. Trowbridge(SEAL) -------------------------- Alexander B. Trowbridge /s/ Gerard J. M. Vlak (SEAL) -------------------------- Gerard J. M. Vlak -2- EX-27 11 EXHIBIT 27
5 THIS FINANCIAL DATA SCHEDULE IS SUBMITTED IN ACCORDANCE WITH REGULATION S-K ITEM 601(C)(2). THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 DEC-31-1998 37,694 4,256 95,745 19,828 0 146,172 5,051,981 578,311 5,154,643 816,758 4,058,820 723 0 41 628,162 5,154,643 692,571 692,571 0 434,715 0 7,735 209,564 105,152 (24) 116,326 (11,174) 4,355 (4,629) 104,902 1.36 1.34 CURRENT ASSETS INCLUDE CASH, UNRESTRICTED MARKETABLE SECURITUES, 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.
EX-99.1 12 EXHIBIT 99.1 Exhibit 99.1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 11-K [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to ______ Commission File Number 0-1743 ---------- A. Full title of the plan and address of the plan: The Rouse Company Savings Plan c/o Human Resources Division The Rouse Company Building 10275 Little Patuxent Parkway Columbia, Maryland 21044 B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive offices: The Rouse Company The Rouse Company Building 10275 Little Patuxent Parkway Columbia, Maryland 21044 REQUIRED INFORMATION Since The Rouse Company Savings Plan (the "Plan") is subject to the Employee Retirement Income Security Act of 1974, the Plan financial statements for the fiscal year ended December 31, 1998 will be filed on or before June 30, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the Plan) have duly caused this annual report to be signed by the undersigned hereunto duly authorized. THE ROUSE COMPANY SAVINGS PLAN ------------------------------ Date: March 30, 1999 By /s/ Janice A. Fuchs ------------------ ----------------------------------- Janice A. Fuchs, Administrator and Date: March 30, 1999 By /s/ Jeffery H. Donahue ------------------ ----------------------------------- Jeffery H. Donahue, Trustee EX-99.2 13 EXHIBIT 99.2 Exhibit 99.2 FACTORS AFFECTING FUTURE OPERATING RESULTS This Form 10-K, the Company's Annual Report to Shareholders, any Form 10-Q or any Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company include forward-looking statements that 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 discussed below that could cause actual results to differ materially from historical results or anticipated results. 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 of The Rouse Company, its subsidiaries, affiliates and Non-REIT Subsidiaries (collectively and individually, the "Company") to differ materially from historical results or anticipated results: REIT Risks. Failure to Qualify as a REIT. Although the Company believes that it is organized and intends to operate in such a manner as to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), no assurance can be given that the Company will remain so qualified. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations. The complexity of these provisions and applicable Treasury Regulations is also increased to the extent a REIT holds some of its assets in partnership form. The determination of various factual matters and circumstances not entirely within the Company's control may affect its ability to qualify as a REIT. In addition, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the Federal income tax consequences of such qualification. Currently, there are proposals before Congress to make significant changes to the requirements for qualifying as a REIT and to the operations REITs may conduct. If in any taxable year the Company fails to qualify as a REIT, the Company would not be allowed a deduction for distributions to shareholders in computing its taxable income and would be subject to Federal income tax (including applicable alternative minimum tax) on its taxable income at regular corporate rates. As a result, the amount available for distribution to the Company's shareholders would be reduced for the year or years involved. In addition, unless entitled to relief under certain statutory provisions, the Company would be disqualified from treatment as a REIT for the four taxable years following the year during which it lost its qualification. Notwithstanding that the Company currently operates in a manner designed to qualify as a REIT, future economic, market, legal, tax or other considerations may cause the Company to determine that it is in the best interest of the Company and its shareholders to revoke its REIT election. The Company would then be disqualified from electing treatment as a REIT for the four taxable years following the year of such revocation. Inability to Comply With REIT Distribution Requirements. To obtain the favorable tax treatment for REITs qualifying under the Code, the Company generally will be required to distribute to its shareholders at least 95% of its otherwise taxable income (after certain adjustments, including for the Company's net operating loss carryover). Such distributions must be paid either (i) in the taxable year to which they relate or (ii) in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular distribution payment after such declaration. Exhibit 99.2 In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income for the calendar year, 95% of its capital gains net income for the calendar year and any undistributed taxable income from prior periods. Failure to comply with the 95% distribution requirement would result in the Company failing to qualify as a REIT and the Company's income being subject to tax at regular corporate rates. The Company intends to make distributions to its shareholders to comply with the 95% tax distribution provision of the Code and to avoid the nondeductible excise tax discussed above. Recently Proposed Tax Legislation. The President's fiscal year 2000 budget contains a number of REIT-related provisions which, if enacted, would change certain of the REIT qualification rules described above. Specifically, a REIT would be prohibited from owning more than 10% of the stock of any one corporate issuer, determined either by vote or by value. Currently, this 10% test is applied only by reference to voting power. The proposal would allow an exception to the 10% rule for "taxable REIT subsidiaries." "Taxable REIT subsidiaries" would be subject to certain anti-stripping provisions limiting the deductibility of payments from the taxable REIT subsidiaries to the REIT, including a disallowance of interest payments to the REIT. This proposal, if enacted, would be effective immediately. If these new rules are enacted, they would limit the deductibility of interest payments by the Company's taxable subsidiaries. In addition, the President proposes to expand upon the "five or fewer requirement" to prohibit any person (including any type of entity) from owning more than 50% of the stock of the REIT determined by vote or by value. The current "closely-held" restriction prohibits more than 50% of the REIT from being owned by five or fewer individuals but does not apply to entities. As proposed, this change would be effective for entities electing REIT status for taxable years beginning on or after the date of the first committee action on the proposal. Further, if these new rules are enacted, it may impact the Company's future ability to invest in certain closely-held REITs. There can be no assurance that the proposals will be enacted in the form proposed or with the proposed effective date. Any legislation, if enacted, may adversely affect the status of the Company as a REIT or its ability to expand certain segments of its business. Real Estate Development and Investment Risks. General. Real property investments are subject to varying degrees of risk. Revenues and property values may be adversely affected by the general economic climate, the local economic climate and local real estate conditions, including (i) the perceptions of prospective tenants or purchasers as to the attractiveness of the property; (ii) the ability to provide adequate management, maintenance and insurance; (iii) the inability to collect rent due to bankruptcy or insolvency of tenants or otherwise; and (iv) increased operating costs. Real estate values may also be adversely affected by such factors as applicable laws, including tax laws, interest rate levels and the availability of financing. Development Risks. New project development is subject to a number of risks, including risks of availability of financing, construction delays or cost overruns that may increase project costs, risks that the properties will not achieve anticipated occupancy levels or sustain anticipated lease or sales levels, and new project commencement risks such as receipt of zoning, occupancy and other required governmental permits and authorizations and the incurrence of development costs in connection with projects that are not pursued to completion. Lack of Geographical Diversification. A significant portion of the properties held by the Company's subsidiaries and affiliates is geographically concentrated. Land sales, for instance, relate primarily to land in and around Columbia, Maryland and Las Vegas, Nevada. These sales are affected by the economic climate in Howard County, Maryland, the Baltimore-Washington area and the greater Las Vegas area, and by local real estate conditions and other factors, including applicable zoning laws and -2- Exhibit 99.2 the availability of financing for residential development. Similarly, most of the office/industrial buildings that are owned by the Company's subsidiaries and affiliates are located in the Baltimore-Washington corridor, including Columbia, Maryland, and the greater Las Vegas metropolitan area. Due to the geographic concentration of this portfolio, the operating results from owning these buildings and selling property for development depend especially on the local economic climate and real estate conditions, including the availability of comparable, competing buildings and properties. Illiquidity of Real Estate Investments. Real estate investments are relatively illiquid and therefore may tend to limit the ability of the Company to react promptly in response to changes in economic or other conditions. Dependence on Rental Income from Real Property. The Company's cash flow and results of operations would be adversely affected if a significant number of tenants were unable to meet their obligations or if the Company were unable to lease a significant amount of space in its income-producing properties on economically favorable lease terms. In the event of a default by a tenant, the Company may experience delays in enforcing its rights as lessor and may incur substantial costs in protecting its investment. The bankruptcy or insolvency of a major tenant may have an adverse effect on an income-producing property. Effect of Uninsured Loss. The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its properties with insured limits and policy specifications that it believes are customary for similar properties. There are, however, certain types of losses (generally of a catastrophic nature, such as wars, floods or earthquakes) which may be either uninsurable, or, in the Company's judgment, not economically insurable. Should an uninsured loss occur, the Company could lose both its invested capital in and anticipated profits from the affected property. Environmental Matters. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances on, under, in or migrating from such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to remediate properly such substances when present, may adversely affect the owner's ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may also be liable for the costs of the investigation, removal and remediation of such wastes at the disposal or treatment facility, regardless of whether such facility is owned or operated by such person. Other federal, state and local laws, ordinances and regulations require abatement or removal of certain asbestos-containing materials in the event of demolition or certain renovations or remodeling, impose certain worker protection and notification requirements and govern emissions of and exposure to asbestos fibers in the air. Certain of the Company's properties contain underground storage tanks which are subject to strict laws and regulations designed to prevent leakage or other releases of hazardous substances into the environment. In connection with its ownership, operation and management of such properties, the Company could be held liable for the environmental response costs associated with the release of such regulated substances or related claims. In addition to remediation actions brought by federal, state and local agencies, the presence of hazardous substances on a property could result in personal injury or similar claims by private plaintiffs. Such claims could result in costs or liabilities which could exceed the value of such property. The Company is not aware of any notification by any private party or governmental authority of any non- compliance, liability or other claim in connection with environmental conditions at any of its properties that it believes will involve any expenditure which -3- Exhibit 99.2 would be material to the Company, nor is the Company aware of any environmental condition with respect to any of its properties that it believes will involve any such material expenditure. However, there can be no assurance that any such non-compliance, liability, claim or expenditure will not arise in the future. Although the Company generally conducts environmental reviews with respect to properties which it acquires and develops, there can be no assurance that the review conducted by the Company will be adequate to identify environmental or other problems prior to such acquisition. Americans with Disabilities Act Compliance. Under the Americans with Disabilities Act (the "ADA"), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. The Company has surveyed each of its properties and believes that it is in substantial compliance with the ADA and that it will not be required to make substantial capital expenditures to address the requirements of the ADA. In addition, the Company has developed an ADA Compliance Plan and has budgeted for and moved forward with the removal of those barriers to access that are readily achievable. The Company believes that implementation of its ADA Compliance Plan will not have a material adverse effect on its financial condition. Competition. There are numerous other developers, managers and owners of real estate that compete with the Company in seeking management and leasing revenues, land for development, properties for acquisition and disposition and tenants for properties, and there can be no assurance that the Company will successfully respond to or manage competitive conditions. Changes in Economic Conditions. The Company's business and operating results can be adversely affected by changes in the economic environment generally. For example, an increase in interest rates will affect the interest payable on the Company's outstanding floating rate debt and may result in increased interest expense if debt is refinanced at higher interest rates. Moreover, in a recessionary economy, credit conditions may be inflexible and consumer spending conservative, which could adversely affect the Company's revenues from its retail centers. Interest Rate Exchange Agreements. The Company makes limited use of interest rate exchange agreements, including interest rate caps and swaps, primarily to manage interest rate risk associated with variable rate debt. Under interest rate cap agreements, the Company makes initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates on the related variable rate debt exceed specified levels during the agreement period. Premiums paid are amortized to interest expense over the terms of the agreements using the interest method, and payments receivable from the counterparties are accrued as reductions of interest expense. Under interest rate swap agreements, the Company and the counterparties agree to exchange the difference between fixed rate and variable rate interest amounts calculated by reference to specified notional principal amounts during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less. Amounts receivable or payable under swap agreements are accounted for as adjustments to interest expense on the related debt. Parties to interest rate exchange agreements are subject to market risk for changes in interest rates and risk of credit loss in the event of nonperformance by the counterparties. Although the Company deals only with highly rated financial institution counterparties (which, in certain cases, are also the lenders on the related debt) and does not expect that any counterparties will fail to meet their obligations, there can be no assurance that this will not occur. -4- Exhibit 99.2 Risks Relating to Nevada Properties. General. Affiliates of the Company own approximately 3.8 million rentable square feet of office and industrial space primarily around Las Vegas, Nevada, Fashion Show Mall, an 840,000 square foot regional shopping center located on "Strip" in Las Vegas, two Tournament Players Club golf clubs in Summerlin and approximately 8,700 saleable acres of development and investment land located in Summerlin, Nevada. These properties could be adversely affected by the following risks. Water Availability in the Las Vegas Metropolitan Area. The Las Vegas metropolitan area is a desert environment where the ability to develop real estate is largely dependent on the continued availability of water. The Las Vegas metropolitan area has a limited supply of water to service future development, and it is uncertain whether the metropolitan area will be successful in obtaining new sources of water. If the Las Vegas metropolitan area does not obtain new sources of water, development activities could be materially hindered. Air Quality. The Las Vegas Valley is classified as a moderate carbon monoxide and a serious PM-10 nonattainment area by the U.S. Environmental Protection Agency ("EPA"). The EPA is currently assessing whether the Las Vegas Valley meets certain regulatory requirements with respect to levels of ozone. Efforts are underway to develop air quality plans to achieve and maintain applicable EPA standards. However, there are also ongoing efforts to relax certain requirements under the Clean Air Act and to modify the EPA's authority thereunder. The outcome of these efforts may significantly affect real estate development activities in the Las Vegas Valley. Availability of Infrastructure. As with many rapidly growing communities, the rate of growth in the Las Vegas metropolitan area is straining the capacity of the community's infrastructure, particularly with respect to schools, water delivery systems, transportation, flood control and sewage treatment. Certain responsible federal, state and local government agencies finance the construction of infrastructure improvements through a variety of means, including general obligation bond issues, some of which are subject to voter approval. The failure of these agencies to obtain financing for or to complete such infrastructure improvements could materially delay development in the area or materially increase development costs through the imposition of impact fees and other fees and taxes, or require the construction or funding of portions of such infrastructure. The availability of infrastructure or water has not had a negative impact on the development or investment activities of the Company's affiliates to date. Non-Nevada Gaming. Until this decade, the gaming industry was principally limited to the traditional markets of Nevada and New Jersey. Several states, however, have legalized casino gaming and other forms of gambling in recent years. In addition, several states have negotiated compacts with Indian tribes pursuant to the Indian Gaming Regulatory Act of 1988 that permit certain forms of gaming on Indian lands. These additional gaming venues create alternative destinations for gamblers and tourists who might otherwise have visited Las Vegas. It is not possible to determine whether current or future legalized gaming venues will have an adverse impact on the Las Vegas economy and thereby adversely affect the properties held by Company affiliates in the Las Vegas area. -5- -----END PRIVACY-ENHANCED MESSAGE-----