-----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, LdOgdFAZMK7poRoMOvCXjdP+DSEtRRazKR6Cxj28Qh71iJ+LmjlIKLpRxosBiXuW 1bPHygSf93HWBXBqSdHMYg== 0000928385-98-000605.txt : 19980331 0000928385-98-000605.hdr.sgml : 19980331 ACCESSION NUMBER: 0000928385-98-000605 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD 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: 98577182 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 SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31,1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE EQUIRED) 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 1c per share) New York Stock Exchange - ------------------------------------- 9 1/4% Cumulative Quarterly Income Preferred Securities New York Stock Exchange - ------------------------------------------------------- Series B Convertible Preferred Stock New York Stock Exchange - ------------------------------------- (par value 1c per share) - -------------------------- 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 (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 February 17, 1998, there were outstanding 66,910,901 shares of the registrant's common stock, par value 1c, 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 $2,204,485,867 Documents Incorporated by Reference The specified portions of the Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorporated by reference into Parts I, II, and IV. Definitive Proxy Statement to be filed pursuant to Regulation 14A on or before April 3, 1998 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, community retail centers and two hotels, and the management of one retail center in Canada, and (ii) the development and sale of land in Maryland, and Las Vegas, Nevada for residential, commercial and industrial uses. DEVELOPMENTS IN 1997 Election to be Taxed as a Real Estate Investment Trust and Related Matters In December 1997, the Company determined that it would elect to be taxed as a real estate investment trust (REIT) effective January 1, 1998. On December 31, 1997, The Rouse Company Incentive Compensation Statutory Trust (the "Trust"), an entity which is neither owned nor controlled by the Company, acquired 91% of the voting common stock of certain subsidiary companies for an aggregate consideration of $1,400,000. The Company retained the remaining voting stock of the companies ("Non-REIT Subsidiaries") and holds shares of nonvoting common and/or preferred stock and, in certain cases, mortgage loans receivable from the Non-REIT Subsidiaries 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 Non- REIT Subsidiaries, the Company began accounting for its investment in them using the equity method effective December 31, 1997. Due to its continuing financial interest in the Non-REIT Subsidiaries, the Company recognized no gain for financial reporting purposes on the sales of stock and the Non- REIT Subsidiaries did not adjust the cost basis of their assets and liabilities. I-2 Item 1. Business, continued. The Company believes that it met the qualifications for REIT status as of December 31, 1997, and it intends to continue to meet the qualifications in the future and to distribute at least 100% of its REIT taxable income (determined by taking into account any net operating loss deduction) to stockholders in 1998 and subsequent years. Accordingly, management does not believe that the Company will be liable for payment of income taxes (except, possibly, in certain states) in those periods. The Company also intends to elect to be subject to the "built-in gain" rules under which taxes may be payable at the time and to the extent the net unrealized gains on its assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten year period following conversion. Due to the availability of the Company's net operating loss carryforward (which was approximately $281,000,000 at December 31, 1997) to offset any built-in gains which might be recognized, the potential for making nontaxable dispositions, if necessary (e.g., like-kind exchanges of properties), and the intent and ability of the Company to defer asset dispositions to periods when related gains will not be subject to built-in gains taxes, management does not believe that the Company will be liable for payment of taxes on built-in gains during the ten year period. Based on these considerations, management does not believe that the Company will be liable for income taxes at the Federal level or in most states in which it operates in future years. Accordingly, the Company eliminated substantially all ($158,433,000) of the deferred tax assets and liabilities it had recorded at December 31, 1997. A summary of the principal assets and operations of the Non-REIT Subsidiaries involved in the subject transactions is as follows: a) Ownership and management of 14 office and industrial buildings, 10 community retail centers, a hotel and a major regional retail center located in Columbia, Maryland. b) Ownership and development of approximately 1,600 acres of saleable land for residential and commercial uses in and around Columbia, Maryland, a master planned community. c) Ownership and development of approximately 10,400 acres of saleable land for residential and commercial uses primarily in Summerlin, Nevada, a master planned community, and Las Vegas, Nevada. I-3 Item 1. Business, continued. d) Ownership of management contracts for approximately 28 retail centers and 71 office buildings. e) Ownership interests in various other operating property and land partnerships. Item 1(b). Financial Information About Industry Segments. Information required by Item 1(b) is incorporated herein by reference to note 10 of the notes to consolidated financial statements included in the 1997 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. Operating Properties: -------------------- As set forth in Item 2, at December 31, 1997, the 52 regional retail centers owned, in whole or in part, or operated by subsidiaries or affiliates of the Company or by Non-REIT Subsidiaries, aggregated 40,478,000 square feet, including 23,472,000 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, acquires interests in completed retail centers, with the Company (or, beginning December 31, 1997, 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) also provide management I-4 Item 1. Business, continued. 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, 1997, Non-REIT Subsidiaries of the Company managed 14 such centers, which are included in the figures in the preceding paragraph and aggregated 10,586,000 square feet of leasable space, 5,779,000 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 14 office and industrial buildings with 2,323,000 square feet of leasable space, 10 community retail centers with 962,000 square feet of leasable space, The Mall in Columbia (which is included in the second preceding paragraph) and other properties and additional commercial space, including the 289-room Columbia Inn in Columbia, Maryland. Howard Hughes Properties, Limited Partnership ("HHPLP", a majority owned affiliate of the Company) and its subsidiaries and affiliates own and/or manage 59 office and industrial buildings with 3,486,000 square feet of leasable space and other properties in and around Las Vegas, Nevada and Los Angeles, California. Other subsidiaries of the Company own and operate 5 mixed-use projects with a total of 691,000 square feet of leasable retail space and 1,858,000 square feet of leasable office space. Other subsidiaries of the Company own, in whole or in part, 6 office buildings with total of 946,000 square feet of leasable office space. The Company also has a 5% interest in Rouse-Teachers Properties, Inc., which owns 29 office and industrial buildings with 4,601,000 square feet of space and 300 acres of land. A Non-REIT Subsidiary of the Company is responsible for the operation, management and development of all buildings and land owned by Rouse-Teachers Properties, Inc. 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-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 I-5 Item 1. Business, continued 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 construction of a new retail center in Orlando, Florida, expansions of existing retail centers, expansions of existing mixed-use projects and expansions of existing master-planned business parks in Las Vegas, Nevada. Land Sales: ---------- HRD, which became a Non-REIT Subsidiary on December 31, 1997, is the developing entity of Columbia, Maryland, which is located in the Baltimore- Washington corridor. HRD owns approximately 2,000 developable acres (1,600 saleable 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", which became Non-REIT Subsidiaries of the Company on December 31, 1997) and their subsidiaries and affiliates are the developing entities of Summerlin, Nevada, which is located immediately north and west of Las Vegas, Nevada. Hughes owns approximately 15,500 developable acres (10,400 saleable 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 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. I-6 Item 1. Business, continued. 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 industry 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 statues 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 industry 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 employ 4,040 full-time and part-time employees at December 31, 1997. I-7 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 62 through 65 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 Fanueil Hall Marketplace Leasehold 2074 First National Bank Plaza Leasehold 2013 Franklin Park Leasehold and fee by joint venture 2024 The Gallery at Market East Leasehold 2082
I-8 Item 2. Properties, continued.
Nature of Year of expiration Property interest of lease -------- --------- ------------------ Governor's Square Leasehold by joint venture 2054 Greengate Mall Leasehold 2070 Harborplace Leasehold 2054 Highland Mall Leasehold and fee by joint venture 2070 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 venture 2076 St. Louis Union Station Leasehold 2060 South Street Seaport Leasehold 2031 Tampa Bay Center Leasehold and fee 2047 Westlake Center Leasehold by joint venture 2043
I-9 Item 3. Legal Proceedings. None. I-10 Item 4. Submission of Matters to a Vote of Security Holders. None. I-11 The executive officers of the Company as of March 27, 1998 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 53 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; and Executive Vice President Finance and Administration and Chief Financial Officer of the Company Jeffrey H. Donahue 51 Senior Vice-President 9/23/93 Senior Vice-President and Chief Financial Chief Financial Officer 9/23/93 Officer of the Company and Director of the and Director of the 8/17/93 Finance Division; formerly Vice-President Finance Division and Treasurer Of the Company John L. Goolsby 56 President and Chief 9/1/88 President and Chief Executive Officer of Executive Officer of The Howard Hughes Corporation The Howard Hughes Corporation, a Non-REIT Subsidiary of the Company Duke S. Kassolis 46 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; formerly Vice-President and Director of Office and Commercial Properties of the Company
I-12 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 - ----------------- --- ------------------ ------------------ ------------------------------------------ Paul I. Latta, Jr. 54 Senior Vice-President 9/23/93 Senior Vice-President and Director And Director of Retail 8/17/93 Of Retail Operations of the Company; Operations formerly Vice-President and Associate Division Director, Operating Properties Division of the Company Douglas A. McGregor 55 Executive Vice-President 8/17/93 Executive Vice-President for Development for Development and and Operations of the Company; formerly Operations Executive Vice-President Development and Director of the Office and Community Development Division of the Company Robert Minutoli 47 Senior Vice-President 9/23/93 Senior Vice-President and Director of and Director of 8/17/93 New Business of the Company; formerly New Business Vice-President for Development of the Company Robert D. Riedy 52 Senior Vice-President 9/23/93 Senior Vice-President and Director of and Director of Retail 8/17/93 Retail Leasing of the Company; formerly Leasing Vice-President for Development of the Company
I-13 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 - ----------------- --- ------------------ ------------------ ------------------------------------------ Alton J. Scavo 51 Senior Vice-President, 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; formerly Vice-President and Manager of Columbia Associate Director of the Community Development Division of the Company Jerome D. Smalley 48 Senior Vice-President 9/23/93 Senior Vice-President and Director of And Director of the 8/17/93 the Commercial and Office Development Commercial and Office Division of the Company; formerly Vice- Development Division President for Development George L. Yungmann 55 Senior Vice-President, 9/23/93 Senior Vice-President and Controller of Controller and 7/26/72 the Company and Director of the Controller's Director of the 7/26/72 Division; formerly Vice-President, Controller Controller's Division and Director of the Controller's Division
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 John L. Goolsby. 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-14 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 49 of Exhibit 13. Item 6. Selected Financial Data. Information required by Item 6 is incorporated by reference to page 48 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 50 through 57 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 49 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 3, 1998. 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: None. 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 23 through 47 of Exhibit 13 incorporated herein by reference: Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Notes to consolidated Financial Statements Schedules: The Rouse Company and Subsidiaries as of December 31, 1997 or for the years ended December 31, 1997, 1996 and 1995: Schedule II Valuation and Qualifying Accounts IV-4 Schedule III Real Estate and Accumulated Depreciation IV-5 All other schedules have been omitted as not applicable or not required, or because the required information is included in the consolidated 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. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, 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 PEAT MARWICK LLP Baltimore, Maryland February 24, 1998 IV-3 Schedule II ----------- THE ROUSE COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1997, 1996 and 1995
Additions -------------------------- Balance at Charged to Charged to Balance at beginning Costs and other end of Descriptions of year expenses accounts Deductions year ------------ ---------- ---------- -------------- ------------- ---------- (in thousands) 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 ======= ======= ========= ======= ======= Year ended December 31, 1995: Allowance for doubtful receivables $25,124 $ 3,318 $ --- $ 3,974 (1) $24,468 ======= ======= ========= ======= ======= Valuation allowance -- properties held for sale $ --- $15,589 $ --- $ --- $15,589 ======= ======= ========= ======= ======= Preconstruction reserve $14,109 $ 3,800 $ --- $ 2,530 (3) $15,379 ======= ======= ========= ======= =======
Notes: (1) Balances written off as uncollectible. (2) Allowance related to properties sold or transferred to operating properties. (3) Costs of unsuccessful projects written off. IV-4 Schedule III ------------ THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acquisition at December 31, 1997 ------------------------------------------- -------------------- ----------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - ----------- ------- ---- -------- -------- --------- ---- --------- ----- (In thousands) Operating Properties: Woodbridge Center $134,231 $26,301 $ -- $117,800 $ -- $26,301 $117,800 $144,101 Retail Center Woodbridge, NJ South Street Seaport 60,297 -- -- 141,534 -- -- 141,534 141,534 Retail Center New York, NY Arizona Center 105,585 97 -- 138,357 -- 97 138,357 138,454 Mixed-use project Phoenix, AZ Beachwood Place 121,058 10,673 -- 120,914 -- 10,673 120,914 131,587 Retail Center Beachwood, OH Fashion Show Mall 75,150 26,776 97,017 1,552 -- 26,776 98,569 125,345 Retail Center Las Vegas, NV Pioneer Place 96,341 -- -- 122,790 -- -- 122,790 122,790 Mixed-use project Portland, OR Westlake Center 93,954 10,582 -- 102,991 -- 10,582 102,991 113,573 Mixed-use project Seattle, WA
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of construction acquired is computed - ----------- ------------------------ ------------------- -------- ---------------------- (In thousands) Operating Properties: Woodbridge Center $24,614 03/71 N/A Note 8 Retail Center Woodbridge, NJ South Street Seaport 24,266 07/83 N/A Note 8 Retail Center New York, NY Arizona Center 26,247 07/83 N/A Note 8 Mixed-use project Phoenix, AZ Beachwood Place 8,628 08/78 N/A Note 8 Retail Center Beachwood, OH Fashion Show Mall 3,806 03/81 06/96 Note 8 Retail Center Las Vegas, NV Pioneer Place 23,364 03/90 N/A Note 8 Mixed-use project Portland, OR Westlake Center 25,526 10/88 N/A Note 8 Mixed-use project Seattle, WA
Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acquisition at December 31, 1997 -------------------- --------------------- --------------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - -------------- -------- ------ --------- --------- -------- ------ --------- ------- (in thousands) The Gallery at Harborplace 107,894 6,648 -- 104,034 -- 6,648 104,034 110,682 Mixed-use project Baltimore, MD Owings Mills 61,000 13,408 -- 87,661 -- 13,408 87,661 101,069 Retail Center Baltimore, MD Bayside Marketplace 83,310 -- -- 97,915 -- -- 97,915 97,915 Retail Center Miami, FL Mall St. Matthews 72,072 -- -- 94,668 -- -- 94,668 94,668 Retail Center Louisville, KY Paramus Park 70,353 13,475 -- 69,614 -- 13,475 69,614 83,089 Retail Center Paramus, NJ Moorestown Mall 42,000 12,169 67,043 -- -- 12,169 67,043 79,212 Retail Center Burlington County, NJ Santa Monica Place -- 5,088 -- 68,740 -- 5,088 68,740 73,828 Retail Center Santa Monica, CA Faneuil Mall Marketplace 53,910 -- -- 73,099 -- -- 73,099 73,099 Retail Center Boston, MA
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of construction acquired is computed - -------------- ------------------------ ------------------ -------- ---------------------- (in thousands) The Gallery at Harborplace 24,823 09/87 N/A Note 8 Mixed-use project Baltimore, MD Owings Mills 11,941 07/86 N/A Note 8 Retail Center Baltimore, MD Bayside Marketplace 16,614 04/87 N/A Note 8 Retail Center Miami, FL Mall St. Matthews 15,176 03/62 N/A Note 8 Retail Center Louisville, KY Paramus Park 8,524 03/74 N/A Note 8 Retail Center Paramus, NJ Moorestown Mall -- 03/63 12/97 Note 8 Retail Center Burlington County, NJ Santa Monica Place 10,379 10/80 N/A Note 8 Retail Center Santa Monica, CA Faneuil Mall Marketplace 11,459 08/76 N/A Note 8 Retail Center Boston, MA
IV-6 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acquisition at December 31, 1997 -------------------- --------------------- --------------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - -------------- -------- ------ --------- --------- -------- ------ --------- ------- (in thousands) Cherry Hill Mall 79,070 14,767 -- 57,536 -- 14,767 57,536 72,303 Retail Center Cherry Hill, NJ Oakwood Center 54,116 14,750 -- 56,959 -- 14,750 56,959 71,709 Retail Center Gretna, LA Augusta Mall 62,783 5,397 -- 65,720 -- 5,397 65,720 71,117 Retail Center Augusta, GA Hulen Mall 64,808 5,064 -- 65,336 -- 5,064 65,336 70,400 Retail Center Ft. Worth, TX Riverwalk 10,627 -- -- 69,900 -- -- 69,900 69,900 Retail Center New Orleans, LA St. Louis Union Station -- -- -- 67,497 -- -- 67,497 67,497 Retail Center St. Louis, MO Echelon Mall 60,294 6,160 -- 54,615 -- 6,160 54,615 60,775 Retail Center Voorhees, NJ
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of construction acquired is computed - -------------- ------------------------ ------------------ -------- ---------------------- (in thousands) Cherry Hill Mall 17,135 10/61 N/A Note 8 Retail Center Cherry Hill, NJ Oakwood Center 8,309 10/82 N/A Note 8 Retail Center Gretna, LA Augusta Mall 6,873 08/78 N/A Note 8 Retail Center Augusta, GA Hulen Mall 10,618 08/77 N/A Note 8 Retail Center Ft. Worth, TX Riverwalk 10,349 08/86 N/A Note 8 Retail Center New Orleans, LA St. Louis Union Station 18,110 08/85 N/A Note 8 Retail Center St. Louis, MO Echelon Mall 11,615 09/70 N/A Note 8 Retail Center Voorhees, NJ
IV-7 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acquisition at December 31, 1997 -------------------- --------------------- --------------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - -------------- -------- ------ --------- --------- -------- ------ --------- ------- (in thousands) Harborplace 37,249 -- -- 51,573 -- -- 51,573 51,573 Retail Center Baltimore, MD Blue Cross & Blue Shield Building I 33,508 1,000 -- 44,756 -- 1,000 44,756 45,756 Office Building Baltimore, MD 3800 Howard Hughes Parkway 39,941 3,676 39,014 1,152 -- 3,676 40,166 43,842 Office Building Las Vegas, NV The Jacksonville Landing 13,511 -- -- 32,549 -- -- 32,549 32,549 Retail Center Jacksonville, FL Tampa Bay Center 46,488 920 -- 31,152 -- 920 31,152 32,072 Retail Center Tampa, FL Governor's Square 27,429 -- -- 31,902 -- -- 31,902 31,902 Retail Center Tallahassee, FL Village of Cross Keys -- 910 -- 30,889 -- 910 30,889 31,799 Mixed-use project Baltimore, MD
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of construction acquired is computed - -------------- ------------------------ ------------------ -------- ---------------------- (in thousands) Harborplace 11,390 07/80 N/A Note 8 Retail Center Baltimore, MD Blue Cross & 8,981 07/89 N/A Note 8 Blue Shield Building I Office Building Baltimore, MD 3800 Howard 2,346 11/86 06/96 Note 8 Hughes Parkway Office Building Las Vegas, NV The Jacksonville Landing 10,270 06/87 N/A Note 8 Retail Center Jacksonville, FL Tampa Bay Center 9,876 08/79 N/A Note 8 Retail Center Tampa, FL Governor's Square 4,472 08/79 N/A Note 8 Retail Center Tallahassee, FL Village of Cross Keys 9,923 09/65 N/A Note 8 Mixed-use project Baltimore, MD
IV-8 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acquisition at December 31, 1997 -------------------- --------------------- --------------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - -------------- -------- ------ --------- --------- -------- ------ --------- ------- (in thousands) White Marsh 41,705 316 -- 31,352 -- 316 31,352 31,668 Retail Center Baltimore, MD North Star -- 168 -- 30,323 -- 168 30,323 30,491 Retail Center San Antonio, TX Plymouth Meeting -- 702 -- 29,259 -- 702 29,259 29,961 Retail Center Montgomery County, PA Willowbrook 38,434 853 -- 28,789 -- 853 28,789 29,642 Retail Center Wayne, NJ Exton Square 7,369 1,408 -- 26,663 -- 1,408 26,663 28,071 Retail Center Exton, PA 3773 Howard Hughes Parkway 22,715 1,764 22,964 2,953 -- 1,764 25,917 27,681 Office Building Las Vegas, NV Alexander & Alexander Building I 21,529 1,000 -- 24,605 -- 1,000 24,605 25,605 Office Building Baltimore, MD
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of construction acquired is computed - -------------- ------------------------ ------------------ -------- ---------------------- (in thousands) White Marsh 8,416 08/81 N/A Note 8 Retail Center Baltimore, MD North Star 7,998 09/60 N/A Note 8 Retail Center San Antonio, TX Plymouth Meeting 12,249 02/66 N/A Note 8 Retail Center Montgomery County, PA Willowbrook 6,482 09/69 N/A Note 8 Retail Center Wayne, NJ Exton Square 9,139 03/73 N/A Note 8 Retail Center Exton, PA 3773 Howard Hughes Parkway 931 11/95 06/96 Note 8 Office Building Las Vegas, NV Alexander & Alexander Building I 5,805 09/87 N/A Note 8 Office Building Baltimore, MD
IV-9 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acqisition at December 31, 1997 ------------------- ------------------- ----------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - ----------- ---------- -------- --------- --------- --------- ------ ---------- ------- (in thousands) The Gallery at Market East -- -- -- 23,916 -- -- 23,916 23,916 Retail Center Philadelphia, PA Perimeter Mall -- -- -- 22,086 -- -- 22,086 22,086 Retail Center Atlanta, GA Franklin Park 25,498 653 -- 20,908 -- 653 20,908 21,561 Retail Center Toledo, OH The Grand Avenue 4,442 -- -- 20,768 -- -- 20,768 20,768 Retail Center Milwaukee, WI Mondawmin 5,008 2,251 -- 17,973 -- 2,251 17,973 20,224 Retail Center Baltimore, MD Highland Mall 6,059 13 -- 17,701 -- 13 17,701 17,714 Retail Center Austin, TX Blue Cross & Blue Shield Building II 12,222 1,000 -- 16,542 -- 1,000 16,542 17,542 Office Building Baltimore, MD
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement and amortization of construction acquired is computed ------------------------ ------------------ -------- ---------------------- The Gallery at Market East 6,985 08/77 N/A Note 8 Retail Center Philadelphia, PA Perimeter Mall 6,324 08/71 N/A Note 8 Retail Center Atlanta, GA Franklin Park 4,685 07/71 N/A Note 8 Retail Center Toledo, OH The Grand Avenue 10,063 08/82 N/A Note 8 Retail Center Milwaukee, WI Mondawmin 6,757 01/78 N/A Note 8 Retail Center Baltimore, MD Highland Mall 5,592 08/71 N/A Note 8 Retail Center Austin, TX Blue Cross & Blue Shield Building II 2,942 08/90 N/A Note 8 Office Building Baltimore, MD
IV-10 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acqisition at December 31, 1997 ------------------- ------------------- ----------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - ----------- ---------- -------- --------- --------- --------- ------ ---------- ------- (in thousands) Alexander & Alexander Building II 11,851 650 -- 16,816 -- 650 16,816 17,466 Office Building Baltimore, MD 3753/3763 Howard Hughes Parkway 11,216 3,901 12,199 237 -- 3,901 12,436 16,337 Office Building Las Vegas, NV Midtown Square -- -- -- 14,759 -- -- 14,759 14,759 Retail Center Charlotte, NC 3930 Howard Hughes Parkway 7,350 3,155 11,448 27 -- 3,155 11,475 14,630 Office Building Las Vegas, NV Canyon Center -- 2,091 7,197 4,924 -- 2,091 12,121 14,212 Office Building Las Vegas, NV Crossing Business Center Phase III 8,666 2,883 1,481 8,254 -- 2,883 9,735 12,618 Office Building Las Vegas, NV
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement and amortization of construction acquired is computed ------------------------ ------------------ -------- ---------------------- Alexander & Alexander Building II 5,696 11/88 N/A Note 8 Office Building Baltimore, MD 3753/3763 Howard Hughes Parkway 597 10/91 06/96 Note 8 Office Building Las Vegas, NV Midtown Square 10,002 10/59 N/A Note 8 Retail Center Charlotte, NC 3930 Howard Hughes Parkway 731 12/94 06/96 Note 8 Office Building Las Vegas, NV Canyon Center 235 03/98 06/96 Note 8 Office Building Las Vegas, NV Crossing Business Center Phase III 413 09/96 06/96 Note 8 Office Building Las Vegas, NV
IV-II Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acqisition at December 31, 1997 ------------------- ------------------- ----------------------------- Buildings Buildings Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - ----------- ---------- -------- --------- --------- --------- ------ ---------- ------- (in thousands) 3980 Howard 10,740 881 5,607 5,947 -- 881 11,554 12,435 Hughes Parkway Office Building Las Vegas, NV Crossing Business Center Phase I 7,820 1,347 8,077 80 -- 1,347 8,157 9,504 Office Building Las Vegas, NV 3770 Howard Hughes Parkway 5,645 702 8,129 425 -- 702 8,554 9.256 Office Building Las Vegas, NV Metro Plaza 686 202 -- 8,038 -- 202 8,038 8,240 Retail Center Baltimore, MD Montgomery Ward 6,312 616 7,320 36 -- 616 7,356 7,972 Office Building Las Vegas, NV Crossing Business Center Phase II 5,686 363 7,426 (215) -- 363 7,211 7,574 Office Building Las Vegas, NV
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement and amortization of construction acquired is computed ------------------------ ------------------ -------- ---------------------- 3980 Howard 177 04/97 06/96 Note 8 Hughes Parkway Office Building Las Vegas, NV Crossing Business Center Phase I 312 12/94 06/96 Note 8 Office Building Las Vegas, NV 3770 Howard Hughes Parkway 527 10/90 06/96 Note 8 Office Building Las Vegas, NV Metro Plaza 3,435 N/A 12/82 Note 8 Retail Center Baltimore, MD Montgomery Ward 331 10/95 06/96 Note 8 Office Building Las Vegas, NV Crossing Business Center Phase II 271 12/95 06/96 Note 8 Office Building Las Vegas, NV
IV-12 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acqisition at December 31, 1997 ------------------- ------------------- ----------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - ----------- ---------- -------- --------- --------- --------- ------ ---------- ------- (in thousands) Equinox @ CBC 7,171 1,257 398 5,696 -- 1,257 6,094 7,351 Office Building Las Vegas, NV Raytheon Building -- 429 6,293 (59) -- 429 6,234 6,663 Office Building Las Vegas, NV 840 Grier 6,233 967 1,537 4,081 -- 967 5,618 6,585 Office Building Las Vegas, NV First National Bank Plaza 5,357 -- -- 6,330 -- -- 6,330 6,330 Office Building Mt. Prospect, IL Plaza East 4,718 925 5,384 (6) -- 925 5,378 6,303 Office Building Las Vegas, NV 420 Pilot Road 4,195 1,080 (108) 5,242 -- 1,080 5,134 6,214 Office Building Las Vegas, NV Plaza West 4,476 198 5,444 103 -- 198 5,547 5,745 Office Building Las Vegas, NV
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement and amortization of construction acquired is computed ------------------------ ------------------ -------- ---------------------- Equinox @ CBC 42 12/97 06/96 Note 8 Office Building Las Vegas, NV Raytheon Building 226 11/92 06/96 Note 8 Office Building Las Vegas, NV 840 Grier 114 03/97 06/96 Note 8 Office Building Las Vegas, NV First National Bank Plaza 1,753 07/81 N/A Note 8 Office Building Mt. Prospect, IL Plaza East 251 12/93 06/96 Note 8 Office Building Las Vegas, NV 420 Pilot Road 226 09/96 06/96 Note 8 Office Building Las Vegas, NV Plaza West 222 11/95 06/96 Note 8 Office Building Las Vegas, NV
IV-13 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost subsequent to Gross amount at which carried to Company acquisition at December 31, 1997 -------------------- ------------------- ------------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - -------------------------------- ---------- -------- ---------- -------- -------- ------ ---------- -------- (in thousands) 975 Kelly Johnson Drive 3,985 383 5,289 -- -- 383 5,289 5,672 Office Building Las Vegas, NV 980 Kelly Johnson Drive 3,385 827 4,843 -- -- 827 4,843 5,670 Office Building Las Vegas, NV Other properties and related investments less than 5% of total 65,477 21,089 76,778 49,489 -- 21,089 126,267 147,356 --------- ------- ------- --------- ------- ------- --------- --------- Total Operating Properties 2,072,929 231,935 400,780 2,447,247 -- 231,935 2,848,027 3,079,962 --------- ------- ------- --------- ------- ------- --------- --------- Properties in Development Oviedo Marketplace 46,296 11,951 -- 72,493 -- 11,951 72,493 84,444 Retail Center under development Orlando, FL Various Office Park Expansions -- 10,159 -- 10,943 -- 10,159 10,943 21,102 Las Vegas, NV Arizona Center -- -- -- 16,373 -- -- 16,373 16,373 Developed/developable land under master lease Phoenix, AZ Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of constrtuction acquired is computed - -------------------------------- ------------------------ ------------------ -------- ---------------------- (in thousands) 975 Kelly Johnson Drive 246 11/90 06/96 Note 8 Office Building Las Vegas, NV 980 Kelly Johnson Drive 223 05/92 06/96 Note 8 Office Building Las Vegas, NV Other properties and related investments less than 5% of total 16,197 -------- Total Operating Properties 515,229 ------- Properties in Development Oviedo Marketplace -- N/A N/A N/A Retail Center under development Orlando, FL Various Office Park Expansions -- N/A 06/96 N/A Las Vegas, NV Arizona Center -- N/A N/A N/A Developed/developable land under master lease Phoenix, AZ
IV-14 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost subsequent to Gross amount at which carried to Company acquisition at December 31, 1997 -------------------- ------------------- ------------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - -------------------------------- ---------- -------- ---------- -------- -------- ------ ---------- -------- (in thousands) Perimeter Mall Expansion -- -- -- 23,232 -- -- 23,232 23,232 Expansion of retail center Atlanta, GA Owings Mills Expansion -- 8,380 -- 10,721 -- 8,380 10,721 19,101 Expansion of retail center Baltimore County, MD 3960 Howard Hughes Parkway -- 794 -- 13,440 -- 794 13,440 14,234 Office Building under development Las Vegas, NV Plymouth Meeting Expansion -- -- -- 13,509 -- -- 13,509 13,509 Expansion of retail center Montgomery County, PA Exton Square Expansion -- 3,251 -- 7,885 -- 3,251 7,885 11,136 Expansion of retail center Exton, PA Canyon Center -- 1,722 -- 4,751 -- 1,722 4,751 6,473 Office Building under development Las Vegas, NV Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of constrtuction acquired is computed - -------------------------------- ------------------------ ------------------ -------- ---------------------- (in thousands) Perimeter Mall Expansion -- N/A N/A N/A Expansion of retail center Atlanta, GA Owings Mills Expansion -- N/A N/A N/A Expansion of retail center Baltimore County, MD 3960 Howard Hughes Parkway -- N/A 06/96 N/A Office Building under development Las Vegas, NV Plymouth Meeting Expansion -- N/A N/A N/A Expansion of retail center Montgomery County, PA Exton Square Expansion -- N/A N/A N/A Expansion of retail center Exton, PA Canyon Center -- N/A 06/96 N/A Office Building under development Las Vegas, NV
IV-15 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acquidsition at December 31, 1997 -------------------- --------------------- --------------------------------- Buildings Buildings and Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - -------------- -------- ------ --------- --------- -------- ------ --------- ------- (in thousands) White Marsh Expansion -- 4,074 -- 1,225 -- 4,074 1,225 5,299 Expansion of retail center Baltimore, MD Arizona Center Theatre -- -- -- 4,079 -- -- 4,079 4,079 Expansion of mixed-use project Phoenix, AZ Paramus Park Expansion -- -- -- 4,392 -- -- 4,392 4,392 Expansion of retail center Paramus, NJ Oakwood Expansion -- 1,188 -- 2,486 -- 1,188 2,486 3,674 Expansion of retail center Gretna, LA Preconstruction costs -- -- -- 16,659 -- -- 16,659 16,659 various projects Preconstruction reserve -- -- -- (17,351) -- -- (17,351) (17,351) Other projects less than 5% of total -- 432 -- 5,561 -- 432 5,561 5,993 ------- ------ ------------ -------- ------- ------- -------- -------- Total Properties in Development 46,296 41,951 -- 190,398 -- 41,951 190,398 232,349 ------- ------- ------------ -------- ------- ------- -------- --------
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement Description and amortization of construction acquired is computed - -------------- ------------------------ ------------------ -------- ---------------------- (in thousands) White Marsh Expansion -- N/A 06/95 N/A Expansion of retail center Baltimore, MD Arizona Center Theatre -- N/A N/A N/A Expansion of mixed-use project Phoenix, AZ Paramus Park Expansion -- N/A N/A N/A Expansion of retail center Paramus, NJ Oakwood Expansion N/A N/A N/A N/A Expansion of retail center Gretna, LA Preconstruction costs N/A N/A N/A N/A various projects Preconstruction reserve N/A N/A N/A N/A Other projects less than N/A N/A N/A N/A 5% of total Total Properties in Development
IV-16 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997
Cost capitalized Initial cost to subsequent to Gross amount at which carried Company acqisition at December 31, 1997 ------------------- ------------------- ----------------------------- Buildings Buildings Encum- and Carrying Improve- brances Improve- Improve- costs ments Description (note 4) Land ments ments (note 2) Land (note 3) Total - ----------- ---------- -------- --------- --------- --------- ------ ---------- ------- (in thousands) Properties held for sale: Village of Cross Keys Inn -- -- -- 7,795 -- -- 7,795 7,795 Hotel Baltimore, MD Salem Mall 35,193 1,285 -- 21,355 -- 1,285 21,355 22,640 Retail Center Dayton, OH Eastfield Mall 5,000 1,077 -- 11,281 -- 1,077 11,281 12,358 Retail Center Springfield, MA Spectrum Club -- 137 1,229 1,016 -- 137 2,245 2,382 Office Building Las Vegas, NV Other Properties held for sale, less than 5% of total -- 291 -- 12,538 -- 291 12,538 12,829 Valuation allowance -- -- -- (37,952) -- -- (37,952) (37,952) --------- --------- --------- --------- ----- ------- --------- --------- Total Properties held for sale 40,193 2,790 1,229 16,033 -- 2,790 17,26 20,052 --------- --------- --------- --------- ----- ------- --------- --------- Total Property 2,159,418 274,258 402,009 2,656,096 -- 274,258 3,058,105 3,332,363 ========= ========= ========= ========= ===== ======= ========= =========
Life on which depreciation in latest Accumulated depreciation Date of completion Date income statement and amortization of construction acquired is computed ------------------------ ------------------ -------- ---------------------- Properties held for sale: Village of Cross Keys Inn -- 09/65 N/A N/A Hotel Baltimore, MD Salem Mall -- 10/66 N/A N/A Retail Center Dayton, OH Eastfield Mall -- 04/68 N/A N/A Retail Center Springfield, MA Spectrum Club -- 09/93 06/96 N/A Office Building Las Vegas, NV Other Properties held for -- sale, less than 5% of total Valuation allowance -- Total Properties held -- for sale ----------------- Total Property 515,229 =================
IV-17 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997 Notes: (1) Reference is made to notes 1, 2, 3, 4, 8, 11, 12 and 16 to the consolidated financial statements. Land was generally acquired one to three years before completion of construction. (2) The determination of these amounts is not practicable and, accordingly, they are included in improvements. (3) Buildings and improvements include deferred costs of $111,455,000 at December 31, 1997. (4) Encumbrances on office buildings are included in operating property encumbrances. (5) The changes in total cost of properties for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands): 1997 1996 1995 ---------- ---------- ---------- Balance at beginning of year $3,691,600 $3,052,873 $2,994,412 Additions, at cost 317,705 158,205 73,155 Cost of properties acquired 84,743 602,944 78,605 Additions to land held for development and sale 134,447 48,474 16,091 Cost of land sales (131,310) (57,204) (14,214) Retirements, sales and other dispositions (114,435) (85,167) (75,787) Property of subsidiaries in which a majority voting interest was sold to an affiliate (621,338) --- --- Additions to preconstruction reserve (2,800) (2,700) (3,800) Provision for loss on operating properties (26,249) (25,825) (15,589) ---------- ---------- ---------- Balance at end of year $3,332,363 $3,691,600 $3,052,873 ========== ========== ==========
IV-18 Schedule III continued ---------------------- THE ROUSE COMPANY AND SUBSIDIARIES Real Estate and Accumulated Depreciation (note 1) December 31, 1997 Notes: (6) The changes in accumulated depreciation and amortization for the years ended December 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995 -------------- ------------- ----------- Balance at beginning of year $ 552,201 $ 519,319 $ 490,158 Depreciation and amortization charged to operations 86,009 79,990 73,062 Retirements, sales and other, net (50,814) (47,108) (43,901) Accumulated depreciation on property of subsidiaries in which a majority voting interest was sold to an affiliate (72,167) --- --- --------- --------- --------- Balance at end of year $ 515,229 $ 552,201 $ 519,319 ========= ========= =========
(7) The aggregate cost of properties for Federal income tax purposes is approximately $3,437,074,000 at December 31, 1997. (8) Reference is made to note 1(c) to the consolidated financial statements for information related to depreciation. (9) Reference is made to note 12 to the consolidated financial statements for information related to provisions for losses on real estate assets. (10) Certain amounts for prior years have been reclassified to conform to the presentation for 1997. IV-19 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 27, 1998 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 27, 1998 Chairman of the Board, President and Chief Executive Officer Principal Financial Officer: /s/Jeffrey H. Donahue ----------------------- Jeffrey H. Donahue March 27, 1998 Senior Vice President and Chief Financial Officer Principal Accounting Officer: /s/George L. Yungmann ----------------------- George L. Yungmann March 27, 1998 Senior Vice President and Controller IV-20 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 27, 1998 For himself and as Attorney-in-fact for the above-named persons IV-21 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------- 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-8 (Registration Nos. 2-83612, 33-56231, 33- 56233, 33-56235 and 333-32277), Form S-3 (Registration Nos. 2-78898, 2-95596, 33-52458, 33-57347, 33-57707 and 333-20781) and Form S-4 (Registration No. 333-1693) of our report dated February 24, 1998, relating to the consolidated financial statements and related schedules of The Rouse Company and subsidiaries as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, which report appears in the Annual Report on Form 10-K of The Rouse Company for the year ended December 31, 1997. KPMG PEAT MARWICK LLP Baltimore, Maryland March 27, 1998 IV-22 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 24 Power of Attorney 27 Financial Data Schedules: 27.1 Financial Data Schedule 27.2 Restated Financial Data Schedule, December 31, 1996 27.3 Restated Financial Data Schedule, December 31, 1995 99 Additional Exhibits: 99.1 Form 11-K Annual Report of The Rouse Company Savings Plan for the year ended December 31, 1997 99.2 Factors affecting future operating results 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. Exhibit 10. Material Contracts. The Company's 1985 Stock Option Plan and 1985 Stock Bonus Plan are incorporated by reference from the Company's definitive proxy statement filed pursuant to Regulation 14A on April 27, 1985, and the Amendment to The Rouse Company 1985 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 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 attached. 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 attached. All documents referred to above may be found in Commission file number 0-1743. EX-10.COV 2 SPECIAL OPTION PLAN THE ROUSE COMPANY THE ROUSE COMPANY SPECIAL OPTION PLAN EFFECTIVE DATE JANUARY 1, 1998 TABLE OF CONTENTS ARTICLE PAGE ARTICLE I PURPOSE...................................... 1 ARTICLE II DEFINITIONS.................................. 1 ARTICLE III OPTION GRANT................................. 3 ARTICLE IV OPTION EXERCISE.............................. 6 ARTICLE V AMENDMENT OR TERMINATION..................... 8 ARTICLE VI ADMINISTRATION............................... 9 ARTICLE VII MISCELLANEOUS PROVISIONS..................... 10 THE ROUSE COMPANY SPECIAL OPTION PLAN ARTICLE I PURPOSE 1.1 PURPOSE. The purpose of the Plan is to provide supplemental compensation to certain key individuals, commensurate with their contributions to the success of the Employer, in a form that will provide incentives and rewards for superior performance, encourage the recipients to continue in the employment of the Employer, and allow the recipients to diversify their investment portfolios. 1.2 INTENT. The Plan is intended to be an unfunded plan maintained by the Employer primarily for a select group of management or highly compensated employees. The Plan is also intended to be a nonqualified stock option plan within the meaning of section 83 of the Code. ARTICLE II DEFINITIONS As used herein, the following capitalized words and phrases shall have the respective meanings set forth below: 2.1 "ADMINISTRATOR" means the Director of Human Resources and any individual or entity designated by the Director of Human Resources pursuant to Section 6.2(f) of the Plan. As described in section 6, the Administrator shall have the ability to determine awards of Options and to administer the Plan. 2.2 "BENEFICIARY" Means The person or persons designated by a Participant, pursuant to Section 3.6, to exercise an Option after the Participant's death. 2.3 "CHANGE OF CONTROL" means any change in (a) the effective control of the employer, or (b) the ownership of a substantial portion of the assets of the Employer, as defined under section 280g of the Code, except as otherwise provided by written agreement executed by the Employer and a Participant prior to such Change of Control. 2.4 "CODE" means the Internal Revenue Code of 1986, any amendments thereto, and any regulations or rulings issued thereunder. 2.5 "EFFECTIVE DATE" means January 1, 1998. 2.6 "EMPLOYEE" means any individual who is employed by the Employer. 1 2.7 "EMPLOYER" means the Rouse Company and any successor thereto and any other employer which adopts the Plan for the benefit of its employees. 2.8 "ERISA" means the Employee Retirement Income Security Act of 1974, any amendments thereto, and any regulations or rulings issued thereunder. 2.9 "EXERCISE DATE" means the date upon which the Administrator approves the Option exercise form which is completed and submitted to the Administrator with respect to the Option being exercised. 2.10 "EXERCISE PERIOD" means the period during which a Participant may exercise an Option, as determined under Section 4.1. 2.11 "EXERCISE PRICE" means the price to be paid by a Participant to exercise an Option, as determined under Section 3.3 or under an Option Agreement signed by the Participant and the Administrator. 2.12 "FAIR MARKET VALUE" means the closing price of a share of Stock (as defined in Section 2.19) reflected in the consolidated trading tables of The Wall Street Journal, or other recognized market source, as determined by the Administrator, on the applicable date of reference hereunder, or if there is no sale on such date, then the closing price on the last previous day on which a sale is reported. Notwithstanding the preceding sentence, if Stock trading operations require the use of the closing price of a share of Stock on the trading date next preceding the date of reference in order to currently execute a purchase or sale of a share of Stock, then such previous day price shall be used and shall constitute the Fair Market Value of the stock on the applicable reference date. 2.13 "GRANT DATE" means, with respect to any Option, the date on which the Option Agreement is executed by the Employer and the Participant. 2.14 "OPTION" means the right of a Participant, granted by the Employer in accordance with Section 3.2, to purchase Stock from the employer at the Exercise Price. 2.15 "OPTION AGREEMENT" means an agreement executed by the Employer and by a Participant to whom Options have been awarded, acknowledging the issuance of the Options and setting forth any terms pursuant to Section 3.2. 2.16 "PARTICIPANT" means any individual who meets the eligibility requirements of Section 3.1, who has received an award of Options in accordance with Section 3.2, and whose Options have not been completely exercised or lapsed. After a Participant's death, his Beneficiary is considered to be a Participant to the extent necessary to facilitate the exercise of any Options that continue to be exercisable under the terms of the Plan. In the event of a Participant's disability or other legal incapacity, the Participant's legal representative is considered to be a Participant to the extent necessary to facilitate the exercise of any Options that are or become exercisable under the terms of the Plan. If a Participant has assigned his Options under Section 3.8 then the Participant's assignee is considered a Participant able to exercise Options under the terms of the Plan. 2 2.17 "PLAN" means The Rouse Company Special Option Plan as adopted by the Employer and set forth herein and from time to time amended. 2.18 "SPREAD" means The difference between the Fair Market Value of an Option's Underlying Stock and the Exercise Price required to exercise such Option. 2.19 "STOCK" means the property subject to purchase through the exercise of an Option. For purposes of the Plan, Stock shall be determined by the Administrator and may consist of any of the following: (i) shares of common or preferred stock of a corporation listed on a national securities exchange, (ii) shares of the Employer, or (iii) shares of a registered investment company regulated by the Investment Company Act of 1940, as amended. Stock may be issued in the form of shares, units or such other designated form, and, for purposes of the Plan, the phrase "shares of" shall refer to the terminology most appropriate to the particular form of Stock subject to Option under the Plan. 2.20 "TERMINATION OF EMPLOYMENT" means an Employee's separation from the service of the Employer (including all subsidiaries and affiliates of the Employer) by reason of resignation, discharge, death or other termination. The Administrator may, in its discretion, determine whether any leave or other absence from service constitutes a Termination of Employment for purposes of the Plan. ARTICLE III OPTION GRANT 3.1 ELIGIBILITY. Options may be granted to any Participant approved by the Administrator who is an executive officer or other employee of the Employer who occupies a managerial position and has the capability of making a contribution to the success of the Employer. In making this selection and in determining the form and amount of Options, the Administrator shall consider any factors that it deems relevant, including the individual's functions, responsibilities, value of services to the Employer and past and potential contributions to the employer's success and growth. 3.2 GRANT OF OPTIONS. (A) IN GENERAL. Options may be granted by the Administrator at any time on or after the Effective Date and prior to the termination of the Plan. Options shall become effective upon the execution by the Employer and the Participant of an Option Agreement specifying the Exercise Price and such other terms and in such form as the Administrator may from time to time determine in accordance with the Plan. The Administrator may in its discretion set the minimum number of Options allowed to be granted during any calendar year. (B) EFFECT OF CASH AND NONCASH DISTRIBUTIONS. In the event of the payment of cash dividends or other noncash distributions with respect to the Option's Stock, the following will occur. 3 (i) PAYMENT OF CASH DIVIDENDS. The treatment of cash dividends (or other cash distributions) will depend upon the actions taken by the issuer of the Stock with respect to such cash dividends or other cash distributions. (A) CASH DIVIDENDS REINVESTED AUTOMATICALLY BY ISSUER. Should the issuer of the Stock automatically reinvest into additional shares of Stock the cash dividends or other cash distributions paid on an Option's Stock, then, without further action on the part of the Administrator or the Participant, additional Options (for the same Stock) shall be considered to be granted to the Participant as of the date of such reinvestment. The grant of new Options because of such distribution shall require the issuance of an Option Agreement for such new shares at the next normally scheduled Option Grant Date for the particular Participant. Any additional Options acquired pursuant to this method shall be subject to the same terms and conditions that would apply to the issuance of any other new Options under the Plan. The Participant shall be notified by the Administrator (or its representative) of the payment of the dividends. (B) CASH DIVIDENDS PAID TO EMPLOYER. Should the issuer of the Stock automatically pay to the Employer the cash dividends or other cash distributions paid on such Stock, then these distributions will be accumulated in a money market (or similar) account for the benefit of the Participant until the next Grant Date, at which time another Option shall be granted to the Participant. (ii) PAYMENT OF NONCASH DIVIDENDS. In the event of a stock dividend, stock split, reverse stock split, rights offering recapitalization or similar transaction that affects the market value or the number of shares of the Stock to which an Option relates, then, without further action by the Administrator or the Participant, the Option's Exercise Price or the number of shares of Stock subject to the Option will be adjusted to maintain the same Exercise Price to Fair Market Value ratio that existed just prior to the transaction. Neither the adjustment of the Option's Exercise Price nor the number of shares of Stock subject to the Option shall require the issuance of a new Option Agreement reflecting the new Exercise Price or the number of shares of Stock now subject to the Option. Instead, the Participant shall be notified in writing by the Administrator (or its representative) of the adjustment of the Exercise Price or the number of shares of Stock now subject to the Option. 4 3.3 EXERCISE PRICE. The Exercise Price shall be initially determined by the Administrator and shall be noted on the individual Option Agreement signed by the eligible Participant and the Administrator. The Administrator has determined the initial Exercise Price shall equal twenty-five percent (25%) of the Fair Market Value of the Stock on the Grant Date. Upon a request to exercise any Option, the Exercise Price required to be paid by the Participant shall be the greater of the Exercise Price on the Grant Date or twenty-five percent (25%) of the Fair Market Value of the Stock on the Exercise Date. 3.4 SUBSTITUTION OF OPTION PROPERTY. The Administrator may, in its discretion, after consultation with the Participant, change the Stock which is subject to purchase by the Participant upon exercise of the Option. When a substitution occurs, the Administrator and the Participant are required to terminate the existing Option Agreement and adopt a new Option Agreement. The new Option shall be awarded with an Exercise Price which, when subtracted from the new underlying stock's current trading price, equals the Spread on the original Option at the date of its termination. The new Option shall also be subject to the same terms and conditions of the Plan which applied to the original Option, including the original Exercise Period. However, in the discretion of the Committee, the new Option may be awarded with new terms and conditions applicable only to the new Option, including a new Exercise Period. Such change in Option property shall be considered the grant of new Options and the terms of this Plan shall apply to the grant of the new Options. In the event that the listing, registration or qualification of the Option or the Stock on any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary as a condition of, or in connection with, the exercise of the Option, then the Option shall not be exercised in whole or in part until such listing, registration, qualification, consent or approval has been effected or obtained. 3.5 PURCHASE OF OPTION PROPERTY. Upon the grant of an Option, the Employer shall acquire an amount of Stock that represents the difference between (a) the Fair Market Value of the Stock subject to purchase under the Option, and (b) the Exercise Price of the Option. At the time the Option is exercised, the Stock acquired by the Employer pursuant to the preceding sentence shall not be subject to any security interest, whether or not perfected, or to any Option or contract under which any other person may acquire any interest in it. Upon a change in Option property pursuant to Section 3.4 above, the Employer shall acquire new Stock that represents the difference between (a) the Fair Market Value (taken as of the Grant Date of the new Option) of the new Stock subject to purchase under the Option, and (b) the Exercise Price of the Option, and the Employer may dispose of any Stock it holds which no longer represents Stock subject to the Option. 3.6 DESIGNATION OF BENEFICIARY. As soon as practicable after the grant of an Option, the Participant shall designate one or more Beneficiaries and successor Beneficiaries, and may change a Beneficiary designation at any time, by filing the prescribed form with the Administrator. The consent of the Participant's current Beneficiary shall not be required for a change of Beneficiary. No Beneficiary shall have any rights under the Plan or an Option Agreement during the lifetime of the Participant, except as may otherwise be provided herein. 5 A Participant who dies without having designated a Beneficiary in accordance with this Section 3.6 and who is lawfully married on the date of death shall be deemed to have named the Participant's surviving spouse as Beneficiary. Any other Participant who dies without having designated a Beneficiary in accordance with this Section 3.6 shall be deemed to have named the Participant's estate as Beneficiary. 3.7 General Non-Transferability. No Option granted under this Plan may be transferred, assigned, or alienated (whether by operation of law or otherwise), except as provided herein, and no Option shall be subject to execution, attachment or similar process. An Option may be exercised only by the Participant or the Participant's Beneficiary pursuant to Section 3.6 or the Participant's assignee pursuant to Section 3.8. 3.8 PERMITTED TRANSFERS. Notwithstanding the provisions of Section 3.7, a Participant may at any time prior to death, assign all or any Options to: (a) the Participant's spouse or lineal descendants, (b) the trustee of a trust for the primary benefit of the Participant's spouse and/or lineal descendants, or (c) a partnership of which the Participant's spouse and/or lineal descendants are the only partners. Any such assignment shall be permitted only if an assignment is expressly permitted in the Option Agreement, or approved in writing by the Administrator, and the Participant receives no consideration for the assignment. Any such assignment shall be evidenced by an appropriate written document executed by the Participant, and delivered to the Administrator on or before the effective date of the assignment. In the event of such assignment, the spouse, lineal descendant, trustee or partnership shall be entitled to all of the rights of the Participant with respect to the assigned portion of the Option, and such portion of the Option, shall continue to be subject to all of the terms, conditions and restrictions applicable to the Option, as set forth in the Plan and the Option Agreement. ARTICLE IV OPTION EXERCISE 4.1 EXERCISE PERIOD. A Participant or the Participant's Beneficiary pursuant to section 3.6 may exercise all or any Options at any time during the period beginning six (6) months after the Grant Date and ending on the earliest of - fifteen (15) years after the date of grant, or six (6) months after his Termination of Employment, if he is terminated involuntarily for cause, or 6 sixty (60) months after the Participant's date of death if the Termination of Employment is on account of retirement, death or disability, or sixty (60) months after the Participant's Termination of Employment, if his termination is for any reason not specified above in this Section 4.1. If a Participant or his Beneficiary fails to exercise an Option within the Exercise Period, then the Participant or his Beneficiary or assignee loses all rights with respect to such Option upon expiration of the Exercise Period. Notwithstanding the foregoing, at no time shall the Exercise Period be less than six months from the Grant Date or less than one year after the date of death of the participant. 4.2 OPTION EXERCISE. A Participant or the Participant's Beneficiary pursuant to Section 3.6 may exercise all or any of his Options by giving written notice to the Administrator and tendering full payment of the Exercise Price by check or other means acceptable to the Administrator on or about the Exercise Date. As provided in the Option Agreement, or with the prior written consent of the Administrator, the Participant may tender payment in whole or in part through the surrender of previously acquired Stock valued at Fair Market Value on the Exercise Date. The minimum number of Options allowed to be exercised at any one time is the lesser of the following: (1) 50% of the total number of Options currently eligible to be exercised or, (2) the number of Options for which the Fair Market Value of the underlying Stock totals $5,000; provided, however, that the Administrator may in its discretion permit the exercise of fewer Options in certain exceptional circumstances. For these purposes, the term "underlying Stock" means the Stock which will be acquired by the Participant upon the exercise of the Option. Any terms not specified in the Plan shall be specified in the Option Agreement. Neither the Participant nor his Beneficiary shall have any of the rights and privileges of a shareholder with respect to any Stock purchasable or issuable upon the exercise of an Option prior to the date of exercise of such Option in accordance with this Section 4.2. In the event that the listing, registration or qualification of the Option or the Stock on any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary as a condition of, or in connection with, the exercise of the Option, then the Option will not be exercised in whole or in part until such listing, registration, qualification, consent or approval has been effected or obtained. 4.3 DELIVERY OF STOCK. Within 5 (five) business days following the date that a participant satisfies the conditions for exercising an Option in accordance with Section 4.2, the Employer shall deliver or cause to be delivered the Stock subject to such Option to the Participant or the Participant's Beneficiary Pursuant to Section 3.6. 4.4 TAX WITHHOLDING. Whenever Stock is to be delivered upon exercise of an Option under the Plan, the Employer shall require as a condition of such delivery (a) the cash payment by the Participant of an amount sufficient to satisfy all federal, state and local tax withholding requirements related thereto, (b) the withholding of such amount from any Stock to be delivered to the Participant, (c) the withholding of such amount from compensation otherwise due to the Participant, or (d) any combination of the foregoing, at the election of the Participant with the consent of the Employer. Such election shall be made before the date on 7 which the amount of tax to be withheld is determined by the Employer, and such election shall be irrevocable. With the consent of the Employer, the Participant may elect a greater amount of withholding, not to exceed the estimated amount of the Participant's total tax liability with respect to the delivery of Stock under the Plan. Such election shall be made at the same time and in the same manner as provided above. 4.5 FAILURE TO EXERCISE. No Option shall be exercised, in whole or in part, after the end of the Exercise Period as stated in Section 4.1, and the Employer shall have no obligation to deliver or cause to be delivered to the Participant or the Participant's Beneficiary pursuant to Section 3.6 the Stock subject to such Option. ARTICLE V AMENDMENT OR TERMINATION 5.1 PLAN AMENDMENT. The Administrator may, from time to time in its discretion, amend any provision of the Plan, in whole or in part, subject to section 5.3 of the plan with respect to any Participant or group of Participants. Such amendment shall be effective as of the date specified therein and shall be binding upon the Administrator, all Participants and Beneficiaries, and all other persons claiming an interest under the Plan. 5.2 PLAN TERMINATION. The Plan shall terminate as the Administrator may determine in its discretion. Such termination shall be effective as of the date determined by the Administrator and shall be binding upon the Administrator, all Participants and Beneficiaries, and all other persons claiming an interest under the Plan. Options shall continue to be exercisable after the effective date of such termination, and may be exercised in accordance with Article IV, but no new Options shall be granted, except for Options required to be granted under Section 3.2(b). 5.3 AMENDMENT OF OPTIONS. An Option may be amended by the Administrator at any time if the Administrator determines that an amendment is necessary or advisable as a result of: (A) any addition to or change in the Code or ERISA, a federal or state securities law or any other law or regulation, which occurs after the Grant Date and by its terms applies to the Option, (B) any substitution of stock acquired pursuant to Section 3.5, or (C) any Plan amendment pursuant to Section 5.1, or Plan termination pursuant to Section 5.2, provided that the amendment or termination does not materially affect the terms, conditions and restrictions applicable to the Option, or (D) any circumstances not specified in Paragraphs (a), or (b), or (c), with the consent of the Participant. 8 5.4 CHANGE OF CONTROL. Notwithstanding any other provision of the Plan or an Option Agreement, in the event of a Change of Control, the Exercise Period under Section 4.1 shall not end prior to six months after such Change of Control, and the Option Agreement shall not be amended by the Administrator under Section 5.3 for any reason without the consent of the Participant. ARTICLE VI ADMINISTRATION 6.1 THE ADMINISTRATOR. The Plan shall be administered by the Administrator as defined in Section 2.1 of the Plan. 6.2 POWERS OF THE ADMINISTRATOR. In carrying out its duties with respect to the general administration of the Plan, the Administrator shall have, in addition to any other powers conferred by the Plan or by law, the following powers: (a) to determine eligibility to participate in the Plan and eligibility to receive Options; (b) to grant Options, and to determine the form, amount and timing of such Options; (c) to determine the terms and provisions of the Option Agreements, and to modify such Option Agreements as provided in Section 5.3; (d) to maintain all records necessary for the administration of the Plan; (e) to prescribe, amend, and rescind rules for the administration of the Plan to the extent not inconsistent with the terms thereof; (f) to appoint such individuals and committees as it deems desirable for the conduct of its affairs and the administration of the Plan; (g) to employ counsel, accountants and other consultants to aid in exercising its powers and carrying out its duties under the Plan; and (h) to perform any other acts necessary and proper for the conduct of its affairs and the administration of the Plan. 6.3 DETERMINATIONS BY THE ADMINISTRATOR. The Administrator shall interpret and construe the Plan and the Option Agreements, and its interpretations and determinations shall be conclusive and binding on all Participants and Beneficiaries. The Administrator's interpretations and determinations under the Plan and the Option Agreements need not be uniform and may be made by it selectively among Participants, Beneficiaries and any other persons whether or not they are similarly situated. 9 6.4 INDEMNIFICATION OF THE ADMINISTRATOR. The Employer shall indemnify and hold harmless the Administrator against any and all expenses and liabilities arising out of such member's action or failure to act in such capacity, excepting only expenses and liabilities arising out of the Administrator's own willful misconduct or failure to act in good faith. Expenses and liabilities against which a member of the Administrator is indemnified hereunder shall include, without limitation, the amount of any settlement or judgment, costs, counsel fees and related charges reasonably incurred in connection with a claim asserted or a proceeding brought against him or the settlement thereof. This right of indemnification shall be in addition to any other rights to which the Administrator may be entitled. The Employer may, at its own expense, settle any claim asserted or proceeding brought against the Administrator when such settlement appears to be in the best interests of the Employer. 6.5 EXPENSES OF THE ADMINISTRATOR. The Administrator shall serve without compensation for services as such. All expenses of the Administrator shall be paid by the Employer. ARTICLE VII MISCELLANEOUS PROVISIONS 7.1 HEADINGS. The headings of articles, sections and paragraphs are solely for convenience of reference. If there is any conflict between such headings and the text of this Plan, the text shall control. 7.2 GENDER. Unless the context clearly requires a different meaning, all pronouns shall refer indifferently to persons of any gender. 7.3 SINGULAR AND PLURAL. Unless the context clearly requires a different meaning, singular terms shall also include the plural and vice versa. 7.4 GOVERNING LAW. Except to the extent preempted by federal law, the construction and operation of the Plan shall be governed by the laws of the State of Maryland without regard to the choice of law principles of such state. 7.5 SEVERABILITY. If any provision of this Plan is held illegal or invalid by any court or governmental authority for any reason, the remaining provisions shall remain in full force and effect and shall be construed and enforced in accordance with the purposes of the Plan as if the illegal or invalid provision did not exist. 7.6 NO OBLIGATION TO EXERCISE. The granting of an Option shall impose no obligation upon a Participant to exercise such Option. 10 7.7 NO RIGHTS OF SHAREHOLDER. Neither the Participant nor a Beneficiary shall have any of the rights and privileges of a shareholder with respect to any Stock purchasable or issuable upon the exercise of an Option prior to the date of exercise of such Option in accordance with Section 4.2 of the Plan. 7.8 NO RIGHT TO CONTINUED EMPLOYMENT. Nothing contained in the Plan shall be deemed to give any person the right to be retained in the employ of the Employer, or to interfere with the right of the Employer to discharge any person at any time without regard to the effect that such discharge shall have upon such person's rights or potential rights, if any, under the Plan. The provisions of the Plan are in addition to, and not a limitation on, any rights that a Participant may have against the Employer by reason of any employment or other agreement with the Employer. 7.9 NOTICES. Unless otherwise specified in an Option Agreement, any notice to be provided under the Plan to the Administrator shall be mailed (by certified mail, postage prepaid) or delivered to the Administrator in care of the Employer at its executive offices, and any notice to the Participant shall be mailed (by certified mail, postage prepaid) or delivered to the participant at the current address shown on the payroll records of the Employer. No notice shall be binding on the Administrator until received by the Administrator, and no notice shall be binding on the Participant until received by the Participant. IN WITNESS WHEREOF, The Rouse Company has caused these presents to be executed by its duly authorized officer as of the 31st day of December, 1997. The Rouse Company [Corporate Seal] By: Title: ______________________________ 11 THE ROUSE COMPANY SPECIAL OPTION PLAN OPTION AGREEMENT The capitalized terms in this Option Agreement (the "Agreement") shall have the same meanings as they do in The Rouse Company Special Option Plan (the "Plan"). 1. Options shall be granted to _________________________ (name of participant) as of the following Grant Dates, provided that Options shall be granted to the Participant only on such dates as the Participant is eligible to receive an Option under Article III of the Plan: Grant Date 1: ____________________ Grant Date 2: ____________________ Grant Date 3: ____________________ Grant Date 4: ____________________ 2. The number of Options granted pursuant to this Agreement as of each Grant Date, the Stock subject to each such Option as of the applicable Grant Date, and the Fair Market Value of such Stock on the applicable Grant Date, shall be as set forth in the attached Addendum to this Agreement. 3. The initial Exercise Price for an Option as of the applicable Grant Date shall equal twenty-five percent (25%) of the Fair Market Value of the Stock subject to such Option on such Grant Date. The Exercise Price shall thereafter be adjusted such that the Exercise Price to be paid upon exercise of the Option shall be the greater of (a) the initial Exercise Price, or (b) twenty-five percent (25%) of the Fair Market Value of the Stock subject to the Option on the Exercise Date. 4. Except as specifically provided in this Agreement, the rights of the Participant, or any other person entitled to exercise the Options, are governed by the terms and provisions of the Plan which are incorporated by reference into this Agreement. 5. The Options may be exercised only by the Participant, the Participant's Beneficiary, or the Participant's assignee. In addition, under the terms of this Agreement, the transfer of Options is not allowable except as permitted under Section 3.8 of the Plan. The Options shall not otherwise be transferred, assigned, pledged or hypothecated (whether by operation of law or otherwise), except as provided herein, and no Options shall be subject to execution, attachment or similar process. 6. As a condition to receiving delivery and title to Stock subject to an Option under the Plan, a Participant must properly complete the Option Exercise Form provided by the Administrator and deliver the form to the Administrator in person or mail (by certified mail, postage prepaid) the form to the Administrator at the following address: Vice President and Director of Human Resources and Administrative Services Division; The Rouse Company 10275 Little Patuxent Parkway Columbia, Maryland 21044-3456 7. Payment of the Exercise Price shall be made by check or other means acceptable to the Administrator no later than one (1) business day after the Exercise Date, or such later date as the Administrator permits in its discretion, and the Participant must satisfy all federal, state and local withholding tax requirements in any manner permitted under the Plan. 8. Options may be exercised at any time during the period beginning six (6) months after the applicable Grant Date and ending the earliest of: fifteen (15) years after the Grant Date, or six (6) months after the Participant's Termination of Employment, if he is terminated involuntarily for cause, or sixty (60) months after the Participant's date of death if the Termination of Employment is on account of retirement, death or disability, or sixty (60) months after the Participant's Termination of Employment, if his termination is for any reason not specified above or in Section 4.1 of the Plan; provided that in no event shall the Exercise Period for an Option be less than six months from the Grant Date or less than one year after the date of death of the Participant. 9. Neither the Participant nor a Beneficiary or assignee shall have any of the rights or privileges of a stockholder with respect to any Stock purchasable or issuable upon the exercise of an Option unless and until such Option is exercised by such Participant or Beneficiary or assignee in accordance with Section 4.2 of the Plan, and the transfer of ownership of the shares of Stock has been completed. 10. The Options are conditioned upon the acceptance of this Agreement by the Participant as evidenced by the return of an executed copy to the Administrator. 11. Except to the extent preempted by federal law, the Options and this Agreement shall be construed and interpreted according to the laws of the State of Maryland without regard to its choice of law principles. The Rouse Company By: __________________________________ Date: __________________________________ The undersigned has consulted with tax and legal advisors and is not relying on the advice or representations of the Employer or the Administrator on any legal or tax matters. - ----------------------------------- ------------------------------------ Participant Date: THE ROUSE COMPANY SPECIAL OPTION PLAN OPTION AGREEMENT ADDENDUM PARTICIPANT: ___________________________ GRANT DATE: ___________________________
NAME OF STOCK PER UNIT OR SHARE NUMBER OF SHARES AGGREGATE FAIR MARKET EXERCISE PRICE PER UNIT SUBJECT TO OPTION VALUE ON GRANT DATE OR UNITS VALUE AT GRANT DATE ON GRANT DATE ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________
EMPLOYMENT AGREEMENT -------------------- This employment agreement ("Agreement") is entered into this 1st day of May, 1996, by and between TRC ACQUISITION COMPANY I, THE ROUSE COMPANY and JOHN L. GOOLSBY (the "Executive"). EXPLANATORY STATEMENT --------------------- The Executive is currently the President and Chief Executive Officer of The Hughes Corporation ("THC"), a Delaware corporation which is to be merged with and into TRC Acquisition Company I, a subsidiary of The Rouse Company ("Rouse") on or about June 1, 1996, pursuant to an Agreement and Plan of Merger dated February 22, 1996 among THC, Rouse and TRC Acquisition Company I (the "Merger"). Following the Merger, TRC Acquisition Company I, as the surviving corporation will be a wholly owned subsidiary of Rouse, and will be renamed "The Howard Hughes Corporation". (TRC Acquisition Company I as it currently exists and as it is intended to exist after the Merger under the name "The Howard Hughes Corporation" is herein referred to as the "Company".) It is intended that the Company will conduct all of the business currently being conducted by The Hughes Corporation and by Howard Hughes Properties, Limited Partnership and their respective affiliates and subsidiaries. Rouse wishes to provide for the Executive's continued employment as Chief Executive Officer of the Company following the Merger. 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 shall commence on the ---- effective date of the Merger (the "Effective Date") and shall terminate on June 30, 1999, unless earlier terminated as provided in Section 4 below (the "Term"). 1.3 Duties. During the Term, the Executive shall serve as the ------ President and the Chief Executive Officer of the Company, with such customary duties and responsibilities as are incident to said positions, including such authority, duties, and responsibilities as set forth with respect to such offices in the Company's articles and bylaws. The Executive shall report directly to the Chief Executive Officer of Rouse (the "Rouse CEO"). The Executive and the Company acknowledge that the Executive's responsibilities and relationships with respect to the Company and Rouse are more fully described in a letter dated -2- March 29, 1996 from Anthony W. Deering to the Executive, to which reference is hereby made. 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 assigned to the Executive. 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, (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 Rouse and its subsidiaries. The parties acknowledge that the Executive's participation as a director of the commercial corporations listed on Schedule 1 attached hereto have been approved by the Rouse CEO. -3- 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 $475,000 (the "Base Salary"). The Personnel Committee of the Board of Directors of Rouse (the "Committee") shall conduct a review of the Base Salary in February, 1997, and thereafter at such time or times as the Committee reviews the annual compensation of the executives of Rouse 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 Rouse 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 Rouse 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 be eligible to receive, for each calendar year or portion thereof occurring during the Term, an annual bonus (the "Annual Bonus") in an amount up to seventy-five percent (75%) of the Executive's Base Salary for such calendar year or portion thereof. The amount of any such Annual Bonus -4- shall be determined by the Committee, based on the recommendation of the Rouse CEO, in accordance with the standard practice of such Committee relating to the incentive compensation program of Rouse. 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 Rouse relating to incentive compensation payments. 2.3 Stock Grant and Stock Option. ---------------------------- (a) Stock Grant and Loan. As of the Effective Date, Rouse shall grant -------------------- Executive a stock grant of 40,000 shares of Rouse's Common Stock pursuant to Rouse's 1994 Stock Incentive Plan. The terms, conditions and restrictions with regard to such stock grant shall be evidenced by a letter agreement between Rouse and the Executive in the form of Exhibit A attached hereto which shall be --------- incorporated herein by reference and its terms, conditions and notifications shall be considered a part of this Agreement. In connection with the stock grant, Executive shall be entitled to receive a loan from Rouse for the purpose of funding income tax payable with regard to the stock grant in an amount equal to one-half ( 1/2) of the product of (i) 40,000 shares -5- multiplied by (ii) the market price per share of Rouse Common Stock as of the Effective Date. The terms and conditions of said loan shall be evidenced by a loan agreement substantially 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. b. Stock Options. As of the Effective Date, Rouse shall grant ------------- Executive a stock option for 40,000 shares of Rouse Common Stock pursuant to Rouse's 1994 Stock Incentive Plan. 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. 2.4 Participation in Employee Benefit Plans. The Company agrees --------------------------------------- to permit the Executive during the Term to -6- participate in any group life, hospitalization and/or disability insurance plan, health program, 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 of 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 Rouse offers its comparable 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 comparable senior executives of Rouse or its subsidiaries. For this purpose, a comparable executive shall be the Executive Vice President of Rouse, and such benefits shall be no less than those offered to the Executive Vice President of Rouse. In addition, the Company agrees that for purposes of determining Executive's eligibility for the Benefits and the Other Benefit Plans, Executive's prior service with Summa Corporation, THC and Howard Hughes Properties, Limited Partnership and their respective affiliates and subsidiaries shall count towards the Executive's eligibility, vesting and -7- benefit accrual under the plans, and the Company agrees to take all action that may be necessary to amend the respective plan documents to provide for this past service credit. The Company also agrees to provide life insurance to the Executive during the Term in an amount equal to two times the Executive's Base Compensation. 2.5 General Business Expenses. The Company shall pay or ------------------------- reimburse the Executive for all expenses that are consistent with Rouse 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 Rouse customarily requires of its executive employees prior to making such payments or reimbursements. 2.6. Vacation. During the Term, the Executive shall be -------- entitled to five weeks of vacation per year. The Executive shall not be permitted to accumulate and carryover unused vacation time or pay from year to year except to the extent permitted in accordance with Rouse's vacation policy for senior executives. -8- 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 office and industrial building development (the "Business") (provided the Business shall not be deemed to include residential real estate brokerage or residential construction activities); (ii) the Company's Business is conducted in the greater Las Vegas, Nevada metropolitan area; (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 Chief ------------ Executive Officer of Rouse or the Board of Directors of the Company, the Executive shall not during the Restricted Period (as defined below) in the greater Las Vegas, Nevada metropolitan area, directly (except in the Executive's capacity as an officer of the Company or any of its affiliates); (i) engage or participate in the Business; -9- (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 in any capacity; provided, that the foregoing restrictions shall not apply at any time if the Executive's employment is terminated during the Term by the Executive for Good Reason (as defined in the Executive's Option Agreement) or by the Company without good cause (as defined in the Executive's Loan Agreement); 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, the "Restricted Period" shall mean the period commencing with the effective date of this Agreement and ending on the first anniversary of the last day of the Term. (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 -10- 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 Chief Executive Officer of Rouse or the Board of Directors of the Company, 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 Rouse, 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 -11- Company or Rouse. 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 Chief Executive Officer of Rouse or 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 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 Rouse or the Company shall be excluded from -12- 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. -13- (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 Rouse and its subsidiaries during the term of Executive's employment. 4. Termination. ----------- 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 -14- 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, as soon as reasonably practicable after the separate determinations thereof, (i) the Base Salary earned, but unpaid, up to such date of termination, (ii) any unpaid vested Benefits accrued up to such date of termination, (iii) an amount equal to the product of (a) the Annual Bonus, if any, otherwise payable with respect to the year in which the Term is terminated, multiplied by (b) 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. These items 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, the loan agreement, and the stock options). 4.2 Other Termination. ----------------- (a) Termination With and Without Cause. Notwithstanding any provision ---------------------------------- of the Agreement to the contrary, the Company has the right, at any time during the Term, exercisable by serving written notice, effective on or after the date of service of such notice as specified therein, to terminate the Executive's employment under this -15- Agreement and to discharge the Executive with or without cause. To be valid, any such notice may be effective no sooner than 30 days after service, and it must state whether the termination is with cause (and the reasons therefor) or without cause. Any such termination of employment by the Company, whether with or without cause or voluntary or involuntary, shall terminate the Term and thereafter no amounts shall be payable, or Benefits provided, to the Executive by the Company pursuant to this Agreement except as provided herein, including: (i) the Base Salary then earned, but unpaid, plus an amount equal to the Base Salary which would have been earned up to and including the end of the Term (as otherwise determined before such termination), (ii) any unpaid vested Benefits accrued up to such date of termination, (iii) an amount equal to the aggregate of the Annual Bonuses which would have been payable on account of any periods ending on or before the end of the Term (as otherwise determined before such termination), which bonuses shall, for each such period be equal to sixty percent (60%) of the then current Base Salary. All of the foregoing amounts shall be payable in a lump sum, less such amounts as shall be required to be deducted or withheld therefrom by -16- applicable law and regulations, within fifteen (15) days after the termination date. (iv) To the extent the Executive is eligible thereunder, for a period through the end of the Term (as otherwise determined before termination pursuant to Section 4.2 hereof), the Executive shall continue to be provided life insurance, disability, long-term disability policies and any other Benefits provided to the Executive on the date hereof or such successor policies in effect at the time of the Executive's termination, and shall also continue to be covered for the applicable period by such other insurance, disability, health or other Benefit program, plan or policy by which he was covered at the time of the Executive's termination. In the event the Executive is ineligible to continue to be so covered under the terms of any such life insurance, disability, long-term disability, insurance, health or other Benefit program, plan or policy, the Company shall provide to the Executive through other sources such benefits, including such additional benefits, as may be necessary to make the benefits applicable to the Executive substantially equivalent to those in effect immediately prior to such termination, provided that if during such -------- period the -17- Executive should enter into the employ of another company or firm which provides to the Executive substantially similar benefit coverage, the Executive's participation in the comparable benefits provided by the Company, either directly or through such other sources, shall cease. Nothing contained in this paragraph shall be deemed to require or permit termination or restriction of any of the Executive's coverage under any plan or program of the Company or any of its subsidiaries or any successor plan or program thereto to which the Executive is entitled under the terms of such plan or program, whether at the end of the aforementioned period or at any other time. These items are in addition to and shall not reduce any other benefits to which the Executive may be entitled (such as, the stock grant, the loan agreement, and the stock options). Nothing in this Agreement shall prevent the Executive's right to terminate his employment with the Company. (b) Termination for Good Reason. Notwithstanding any provision of the --------------------------- Agreement to the contrary, the Executive has the right, at any time during the Term, exercisable by serving written notice, effective on or after the date of -18- service of such notice as specified therein, to terminate his employment under this Agreement with or without Good Reason (as defined in the Executive's option agreement). Any such termination shall terminate the Term, and in the case of the Executive's termination for Good Reason, the following amounts shall be payable or provided by the Company: (i) the Base Salary then earned, but unpaid, plus an amount equal to the Base Salary which would have been earned up to and including the end of the Term (as otherwise determined before such termination), (ii) any unpaid vested Benefits accrued to such date of termination, (iii) an amount equal to the aggregate Annual Bonuses which would have been payable on account of any periods ending on or before the end of the Term (as otherwise determined before such termination) which bonuses shall, for each such period be equal to sixty percent (60%) of the then current Base Salary. All of the foregoing amounts shall be payable in a lump sum, less such amounts as shall be required to be deducted or withheld therefrom by applicable law and regulations, within fifteen (15) days after the termination date. (iv) To the extent the Executive is eligible thereunder, for a period through the end of the Term (as -19- otherwise determined before termination pursuant to Section 4.2 hereof), the Executive shall continue to be provided life insurance, disability, long-term disability policies and any other Benefits provided to the Executive on the date hereof or such successor policies in effect at the time of the Executive's termination, and shall also continue to be covered for the applicable period by such other insurance, disability, health or other Benefit program, plan or policy by which he was covered at the time of the Executive's termination. In the event the Executive is ineligible to continue to be so covered under the terms of any such life insurance, disability, long-term disability, insurance, health or other Benefit program, plan or policy, the Company shall provide to the Executive through other sources such benefits, including such additional benefits, as may be necessary to make the benefits applicable to the Executive substantially equivalent to those in effect immediately prior to such termination, provided that if during such period the Executive should enter into the employ of another company or firm which provides to the Executive substantially similar benefit coverage, the Executive's participation in the comparable benefits provided by the -20- Company, either directly or through such other sources, shall cease. Nothing contained in this paragraph shall be deemed to require or permit termination or restriction of any of the Executive's coverage under any plan or program thereto to which the Executive is entitled under the terms of such plan or program, whether at the end of the aforementioned period or at any other time. These items are in addition to and shall not reduce any other benefits to which the Executive may be entitled (such as the Stock Grant, the Loan Agreement, and the Stock Agreement). (c) Termination Without Good Reason. Notwithstanding any provision of ------------------------------- the Agreement to the contrary, the Executive has the right, at any time during the Term, exercisable by serving written notice, effective on or after the date of service of such notice as specified therein, to terminate his employment under this Agreement with or without Good Reason (as defined in the Executive's option agreement). Any such termination shall terminate the Term, and in the case of the Executive's termination without Good Reason the following amounts shall be payable or provided by the Company: (i) the Base Salary then earned, but unpaid, (ii) any unpaid vested Benefits accrued to such date of -21- termination, (iii) an amount equal to the product of (a) the Annual Bonus, if any, otherwise payable with respect to the year in which the Term is terminated, multiplied by (b) 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. All of the foregoing amounts shall be payable in a lump sum, less such amounts as shall be required to be deducted or withheld therefrom by applicable law and regulations, within fifteen (15) days after the termination date. These items are in addition to and shall not reduce any other benefits to which the Executive may be entitled (such as, the stock grant, the loan agreement, and the stock options). 4.3 Stock Grant and Stock Options. In the event of any termination ----------------------------- described in Sections 4.1 or 4.2 above, Executive's rights with regard to his stock grant, loan agreement and stock options shall be as set forth in the respective agreement containing the terms and conditions pertaining thereto. 4.4 Certain Additional Payments by the Company. Anything in this ------------------------------------------ Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution -22- 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 Internal Revenue Code of 1986, as amended (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 (a "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 Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Subject to the provisions of this Section 4.4, all determinations required to be made hereunder, including whether a Gross-Up Payment is required and the amount of such 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 -23- 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 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 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 Gross-Up Payment. Such notification shall be given as soon as practicable but no -24- 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; -25- 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 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 -26- 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 a 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 -27- 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 Gross-Up Payment required to be paid. 5. Other Provisions. ---------------- 5.1 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 or Rouse, to: The Rouse Company 10275 Little Patuxent Parkway Columbia, Maryland 21044 Attn: General Counsel (ii) If to the Executive, to: John L. Goolsby 9029 Greensboro Lane Las Vegas, Nevada 89134 Any party may change its address for notice hereunder by notice to the other party hereto. -28- 5.2 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. 5.3 Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of Nevada. 5.4 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 Company, so long as the obligations of the Company under this Agreement remain the obligations of the Company and of Rouse, 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 -29- 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. 5.5 Termination. Except as otherwise provided expressly herein, ----------- this Agreement shall terminate upon end of the Restricted Period. 6. Resolution of Disputes. ---------------------- 6.1 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 and Rouse 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 and Rouse shall meet at a mutually acceptable time and place within the Las Vegas, Nevada 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 -30- 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 6.1 shall be treated as compromise and settlement negotiations for the purposes of the federal and state rules of evidence and procedure. 6.2 Arbitration. Any dispute arising out of or relating to this ----------- Agreement or the breach, termination or validity thereof, which has not been resolved by non-binding means as provided in Section 6.1 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 -31- 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 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. 6.3 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 or Rouse) arising out of, or challenging the validity or enforceability of, this Agreement or any provision hereof. 7. Guaranty. In addition to Rouse's own obligations under this Agreement, -------- Rouse undertakes that on default of the Company it will be bound by and will do and perform all acts and things referred to or provided to be done by the Company under this Agreement. Except as may be expressly set forth herein, no provision of this Agreement is intended to limit the Executive's -32- authority as Chief Executive Officer of the Company and no such action shall have the effect of waiving or otherwise affecting the validity or quantity of Rouse's guaranty hereunder. 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 or Rouse'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 or Rouse may have against the Executive. -33- 10. This Agreement may be amended or modified by an agreement in writing executed by all of the parties hereto. IN WITNESS WHEREOF, the parties have executed this Agreement effective for all purposes as of the date first above written. WITNESS/ATTEST: TRC ACQUISITION COMPANY I By: - ------------------------- --------------------------- President THE ROUSE COMPANY By: - ------------------------- --------------------------- President - ------------------------- ------------------------------ John L. Goolsby -34- SCHEDULE 1 John L. Goolsby Executive's Participation as a Director in Commercial Corporation Bank of America Nevada Power Company America West Airlines, Inc. EXHIBIT A --------- Effective Date John L. Goolsby - ----------------------- - ----------------------- - ----------------------- Dear : ----------------- On February 22, 1996, the Board of Directors of the Company granted you a stock bonus under the 1994 Stock Incentive Plan for 40,000 shares of the Company's Common Stock (the "Bonus Shares"). This stock bonus is subject to the following restrictions: 1. If your employment with the Company terminates for any reason other than death, total disability, discharge without good cause or retirement from the Company after attaining age 62 or the termination of employment by you for Good Reason (as defined in your Operating Agreement), the Bonus Shares that are still subject to the restrictions will be forfeited to the Company without payment therefor. 2. You may not sell, assign, transfer, pledge, hypothecate, encumber or otherwise dispose of the Bonus Shares except to the extent that the restrictions have lapsed. The restrictions on the Bonus Shares will lapse as to thirty percent (30%) of the shares on January 1, 1997, an additional thirty percent (30%) of the shares on January 1, 1998 and the remaining forty percent (40%) of the shares on January 1, 1999. Attachment 1, attached hereto and incorporated by reference herein. You may have The Rouse Company retain or accept a sufficient number of shares to satisfy the Company's tax withholding obligations or your tax liabilities in connection with the receipt of the Bonus Shares, the lapse of restrictions with respect to the Bonus Shares, the sale of the Bonus Stock or the receipt or forgiveness of a loan or loans relating to the Bonus Shares. Three certificates for shares of the The Rouse Company's Common Stock in the respective amounts of 12,000 shares, 12,000 shares and 16,000 shares, have been delivered to you. The legend on the reverse side of each certificate describes the restrictions to which the stock represented by such certificate is subject. Page 2 Effective Date John L. Goolsby Enclosed is a Loan Agreement between the Company and you. Section 6 of the Agreement defines "total disability" and "discharge without good cause." Section 2 of the Option Agreement defined "Good Reason". In the event of your death, total disability, discharge without good cause or retirement from the Company after attaining age 62 or your termination of employment for Good Reason (as defined in your Option Agreement), all restrictions on your Bonus Shares will immediately terminate, and you will own those shares outright. 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. The copy is for your files. You should also sign and date the enclosed Loan Agreement and Promissory Note. When you actually receive any portion of the proceeds of the loan, you also will need to sign a Receipt, a copy of which is enclosed. The signed documents, including the original of this letter, should be returned to Dave Schwiesow. If you have any questions concerning your stock bonus, please feel free to contact me. Sincerely yours, THE ROUSE COMPANY By -------------------------- Anthony W. Deering President and Chief Executive Officer Enclosures The undersigned agrees to the above-described terms and restrictions to which the Bonus Shares are subject. Signature: ------------------------ Date: ----------------------------- -2- ATTACHMENT 1 to Letter Agreement Regarding Stock Grant Any capitalized term used herein which is not otherwise defined shall have the meaning attributed to it in the letter agreement (the "Letter Agreement") to which this is attached or the Executive's Employment Agreement (the "Employment Agreement"). The Letter Agreement provides that certain restrictions (the "Restrictions") on the Bonus Shares shall lapse if the Chief Executive Officer of Rouse (the "Rouse CEO") shall determine that certain objectives for "income from operations" for The Howard Hughes Corporation (the "Income Objectives") have been achieved. The purpose of this Attachment is to set forth the procedure for (i) setting the Income Objectives for each year and (ii) determining whether the Income Objectives have been obtained. The parties further recognize that the Executive will be establishing annual objectives (the "Bonus Objectives") to be used in connection with the Executive's participation in The Rouse Company incentive compensation program. The parties also wish to provide for the integration of the processes by which the Bonus Objectives and the Income Objectives are established. Therefore, the Income Objectives and Bonus Objectives described herein must also be the same as the annual objectives for The Howard Hughes Corporation integrated into The Rouse Company's corporate objectives for its annual incentive compensation program. On or prior to December 15, 1996 and December 15, 1997 the Executive shall submit a proposed business plan to the Rouse CEO for the ensuing calendar year. The proposed Business Plan shall be in form similar to the approved 1996 business plan which is attached hereto as Exhibit 1. The proposed business plan shall be subject to review and approval by the Rouse CEO. The Executive and the Rouse CEO shall discuss in good faith any revisions to the proposed plan required by the CEO, but notwithstanding such discussions, the business plan shall be subject to the approval of the Rouse CEO in the exercise of his discretion. The business plan shall constitute an essential portion of the Executive's Bonus Objectives, it being acknowledged that for 1997 and 1998, the Executive may include in his Bonus Objectives, other performance objectives, in addition to the business plan, as he and the Rouse CEO shall agree. In formulating the business plan the Executive and the Rouse CEO shall agree on a budgeted amount of "income from operations" to be generated by The Howard Hughes Corporation, such amount to be calculated in the manner as set forth in Exhibit 2 entitled "The Howard Hughes Corporation" - Projected Summary of Operations 1996-1998 (the "Current Projections") attached hereto. The Income Objectives for 1996 shall be $46,896,000 as shown on the Current Projections, as may be adjusted for changes in accounting policies and practices, as described below. The Income Objectives for 1997 and 1998 shall be presumed to be the amounts shown on the Current Projections for those years subject to submission and review of the annual business plan as set forth above. In submitting the proposed business plan for 1997 and 1998 the Executive may suggest revisions to the Income Objectives. The final determination of the Income Objectives shall be subject to the approval of the Rouse CEO, but in no event shall the Rouse CEO increase the Income Objectives for 1997 or 1998 above the amounts set forth in the Current Projections. Moreover, the Income Objectives for 1996, 1997 and 1998 shall be adjusted to reflect any changes in accounting policies and practices implemented by The Howard Hughes Corporation after the Merger. Within ten (10) days after the year end financial results of the Company are made available to the Rouse CEO, he shall determine whether, in his good faith judgment, the Company's income from operations has met or exceeded, the Income Objectives. If the Income Objectives have been met or exceeded, then the Restrictions as to the applicable percentage of Bonus Stock shall be removed. If the income from operations is less than the Income Objectives, then the Rouse CEO may determine that the Restrictions as to the full percentage, or some lesser percentage of the Bonus Stock shall be removed. In making such determination, the Rouse CEO shall take into consideration, as he deems appropriate, factors which may have affected the Company's ability to meet the Income Objectives, including unusual market conditions, Rouse's failure to approve (or take other appropriate action regarding) any material recommendation by the Executive regarding the Company or to the extent Rouse rather than the Executive assumes responsibility for providing equity requirements or financing, the failure of Rouse to provide such equity requirements or financing. Notwithstanding the foregoing, (i) if the Income Objectives for either 1996 or 1997 are not met, but as of the end of 1997, the aggregate net income from operations for 1996 and 1997 equals or exceeds the aggregate Income Objectives for 1996 and 1997 then the Restrictions on the Bonus Stock eligible for removal in 1996 and 1997 shall be removed and (ii) if the aggregate income from operations for 1996, 1997 and 1998 equals or exceeds the aggregate Income Objectives for 1996, 1997 and 1998 then the Restrictions as to all of the Bonus Stock shall be removed, notwithstanding that for any of the individual years 1996, 1997 and 1998 the income from operations did not meet or exceed the Income Objectives. The income from operations shall be deemed to have met the Income Objectives and the Restrictions shall automatically be removed as of January 31 of each applicable year unless prior thereto the Rouse CEO shall have notified the Executive in writing of his determination that the Restrictions are not to be fully removed. The Rouse CEO agrees to discuss with the Executive, at his request, any determination that the Restrictions are not to be fully removed. With regard to any shares of Bonus Stock as to which the Restrictions have not been removed by February 1, 1999 such shares shall be forfeited to The Rouse Company without payment therefor and any rights of the Executive therein shall be terminated. -3- EXHIBIT 1 to ATTACHMENT 1 ------------------------- 1996 Business Plan ------------------ The following are key objectives for 1996: 1. Produce revenues consistent with the Projected Summary of Operations for 1996. 2. Complete or commence construction of the following commercial/residential projects in accordance with approved budgets. Hughes Center ------------- Restaurant 23,500 square feet Office 85,000 square feet Summerlin Commercial -------------------- Office/flex 276,000 square feet Hughes Airport Center --------------------- Office/industrial/flex 248,000 square feet Hughes Cheyenne Center ---------------------- Industrial/flex 210,000 square feet 3. Continue or commence construction of required infrastructure to support land sales on Summerlin Villages 3, 11/12 and 14A. 4. Obtain required permanent project financing for 1996 as follows (with Rouse support where required): Hughes Center $39,500,000 Summerlin Commercial 20,750,000 Hughes Airport 25,200,000 5. Complete next increment of Special Improvement District Financing of approximately $40,000,000 for Summerlin. 6. Complete the lease up of new commercial buildings consistent with approved pro forma. 7. Maintain occupancy in existing commercial buildings within 5% of December 1995 levels. EXHIBIT 2 TO ATTACHMENT 1 The Howard Hughes Corporation Projected Summary of Operations 1996 - 1998 (in thousands)
1996 1997 1998 Operating Revenues: Income producing properties 73,379 88,285 100,097 Development properties 116,472 146,428 107,201 Investment properties 8,485 43,871 17,465 Subtotal 198,336 278,584 224,763 Cost of Revenues: Income producing properties (27,959) (32,840) (36,288) Development properties (81,979) (97,508) (74,132) Investment properties (1,918) (5,891) (2,669) Subtotal (111,856) (136,239) (113,089) Gross Project From Operations 86,480 142,345 111,674 Other Income (Expense): General and administrative (10,659) (10,290) (10,555) Interest income 8,517 4,492 5,642 Interest expense (net of capitalized) (18,990) (28,789) (24,260) Depreciation and amortization (20,517) (21,775) (24,349) Abandoned Tenant Costs Other - net 2,065 2,768 2,811 Subtotal (39,584) (53,594) (50,711) Income from Operations 46,896 88,751 60,963
EXHIBIT B --------- LOAN AGREEMENT THIS AGREEMENT is made as of the ___ day of __________, 1996, ("Agreement"), by and between JOHN L. GOOLSBY (the "Borrower") and THE ROUSE COMPANY, a Maryland corporation (the "Company"). WHEREAS, the Borrower, a senior officer of The Howard Hughes Corporation, a subsidiary of the Company, intends to continue to serve the Company for the foreseeable future, subject to the direction of the Board of Directors of the Company; the Borrower wishes to borrow money from the Company for purposes which include the satisfaction of certain obligations that he has incurred or will incur with respect to the receipt of shares of Common Stock of the Company pursuant to the Company's 1994 Stock Incentive Plan (the "Shares"), including, but not limited to, the payment of federal and state income taxes; the Company, in recognition of the services the Borrower has performed for The Howard Hughes Corporation, and in contemplation of future services that the Borrower will perform for The Howard Hughes Corporation, has determined to extend credit to the Borrower on the terms set forth herein, it being the considered view of the Board of Directors of the Company that the best interests of the Company and its stockholders will be served and advanced through the continued services of Borrower to the Company. NOW THEREFORE, for good and valuable consideration as reflected in this Agreement, the Company and the Borrower agree as follows: 1. The Company agrees to lend to Borrower, and Borrower agrees to borrow from the Company from time to time, [the principal sum of one-half ( 1/2) market value (the "Loan Amount") of the shares on the effective date of the Merger (the "Effective Date"], which loan shall be evidenced by the Promissory Note of Borrower (attached as Exhibit A) Borrower may borrow all or any portion of the principal sum of the loan upon at least one day's written notice to the Company (attached as Exhibit B), except that Borrower must borrow at least [one- third of loan] on or before each of [January 31, 1997], [January 31, 1998] and [January 31, 1999]. The loan shall be the unsecured obligation of Borrower, shall bear interest as stated in the Promissory Note, payable on January 31 of each year, at the rate of 5% per annum on the principal balance outstanding from time to time, shall mature in its entirety on [January 31, 1999], and shall be repayable (unless forgiven as hereinafter set forth) as to principal in three equal installments of [one-third of Loan Amount] payable on [January 31] in each of the years 1997 through 1999. The Company agrees that Borrower is entitled to the entire loan proceeds and is entitled to have the loan forgiven notwithstanding whether the Borrower remains an employee of the Company at the time the restrictions lapse. 2. The Company represents and warrants to Borrower that this Agreement has been duly authorized by its Board of Directors and constitutes the legal, valid and enforceable obligation of the Company in consideration of the obligations of -2- Borrower under this Agreement, the Promissory Note and the contemplated services of Borrower. The Company understands that the Promissory Note constitutes the unsecured obligation of Borrower. 3. Borrower represents and warrants to the Company that he intends to apply the proceeds of the loan from the Company for purposes that include the payment of obligations, and interest thereon, incurred or to be incurred by him in connection with the grant of the Shares, including the payment of federal and state income taxes. 4. On January 31 in each of the years 1997 through 1999, Borrower's obligation evidenced by the Promissory Note shall be extinguished and forgiven by the Company as to [one-third (1/3) of the loan amount], without any payment by Borrower, provided that Borrower has not prior to any such dates been discharged as an employee of the Company or any subsidiary thereof for cause. Accordingly, if the Borrower has not previously been discharged for cause as of January 31, 1999, his obligation to the Company as evidenced by the Promissory Note shall be extinguished and forgiven totally as to principal without any payment by him except as to interest on the principal balance outstanding from time to time. In no event shall termination of Borrower's employment at any time reestablish personal responsibility of Borrower for amounts of principal indebtedness extinguished and forgiven prior to such termination. -3- 5. Provided that an uncured Event of Default has not theretofore occurred, in the event of the Borrower's death, total disability, discharge without good cause, retirement from the Company and all subsidiaries thereof after attaining age 62, or termination of employment for Good Reason (as defined in the Option Agreement) at any time prior to January 31, 1999, while he is employed by the Company or any subsidiary thereof, the entire remaining balance of principal indebtedness evidenced by the Promissory Note shall be extinguished and forgiven without any payment on the part of the Borrower except as to accrued interest to the date of the event. 6. When used in Sections 5 and 7, (a) "total disability" shall mean a disability on the part of the Borrower that has continued for a period of more than 180 days and has prevented him from performing in a usual and proper manner the functions of his position, and (b) "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, any of which has or have a material adverse effect on Borrower's ability to perform the duties of his position or on the good standing, financial condition or profitability of the Company or The Howard Hughes Corporation, and shall be deemed to include any voluntary termination of employment by the Borrower after January 31, 1999; or (ii) any change of control of the Company or The Howard Hughes Corporation (as hereinafter defined); for purposes hereof, a "change of -4- control" shall mean (1) any merger by the Company or The Howard Hughes Corporation 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 or The Howard Hughes Corporation 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 or The Howard Hughes Corporation (as defined below) and rights to acquire voting securities of the Company or The Howard Hughes Corporation (also as defined below) 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 or The Howard Hughes Corporation, 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 or The Howard Hughes Corporation's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly. Notwithstanding the preceding sentence, 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 of control." -5- For purposes of this Agreement, the term "voting securities" means Common Stock of the Company or The Howard Hughes Corporation or any securities having presently exercisable voting rights that the Company or The Howard Hughes Corporation may issue in the future. "Rights to acquire voting securities" include, but are not limited to, securities that are convertible into voting securities (as defined above) and rights, options, warrants and other agreements or arrangements to acquire such voting securities. A person's ownership position shall be computed on the basis that its rights to acquire voting securities are immediately exercisable and exercised. 7. Upon the occurrence of an Event of Default, as hereinafter defined, the Company may declare all unpaid principal and interest on the Promissory Note to be due and payable within ninety (90) days. For the purposes of this Agreement and the Promissory Note, "Event of Default" shall mean (i) default in the payment when due of any interest on the Promissory Note, which default shall have continued for a period of thirty (30) days after notice to the Borrower or (ii) termination before January 31, 1999 of the Borrower's employment with the Company or any subsidiary other than as a result of death, total disability, discharge without good cause, retirement from the Company or any subsidiary after attaining age 62, or the Borrower's termination of employment for Good Reason (as defined in the Borrower's Option Agreement). -6- 8. Upon the occurrence of an Event of Default, the Borrower shall be entitled to no further forgiveness of indebtedness under Sections 4 or 5. 9. This Agreement shall be governed by the laws of the State of Maryland and shall be binding upon and inure to the benefit of the Company and its successors and assigns and the Borrower and his heirs, personal representatives and assigns. IN WITNESS WHEREOF, the Company and Borrower have executed this Agreement as of the _______ day of June, 1996. WITNESS: - -------------------------- -------------------------- JOHN L. GOOLSBY ATTEST: THE ROUSE COMPANY - -------------------------- -------------------------- Anthony W. Deering President and Chief Executive Officer -7- EXHIBIT A TO LOAN AGREEMENT --------------------------- PROMISSORY NOTE Columbia, Maryland ____________, 1996 FOR VALUE RECEIVED the undersigned, (the "Maker"), promises to pay to the order of THE ROUSE COMPANY (the "Company") the sum of __________ Dollars, or such lesser amount as shall be outstanding from time to time, at the offices of the Company in Columbia, Maryland, with interest on the balance outstanding from time to time at the rate of 5% per annum. This Promissory Note has been issued pursuant to a Loan Agreement, dated [Effective Date], by and between the Maker and the Company to which reference is made for further description of the rights and obligations specified herein and of certain other rights and obligations of the Maker and the Company that affect the terms and provisions of this Promissory Note. Interest on the balance outstanding from time to time shall be paid on January 31, 1997, and thereafter on January 31 in each succeeding year until the principal and interest on this Promissory Note are paid in full. Payments of principal shall be made in annual installments of _________ Dollars ($__________) on January 31 in each of the years 1997 through 1999, inclusive, unless repaid prior thereto by the Maker or extinguished and forgiven pursuant to the terms of the Loan Agreement. Prepayments of principal may -8- be made in the sole discretion of the Maker, in whole or in part, at any time or from time to time, without penalty. The obligation represented by this Promissory Note shall constitute the unsecured general obligation of the Maker. Upon the occurrence of any Event of Default, as defined in the Loan Agreement, the Company may declare all unpaid principal and interest on this Promissory Note to be due and payable within ninety (90) days thereafter. To the extent permitted by law, the Maker waives all exemptions, diligence in collection, demand, presentment for payment, protest and notice of protest of nonpayment. The Company agrees to make an appropriate notation on this Promissory Note to reflect all payments of principal or the extinguishment and forgiveness of principal pursuant to the terms of the Loan Agreement, and upon the Maker's request, the Company will submit this Promissory Note to the Maker for a review of such notation. This Promissory Note shall be governed by the laws of the State of Maryland and shall be binding upon and inure to the benefit of the Company, its successors and assigns and to the Maker and the Maker's heirs, personal representatives and assigns. (SEAL) ------------------------ John L. Goolsby -9- EXHIBIT B TO LOAN AGREEMENT --------------------------- NOTICE OF BORROWING Pursuant to Section 1 of the Loan Agreement, made as of [Effective Date] by the undersigned and The Rouse Company, this is to request $______________, representing a loan from The Rouse Company to the undersigned under the Loan Agreement. Dated: ------------------- ------------------------------ John L. Goolsby EXHIBIT C --------- Effective Date John L. Goolsby - --------------------- - --------------------- - --------------------- Dear : ---------------- The Personnel Committee of the Board of Directors of The Rouse Company (the "Company") has granted you an incentive stock option to purchase _________ shares of the Common Stock of the Company and a nonqualified stock option to purchase _________ shares of the Common Stock of the Company. As determined in accordance with Article I(b)(4) of The Rouse Company 1994 Stock Incentive Plan, the exercise price for both options is [price as of Effective Date] per share. To accept the options, sign the originals of the enclosed Incentive Stock Option Agreement and Nonqualified Stock Option Agreement and the duplicate of this letter and return them to David Schwiesow. Please retain the copies of the Agreements and the original of this letter for your records. If you have any questions concerning your option grants, feel free to give me a call. Sincerely, THE ROUSE COMPANY By:___________________________ Anthony W. Deering President and Chief Executive Officer I accept the stock options to purchase shares of the Company's Common Stock upon the terms and conditions contained in the Incentive Stock Option Agreement and the Nonqualified Stock Option Agreement, each dated _________________________ between the Company and me. Signature:______________________ EXHIBIT C-1 ----------- THE ROUSE COMPANY 1994 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT -------------------------------- THIS INCENTIVE STOCK OPTION AGREEMENT, effective the [Effective Date] by and between THE ROUSE COMPANY 1994 Stock Incentive Plan, a Maryland corporation (the "Company"), and JOHN L. GOOLSBY (the "Employee"). BACKGROUND ---------- By action of its Board of Directors and Stockholders, the Company has adopted The Rouse Company 1994 Stock Incentive Plan (the "Plan"), under which the Company may grant stock options and other stock awards to employees of the Company and its subsidiaries. The Plan is administered by a Committee of the Board of Directors that has authority (i) to grant stock options to officers and other key employees of the Company and its subsidiaries 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 Committee 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 [_________] shares of Common Stock of the Company, par value one cent ($.0l) per share ("Common Stock"), which shares are designated as shares granted under an incentive stock option (as that term is described in Section i(d) below). b. Option Price. The purchase price of all such shares of Common Stock shall be $______________ per share, which price is equal to the last sale price for Common Stock on the Effective Date. 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 Company and the Employee ----------------- acknowledge that simultaneously herewith the Employee and the Company are entering into a letter agreement (the "Stock Grant Agreement") pursuant to which the Employee is receiving a grant of 40,000 shares (the "Bonus Stock") of the Common Stock of the Company. Pursuant to the Stock Grant Agreement certain restrictions apply to Employee's ownership of the Bonus Stock which restrictions (the "Restrictions") may be removed as to percentages of the Bonus Stock as of January 31, 1997, January 31, 1998 and January 31, 1999. It is intended that the Option granted herein shall vest at the same time and in the same percentages as the Restrictions on the Bonus Stock are removed. Accordingly, the Option shall vest as to a percentage of the total shares of the Option on each of January 31, 1997, January 31, 1998 and January 31, 1999, which percentage on each such date shall equal the percentage of the total shares of Bonus Stock on which the Restrictions are removed as of each such date. 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(d) below), retirement from the Company after attaining age 62, discharge without good cause (as defined in Section 3 below), or in the event of the Employee's termination of employment for Good Reason. As used in this paragraph, the term "Good Reason" shall mean the occurrence of any of the following events which is not corrected by the Company within 15 days after Employee has provided the Company with written notice of such event: (i) assignment to the Employee of any duties materially inconsistent with the Employee's position, authority, duties or responsibilities with the Company as established pursuant to the Employment Agreement between the Employee and the Company as then in effect, (ii) reduction of Employee's annual base salary as established pursuant to the Employment Agreement between Employee and the Company as then in effect, (iii) relocation of the Company's principal executive offices or Employee's principal place of performance of his duties and responsibility of employment with the Company to a location outside the Greater Las Vegas area, (iv) a material breach by the Company or Rouse of any of its obligations to Employee pursuant to the Employment Agreement between Employee and the Company as then in effect, (v) any amendment to the articles or bylaws by the Company or Rouse that adversely affects the Employee's right to indemnification by the Company or Rouse, except as may be required by applicable federal or state law, and (vi) the failure of the Company or Rouse to have the obligations under this Agreement assumed by any assignee under Section 5.4 of the Employment Agreement. -2- 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 Howard Hughes Corporation; or (ii) any change of control of the Company or The Howard Hughes Corporation(as hereinafter defined). b. "Change of Control." For purposes of this Agreement, a "change ------------------ of control" shall mean (1) any merger by the Company or The Howard Hughes Corporation 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 or The Howard Hughes Corporation 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 or The Howard Hughes Corporation (defined as Common Stock of the Company or The Howard Hughes Corporation or any securities having voting rights that the Company or The Howard Hughes Corporation may issue in the future) and rights to acquire voting securities of the Company or The Howard Hughes Corporation (defined as including, without limitation, securities that are convertible into voting securities of the Company or The Howard Hughes Corporation (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 or The Howard Hughes Corporation, 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 or The Howard Hughes Corporation's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly. Notwithstanding the preceding sentence, 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 of control." -3- SECTION 4. Termination of Option. ---------------------- a. Termination for Cause. If Employee's employment is terminated by --------------------- the Company for cause, 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 or any subsidiary terminates for any reason other than death, total disability (as defined in Section 5 (d) below) , retirement from the Company or any subsidiary after attaining age 62, discharge without good cause (as defined in Section 3 above), or the Employee's termination of employment for Good Reason (as defined in Section 2 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. Subject to the provisions of Sections ------------------------- 5 (b) and 5 (c) below, Employee may exercise the Option to purchase the vested shares at any time (whether while serving as an employee of the Company or any subsidiary or after ceasing to be an employee of the Company or any subsidiary), 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 (ten (10) years) (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 - Certain Terminations of Employment. Employee ---------------------------------------------------- may exercise the Option to purchase the vested shares for only one year following a voluntary termination of employment other than upon retirement from the Company after attaining age 62, a termination of employment due to a discharge without good cause (as defined in Section 3 above) or the Employee's termination of employment for Good Reason (as defined in Section 2 above). c. Exercise Period - Death or Total Disability. If Employee dies or ------------------------------------------- becomes totally disabled (as defined in Section 5(d) below) either while serving as an employee of the Company or any subsidiary or after ceasing to be an employee of the Company or any subsidiary, 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. -4- d. "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. e. 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 [ten (10) years after Effective Date]. 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 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. 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 -5- Company's tax withholding obligations, if any, or Employee's tax liabilities with respect to such transactions. SECTION 8. 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 9. 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 certificates for such shares have been issued. SECTION 10. 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 operation of law or otherwise) and shall not be subject to execution, attachment or similar process. SECTION 11. Continued Employment. Employee shall have no duty or -------------------- obligation to remain in the employ of the Company or any subsidiary. 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 (except as otherwise provided in the Employment Agreement) is at will, at any time. SECTION 12. 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 13. 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 14. Amendments. This Agreement may only be amended in ---------- writing and with the mutual consent of the Company and Employee. SECTION 15. 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. IN WITNESS WHEREOF the Company and Employee have executed this Agreement as of the day and year first above written. ATTEST/WITNESS: THE ROUSE COMPANY By - ------------------------ ---------------------------- ANTHONY W. DEERING President and Chief Executive Officer - ------------------------ ---------------------------- JOHN L. GOOLSBY -7- EXHIBIT C-2 ----------- THE ROUSE COMPANY 1994 STOCK INCENTIVE PLAN NONQUALIFIED STOCK OPTION AGREEMENT ----------------------------------- THIS NONQUALIFIED STOCK OPTION AGREEMENT, effective [Effective Date], by and between THE ROUSE COMPANY, a Maryland corporation (the "Company"), and John L. Goolsby (the "Employee"). BACKGROUND ---------- By action of its Board of Directors and Stockholders, the Company has adopted The Rouse Company 1994 Stock Incentive Plan (the "Plan"), under which the Company may grant stock options and other stock awards to employees of the Company. The Plan is administered by a Committee of the Board of Directors that 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 Committee 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 [40,000 minus number of incentive shares] 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 [___________], which price is equal to the last sale price for Common Stock on the Effective Date. 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 Company and the Employee ----------------- acknowledge that simultaneously herewith the Employee and the Company are entering into a letter agreement (the "Stock Grant Agreement") pursuant to which the Employee is receiving a grant of 40,000 shares (the "Bonus Stock") of the Common Stock of the Company. Pursuant to the Stock Grant Agreement certain restrictions apply to Employee's ownership of the Bonus Stock which restrictions (the "Restrictions") may be removed as to percentages of the Bonus Stock as of January 31, 1997, January 31, 1998 and January 31, 1999. It is intended that the Option granted herein shall vest at the same time and in the same percentages as the Restrictions on the Bonus Stock are removed. Accordingly, the Option shall vest as to a percentage of the total shares of the Option on each of January 31, 1997, January 31, 1998 and January 31, 1999, which percentage on each such date shall equal the percentage of the total shares of Bonus Stock on which the Restrictions are removed as of each such date. 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(d) below), retirement from the Company after attaining age 62, discharge without good cause (as defined in Section 3 below), or in the event of the Employee's termination of employment for Good Reason. As used in this paragraph, the term "Good Reason" shall mean the occurrence of any of the following events which is not corrected by the Company within 15 days after Employee has provided the Company with written notice of such event: (i) assignment to the Employee of any duties materially inconsistent with the Employee's position, authority, duties or -2- responsibilities with the Company as established pursuant to the Employment Agreement between the Employee and the Company as then in effect, (ii) reduction of Employee's annual base salary as established pursuant to the Employment Agreement between Employee and the Company as then in effect, (iii) relocation of the Company's principal executive offices or Employee's principal place of performance of his duties and responsibility of employment with the Company to a location outside the Greater Las Vegas area, (iv) a material breach by the Company of any of its obligations to Employee pursuant to the Employment Agreement between Employee and the Company as then in effect, (v) any amendment to the articles or bylaws by the Company or Rouse that adversely affects the Employee's right to indemnification by the Company or Rouse, except as may be required by applicable federal or state law, and (vi) the failure of the Company or Rouse to have the obligations under this Agreement assumed by any assignee under Section 5.4 of the Employment Agreement. 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 Howard Hughes Corproation; or (ii) any change of control of the Company or The Howard Hughes Corporation (as hereinafter defined). b. "Change of Control." For purposes of this Agreement, a "change of ----------------- control" shall mean (1) any merger by the Company or The Howard Hughes Corporation 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 or The Howard Hughes Corporation 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 or The Howard Hughes Corporation (defined as Common Stock of the Company or The Howard Hughes Corporation or any securities having voting rights that the Company or The Howard Hughes Corporation may issue in the future) and rights to acquire voting securities of the Company or The Howard Hughes Corporation (defined as including, without limitation, securities that are convertible into voting securities of the Company or The Howard Hughes Corporation (as defined above) and rights, options, warrants and other agreements -3- 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 or The Howard Hughes Corporation, 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 or The Howard Hughes Corporation's then outstanding voting securities by any person, corporation or other entity or group thereof acting jointly. Notwithstanding the preceding sentence, 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 of control." SECTION 4. Termination of Option. --------------------- a. Termination for Cause. If Employee's employment is terminated by --------------------- the Company for cause, 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 or any subsidiary terminates for any reason other than death, total disability (as defined in Section 5(d) below), retirement from the Company or any subsidiary after attaining age 62, or discharge without good cause (as defined in Section 3 above), or the Employee's termination of employment for Good Reason (as defined in Section 2 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. Subject to the provisions of Sections ------------------------- 5(b) and 5(c) below, Employee may exercise the Option to purchase the vested shares at any time (whether while serving as an employee of the Company or any subsidiary or after ceasing to be an employee of the Company or any subsidiary), 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 [Ten (10) years after the Effective Date (the "Expiration Date")]. b. Exercise Period - Certain Terminations of Employment. Employee ---------------------------------------------------- may exercise the Option to purchase the -4- vested shares for only one year following a voluntary termination of employment other than upon retirement from the Company after attaining age 62, a termination of employment due to a discharge without good cause (as defined in Section 3 above) or the Employee's termination of employment for Good Reason (as defined in Section 2 above). c. Exercise Period - Death or Total Disability. If Employee dies or ------------------------------------------- becomes totally disabled (as defined in Section 5(d) below) either while serving as an employee of the Company or any subsidiary, or after ceasing to be an employee of the Company or any subsidiary, 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. d. "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. e. 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 February 21, 2006. 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 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 -5- 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. 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 8. 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 9. 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 certificates for such shares have been issued. -6- SECTION 10. 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 operation of law or otherwise) and shall not be subject to execution, attachment or similar process. SECTION 11. Continued Employment. Employee shall have no duty or -------------------- obligation to remain in the employ of the Company or any subsidiary. 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 (except as otherwise provided in the Employment Agreement) is at will, at any time. SECTION 12. 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 13. 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 14. Amendments. This Agreement may only be amended in ---------- writing and with the mutual consent of the Company and Employee. SECTION 15. 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. IN WITNESS WHEREOF the Company and Employee have executed this Agreement as of the day and year first above written. ATTEST/WITNESS: THE ROUSE COMPANY By - ----------------------------- --------------------------- ANTHONY W. DEERING President and Chief Executive Officer - ----------------------------- --------------------------- John L. Goolsby -7- EXHIBIT 1 --------- A business plan for The Howard Hughes Corporation (the "Business Plan") shall be established for each of calendar years 1996, 1997 and 1998 as follows. The Business Plan for 1996 is attached hereto as Exhibit 1-A. On or prior to December 15, 1996 and December 15, 1997, John Goolsby (the "Executive") shall submit to the Chief Executive Officer of The Rouse Company (the "CEO") a proposed Business Plan for the ensuing calendar year. The proposed Business Plan shall be in form similar to the 1996 Business Plan. The essential basis of the Business Plan shall be the achievement by the Company of the "net income" amounts shown on the "Projected Summary of Operations" which is attached hereto. The parties however, recognize that the Projected Summary of Operations reflects accounting policies and practices of the Company in effect prior to the Merger. To the extent that those accounting policies are revised after the Merger, the amount of "net income" shall be appropriately adjusted to reflect any such policy revisions. The proposed business plan shall be subject to review and approval by the CEO. The Executive and the CEO shall discuss in good faith any revisions to the proposed plan required by the CEO, but such revisions shall be made unless they require results in excess of the "net income" shown in the Projected Summary of Operations. Within five (5) days after the financial results of the Company are available to the CEO, the CEO shall determine in his good faith judgment whether the Executive has achieved the objectives of the Business Plan. If the CEO determines that the Business Plan has not been achieved, then the CEO shall communicate such fact to the Executive and the Executive shall have the opportunity to discuss the CEO's determination with the CEO. The decision of the CEO, made in good faith, shall be final and binding. The CEO may take into consideration, to the extent he believes it appropriate, factors affecting the Executive's ability to achieve the Business Plan, such as unusual market conditions or inability of Rouse to provide equity requirements or financing. If such factors exist, the CEO may determine that the Business Plan has been achieved notwithstanding that the net income amounts for the Company have not been achieved. However, the Executive acknowledges that the essential determination is whether the "net income" amounts are achieved notwithstanding the existence of conditions beyond the Executive's control. EXHIBIT 1-A ----------- 1996 Business Plan ------------------ The following are key objectives for 1996: 1. Produce revenues consistent with the Projected Summary of Operations. 2. Complete or commence construction of the following commercial/residential projects in accordance with approved budgets. Hughes Center ------------- Restaurant 23,500 square feet Office 85,000 square feet Summerlin Commercial -------------------- Office/flex 276,000 square feet Hughes Airport Center --------------------- Office/industrial/flex 248,000 square feet Hughes Cheyenne Center ---------------------- Industrial/flex 210,000 square feet 3. Continue or commence construction of required infrastructure to support land sales on Summerlin Villages 3, 11/12 and 14A. 4. Complete next increment of Special Improvement District Financing of approximately $40,000,000 for Summerlin. 5. Complete the lease up of new commercial buildings consistent with approved pro forma. 6. Maintain occupancy in existing commercial buildings within 5% of December 1995 levels. -2- EX-12.1 3 COMPUTATIONS Exhibit 12.1 The Rouse Company and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (dollars in thousands)
Year ended December 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Earnings before income taxes, extraordinary loss and cumulative effect of change in accounting principle $ 73,826 $ 43,605 $ 10,169 $ 13,336 $ 3,072 Fixed charges: Interest costs 231,098 230,960 219,838 220,971 219,705 Capitalized interest (23,608) (10,579) (6,875) (7,388) (8,899) Amortization of debt issuance costs 1,645 2,066 2,527 2,146 2,801 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 1,204 -- -- Portion of rental expense representative of interest factor (1) 7,949 8,487 8,266 10,788 15,988 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- 31 Adjustments to earnings (loss): Minority interest in earnings of majority-owned subsidiaries having fixed charges 3,178 1,164 2,026 2,234 1,909 Undistributed earnings of less than 50%-owned subsidiaries (34) (88) (189) (564) (68) Previously capitalized interest amortized into earnings: Depreciation of operating properties (2) 3,962 3,866 3,764 3,670 3,605 Cost of land sales (3) 5,025 1,778 1,421 1,580 1,627 -------- -------- -------- -------- -------- Earnings available for fixed charges $315,760 $293,978 $242,151 $246,773 $239,771 ======== ======== ======== ======== ======== Fixed charges: Interest costs $231,098 $230,960 $219,838 $220,971 $219,705 Amortization of debt issuance costs 1,645 2,066 2,527 2,146 2,801 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 1,204 -- -- Portion of rental expense representative of interest factor (1) 7,949 8,487 8,266 10,788 15,988 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- 31 -------- -------- -------- -------- -------- Total fixed charges $253,411 $254,232 $231,835 $233,905 $238,525 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.25 1.16 1.04 1.06 1.01 ======== ======== ======== ======== ========
Exhibit 12.1, continued The Rouse Company and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (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 $3,158,000, $3,844,000, $3,644,000, $6,232,000 and $10,006,000 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. (2) 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. (3) Represents 10% of 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. EX-12.2 4 COMPUTATIONS 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, ---------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Earnings before income taxes, extraordinary loss and cumulative effect of change in accounting principle $ 73,826 $ 43,605 $ 10,169 $ 13,336 $ 3,072 Fixed charges: Interest costs 231,098 230,960 219,838 220,971 219,705 Capitalized interest (23,608) (10,579) (6,875) (7,388) (8,899) Amortization of debt issuance costs 1,645 2,066 2,527 2,146 2,801 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 1,204 -- -- Portion of rental expense representative of interest factor (1) 7,949 8,487 8,266 10,788 15,988 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- 31 Adjustments to earnings (loss): Minority interest in earnings of majority-owned subsidiaries having fixed charges 3,178 1,164 2,026 2,234 1,909 Undistributed earnings of less than 50%-owned subsidiaries (34) (88) (189) (564) (68) Previously capitalized interest amortized into earnings: Depreciation of operating properties (2) 3,962 3,866 3,764 3,670 3,605 Cost of land sales (3) 5,025 1,778 1,421 1,580 1,627 -------- -------- -------- -------- -------- Earnings available for fixed charges and Preferred stock dividend requirements $315,760 $293,978 $242,151 $246,773 $239,771 ======== ======== ======== ======== ======== Combined fixed charges and Preferred stock dividend requirements: Interest costs $231,098 $230,960 $219,838 $220,971 $219,705 Amortization of debt expense 1,645 2,066 2,527 2,146 2,801 Distributions on Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 12,719 12,719 1,204 -- -- Portion of rental expense representative of interest factor (1) 7,949 8,487 8,266 10,788 15,988 Support for debt service costs provided to affiliates accounted for under the equity method -- -- -- -- 31 Preferred stock dividend requirements (4) 10,313 17,555 24,402 21,802 18,968 -------- -------- -------- -------- -------- Total combined fixed charges and Preferred stock dividend requirements $263,724 $271,787 $256,237 $255,707 $257,493 ======== ======== ======== ======== ======== Ratio of earnings to combined fixed charges and Preferred stock dividend requirements (5) 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 $3,158,000 $3,844,000, $3,644,000, $6,232,000 and $10,006,000 for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. (2) 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. (3) Represents 10% of 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. (4) Represents estimated pre-tax earnings required to cover Preferred stock dividend requirements. All amounts are calculated based on actual Preferred stock dividends and an estimated effective tax rate of 0% in 1997 and 40% in 1996, 1995, 1994 and 1993. Exhibit 12.2, continued The Rouse Company and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (5) 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, $8,934,000 and $17,722,000 for the years ended December 31, 1995, 1994 and 1993, respectively. EX-13 5 ANNUAL REPORT Exhibit 13. Annual report to security holders The annual report to shareholders has not been completed as of this filing and will be filed with the Securities and Exchange Commission in its entirety on or before April 3, 1998. The financial section of the annual report, which is incorporated by reference, is final and is enclosed as Exhibit 13. This financial section includes all the information incorporated by reference in Parts I, II and IV of this Form 10-K Annual Report for the fiscal year ended December 31, 1997. INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- KPMG Peat Marwick LLP Certified Public Accountants 111 South Calvert Street Baltimore, Maryland 21202 The Board of Directors and Shareholders The Rouse Company: We have audited the accompanying consolidated balance sheets of The Rouse Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 aforementioned consolidated financial statements present fairly, in all material respects, the financial position of The Rouse Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP February 24, 1998 22 The Rouse Company and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (in thousands) - -------------------------------------------------------------------------------- 1997 1996 --------- --------- Assets Property (notes 3, 4, 8, 16 and 17): Operating properties: Property and deferred costs of projects............... $3,079,962 $3,198,343 Less accumulated depreciation and amortization........ 515,229 552,201 ---------- ---------- 2,564,733 2,646,142 Properties in development.............................. 232,349 176,060 Properties held for sale............................... 20,052 73,080 Investment land and land held for development and sale. --- 244,117 ---------- ---------- Total property........................................ 2,817,134 3,139,399 ---------- ---------- Investments in and advances to unconsolidated real estate ventures (note 3)............................... 338,692 100,181 Prepaid expenses, receivables under finance leases and other assets (note 16)................................. 228,956 264,141 Accounts and notes receivable (note 5).................. 114,300 92,369 Investments in marketable securities.................... 3,586 3,596 Cash and cash equivalents............................... 87,100 43,766 ---------- ---------- Total.................................................. $3,589,768 $3,643,452 ========== ========== The accompanying notes are an integral part of these statements. 23 - -------------------------------------------------------------------------------- 1997 1996 ---------- ---------- Liabilities Debt (note 8): Property debt not carrying a Parent Company guarantee of repayment............................ $2,085,456 $2,290,406 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt..................................... 158,093 179,540 Convertible subordinated debentures............... 130,000 130,000 Other debt........................................ 256,000 235,300 ---------- ---------- 544,093 544,840 ---------- ---------- Total debt........................................ 2,629,549 2,835,246 ---------- ---------- Obligations under capital leases (note 16).......... 54,591 60,201 Accounts payable, accrued expenses and other liabilities........................................ 300,113 298,562 Deferred income taxes (note 11)..................... 2,500 134,794 Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities (note 9).............. 137,500 137,500 Commitments and contingencies (notes 16 and 17) Shareholders' equity (notes 13, 14 and 15) Series B Convertible Preferred stock with a liquidation preference of $202,500................. 41 --- Common stock of 1c par value per share; 250,000,000 shares authorized; issued 66,910,901 shares in 1997 and 66,742,871 shares in 1996....... 669 667 Additional paid-in capital.......................... 686,976 488,849 Accumulated deficit................................. (222,171) (312,367) ---------- ---------- Total shareholders' equity 465,515 177,149 ---------- ---------- Total.............................................. $3,589,768 $3,643,452 ========== ========== 24 The Rouse Company and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 (in thousands, except per share data) - --------------------------------------------------------------------------------
1997 1996 1995 -------- -------- -------- Revenues......................................................................... $930,094 $831,917 $672,821 Operating expenses, exclusive of provision for bad debts, depreciation and amortization.................................................. 532,240 468,366 347,560 Interest expense (note 8)........................................................ 207,490 220,381 212,963 Provision for bad debts.......................................................... 5,766 3,688 3,318 Depreciation and amortization (note 4)........................................... 86,009 79,990 73,062 Gain (loss) on dispositions of assets and other provisions, net (note 12)........ (24,763) (15,887) (25,749) -------- -------- -------- Earnings before income taxes, extraordinary losses and cumulative effect of change in accounting principle.......................... 73,826 43,605 10,169 -------- -------- -------- Income taxes (note 11): Current........................................................................ 8,137 123 620 Deferred--primarily Federal.................................................... (124,203) 25,596 3,699 -------- -------- -------- (116,066) 25,719 4,319 -------- -------- -------- Earnings before extraordinary losses and cumulative effect of change in accounting principle............................................ 189,892 17,886 5,850 Extraordinary losses, net (note 8)............................................... 21,342 1,453 8,631 Cumulative effect at October 1, 1997 of change in accounting for business process reengineering costs, net (note 1)......................... 1,214 -- -- -------- -------- -------- Net earnings (loss)............................................................ $167,336 $ 16,433 $ (2,781) ======== ======== ======== Net earnings (loss) applicable to common shareholders.......................... $157,023 $ 5,900 $(17,422) ======== ======== ======== Earnings (loss) per share of common stock (note 15): Basic: Earnings (loss) before extraordinary losses................................ $ 2.70 $ .13 $ (.19) Extraordinary losses....................................................... (.32) (.03) (.18) Cumulative effect of change in accounting principle........................ (.02) -- -- -------- -------- -------- Total.................................................................... $ 2.36 $ .10 $ (.37) ======== ======== ======== Diluted: Earnings (loss) before extraordinary losses................................ $ 2.59 $ .12 $ (.19) Extraordinary losses....................................................... (.28) (.03) (.18) Cumulative effect of change in accounting principle........................ (.02) -- -- -------- -------- -------- Total.................................................................... $ 2.29 $ .09 $ (.37) ======== ======== ========
The accompanying notes are an integral part of these statements. 25 The Rouse Company and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1997, 1996 and 1995 (in thousands) - --------------------------------------------------------------------------------
Series A Series B Additional Preferred Preferred Common paid-in Accumulated stock stock stock capital deficit --------- --------- ------ ---------- ----------- Balance at December 31, 1994...................... $ 45 $-- $476 $306,674 $(212,169) Net loss.......................................... -- -- -- -- (2,781) Dividends declared: Common stock -- $ .80 per share................ -- -- -- -- (38,292) Preferred stock -- $3.25 per share............. -- -- -- -- (14,641) Proceeds from exercise of stock options, net...... -- -- 3 2,139 -- Amortization of restricted common stock awards.... -- -- -- 1,130 -- ---- --- ---- -------- --------- 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 13).. (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 14)...................... -- -- 2 5,023 -- Proceeds from exercise of stock options, net...... -- -- 4 1,038 -- Amortization of restricted 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 13).... -- 41 -- 196,787 -- Purchases of common stock......................... -- -- (8) (26,357) -- Common stock issued pursuant to Contingent Stock Agreement (note 14)...................... -- -- 8 23,305 -- Proceeds from exercise of stock options, net...... -- -- 2 2,077 -- Amortization of restricted common stock awards.... -- -- -- 2,315 -- ---- --- ---- -------- --------- Balance at December 31, 1997...................... $ -- $41 $669 $686,976 $(222,171) ==== === ==== ======== =========
The accompanying notes are an integral part of these statements. 26 The Rouse Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 (in thousands) - --------------------------------------------------------------------------------
1997 1996 1995 --------- --------- --------- Cash flows from operating activities Rents and other revenues received....................................... $ 714,784 $ 685,990 $ 625,373 Proceeds from land sales................................................ 159,932 122,245 33,233 Interest received....................................................... 11,877 11,939 10,323 Land development expenditures........................................... (97,868) (54,343) (16,874) Operating expenditures.................................................. (395,528) (381,061) (327,163) Interest paid........................................................... (207,681) (216,644) (217,891) --------- --------- --------- Net cash provided by operating activities............................ 185,516 168,126 107,001 --------- --------- --------- Cash flows from investing activities Expenditures for properties in development and improvements to existing properties funded by debt................... (283,401) (123,985) (61,591) Expenditures for acquisition of The Hughes Corporation, net of acquired cash.................................... -- (36,331) -- Expenditures for property acquisitions.................................. (79,420) (18,152) (28,206) Expenditures for improvements to existing properties funded by cash provided by operating activities: Tenant leasing and remerchandising................................ (5,964) (8,095) (8,344) Building and equipment............................................ (15,933) (12,691) (4,688) Proceeds from sales of operating properties............................. 81,281 26,345 -- Purchases of marketable securities...................................... (15,378) (8,903) (5,411) Proceeds from redemptions or sales of marketable securities............. 15,388 8,217 32,650 Other................................................................... (19,052) (9,400) 10,595 --------- --------- --------- Net cash used by investing activities................................ (322,479) (182,995) (64,995) --------- --------- --------- Cash flows from financing activities Proceeds from issuance of property debt................................. 693,525 291,373 288,851 Repayments of property debt: Scheduled principal payments......................................... (46,282) (39,048) (36,446) Other payments....................................................... (572,139) (251,807) (413,438) Proceeds from issuance of other debt.................................... 121,868 141,337 124,831 Repayments of other debt................................................ (111,520) (109,685) (42,440) Proceeds from issuance of Company-obligated mandatorily redeemable preferred securities.......................... -- -- 132,951 Proceeds from issuance of Series B Preferred stock...................... 196,828 -- -- Purchases of common stock............................................... (26,365) (7,007) -- Dividends paid.......................................................... (77,140) (60,917) (52,933) Other................................................................... 1,522 (533) 2,142 --------- --------- --------- Net cash provided (used) by financing activities.................. 180,297 (36,287) 3,518 --------- --------- --------- Net increase (decrease) in cash and cash equivalents.................... 43,334 (51,156) 45,524 Cash and cash equivalents at beginning of year.......................... 43,766 94,922 49,398 --------- --------- --------- Cash and cash equivalents at end of year................................ $ 87,100 $ 43,766 $ 94,922 ========= ========= =========
The accompanying notes are an integral part of these statements. 27 - -------------------------------------------------------------------------------- Reconciliation of Net Earnings (Loss) to Net Cash Provided by Operating Activities
1997 1996 1995 -------- -------- --------- Net earnings (loss).................................................................. $167,336 $ 16,433 $ (2,781) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization...................................................... 86,009 79,990 73,062 (Gain) loss on dispositions of assets and other provisions, net.................... 24,763 15,887 25,749 Extraordinary losses, net.......................................................... 21,342 1,453 8,631 Cumulative effect of change in accounting principle, net........................... 1,214 -- -- Additions to preconstruction reserve............................................... 2,800 2,700 3,800 Provision for bad debts............................................................ 5,766 3,688 3,318 Decrease (increase) in: Accounts and notes receivable.................................................... (70,045) (26,862) (3,836) Other assets..................................................................... (2,312) (5,694) 1,357 Increase (decrease) in accounts payable, accrued expenses and other liabilities............................................................ 84,615 54,729 (10,690) Deferred income taxes.............................................................. (124,203) 25,596 3,699 Other, net......................................................................... (11,769) 206 4,692 -------- -------- -------- Net cash provided by operating activities............................................ $185,516 $168,126 $107,001 ======== ======== ========
- -------------------------------------------------------------------------------- Schedule of Noncash Investing and Financing Activities
1997 1996 1995 -------- -------- --------- 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)......................................... 549,171 -- -- 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 -- Common stock issued pursuant to Contingent Stock Agreement (note 14)................................................................ 23,313 5,025 -- Debt assumed by purchasers of land................................................... 21,928 16,991 -- Notes received from sales of operating properties.................................... -- 8,440 -- Value of noncash consideration given in acquisitions of interests in properties............................................ 5,323 13,520 79,811 Mortgage and other debt assumed in acquisitions of interests in properties............................................................ -- 21,090 6,175 Mortgage debt extinguished on dispositions of interests in properties......................................................... -- -- 20,779 Capital lease obligations incurred................................................... 1,101 3,789 1,837 ======== ======== ========
28 The Rouse Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 - -------------------------------------------------------------------------------- (1) Summary of significant accounting policies (a) Description of business 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, primarily in Columbia, Maryland and Summerlin, Nevada. 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. 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. The proportionate revenues of the Company's lines of business are summarized as follows: 1997 1996 1995 ---- ---- ---- Retail centers......................................... 54% 61% 73% Office, mixed-use and other properties................. 24 22 22 Land sales............................................. 22 17 5 --- --- --- Total 100% 100% 100% === === === (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 unincorporated 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, investment land and land held for development and 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 estimates. Certain amounts for prior years have been reclassified to conform to the presentation for 1997. (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 operating properties, 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. 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. The annual rate of depreciation for most of the Company's retail centers is based on a 55-year com- 29 - -------------------------------------------------------------------------------- posite 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 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 Company 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 Company is 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. (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 obligations. 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, 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, 1997 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 1998 and subsequent years. As discussed more fully in note 11, 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 Federal level or in most of the states in which it operates in future years. Accordingly, the Company eliminated substantially all of its existing deferred tax 30 - -------------------------------------------------------------------------------- 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, 1997 and 1996, 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) 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 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 8. (j) Earnings (loss) per share of common stock The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" in 1997 and, as required by the Statement, earnings per share (EPS) data presented for prior periods have been restated to conform to the new standard. In accordance with the provisions of the Statement, basic 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 dur- 31 - -------------------------------------------------------------------------------- ing 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 (loss) and earnings (loss) 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 14. (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 and 1995 would not have had a material effect on earnings before extraordinary losses, net earnings (loss) or related per share amounts reported for those periods. (2) Acquisition of The Hughes Corporation and related matters On June 12, 1996, the Company acquired all of the outstanding equity interests in The Hughes 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 14, additional shares of common stock (or, in certain circumstances, Increasing Rate Cumulative Preferred stock) may 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 value of the assets acquired which consist primarily of a regional shopping center and a large-scale, master-planned community in Las Vegas, Nevada, and four large-scale, master-planned business parks and various other properties in Nevada and Southern California. The consolidated statement of operations 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 years ended December 31, 1996 and 1995, assuming the acquisition of Hughes occurred on January 1, 1995, are summarized as follows (in thousands, except per share data): 1996 1995 -------- -------- Revenues.................................................. $883,686 $956,094 Earnings before extraordinary losses...................... 20,990 29,504 Net earnings.............................................. 19,537 20,873 Earnings per share of common stock: Basic: Earnings before extraordinary losses................ .16 .26 Net earnings........................................ .14 .10 Diluted: Earnings before extraordinary losses................ .16 .26 Net earnings........................................ .14 .10 ======== ======== 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, 1995. 32 - -------------------------------------------------------------------------------- (3) Unconsolidated real estate ventures Investments in and advances to unconsolidated real estate ventures at December 31, 1997 and 1996 are summarized, based on the level of the Company's financial interest, as follows (in thousands): 1997 1996 -------- -------- Majority interest ventures................................. $259,320 $ -- Joint interest and control ventures........................ 3,412 6,235 Minority interest ventures................................. 75,960 93,946 -------- -------- Total................................................. $338,692 $100,181 ======== ======== 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 did not adjust the cost basis of their assets and liabilities. The assets of the ventures consist primarily of land to be developed and sold as part of community development projects in Columbia and Las Vegas, 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, 1997, are summarized as follows (in thousands): Assets: Operating properties, net......................................... $211,385 Properties in development......................................... 23,144 Properties held for sale.......................................... 46,289 Land held for development and sale................................ 233,406 Investment land................................................... 34,947 Other............................................................. 80,355 -------- Total........................................................... $629,526 ======== Liabilities and shareholders' deficit: Loans and advances from The Rouse Company......................... $298,705 Mortgages payable and other long-term debt........................ 280,595 Other liabilities................................................. 89,710 Shareholders' deficit............................................. (39,484) -------- Total........................................................... $629,526 ======== 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. 33 - -------------------------------------------------------------------------------- The condensed, combined balance sheets of these ventures and the Company's proportionate share of their assets, liabilities and equity at December 31, 1997 and 1996 and the condensed, combined statements of earnings of these ventures and the Company's proportionate share of their revenues and expenses for 1997, 1996 and 1995 are summarized as follows (in thousands):
Combined Proportionate Share ------------------ ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Total assets, primarily property.............................. $353,132 $296,232 $153,399 $119,702 ======== ======== ======== ======== Liabilities, primarily long-term debt......................... $247,949 $223,480 $109,852 $ 98,436 Venturers' equity............................................. 105,183 72,752 43,547 21,266 -------- -------- -------- -------- Total liabilities and venturers' equity...................... $353,132 $296,232 $153,399 $119,702 ======== ======== ======== ======== Combined Proportionate Share ---------------------------- ----------------------------- 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- -------- Revenues.................................. $123,802 $118,360 $128,979 $ 55,477 $ 56,105 $ 58,085 Operating and interest expenses........... 69,825 65,862 77,223 31,528 29,535 35,336 Depreciation and amortization............. 12,013 11,257 13,071 3,657 2,588 3,472 -------- -------- -------- -------- -------- -------- Net earnings............................. $ 41,964 $ 41,241 $ 38,685 $ 20,292 $ 23,982 $ 19,277 ======== ======== ======== ======== ======== ========
The ventures in which the Company holds minority interests are accounted for using the equity or cost methods, as appropriate. These ventures include partnerships and corporations which own retail centers, office buildings and various other properties. 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. The condensed, combined balance sheets of these ventures at December 31, 1997 and 1996 and their condensed, combined statements of earnings for 1997, 1996 and 1995 are summarized as follows (in thousands): 1997 1996 ---------- ---------- Total assets, primarily property................... $1,168,574 $1,340,699 ========== ========== Liabilities, primarily long-term debt.............. $ 530,482 $ 540,418 Venturers' equity.................................. 638,092 800,281 ---------- ---------- Total liabilities and venturers' equity........... $1,168,574 $1,340,699 ========== ========== [CAPTION] 1997 1996 1995 -------- -------- -------- Revenues.................................. $216,782 $201,769 $209,100 Operating and interest expenses........... 152,545 138,460 141,509 Depreciation and amortization............. 38,757 35,634 39,701 Gain (loss) on dispositions of assets..... (11,097) 1,110 -- -------- -------- -------- Net earnings............................. $ 14,383 $ 28,785 $ 27,890 ======== ======== ======== The Company's share of net earnings of these ventures was $6,936,000, $9,127,000, and $7,559,000 in 1997, 1996 and 1995, respectively. 34 - -------------------------------------------------------------------------------- (4) Property Operating properties and deferred costs of projects at December 31, 1997 and 1996 are summarized as follows (in thousands): 1997 1996 ---------- ---------- Buildings and improvements........................... $2,729,908 $2,822,164 Land................................................. 231,935 244,243 Deferred costs....................................... 111,455 113,904 Furniture and equipment.............................. 6,664 18,032 ---------- ---------- Total............................................... $3,079,962 $3,198,343 ========== ========== Depreciation expense for 1997, 1996 and 1995 was $73,816,000, $66,689,000, and $59,247,000, respectively. Amortization expense for 1997, 1996 and 1995 was $12,193,000, $13,301,000, and $13,815,000, respectively. Properties in development include construction and development in progress and preconstruction costs, net. Construction and development in progress includes land and land improvements of $41,951,000 and $41,032,000 at December 31, 1997 and 1996, respectively. Properties held for sale are generally those that, for various reasons, management has determined do not meet the Company's investment criteria. Properties held for sale at December 31, 1997 and 1996 are summarized as follows (in thousands): 1997 1996 -------- ------- Retail centers (three properties in 1997 and six properties in 1996)............................ $ 10,499 $ 70,775 Office and other properties......................... 9,553 2,305 -------- -------- Total.............................................. $ 20,052 $ 73,080 ======== ======== Revenues relating to properties held for sale were $17,642,000 in 1997, $29,600,000 in 1996 and $8,355,000 in 1995, and operating losses relating to these properties were $3,558,000 in 1997, $811,000 in 1996 and $1,174,000 in 1995. All of the properties held for sale at December 31, 1997 are expected to be sold in 1998. Investment land and land held for development and sale at December 31, 1996 is summarized as follows (in thousands): Land under development................................................ $ 87,301 Finished land......................................................... 59,913 Raw land.............................................................. 96,903 -------- Total................................................................ $244,117 ======== (5) Accounts and notes receivable Accounts and notes receivable at December 31, 1997 and 1996 are summarized as follows (in thousands): 1997 1996 -------- -------- Accounts receivable, primarily accrued rents and income under tenant leases................................ $ 49,424 $ 67,527 Notes receivable from sales of properties.................. 10,154 16,929 Notes receivable from sales of land........................ 76,033 36,066 -------- -------- 135,611 120,522 Less allowance for doubtful receivables.................... 21,311 28,153 -------- -------- Total..................................................... $114,300 $ 92,369 ======== ======== Accounts and notes receivable due after one year were $54,180,000 and $41,654,000 at December 31, 1997 and 1996, 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 Las Vegas. The Company 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 and deferred compensation plans The Company has a defined benefit pension plan (the "funded plan") covering substantially all employees and employees of certain affiliates. The Company's policy is to fund, at a minimum, current service costs and amortization of unfunded accrued liabilities subject to the limits of the Internal Revenue Code. In addition, the Company has separate, nonqualified unfunded retirement plans (the "unfunded plans") covering directors and participants whose defined benefits exceed the limits of the funded plan. Benefits under the pension plans are based on the participants' years of service and compensation. The net pension cost includes the following components (in thousands): 1997 1996 1995 ------- -------- ------- Service cost.................................... $ 3,373 $ 2,989 $ 2,382 Interest cost on projected benefit obligations.................................... 3,702 3,107 3,309 Actual return on funded plan assets............. (7,870) (4,997) (5,422) Other, net...................................... 6,678 4,022 3,262 ------- -------- ------- Net pension cost............................... $ 5,883 $ 5,121 $ 3,531 ======= ======== ======= The funded status of the pension plans at December 31, 1997 and 1996 is summarized as follows (in thousands):
1997 1996 ------------------ ------------------- Funded Unfunded Funded Unfunded Plan Plans Plan Plans -------- -------- -------- -------- Accumulated benefit obligations: Vested................................ $ 38,959 $ 8,112 $ 30,589 $ 2,610 Nonvested............................. 4,445 706 3,386 193 ------- ------ ------- ------ Total................................ $ 43,404 $ 8,818 $ 33,975 $ 2,803 ======== ======= ======== ======= Projected benefit obligations.......... $ 47,454 $ 9,986 $ 38,567 $ 4,322 Plan assets at fair value.............. (47,083) -- (38,990) -- -------- ------- -------- ------- Projected benefit obligations over (under) plan assets.............. 371 9,986 (423) 4,322 Unamortized prior service cost......... (4,259) (4,804) (1,888) (2,081) Unrecognized net loss.................. (10,959) (1,333) (8,513) (330) Unrecognized net obligation at January 1, 1987, net of amortization.. (531) (540) (598) (676) Additional minimum liability........... -- 5,508 -- 1,568 -------- ------- -------- ------- Accrued (prepaid) pension cost........ $(15,378) $ 8,817 $(11,422) $ 2,803 ======== ======= ======== =======
The aggregate accumulated benefit obligations for the plans for 1997 increased approximately $6,400,000 as a result of a plan amendment which changed the benefit formula effective January 1, 1997. The projected benefit obligations for the plans were determined using discount rates of 7.25% and 7.75% in 1997 and 1996, respectively. The rates of compensation increases assumed were 4.5% in 1997 and 1996. The expected long-term rates of return on plan assets of the funded plan were 8% in 1997 and 1996. The assets of the funded plan consist primarily of pooled separate accounts with an insurance company and marketable equity securities. 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 matches a percentage of the participants' contributions in common stock. Total deferred compensation liabilities were $11,183,000 and $6,584,000 at December 31, 1997 and 1996, respectively. 36 - -------------------------------------------------------------------------------- (7) Other postretirement benefits The Company has a retiree benefits plan that provides postretirement medical and life insurance benefits to full-time employees of the Company and 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 based on years of service to the cost of participants' medical insurance coverage, subject to a maximum annual contribution. The net postretirement benefit cost includes the following components (in thousands):
1997 1996 1995 ------ ------ ------ Service cost........................................ $ 578 $ 640 $ 607 Interest cost on accumulated benefit obligation..... 990 932 853 Amortization of transition obligation at January 1, 1993............................................... 333 333 484 Amortization of net gain............................ -- -- (26) ------ ------ ------ Net postretirement benefit cost.................... $1,901 $1,905 $1,918 ====== ====== ====== The status of the postretirement benefit plan at December 31, 1997 and 1996 is summarized as follows (in thousands): 1997 1996 ------- ------- Accumulated postretirement benefit obligation: Retirees................................................. $ 6,954 $ 7,303 Other fully eligible participants........................ 1,420 1,170 Other active participants................................ 6,294 4,729 ------- ------- 14,668 13,202 Unrecognized net gain..................................... 199 739 Unrecognized transition obligation........................ (4,998) (5,331) ------- ------- Accrued postretirement benefit cost...................... $ 9,869 $ 8,610 ======= =======
The weighted average discount rates used to determine the accumulated postretirement benefit obligation were 7.25% and 7.75% in 1997 and 1996, respectively. The transition obligation at January 1, 1993 is being amortized to postretirement benefit cost over 20 years. Because the Company's contributions are fixed, health care cost trend rates do not affect the accumulated postretirement benefit obligation. (8) 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, 1997 and 1996, nonrecourse loans include $416,335,000 and $475,754,000, 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. Debt at December 31, 1997 and 1996 is summarized as follows (in thousands): 1997 1996 ---------- ---------- Mortgages and bonds................................. $2,159,418 $2,279,971 Convertible subordinated debentures................. 130,000 130,000 Medium-term notes................................... 110,300 115,300 Credit line borrowings.............................. -- 64,000 Other loans......................................... 229,831 245,975 ---------- ---------- Total.............................................. $2,629,549 $2,835,246 ========== ========== 37 - -------------------------------------------------------------------------------- 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 2025 and, at December 31, 1997, bears interest at a weighted average effective rate of 8.25%, including lender participations. At December 31, 1997, approximately $481,997,000 of this debt provides for payments of additional interest based on operating results of the related properties in excess of stated levels and approximately $170,424,000 of this debt provides for payments to lenders of shares of the appreciation in value of the related properties, if any, upon sale or refinancing or at maturity. At December 31, 1997, approximately $940,394,000 of the mortgages and bonds were payable to one lender. 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, 1997, mature at various dates from 1998 to 2015, bear interest at a weighted average effective rate of 7.61% (including an average rate of 6.74% on $38,800,000 of variable rate notes) and have a weighted average maturity of 4.9 years. The Company has a line of credit from a group of commercial banks and other lenders that provides for aggregate unsecured borrowings of up to $250,000,000. The line of credit agreement expires in December 2000, subject to a one-year renewal option. 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 $208,019,000 and $209,705,000 at December 31, 1997 and 1996, respectively, and at December 31, 1997, bear interest at a weighted average effective rate of 8.34%. The agreements relating to the medium-term notes, the line of credit, the 8.5% unsecured notes and certain other loans impose limitations on the Company. The most restrictive of these limit the Company's ability to incur additional debt if it does not meet certain financial covenants relating to levels of debt, debt service coverage, net worth and various other matters. The agreements also impose restrictions on sale, lease and certain other transactions, subject to various exclusions and limitations. These restrictions have not limited the Company's normal business activities. The annual maturities of debt at December 31, 1997 are summarized as follows (in thousands): Nonrecourse Company and Loans Recourse Loans Total ----------- -------------- ---------- 1998................................. $ 46,842 $ 23,296 $ 70,138 1999................................. 113,341 78,162 191,503 2000................................. 142,120 45,138 187,258 2001................................. 162,660 40,190 202,850 2002................................. 144,496 154,811 299,307 Subsequent to 2002................... 1,475,997 202,496 1,678,493 ---------- -------- ---------- Total $2,085,456 $544,093 $2,629,549 ========== ======== ========== At December 31, 1997, the Company had interest rate cap agreements which effectively limit the average interest rate on $71,138,000 of mortgages to 8.9% through May 2002. The interest rate swap agreements outstanding at December 31, 1997 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, 1997 and 1996 or interest expense for 1997, 1996 and 1995. Total interest costs were $231,098,000 in 1997, $230,960,000 in 1996, and $219,838,000 in 1995 of which $23,608,000, $10,579,000 and $6,875,000 were capitalized, respectively. During 1997, 1996 and 1995, the Company incurred extraordinary losses, related to extinguishments of debt prior to scheduled maturity, of $32,834,000, $2,236,000 and $13,278,000, respectively, less related deferred income tax benefits of $11,492,000, $783,000 and $4,647,000, 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 38 - -------------------------------------------------------------------------------- issued in 1997, the medium-term notes and the Company-obligated mandatorily redeemable preferred securities issued in 1995 and the 8.5% unsecured notes issued in 1993. In May 1997, the American Institute of Certified Public Accountants issued 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 term of the related loans. The Statement is effective with respect to the Company in 1998. The Company has not previously recognized lenders' participations in the appreciation in value of mortgaged properties and, accordingly, it will recognize the cumulative effect of initially adopting the Statement in its statement of operations for the first quarter of 1998. The cumulative effect of initial adoption of the Statement will be to increase liabilities and reduce net earnings by approximately $4,500,000. Ongoing application of the Statement will result in changes in interest expense and liabilities to lenders reported in the financial statements; however, because of the unpredictability of the timing and magnitude of changes in property values, it is not possible to estimate the timing, amount or direction of these changes. 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, cash flows under interest rate exchange agreements, where applicable, 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, 1997 and 1996 are summarized as follows (in thousands): 1997 1996 --------------------- ---------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------- ---------- --------- ---------- Fixed rate debt........ $2,390,590 $2,528,215 $2,405,382 $2,466,854 Variable rate debt..... 238,959 238,959 429,864 429,864 ---------- ---------- ---------- ---------- $2,629,549 $2,767,174 $2,835,246 $2,896,718 ========== ========== ========== ========== 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. (9) Company-obligated mandatorily redeemable preferred securities The redeemable preferred securities consist of 5,500,000 Cumulative Quarterly Income Preferred 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 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 a 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. 39 - -------------------------------------------------------------------------------- (10) Operating results and assets by line of business Operating results before gain (loss) on dispositions of assets and other provisions, net, income taxes, extraordinary losses and cumulative effect of change in accounting principle are summarized by line of business as follows (in thousands): 1997 1996 1995 ---------- ---------- ---------- Operating properties: Revenues................................ $ 722,390 $ 690,569 $ 636,646 Operating expenses, exclusive of provision for bad debts, depreciation and amortization....................... 362,309 345,863 313,525 Interest expense........................ 204,230 205,750 197,249 Provision for bad debts................. 5,766 3,688 3,318 Depreciation and amortization........... 86,009 79,990 73,062 ---------- ---------- ---------- 64,076 55,278 49,492 ---------- ---------- ---------- Land sales: Revenues................................ 203,219 137,853 33,403 Operating costs and expenses............ 151,800 107,787 17,827 Interest expense........................ 4,287 1,658 5,071 ---------- ---------- ---------- 47,132 28,408 10,505 ---------- ---------- ---------- Development: Operating costs and expenses............ 4,747 4,964 7,288 Interest expense........................ -- 361 358 ---------- ---------- ---------- (4,747) (5,325) (7,646) ---------- ---------- ---------- Corporate: Interest income......................... 4,485 3,495 2,772 Interest expense (credit)............... (1,027) 12,612 10,285 Other expenses.......................... 13,384 9,752 8,920 ---------- ---------- ---------- (7,872) (18,869) (16,433) ---------- ---------- ---------- Operating income........................ $ 98,589 $ 59,492 $ 35,918 ========== ========== ========== The assets by line of business at December 31, 1997, 1996 and 1995 are as follows (in thousands): 1997 1996 1995 ---------- ---------- ---------- Operating properties.................... $2,895,417 $3,084,445 $2,656,527 Land sales.............................. 335,400 308,014 141,275 Development............................. 232,358 178,076 63,732 Corporate............................... 126,593 72,917 124,075 ---------- ---------- ---------- Total.................................. $3,589,768 $3,643,452 $2,985,609 ========== ========== ========== 40 - -------------------------------------------------------------------------------- (11) Income taxes Income tax expense (benefit) is reconciled to the amount computed by applying the Federal corporate tax rate as follows (in thousands): 1997 1996 1995 --------- --------- -------- Tax at statutory rate on earnings before income taxes, extraordinary losses and cumulative effect of change in accounting principle........................ $ 25,839 $ 15,262 $ 3,560 State income taxes, net of Federal income tax benefit................................. 3,147 1,023 759 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 $ 4,319 ========= ========= ======== As discussed in note 1, 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, 1997, 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 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 future years. The net deferred tax liability at December 31, 1996 is summarized as follows (in thousands): Total deferred tax liabilities................................. $355,182 Total deferred tax assets...................................... 220,388 -------- Net deferred tax liability................................... $134,794 ======== The tax effects of temporary differences and carryforwards included in the net deferred tax liability at December 31, 1996 relate to the following (in thousands): Property, primarily differences in depreciation and amortization, the tax basis of acquired assets and treatment of interest and certain other costs................ $329,413 Accounts and notes receivable, primarily differences in timing of recognition of rent revenues and doubtful receivables............................ 4,368 Accrued expenses, primarily differences in timing of recognition of interest, compensation and pension expenses..................................................... 4,296 Operating loss and tax credit carryforwards.................... (203,283) -------- Total........................................................ $134,794 ======== At December 31, 1997, the income tax bases of the Company's assets and liabilities were approximately $3,036,000 and $2,969,000, respectively. The net operating losses carried forward from December 31, 1997 for Federal income tax purposes aggregate approximately $281,000,000. 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 payments of taxes on built-in gains during the ten-year period due to the availability of its net operating loss carryforward to offset built-in gains which might be recognized, the potential for the Company to make nontaxable dispositions, if necessary (e.g., like-kind exchanges of properties) and the 41 - -------------------------------------------------------------------------------- intent and ability of the Company to defer asset dispositions to periods when related gains will not be subject to the built-in gains taxes. At December 31, 1997, the net operating loss carryforward is sufficient to offset built-in gains on assets the Company has identified for disposition and no net deferred tax liability for built-in gains taxes has been recognized. It may be necessary to recognize a liability for such taxes in the future, however, if management's plans and intentions with respect to asset dispositions, or the related tax laws, change. (12) Gain (loss) on dispositions of assets and other provisions, net Gain (loss) on dispositions of assets and other provisions, net, is summarized as follows (in thousands):
1997 1996 1995 -------- -------- -------- Net loss on operating properties..... $(23,705) $(25,903) $(13,210) Litigation judgment.................. -- 8,716 (12,321) Other, net........................... (1,058) 1,300 (218) -------- -------- -------- Total $(24,763) $(15,887) $(25,749) ======== ======== ========
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 net loss on operating properties in 1995 relates primarily to provisions for losses recognized on four retail centers the Company decided to sell ($15,589,000). These provisions were partially offset by a gain on disposition of a retail center ($2,379,000). The litigation judgment relates to a matter involving a former tenant at the Riverwalk Shopping Center. In the fourth quarter of 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 at that time. In 1996, a portion of the provision recorded in 1995 was reversed following settlement of the matter. (13) Preferred stock The Company has authorized 50,000,000 shares of Preferred stock of 1c 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 and 1995, the Company issued 10,598,721 and 75 shares, respectively, of common stock in exchange for 4,504,579 and 32 shares, respectively, of Series A Convertible Preferred stock. 42 - -------------------------------------------------------------------------------- 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 14. 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, 1997 and 1996. (14) Common stock At December 31, 1997, shares of authorized and unissued common stock are reserved as follows: (a) 18,978,858 shares for issuance under the Contingent Stock Agreement discussed below; (b) 7,940,643 shares for issuance under the Company's stock option and stock bonus plans; (c) 4,541,485 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 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 assets acquired in the purchase of Hughes 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 and, at December 31, 1997, a distribution of approximately 495,000 shares ($15,736,000) was payable to the beneficiaries. The Contingent Stock 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. The Company accounts for the beneficiaries' share of earnings from the assets subject to the Contingent Stock Agreement as an operating expense and will account for any distributions to the beneficiaries as of the termination dates as an additional cost to acquire the related assets (i.e., contingent consideration). At the time of acquisition of Hughes, the Company reserved 20,000,000 shares of common stock for possible issuance under the Contingent Stock 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 determinable 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:
1997 1996 1995 ------------------ ------------------ --------------------- Weighted- Weighted- Weighted- average average average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------------ ------------------ --------------------- Balance at beginning of year................... 2,765,779 $20.18 2,227,400 $19.89 2,228,102 $19.68 Options granted......... 2,155,901 30.45 654,000 21.09 200,500 18.63 Options exercised....... (239,942) 20.16 (87,371) 18.61 (179,452) 5.36 Options canceled........ (11,600) 28.76 (28,250) 22.82 (21,750) 24.41 --------- ------ --------- ------ --------- ------ Balance at end of year 4,670,138 $24.90 2,765,779 $20.18 2,227,400 $19.89 ========= ====== ========= ====== ========= ======
43 Information about stock options outstanding at December 31, 1997 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 1,814,837 6.5 $18.52 908,444 $17.96 $23.75 to $32.75 2,855,301 7.9 28.96 686,261 25.18 --------- --- ------ --------- ------ 4,670,138 7.4 $24.90 1,594,705 $21.07 ========= === ====== ========= ======
At December 31, 1996 and 1995, options to purchase 1,449,844 and 1,229,000 shares, respectively, were exercisable at per share weighted-average prices of $20.84 and $21.50, respectively. The per share weighted-average estimated fair values of options granted during 1997, 1996 and 1995 were $8.34, $5.44 and $5.24, respectively. These fair values were estimated on the dates of each grant using the Black-Scholes option-pricing model with the following assumptions: 1997 1996 1995 -------- -------- -------- Risk-free interest rate....................... 6.0% 6.0% 7.2% Dividend yield................................ 3.5 4.0 4.0 Volatility factor............................. 28.0 28.0 28.0 Expected life (years)......................... 6.9 7.0 7.0 ==== ==== ==== The option prices were equal to the market prices at the date of grant for all of the options granted in 1997, 1996 and 1995 and, accordingly, no compensation cost has been recognized for stock options in the financial statements. If the Company had applied a fair value-based method to recognize compensation cost for stock options, net earnings (loss) and earnings (loss) per share of common stock would have been adjusted as indicated below (in thousands): 1997 1996 1995 -------- -------- -------- Net earnings (loss): As reported.................................. $167,336 $16,433 $(2,781) Pro forma.................................... 164,445 15,397 (3,036) Earnings (loss) per share of common stock: Basic: As reported................................. 2.36 .10 (.37) Pro forma................................... 2.32 .08 (.38) Diluted: As reported................................. 2.29 .09 (.37) Pro forma................................... 2.25 .08 (.38) ======== ======= ======= 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 1997, 1996 and 1995 aggregated 49,000, 415,000 and 200,000 shares, respectively, with a weighted average market value per share of $31.25, $20.99 and $18.63, 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, 1997, 1996 and 1995 were $5,710,000, $6,565,000 and $3,829,000, respectively. The Company recognizes amortization of the fair 44 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 $6,807,000 in 1997, $4,923,000 in 1996 and $2,763,000 in 1995. (15) Earnings per share Information relating to the calculations of earnings (loss) per share of common stock for 1997, 1996 and 1995 is summarized as follows (in thousands):
1997 1996 1995 ------------------- ------------------- ------------------- Basic Diluted Basic Diluted Basic Diluted -------- -------- -------- -------- -------- -------- Earnings before extraordinary losses and cumulative effect of change in accounting principle............... $189,892 $189,892 $ 17,886 $ 17,886 $ 5,850 $ 5,850 Dividends on Preferred stock............. (10,313) -- (10,533) (10,533) (14,641) (14,641) Dividends on unvested common stock awards................................ (632) (552) (659) (659) (369) (369) Interest on convertible subordinated debentures............... -- 7,475 -- -- -- -- -------- -------- -------- -------- -------- -------- Adjusted earnings (loss) before extraordinary losses and cumulative effect of change in accounting principle used in EPS computation.................. $178,947 $196,815 $ 6,694 $ 6,694 $ (9,160) $ (9,160) ======== ======== ======== ======== ======== ======== Weighted-average shares outstanding...... 66,201 66,201 54,913 54,913 47,375 47,375 Dilutive securities: Convertible subordinated debentures... -- 4,542 -- -- -- -- Convertible Preferred stock........... -- 4,509 -- -- -- -- Options, warrants and unvested common stock awards................. -- 753 -- 398 -- -- -------- -------- -------- -------- -------- -------- Adjusted weighted-average shares used in EPS computation............. 66,201 76,005 54,913 55,311 47,375 47,375 ======== ======== ======== ======== ======== ========
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. (16) Leases The Company, as lessee, has entered into operating leases expiring at various dates through 2076. Rents under such leases aggregated $9,147,000 in 1997, $9,648,000 in 1996, and $9,421,000 in 1995, including contingent rents, based on the operating performance of the related properties, of $3,158,000, $3,844,000, and $3,644,000, 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, 1997 are summarized as follows (in thousands): 1998................................................................ $ 5,381 1999................................................................ 5,357 2000................................................................ 5,365 2001................................................................ 5,374 2002................................................................ 5,383 Subsequent to 2002.................................................. 227,963 -------- Total.............................................................. $254,823 ======== 45 PAGE> Obligations under capital leases relate to the Company's headquarters building and certain operating properties and equipment. The property and other asset accounts include costs of $58,550,000 and $67,866,000 and accumulated depreciation of $17,123,000 and $19,780,000 at December 31, 1997 and 1996, respectively, related to these leases. Minimum rent payments due under capital leases and their present value at December 31, 1997 are summarized as follows (in thousands): 1998............................................................... $ 7,828 1999............................................................... 7,649 2000............................................................... 7,621 2001............................................................... 7,350 2002............................................................... 7,237 Subsequent to 2002................................................. 180,948 --------- 218,633 Imputed interest at rates ranging from 8.29% to 13.0%.............. (164,042) --------- Obligations under capital leases................................. $ 54,591 ========= Space in the Company's operating properties is leased to approximately 5,800 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): 1997 1996 1995 -------- -------- -------- Minimum rents.............................. $387,488 $355,656 $317,377 Percentage rents........................... 14,999 14,830 15,362 Other rents................................ 213,005 216,589 209,809 -------- -------- -------- Total.................................... $615,492 $587,075 $542,548 ======== ======== ======== Minimum rents to be received from tenants under operating leases in effect at December 31, 1997 are summarized as follows (in thousands): 1998............................................................... $ 313,655 1999............................................................... 281,697 2000............................................................... 255,649 2001............................................................... 216,647 2002............................................................... 182,797 Subsequent to 2002................................................. 567,089 ---------- Total............................................................ $1,817,534 ========== Rents under finance leases aggregated $9,316,000 in 1997, $9,645,000 in 1996, and $8,780,000 in 1995. The net investment in finance leases at December 31, 1997 and 1996 is summarized as follows (in thousands): 1997 1996 -------- -------- Total minimum rent payments to be received over lease terms....................................... $166,706 $178,275 Estimated residual values of leased properties.......... 5,695 7,567 Unearned income......................................... (83,237) (90,966) -------- -------- Net investment in finance leases...................... $ 89,164 $ 94,876 ======== ======== Minimum rent payments to be received from tenants under finance leases in effect at December 31, 1997 are $9,332,000, $9,304,000, $9,365,000, $10,190,000 and $10,164,000 for 1998, 1999, 2000, 2001 and 2002, respectively. 46 - -------------------------------------------------------------------------------- (17) Other commitments and contingencies Commitments for the construction and development of properties in the ordinary course of business and other commitments not set forth elsewhere amount to approximately $111,000,000 at December 31, 1997. At December 31, 1997, subsidiaries of the Company have contingent liabilities of approximately $25,211,000 with respect to future minimum rents under long-term lease obligations of certain unconsolidated real estate ventures and approximately $12,742,000 with respect to bank letters of credit issued to secure their obligations under certain agreements. In addition, the Company had contingent liabilities with respect to debt of an unconsolidated real estate venture of approximately $19,695,000. In February 1997, the Company registered to sell up to an aggregate of $500,000,000 (based on the public offering price) of common stock, Preferred stock and debt securities. At December 31, 1997, up to an aggregate of $297,500,000 of stock and/or debt may be issued pursuant to this registration 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 (loss), it is not possible to predict whether the resolution of these matters is likely to have a material effect on the Company's consolidated net earnings (loss) and it is, therefore, possible that the resolution of these matters could have such an effect in any future quarter or year. 47 FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA Year ended December 31 (in thousands, except per share data) - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 --------- --------- --------- --------- ---------- Operating results data: Revenues from continuing operations........................ $ 930,094 $ 831,917 $ 672,821 $ 671,171 $ 646,805 Earnings (loss) from continuing operations................. 189,892 17,886 5,850 6,606 (1,291) Basic earnings (loss) from continuing operations applicable to common shareholders per share of common stock........................................... 2.70 .13 (.19) (.14) (.27) Diluted earnings (loss) from continuing operations applicable to common shareholders per share of common stock........................................... 2.59 .12 (.19) (.14) (.27) Balance sheet data: Total assets............................................... 3,589,768 3,643,452 2,985,609 2,915,860 2,874,982 Debt and capital leases.................................... 2,684,140 2,895,447 2,538,315 2,532,920 2,473,596 Shareholders' equity....................................... 465,515 177,149 42,584 95,026 113,151 Shareholders' equity per share of common stock (note 1)............................................ 6.45 2.65 .73 1.63 1.98 Other selected data: Earnings before depreciation and deferred taxes from operations (note 2).................................. 181,390 139,359 108,360 94,710 78,281 Net cash provided (used) by: Operating activities...................................... 185,516 168,126 107,001 113,775 101,149 Investing activities...................................... (322,479) (182,995) (64,995) (178,551) (154,446) Financing activities...................................... 180,297 (36,287) 3,518 40,618 47,068 Dividends per share of common stock........................ 1.00 .88 .80 .68 .62 Dividends per share of convertible Preferred stock......... 2.65 2.44 3.25 3.25 2.83 Market price per share of common stock at year end............................................... 32.75 31.75 20.13 19.25 17.75 Market price per share of convertible Preferred stock at year end......................................... 50.50 -- 51.63 48.50 53.75 Weighted average common shares outstanding (basic)....................................... 66,201 54,913 47,375 47,258 47,133 Weighted average common shares outstanding (diluted)..................................... 76,005 55,311 47,375 47,258 47,133
Note 1--For the year ended December 31, 1997, shareholders' equity per share of common stock assumes conversion of the Series B Convertible Preferred stock issued in 1997. For the years ended December 31, 1995, 1994 and 1993, 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. Note 2--Earnings before depreciation and deferred taxes (EBDT) is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles. Additionally, EBDT 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 "Earnings Before Depreciation and Deferred Taxes" section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 54 for a full discussion of EBDT. 48 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 31, 1997 30, 1997 30, 1997 31, 1997 -------- --------- -------- -------- Revenues....................................... $244,555 $231,769 $242,729 $211,041 Operating income............................... 29,103 27,781 25,417 16,288 Earnings (loss) before extraordinary losses.... 162,086 16,271 3,125 8,410 Net earnings (loss)............................ 151,852 16,164 (6,961) 6,281 ======== ======== ======== ======== Earnings (loss) per common share: Basic: Earnings (loss) before extraordinary losses... $ 2.40 $ .20 $ -- $ .10 Extraordinary losses.......................... (.14) -- (.15) (.03) Cumulative effect of accounting change........ (.02) -- -- -- -------- --------- -------- -------- Total..................................... $ 2.24 $ .20 $ (.15) $ .07 ======== ======== ======== ======== Diluted: Earnings (loss) before extraordinary losses... $ 2.12 $ .19 $ -- $ .10 Extraordinary losses.......................... (.11) -- (.15) (.03) Cumulative effect of accounting change........ (.02) -- -- -- -------- --------- -------- -------- Total..................................... $ 1.99 $ .19 $ (.15) $ .07 ======== ======== ======== ======== Quarter ended ------------------------------------------ December September June March 31, 1996 30, 1996 30, 1996 31, 1996 -------- -------- -------- -------- Revenues....................................... $252,044 $227,675 $179,050 $173,148 Operating income............................... 25,796 11,477 11,061 11,158 Earnings (loss) before extraordinary losses.... 7,291 (2,456) 6,308 6,743 Net earnings (loss)............................ 7,199 (2,502) 6,308 5,428 ======== ======== ======== ======== Earnings (loss) per common share: Basic: Earnings (loss) before extraordinary losses... $ .11 $ (.10) $ .05 $ .06 Extraordinary losses.......................... -- -- -- (.03) Cumulative effect of accounting change........ -- -- -- -- -------- -------- -------- -------- Total..................................... $ .11 $ (.10) $ .05 $ .03 ======== ======== ======== ======== Diluted: Earnings (loss) before extraordinary losses... $ .11 $ (.10) $ .05 $ .06 Extraordinary losses.......................... -- -- -- (.03) Cumulative effect of accounting change........ -- -- -- -- -------- -------- -------- -------- Total..................................... $ .11 $ (.10) $ .05 $ .03 ======== ======== ======== ========
Note--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. Net earnings (loss) for the third and fourth quarters of 1996 include provisions for losses on dispositions of retail centers of $9,604,000 ($.17 per share) and $6,196,000 ($.09 per share), respectively. The provision for loss in the third quarter of 1996 was partially offset by the reversal of a provision for a litigation matter of $5,665,000 ($.10 per share). - -------------------------------------------------------------------------------- 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, 1997 30, 1997 30, 1997 31, 1997 31, 1996 30, 1996 30, 1996 31, 1996 -------- -------- -------- -------- -------- --------- -------- -------- High bid or sales price...... $33.00 $31.50 $29.50 $32.00 $32.25 $26.00 $27.38 $22.13 Low bid or sales price....... 27.25 28.44 25.75 28.88 25.00 24.38 20.38 18.25 Dividends.................... .25 .25 .25 .25 .22 .22 .22 .22
- -------------------------------------------------------------------------------- Number of Holders of Common Stock The number of holders of record of the Company's common stock as of February 17, 1998 was 2,204. 49 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/or manages a diversified portfolio of retail centers, office and industrial buildings and mixed-use and other 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 will have greater flexibility in acquisition and merger opportunities and expanded access to capital markets and its corporate income taxes will be reduced in periods after the use or expiration of its net operating loss carryforward. The Company has continued to achieve strong financial results in recent years, despite the generally difficult environment for retail businesses. Earnings before depreciation and deferred taxes ("EBDT"), which is defined and discussed in detail below, increased 30% in 1997 and 29% in 1996, including increases of 11% in EBDT from operating properties in each year, and increases of 66% and 170%, respectively, in EBDT from land sales. These results have been made possible by several factors, including the acquisition of The Hughes Corporation and its affiliated partnership, Howard Hughes Properties, Limited Partnership (together "Hughes") in June 1996, expansions of and/or acquisitions of ownership interests in certain retail properties, higher occupancy levels in office properties, refinancings of project-related debt at lower interest rates and, in 1997, repayments of certain project-related and corporate debt. These results were also affected, to a lesser extent, by dispositions of properties which were incurring losses before depreciation and deferred taxes. Management believes the outlook is for continued solid growth in EBDT in 1998. The Company will continue to focus considerable effort and resources on leasing and remerchandising existing retail centers which, together with the openings of new projects and expansions, should result in a higher rate of EBDT growth from retail properties in 1998 than that experienced in 1997 (3.2%). The prospects for growth from office/mixed-use properties are excellent as the Company should benefit from a full year of operations of projects opened in 1997, continued strong occupancy levels and increasing rents in existing projects and the openings of several new projects. Earnings from land sales should also remain strong in 1998, assuming continued good market conditions in Columbia and Summerlin. The Company's primary objective is to own and operate premier properties-- shopping centers, office and industrial buildings and major mixed-use properties--in major markets across the United States. In order to achieve this objective, management is continually evaluating the future outlook for properties in the Company's portfolio. This includes considering opportunities to expand and/or renovate the properties and assessing whether particular properties are meeting or have the potential to meet the Company's investment criteria. The Company plans to continue making substantial investments to expand, renovate and/or add new department stores to its existing properties to meet its objective. 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 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 expected to have a material effect on the consolidated financial position or operating income of the Company. Operating results This discussion and analysis of operating results covers each of the Company's four business segments as management believes that a segment analysis provides the most effective means of understanding the Company's business. Note 10 to the consolidated financial statements and the information relating to revenues and expenses in the Five Year Summary of Earnings Before Depreciation and Deferred Taxes from Operations and Net Earnings (Loss) on page 58 should be referred to when reading this discussion. Operating Properties: The Company reports the results of its operating properties in two categories: retail centers ("retail" properties) and office, mixed-use and other properties ("office/mixed-use" properties). The Company's tenant leases provide the foundation for the performance of its retail 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 operat- 50 - -------------------------------------------------------------------------------- ing 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 and, in some instances, a share of the appreciation in value of the related properties, if any, upon sale or refinancing or at maturity. Operating results of retail properties are summarized as follows (in millions):
1997 1996 1995 ------ ------ ------ Revenues........................................ $503.6 $508.4 $491.7 Operating expenses, exclusive of depreciation and amortization.................. 257.8 260.0 246.7 Interest expense................................ 122.3 129.1 128.2 ------ ------ ------ 123.5 119.3 116.8 Depreciation and amortization................... 51.2 50.1 45.9 ------ ------ ------ Operating income................................ $ 72.3 $ 69.2 $ 70.9 ====== ====== ======
Revenues from retail properties decreased $4.8 million in 1997 and increased $16.7 million in 1996. The decrease in 1997 was attributable primarily to dispositions of interests in properties in 1997 and 1996 and lower tenant lease termination payments. These decreases were 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. The increase in 1996 was attributable primarily to acquisitions of interests in four properties (two in the third quarter of 1995, one in connection with the acquisition of Hughes in the second quarter of 1996 and one in the third quarter of 1996), increased lease termination payments due to tenant restructurings and downsizings and higher rents on re-leased space. These increases were partially offset by the effects of lower average occupancy (90.2% in 1996 compared to 90.9% in 1995) and dispositions of interests in properties in the second quarter of 1995 and first quarter of 1996. Total operating and interest expenses (exclusive of depreciation and amortization) for retail properties decreased $9 million in 1997 and increased $14.2 million in 1996. 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. The increase in 1996 was attributable primarily to the net effect of the changes in the retail property portfolio referred to above and reductions in interest expense due to debt repayments and refinancings completed in 1995 and early 1996. Depreciation and amortization expense for retail properties increased $1.1 million in 1997 and $4.2 million in 1996. These changes were due primarily to the net effect of changes in the Company's portfolio of retail properties referred to above. Operating results of office/mixed-use properties are summarized as follows (in millions):
1997 1996 1995 ------ ------ ------ Revenues........................................ $218.7 $182.2 $145.0 Operating expenses, exclusive of depreciation and amortization.................. 110.2 89.5 70.1 Interest expense................................ 81.9 76.7 69.1 ------ ------ ------ 26.6 16.0 5.8 Depreciation and amortization................... 34.8 29.9 27.2 ------ ------ ------ Operating loss.................................. $ (8.2) $(13.9) $(21.4) ====== ====== ======
51 Revenues from office/mixed-use properties increased $36.5 million in 1997 and $37.2 million in 1996. 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. The increase in 1996 was attributable primarily to operations of the properties acquired in the Hughes transaction and higher occupancy levels at hotel and other office properties. These increases were partially offset by decreases in tenant lease termination payments and the disposition of a property in the second quarter of 1995. Total operating and interest expenses (exclusive of depreciation and amortization) for office/mixed-use properties increased $25.9 million in 1997 and $27 million in 1996. 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. The increase in 1996 was attributable primarily to operations of the properties acquired in the Hughes transaction and expenses associated with higher occupancy levels. These increases were partially offset by the dispositions of a vacant industrial property in the second quarter of 1996 and an office property in the second quarter of 1995. Land Sales: Land sales operations relate primarily to the communities of Columbia, Maryland, and Summerlin, Nevada. Generally, revenues and operating income from land sales are affected by such factors as the availability to purchasers of construction and permanent mortgage financing at acceptable interest rates, consumer and business confidence, availability of saleable land for particular uses and management's decisions to sell, develop or retain land. Operating results from land sales are summarized as follows (in millions):
1997 1996 ------------------------ ------------------------ Columbia Columbia Hughes and Hughes and Division Other Total Division Other Total 1995 -------- -------- ------ -------- -------- ------ ----- Revenues.............. $163.2 $40.0 $203.2 $98.4 $39.5 $137.9 $33.4 Operating costs and expenses.............. 130.0 21.8 151.8 83.4 24.4 107.8 17.8 Interest expense...... .5 3.8 4.3 .7 1.0 1.7 5.1 ------ ----- ------ ----- ----- ------ ----- Operating income...... $ 32.7 $14.4 $ 47.1 $14.3 $14.1 $ 28.4 $10.5 ====== ===== ====== ===== ===== ====== =====
Revenues and operating income from Hughes Division land sales 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 Division land sales for 1996 include $93 million and $14.2 million, respectively, relating to Summerlin and $5.3 million and $.1 million, respectively, relating to other land holdings. The increases in revenues and operating income in 1997 relating to Summerlin are attributable primarily to a full year of operations of the Hughes Division. The increase in operating income 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. The increases in revenues and operating income in 1997 relating to other land holdings are attributable primarily to sales of various investment land parcels, particularly holdings in Nevada. Revenues from land sales in Columbia increased $.5 million in 1997 and $6.1 million in 1996. The increase in 1996 was due primarily to higher sales of land for commercial/other uses, partially offset by lower sales of residential land. Columbia and other land sales costs and expenses decreased $2.6 million in 1997 and increased $6.6 million in 1996. Expenses were higher in 1996 due to higher land sales revenues and settlement costs and broker commissions related to sales of land for commercial/other uses. 52 - -------------------------------------------------------------------------------- Development: Development expenses were $4.7 million in 1997, $5.3 million in 1996 and $7.6 million in 1995. 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 property renovation and expansion opportunities, which may not go forward to completion. Additions to the preconstruction reserve were $2.8 million in 1997, $2.7 million in 1996 and $3.8 million in 1995. New business costs relate primarily to the initial evaluation of potential acquisition and development opportunities. These costs were $1.9 million in 1997, $1.8 million in 1996 and $3.5 million in 1995. The lower levels of preconstruction reserve additions in 1997 and 1996 were due to the progress of several significant retail center projects. The lower levels of new business costs in 1997 and 1996 were attributable to the Company's focus on development projects and, in 1996, the Hughes acquisition, which reduced evaluation of other opportunities. Corporate: Corporate revenues consist primarily of interest income earned on temporary investments, including investments of unallocated proceeds from refinancings of certain properties. Corporate interest income was $4.5 million in 1997, $3.5 million in 1996 and $2.8 million in 1995. 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 and unallocated proceeds from refinancings of certain properties, net of interest capitalized on development projects or allocated to other segments, and corporate operating expenses consist primarily of general and administrative costs and distributions on the redeemable preferred securities, net of distributions allocated to other segments. Corporate interest costs were $13.9 million in 1997, $18 million in 1996 and $14 million in 1995. Interest of $14.9 million, $5.4 million and $3.7 million was capitalized in 1997, 1996 and 1995, respectively, on funds invested in development projects. The decrease in corporate interest costs in 1997 was attributable primarily to allocations of debt to other segments to fund certain capital expenditures. The increase in corporate interest costs in 1996 was attributable primarily to a higher level of credit line borrowings for development projects and for other corporate purposes. The higher level of interest capitalized in 1997 and 1996 reflects the higher level of corporate funds invested in projects under development. Gain (Loss) on Dispositions of Assets and Other Provisions, Net: 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 million) of a 1995 provision for loss on a tenant litigation judgment as a result of settlement of the matter. The loss on dispositions of assets and other provisions, net, for 1995 consisted primarily of a provision for loss of $12.3 million on a litigation judgment as a result of an appellate court award to a former tenant and provisions for losses totaling $15.6 million recognized on retail properties the Company decided to sell. These losses were partially offset by a gain of $2.4 million on disposition of a retail property. 53 - -------------------------------------------------------------------------------- Extraordinary Losses, Net of Related Income Tax Benefits: The extraordinary losses in 1997, 1996 and 1995 resulted from early extinguishments of debt and aggregated $32.8 million, $2.2 million and $13.3 million, respectively, less deferred income tax benefits of $11.5 million, $.8 million and $4.6 million, respectively. Net Earnings (Loss): The Company had net earnings of $167.3 million in 1997 and $16.4 million in 1996 and a net loss of $2.8 million in 1995. The Company's operating income (after depreciation and amortization) was $98.6 million in 1997, $59.5 million in 1996 and $35.9 million in 1995. The improvements in operating income were due primarily to the factors described above. Net earnings (loss) 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 losses, 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, 58.9% in 1996 and 42.5% in 1995. 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 higher in 1997 and 1996 because a portion of the distributions payable to the former Hughes owners (or their successors) under the Contingent Stock Agreement is not deductible for income tax purposes. Earnings Before Depreciation and Deferred Taxes: The Company uses a supplemental performance measure along with net earnings (loss) to report its operating results. This measure, referred to as Earnings Before Depreciation and Deferred Taxes ("EBDT"), is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles. Additionally, EBDT 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 EBDT provides relevant information about its operations and is necessary, along with net earnings (loss), for an understanding of its operating results. Depreciation and amortization are excluded from EBDT because management believes the Company's portfolio of operating properties is worth substantially more than its undepreciated historical cost. Deferred income taxes are excluded from EBDT 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 EBDT; 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 are nonrecurring and are 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 EBDT. EBDT is reconciled to net earnings (loss) in the Five Year Summary of Earnings Before Depreciation and Deferred Taxes from Operations and Net Earnings (Loss) on page 59. EBDT was $181.4 million in 1997, $139.4 million in 1996 and $108.4 million in 1995. The increases in EBDT in 1997 and 1996 were 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 EBDT by segment are described above. 54 - -------------------------------------------------------------------------------- Financial condition, liquidity and capital resources Management believes that the Company's financial position is sound and that its liquidity and capital resources are adequate for near term and longer term requirements. Shareholders' equity increased to $465.5 million at December 31, 1997 from $177.1 million at December 31, 1996. The increase was due primarily to the issuance of the Series B Convertible Preferred stock ($196.8 million) in the first quarter and net earnings for the year (including the reversal of net deferred income tax liabilities of $158.3 million), 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 $90.6 million and $47.4 million at December 31, 1997 and 1996, respectively. Net cash provided by operating activities was $185.5 million, $168.1 million and $107 million in 1997, 1996 and 1995, 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. In 1997 and 1996, over 80% of the Company's debt consisted of mortgages and bonds collateralized by operating properties. Scheduled principal payments on property debt were $46.3 million, $39 million and $36.4 million in 1997, 1996 and 1995, 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 --------- -------- ----- 1998. . . . . . $ 46.1 $ 24.0 $ 70.1 1999. . . . . . 43.1 148.4 191.5 2000. . . . . . 45.4 141.9 187.3 2001. . . . . . 46.7 156.2 202.9 2002. . . . . . 49.4 249.9 299.3 ------ ------ ------ $230.7 $720.4 $951.1 ====== ====== ======
The balloon payments due in 1998 are expected to be paid at the scheduled maturity dates of the related loans from proceeds of refinancings or from other available corporate funds. The Company has historically relied 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. In recent years, however, the Company has made greater use of the public capital markets to meet its capital resource needs. Since 1993, the Company has completed public corporate debt and equity offerings aggregating over $700 million, the proceeds of which have been used primarily to repay or refinance corporate and project-related debt and to provide funds for project development costs, acquisitions and other corporate purposes. These transactions were completed on terms which allowed the Company to reduce its overall cost of capital while restructuring its debt maturities and increasing its financial flexibility. The Company is continually evaluating sources of capital, and management believes there are satisfactory sources available for all requirements without necessitating property sales. Cash expenditures for properties in development and improvements to existing properties funded by debt were $283.4 million, $124 million and $61.6 million in 1997, 1996 and 1995, respectively. The increases in 1997 and 1996 were due to increased project development activity, primarily 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 55 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 1998. 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 the acquisition of Hughes were $36.3 million in 1996 and were financed primarily by credit line borrowings. Cash expenditures for acquisitions of interests in properties were $79.4 million in 1997, $18.1 million in 1996 and $28.2 million in 1995. These costs were financed primarily by nonrecourse debt. 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. The acquisitions in 1995 consisted of purchases of partners' interests in two retail centers, which were financed in whole or in part by the sellers, and purchase of a minority interest in a third retail center. The Company has available sources of capital in addition to those discussed above. The Company has a line of credit with a group of commercial banks and other lenders that provides for aggregate unsecured borrowings of up to $250 million, all of which was available at December 31, 1997. 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 effective registration statements, the Company may issue additional medium-term notes of up to $29.7 million and additional common stock, Preferred stock and/or debt securities of up $297.5 million. The agreements relating to the line of credit, the 8.5% unsecured notes, the medium-term notes and certain other loans impose limitations on the Company. The most restrictive of these limit the Company's ability to incur certain types of additional debt if it does not meet financial covenants relating to levels of debt, debt service coverage, net worth and various other matters. The agreements also impose restrictions 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. The 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. Systems that do not properly recognize such information could generate erroneous data or fail. In 1996, the Company adopted a plan to replace and substantially upgrade its management information and accounting systems and is addressing the year 2000 issue as part of this plan. The Company has implemented new financial accounting and payroll systems which are year 2000 compliant and is in the process of implementing new property management and human resource systems (both of which are expected to become operational on or before January 1, 1999) which will also be year 2000 compliant. In addition, as a result of the Company's normal upgrade and replacement processes, all network and desktop equipment in use meets the requirements for the year 2000. The Company is in the process of conducting a comprehensive review of the computer hardware and software in the mechanical systems (e.g., escalators, elevators, heating, ventilating and cooling systems, etc.) at its operating properties to identify year 2000 issues. The review is expected to be completed by June 30, 1998. While it is likely that the review will identify the need to modify and/or replace certain equipment and software, management does not believe that the year 2000 issue will pose significant problems in these systems or that resolution of the problems will have a material effect on the Company's financial condition or results of operations. However, if the necessary modifications and replacements are not completed on a timely basis, the year 2000 issue could affect the Company's operations. New accounting standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. It requires 56 all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed in equal prominence with other financial statements. It requires that an enterprise display an amount representing total comprehensive income for each period. It does not require per share amounts of comprehensive income to be disclosed. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for public companies to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. In May 1997, the American Institute of Certified Public Accountants issued 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 term of the related loans. The Statement is effective with respect to the Company in 1998. The Company has not previously recognized lenders' participations in the appreciation in value of mortgaged properties and, accordingly, it will recognize the cumulative effect of initially adopting the Statement in its statement of operations for the first quarter of 1998. The cumulative effect of initial adoption of the Statement will be to increase liabilities and reduce net earnings by approximately $4,500,000. This cumulative effect will be reported as a "cumulative effect of change in accounting principle" and therefore, will not impact income from continuing operations or EBDT. Ongoing application of the Statement will result in changes in interest expense and liabilities to lenders reported in the financial statements; however, because of the unpredictability of the timing and magnitude of changes in property values, it is not possible to estimate the timing, amount or direction of these changes. Impact of inflation The major portion of the Company's operating properties, its 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 relating to forward-looking statements This Annual Report to Shareholders of the Company includes forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those identified below which could cause actual results to differ materially from historical results or those anticipated. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following are among the factors that could cause actual results to differ materially from historical results or those anticipated: (1) risks associated with the Company's qualification and operation as a REIT; (2) real estate investment risks; (3) development risks; (4) liquidity of real estate investments; (5) dependence on rental income from real property; (6) effect of uninsured loss; (7) lack of geographical diversification; (8) possible environmental liabilities; (9) difficulties of compliance with Americans with Disabilities Act; (10) competition; (11) changes in the economic climate; and (12) 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, 1997. 57 The Rouse Company and Subsidiaries FIVE YEAR SUMMARY OF EARNINGS BEFORE DEPRECIATION AND DEFERRED TAXES FROM OPERATIONS AND NET EARNINGS (LOSS) - --------------------------------------------------------------------------------
Year ended December 31, -------------------------------------------------- 1997 1996 1995 1994 1993 --------- -------- -------- -------- -------- (in thousands) Revenues: Operating properties: Retail centers: Minimum and percentage rents................................ $271,743 $256,880 $245,192 $238,222 $227,140 Other rents and other revenues.............................. 231,912 251,535 246,488 248,253 236,458 Office, mixed-use and other: Minimum and percentage rents................................ 130,744 106,246 80,319 82,347 81,415 Other rents and other revenues.............................. 87,991 75,908 64,647 64,225 62,617 --------- -------- -------- -------- -------- 722,390 690,569 636,646 633,047 607,630 Land sales..................................................... 203,219 137,853 33,403 35,232 35,313 Corporate interest income...................................... 4,485 3,495 2,772 2,892 3,862 --------- -------- -------- -------- -------- 930,094 831,917 672,821 671,171 646,805 --------- -------- -------- -------- -------- Operating expenses, exclusive of depreciation and amortization: Operating properties: Retail centers............................................... 257,848 260,027 246,747 253,095 251,386 Office, mixed-use and other.................................. 110,227 89,524 70,096 74,368 76,148 --------- -------- -------- -------- -------- 368,075 349,551 316,843 327,463 327,534 Land sales..................................................... 151,800 107,787 17,827 19,877 19,387 Development.................................................... 4,747 4,964 7,288 6,494 3,853 Corporate...................................................... 13,384 9,752 8,920 8,309 6,184 --------- -------- -------- -------- -------- 538,006 472,054 350,878 362,143 356,958 --------- -------- -------- -------- -------- Interest expense: Operating properties: Retail centers............................................... 122,325 129,091 128,215 128,798 124,204 Office, mixed-use and other.................................. 81,905 76,659 69,034 67,892 65,601 --------- -------- -------- -------- -------- 204,230 205,750 197,249 196,690 189,805 Land sales..................................................... 4,287 1,658 5,071 5,028 4,093 Development.................................................... -- 361 358 495 495 Corporate...................................................... (1,027) 12,612 10,285 11,370 16,413 --------- -------- -------- -------- -------- 207,490 220,381 212,963 213,583 210,806 --------- -------- -------- -------- -------- Current income taxes applicable to operations (note 2)......... 3,208 123 620 735 760 --------- -------- -------- -------- -------- 748,704 692,558 564,461 576,461 568,524 --------- -------- -------- -------- -------- Earnings before depreciation and deferred taxes from operations (note 1).............................. $181,390 $139,359 $108,360 $ 94,710 $ 78,281 ========= ======== ======== ======== ========
58 - --------------------------------------------------------------------------------
Year ended December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (in thousands) Earnings before depreciation and deferred taxes from operations by segment: Operating properties: Retail centers.................................................. $123,101 $119,297 $116,135 $103,978 $ 87,248 Office, mixed-use and other..................................... 26,562 15,852 5,839 4,273 2,283 -------- -------- -------- -------- -------- 149,663 135,149 121,974 108,251 89,531 Land sales......................................................... 47,090 28,404 10,502 10,330 11,833 Development........................................................ (4,747) (5,325) (7,646) (6,989) (4,348) Corporate.......................................................... (10,616) (18,869) (16,470) (16,882) (18,735) -------- -------- -------- -------- -------- Earnings before depreciation and deferred taxes from operations................................... $181,390 $139,359 $108,360 $ 94,710 $ 78,281 ======== ======== ======== ======== ======== Reconciliation to net earnings (loss): Earnings before depreciation and deferred taxes from operations............................................ $181,390 $139,359 $108,360 $ 94,710 $ 78,281 Depreciation and amortization...................................... (86,009) (79,990) (73,062) (74,186) (70,200) Deferred income taxes applicable to operations..................... 124,203 (25,596) (3,699) (5,995) (3,603) Certain current income taxes (note 2).............................. (4,929) -- -- -- -- Gain (loss) on dispositions of assets and other provisions, net............................................ (24,763) (15,887) (25,749) (7,923) (5,769) Extraordinary losses, net.......................................... (21,342) (1,453) (8,631) (4,447) (8,051) Cumulative effect at October 1, 1997 of change in accounting for business process reengineering costs, net......... (1,214) -- -- -- -- -------- -------- -------- -------- -------- Net earnings (loss)................................................ $167,336 $ 16,433 $( 2,781) $ 2,159 $ (9,342) ======== ======== ======== ======== ========
Note 1--Earnings before depreciation and deferred taxes (EBDT) is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles. Additionally, EBDT 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 "Earnings Before Depreciation and Deferred Taxes" section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 54 for a full discussion of EBDT. Note 2--EBDT 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. 59 PROJECTS OF THE ROUSE COMPANY
- ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers in Operation - ------------------------------------------------------------------------------------------------------------------------------------ Date of Opening Retail Square Footage Consolidated Centers or Acquisition Department Stores/Anchor Tenants Total Center Mall Only - ------------------------------------------------------------------------------------------------------------------------------------ Augusta Mall, Augusta, GA (a) 8/78 Rich's; Macy's; JCPenney; Sears 921,000 332,000 - ------------------------------------------------------------------------------------------------------------------------------------ Bayside Marketplace, Miami, FL (b) 4/87 -- 223,000 223,000 - ------------------------------------------------------------------------------------------------------------------------------------ Beachwood Place, Cleveland, OH (a) 8/78 Saks Fifth Avenue; Dillard's; Nordstrom 912,000 348,000 - ------------------------------------------------------------------------------------------------------------------------------------ Cherry Hill Mall, Cherry Hill, NJ (a) 10/61 Strawbridge's, Macy's; JCPenney 1,292,000 543,000 - ------------------------------------------------------------------------------------------------------------------------------------ Echelon Mall, Voorhees, NJ (a) 9/70 Strawbridge's; JCPenney; Boscov's 1,008,000 439,000 - ------------------------------------------------------------------------------------------------------------------------------------ Exton Square, Exton, PA (a) 3/73 Strawbridge's 434,000 253,000 - ------------------------------------------------------------------------------------------------------------------------------------ Faneuil Hall Marketplace, Boston, MA (a) 8/76 -- 215,000 215,000 - ------------------------------------------------------------------------------------------------------------------------------------ The Fashion Show, Las Vegas, NV (b) 6/96 Neiman Marcus; Saks Fifth Avenue; Macy's; Dillard's; Robinsons-May 840,000 308,000 - ------------------------------------------------------------------------------------------------------------------------------------ Franklin Park, Toledo, OH (b) 7/71 Hudson's; JCPenney; Jacobson's; Lion 1,056,000 313,000 - ------------------------------------------------------------------------------------------------------------------------------------ The Gallery at Market East, Philadelphia, PA(a)(c) 8/77 Strawbridge's; JCPenney; KMart 1,179,000 363,000 - ------------------------------------------------------------------------------------------------------------------------------------ Governor's Square, Tallahassee, FL (b) 8/79 Burdines; Dillard's; Sears; JCPenney 1,044,000 340,000 - ------------------------------------------------------------------------------------------------------------------------------------ The Grand Avenue, Milwaukee, WI (a) 8/82 The Boston Store 842,000 242,000 - ------------------------------------------------------------------------------------------------------------------------------------ Harborplace, Baltimore, MD (a) 7/80 -- 136,000 136,000 - ------------------------------------------------------------------------------------------------------------------------------------ Highland Mall, Austin, TX (b) 8/71 Dillard's; Foley's; JCPenney 1,085,000 367,000 - ------------------------------------------------------------------------------------------------------------------------------------ Hulen Mall, Ft. Worth, TX (a) 8/77 Foley's; Montgomery Ward; Dillard's 938,000 327,000 - ------------------------------------------------------------------------------------------------------------------------------------ The Jacksonville Landing, Jacksonville, FL (a) 6/87 -- 128,000 128,000 - ------------------------------------------------------------------------------------------------------------------------------------ Mall St. Matthews, Louisville, KY (a) 3/62 Dillard's; JCPenney; Bacon 981,000 353,000 - ------------------------------------------------------------------------------------------------------------------------------------ Midtown Square, Charlotte, NC (a) 10/59 Burlington Coat Factory 235,000 190,000 - ------------------------------------------------------------------------------------------------------------------------------------ Mondawmin Mall (a)/Metro Plaza (b), Baltimore, MD 1/78; 12/82 -- 496,000 496,000 - ------------------------------------------------------------------------------------------------------------------------------------ Moorestown Mall, Moorestown, NJ (a) 12/97 Strawbridge's; Boscov's; Sears 857,000 258,000 - ------------------------------------------------------------------------------------------------------------------------------------ North Star, San Antonio, TX (b) 9/60 Dillard's; Foley's; Saks Fifth Avenue; Macy's; Mervyn's 1,276,000 487,000 - ------------------------------------------------------------------------------------------------------------------------------------ Oakwood Center, Gretna, LA (a) 10/82 Sears; Dillard's; Mervyn's; Maison Blanche 960,000 362,000 - ------------------------------------------------------------------------------------------------------------------------------------ Owings Mills, Baltimore, MD (a) 7/86 Macy's; Hecht's; JCPenney 884,000 325,000 - ------------------------------------------------------------------------------------------------------------------------------------ Paramus Park, Paramus, NJ (a) 3/74 Macy's; Sears 746,000 279,000 - ------------------------------------------------------------------------------------------------------------------------------------ Perimeter Mall, Atlanta, GA (b) 8/71 Rich's; JCPenney; Macy's 1,139,000 444,000 - ------------------------------------------------------------------------------------------------------------------------------------ Plymouth Meeting, Plymouth Meeting, PA (a) 2/66 Strawbridge's; Boscov's; IKEA 790,000 390,000 - ------------------------------------------------------------------------------------------------------------------------------------ Riverwalk, New Orleans, LA (a) 8/86 -- 179,000 179,000 - ------------------------------------------------------------------------------------------------------------------------------------ St. Louis Union Station, St. Louis, MO (a) 8/85 -- 172,000 172,000 - ------------------------------------------------------------------------------------------------------------------------------------ Santa Monica Place, Santa Monica, CA (a) 10/80 Macy's; Robinsons-May 570,000 287,000 - ------------------------------------------------------------------------------------------------------------------------------------ South Street Seaport, New York, NY (a) 7/83 -- 259,000 259,000 - ------------------------------------------------------------------------------------------------------------------------------------ Tampa Bay Center, Tampa, FL (b) 8/76 Burdines; Sears; Montgomery Ward 895,000 325,000 - ------------------------------------------------------------------------------------------------------------------------------------ White Marsh, Baltimore, MD (b) 8/81 Macy's; JCPenney; Hecht's; Sears; IKEA 1,028,000 359,000 - ------------------------------------------------------------------------------------------------------------------------------------ Willowbrook, Wayne, NJ (b) 9/69 Lord & Taylor; Macy's; Stern's; Sears 1,530,000 502,000 - ------------------------------------------------------------------------------------------------------------------------------------ Woodbridge Center, Woodbridge, NJ (a) 3/71 Lord & Taylor; Sears; Stern's; Fortunoff; JCPenney 1,546,000 560,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Consolidated Centers in Operation* 26,796,000 11,104,000 - ------------------------------------------------------------------------------------------------------------------------------------
62
- ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers in Operation - ------------------------------------------------------------------------------------------------------------------------------------ Date of Opening Retail Square Footage Nonconsolidated/Managed Centers or Acquisition Department Stores/Anchor Tenants Total Center Mall Only - ------------------------------------------------------------------------------------------------------------------------------------ Burlington Center, Burlington Township, NJ (d) 8/82 Strawbridge's; Sears; JCPenney 666,000 242,000 - ------------------------------------------------------------------------------------------------------------------------------------ Collin Creek, Plano, TX (d) 9/95 Dillard's; Foley's; JCPenney; Sears; Mervyn's 1,123,000 333,000 - ------------------------------------------------------------------------------------------------------------------------------------ The Mall in Columbia, Columbia, MD (e) 8/71 Hecht's; JCPenney; Sears 953,000 421,000 - ------------------------------------------------------------------------------------------------------------------------------------ Northwest Arkansas Mall, Fayetteville, AR (d) 8/80 Dillard's; JCPenney; Sears 790,000 309,000 - ------------------------------------------------------------------------------------------------------------------------------------ Randhurst, Mt. Prospect, IL (d) 7/81 Carson, Pirie, Scott; JCPenney; Montgomery Ward; Kohl's 1,304,000 581,000 - ------------------------------------------------------------------------------------------------------------------------------------ Ridgedale Center, Minnetonka, MN (d) 1/89 Dayton's; JCPenney; Sears 1,027,000 334,000 - ------------------------------------------------------------------------------------------------------------------------------------ Sherway Gardens, Toronto, ONT (c) 12/78 Eaton's; The Bay 972,000 524,000 - ------------------------------------------------------------------------------------------------------------------------------------ Southland Center, Taylor, MI (d) 1/89 Hudson's; Mervyn's; JCPenney 903,000 320,000 - ------------------------------------------------------------------------------------------------------------------------------------ Staten Island Mall, Staten Island, NY (d) 11/80 Sears; Macy's; JCPenney 1,229,000 622,000 - ------------------------------------------------------------------------------------------------------------------------------------ Town & Country Center, Miami, FL (c) 2/88 Sears; Marshalls 645,000 467,000 - ------------------------------------------------------------------------------------------------------------------------------------ Community Centers in Columbia, MD (10) (e) -- -- 962,000 962,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Nonconsolidated/Managed Centers in Operation 10,574,000 5,115,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Retail Centers in Operation* 37,370,000 16,219,000 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers Held for Sale - ------------------------------------------------------------------------------------------------------------------------------------ Date of Opening Retail Square Footage Consolidated Centers or Acquisition Department Stores/Anchor Tenants Total Center Mall Only - ------------------------------------------------------------------------------------------------------------------------------------ Eastfield Mall, Springfield, MA (a) 4/68 Sears; Filene's; JCPenney 660,000 217,000 - ------------------------------------------------------------------------------------------------------------------------------------ Greengate Mall, Greensburg, PA (a) 8/65 Lazarus; Montgomery Ward 645,000 233,000 - ------------------------------------------------------------------------------------------------------------------------------------ Salem Mall, Dayton, OH (a) 10/66 Lazarus; Sears 838,000 312,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Consolidated Retail Centers Held for Sale 2,143,000 762,000 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Nonconsolidated/Managed Centers - ------------------------------------------------------------------------------------------------------------------------------------ College Square, Cedar Falls, IA (d) 8/80 Von Maur; Younkers; Wal-Mart 560,000 313,000 - ------------------------------------------------------------------------------------------------------------------------------------ Marshall Town Center, Marshalltown, IA (d) 8/80 JCPenney; Younkers; Menard's; Stage 343,000 164,000 - ------------------------------------------------------------------------------------------------------------------------------------ Muscatine Mall, Muscatine, IA (d) 8/80 JCPenney 339,000 178,000 - ------------------------------------------------------------------------------------------------------------------------------------ North Grand, Ames, IA (d) 8/80 JCPenney; Sears; Younkers 350,000 157,000 - ------------------------------------------------------------------------------------------------------------------------------------ Westland Mall, West Burlington, IA (d) 8/80 JCPenney; Younkers; Stage 335,000 175,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Nonconsolidated/Managed Retail Centers Held for Sale 1,927,000 987,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Retail Centers Held for Sale 4,070,000 1,749,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total Retail Centers* 41,440,000 17,968,000 - ------------------------------------------------------------------------------------------------------------------------------------ * Not including 691,000 square feet of retail space in five mixed-use properties listed on the following page. - ------------------------------------------------------------------------------------------------------------------------------------
63
- ------------------------------------------------------------------------------------------------------------------- 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 One Arizona Center Office Tower 330,000 Two Arizona Center Office Tower 449,000 - ------------------------------------------------------------------------------------------------------------------- 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 (a) Seattle, WA Retail Pavillion 118,000 Office Tower 342,000 - ------------------------------------------------------------------------------------------------------------------- Consolidated Office and Other Properties - ------------------------------------------------------------------------------------------------------------------- Hughes Center (11 buildings) (a) Las Vegas, NV 836,000 Hughes Airport Center (29 buildings) (a) Las Vegas, NV 1,468,000 Hughes Cheyenne Center (3 buildings) (a) Las Vegas, NV 377,000 Summerlin Commercial (11 buildings) (a) Summerlin, NV 610,000 Lucky's Center (3 buildings) (a) Los Angeles, CA 142,000 Owings Mills Town Center (4 buildings) (b) Baltimore County, MD 731,000 Other Office Projects (4 buildings) (a) Various 268,000 Total Consolidated Office, Mixed-Use and Other Properties** 6,981,000 - ------------------------------------------------------------------------------------------------------------------- Nonconsolidated/Managed Office, Mixed-Use and Other Properties - ------------------------------------------------------------------------------------------------------------------- Columbia Office and Industrial (12 buildings) (e) Columbia, MD 1,033,000 - ------------------------------------------------------------------------------------------------------------------- Properties owned by Rouse-Teachers Baltimore-Washington Corridor Properties, Inc. (d) (29 buildings) 4,601,000 - ------------------------------------------------------------------------------------------------------------------- 300 East Lombard (d) Baltimore, MD 233,000 - ------------------------------------------------------------------------------------------------------------------- Total Nonconsolidated/Managed Office, Mixed-Use And Other Properties 5,867,000 - ------------------------------------------------------------------------------------------------------------------- Total Office, Mixed-Use and Other Properties in Operation** 12,848,000 - ------------------------------------------------------------------------------------------------------------------- Office, Mixed-Use and Other Properties Held for Sale - ------------------------------------------------------------------------------------------------------------------- Consolidated Properties - ------------------------------------------------------------------------------------------------------------------- Cross Keys Inn (a) Baltimore, MD 148 rooms - ------------------------------------------------------------------------------------------------------------------- Nonconsolidated/Managed Properties - ------------------------------------------------------------------------------------------------------------------- Columbia Inn (e) Columbia, MD 289 rooms - ------------------------------------------------------------------------------------------------------------------- Gateway Commerce Center (e) Columbia, MD 1,290,000 - ------------------------------------------------------------------------------------------------------------------- Total Office, Mixed-Use and Other Properties** 14,138,000 - ------------------------------------------------------------------------------------------------------------------- ** Including 691,000 square feet of retail space in the mixed-use properties. - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Retail Centers Under Construction Retail Square Footage or in Development Department Stores/Anchor Tenants Total Center Mall Only - ---------------------------------------------------------------------------------------------------------------------------------- Oviedo Marketplace, Orlando, FL Dillard's; Gayfers; Regal Cinema 850,000 300,000 - ---------------------------------------------------------------------------------------------------------------------------------- Summerlin Town Center, Summerlin, NV Robinsons-May; Lord & Taylor; Dillard's 1,050,000 350,000 - ---------------------------------------------------------------------------------------------------------------------------------- Perimeter Mall Expansion, Atlanta, GA Nordstrom 225,000 100,000 - ---------------------------------------------------------------------------------------------------------------------------------- Augusta Mall Expansion, Augusta, GA JB White 160,000 5,000 - ---------------------------------------------------------------------------------------------------------------------------------- Oakwood Center Expansion, Gretna, LA JCPenney 125,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- White Marsh Expansion, Baltimore, MD Lord & Taylor 120,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- Owings Mills Expansion, Baltimore, MD Lord & Taylor; Sears; General Cinema 330,000 25,000 - ---------------------------------------------------------------------------------------------------------------------------------- Plymouth Meeting Expansion, Plymouth Meeting, PA General Cinema 48,000 48,000 - ---------------------------------------------------------------------------------------------------------------------------------- Moorestown Mall Expansion, Moorestown, NJ Strawbridge's; Lord & Taylor 320,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- Northwest Arkansas Mall Expansion, Fayetteville, AR Sears 40,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- Echelon Mall Expansion, Voorhees, NJ Sears 142,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- Paramus Park Expansion, Paramus, NJ Old Navy 95,000 95,000 - ---------------------------------------------------------------------------------------------------------------------------------- Mall St. Matthews Expansion, Louisville, KY Lord & Taylor 128,000 8,000 - ---------------------------------------------------------------------------------------------------------------------------------- The Mall in Columbia Expansion, Columbia, MD Nordstrom; Lord & Taylor 355,000 75,000 - ---------------------------------------------------------------------------------------------------------------------------------- Exton Square Expansion, Exton, PA Sears; Boscov's; JCPenney 569,000 120,000 - ---------------------------------------------------------------------------------------------------------------------------------- The Fashion Show Expansion, Las Vegas, NV Neiman Marcus; Saks Fifth Avenue; Macy's; 885,000 300,000 Robinsons-May; Lord & Taylor - ---------------------------------------------------------------------------------------------------------------------------------- Hulen Mall Expansion, Fort Worth, TX Lord & Taylor; Nordstrom 360,000 80,000 - ---------------------------------------------------------------------------------------------------------------------------------- Harborplace Renovation, Baltimore, MD Planet Hollywood -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Faneuil Hall Marketplace Renovation, Boston, MA - -- -- - ---------------------------------------------------------------------------------------------------------------------------------- The Village Center at The Trails, Summerlin, NV - 169,000 169,000 - ---------------------------------------------------------------------------------------------------------------------------------- Fairwood Village Center, Fairwood, MD - 80,000 80,000 - ---------------------------------------------------------------------------------------------------------------------------------- Lake Mead at Buffalo, Summerlin, NV - 69,000 69,000 - ---------------------------------------------------------------------------------------------------------------------------------- Total Retail Centers Under Construction or in Development 6,120,000 1,824,000 - ---------------------------------------------------------------------------------------------------------------------------------- Office, Mixed-Use and Other Properties Under Construction or in Development Type of Space Square Feet - ---------------------------------------------------------------------------------------------------------------------------------- Pioneer Place Expansion, Portland, OR Saks Fifth Avenue 150,000 - ---------------------------------------------------------------------------------------------------------------------------------- Arizona Center Expansion, Phoenix, AZ AMC Theatre 90,000 Doubletree Hotel 400 rooms - ---------------------------------------------------------------------------------------------------------------------------------- The Village at Merrick Park, Coral Gables, FL Neiman Marcus, Nordstrom 385,000 Mall Only Retail 430,000 Office 80,000 - ---------------------------------------------------------------------------------------------------------------------------------- Hughes Center (2 buildings), Las Vegas, NV Office 166,000 - ---------------------------------------------------------------------------------------------------------------------------------- Hughes Airport Center (2 buildings), Las Vegas, NV Industrial 109,000 - ---------------------------------------------------------------------------------------------------------------------------------- Summerlin Commercial (2 buildings), Summerlin, NV Office 161,000 - ---------------------------------------------------------------------------------------------------------------------------------- Total Office, Mixed-Use and Other Properties Under Construction or in Development 1,571,000 - ----------------------------------------------------------------------------------------------------------------------------------
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. EX-21 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21. Subsidiaries of the Registrant. The Registrant had no parent at December 31, 1997. As of December 31, 1997, 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 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 1) 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 2) 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 3) Pennsylvania PT Funding, Inc. Maryland Rouse-Brandywood, Inc. Maryland Rouse-Camden Warehouse, Inc. Maryland Rouse Capital (Note 4) 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 5) Alabama Rouse Company of Alaska, Inc., The Maryland Rouse Company of Arkansas, Inc., The Maryland Rouse Company of California, Inc., The (Note 6) Maryland Rouse Company of Colorado, Inc., The (Note 7) Maryland Rouse Company of Connecticut, Inc., The (Note 8) Connecticut Rouse Company of Florida, Inc., The (Note 9) Florida Rouse Company of Georgia, Inc., The (Note 10) Georgia Rouse Company of Idaho, Inc., The Maryland Rouse Company of Illinois, Inc., The Maryland Rouse Company of Iowa, Inc., The (Note 11) Maryland Rouse Company of Louisiana, The (Note 12) Maryland Rouse Company of Maine, Inc., The Maryland Rouse Company of Massachusetts, Inc., The (Note 13) Maryland Rouse Company of Michigan, Inc., The (Note 14) Maryland Rouse Company of Minnesota, Inc., The (Note 15) Maryland Rouse Company of Mississippi, Inc., The Maryland Rouse Company of Montana, Inc., The Maryland Rouse Company of Nevada, Inc., The (Note 16) Nevada Rouse Company of New Hampshire, Inc., The Maryland Rouse Company of New Jersey, Inc., The (Note 17) New Jersey Rouse Company of New Mexico, Inc., The Maryland Rouse Company of New York, Inc., The (Note 18) New York Rouse Company of North Carolina, Inc., The (Note 19) Maryland Rouse Company of North Dakota, Inc., The Maryland Rouse Company of Ohio, Inc., The (Note 20) Ohio Rouse Company of Oklahoma, Inc., The Maryland Rouse Company of Oregon, Inc., The (Note 21) Maryland Rouse Company of Pennsylvania, Inc., The (Note 22) 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 23) 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 24) Maryland 2 Rouse Company of Washington, Inc., The (Note 25) 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 Credit Corporation Maryland Rouse Development Company of California, Inc., The Maryland Rouse Event Marketing, Inc. 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 26) Maryland Rouse-Inglewood, Inc. Maryland Rouse Investing Company (Note 27) Maryland Rouse Management, Inc. Maryland Rouse Management Services Corporation Maryland Rouse Management Services Corporation of Arkansas, Maryland Inc. Rouse Management Services Corporation of Louisiana, Maryland Inc. 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 28) 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 3 Rouse-Wates, Incorporated (Note 29) Delaware RREF Holding, Inc. (Note 30) Texas Salem Mall, Incorporated Maryland Santa Monica Place, Inc. Maryland Saratoga Equipment Corporation, The Maryland 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 31) Delaware TRC Holding Company of Washington, D.C. (Note 32) 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. Gallery Maintenance, Inc. owns all of the outstanding capital stock of Rouse Gallery Management, Inc., a Maryland corporation. 2. 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. Regency-Huntington, Inc. 3. Plymouth Meeting Mall, Inc. owns all of the outstanding common stock of 1150 Plymouth Associates, Inc., a Maryland corporation. 4. 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. 5. The Rouse Company of Alabama, Inc. owns all of the outstanding capital stock of Rouse-Liberty Park, Inc., a Maryland Corporation. 6. 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-Irvine, Inc. Rouse-Oakland, Inc. Rouse-Palm Springs II, Inc. Rouse-Sacramento, Inc. 7. The Rouse Company of Colorado, Inc. owns all of the outstanding capital stock of Rouse Management Services Corporation of Colorado, Inc., a Maryland corporation. 8. 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. 5 9. 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-Jacksonville, Inc., a Maryland corporation Rouse Kendall Management Corporation, a Maryland corporation Rouse-Marina, Inc., 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 Retail Management - Bayside, Inc., a Maryland corporation Rouse-Sunrise, Inc., a Maryland corporation Rouse-Tampa, Inc., a Florida corporation 10. 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 11. 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 12. The Rouse Company of Louisiana owns all of the outstanding capital stock of each of the following Maryland corporations: Riverwalk Operating Company, Inc. Rouse-New Orleans, Inc. 13. The Rouse Company of Massachusetts, Inc. owns all of the outstanding capital stock of each of the following Maryland corporations: Eastfield Mall, Incorporated Faneuil Hall Marketplace, Inc. Marketplace Grasshopper, Inc. 14. 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. 15. 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 16. The Rouse Company of Nevada, Inc. owns all of the outstanding capital stock of each of the following entities: 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 Fashion Show, Inc., a Nevada corporation Rouse-Moorestown, Inc., a Maryland corporation Rouse-Moorestown II, Inc., a Maryland corporation Rouse-Wincopin, Inc., a Maryland corporation Two Willow Corporation, a Delaware corporation The Village of Cross Keys, Incorporated, a Maryland corporation White Marsh Mall, Inc., a Maryland corporation Woodbridge Center, Inc., a Maryland corporation 7 One Willow Corporation owns all of the outstanding capital stock of Three Willow Corporation, a Delaware corporation. The Village of Cross Keys, Incorporated owns all of the outstanding capital stock of The Roost, Inc., a Maryland corporation. 17. 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. Rouse-Echelon, Inc. The Willowbrook Corporation Willmall Holdings, Inc. Willowbrook Management Corporation 18. 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 19. 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. 8 20. 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 21. 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 22. The Rouse Company of Pennsylvania, Inc. owns all of the outstanding capital stock of Whiteland I, Inc. and Whiteland II, Inc., both Maryland corporations. 23. 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 AM Management Corporation, a Texas 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 DK Management Corporation, a Texas corporation DK Shopping Center, Inc., a Texas corporation Greengate Mall, Inc., a Pennsylvania corporation NC Shopping Center, Inc., a Maryland corporation North Star Mall, Inc., a Texas corporation Northwest Mall, Inc., a Maryland corporation NS Management Corporation, a Texas corporation NW 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 9 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-Southlake, Inc., a Maryland corporation Rouse-Tarrant, Inc., a Maryland corporation SDK Mall, Inc., a Texas corporation South DeKalb Mall, Inc., a Texas corporation 24. 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. 25. The Rouse Company of Washington, Inc. owns all of the outstanding capital stock of Rouse-Seattle, Inc., a Maryland corporation. 26. 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. 27. 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 Wilmington Homes, Inc. owns all of the outstanding capital stock of Echo Farms Golf and Country Club, Inc., a North Carolina corporation. 28. 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. 10 The Rouse Company of Missouri, Inc. owns all of the outstanding capital stock of The Rouse Company of St. Louis, Inc., a Maryland Corporation. 29. 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 each of the following corporations: Norbury Construction Company, a Delaware corporation Owen Brown B Development Company, a Maryland corporation 30. RREF Holding, Inc. owns all of the outstanding capital stock of RII Holding, Inc., a Texas corporation. 31. 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. 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. 32. TRC Holding Company of Washington, D.C. owns all of the outstanding capital stock of Rouse-National Press Management, Inc., a Maryland corporation 11 EX-24 7 POWER OF ATTORNEY Exhibit 24. Power of Attorney. The Power of Attorney, dated February 25, 1997, is incorporated by reference from the Exhibits to the Company's Form 10-K Annual Report for the fiscal year ended December 31, 1996. EX-27.1 8 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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, 1997 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1997 DEC-31-1997 87,100 3,586 135,611 21,311 0 225,631 3,332,363 515,229 3,589,768 370,469 2,629,549 0 41 669 464,805 3,589,768 930,094 930,094 0 618,249 24,763 5,766 207,490 73,826 (116,066) 189,892 0 (21,342) (1,214) 167,336 2.36 2.29 Current assets include cash, unrestricted marketable securities, current portion of accounts and notes receivable and prepaid expenses and deposits. Current liabilities include the current portion of long-term debt and accounts payable, accrued expenses and other liabilities.
EX-27.2 9 FINANCIAL DATA SCHEDULE
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, 1996 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1996 DEC-31-1996 43,766 3,596 120,522 (28,153) 0 132,816 3,868,233 (552,201) 3,643,452 423,087 2,835,246 0 0 667 176,482 3,643,452 831,917 831,917 0 548,356 15,887 3,688 220,381 43,605 25,719 17,886 0 1,453 0 16,433 .10 .09 Current assets include cash, unrestricted marketable securities, current portion of accounts and notes receivable and prepaid expenses and deposits. Current liabilities include the current portion of long-term debt and accounts payable, accrued expenses and other liabilities.
EX-27.3 10 FINANCIAL DATA SCHEDULE
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, 1995 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1995 DEC-31-1995 94,922 2,910 61,219 (24,468) 0 143,114 3,219,277 (519,319) 2,985,609 302,638 2,479,529 0 45 479 42,060 2,985,609 672,821 672,821 0 420,622 25,749 3,318 212,963 10,619 4,319 5,850 0 8,631 0 (2,781) (.37) (.37) Current assets include cash, unrestricted marketable securities, current portion of accounts and notes receivable and prepaid expenses and deposits. Current liabilities include the current portion of long-term debt and accounts payable, accrued expenses and other liabilities.
EX-99.1 11 FORM 11K Exhibit 99. Additional Exhibits. 99.1 Form 11-K Annual Report of The Rouse Company Savings Plan for the year ended December 31, 1997. 99.2 Factors affecting future operating results. 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, 1997 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, 1997 will be filed on or before June 30, 1998. 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 27, 1998 By /s/ William D. Boden --------------- -------------------- William D. Boden, Administrator and Date: March 27, 1998 By /s/ George L. Yungmann --------------- ---------------------- George L. Yungmann, Trustee EX-99.2 12 FACTORS - OPERATING RESULTS 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 and affiliates (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. 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 1999 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 make this change generally effective with respect to stock acquired on or after the date of the first Congressional committee action on the proposal. 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. It is anticipated that, because of the proposed effective date provisions, these new rules, if enacted, would not apply to the Company. However, there can be no assurance that the proposals will be enacted in the form proposed or with the proposed effective date and, therefore, any legislation, if enacted, may adversely effect the status of the Company as a REIT. 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 the availability of financing for residential development. Similarly, most of the office/industrial buildings that are owned or managed 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 managing these buildings and 2 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 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. 3 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. RISKS RELATING TO NEVADA PROPERTIES. General. Affiliates of the Company own approximately 3.5 million rentable square feet of office and industrial space primarily around Las Vegas, Nevada, a 75% partnership interest in Fashion Show Mall, an 840,000 square foot regional shopping center located on the "Strip" in Las Vegas, two Tournament Players Club golf clubs in Summerlin and approximately 16,500 acres (11,500 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. 4 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-----