<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
---------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-1743
------
The Rouse Company
-----------------
(Exact name of registrant as specified in its charter)
Maryland 52-0735512
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10275 Little Patuxent Parkway
Columbia, Maryland 21044-3456
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 992-6000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
Indicate the number of shares outstanding of the issuer's common stock as of May
5, 1999:
Common Stock, $0.01 par value 72,268,031
- ----------------------------- --------------
Title of Class Number of Shares
<PAGE>
Part I. Financial Information
Item 1. Financial Statements:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Three Months Ended March 31, 1999 and 1998
(Unaudited, in thousands, except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months
ended March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Retail centers $126,769 $108,515
Office, mixed-use and other 52,123 39,475
Land sales operations 1,054 22,612
Corporate interest income 96 970
-------- --------
Total revenues 180,042 171,572
-------- --------
Operating expenses, exclusive of
provision for bad debts,
depreciation and amortization:
Retail centers 58,202 54,609
Office, mixed-use and other 20,058 16,936
Land sales operations 656 19,772
Development 1,466 3,566
Corporate 3,490 4,098
-------- --------
83,872 98,981
-------- --------
Interest expense:
Retail centers 39,375 29,974
Office, mixed-use and other 21,878 17,555
Land sales operations 208 267
Corporate 2,163 2,358
-------- --------
63,624 50,154
-------- --------
Provision for bad debts 1,312 854
Depreciation and amortization 27,673 18,790
-------- --------
Total expenses 176,481 168,779
-------- --------
Earnings before equity in earnings of
unconsolidated real estate ventures
and income taxes 3,561 2,793
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income, continued
Three Months Ended March 31, 1999 and 1998
(Unaudited, in thousands, except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Equity in earnings of
unconsolidated real estate
ventures (note 3) $23,333 $29,910
Current income taxes (note 2) (74) (106)
------- -------
Earnings before gain on
dispositions of assets and other
provisions, net, extraordinary
items and cumulative effect of
change in accounting principle 26,820 32,597
Gain on dispositions of assets and
other provisions, net (note 6) 1,106 1,935
------- -------
Earnings before extraordinary
items and cumulative effect
of change in accounting
principle 27,926 34,532
Extraordinary loss, net (note 7) --- (916)
Cumulative effect at
January 1, 1998 of change
in accounting for participating
mortgages --- (4,629)
------- -------
Net earnings 27,926 28,987
Other items of comprehensive income -
minimum pension liability adjustment (334) ---
------- -------
Comprehensive income $27,592 $28,987
======= =======
Net earnings applicable
to common shareholders $24,888 $25,949
======= =======
</TABLE>
3
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income, continued
Three Months Ended March 31, 1999 and 1998
(Unaudited, in thousands, except per share amounts, note 1)
<TABLE>
<CAPTION>
Three months
ended March 31,
-----------------
1999 1998
------- --------
<S> <C> <C>
EARNINGS PER SHARE OF
COMMON STOCK (Note 8):
Basic:
Earnings before extraordinary items and
cumulative effect of change in
accounting principle $ .34 $ .47
Extraordinary loss --- (.01)
Cumulative effect of change in accounting
principle --- (.07)
----- -----
Total $ .34 $ .39
===== =====
Diluted:
Earnings before extraordinary items and
cumulative effect of change in
accounting principle $ .34 $ .46
Extraordinary loss --- (.01)
Cumulative effect of change in accounting
principle --- (.06)
----- -----
Total $ .34 $ .39
===== =====
DIVIDENDS PER SHARE:
Common stock $ .30 $ .28
===== =====
Preferred stock $ .75 $ .75
===== =====
</TABLE>
4
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998
(in thousands, except share data, note 1)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
----------- ------------
<S> <C> <C>
Assets:
Property:
Operating properties:
Property and deferred costs
of projects $3,873,646 $4,718,727
Less accumulated depreciation
and amortization 540,345 578,311
---------- ----------
3,333,301 4,140,416
Properties in development 173,840 167,360
Properties held for sale (note 10) 169,266 165,894
---------- ----------
Total property 3,676,407 4,473,670
Investments in and advances to unconsolidated
real estate ventures (note 3) 473,574 322,066
Prepaid expenses, receivables under finance
leases and other assets 247,970 241,040
Accounts and notes receivable 91,566 75,917
Investments in marketable securities 4,076 4,256
Cash and cash equivalents 29,470 37,694
---------- ----------
Total $4,523,063 $5,154,643
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets, continued
March 31, 1999 and December 31, 1998
(in thousands, except share data, note 1)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
----------- ------------
<S> <C> <C>
Liabilities:
Debt (notes 4 and 11):
Property debt not carrying a Parent
Company guarantee of repayment $2,458,334 $2,865,119
Parent Company debt and debt carrying a
Parent Company guarantee of repayment:
Property debt 161,983 161,986
Convertible subordinated debentures 128,515 128,515
Other debt 691,315 903,200
---------- ----------
981,813 1,193,701
---------- ----------
Total debt 3,440,147 4,058,820
---------- ----------
Accounts payable, accrued expenses
and other liabilities 308,294 329,932
Company-obligated mandatorily redeemable
preferred securities of a trust holding
solely Parent Company subordinated debt
securities 136,965 136,965
Shareholders' equity:
Series B Convertible Preferred stock
with a liquidation preference of
$202,500 41 41
Common stock of 1 cent par value per share;
250,000,000 shares authorized; 72,268,031
shares issued in 1999 and 72,225,223
shares issued in 1998 723 723
Additional paid-in capital 842,325 836,508
Accumulated deficit (203,272) (206,520)
Accumulated other comprehensive income (2,160) (1,826)
---------- ----------
Net shareholders' equity 637,657 628,926
---------- ----------
Total $4,523,063 $5,154,643
========== ==========
</TABLE>
6
<PAGE>
Part I. Financial Information, continued:
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998
(Unaudited, in thousands, note 1)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Rents and other revenues received $163,737 $147,821
Proceeds from land sales and on notes
receivable from land sales 5,731 33,344
Interest received 2,186 3,752
Operating expenditures (90,813) (85,172)
Interest paid (59,957) (47,927)
Dividends, interest and other operating
distributions received from unconsolidated
majority financial interest ventures -- 27,024
-------- --------
Net cash provided by operating activities 20,884 78,842
-------- --------
Cash flows from investing activities:
Expenditures for properties in development
and improvements to existing properties
funded by debt (61,290) (71,382)
Expenditures for improvements to existing
properties funded by cash provided by
operating activities:
Tenant leasing and remerchandising (1,870) (1,501)
Building and equipment (4,693) (3,641)
Payments received on loans and advances to
unconsolidated majority financial interest
ventures 9,820 5,484
Proceeds from sales of operating properties 361 15,452
Other (3,313) (1,724)
-------- --------
Net cash used in investing activities (60,985) (57,312)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of property debt 28,938 21,858
Repayments of property debt:
Scheduled principal payments (11,659) (10,739)
Other payments --- (1,499)
Proceeds from issuance of other debt 59,237 22,000
Repayments of other debt (440) (10,135)
Purchases of common stock (13,152) (16,258)
Proceeds from exercise of stock options 32 121
Dividends paid (24,683) (21,798)
Other (6,396) ---
-------- --------
Net cash provided (used) by financing activities 31,877 (16,450)
-------- --------
Net increase (decrease) in cash and cash equivalents (8,224) 5,080
Cash and cash equivalents at beginning of period 37,694 87,100
-------- --------
Cash and cash equivalents at end of period $ 29,470 $ 92,180
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
Three Months Ended March 31, 1999 and 1998
(Unaudited, in thousands, note 1)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 27,926 $28,987
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 27,673 18,790
Undistributed earnings of majority
financial interest ventures (27,136) (7,968)
Gain on dispositions of assets and
other provisions, net (1,106) (1,935)
Extraordinary loss, net --- 916
Cumulative effect of change in accounting
principle --- 4,629
Additions to preconstruction reserve 600 2,000
Participation expense pursuant to
Contingent Stock Agreement 6,660 27,794
Provision for bad debts 1,312 854
Decrease (increase) in operating assets
and liabilities, net (15,045) 4,775
-------- -------
Net cash provided by operating activities $ 20,884 $78,842
======== =======
Schedule of Noncash Investing and Financing
Activities:
Common stock issued pursuant to Contingent
Stock Agreement $ 16,207 $15,754
Property and other assets contributed to an
unconsolidated real estate venture 701,105 ---
Mortgage debt, other debt and other liabilities
related to property and other assets
contributed to an unconsolidated real
estate venture 432,525 ---
Other debt repaid in the formation of an
unconsolidated real estate venture 271,233 ---
Capital lease obligations incurred 1,278 ---
======== =======
</TABLE>
8
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
March 31, 1999
(1) Principles of statement presentation
------------------------------------
The unaudited consolidated financial statements include all adjustments
which are necessary, in the opinion of management, to fairly reflect the
Company's financial position and results of operations. All such
adjustments are of a normal recurring nature. The statements have been
prepared using the accounting policies described in the 1998 Annual Report
to Shareholders.
Certain amounts have been reclassified to conform to the current
presentation.
(2) Tax status
----------
The Company determined that it would elect to be taxed as a real estate
investment trust (REIT) effective January 1, 1998 pursuant to the Internal
Revenue Code, as amended. Management believes the Company met the
qualifications for REIT status as of March 31, 1999, intends for it to
continue to meet the qualifications in the future and accordingly, does not
expect that the Company will be liable for significant income taxes at the
Federal level or in most states in which it operates in 1999 and future
years.
In connection with its election to be taxed as a REIT, the Company will also
elect to be subject to the "built-in gain" rules. Under these rules, taxes
may be payable at the time and to the extent that the net unrealized gains
on the Company's assets at the date of conversion to REIT status are
recognized in taxable dispositions of such assets in the ten-year period
following conversion. Such net unrealized gains were approximately
$2,100,000,000 at January 1, 1998. At March 31, 1999, the regular tax net
operating loss carryforward is sufficient to offset built-in gains on
assets the Company has identified for disposition and no net deferred tax
liability for built-in gains taxes has been recognized. It may however, be
necessary to recognize a liability for such taxes in the future if
management's plans and intentions with respect to asset dispositions, or
the related tax laws, change.
9
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(3) Unconsolidated real estate ventures
-----------------------------------
Investments in and advances to unconsolidated real estate ventures at
March 31, 1999 and December 31, 1998 are summarized, based on the
level of the Company's financial interest, as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Majority interest ventures $294,469 $270,085
Joint interest and control ventures 1,223 1,140
Minority interest ventures 177,882 50,841
-------- --------
Total $473,574 $322,066
======== ========
</TABLE>
The equity in earnings of unconsolidated real estate ventures for the three
months ended March 31, 1999 and 1998 is summarized, based on the level of
the Company's financial interest, as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Majority interest ventures $20,777 $27,511
Minority interest ventures 2,556 2,399
------- -------
Total $23,333 $29,910
======= =======
</TABLE>
10
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(3) Unconsolidated real estate ventures, continued
----------------------------------------------
The condensed, combined balance sheets of the ventures in which the
Company holds majority financial interests at March 31, 1999 and
December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -------------
<S> <C> <C>
Assets:
Operating properties, net $ 257,513 $ 244,470
Properties in development 79,699 66,442
Land held for development and sale 224,604 236,999
Investment land 40,082 41,156
Advances to the Company 122,556 112,310
Other 164,939 192,437
--------- ---------
Total $ 889,393 $ 893,814
========= =========
Liabilities and shareholders' deficit:
Loans and advances from the Company $ 507,807 $ 488,363
Mortgages payable and other long-term debt 341,947 332,945
Other liabilities 71,370 116,244
Redeemable Series A Preferred stock 50,000 50,000
Shareholders' deficit (81,731) (93,738)
--------- ---------
Total $ 889,393 $ 893,814
========= =========
</TABLE>
11
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolcdated Financial Statements (Unaudited), continued
(3) Unconsolidated real estate ventures, continued
----------------------------------------------
The condensed combined statements of operations of the ventures in which the
Company holds a majority financial interest for the three months ended
March 31, 1999 and 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenues, including interest on
loans to the Company of
$2,577 in 1999 and $3,610 in 1998 $ 88,025 $100,769
Operating expenses (48,576) (54,244)
Interest expense, including interest
on loans from the Company of
$14,577 in 1999 and $16,213 in 1998 (17,366) (18,666)
Depreciation and amortization (2,896) (2,525)
Equity in earnings of unconsolidated
real estate ventures 186 1,281
Gain on dispositions of assets, net 707 7,519
Income taxes, including deferred tax
provision of $6,372 in 1999 and
$10,373 in 1998 (8,073) (10,418)
Extraordinary loss, net --- (925)
-------- --------
Net earnings $ 12,007 $ 22,791
======== ========
</TABLE>
12
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(3) Unconsolidated real estate ventures, continued
----------------------------------------------
The Company's share of the earnings before extraordinary items of the
ventures at March 31, 1999 and 1998 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Share of net earnings based on
ownership interest $ 11,887 $ 22,563
Share of extraordinary loss --- 916
Participation by others in the Company's
share of earnings (6,359) (7,481)
Interest on loans and advances, net 12,000 12,603
Eliminations and other, net 3,249 (1,090)
---------- --------
$ 20,777 $ 27,511
========== ========
(4) Debt
----
Debt at March 31, 1999 and December 31, 1998 is summarized as follows (in
thousands):
March 31, 1999 December 31, 1998
-------------------- ---------------------
Due in Due in
Total one year Total one year
---------- -------- -------- ---------
Mortgages and bonds $2,500,546 $177,245 $2,948,324 $159,171
Convertible subordi-
nated debentures 128,515 --- 128,515 ---
Medium-term notes 97,500 11,000 97,500 6,000
Credit line borrowings 390,000 32,000 602,000 304,000
Other loans 323,586 27,152 282,481 27,294
---------- -------- ---------- --------
Total $3,440,147 $247,397 $4,058,820 $496,465
========== ======== ========== ========
</TABLE>
The amounts due in one year reflect the terms of existing loan agreements
except where refinancing commitments from outside lenders have been obtained.
In these instances, maturities are determined based on the terms of the
refinancing commitments.
13
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(5) Segment Information
-------------------
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This Statement establishes standards for reporting financial information
about operating segments in interim and annual financial reports and
provides for a "management approach" to identifying the reportable segments
in place of the industry segment approach used previously.
The Company has five reportable segments: retail centers, office, mixed-use
and other properties, land sales operations, development and corporate.
Segment operating results are measured and assessed based on a performance
measure referred to as Funds from Operations (FFO). The National
Association of Real Estate Investment Trusts defines FFO as net earnings
(computed in accordance with generally accepted accounting principles),
excluding cumulative effects of changes in accounting principles,
extraordinary or unusual items and gains or losses from debt restructurings
and sales of properties, plus depreciation and amortization, and after
adjustments for minority interests and to record unconsolidated
partnerships and joint ventures on the same basis. The Company also
excludes deferred income taxes from its computation of FFO. The method
used by the Company to compute FFO may differ from methods used by other
REITs. FFO is not a measure of operating results or cash flows from
operating activities as measured by generally accepted accounting
principles, and is not necessarily indicative of cash available to fund
cash needs and should not be considered an alternative to cash flows as a
measure of liquidity.
The accounting policies of the segments are the same as those of the Company,
except that real estate ventures in which the Company holds substantially
all (at least 98%) of the financial interest but does not own a majority
voting interest are accounted for on a consolidated basis, rather than
using the equity method, and the Company's share of FFO of unconsolidated
real estate ventures in which it holds a minority interest is included in
revenues.
14
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(5) Segment Information, continued
------------------------------
Operating results for the segments are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Office, Mixed- Land
Retail Use and Other Sales
Centers Properties Operations Development Corporate Total
--------- -------------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Three months ended
March 31, 1999
- --------------
Revenues $146,018 $62,842 $60,581 $ --- $ 271 $269,712
Operating expenses,
exclusive of
depreciation and
amortization 67,906 26,808 40,717 1,473 5,181 142,085
Interest expense 42,962 23,885 926 --- (1,360) 66,413
-------- ------- ------- ----------- -------- --------
FFO $ 35,150 $12,149 $18,938 $ (1,473) $ (3,550) $ 61,214
======== ======= ======= =========== ======== ========
Three months ended
March 31, 1998
- --------------
Revenues $124,668 $55,569 $90,564 $ --- $ 1,307 $272,108
Operating expenses,
exclusive of
depreciation and
amortization 62,417 26,979 64,833 3,566 4,120 161,915
Interest expense 33,064 20,620 1,133 --- (2,170) 52,647
-------- ------- ------- ----------- -------- --------
FFO $ 29,187 $ 7,970 $24,598 $ (3,566) $ (643) $ 57,546
======== ======= ======= =========== ======== ========
</TABLE>
15
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(5) Segment Information, continued
------------------------------
Reconciliations of the total revenues and expenses reported above to the
related amounts in the consolidated financial statements and of FFO
reported above to earnings before extraordinary items and cumulative effect
of change in accounting principle in the financial statements are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Total reported above $ 269,712 $ 272,108
Revenues of majority financial interest
ventures excluding interest on advances
to the Company (85,448) (97,159)
Revenues representing the Company's share of
FFO of minority financial interest ventures (4,101) (3,224)
Other (121) (153)
--------- ---------
Total in financial statements $ 180,042 $ 171,572
========= =========
Operating expenses, exclusive of depreciation
and amortization:
Total reported above $ 142,085 $ 161,915
Operating expenses of majority financial
interest ventures (48,576) (54,244)
Current income taxes applicable to operation (74) (106)
Provision for bad debts (1,312) (854)
Participation by others in the Company's
share of earnings of majority financial
interest ventures (6,359) (7,481)
Other (1,892) (249)
--------- ---------
Total in financial statements $ 83,872 $ 98,981
========= =========
Interest expense:
Total reported above $ 66,413 $ 52,647
Interest expense of majority financial
interest ventures excluding interest on
borrowings from the Company (2,789) (2,453)
Other -- (40)
--------- ---------
Total in financial statements $ 63,624 $ 50,154
========= =========
Operating results:
FFO reported above $ 61,214 $ 57,546
Depreciation and amortization (27,673) (18,790)
Gain on dispositions of assets and other
provisions, net 1,106 1,935
Depreciation and amortization, gain on
disposition of assets and deferred income
taxes of unconsolidated real estate
ventures, net (6,721) (6,159)
--------- ---------
Earnings before extraordinary items and
cumulative effect of change in
accounting principle $ 27,926 $ 34,532
========= =========
</TABLE>
16
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(6) Gain on dispositions of assets and other provisions, net
--------------------------------------------------------
The gain for the three months ended March 31, 1999 represents recoveries of
certain costs relating to a property sale and of costs incurred in
connection with the Company's determination to elect to be taxed as a REIT.
The gain for the three months ended March 31, 1998 relates primarily to a
reduced provision for loss on a retail center which the Company sold in
April 1998, and partial recovery of a loss previously recognized on a
litigation matter. These items were partially offset by losses on the sales
of a hotel and an office building.
(7) Extraordinary loss, net
-----------------------
The extraordinary loss for the three months ended March 31, 1998 related to
the Company's share of a loss (net of related income taxes) incurred by an
unconsolidated majority interest venture on extinguishment of debt prior
to its scheduled maturity. The debt was related to a hotel property which
the venture sold, and a portion of the proceeds of the sale were used to
repay the debt.
17
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(8) Earnings per share
------------------
Information relating to the calculation of earnings per share (EPS)
of common stock for the three months ended March 31, 1999 and 1998
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings before extra-
ordinary items and
cumulative effect of
change in accounting
principle $27,926 $27,926 $34,532 $34,532
Dividends on Preferred
stock (3,038) (3,038) (3,038) (3,038)
Dividends on unvested
common stock awards (123) (606) (134) (69)
Interest on convertible
subordinated debentures -- -- -- 1,842
------- ------- ------- -------
Adjusted earnings before
extraordinary items
and cumulative effect
of change in accounting
principle used in EPS
computation $24,765 $24,282 $31,360 $33,267
======= ======= ======= =======
Weighted-average shares
outstanding 71,865 71,865 66,662 66,662
Dilutive securities:
Convertible subordinated
debentures -- -- -- 4,538
Options, warrants, and
unvested common stock
awards -- 478 -- 1,196
------- ------- ------- -------
Adjusted weighted-average
shares used in EPS
computation 71,865 72,343 66,662 72,396
======= ======= ======= =======
</TABLE>
Effects of potentially dilutive securities are presented only in periods in
which they are dilutive.
18
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(9) Contingencies
-------------
The Company and certain of its subsidiaries are defendants in various
litigation matters arising in the ordinary course of business, some of
which involve claims for damages that are substantial in amount. Some of
these litigation matters are covered by insurance. In the opinion of
management, adequate provision has been made for losses with respect to
all litigation matters, where appropriate, and the ultimate resolution of
all such litigation matters is not likely to have a material effect on the
consolidated financial position of the Company. Due to the Company's
fluctuating net earnings (loss), it is not possible to predict whether the
resolution of these matters is likely to have a material effect on the
Company's consolidated net earnings (loss), and it is, therefore, possible
that resolution of these matters could have such an effect in any future
quarter or year.
(10) Property acquisitions, dispositions and related matters
-------------------------------------------------------
In 1998, the Company completed several property acquisitions, including
the purchase of interests in seven retail centers from TrizecHahn Centers
Inc. In February 1999, the Company contributed its ownership interests in
four of the acquired centers (Bridgewater Commons, Fashion Place Mall,
Park Meadows and Towson Town Center) to a joint venture (the "Four State
Venture") in which it retained a 35% ownership interest. Another venturer
contributed approximately $271 million in cash to the Four State Venture
and received a 65% ownership interest. Four State Venture used the
contributed cash to repay approximately $271 million of Company borrowings
under its bridge loan credit facility. The contribution of three of the
centers to Four State Venture was accounted for as a sale, and the fair
value of the joint venture interest received was considered in the
Company's allocation of the acquisition costs of all of the property
interests acquired. Accordingly, no gain or loss was recognized on the
sale. The Company's 35% ownership interest in the Four State Venture
related to these property interests is accounted for using the equity
method.
The Four State Venture agreement provides for the purchase, at the option of
the Company or the other venturer and subject to certain terms and
conditions, of the other venturer's interest in the Four State Venture
related to Fashion Place at a specified amount. Accordingly, the
transaction related to Fashion Place was accounted for as a financing. If
the option is exercised, the purchase price
19
<PAGE>
Part I. Financial Information, continued
Item 1. Financial Statements, continued:
THE ROUSE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), continued
(10) Property acquisitions, dispositions and related matters, continued
------------------------------------------------------------------
can be paid, at the option of the Company, in cash or in common stock of
the Company.
In May, 1999 the Company agreed to sell its interest in Valley Fair Mall to
Westfield America, Inc. for approximately $147 million. The Company
acquired the property in July 1998 from TrizecHahn Centers Inc. for
approximately the same price with the intention to sell it and,
accordingly, will record no gain or loss on the sale. The Company expects
the transaction to close in June, 1999.
(11) Shelf registration statement
----------------------------
At March 31, 1999, the Company had a shelf registration statement for
future sale of up to an aggregate of $2.1 billion (based on the public
offering price) of common stock, Preferred stock and debt securities. On
May 4, 1999, the Company issued $200 million of 8% unsecured notes, due in
May 2009, under this registration statement. The Company plans to use the
net proceeds of approximately $198 million to repay the convertible
subordinated debentures and certain other debt.
20
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
THE ROUSE COMPANY AND SUBSIDIARIES
The following discussion and analysis covers any material changes in financial
condition since December 31, 1998 and any material changes in the results of
operations for the three months ended March 31, 1999 as compared to the same
period in 1998. This discussion and analysis should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the 1998 Annual Report to Shareholders.
General:
- -------
Through its subsidiaries and affiliates, the Company acquires, develops and
manages a diversified portfolio of retail centers, office and industrial
buildings and mixed-use and other properties (office/mixed-use properties)
located throughout the United States and develops and sells land for
residential, commercial and other uses, primarily in Columbia, Maryland and
Summerlin, Nevada.
One of the Company's primary objectives is to own and operate premier properties
- shopping centers, office and industrial buildings and major mixed-use
projects - in major markets across the United States. In order to achieve this
objective, management is actively evaluating opportunities to acquire
properties owned by others that may have future prospects consistent with the
Company's long-term investment criteria and is continually evaluating the
future outlook for properties in the Company's portfolio. This includes
considering opportunities to expand and/or renovate the properties and
assessing whether particular properties are meeting or have the potential to
meet the Company's investment criteria. The Company plans to continue making
substantial investments to expand and/or renovate leasable mall space and/or
add new department stores to its existing properties to meet its objective. The
Company is also continually evaluating opportunities for new operating
properties and/or land development projects it believes have future prospects
consistent with its objectives. The Company has sold a number of properties
over the last several years and intends to continue to dispose of properties
that are not meeting and/or are not considered to have the potential to
continue to meet its investment criteria. The Company may also selectively
dispose of properties for other reasons. While disposition decisions may cause
the Company to recognize gains or losses that could have material effects on
reported net earnings (loss) in future quarters or fiscal years, they are not
anticipated to have a material effect on the overall consolidated financial
position or operating income of the Company.
21
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Portfolio changes:
- -----------------
In 1998, the Company completed several transactions designed to upgrade the
overall quality of its portfolio of operating properties. In the third and
fourth quarters, the Company purchased ownership interests in eight retail
centers, including the interests of partners in two centers (The Fashion Show
and Governor's Square) in which the Company now holds 100% ownership interests.
In February 1999, the Company contributed its ownership interests in four of
the acquired centers (Bridgewater Commons, Fashion Place Mall, Park Meadows and
Towson Town Center) to a joint venture in which it retained a 35% ownership
interest. The Company acquired the other two ownership interests with the
intent to sell them. The Company disposed of four retail centers (Eastfield
Mall and Salem Mall in the second quarter, and Greengate Mall and St. Louis
Union Station in the third quarter) and its 5% ownership interest in six retail
centers (five in the second quarter and one in the fourth quarter.) In the
fourth quarter, the Company also acquired the portfolio of office and
industrial properties and salable land of an entity in which the Company
previously held a 5% ownership interest. The acquired assets consisted of 64
buildings (excluding three which were subsequently sold) and approximately 100
acres of land. Substantially all of the acquired assets are in the Baltimore-
Washington metropolitan area. The Company and its affiliates disposed of their
interests in two hotels and certain industrial buildings in Baltimore and
Columbia and their office properties in Los Angeles in the first quarter of
1998.
The Company and its affiliates also completed certain development projects
designed to enhance the quality of its portfolio. A new regional shopping
center opened in Orlando, Florida in the first quarter of 1998, and two
community retail centers opened in the Summerlin/Las Vegas area in the second
quarter of 1998. Expansions of nine retail centers opened in 1998 (three in
the first quarter and six in the fourth quarter), and three community retail
centers in Columbia were substantially redeveloped. Six office and industrial
buildings opened in Las Vegas and Summerlin in 1998, and Arizona Center, in
Phoenix was expanded in the first quarter of 1998 to include a 90,000 square
foot cinema. In January 1999, an affiliate of the Company opened a new 100,000
square foot office building in Columbia's town center.
22
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating results:
- -----------------
As indicated in the 1998 Annual Report to Shareholders, the discussion of
operating results covers each of the Company's business segments as management
believes that a segment analysis provides the most effective means of
understanding the business. Note 5 to the consolidated financial statements
should be referred to when reading this discussion and analysis. As discussed
in note 5, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" in
1998. As required by the Statement, segment operating data are reported using
the accounting policies followed by the Company for internal reporting to
management. These policies are the same as those followed for external
reporting, except that real estate ventures in which the Company holds
substantially all (at least 98%) of the financial interests, but does not own a
majority voting interest, are reported on a consolidated basis rather than
using the equity method; the Company's share of FFO of unconsolidated real
estate ventures in which it holds a minority interest is included in revenues;
and the Company's share of depreciation and amortization expense of
unconsolidated real estate ventures in which it holds a minority interest is
included in depreciation and amortization expense. These differences affect
only the reported revenue, operating and interest expenses and depreciation and
amortization expense of the segments, and have no effect on the reported net
earnings of the Company. Revenues and operating and interest expenses reported
for the segments are reconciled to the related amounts reported in the
financial statements in note 5.
23
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating Properties - Retail Centers:
Operating results of retail properties are summarized as follows (in millions):
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues $146.0 $124.7
Operating expenses, exclusive
of depreciation and
amortization 67.9 62.4
Interest expense 43.0 33.1
------ ------
35.1 29.2
Depreciation and amortization, including
unconsolidated real estate ventures 21.8 13.8
------ ------
Operating income $ 13.3 $ 15.4
====== ======
</TABLE>
Revenues from retail centers increased $21.3 million for the three months ended
March 31, 1999, compared to the same period in 1998. The increase in revenues
was attributable primarily to effects of the aforementioned acquisitions
(approximately $14.4 million) and project openings and expansions
(approximately $7.4 million), and higher average occupancy levels at comparable
properties (94.0% in 1999 compared to 91.2% in 1998). These increases were
partially offset by the aforementioned dispositions (approximately $6.0
million).
Total operating and interest expenses for retail centers increased $15.4 million
for the three months ended March 31, 1999, compared to the same period in 1998.
The increase in operating and interest expenses was attributable primarily to
the aforementioned acquisitions (approximately $13.0 million) and project
openings and expansions (approximately $6.1 million). These increases were
partially offset by the aforementioned dispositions (approximately $6.6
million). Depreciation and amortization expense increased $8.0 million for the
three months ended March 31, 1999, compared to the same period in 1998. The
increase was attributable primarily to the portfolio changes described above.
24
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Operating Properties - Office, Mixed-Use and Other Properties:
Operating results of office, mixed-use and other properties are summarized
as follows (in millions):
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
Revenues $ 62.8 $ 55.6
Operating expenses, exclusive
of depreciation and amortization 26.8 27.0
Interest expense 23.9 20.6
------- ------
12.1 8.0
Depreciation and amortization, including
unconsolidated real estate ventures 10.2 8.2
------- -------
Operating income (loss) $ 1.9 $ (.2)
======= ======
</TABLE>
Revenues from office, mixed-use and other properties increased $7.2 million for
the three months ended March 31, 1999, compared to the same period in 1998.
The increase in revenues was attributable primarily to the aforementioned
acquisition (approximately $10.3 million) and project openings and expansion
(approximately $2.1 million). These increases were partially offset by the
dispositions of properties in 1998 (approximately $5.0 million).
Total operating and interest expenses for office, mixed-use and other properties
increased $3.1 million for the three months ended March 31, 1999, compared to
the same period in 1998. The increase in operating and interest expenses was
attributable primarily to the aforementioned acquisition (approximately $8.8
million) and project openings and expansion (approximately $1.4 million). These
increases were substantially offset by the aforementioned dispositions
(approximately $4.7 million) and lower interest expense related to the
refinancing of a mixed-use property. Depreciation and amortization expense
increased $2.0 million for the three months ended March 31, 1999, compared to
the same period in 1998. The increase was attributable primarily to the
portfolio changes described above.
25
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Land Sales Operations:
Land sales operations relate primarily to the communities of Columbia, Maryland
and Summerlin, Nevada. Generally, revenues and operating income from land
sales are affected by such factors as the availability to purchasers of
construction and permanent mortgage financing at acceptable interest rates,
consumer and business confidence, availability of saleable land for particular
uses and management's decisions to sell, develop or retain land.
Operating results of land sales operations are summarized as follows (in
millions):
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------------
1999 1998
----------------------- -------------------
<S> <C> <C>
Hughes Operations:
Revenues $30.3 $67.6
Operating costs and expenses 24.1 54.2
Interest expense -- .1
----- -----
Operating income $ 6.2 $13.3
===== =====
Columbia and other:
Revenues $30.3 $22.9
Operating costs and expenses 16.6 10.6
Interest expense .9 1.0
----- -----
Operating income $12.8 $11.3
===== =====
Total:
Revenues $60.6 $90.5
Operating costs and expenses 40.7 64.8
Interest expense .9 1.1
----- -----
Operating income $19.0 $24.6
===== =====
</TABLE>
26
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Revenues from Hughes land sales operations decreased $37.3 million for the three
months ended March 31, 1999, while related costs and expenses decreased $30.2
million compared to the same period in 1998. The decreases in revenues and
related costs and expenses for the three months relate primarily to a reduction
in sales of business park land, particularly in Los Angeles. The Company sold
all of the land in its Los Angeles business park in the first quarter of 1998.
The decrease in costs and expenses relates primarily to the lower level of land
sales.
Revenues from land sales operations in Columbia increased $7.4 million for the
three months ended March 31, 1999, while related costs and expenses increased
$5.9 million compared to the same period in 1998. The increase in revenues and
related costs and expenses for the three month period was due primarily to
higher levels of sales for commercial uses.
Development:
Development expenses consist primarily of additions to the preconstruction
reserve and new business costs. The preconstruction reserve is maintained to
provide for costs of projects which may not go forward to completion. New
business costs relate primarily to the initial evaluation of potential
acquisition and development opportunities. The expenses decreased $2.1 million
for the three months ended March 31, 1999 compared to the same period in 1998.
The decrease in expenses is a result of projects progressing to further stages
of development.
Corporate:
Corporate expenses consist of certain interest and operating expenses reduced by
costs capitalized or allocated to other segments. Interest is capitalized on
corporate funds invested in projects under development, and interest on the
proceeds of corporate borrowings and distributions on the Company-obligated
mandatorily redeemable preferred securities which are used for other segments
are allocated to those segments. Accordingly, corporate interest expense
consists primarily of interest on the convertible subordinated debentures, the
unsecured 8.5% notes, the medium-term notes, and unallocated proceeds from
refinancings of certain properties, net of interest capitalized on development
projects or allocated to other segments, and corporate operating expenses
consist primarily of general and administrative costs and distributions on the
redeemable preferred securities, net of distributions allocated to other
segments. These costs increased $1.9 million for the three months ended March
31, 1999, as compared to the same period in 1998. This increase was primarily
attributable to higher income taxes incurred by certain majority financial
interest ventures due to the sales of certain land parcels.
27
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Corporate, continued:
Corporate revenue consists primarily of corporate interest income on cash
invested and notes receivable. The decrease in revenue of $1.0 million for the
three months ended March 31, 1999 relates primarily to lower interest income on
lower invested cash balances.
Gain on dispositions of assets and other provisions, net:
The gain for the three months ended March 31, 1999 represents recoveries of
certain costs relating to a property sale and of costs incurred in connection
with the Company's determination to elect to be taxed as a REIT. The gain for
the three months ended March 31, 1998 relates primarily to a reduced provision
for loss on a retail center which the Company sold in April 1998, and partial
recovery of a loss previously recognized on a litigation matter. These items
were partially offset by losses on the sales of a hotel and an office building.
Unconsolidated real estate ventures in which the Company holds substantially all
of the financial interest recorded a net gain on disposition of assets of $7.5
million for the three months ended March 31, 1998, relating to the sales of a
hotel and certain industrial buildings.
Extraordinary loss, net:
The extraordinary loss for the three months ended March 31, 1998 related to the
Company's share of a loss (net of related income taxes) incurred by an
unconsolidated majority interest venture on extinguishment of debt prior to
its scheduled maturity. The debt was related to a hotel property which the
venture sold, and a portion of the proceeds of the sale was used to repay the
debt.
Net earnings:
Net earnings for the three months ended March 31, 1999 and 1998 were affected by
unusual and/or nonrecurring items. The most significant of these are the items
discussed above in gain on dispositions of assets and other provisions, net,
extraordinary loss, net and the cumulative effect of change in accounting for
participating mortgages.
Financial condition and liquidity:
Shareholders' equity increased by $8,731,000 from December 31, 1998 to March 31,
1999. The increase was primarily attributable to the net earnings for the
three months ended March 31, 1999 and issuance of common stock pursuant to the
Contingent Stock Agreement, partially offset by the payment of regular
quarterly dividends on the Company's common and Preferred stocks and purchases
of common stock.
28
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Financial condition and liquidity (continued):
The Company had cash and cash equivalents and investments in marketable
securities totaling $33,546,000 at March 31, 1999, including $4,076,000
of investments held for restricted uses.
In July 1998, the Company obtained an $800 million unsecured line of credit
facility from a group of lenders to replace a $250 million revolving line of
credit facility. The new facility is structured as a $350 million 364 day
bridge loan facility to fund specific property acquisitions made in the third
and fourth quarters of 1998, and a $450 million three-year revolving line of
credit. Repayment of borrowings under the new facilities is guaranteed by
certain of the Company's majority interest ventures. The revolving line of
credit may be used for various purposes, including project development costs,
property acquisitions, liquidity and other corporate needs. It may also be
used to pay some portion of existing debt, including maturities in 1999. At
March 31, 1999, the Company had outstanding borrowings of $358 million under
the line of credit and $32 million on the bridge loan facility. In April 1999,
the Company used proceeds from a new mortgage secured by an operating property
to repay the bridge loan facility.
On May 4, 1999, the Company issued $200 million of 8% unsecured notes, due in
May 2009, under its shelf registration statement. The Company plans to use the
net proceeds of approximately $198 million to repay the convertible
subordinated debentures and certain other debt.
In May 1999, the Company agreed to sell its interest in Valley Fair Mall for
approximately $147 million. The Company acquired Valley Fair Mall in 1998 with
the intention to sell it. The Company expects the transaction to close in June
1999. The Company expects the purchase price to include the assumption of a $40
million mortgage secured by the property and cash of approximately $107
million.
As of March 31, 1999, debt due in one year was $247 million, including balloon
payments due of $200 million. The balloon payments due in one year include $40
million due on a mortgage securing the property referred to above that the
Company has agreed to sell. The transaction is expected to close in the second
quarter of 1999, and the Company expects the buyer to assume the mortgage. The
remaining balloon payments due in one year are expected to be paid at or before
the scheduled maturity dates of the related loans from proceeds of the sale of
the property interest referred to above, the proceeds of the $200 million 8%
unsecured notes referred to above, property refinancings, credit facility
borrowings or other available corporate funds. The Company had remaining
availability under its revolving credit facility of $92 million at March 31,
1999. There is no availability under the bridge loan facility. The Company
is continually evaluating sources of capital, and management believes there are
satisfactory sources available for all requirements without
29
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Financial condition and liquidity (continued):
necessitating sales of other operating properties. The Company may, however,
selectively dispose of properties or groups of properties when it believes it
is prudent to do so.
The Company has a shelf registration statement for the sale of up to an
aggregate of approximately $2.25 billion (based on the public offering price)
of common stock, Preferred stock and debt securities. At May 5, 1999, the
Company had issued approximately $358 million of common stock and debt
securities under the shelf registration statement, with a remaining
availability of approximately $1.9 billion. Also, under an effective
registration statement the Company may issue additional medium-term notes of up
to $29.7 million.
Net cash provided by operating activities was $20.9 and $78.8 million for the
three months ended March 31, 1999 and 1998, respectively. The level of cash
flows provided by operating properties is affected by the timing of receipts of
rents and other revenues and payment of operating and interest expenses. The
decrease in net cash provided of $57.9 million was due primarily to lower cash
received on notes receivable from land sales that the Company financed prior to
1998, and lower operating distributions from unconsolidated majority financial
interest ventures. The level of cash provided by operating distributions from
unconsolidated majority financial interest ventures is affected by the timing
of receipt of their land sales revenues, payment of operating and interest
expenses and other sources and uses of cash. Other changes in net cash provided
by operating activities were due to the factors discussed previously under the
operating results of the four major business segments.
Net cash used in investing activities was $61.0 and $57.3 million for the three
months ended March 31, 1999 and 1998, respectively. The increase in net cash
used of $3.7 million was due primarily to lower proceeds from sales of
interests in properties partially offset by a decrease in expenditures for
properties in development and higher principal payments received on loans to
majority financial interest ventures.
Net cash provided by financing activities was $31.9 million and net cash used by
financing activities was $16.5 million for the three months ended March 31,
1999 and 1998, respectively. The increase in net cash provided of $48.4
million was due primarily to increased net credit facility borrowings
principally to finance property development expenditures.
Year 2000 issue:
The year 2000 (Y2K) issue relates to whether computer systems will properly
recognize date sensitive information to allow accurate processing of
transactions and data relating to the year 2000 and beyond. In addition, the
Y2K issue relates to whether non-Information Technology (IT) systems that
depend on embedded computer technology will recognize the year 2000. Systems
that do not properly recognize such information could generate erroneous data
or fail.
30
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Year 2000 issue, continued:
In 1996, the Company adopted a plan to replace virtually all of its management
information and accounting systems. This plan was adopted in the context of the
Company's long-term Information Systems strategy. In accordance with this plan,
all mission-critical IT systems are being replaced with systems that have been
certified by the vendors as Y2K compliant. To date, the Company has implemented
new financial accounting, accounts payable, property management, human
resources, payroll and leasing management systems. Certain legacy systems that
are still in use by the Hughes Division are not Y2K compliant. The Company is
in the process of migrating the Hughes Division from its legacy general ledger,
accounts payable and property management systems to the Company's new systems.
This migration is scheduled to be completed no later than October 1, 1999.
Also, the Company is in the process of implementing a new cash management
system, which is expected to be operational by June 1, 1999 and which will be
tested for Y2K compliance by June 30, 1999. The Company has completed testing
of its new mission-critical IT systems that have been implemented and has
determined that these systems are Y2K compliant, except with respect to certain
minor aspects of the financial accounting system. The issues relating to the
financial accounting system are being addressed and the systems will be
retested by June 30, 1999. In addition, in connection with the Company's normal
upgrade and replacement process, all network and desktop equipment meet the
requirements for the year 2000. Testing and remediation of other network and
desktop equipment is expected to be completed by June 30, 1999. The hardware
and software that supports the Company's local and wide area networks have been
tested. Approximately 70% of the network components were determined to be Y2K
compliant. The remaining 30% of the components will be upgraded or replaced
with hardware or software that is Y2K compliant by June 30, 1999. The Company
expects that the aggregate costs to specifically remediate Y2K IT issues will
be minimal.
For non-IT systems, the Company has completed a comprehensive review of computer
hardware and software in mechanical systems and has developed a program to
repair or replace non-IT systems that are not year 2000 compliant. It is
anticipated that the program will be completed in the third quarter of 1999.
Costs to specifically remediate non-IT systems (e.g., escalators, elevators,
heating, ventilating and cooling systems, etc.) that are non-compliant are not
expected to exceed $2 million. Management does not believe that the year 2000
issue will pose significant problems in its IT or non-IT systems, or that
resolution of any potential problems with respect to these systems will have a
material effect on the Company's financial condition or results of operations.
It is very difficult to identify "the most reasonably likely worst-case
scenario." The Company's exposure is widely spread, with no known major direct
exposure. The Company believes that the most likely worst-case exposure is at
the indirect level, involving vendors, suppliers and tenants. For example,
there could be failures in the information systems of certain tenants that may
delay the payment of rents. While it is not possible at this time to determine
the likely impact of these potential problems, the Company has identified the
top 20 tenants, ten anchor stores, five banks, three contractors and three
third party benefit administrators with which it does business. The Company is
in the process of reviewing the 1999 Form 10-K reports and Y2K compliance
statements for the publicly owned entities. In addition, a Y2K compliance
letter and questionnaire will be sent to any of these entities that have not
provided a public statement disclosing the status of their Y2K compliance
31
<PAGE>
Part I. Financial Information, continued
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, (continued):
Year 2000 issue, continued:
efforts. This review is expected to be completed in the second quarter of 1999,
at which time the Company will determine whether specific contingency plans
should be developed. There can be no assurance, however, that the Company has
adequately assessed or identified all aspects of its business which may be
affected by Y2K issues, and that Y2K issues including those that may affect its
vendors, suppliers and tenants, will not have a material adverse effect on the
Company's financial condition or results of operations.
Information relating to forward-looking statements:
This report on Form 10-Q of the Company includes forward-looking statements
which reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those identified below, which could cause
actual results to differ materially from historical results or those
anticipated. The words believe, expect, anticipate and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise. The following factors could cause actual results to
differ materially from historical results or those anticipated: (1) risks
associated with the Company's qualification and operation as a REIT; (2) real
estate investment risks; (3) development risks; (4) illiquidity of real estate
investments; (5) dependence on rental income from real property; (6) effect of
uninsured loss; (7) lack of geographical diversification; (8) possible
environmental liabilities; (9) difficulties of compliance with the Americans
with Disabilities Act; (10) competition; (11) changes in the economic climate
and (12) certain matters relating to Nevada properties; (13) changes in tax
laws or regulations. For a more detailed discussion of these factors, see
Exhibit 99.2 of the Company's Form 10-K for the fiscal year ended December 31,
1998.
32
<PAGE>
Part I. Financial Information, continued
Item 3. Quantitative and Qualitative Disclosures about Market Risk:
Market risk information:
The market risk associated with financial instruments and derivative financial
and commodity instruments is the risk of loss from adverse changes in market
prices or rates. The Company's market risk arises primarily from interest rate
risk relating to variable rate borrowings used to maintain liquidity (e.g.,
revolving credit facility advances) or finance project acquisition or
development costs (e.g., acquisition bridge loan facility or construction loan
advances). The Company's interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows. In order to
achieve this objective, the Company relies primarily on long-term, fixed rate,
nonrecourse loans from institutional lenders to finance its operating
properties. In addition, long-term, fixed rate financing is typically arranged
concurrently with or shortly after a variable rate project acquisition or
construction loan is negotiated. The Company also makes limited use of interest
rate exchange agreements, including interest rate swaps and caps, to mitigate
its interest rate risk on variable rate debt. The Company does not enter into
interest rate exchange agreements for speculative purposes and the fair value
of these and other derivative financial instruments is insignificant at March
31, 1999.
The Company's interest rate risk is monitored closely by management. The table
below presents the principal amounts due and weighted-average interest rates
applicable to principal amounts outstanding at the end of each year. This
information may be used to evaluate the expected cash flows of the Company
under debt and related agreements and its sensitivity to interest rate changes.
The information relating to debt maturities (in millions) is based on expected
maturity dates which consider anticipated refinancing or other transactions:
<TABLE>
<CAPTION>
Remaining
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 132 $ 52 $ 198 $ 213 $ 401 $1,704 $2,700
Average interest rate 7.8% 7.8% 7.9% 8.0% 8.0% 8.0% 7.8%
Variable rate LIBOR debt $ 79 $ 106 $ 437 $ 66 $ 2 $ 50 $ 740
Average interest rate 6.1% 6.1% 5.6% 6.1% 6.1% 6.1% 6.0%
</TABLE>
At March 31, 1999, the Company had interest rate cap agreements which
effectively limit the average interest rate on all of the variable rate LIBOR
debt maturing in 2002 to 8.9%.
As the table incorporates only those exposures that exist as of March 31, 1999,
it does not consider exposures or positions which could arise after that date.
As a result, the Company's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise after March
31, 1999, the Company's hedging strategies during that period and interest
rates.
33
<PAGE>
Part II. Other Information.
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K
Current Report on Form 8-K/A filed February 12, 1999
disclosing financial statements required under Rule 3-14
of Regulation S-X and certain pro forma financial information.
Current Report on Form 8-K filed February 12, 1999
disclosing disposition of assets.
Current Report on Form 8-K/A filed February 16, 1999
disclosing financial statements required under Rule 3-14
of Regulation S-X and certain pro forma financial information.
34
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
on behalf of
THE ROUSE COMPANY and as
Principal Financial Officer:
Date: May 13, 1999 By /s/Jeffrey H. Donahue
------------ ---------------------
Jeffrey H. Donahue
Executive Vice President and
Chief Financial Officer
35
<PAGE>
Exhibit Index
Exhibit Number Description
- -------------- -----------
1 Underwriting Agreement, dated
April 28, 1999, among The Rouse
Company, BT Alex Brown Incorporated
and Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
4 8% Notes due 2009 in the aggregate
principal amount of $200,000,000.
27.1 Financial Data Schedule
36
<PAGE>
THE ROUSE COMPANY
DEBT SECURITIES
UNDERWRITING AGREEMENT
April 28, 1999
To the Representatives of the
several Underwriters named in the
respective Pricing Agreements
hereinafter described.
Ladies and Gentlemen:
From time to time The Rouse Company, a Maryland corporation (the
"Company"), proposes to enter into one or more Pricing Agreements (each a
"Pricing Agreement") in the form of Annex I hereto, with such additions and
deletions as the parties thereto may determine, and, subject to the terms and
conditions stated herein and therein, to issue and sell to the firms named in
Schedule I to the applicable Pricing Agreement (such firms constituting the
"Underwriters" with respect to such Pricing Agreement and the securities
specified therein) certain of its debt securities (the "Securities") specified
in Schedule II to such Pricing Agreement (with respect to such Pricing
Agreement, the "Designated Securities").
The terms and rights of any particular issuance of Designated Securities
shall be as specified in the Pricing Agreement relating thereto and in or
pursuant to the Indenture, dated as of February 24, 1995 (the "Indenture"),
between the Company and The First National Bank of Chicago, as trustee (the
"Trustee").
1. Particular sales of Designated Securities may be made from time to time
to the Underwriters of such Securities, for whom the firms designated as
representatives of the Underwriters of such Securities in the Pricing Agreement
relating thereto will act as representatives (the "Representatives"). The term
"Representatives" also refers to a single firm acting as sole representative of
the Underwriters and to an Underwriter or Underwriters who act without any firm
being designated as its or their representatives. This Underwriting Agreement
(the "Agreement") shall not be construed as an obligation of the Company to sell
any of the Securities or as an obligation of any of the Underwriters to purchase
the Securities. The obligation of the Company to issue and sell any of the
Securities and the obligation of any of the Underwriters to purchase any of the
Securities shall be evidenced by the Pricing Agreement with respect to the
Designated Securities specified therein. Each Pricing Agreement shall specify
the aggregate principal amount of such Designated Securities, the initial public
offering price of such Designated Securities, the purchase price to the
Underwriters of such Designated Securities, the names of the Underwriters of
such Designated Securities, the names of the Representatives of such
Underwriters and the
<PAGE>
principal amount of such Designated Securities to be purchased by each
Underwriter and shall set forth the date, time and manner of delivery of such
Designated Securities and payment therefor. The Pricing Agreement shall also
specify (to the extent not set forth in the Indenture and the registration
statement and prospectus with respect thereto) the terms and conditions of such
Designated Securities. A Pricing Agreement shall be in the form of an executed
writing (which may be in counterparts), and may be evidenced by an exchange of
telegraphic communications or any other rapid transmission device designed to
produce a written record of communications transmitted. The obligations of the
Underwriters under this Agreement and each Pricing Agreement shall be several
and not joint.
2. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-67137) (the
"Initial Registration Statement") in respect of the Securities has been filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"); the Initial Registration
Statement and any post-effective amendment thereto, each in the form heretofore
delivered or to be delivered to the Representatives, excluding exhibits to such
registration statement, but including all documents incorporated by reference in
the prospectus included therein, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement") filed pursuant to Rule
462(b) of the rules and regulations of the Commission under the Act which became
effective upon filing, no other document with respect to such registration
statement or document incorporated by reference therein has heretofore been
filed or transmitted for filing with the Commission (other than the prospectuses
filed pursuant to Rule 424(b) of the rules and regulations of the Commission
under the Act, each in the form heretofore delivered to the Representatives);
and no stop order suspending the effectiveness of the Initial Registration
Statement, any post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued, and no proceeding for that purpose has been
initiated or threatened by the Commission (any preliminary prospectus included
in the Initial Registration Statement or filed with the Commission pursuant to
Rule 424(a) of the rules and regulations of the Commission under the Act, is
hereinafter called a "Preliminary Prospectus"; the various parts of the Initial
Registration Statement and the 462(b) Registration Statement, if any, including
all exhibits thereto and including (i) the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b) of the rules
and regulations of the Commission under the Act in accordance with Section 5(a)
hereof and deemed by virtue of Rule 430A of the rules and regulations of the
Commission under the Act to be part of the Initial Registration Statement at the
time it was declared effective and (ii) the documents incorporated by reference
in the prospectus contained in the registration statement at the time such part
of the registration statement became effective, but excluding the Statement of
Eligibility and Qualification of the Trustee on Form T-1 ("Form T-1"), each as
amended at the time such part of the Initial Registration Statement became
effective or such part of the Rule 462(b) Registration Statement, if any, became
effective, are hereinafter collectively called the "Registration Statement"; the
prospectus relating to the Securities, in the form in which it has most recently
been filed, or transmitted for filing, with the Commission pursuant to Rule
2
<PAGE>
424(b) under the Act on or prior to the date of this Agreement, is hereinafter
called the "Prospectus"; any reference herein to any Preliminary Prospectus or
the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Item 12 of the Form S-3 under the
Act, as of the date of such Preliminary Prospectus or Prospectus, as the case
may be; any reference to any amendment or supplement to any Preliminary
Prospectus or the Prospectus shall be deemed to refer to and include any
documents filed after the date of such Preliminary Prospectus or Prospectus, as
the case may be, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and incorporated therein by reference; any reference to any
amendment to the Registration Statement shall be deemed to refer to and include
any annual report of the Company filed pursuant to Section 13(a) or 15(d) of the
Exchange Act after the effective date of the Initial Registration Statement that
is incorporated by reference in the Registration Statement; and any reference to
the Prospectus shall be deemed to refer to and include the Prospectus as amended
or supplemented in relation to the applicable Designated Securities in the form
filed or transmitted for filing with the Commission pursuant to Rule 424(b)
under the Act and in accordance with Section 5(a) hereof, including any
documents incorporated by reference therein as of the date of such filing)
(notwithstanding the foregoing, for purposes of subsections (d), (e), (f) and
(j) of this Section 2 and subsection (f) of Section 7, references to the
Prospectus shall be deemed to mean the Prospectus as of the date hereof without,
unless otherwise approved by you, giving effect to any amendment or supplement
(including any document deemed to be incorporated by reference in the
Prospectus) dated or filed with the Commission after the date hereof);
(b) The documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case may be,
conformed in all material respects to the requirements of the Act or the
Exchange Act, as applicable, and the rules and regulations of the Commission
thereunder, and none of such documents contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading;
(c) The Registration Statement and the Prospectus conform, and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and
the rules and regulations of the Commission thereunder; the Registration
Statement and any amendment thereto do not and will not, as of the applicable
effective date, contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading; the Prospectus and any amendment or
supplement thereto, as of the applicable filing date, do not and will not,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein in
light of the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any statements
or omissions made in reliance upon and in conformity with information furnished
in writing to the Company by an Underwriter of Designated Securities through the
Representatives expressly for use in the Prospectus relating to such Securities;
3
<PAGE>
(d) The Company and its subsidiaries, taken as a whole, have not
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the Prospectus;
and, since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any change in the
capital stock (other than issuances of capital stock (i) pursuant to bonus stock
awards granted in the ordinary course of business, (ii) upon exercise of options
and stock appreciation rights and upon conversions of convertible securities and
(iii) pursuant to the terms of the Contingent Stock Agreement, effective as of
January 1, 1996, executed in connection with the acquisition by the Company of
all of the outstanding equity interests in The Hughes Corporation and its
affiliated partnership, Howard Hughes Properties, Limited Partnership (the
"Contingent Stock Agreement"), in each case, except with respect to bonus stock
awards granted in the ordinary course of business, which were outstanding as of
the date of the latest audited financial statements included or incorporated by
reference in the Prospectus), or any material and adverse change in the long-
term debt of the Company and its subsidiaries, taken as a whole (it being
understood that, absent unusual circumstances, an increase in long term debt of
the Company and its subsidiaries, taken as a whole, of less than 5% would not be
a material and adverse change to the Company and its subsidiaries, taken as a
whole), or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, current value basis shareholders' equity or results of operations
(based on Funds from Operations) of the Company and its subsidiaries, taken as a
whole, otherwise than as set forth or contemplated in the Prospectus;
(e) The Company and its subsidiaries have, or in those cases where
such subsidiary is a general partner in a partnership, such partnership has,
good and marketable fee simple and/or leasehold title (as the case may be) to
all real property (except for those lesser estates in real property which, in
the aggregate, are not material in value to the Company and its subsidiaries),
subject only to (A) those liens and encumbrances which have been reflected
generally or in the aggregate in the financial statements of the Company as
disclosed in the Prospectus or as are described specifically, generally or in
the aggregate in the Prospectus, or (B) such liens and encumbrances (i) not
required by generally accepted accounting principles to be disclosed in the
financial statements of the Company, which (a) if all material covenants and
conditions thereof are observed or performed, will not materially interfere with
the use made or proposed to be made of such property by the Company and its
subsidiaries or (b) are reasonable and customary with regard to the normal
operation of land and improvements held for commercial purposes by first class
owners and operators of commercial real estate, or (ii) which were incurred
after the date of the latest audited financial statements included or
incorporated by reference in the Prospectus in the ordinary course of business
(including financings) and which, in the aggregate (on a net basis), are not
material to the Company and its subsidiaries, taken as a whole. The Company and
its subsidiaries have title to the personal property owned by it or them and,
subject to the continued performance of the material covenants and conditions of
liens and encumbrances thereon, have the right to use such without interference
in the normal course of business, except for such interference as would not have
a material adverse effect on the Company and its subsidiaries, taken as a whole;
4
<PAGE>
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of Maryland, with power and
authority (corporate and other) to own its properties and conduct its business
as described in the Prospectus, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which the failure so to qualify and maintain
good standing would have a material adverse effect on the Company and its
subsidiaries, taken as a whole; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation except for such failures to maintain
good standing as would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued and are fully paid and non-
assessable; and all of the issued shares of capital stock of each subsidiary of
the Company have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned (with exceptions that are disclosed (whether
directly or through incorporation by reference) in the Prospectus or are not
material to the Company and its subsidiaries, taken as a whole) directly or
indirectly by the Company, free and clear of all liens, encumbrances or claims
(collectively, "Liens") except (i) Liens relating to debt which has been
disclosed specifically, generally or in the aggregate in the Prospectus or
incurred after the date of the latest audited financial statements included or
incorporated by reference in the Prospectus in the ordinary course of business
(including financings), (ii) Liens incurred in the ordinary course of business
which are not materially adverse to the operations of the Company and its
subsidiaries, taken as a whole, and (iii) restrictions on the transfer or use of
the stock of any subsidiary under any partnership, joint venture or lease
agreements to which the Company or any of its subsidiaries is a party;
(h) The Securities have been duly authorized, and, when Designated
Securities are issued and delivered pursuant to this Agreement and the Pricing
Agreement with respect to such Designated Securities, such Designated Securities
will have been duly executed, authenticated, issued and delivered and will
constitute valid and legally binding obligations of the Company entitled to the
benefits provided by the Indenture, which will be substantially in the form
filed as an exhibit to the Registration Statement; the Indenture has been duly
authorized and duly qualified under the Trust Indenture Act and, at the Time of
Delivery for such Designated Securities (as defined in Section 4 hereof), the
Indenture will constitute a valid and legally binding instrument, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles; and the
Indenture conforms and the Designated Securities will conform to the
descriptions thereof contained in the Prospectus;
(i) The issue and sale of the Securities, the compliance by the
Company with all of the provisions of the Securities, the Indenture, this
Agreement and any Pricing Agreement, and the consummation of the transactions
herein and therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
5
<PAGE>
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject except for such conflict, breach, violation or default which does not
have a material adverse effect on the Company and its subsidiaries, taken as a
whole, nor will such actions result in any violation of the provisions of the
Articles of Incorporation, as then amended or supplemented, or the Bylaws of the
Company or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any court or
governmental agency or body is required for the issue and sale of the Securities
or the consummation by the Company of the other transactions contemplated by
this Agreement, any Pricing Agreement or the Indenture, except such as have
been, or will have been prior to the Time of Delivery, obtained under the Act or
the Trust Indenture Act and such consents, approvals, authorizations, orders,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Securities
by the Underwriters;
(j) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or to which any property of the Company or any of its subsidiaries is
subject, which are likely, individually or in the aggregate, to have a material
adverse effect on the Company and its subsidiaries taken as a whole, and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(k) The Company is not, and after giving effect to each offering and
sale of the Securities will not be, an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(l) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba within
the meaning of Section 517.075, Florida Statutes;
(m) The independent certified public accountants of the Company, who
have certified certain financial statements of the Company and its subsidiaries,
are independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder; and
(n) The Company has qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, commencing with
the taxable year beginning on January 1, 1998; the Company intends to make the
formal election to be treated as a REIT with the filing of its corporate income
tax return for such 1998 taxable year; and the Company's organization and method
of operation have enabled it to continue to so qualify as a REIT at all times
subsequent to December 31, 1998. The Company intends to conduct its operations
in a manner to enable it to continue to so qualify as a REIT.
6
<PAGE>
3. Upon the execution of the Pricing Agreement applicable to any
Designated Securities and authorization by the Representatives of the release of
such Designated Securities, the several Underwriters propose to offer such
Designated Securities for sale upon the terms and conditions set forth in the
Prospectus.
4. Designated Securities to be purchased by each Underwriter pursuant to
the Pricing Agreement relating thereto, in the form specified in such Pricing
Agreement, and in such authorized denominations and registered in such names as
the Representatives may request upon at least twenty-four hours' prior notice to
the Company, shall be delivered by or on behalf of the Company to the
Representatives for the account of such Underwriter, against payment by such
Underwriter or on its behalf of the purchase price therefor by wire transfer in
federal (same day) funds, payable to the order of the Company in the funds
specified in such Pricing Agreement, all in the manner and at the place and time
and date specified in such Pricing Agreement or at such other place and time and
date as the Representatives and the Company may agree upon in writing, such time
and date being herein called the "Time of Delivery" for such Securities.
5. The Company agrees with each of the Underwriters of any Designated
Securities:
(a) To prepare the Prospectus as amended or supplemented in relation
to the applicable Designated Securities in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under the
Act no later than the Commission's close of business on the second business day
following the execution and delivery of the Pricing Agreement relating to the
applicable Designated Securities or, if applicable, such earlier time as may be
required by Rule 424(b); to make no further amendment or any supplement to the
Registration Statement or Prospectus after the date of the Pricing Agreement
relating to such Securities and prior to the Time of Delivery for such
Securities which shall be disapproved by the Representatives for such Securities
promptly after reasonable notice thereof; to advise the Representatives promptly
of any such amendment or supplement after the Time of Delivery and furnish the
Representatives with copies thereof; to file promptly all reports and any
definitive proxy or information statements required to be filed by the Company
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act for so long as the delivery of a prospectus is required in
connection with the offering or sale of such Securities, and during such same
period to advise the Representatives, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended Prospectus
has been filed with the Commission, of the issuance by the Commission of any
stop order or any order preventing or suspending the use of any prospectus
relating to the Securities, of the suspension of the qualification of such
Securities for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance of
any such stop order or of any such order preventing or suspending the use of any
prospectus relating to the Securities or suspending any such qualification, to
promptly use its best efforts to obtain the withdrawal of such order;
7
<PAGE>
(b) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify such Securities for offering
and sale under the securities laws of such jurisdictions as the Representatives
may request and to comply with such laws so as to permit the continuance of
sales and dealings therein for as long as may be necessary to complete the
distribution of such Securities; provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to file
a general consent to service of process in any jurisdiction;
(c) To furnish the Underwriters with copies of the Prospectus in such
quantities as the Representatives may from time to time reasonably request, and,
if the delivery of a prospectus is required at any time in connection with the
offering or sale of the Securities and if at such time any event shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during such
same period to amend or supplement the Prospectus or to file under the Exchange
Act any document incorporated by reference in the Prospectus in order to comply
with the Act, the Exchange Act or the Trust Indenture Act, to notify the
Representatives and upon their request to file such document and to prepare and
furnish without charge to each Underwriter and to any dealer in securities as
many copies as the Representatives may from time to time reasonably request of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance;
(d) During the period beginning from the date of the Pricing Agreement
for such Designated Securities and continuing to and including the later of (i)
the termination of trading restrictions for such Designated Securities, as
notified to the Company by the Representatives and (ii) the Time of Delivery for
such Designated Securities, not to offer, sell, contract to sell or otherwise
dispose of any debt securities of the Company which mature more than one year
after the Time of Delivery and which are substantially similar to such
Designated Securities, without the prior written consent of the Representatives;
and
(e) To make generally available to its security holders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158).
6. The Company covenants and agrees with the several Underwriters that the
Company will pay or cause to be paid the following: (i) the fees, disbursements
and expenses of the Company's counsel and accountants in connection with the
registration of the Securities under the Act and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectus and all other
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing and producing
any Agreement
8
<PAGE>
among Underwriters, this Agreement, any Pricing Agreement, any Indenture, any
Blue Sky and legal investment memoranda, closing documents (including any
compilations thereof) and any other documents so long as such documents have
been approved by the Company in connection with the offering, purchase, sale and
delivery of the Securities; (iii) all expenses in connection with the
qualification of the Securities for offering and sale under state securities
laws as provided in Section 5(b) hereof, including the fees and disbursements of
the Company's counsel in connection with such qualification and in connection
with the Blue Sky and legal investment surveys; (iv) any fees charged by
securities rating agencies for rating the Securities; (v) any filing fees
incident to, and the reasonable fees and disbursements of the Company's counsel
in connection with, any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Securities; (vi) the
cost of preparing the Securities; (vii) the reasonable fees and expenses of any
Trustee and any agent of any Trustee and any transfer or paying agent of the
Company and the reasonable fees and disbursements of counsel for any Trustee or
such agent in connection with any Indenture and the Securities; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section. It
is understood, however, that, except as provided in this Section 6, and Sections
8 and 11 hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, transfer taxes on resale of any of the
Securities by them, and any advertising expenses connected with any offers they
may make.
7. The obligations of the Underwriters of any Designated Securities under
the Pricing Agreement relating to such Designated Securities shall be subject,
in the Representatives' discretion, to the condition that all representations
and warranties and other statements of the Company included or incorporated by
reference in the Pricing Agreement relating to such Designated Securities are
true and correct at and as of the Time of Delivery for such Designated
Securities and the condition that prior to such Time of Delivery the Company
shall have performed all of its obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) (i) The Prospectus in relation to the applicable Designated
Securities shall have been filed with the Commission pursuant to Rule 424(b)
under the Act within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; (ii) no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the Commission; and (iii) all
requests for additional information on the part of the Commission shall have
been complied with to the reasonable satisfaction of the Representatives;
(b) Counsel for the Underwriters shall have furnished to the
Representatives such opinion or opinions, dated the Time of Delivery, with
respect to the incorporation of the Company, the Indenture, the Securities, the
Registration Statement, the Prospectus, and such other related matters as the
Representatives may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable them to
pass upon such matters;
9
<PAGE>
(c) The General Counsel of the Company, or other counsel for the
Company satisfactory to the Representatives, shall have furnished to the
Representatives such counsel's written opinion (which may be limited to the laws
of the State of Maryland and, with respect to clauses (viii), (ix), (xi) and
(xii) below, the federal securities laws), dated the Time of Delivery in form
and substance reasonably satisfactory to the Representatives, to the effect
that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Maryland, with corporate power and authority to own its properties and
conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued and are fully paid
and non-assessable;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under
the laws of each other jurisdiction in which the failure so to qualify and
maintain good standing would have a material adverse effect on the Company
and its subsidiaries, taken as a whole (such counsel being entitled to rely
in respect of the opinion in this clause upon opinions of local counsel and
in respect of matters of fact upon certificates of officers of the
Company);
(iv) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is the subject
which is likely, individually or in the aggregate, to have a material
adverse effect on the Company and its subsidiaries, taken as a whole, and,
to the best of such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others;
(v) This Agreement and the Pricing Agreement with respect to the
Designated Securities have been duly authorized, executed and delivered by
the Company;
(vi) The Designated Securities have been duly authorized,
executed and issued by the Company;
(vii) The Indenture has been duly authorized, executed and
delivered by the Company;
(viii) To the best of such counsel's knowledge, the issue and
sale of the Designated Securities, the compliance by the Company with all
of the provisions of the Designated Securities, the Indenture, this
Agreement and any Pricing Agreement, and the consummation of the
transactions herein and therein contemplated
10
<PAGE>
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument
known to such counsel to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject except for any such conflict, breach, violation or
default which does not have a material adverse effect on the Company and
its subsidiaries, taken as a whole, nor will such actions result in any
violation of the provisions of the Articles of Incorporation, as then
amended or supplemented, or Bylaws of the Company or any statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of
its properties;
(ix) To the best of such counsel's knowledge, no consent,
approval, authorization, order, registration or qualification of or with
any court or governmental agency or body is required for the issue and sale
of the Designated Securities or the consummation by the Company of the
other transactions contemplated by this Agreement, such Pricing Agreement
or the Indenture, except such as have been obtained under the Act or the
Trust Indenture Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Designated Securities by the Underwriters;
(x) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act;
(xi) The documents incorporated by reference in the Prospectus
(other than the financial statements and related notes and schedules
therein and other financial data included therein or omitted therefrom, as
to which such counsel need express no opinion), when they were filed with
the Commission appeared on their face to be appropriately responsive, in
all material respects, to the requirements of the Act or the Exchange Act,
as applicable, and the rules and regulations of the Commission thereunder;
and nothing has come to such counsel's attention to cause such counsel to
believe that any of such documents, when they were so filed contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were so filed,
not misleading; and
(xii) Nothing has come to such counsel's attention to cause such
counsel to believe that, as of its effective date, the Registration
Statement or any further amendment or supplement thereto made by the
Company prior to the Time of Delivery (other than the financial statements
and related notes and schedules included therein or omitted therefrom and
other financial data included therein or omitted therefrom and the Form T-1
included therein, as to which such counsel need express no opinion)
contained an untrue statement of a material fact or omitted to state a
11
<PAGE>
material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date and as of the
date of such opinion, the Prospectus or any amendment or supplement thereto
made by the Company prior to the Time of Delivery (other than the financial
statements and related notes and schedules included therein or omitted
therefrom and other financial data included therein or omitted therefrom
and the Form T-1 included therein, as to which such counsel need express no
opinion) contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; and such counsel
does not know of any amendment to the Registration Statement required to be
filed or any contracts or other documents of a character required to be
filed as an exhibit to the Registration Statement or required to be
incorporated by reference into the Prospectus or required to be described
in the Registration Statement or the Prospectus which are not filed or
incorporated by reference or described as required.
(d) Fried, Frank, Harris, Shriver & Jacobson, counsel for the Company,
or other counsel for the Company satisfactory to the Representatives, shall have
furnished to the Representatives their written opinion (which will be limited to
the laws of the State of New York and federal laws and may rely on an opinion of
the General Counsel of the Company, or other counsel for the Company reasonably
satisfactory to the Representatives, as to the laws of the State of Maryland),
dated the Time of Delivery in form and substance reasonably satisfactory to the
Representatives, to the following effect:
(i) The Designated Securities have been duly executed and issued
and, when duly authenticated by the Trustee and delivered by the Company,
will constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms;
(ii) The Indenture constitutes a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms;
(iii) The Indenture has been qualified under the Trust Indenture
Act;
(iv) The Indenture conforms, and the Designated Securities will
conform, in all material respects to the descriptions thereof contained in
the Prospectus;
(v) The Registration Statement has become effective under the
Act, and any required filing of the Prospectus pursuant to Rule 424(b)
under the Act has been made in the manner and within the time period
required by Rule 424(b);
(vi) The Registration Statement, at the time it was declared
effective by the Commission, and the Prospectus, as of its date, appeared
on their face to be responsive as to form in all material respects to the
requirements of the Act and the Trust Indenture Act and the rules and
regulations promulgated thereunder (other than (a) the financial
statements, notes and schedules thereto included therein or omitted
12
<PAGE>
therefrom, (b) other financial data included therein or omitted therefrom,
(c) the documents incorporated by reference therein and (d) the Form T-1
included therein, as to which such counsel need not express an opinion);
and
(vii) The Company is not an "investment company," as such term
is defined in the Investment Company Act of 1940, as amended.
The opinions set forth in paragraphs (i) and (ii) above are subject to: (i)
applicable bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium or other laws now or hereafter in effect affecting creditors' rights
generally; and (ii) general principles of equity (including, without limitation,
standards of materiality, good faith, fair dealing and reasonableness) whether
such principles are considered in a proceeding in equity or at law;
(e) On the date of the Pricing Agreement for such Designated
Securities but prior to the execution of the Pricing Agreement with respect to
such Designated Securities and at the Time of Delivery for such Designated
Securities, the independent certified public accountants of the Company who have
certified the financial statements of the Company and its subsidiaries included
or incorporated by reference in the Registration Statement, or such other
independent certified public accountants as are reasonably satisfactory to the
Representatives, shall have furnished to the Representatives a "comfort" letter,
substantially to the effect set forth in Annex II hereto, and as to such other
matters as the Representatives may reasonably request and, in each case, in form
and substance satisfactory to the Representatives;
(f) (i) The Company and its subsidiaries, taken as a whole, have not
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any material loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the Prospectus
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock (other than
issuances of capital stock pursuant to bonus stock awards granted in the
ordinary course of business, upon exercise of options and stock appreciation
rights or upon conversion of convertible securities in each case, except with
respect to bonus stock awards granted in the ordinary course of business, which
were outstanding as of the date of the latest audited financial statements
included or incorporated by reference in the Prospectus or pursuant to the
Contingent Stock Agreement) or any material adverse change in the long-term debt
of the Company and its subsidiaries, taken as a whole (it being understood that,
absent unusual circumstances, an increase in long-term debt of the Company and
its subsidiaries, taken as a whole, of less than 5% would not be a material and
adverse change to the Company and its subsidiaries, taken as a whole), or any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the general affairs, management, current value
basis shareholders' equity or results of operations (based on Funds from
Operations) of the Company and its subsidiaries, taken as a whole, otherwise
than as set forth or contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it
13
<PAGE>
impracticable or inadvisable to proceed with the public offering or the delivery
of the Designated Securities on the terms and in the manner contemplated in the
Prospectus;
(g) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities by any "nationally
recognized statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities;
(h) On or after the date of the Pricing Agreement relating to the
Designated Securities there shall not have occurred any of the following: (i) a
suspension or material limitation in trading in the Company's securities or in
trading (other than a brief temporary suspension due to a Level 1 "circuit
breaker" occurrence) in securities generally on the New York Stock Exchange;
(ii) a general moratorium on commercial banking activities in New York declared
by either federal or New York State authorities; or (iii) a material adverse
change in the financial markets in the United States or the outbreak or
escalation of hostilities involving the United States or the declaration by the
United States of a national emergency or war, if the effect of any such event
specified in clause (i), (ii) or (iii) in the Representatives' reasonable
judgment makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Designated Securities on the terms and in the
manner contemplated in the Prospectus as first amended or supplemented relating
to the Designated Securities; and
(i) The Company shall have furnished or caused to be furnished to the
Representatives at the Time of Delivery for the Designated Securities a
certificate or certificates of officers of the Company in such form and executed
by such officers of the Company as shall be satisfactory to the Representatives,
as to the accuracy of the representations and warranties of the Company herein
at and as of such Time of Delivery, as to the performance by the Company of all
of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a), (f) and (g) of this
Section, and as to such other matters as the Representatives may reasonably
request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, any preliminary
prospectus supplement, the Registration Statement, the Prospectus and any other
prospectus relating to the Securities, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were made not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged
14
<PAGE>
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, any preliminary prospectus supplement, the Registration Statement,
the Prospectus and any other prospectus relating to the Securities, or any such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by any Underwriter of Designated Securities
through the Representatives expressly for use in the Prospectus relating to such
Securities.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, any preliminary prospectus supplement,
the Registration Statement, the Prospectus and any other prospectus relating to
the Securities, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in any Preliminary Prospectus, any preliminary prospectus supplement, the
Registration Statement, the Prospectus and any other prospectus relating to the
Securities, or any such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. If however, the indemnifying party does
not assume the defense of such action or any indemnified party or parties notify
the indemnifying party that it or they have been advised by counsel that it
would be inappropriate for the indemnifying party to assume the defense of such
action as aforesaid due to actual or potential conflicting interests, then such
indemnified party or parties shall be entitled to employ separate counsel at the
expense of the Company (it being understood that the
15
<PAGE>
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the fees and
expenses of more than one separate firm of attorneys (in addition to one
separate firm of local attorneys in each such jurisdiction) at any time for all
such indemnified parties, which firms shall be designated in writing by you, if
the indemnified parties under this Section 8 consist of any Underwriter of
Designated Securities or any of its respective controlling persons, or by the
Company, if the indemnified parties under this Section 8 consist of the Company
or any of its directors, officers, administrative trustees or controlling
persons). The indemnifying party shall not be liable for any settlement of an
action or claim for monetary damages which an indemnified party may effect
without the consent of the indemnifying party, which consent shall not be
unreasonably withheld. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim), unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to,
or an admission of, fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
of the Designated Securities on the other from the offering of the Designated
Securities to which such loss, claim, damage or liability (or action in respect
thereof) relates.
If, however, the allocation provided by the immediately preceding sentence
is not permitted by applicable law or if the indemnified party failed to give
the notice required under subsection (c) above, then each indemnifying party
shall contribute to such amount paid or payable by such indemnified party in
such proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company on the one hand and the Underwriters of
the Designated Securities on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and such Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from such offering (before deducting expenses)
received by the Company bear to the total commissions or discounts received by
such Underwriters in respect thereof. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading relates to information supplied by the Company on the one
hand or by any such Underwriters on the other and the parties' relative intent,
16
<PAGE>
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total public offering
price at which the applicable Designated Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The obligations of the Underwriters
of Designated Securities in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations with respect to such
Securities and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Designated Securities which it has agreed to purchase under the Pricing
Agreement relating to such Designated Securities, the Representatives may in
their discretion arrange for themselves or another party or other parties to
purchase such Designated Securities on the terms contained herein. If within
thirty-six hours after such default by any Underwriter the Representatives do
not arrange for the purchase of such Designated Securities, then the Company
shall be entitled to a further period of thirty-six hours within which to
procure another party or other parties satisfactory to the Representatives to
purchase such Designated Securities on such terms. In the event that, within
the respective prescribed period, the Representatives notify the Company that
they have so arranged for the purchase of such Designated Securities, or the
Company notifies the Representatives that it has so arranged for the purchase of
such Designated Securities, the Representatives or the Company shall have the
right to postpone the Time of Delivery for such Designated Securities for a
period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees to file promptly any
amendments or supplements to the Registration Statement or the Prospectus which
in the opinion of the Representatives may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person
17
<PAGE>
substituted under this Section with like effect as if such person had originally
been a party to the Pricing Agreement with respect to such Designated
Securities.
(b) If, after giving effect to any arrangements for the purchase of
the Designated Securities of a defaulting Underwriter or Underwriters by the
Representatives and the Company as provided in subsection (a) above, the
aggregate principal amount of such Designated Securities which remains
unpurchased does not exceed one-eleventh of the aggregate principal amount of
the Designated Securities, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the principal amount of Designated
Securities which such Underwriter agreed to purchase under the Pricing Agreement
relating to such Designated Securities and, in addition, to require each non-
defaulting Underwriter to purchase its pro-rata share (based on the principal
amount of Designated Securities which such Underwriter agreed to purchase under
such Pricing Agreement) of the Designated Securities of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of
the Designated Securities of a defaulting Underwriter or Underwriters by the
Representatives and the Company as provided in subsection (a) above, the
aggregate principal amount of Designated Securities which remains unpurchased
exceeds one-eleventh of the aggregate principal amount of the Designated
Securities as referred to in subsection (b) above, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Designated Securities of a defaulting Underwriter or
Underwriters, then the Pricing Agreement relating to such Designated Securities
shall thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company, except for the expenses to be borne by the Company
and the Underwriters as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Securities.
11. If any Pricing Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
with respect to the Designated Securities covered by such Pricing Agreement
except as provided in Sections 6 and 8 hereof; but, if for any other reason,
Designated Securities are not delivered by or on behalf of the Company as
provided herein, the Company will reimburse the Underwriters through the
Representatives for all out-of-pocket expenses approved in writing by the
Representatives, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of such Designated
18
<PAGE>
Securities, but the Company shall then be under no further liability to any
Underwriter with respect to such Designated Securities except as provided in
Sections 6 and 8 hereof.
19
<PAGE>
12. In all dealings hereunder, the Representatives of the Underwriters of
Designated Securities shall act on behalf of each of such Underwriters, and the
parties hereto shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of any Underwriter made or given by such
Representatives jointly or by such of the Representatives, if any, as may be
designated for such purpose in the Pricing Agreement.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Representatives as set forth in the
Pricing Agreement; and if to the Company shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: General Counsel; provided, however, that any
notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its underwriters' questionnaire, or telex constituting such
questionnaire, which address will be supplied to the Company by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
13. This Agreement and each Pricing Agreement shall be binding upon, and
inure solely to the benefit of, the Underwriters, the Company and, to the extent
provided in Sections 8 and 10 hereof, the officers and directors of the Company
and each person who controls the Company or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right under or by virtue of this
Agreement or any such Pricing Agreement. No purchaser of any of the Securities
from any Underwriter shall be deemed a successor or assign by reason merely of
such purchase.
14. Time shall be of the essence of each Pricing Agreement. As used
herein, "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT AND EACH PRICING AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement and each Pricing Agreement may be executed by any one
or more of the parties hereto and thereto in any number of counterparts, each of
which shall be deemed to be an original, but all such respective counterparts
shall together constitute one and the same instrument.
Very truly yours,
THE ROUSE COMPANY
By: /s/Patricia H. Dayton
---------------------
Name: Patricia H. Dayton
Title: Vice President and Treasurer
20
<PAGE>
BT ALEX. BROWN INCORPORATED
By: /s/Warren H. Spar
-----------------
Name: Warren H. Spar
Title: Managing Director
MERRILL LYNCH, PIERCE FENNER & SMITH
INCORPORATED
By: /s/Alexander S. Rubin
---------------------
Name: Alexander S. Rubin
Title: Vice President
On behalf of each of the Underwriters
21
<PAGE>
ANNEX II
Accountants' Letter
-------------------
Pursuant to Section 7(e) of the Underwriting Agreement, the Company's
independent certified public accountants shall furnish letters to the effect
that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the Act
and the applicable rules and regulations thereunder adopted by the
Commission;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) audited or
examined by them and included or incorporated by reference in the
Registration Statement or the Prospectus comply as to form in all material
respects with the applicable accounting requirements of the Act or the
Exchange Act, as applicable, and the related rules and regulations
thereunder adopted by the Commission; and, if applicable, they have made a
review in accordance with standards established by the American Institute
of Certified Public Accountants of the consolidated interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified in
such letter, as indicated in their reports thereon, copies of which have
been separately furnished to the Representatives;
(iii) If applicable, they have made a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and/or included in the Company's quarterly
report on Form 10-Q incorporated by reference into the Prospectus as
indicated in their reports thereon copies of which have been separately
furnished to the Representatives; and on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the related published
rules and regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the related
rules and regulations adopted by the Commission;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the Prospectus
and included or incorporated by reference in Item 6 of the Company's Annual
Report on Form 10-K for the most recent fiscal year agrees with the
corresponding amounts (after restatement where applicable) in the audited
consolidated financial statements for five such fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-K for such fiscal years;
II-1
<PAGE>
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included or incorporated by reference
in the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) (i) if applicable, the unaudited condensed
consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus
and/or included or incorporated by reference in the Company's
Quarterly Reports on Form 10-Q incorporated by reference in the
Prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the Exchange Act and the
related published rules and regulations, or (ii) any material
modifications should be made to the unaudited condensed consolidated
statements of income, consolidated balance sheets and consolidated
statements of cash flows included in the Prospectus or included in
the Company's Quarterly Reports on Form 10-Q incorporated by
reference in the Prospectus for them to be in conformity with
generally accepted accounting principles;
(B) if applicable, any other unaudited income statement data
and balance sheet items included in the Prospectus do not agree with
the corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any such
unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included or
incorporated by reference in the Company's Annual Report on Form 10-
K for the most recent fiscal year;
(C) if applicable, the unaudited financial statements which
were not included in the Prospectus but from which were derived the
unaudited condensed financial statements referred to in clause (A)
and any unaudited income statement data and balance sheet items
included in the Prospectus and referred to in Clause (B) were not
determined on a basis substantially consistent with the basis for
the audited financial statements included or incorporated by
reference in the Company's Annual Report on Form 10-K for the most
recent fiscal year;
II-2
<PAGE>
(D) if applicable, any unaudited pro forma consolidated
condensed financial statements included or incorporated by reference
in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the rules
and regulations thereunder adopted by the Commission or the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date (where practicable not more than
five days prior to the date of such letter), there have been any
changes in the consolidated capital stock (other than issuances of
capital stock upon exercise of options and stock appreciation
rights, upon earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on the
date of the latest balance sheet included or incorporated by
reference in the Prospectus or issuance pursuant to the Contingent
Stock Agreement) or any increase in excess of 1% in the consolidated
long-term debt of the Company and its subsidiaries, or any decreases
in consolidated net current assets (defined for this purpose as all
assets other than property and investments in and advances to
unconsolidated real estate ventures less accounts payable, accrued
expenses and other liabilities) or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the
latest balance sheet included or incorporated by reference in the
Prospectus, except in each case for changes, increases or decreases
which the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest financial
statements included or incorporated by reference in the Prospectus
to a specified date there were any decreases in Funds from
Operations (as defined in "Selected Financial Data" in the
Prospectus) or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each
case as compared with the comparable period of the preceding year
and with any other period of corresponding length specified by the
Representatives, except in each case for increases or decreases
which the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(vii) In addition to the audit referred to in their report(s)
included or incorporated by reference in the Prospectus and the limited
procedures, inspection of minute books, inquiries and other procedures
referred to in paragraphs (iii) and (vi) above, they have carried out
certain specified procedures, not constituting an audit in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Representatives
which are derived from the general accounting records of the Company and
its subsidiaries, which appear in the Prospectus (excluding documents
incorporated by reference), or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives or
II-3
<PAGE>
in documents incorporated by reference in the Prospectus specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
All references in this Annex II to the Prospectus shall be deemed to refer
to the Prospectus (including the documents incorporated by reference therein) as
defined in the Underwriting Agreement as of the date of the letter delivered on
the date of the Pricing Agreement for purposes of such letter and to the
Prospectus (including the documents incorporated by reference therein) in
relation to the applicable Designated Securities for purposes of the letter
delivered at the Time of Delivery for such Designated Securities.
II-4
<PAGE>
Exhibit 4
Unless this certificate is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC"), to the Company or its
agent for registration of transfer, exchange, or payment, and any certificate
issued is registered in the name of Cede & Co. or in such other name as is
requested by an authorized representative of DTC (and any payment is made to
Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.
Unless and until it is exchanged in whole or in part for Securities in
definitive registered form, this Security may not be transferred except as a
whole by the Depositary to the nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another Depositary or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary.
THE ROUSE COMPANY
8% Notes due 2009
No. 1 $200,000,000
-----
CUSIP No. 779273AE1
THE ROUSE COMPANY, a corporation duly organized and existing under the
laws of the State of Maryland (herein called the "Company," which term includes
any successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to CEDE & CO., or registered assigns, the
principal sum of Two Hundred Million United States Dollars (U.S. $200,000,000)
on April 30, 2009 and to pay interest thereon from May 4, 1999 or from the most
recent Interest Payment Date to which interest has been paid or duly provided
for, semi-annually on April 30 and October 30 of each year, commencing October
30, 1999, at the rate of 8% per annum, until the principal hereof is paid or
made available for payment. Interest will be computed on the basis of a 360-day
year of twelve 30-day months. The interest so payable, and punctually paid or
duly provided for, on any Interest Payment Date will, as provided in the
Indenture (as defined on the reverse hereof), be paid to the Person in whose
name this Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest, which shall be
April 15 or October 15 (whether or not a Business Day) next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder on such Regular
Record Date and may either be paid to the Person in whose name this Security (or
one or more Predecessor Securities) is registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest to be fixed by
the Trustee, notice whereof shall be given to Holders of Securities of this
series not less than 10 days prior to such Special Record Date, or be paid at
any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Securities of this series may be listed,
and upon such notice as may be required by such exchange, all as more fully
provided in said Indenture.
<PAGE>
Payment of the principal of (and premium, if any) and any interest on
this Security will be made at the Corporate Trust Office of the Trustee, in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts; provided, however, that at
the option of the Company payment of interest may be made by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Security Register.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be
signed manually or by facsimile by its duly authorized officers and its
corporate seal to be affixed or imported thereon.
Dated: May 4, 1999
THE ROUSE COMPANY
By: /s/Jeffrey H. Donahue
---------------------
Jeffrey H. Donahue
Executive Vice President and
Chief Financial Officer
Attest:
/s/David R. Schwiesow
- ---------------------
David R. Schwiesow
Assistant Secretary
2
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
Dated: May 4, 1999 THE FIRST NATIONAL BANK
OF CHICAGO, as Trustee
By: /s/Sandra Caruba
-------------------
Authorized Officer
3
<PAGE>
[Reverse of Security]
1. Indenture. This Security is one of a duly authorized issue of
securities of the Company (herein called the "Securities"), issued and to be
issued in one or more series under an Indenture, dated as of February 24, 1995
(herein called the "Indenture"), between the Company and The First National Bank
of Chicago, as trustee (herein called the "Trustee," which term includes any
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered. This Security is one
of the series designated on the face hereof, initially limited in aggregate
principal amount to $200,000,000.
2. Redemption. The Securities of this series are subject to redemption
at the election of the Company at any time and from time to time, in whole or in
part, at a Redemption Price equal to the Make-Whole Price. Unless the Company
shall default in the payment of the Redemption Price from and after the
Redemption Date interest will cease to accrue on the Securities or portion of
Securities called for redemption. Notice of redemption shall be mailed to the
registered holders of the Securities of this series designated for redemption at
their addresses as the same shall appear on the Securities Register of this
series not less than 30 days nor more than 60 days prior to the Redemption Date,
subject to all the conditions and provisions of the Indenture.
In the event of redemption of Securities of this series in part only, new
Securities of this series for the amount of the unredeemed portion hereof shall
be issued in the name of the Holder thereof upon the presentation and
cancellation thereof.
No sinking fund has been provided for the Securities.
3. Modifications to Existing Covenants and Additional Covenants. (a) The
covenant set forth in Section 1008 of the Indenture shall be modified with
respect to the Securities of this series as follows:
(i) the Ratio Calculation shall be 1.7 to 1 (instead of 1.1 to 1);
(ii) the Ratio Calculation shall be based on Total FFO and Total
Interest Expense (instead of EBDT and Consolidated Interest
Expense, respectively); and
(iii) the Ratio Calculation and other covenant-related calculations
with respect to the Securities of this series shall be based
upon GAAP as reflected in the Financial Statements as prepared
and provided in accordance with the Indenture.
(b) All references in the Indenture to EBDT and Consolidated Interest
Expense shall, with respect to the Securities of this series, be deemed to mean
(and be replaced by) Total FFO and Total Interest Expense, respectively.
4
<PAGE>
(c) The Ratio Calculation for the covenants set forth in Sections 801 and
1009 of the Indenture shall be 1.7 to 1 (instead of 1.1 to 1).
(d) The Company will not, and will not permit any Subsidiary (as to which
the Company owns, directly or indirectly, more than 50% of the voting stock
therein) to, incur any Debt if, immediately after giving effect to the
incurrence of such additional Debt, the aggregate principal amount of
outstanding Total Debt would be greater than 70% of the sum of (i) the Gross
Asset Value as of the end of the fiscal quarter prior to the incurrence of such
additional Debt, plus (ii) any increase in the Gross Asset Value resulting from
any acquisition completed after the end of such quarter, including, without
limitation, any pro forma increase from the application of the proceeds of such
additional Debt, less (iii) any decrease in the Gross Asset Value resulting from
any disposition completed after the end of such quarter.
(e) The Company will not, and will not permit any Subsidiary (as to which
the Company owns, directly or indirectly, more than 50% of the voting stock
therein) to, incur any Secured Debt if, immediately after giving effect to the
incurrence of such additional Secured Debt, the aggregate principal amount of
all outstanding Secured Debt would be greater than 60% of the sum of (i) the
Gross Asset Value as of the end of the fiscal quarter prior to the incurrence of
such additional Secured Debt, plus (ii) any increase in the Gross Asset Value
resulting from any acquisition completed after the end of such quarter,
including, without limitation, any pro forma increase from the application of
the proceeds of such additional Secured Debt, less (iii) any decrease in the
Gross Asset Value resulting from any disposition completed after the end of such
quarter.
4. Defeasance. The Indenture contains provisions, which are hereby made
applicable to the Securities of this series, for defeasance at any time of (1)
the entire indebtedness of the Securities of this series or (2) certain
restrictive covenants and Events of Default with respect to the Securities of
this series, in each case, upon compliance with certain conditions set forth in
the Indenture.
In addition to the covenants specified in Section 1303 of the Indenture,
the defeasance provided under such Section shall be equally applicable to
paragraphs (d) and (e) of Section 3 of this Security. To the extent the
covenants set forth in paragraphs (d) and (e) of Section 3 of this Security are
defeased in accordance with the Indenture, the failure of the Company to comply
with such covenants shall not be deemed to constitute or result in an Event of
Default.
5. Events of Default. (a) If an Event of Default with respect to
Securities of this series shall occur and be continuing, the principal of the
Securities of this series may be declared due and payable in the manner and with
the effect provided in the Indenture.
(b) With respect to the Securities of this series, Clause (5) of
Section 501 of the Indenture shall be replaced with the following:
(5) a default under any bond, debenture, note, mortgage,
indenture or instrument under which there may be issued or by which
there may be secured or evidenced any indebtedness for money borrowed
by the Company (or by any Subsidiary, the repayment of which the
Company has guaranteed or for which the Company is directly
responsible or liable as
5
<PAGE>
obligor or guarantor) (including a default with respect to Securities
of any series other than that series) having an aggregate principal
amount outstanding of at least $10,000,000, whether such indebtedness
now exists or shall hereafter be created, which default shall have
resulted from the failure to pay such indebtedness at its maturity or
shall have resulted in such indebtedness being declared due and
payable prior to the date on which it would otherwise have become due
and payable, without such acceleration having been rescinded or
annulled, within a period of 10 days after there shall have been
given, by registered or certified mail, to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities of that series a
written notice specifying such default and requiring the Company to
cause such acceleration to be rescinded or annulled and stating that
such notice is a "Notice of Default" hereunder; or
(c) As provided in and subject to the provisions of the Indenture, the
Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and shall have failed to institute any such proceeding, for 60
days after receipt of such notice, request and offer of indemnity. The
foregoing shall not apply to any suit instituted by the Holder of this Security
for the enforcement of any payment of principal hereof or any premium or
interest hereon on or after the respective due dates expressed herein.
6. Modification and Waiver. The Indenture permits, with certain
exceptions as therein provided, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders of the
Securities of each series to be affected under the Indenture at any time by the
Company and the Trustee with the consent of the Holders of a majority in
principal amount of the Securities at the time Outstanding of each series to be
affected.
The Indenture also contains provisions permitting the Holders of a majority
in principal amount of the Securities of each series at the time Outstanding, on
behalf of the Holders of all Securities of such series, to waive compliance by
the Company with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by the
Holder of this Security shall be conclusive and binding upon such Holder and
upon all future Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Security.
7. Certain Definitions. The following are definitions of certain terms
applicable with respect to the Securities of this series:
6
<PAGE>
"Adjusted Treasury Rate" means, with respect to any Determination
Date, the rate per annum equal to the semi-annual yield to maturity of
the ComparableTreasury Issue, assuming a price for the Comparable
Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such Determination Date,
plus 25 basis points.
"Assets Under Development" means land and improvements owned by a
member of the Consolidated Group or an Investment Affiliate being
developed for retail, office, mixed-use or other rental-income
producing purposes which meet all four of the following criteria:
(i) such project (or phase) has not yet been substantially completed;
(ii) no rental income has yet been received; (iii) no certificate of
occupancy has yet been issued for such project (or phase); and
(iv) such project (or phase) is classified as construction in progress
in accordance with GAAP.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday or
Friday which is not a legal holiday in New York, New York.
"Capital Stock" means shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation,
equivalent ownership interests in a Person which is not a corporation,
and warrants or options to purchase any of the foregoing.
"Cash Equivalents" means (i) short-term obligations of, or fully
guaranteed by, the United States of America, (ii) commercial paper
rated A-1 or better by Standard & Poor's Rating Services (or any
successor) or P-1 or better by Moody's Investors Service, Inc. (or any
successor), or (iii) certificates of deposit issued by, and time
deposits with, commercial banks (whether domestic or foreign) having
capital and surplus in excess of $100,000,000.
"Code" means the Internal Revenue Code of 1986, as amended from
time to time, or any replacement or successor statute, and the
regulations promulgated thereunder from time to time.
"Comparable Treasury Issue" means the United States Treasury
security selected by the Independent Investment Banker as having a
maturity comparable to the remaining term of the Notes that would be
utilized, at the time of selection and in accordance with customary
financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining term of the Securities of this
series.
"Comparable Treasury Price" means, with respect to any
Determination Date:
(i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of
its
7
<PAGE>
principal amount) on the third Business Day preceding
such Determination Date, as set forth in the daily
statistical release (or any successor release) published by
the Federal Reserve Bank of New York and designated
"Composite 3:30 p.m. Quotations for U.S. Government
Securities," or
(ii) if such release (or any successor release) is not published
or does not contain such prices on such Business Day, (a)
the average of the Reference Treasury Dealer Quotations for
such date, after excluding the highest and lowest such
Reference Treasury Dealer Quotations, or (b) if fewer than
three such Reference Treasury Dealer Quotations are
obtained, the average of all such Reference Treasury Dealer
Quotations.
"Consolidated Group" means the Company and its Subsidiaries that
are consolidated with the Company for financial reporting purposes
under GAAP, and any other Person whose financial results are
consolidated using the proportionate share method under GAAP in the
Financial Statements.
"Consolidated Group's Pro Rata Share" means, with respect to any
Investment Affiliate, the percentage of the total ownership and
financial interests held by the Consolidated Group, in the aggregate,
in such Investment Affiliate as determined in accordance with GAAP.
"Determination Date" means, with respect to the calculation of
the Make-Whole Price in connection with any redemption of the
Securities of this series, the Redemption Date.
"GAAP" means generally accepted accounting principles in the
United States, consistent with the accounting principles utilized in
preparing the Financial Statements in accordance with the Indenture.
"Gross Asset Value" means, as of any determination date, the sum
of the values of the following assets of the Consolidated Group,
including the Consolidated Group's Pro Rata Share of the values of
such assets of Investment Affiliates, based on the valuation methods
set forth below:
(a) with respect to all Retail Properties, the Net Operating
Income attributable thereto for the most recent period of
four full fiscal quarters for which financial results have
been reported, divided by 0.0825;
(b) with respect to all office, mixed-use and other income-
producing properties other than Retail Properties, the Net
Operating Income attributable thereto for the most recent
period of four full fiscal quarters for which financial
results have been reported, divided by 0.09;
8
<PAGE>
(c) with respect to the Summerlin, Las Vegas and Columbia,
Maryland properties and any other properties relating to
additional master-planned communities developed or acquired
after the date hereof, 100% of the most recent current value
thereof (without deduction for the value of the interests of
the Hughes heirs therein under the Hughes Agreement) as set
forth in appraisals prepared by Landauer Associates, Inc.
(or another nationally recognized appraisal firm selected by
the Company), provided that the Company will obtain updated
appraisals thereof at least once during each fiscal year and
also when, during any four consecutive full fiscal quarters,
any such properties having an aggregate value in excess of
5% of Gross Asset Value as of the end of the last full
fiscal quarter are sold or transferred;
(d) 100% of the GAAP book value of all other land, all Assets
Under Development and other non-income-producing properties
(less the portion of such value attributable to minority
interest holders);
(e) 100% of the GAAP book value of cash and Cash Equivalents
held by the Consolidated Group; and
(f) 100% of the GAAP book value of current accounts receivable,
net held by the Consolidated Group.
Notwithstanding the preceding sentence, the contribution to the Gross
Asset Value of those assets acquired in any acquisition will be
calculated prior to the date ending on or after four full fiscal
quarters subsequent to any such acquisition using the actual
acquisition cost of such assets excluding actual transaction costs
(without regard to any adjustments which may be made in determining
book value under GAAP).
"Hughes Agreement" means the Contingent Stock Agreement,
effective as of January 1, 1996, by the Company in favor of and for
the benefit of the holders and the representatives named therein.
"Independent Investment Banker" means one of the Reference
Treasury Dealers appointed by the Trustee after consultation with the
Company.
"Investment Affiliate" means any Person in which any member of
the Consolidated Group, directly or indirectly, has an ownership
interest, whose financial results are not consolidated using the
proportionate share method under GAAP with the financial results of
the Consolidated Group in the Financial Statements.
9
<PAGE>
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without
limitation, any conditional sale or other title retention agreement or
lease in the nature thereof, any filing or agreement to file a
financing statement as debtor under the Uniform Commercial Code on any
property leased to any Person under a lease which is not in the nature
of a conditional sale or title retention agreement, or any
subordination agreement in favor of another Person).
"Make-Whole Price" means, with respect to any Security of this
series as of any Determination Date, an amount equal to the greater
of:
(i) 100% of the principal amount of such Security; and
(ii) as determined by an Independent Investment Banker, the sum
of the present values of the remaining scheduled payments
of principal and interest thereon (not including any
portion of such payments of interest accrued as of the
Determination Date) discounted to the Determination Date on
a semi-annual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Adjusted Treasury Rate,
plus, in each case, accrued and unpaid interest thereon to such
Determination Date.
"Net Operating Income" means, with respect to any Property, for
any period, earnings from rental operations (computed in accordance
with GAAP, but without deduction for reserves) attributable to such
Property, plus depreciation, amortization, interest expense and
deferred taxes with respect to such Property for such period, and, if
such period is less than four full fiscal quarters, adjusted by
straight lining ordinary operating expenses which are payable less
frequently than once during every such period (e.g., real estate taxes
and insurance). The amounts determined under the preceding sentence
will be adjusted by adding back (i) the interests of the former Hughes
owners pursuant to the Hughes Agreement that were excluded in
determining such amounts and (ii) dividends or other distributions
accrued with respect to such period on any preferred stock or other
preferred security issued by the Company to the extent that such
dividends or other distributions are treated as an operating expense
under GAAP. "Net Operating Income" will be adjusted to include a pro
forma amount thereof (as determined in good faith by the Company) for
four full fiscal quarters for any Property placed in service during
any quarter and to exclude any Net Operating Income for the prior four
full fiscal quarters from any Property not owned as of the end of any
quarter.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision
thereof.
"Property" means each parcel of real property owned or operated
by any member of the Consolidated Group or any Investment Affiliate.
10
<PAGE>
"Reference Treasury Dealer" means each of BT Alex. Brown
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc
One Capital Markets, Inc., J.P. Morgan Securities Inc. and Deutsche
Bank Securities Inc. and their respective successors; provided,
however, that if any of the foregoing shall not be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury
Dealer"), the Company shall substitute therefor another Primary
Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to
each Reference Treasury Dealer and any Determination Date, the average
of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount)
quoted in writing by such Reference Treasury Dealer at 5:00 p.m. on
the third Business Day preceding such Determination Date.
"Retail Property" means a shopping center or other retail
development containing more than one retail tenant in which at least
90% of the Net Operating Income from such center or development is
attributable to retail uses.
"Secured Debt" means, as of any determination date, the sum of:
(i) the aggregate principal amount of all Debt of the
Consolidated Group then outstanding (including only the
Company's proportionate interest, as determined under GAAP,
in the Debt of any Person whose financial results are
consolidated using the proportionate share method in the
Financial Statements) which is secured by a Lien on any
asset (including any Capital Stock) of any member of the
Consolidated Group, including, without limitation, loans
secured by mortgages, stock, or partnership interests, plus
(ii) the Consolidated Group's Pro Rata Share of any Debt of an
Investment Affiliate then outstanding which is secured by a
Lien on any asset (including any Capital Stock) of such
Investment Affiliate, without duplication of any such
items.
For purposes of the preceding sentence, "Debt" will (a) include, with
respect to any Person, any loans where such Person is liable as a
general partner or co-venturer less, in each case, the proportionate
share of any other general or limited partners or co-venturers and (b)
exclude any Debt due from any member of the Consolidated Group or any
Investment Affiliate solely to one or more members of the Consolidated
Group.
"Subsidiary" means a Person more than 50% of the (1) outstanding
voting stock or interest in which and/or (2) financial interest in
which, is
11
<PAGE>
owned, directly or indirectly, by the Company or by one or more other
Subsidiaries, or by the Company and one or more other Subsidiaries.
For purposes of this definition, "voting stock" means stock or other
interest which ordinarily has voting power for the election of
directors or equivalent persons, whether at all times or only so long
as no senior class of stock or other interest has such voting power by
reason of any contingency.
"Total Debt" means, as of any determination date,
(i) all Debt of the Consolidated Group then outstanding
(including only the Company's proportionate interest, as
determined under GAAP, in the Debt of any Person whose
financial results are consolidated using the proportionate
share method in the Financial Statements), plus
(ii) the Consolidated Group's Pro Rata Share of all Debt of
Investment Affiliates then outstanding, without duplication
of any such items.
For purposes of the preceding sentence, "Debt" will (a) include, with
respect to any Person, any loans where such Person is liable as a
general partner or co-venturer less, in each case, the proportionate
share of any other general or limited partners or co-venturers and
(b) exclude any Debt due from any member of the Consolidated Group or
any Investment Affiliate solely to one or more members of the
Consolidated Group.
"Total FFO" means, for any period, net earnings, as reported by
the Consolidated Group in accordance with GAAP, excluding cumulative
effects of changes in accounting principles, extraordinary or unusual
items, gains or losses from debt restructurings and sales of
properties, and deferred income taxes, plus depreciation and
amortization and after adjustments for minority interests, and
treating unconsolidated partnerships and joint ventures on the same
basis, plus (i) distributions accrued with respect to such period of
the 9-1/4% Cumulative Quarterly Income Preferred Securities (QUIPS) of
Rouse Capital (Delaware statutory business trust), plus (ii) payments
made and other amounts treated as an expense of the Company under GAAP
with respect to such period pursuant to the Hughes Agreement (provided
that no item of income or expense shall be included more than once in
such calculation even if it falls within more than one of the above
categories).
"Total Interest Expense" means, for any period, the sum of
(1) all interest expense of the Consolidated Group (less the
proportionate share of interest expense of any minority interest
holders), plus (2) the allocable portion (based on liability) of any
interest expense on any obligation for which any member of the
Consolidated Group is wholly or partially liable under repayment,
interest carry or performance guarantees or other relevant
liabilities, plus (3) the Consolidated Group's Pro Rata Share of
12
<PAGE>
any interest expense on any Debt of any Investment Affiliate, whether
recourse or non-recourse (provided that no expense shall be included
more than once in such calculation even if it falls within more than
one of the foregoing categories, and provided, further, that no
interest expense on Debt due from one member of the Consolidated Group
solely to another member of the Consolidated Group shall be included
in determining Total Interest Expense). For purposes of the preceding
sentence, interest expense will be determined in accordance with GAAP
and will exclude any amortization of debt issuance costs.
Except as otherwise provided herein, all terms used in this Security which
are defined in the Indenture shall have the meanings assigned to them in the
Indenture
8. Absolute Obligation. No reference herein to the Indenture and no
provision of this Security or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and any premium and interest on this Security at the times, place
and rate, and in the coin or currency, herein prescribed.
9. Registration of Transfer and Exchange. As provided in the Indenture
and subject to certain limitations therein set forth, the transfer of this
Security is registrable in the Security Register, upon surrender of this
Security for registration of transfer at the office or agency of the Company in
any place where the principal of and any premium and interest on this Security
are payable, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Security Registrar duly
executed by, the Holder hereof or its attorney duly authorized in writing, and
thereupon one or more new Securities of this series and of like tenor, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made to a Holder for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE SUBMITTED IN ACCORDANCE WITH REGULATION S-K ITEM
601(C)(2). THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 10-Q FOR
THE ANNUAL PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 29,470
<SECURITIES> 4,076
<RECEIVABLES> 113,114
<ALLOWANCES> 21,548
<INVENTORY> 0
<CURRENT-ASSETS> 143,878<F1>
<PP&E> 4,216,752
<DEPRECIATION> 540,345
<TOTAL-ASSETS> 4,523,063
<CURRENT-LIABILITIES> 544,403<F2>
<BONDS> 3,440,147
0
41
<COMMON> 723
<OTHER-SE> 636,893
<TOTAL-LIABILITY-AND-EQUITY> 4,523,063
<SALES> 180,042
<TOTAL-REVENUES> 180,042
<CGS> 0
<TOTAL-COSTS> 111,545
<OTHER-EXPENSES> (1,106)
<LOSS-PROVISION> 1,312
<INTEREST-EXPENSE> 63,624
<INCOME-PRETAX> 28,000
<INCOME-TAX> 74
<INCOME-CONTINUING> 26,820
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,926
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<FN>
<F1>CURRENT ASSETS INCLUDE CASH, UNRESTRICTED MARKETABLE SECURITIES, CURRENT
PORTION OF ACCOUNTS AND NOTES RECEIVABLE AND PREPAID EXPENSES AND DEPOSITS.
<F2>CURRENT LIABILITIES INCLUDE THE CURRENT PORTION OF LONG-TERM DEBT AND
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES.
</FN>
</TABLE>
