CX_Rouse Cover 4/14/99 3:03 PM Page III THE ROUSE COMPAN Y

Creating a ortfolio Pof Quality

A N N U AL REPORT 1998 CX_Rouse Cover 4/14/99 3:03 PM Page IV

Creating a ortfolio Pof Quality

HE ROUSE COMPA N Y traces its founding back to 1939 as a mortg a g e Tbanking firm. Since the mid-1950s, the Company’s primary business has been the development and management of commercial real estate proj e c t s ,

st a r ting out with centers and later including new communities and

office and industrial projects.

Among the Company’s well-known retail projects are Faneuil Hall

Marketplace in , in ,

in Bal t i m o r e, The Fashion Sho w in Las Vegas, in Cleve-

land and in . Well-known, mixed-use projects

include in Portland, in and

Center in Phoenix. The Company, through its affiliates, is also developer

of two of the most successful new communities in the United States:

Columbia, and Summerlin, .

The Company views the development, prop e r ty management and

acquisition/disposition efforts as long term value creation opportu n i t i e s .

Beginning on page 7, a special section of this rep o r t is devoted to the Com-

pa n y ’s overall objectives and some of the developments, acquisitions, dispo-

sitions and management strategies that create and enhance the value of this

po r tfolio of prop e rt i e s . Highlights

Operating Results 1998 1997

Revenues (note 1) $ 977,243,000 $ 927,930,000 Funds from Operations (note 2) $ 204,842,000 $ 181,390,000 Net Earnings $ 104,902,000 $ 167,336,000

Financial Position

Total Assets (note 1) $ 5,783,296,000 $ 4,179,555,000 Debt and Capital Leases (note 1) $ 4,401,920,000 $ 2,965,551,000 Shareholders’ Equity $ 628,926,000 $ 465,515,000

Other Selected Data

Net Earnings Per Share—Diluted $ 1.34 $ 2.29

Funds from Operations Per Share—Diluted $ 2.69 $ 2.47

Weighted Average Common Shares Outstanding Used in Diluted Per Share Calculations: Earnings Per Share 68,859,000 76,005,000 Funds from Operations Per Share 78,748,000 76,376,000

Dividends Per Share: Common stock $ 1.12 $ 1.00 Preferred stock $ 3.00 $ 2.65 Number of Employees 4,126 4,040

Note 1—Amounts are adjusted to include unconsolidated real estate ventures in which the Company holds a majority of the financial interest, but does not own a majority voting interest. Revenues also include the Company’s share of Funds from Operations of unconsolidated real estate ventures in which it holds a minority interest. See note 3 of the notes to the consolidated financial statements for a descrip- tion of these ventures. Note 2—Funds from Operations (FFO) represents revenues less operating, interest and certain current income tax expenses. FFO is also adjusted to include the Company’s share of FFO of unconsolidated real estate ventures. See the “Funds from Operations” section of Manage- ment’s Discussion and Analysis of Financial Condition and Results of Operations on page 64 for a full discussion of FFO.

C O N T E N T S

Hig h l i g h t s 1

Letter to Sha re h o l d e r s 2

Financial Rev i e w 2 3

Man a g e m e n t ’s An a l y s i s 5 8

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Letter to Shareholders

HE PAST YEAR WAS A PERIOD OF SIGNIFICANT CHANGE and accomplishment for Th e At year-end, occupancy of the Company’s retail centers, historically the highest in . On Jan u a r y 1st, after 42 years as a public “C” Corporation, The Rou s e in d u s t r y, was 95.2%, compared to 94.1% at December 31, 1997. Comparable space sales of Company began operating as a real estate investment trust (REIT). This new corporate struc - me r chants in the Company’s retail centers increased by almost 5% in 1998, while compara- tu r e allows the Company to pursue strategic objectives in a more competitive format. Dur i n g ble merchant sales on a per square foot basis increased to $371 from $341 at the end of 1997. the yea r , the Company completed two large acquisitions: the $1.0 billion purchase of five pr emier retail centers from Tri ze c H ahn Centers, Inc.; and the $373 million purchase of 67 Office, Mi xe d - Use and Ot h e r The Company’s portfolio of office, mixed-use and other prop e r ties produced rec o r d Funds office/industrial buildings and 107 acres of commercially zoned land from Rou s e - Te a c h e r s Pro p e rties Re p o rt Sixth From Operations for 1998 of $35.1 million, a 32% increase over $26.6 million in 1997. Prop e r ties, Inc.. In addition to these milestones, each of the Company’s operating lines of Year of St rong Grow t h Similar to the Company’s retail centers, higher rents on re-leasing and high occupancy business produced a rec o r d year of financial perfo r m a n c e . l e vels we re significant factors in this growth. New projects in Las Vegas, improved oper- T Total Funds From Operations for the year wer e ations of the retail segments of the mixed-use projects and lower interest expenses we re $204.8 million, a 13% increase over $181.4 million in also important factors. 1997. On a diluted per share basis, Funds Fro m During the yea r , 1.6 million square feet of space was leased, and occupancy at yea r - Operations totaled $2.69, up from $2.47 a year ago. Net end was almost 96% for office space and 95% for industrial space (excluding new buildings Earnings wer e $104.9 million, down from 1997’s $167.3 opened during 1998). The combination of strong demand in our markets and six new build- million, which included a one time rev ersal of $124.2 ings coming on stream gives confidence that 1999 will set the seventh consecutive rec o r d yea r million of net deferred income tax liabilities related to the for earnings.

A N T H O N Y W. DE E R I N G co n v ersion to REIT status. Ch a i r man of the Board and This outstanding operating performance was Community De ve l o p m e n t The Company’s two major community development projects, the master-planned com- Chief Executive Officer accompanied by significant prog r ess on projects in the Results On Target, munities of Columbia, Mar yland, and Summerlin, Nev ada, had excellent years again in co m m e r cial development pipeline. Openings during 1998 Another New Re c o rd 1998. Total land sales from community development operations wer e $197.7 million, while included a new regional shopping center, eight depart- Funds From Operations wer e a rec o r d $48.8 million, as compared to $47.1 million in 1997. ment store additions to existing centers, five new Both communities had years of exceptional prog r ess, and both continue to experience out- office/industrial buildings, three complete ren o vations of standing market recognition and demand. Columbia, now approaching the 32nd anniver - village centers in Columbia, Mar yland and two new village centers in Summerlin, Neva d a . sa r y of its first residents, is in a more mature phase than Summerlin, but there is still sufficient Cur r ent Value Sha re h o l d e r s ’ Equity increased to $2.4 billion or $33.15 per share, up saleable acreage to produce substantial rev enues and earnings fr om $2.1 billion or $31.80 per share at the end of 1997. well into the first quarter of the next century. In 1998, The Board of Dir ectors, in recognition of the outstanding year and of the Company’s Summerlin was the best-selling master- fu t u r e prospects, approved an increase in the common stock dividend to $.30 per share per in the United States for the sixth time in the last seven yea r s . qu a rt e r , or $1.20 on an annual basis. This 7% increase rep r esents the 19th increase in the Its population is now approximately 33,000 out of an antic- dividend rate over the 21 years since the program began. ipated 160,000 at completion, so there is now opportu n i t y not only for residential growth, but also for expansion of the Retail Centers Post Funds From Operations from the Company’s portfolio of operating retail centers totaled a co m m u n i t y ’s commercial base. Another Re c o rd Ye a r rec o r d $140.1 million, a 14% increase over $123.1 million for 1997. Higher rents from The Company’s 1999 community deve l o p m e n t re-leased space and higher average occupancy rates wer e the primary factors in this growt h . ob j e c t i v es are for approximately $175-$200 million of rev - A total of 3.2 million square feet of space in existing and new retail projects was leased dur- enues and $45-$50 million of Funds From Operations, goals ing the yea r . In existing centers, new first year rents averaged $31.00 per square foot, almost un d e r g i r ded by the strong dynamics of both marke t s . $7.00 per square foot above the existing rents. In 1998, for the sixth time in seven years, Summerlin was ranked as the nation's top-selling master-planned community.

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De velopment Pipeline A large number of development projects reached fruition with openings during 1998. al r eady has a significant presence, central and Bal t i m o r e, res p e c t i ve l y . The pur- The Company solidified its presence in Still Brimming with Oviedo Mar ketplace in the northeastern suburbs of Orlando, opened on Mar ch 4, chase also included a 25% interest in The Fashion Sho w, the premier traditional retail center the retail market with the acqui- Exciting Pro j e c t s 1998. The center has Dil l a r d’s and Par i s i a n de p a r tment stores and 300,000 square feet of sition of — a one in Las Vegas. The Company already owned the other 75% of The Fashion Sho w, and the mall retail space, including several “big boxes ” (e.g., Bed, Bath & Bey ond and Barnes & million square foot center anchored by acquisition simplifies plans for a pending major expansion. Bri d g e water Commons and Noble) and a 22-screen Regal Cinemas complex. Add i t i o n a l l y , will open a store at Nordstrom and Hecht's. are also moving forwa r d with major expansions in the next few years. Oviedo Mar ketplace in 2000. Fur ther expansion that will create a five department store, Subsequent to the purchase of these pro p e rties fro m dominant center is currently underwa y . Tri ze c H ahn Centers Inc., the Company, in early 1999, established a

In Mar ch, Nord s t r om opened its first store in the southeastern Uni t e d joint ven t u r e with a ven t u r e consisting of the J. P. Morgan Str a t e g i c States at Perimeter Mall in Atlanta, . Customer response has been Prop e r ty Fund and the New Yor k State Tea c h e r s ’ Ret i r ement Sys t e m . ver y enthusiastic, boosting sales of the other mall tenants and paving the The ven t u r e invested $604 million ($271 million of cash and $333 way for a further expansion of the center, which is now underwa y . million of related financing) to acquire a 65% interest in four of the

Lo r d & Taylor department stores wer e added to four of the Company’s centers (not including Fashion Sho w), with the Company retaining a centers during the year: Mall St. Mat t h e ws in Louisville, and 35% interes t . White Marsh, Owings Mills and in metrop o l i - The Company’s purchase of its partn e r ’s 95% interest in tan Bal t i m o r e, Mary l a n d . Rou s e - T eachers Prop e r ties, Inc. was completed late in the yea r . Th e

Sears opened two new stores, one at Echelon Mall in New Jersey and 67 office and industrial buildings (three of which wer e subsequently another at Owings Mills in Mar yland, and Dil l a r d’s opened at Aug u s t a sold) and 107 acres of land are almost excl u s i v ely located in the Mall in Geo r g i a . Bal t i m o re - W ashington area and have been managed by the Company

In Nev ada, two office projects wer e opened in Summerlin; an office for the past ten years. They rep r esent an excellent strategic addition in building and a restaurant at Hughes Center in Las Vegas; and two flex this dynamic growth marke t . buildings at Hughes Airport Center adjacent to McCarran Airport. In other transactions designed to strengthen the overall quality Sears will join Dillard's, Parisian Two village centers — The Trails and Summerlin Gat e way Plaza — opened in Sum m e r l i n , of the portfolio, the Company acquired its partn e r s ’ 50% interest in and Regal Cinemas 22 at the and three village centers, Har p e r ’s Choice, Long Reach and Oakland Mills, wer e ren o vat e d Gover n o r ’s Squ a r e, a dominant, four department store retail center in Company's newest regional shopping in Columbia. Tallahassee, Florida, and disposed of its interests in ten retail centers. In addition to the ret a i l center, Oviedo Marketplace in the This successful activity typifies the Company’s development objectives going forwa rd . center sales, dispositions included two hotels and two industrial buildings in Columbia that fast-growing northeastern suburbs of Orlando, Florida. The pipeline is filled with a wide variety of new regional shopping centers, expansions to did not fit the long term growth prof i l e . existing centers, village centers, office and industrial buildings and other opportunities. Th e special section of this annual rep o r t that begins on page 7 highlights many of these proj e c t s , Organizational Changes Ov er the course of 1998, several promotions wer e made at senior management levels. In which are scheduled for completion over the next four yea r s . Instituted to Im p rov e Dec e m b e r , Douglas A. McG regor was elected Vice Chairman and Chief Operating Off i c e r , Operating Ef f i c i e n c i e s and Jef f r ey H. Donahue and Jer ome D. Smalley wer e named Exec u t i v e Vice Presidents. Banner Yea r for As noted, the Company completed the acquisition of five premier regional shopping centers Jeff Donahue, who is Chief Financial Off i c e r , now has responsibility for all Finance, Legal, Ma jo r Ac q u i s i t i o n s during the yea r . Two of the centers, Par k Mea d o ws and Fashion Place, are in the rapidly grow- Co n t r ollership and Tax functions, while Jer r y Smalley now oversees all Commerci a l ing metropolitan areas of Den v er and , res p e c t i ve l y . In addition, Bri d g ew a t e r Dev elopment and New Business activities. Commons and Towson Town Center, are in densely populated areas where the Company

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Creating a ortfolio Pof Quality

The Operations Committee (pictured on the inside back cover) was expanded to HILE THE QUEST FOR QUA L I TY is dynamic and forwa r d-looking, a look include three individuals who wer e promoted to the post of corporate vice president. Dan i e l C. Van Epp , head of the Summerlin Division, and John A. Kilduff, director of commerci a l at past performance can provide a good sense of the future. The first six de v elopment in the west, both join the committee from The Howa r d Hughes Corporation, W pages of this special section deal with the prog r ess over the past five years in replacing John L. Goo l s b y who ret i r ed. Janice A. Fuchs was named Dir ector of Hum a n Res o u r ces and Adm i n i s t r a t i v e Ser vices and, in recognition of the importance of these func- each of the Company's three operating lines of business. The balance of the tions, was appointed to the Operations Committee. section then highlights some of the projects and programs that will be pur-

Su m m a r y Tremendous prog r ess was made during 1998 and operating results wer e excellent. Like most sued into the early part of the next century. The quality of the Company's small capitalization public companies and virtually all public real estate companies, the The first Galleries of Neiman Co m p a n y ’s stock price did not reflect this excellent performance. Wh i l e cu r r ent portfolio now ranks at the top of the industry and will continue to Marcus store in the United States the National Association of Real Estate Inv estment Trusts Index of share opened at Beachwood Place in im p r ove with the addition of projects presently underwa y . prices declined by 25% for 1998, the Company’s price decline was 16%, Cleveland, , further reinforc- small solace for a difficult market. Ever y effort is being made to rei n f o rc e ing the center's position as the the Company’s story with the investment community again in 1999, but premier fashion mall in Ohio. the basic imperative of the Company is to do its business well, while seek- ing opportunities for growth and value creation. Operating results for 1999 should reflect continued strong growt h fr om retail and office, mixed-use operations, while community devel o p - ment should meet the Company’s Funds From Operations objective of $45-$50 million. As a result, we believe that investors will rec o g n i z e that our growing Funds From Operations and cash dividends plus the increa s - ing value being created in our portfolio through focused development and acquisition make The Rouse Company a superior equity inves t m e n t .

Pioneer Place, the Company’s highly successful mixed-use project, is presently being expanded to cover a third, prime block in downtown Portland, . A N T H O N Y W. D E E R I N G Chairman of the Board and Chief Executive Officer

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Retail Centers Since 1996, the Company has added six Lord & Taylor department stores to its portfolio, at The Mall in Columbia, Mall St. Matthews, Owings Mills, White Marsh, Willowbrook and .

N 1993, the Company undertook a com- In an effort to quantify the success of this strategy, the Company's Mar ket Res e a rc h pre h e n s i v e rev i e w of its retail prop e rt i e s Dep a r tment developed a model to rank regional malls. Factors used in this analysis included:

and concluded that a number of centers total malltotal salesmall sales number number of anchor of anchor tenants tenants Iwer e not well positioned for the future. mall shopmall salesshop persales square per square foot foot quality quality of national of national retail retailalignment alignment Th e r e wer e a number of factors that cre- mall shopmall occupancyshop occupancy rate rate mall competitivemall competitive position position in mar ink e mart ke t ated this concern: The model was applied to a universe of 253 regional centers operated by the

Dem o g r a p h i c a l l y , the United States was Company and four other major, publicly owned "mall REITS," and it resulted in 68 "A" seeing a shrinking middle class, as rea l centers, 81 "B" centers and 104 "C" centers. The Company's portfolio as it existed in 1993 family income declined for many, while was then evaluated as a baseline: in c r easing significantly for some. TOT A L “ A ” “ B ” “ C ” Retailing was changing dramatically as C E N T E R S C E N T E R S C E N T E R S C E N T E R S 1 9 9 3 "big boxes," category killers, discounters 5 1 5 1 3 3 3 and outlets proliferated, all reaching out

for the price-conscious consumer. By the end of 1998, the Company's portfolio, now smaller but more prod u c t i v e, has De p a rtment stores we re undergoing been altered for the better by a substantial amount. intense consolidation, with mergers and TOT A L “ A ” “ B ” “ C ” acquisitions and dissolutions and bank- C E N T E R S C E N T E R S C E N T E R S C E N T E R S 1 9 9 8 ruptcies commonplace. This industry 3 6 1 6 1 0 1 0 seemed destined to evol v e into a classic

ol i g o p o l y , with only a handful of national During the five- y ear period, seven centers wer e acquired and one newly devel o p e d de p a r tment store chains. mall was added, but the total number of centers in the portfolio has declined to 36, throu g h New technologies wer e emerging that offered the prospect of changing some traditional shop- the dispositions of centers. At the same time, six of the centers wer e expanded and upgraded R et a i l Po rtfolio Changes Since 1993 ping patterns. and nine others have added new department stores . N E W P RO J E C TS / D E PA RT M E N T PA RT N E R As a result, the Company adopted a strategy of repositioning its shopping center port- E X PA N S I O N S S TORE ADDITIONS A C QU I S I T I O N S B U Y- O U TS On pages 14-19, future new project and expansion openings are highlighted. By the folio, focusing on quality and market dominance. The objective would be to own and man- Beachwood Pla c e Augusta Mal l Bri d g e water Commons Augusta Mal l year 2003, when these projects are completed, the portfolio composition will look as follows : age centers that wer e strategically located in their markets and wer e convenient, safe, attractive Hulen Mal l Burlington Center Collin Cree k Beachwood Pla c e TOT A L “ A ” “ B ” “ C ” to the consumer and offered the best selection of quality merchandise and services. A rel a t e d Mall St. Mat t h ew s The Mall in Columbia Fashion Pla c e The Fashion Sho w C E N T E R S C E N T E R S C E N T E R S C E N T E R S 2 0 0 3 goal would be to attract additional department stores and destination retailers to the centers, Echelon Mal l The Fashion Sho w Gover n o r ’s Squ a r e 3 9 1 9 1 5 5 th e re b y rei n f o r cing their competitive market position. As a result of these strategic decisions, Perimeter Mal l Owings Mil l s Moo re s t o wn Mal l Paramus Par k the Company undertook an aggres s i v e program of: expanding and/or ren o vating all existing Mal l Plymouth Mee t i n g Par k Mea d ow s Santa Monica Pla c e The operating results of the retail portfolio between 1993 and 1998 reflect the centers that had strong fundamentals; selectively undertaking the development of new pro- Oviedo Mark e t p l a c e Wil l ow b ro o k Towson Town Center im p r ovement in quality over that five year time span. Even with fewer prop e r ties, Fun d s jects; buying centers that conformed to the new strategy; and disposing of interests in those White Mar s h From Operations from retail centers increased ever y yea r , gaining 14% in 1998; comparable pro p e r ties with limited future potential. Woodbridge Center me r chant sales per square foot increased from an average of $285 in 1993 to $371 in 1998, while occupancy levels, which wer e in the 92% range in 1995 and 1996, rose to 95%. Th e s e st r ong Funds From Operations, sales and occupancy results validate the success of the strat- eg y , and the further improvements and additions to the portfolio occurring over the next few years will rei n f o r ce this perfo r m a n c e .

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3960 Howard Hughes Parkway, Office,Mixed-Use a Class-A office building that and opened in May at Hughes OtherProperties Center in Las Vegas, is now fully leased and occupied.

HE QUAL I T Y of the Company's Office, Mixe d - U se and Other Prop e r ties portfolio res u l t s fr om some of the same factors that influence the retail arena. In 1993, the portfolio was pri- marily located in Columbia and the Bal t i m o re - W ashington Corridor and included the assets Tof Rou s e - T eachers Prop e r ties, Inc. (RTP I), a joint ven t u r e between the Company (5%) and a subsidiary of Teachers Insurance and Annuity Association (95%). The Company was, and remains, the primary devel o p e r / o wner in down t o wn Columbia, while RTP I holdings dominate three of the Corridor's principal submarkets: Hunt Valley and Woodlawn in Bal t i m o r e County and Landover in Prince Geo r g e ’s County. The Company also own s The Corporate Center at Owings Mills, in the growth Bal t i m o r e City's premier office address, The Gal l e r y at Harborplace. The only significant corridor northwest of assets outside this geographic area are the Company's three major mixed-use projects in the Baltimore, currently consists dow n t o wns of Phoenix, Seattle and Port l a n d . of four premier office towers In 1996, the Company strengthened its asset base when it added the operating port- (730,000 square feet) shown folio of The Howa r d Hughes Corporation. These prop e r ties dominate Las Vegas and its sub- here behind the Company's ma r kets in much the same way that the Company's Bal t i m o re - W ashington Corridor five department store regional pro p e r ties dominate their res p e c t i v e areas. The acquisition has also provided an exce l l e n t shopping center (foreground). commercial development pipeline in a st r ong and growing reg i o n . In 1998, the Company purch a s e d its partner's interest in RTP I, thereb y gaining total control of this diverse, wel l - located and prod u c t i v e portf o l i o . The quality of the overall office and industrial portfolio is best evidenced by its financial performance since 1993. As office and industrial markets across the country ha v e flourished in the face of increa s e d demand and limited new devel o p m e n t , Funds From Operations have grown from $2.3 million in 1993 to $35.1 million in 1998, and occupancy has increased from 86% to 95%. Contributors to this success include not only the strategic locations, ex p e r t management and attentive mainte- nance, but also the significant submarke t concentrations of buildings that facilitate both efficient operations and detailed ma r ket knowl e d g e .

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Community Development

IVE YEARS AG O, community development operations consisted primarily of Columbia, FMar yland. In 1993, land sales rev enues totaled $35.3 million and Funds From Ope r a t i o n s wer e $11.8 million. By 1998, Columbia's rev enues totaled $43.5 million and Funds From Operations wer e $17.3 million. Although it's been almost 37 years since the first land parce l s wer e purchased for Columbia, and the community is in the advanced stages of its devel o p - ment, remaining land inven t o r y should last well into the first quarter of the 21st century. As residential land is sold, commercial and office land sales should continue to increase, rei n - fo r ced by Columbia's excellent schools, highly educated work force, proximity to Bal t i m o r e and and other quality of life considerations. In 1996, the purchase of The Howa r d Hughes Corporation added another major community development, Summerlin, Nev ada. Only ten years old, Summerlin is in a much earlier stage of its development cycle than Columbia. During 1998, Summerlin ranked num- ber one in the United States for sales of residential units in master-planned communities for the sixth time in the past seven years. Add i t i o n a l l y , in 1998, the first two village centers and two office projects opened. Opp o r tunities for additional retail projects and other commer- cial uses increase with the success of each new addition and the continuing growth of the po p u l a t i o n . Summerlin's development will accelerate with the year 2000 opening of the first phase of the Las Vegas perimeter beltway. It will be a limited access highway connecting the com- munity to McCarran Airport, which will then be only 15 minutes away. The beltway's six in t e r changes in Summerlin provide excellent commercial development opportunities, includ- ing Town Center, a four department store (first phase) regional mall which is expected to open after the beltway is completed. These new amenities will enhance Summerlin as a loca- tion for business and industry, just as the low taxes, warm climate and excellent rec re a t i o n a l facilities make it appealing to residents of all ages, including a significant component of senior citizen ret i re e s .

New high-density luxury C O LU M B I A S U M M E R L I N housing and new office space AC R E S Tot a l 18 , 0 0 0 22 , 5 0 0 highlight the dramatically Rem a i n i n g 4, 8 0 0 13 , 6 0 0 Divided into villages, each changing skyline of R E S I D E N TS Tot a l 87 , 0 0 0 33 , 0 0 0 with its own park or golf Columbia's Town Center. At Completion 10 0 , 0 0 0 16 0 , 0 0 0 course, Summerlin sits on J O B S Tod a y 60 , 0 0 0 5, 0 0 0 22,500 acres along the Las OT H E R A broad range of social, cultural entertainment, Vegas Valley's western rim. educational and rec r eational programs and facilities More than 200 model homes are currently open to the home-buying public, offering a wide variety of choices for a multi- generational population.

12 13 CX_Rouse P1-P22_new2 4/20/99 11:40 AM Page 14  Openings The Mall in Columbia Expansion Phase I

Exton Square Expansion Phase I

Par k Square

Hughes Office and Ind u s t r i a l

Construction is on pace for a Spring, 1999 opening of the $270 million Resort at Summerlin - a grand new luxury Circle Seven Resort featuring 540 deluxe rooms and suites, a 50,000 square foot casino, a world renown spa, a golf course, gourmet restaurants, specialty shops, gardens, pools and other recreational facilities.

With a new Lord & Taylor now open, The Mall in

L O R D & T A Y L O R Columbia is poised for a H E C H T ’ S J C P E N N E Y September opening of Nordstrom and a 60,000 square foot expansion wing of Major commercial develop- high N O R D S T R O M ment activity in downtown quality retailers. A complete S E A R S Columbia, Maryland, center-wide renovation and includes the February opening remerchandising includes of a new, fully leased, Class-A a pedestrian promenade office building, Park Square. that will link the center to several superstore anchors, a Premium General Cinema, restaurants and

14 15 CX_Rouse P1-P22_new2 4/20/99 11:41 AM Page 16  Openings The Mall in Columbia Exp a n s i o n Phase II An expanded Saks Fifth Avenue store and a new

Exton Square Exp a n s i o n Sundance Cinema will Phase II anchor an expansion at Pioneer Place in downtown Moo re s t o wn Mall Portland, Oregon. Exp a n s i o n

Perimeter Mall Exp a n s i o n

Oviedo Mar ketplace Exp a n s i o n

Pioneer Place Exp a n s i o n

Hughes Office and Ind u s t r i a l

Construction has begun on a 171,000 square foot Class-A building which will open later this year at Hughes Center in Las Vegas.

Nordstrom opened its first store in the Southeast at Perimeter Mall in Atlanta, Georgia, paving the way for the addition of a dramatic new garden entrance of restaurants and superstores in the Spring of 2000.

16 CX_Rouse P1-P22_new2 4/20/99 11:41 AM Page 17 CX_Rouse P1-P22_new2 4/20/99 11:41 AM Page 18  Openings The Fashion Sho w Expansion Phase I

Hughes Office and Ind u s t r i a l

Columbia Off i c e

With its main entrance strat e - gically positioned on Las Veg a s Bo u l e va r d (The Strip), one of the most dynamic retail loca- tions in the world, the expan- sion and ren o vation of Th e Fashion Sho w will bring together new Blo o m i n g d a l e ' s , Saks Fifth Avenue, Lord & Taylor and Dillard's depart- ment stores with newly expanded and rem e rc h a n d i s e d Neiman Mar cus, Rob i n s o n s - May and Macy's stores in two million square feet of ret a i l space. One-of-a-kind ret a i l shops, signature res t a u ra n t s and entertainment ven u e s will debut in two phases in 2001 and 2002.

An expansion and remerchan- dising program will soon commence at , located in the New Jersey suburbs of . A new Bloomingdale's and new expansion retail space will join Lord & Taylor, Macy's, Sterns in one million square feet of retail space.

18 CX_Rouse P1-P22_new2 4/20/99 11:41 AM Page 19 CX_Rouse P1-P22_new2 4/20/99 11:41 AM Page 20  Openings Bridgewater Commons Exp a n s i o n

The Village of Merrick Par k

The Fashion Sho w Expansion Phase II

Ft. Myers Cen t e r

Fashion Place Exp a n s i o n The Village of Merrick Park,

Hughes Office a mixed-use project in afflu- and Ind u s t r i a l ent Coral Gables, Florida, will be anchored by Neiman Marcus and Florida's first Nordstrom. This project will blend retail, residential, restaurant, entertainment, recreational and commercial office uses in an extraordinary park-like setting of land- scaped public plazas and ornately detailed fountains.

Summerlin Center, a regional shopping place with more than one million square feet of retail space, including Robinsons-May, Lord & Taylor and Dillard’s depart- ment stores will form the heart of Town Center in the rapidly growing master- planned community. 20 CX_Rouse P1-P22_new2 4/20/99 11:41 AM Page 22 FINANCIAL REVIEW Financial Review

The financial rev i e w section of this The financial review section of annual rep o r t to shareholders this annual report to shareholders contains the following sections: contains the following sections:

Management’s Statement on Man a g e m e n t ’s Statement Responsibilities for Accounting, on Responsibilities for Auditing and Financial Reporting Accounting, Auditing and 2 4 Financial Rep o rt i n g 24 Independent Auditors’ Report 2 5 Independent Aud i t o r s ’ Rep o r t 25

Consolidated Financial Statements Consolidated Financial 2 6 Sta t e m e n t s 26

Notes to Consolidated Financial Statements Notes to Consolidated 3 2 Financial Sta t e m e n t s 32

Management’s Discussion and Analysis of Financial Condition Man a g e m e n t ’s Discussion And Results of Operations and Analysis of Financial 5 8 Condition and Results of Ope r a t i o n s 58 Five Year Summary of Funds from Operations and Net Earnings (Loss) Fiv e Year Sum m a r y of Funds 7 0 fr om Operations and Net Earnings (Loss) 70

Park Meadows, in Denver, , one of the five pre- mier regional shopping centers purchased in 1998, will add a new Lord & Taylor this summer.

23 23 The Rouse Company and Subsidiaries MANAGEMENT’S STATEMENT ON RESPONSIBILITIES FOR ACCOUNTING, INDEPENDENT AUDITORS’ REPORT AUDITING AND FINANCIAL REPOR T I N G

The financial statements and other information included in the financial KPMG LLP The Board of Directors and Shareholders re v i ew section of this annual re p o rt to shareholders have been pre p a re d Certified Public Accountants The Rouse Company: by management of the Company. Financial information presented else- 111 South Calvert Street where in this report is consistent with the data presented in the financial Baltimore, Maryland 21202 We have audited the accompanying consolidated balance sheets of The Rouse Company and review section. subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of The consolidated financial statements have been prep a r ed on the basis of operations and compreh e n s i v e income, changes in shareh o l d e r s ’ equity and cash flows for the generally accepted accounting principles considered appropriate in the each of the years in the three - y ear period ended December 31, 1998. These financial state- ci r cumstances. Preparation of the financial statements and other financial ments are the responsibility of the Company’s management. Our responsibility is to expres s information re q u i res a certain amount of estimation and judgment. an opinion on these financial statements based on our audits. Management has made these estimates and judgments based on extensive We conducted our audits in accordance with generally accepted auditing standards . experience and substantive understanding of rel e v ant events and transactions. Those standards req u i r e that we plan and perform the audit to obtain reasonable assurance The primary objective of financial rep o r ting is to provide users of financial about whether the financial statements are free of material misstatement. An audit includes statements with sufficient, rel e v ant information to enable them to eval u a t e examining, on a test basis, evidence supporting the amounts and disclosures in the financial the financial strength and profitability of the Company. Consistent with this statements. An audit also includes assessing the accounting principles used and significant ob j e c t i v e, this annual rep o r t includes a measurement of operating res u l t s estimates made by management, as well as evaluating the overall financial statement pres e n - (F unds from Operations) which supplements net earnings (loss). tation. We believe that our audits provide a reasonable basis for our opinion. In fulfilling its responsibility for the reliability and integrity of financial In our opinion, the aforementioned consolidated financial statements present fairly, in all information, management has established and maintains a system of internal material respects, the financial position of The Rouse Company and subsidiaries as of co n t r ol. Management believes that this system provides reasonable assurance December 31, 1998 and 1997, and the results of their operations and their cash flows for reg a r ding achievement of the Company’s objectives with respect to the rel i a - each of the years in the three - y ear period ended December 31, 1998, in conformity with bility of financial rep o r ting, the effectiveness and efficiency of operations and generally accepted accounting principles. compliance with applicable laws and reg u l a t i o n s . This system is supported by the Company’s business ethics policy and is regularly tested by internal audi- tors. The independent auditors also consider the system of internal control to the extent necessary to determine the nature, timing and extent of their audit procedures. The Audit Committee of the Board of Dir ectors is composed of direc t o r s Feb ru a r y 24, 1999 who are neither officers nor employees of the Company. The Committee meets periodically with management, the Company’s internal auditors and the independent auditors to rev i e w the work and conclusions of each. Th e internal auditors and the independent auditors have full and free access to the Audit Committee and meet with it, with and without management pres e n t , to discuss accounting, auditing and financial rep o r ting matters. The Aud i t Committee recommends, and the Board of Di rectors appoints, the Co m p a n y ’s independent auditors.

24 25 The Rouse Company and Subsidiaries C O N S O L I D A TED BALANCE SHEETS December 31, 1998 and 1997 (in thousands, except share data)

1998 1997 1998 1997 —— — — — — —— — — — — —— — — — — —— — — — — Assets Liabilities Prop e r ty (notes 4 and 7): Debt (note 7): Prop e r ty debt not carrying a Par ent Company guarantee of rep a y m e n t ...... $2, 9 2 3 , 1 1 9 $2, 0 8 5 , 4 5 6 Operating prop e rt i e s : Prop e r ty and deferred costs of proj e c t s ...... $4, 7 1 8 , 7 2 7 $3, 0 7 9 , 9 6 2 Par ent Company debt and debt carrying a Par ent Company guarantee of rep a y m e n t :

Prop e r ty debt...... 16 1 , 9 8 6 15 8 , 0 9 3 Less accumulated depreciation and amorti z a t i o n ...... 57 8 , 3 1 1 51 5 , 2 2 9 —— — — — — —— — — — — Co n ve r tible subordinated debentures ...... 12 8 , 5 1 5 13 0 , 0 0 0 4, 1 4 0 , 4 1 6 2, 5 6 4 , 7 3 3 Other debt...... 84 5 , 2 0 0 25 6 , 0 0 0 —— — — — — —— — — — —

Prop e r ties in devel o p m e n t ...... 16 7 , 3 6 0 23 2 , 3 4 9 1, 1 3 5 , 7 0 1 54 4 , 0 9 3 —— — — — — —— — — — —

Prop e r ties held for sale ...... 16 5 , 8 9 4 20 , 0 5 2 Total debt ...... 4, 0 5 8 , 8 2 0 2, 6 2 9 , 5 4 9 —— — — — — —— — — — — —— — — — — —— — — — —

Obligations under capital leases ...... 9, 6 3 9 54 , 5 9 1 Total prop e rt y ...... 4, 4 7 3 , 6 7 0 2, 8 1 7 , 1 3 4 Accounts payable, accrued expenses and other liabilities ...... 32 0 , 2 9 3 30 2 , 6 1 3

Company-obligated mandatorily redeemable pref e r r ed securities of a trus t Inv estments in and advances to unconsolidated real estate ven t u r es (notes 3 and 7) ...... 32 2 , 0 6 6 33 8 , 6 9 2 holding solely Par ent Company subordinated debt securities (note 8) ...... 13 6 , 9 6 5 13 7 , 5 0 0

Commitments and contingencies (notes 15 and 16)

Prepaid expenses, rec e i v ables under finance leases and other assets (note 15) ...... 24 1 , 0 4 0 22 8 , 9 5 6 Sha re h o l d e r s ’ equity (notes 12 and 13)

Series B Conver tible Pref e r r ed stock with a liquidation pref e r ence of $202,500 ...... 41 41

Accounts and notes rec e i v able (note 5)...... 75 , 9 1 7 11 4 , 3 0 0 Common stock of 1¢ par value per share; 250,000,000 shares authorized; issued 72,225,223 shares in 1998 and 66,910,901 shares in 1997 ...... 72 3 66 9

Additional paid-in capital ...... 83 6 , 5 0 8 68 6 , 9 7 6 Inv estments in marketable securities ...... 4, 2 5 6 3, 5 8 6 Accumulated deficit ...... (2 0 6 , 5 2 0 ) (2 2 2 , 1 7 1 )

Accumulated other compreh e n s i v e income...... (1 , 8 2 6 ) — —— — — — — —— — — — — Cash and cash equival e n t s ...... 37 , 6 9 4 87 , 1 0 0 —— — — — — —— — — — — Net shareh o l d e r s ’ equity ...... 62 8 , 9 2 6 46 5 , 5 1 5 —— — — — — —— — — — — Tot a l ...... — $5, 1 —5 4 , 6 4 3 —$3, 5 —8 9 ,7 6 8 Tot a l ...... — $5, 1 —5 4 , 6 4 3 —$3, 5 —8 9 ,7 6 8

The accompanying notes are an integral part of these statements.

26 27 The Rouse Company and Subsidiaries The Rouse Company and Subsidiaries C O N S O L I D A TED STATEMENTS OF OPERA T I O N S C O N S O L I D A TED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME Years ended December 31, 1998, 1997 and 1996 (in thousands) Years ended December 31, 1998, 1997 and 1996 (in thousands, except per share data)

1998 1997 1996 Accumulated —— — — — — —— — — — — —— — — — — Series A Series B Additional other Preferred Preferred Common paid-in Accumulated comprehensive Reve n u e s ...... $69 2 , 5 7 1 $91 6 , 7 7 1 $82 1 , 0 3 6 stock stock stock capital deficit income Operating expenses, excl u s i v e of provision for bad debts, —— — — — —— — — — —— — — — —— — — — —— — — — —— — — — de p r eciation and amorti z a t i o n ...... 35 0 , 6 4 7 53 0 , 0 7 6 46 8 , 3 6 6 Balance at December 31, 1995 ...... $ 45 $ — $4 7 9 $3 0 9 , 9 4 3 $( 2 6 7 , 8 8 3 ) $ — Int e r est expense (note 7) ...... 20 9 , 5 6 4 20 7 , 4 9 0 22 0 , 3 8 1 Provision for bad debts...... 7, 7 3 5 5, 7 6 6 3, 6 8 8 Net earnings...... — — — — 16 , 4 3 3 — Dep r eciation and amortization (note 4) ...... 84 , 0 6 8 82 , 9 4 4 77 , 4 1 4 Dividends declared : Equity in earnings of unconsolidated real estate ven t u r es (note 3) ...... 75 , 7 6 9 6, 8 1 5 8, 9 1 7 Common stock — $.88 per share ...... — — — — (5 0 , 3 8 4 ) — Loss on dispositions of assets and other provisions, net (note 11)...... 11 , 1 7 4 23 , 4 8 4 16 , 4 9 9 —— — — — — —— — — — — —— — — — — Pref e r r ed stock — $2.44 per share ...... — — — — (1 0 , 5 3 3 ) — Co n v ersion of Series A Pref e r r ed stock (note 12). (4 5 ) — 10 6 (6 1 ) —— Earnings before income taxes, extraordi n a r y items and Pur chases of common stock ...... — — (2 ) (7 , 0 0 5 ) —— cu m u l a t i v e effect of changes in accounting principle...... 10 5 , 1 5 2 73 , 8 2 6 43 , 6 0 5 —— — — — — —— — — — — —— — — — — Common stock issued in acquisition of The Hughes Corporation (note 2) ...... — — 78 17 8 , 0 0 8 —— Income tax provision (benefit) (note 10): Common stock issued pursuant to Contingent Cur re n t ...... (2 4 ) 8, 1 3 7 12 3 Stock Agreement (note 13)...... — — 2 5, 0 2 3 —— Def e r r ed — primarily Fed e r a l ...... — (1 2 4 , 2 0 3 ) 25 , 5 9 6 Proceeds from exer cise of stock options, net. . . . — — 4 1, 0 3 8 —— —— — — — — —— — — — — —— — — — — Lapse of restrictions on common stock awards . . — — — 1, 9 0 3 —— (2 4 ) (1 1 6 , 0 6 6 ) 25 , 7 1 9 —— — — — — —— — — — — —— — — — — —– – —– – —— ———— ————— –––––— Earnings before extraordi n a r y items and cumulative effect Balance at December 31, 1996 ...... — — 66 7 48 8 , 8 4 9 (3 1 2 , 3 6 7 ) — of changes in accounting principle...... 10 5 , 1 7 6 18 9 , 8 9 2 17 , 8 8 6 Net earnings...... — — — — 16 7 , 3 3 6 — Ext r a o rd i n a r y gain (loss), net (note 7)...... 4, 3 5 5 (2 1 , 3 4 2 ) (1 , 4 5 3 ) Dividends declared : Cum u l a t i v e effect at Jan u a r y 1, 1998 of change in accounting Common stock — $1.00 per share ...... — — — — (6 6 , 8 2 7 ) — for participating mortgages (note 1) ...... (4 , 6 2 9 ) —— Pref e r r ed stock — $2.65 per share ...... — — — — (1 0 , 3 1 3 ) — Cum u l a t i v e effect at October 1, 1997 of change in accounting Issuance of Series B Pref e r r ed stock (note 12). . . — 41 — 19 6 , 7 8 7 —— for business process reengineering costs, net (note 1)...... — (1 , 2 1 4 ) — —— — — — — —— — — — — —— — — — — Pur chases of common stock ...... — — (8 ) (2 6 , 3 5 7 ) —— Net earni n g s ...... 10 4 , 9 0 2 16 7 , 3 3 6 16 , 4 3 3 Common stock issued pursuant to Contingent Stock Agreement (note 13)...... — — 8 23 , 3 0 5 —— Other items of compreh e n s i v e income — minimum Proceeds from exer cise of stock options, net. . . . — — 2 2, 0 7 7 —— pension liability adjustment ...... (1 , 8 2 6 ) —— Lapse of restrictions on common stock awards . . — — — 2, 3 1 5 —— —— — — — — —— — — — — —— — — — — —– – —– – —— ———— ————— –––––— Co m p re h e n s i v e income ...... $10 3 , 0 7 6 $16 7 , 3 3 6 $ 16 , 4 3 3 —— —— —— Balance at December 31, 1997 ...... — 41 66 9 68 6 , 9 7 6 (2 2 2 , 1 7 1 ) — Net earnings applicable to common shareh o l d e r s ...... $ 92 , 7 5 0 $15 7 , 0 2 3 $ 5, 9 0 0 —— —— —— Net earnings...... — — — — 10 4 , 9 0 2 — Ea r nings per share of common stock (note 14): Other compreh e n s i v e income ...... — — — — — (1 , 8 2 6 ) Bas i c : Dividends declared : Earnings before extraordi n a r y items and cumulative effect Common stock — $1.12 per share ...... — — — — (7 7 , 0 9 9 ) — of changes in accounting principle ...... $ 1. 3 6 $ 2. 7 0 $ .1 3 Pref e r r ed stock — $3.00 per share ...... — — — — (1 2 , 1 5 2 ) — Extraordinary items ...... 0 7 (. 3 2 ) (. 0 3 ) Pur chases of common stock ...... — — (2 1 ) (6 5 , 4 1 2 ) —— Cum u l a t i v e effect of changes in accounting principle...... (. 0 7 ) (. 0 2 ) — Co n v ersion of conver tible subordi n a t e d —— — — — — —— — — — — —— — — — — de b e n t u re s ...... — — 1 1, 4 8 4 —— Tot a l ...... $ 1. 3 6 $ 2. 3 6 $ .1 0 Common stock issued pursuant to Contingent —— —— —— Stock Agreement (note 13)...... — — 21 65 , 0 0 2 —— Dil u t e d : Other common stock issued ...... — — 50 14 3 , 3 7 8 —— Earnings before extraordi n a r y items and cumulative effect Proceeds from exer cise of stock options, net. . . . — — 3 48 4 —— of changes in accounting principle ...... $ 1. 3 4 $ 2. 5 9 $ .1 2 Lapse of restrictions on common stock awards . . — — — 4, 5 9 6 —— Ext r a o rd i n a r y items ...... 0 7 (. 2 8 ) (. 0 3 ) —– – –––– —— ———— ————— –––––— Cum u l a t i v e effect of changes in accounting principle...... (. 0 7 ) (. 0 2 ) — Balance at December 31, 1998 ...... $ — $ 41 $7 2 3 $8 3 6 , 5 0 8 $( 2 0 6 , 5 2 0 ) $( 1 , 8 2 6 ) —— — — — — —— — — — — —— — — — — ÐÐ ÐÐ ÐÐ ÐÐÐ —ÐÐ —— Tot a l ...... $——1. 3 4 $——2. 2 9 $——.0 9 The accompanying notes are an integral part of these statements. The accompanying notes are an integral part of these statements.

28 29 The Rouse Company and Subsidiaries C O N S O L I D A TED STATEMENTS OF CASH FLOWS Years ended December 31, 1998, 1997 and 1996 (in thousands)

1998 1997 1996 Reconciliation of Net Earnings to Net Cash —— — — — — —— — — — — —— — — — — Provided by Operating Activities Cash flows from operating activities 1998 1997 1996 —— — — — — —— — — — — —— — — — — Rents and other rev enues rec e i ve d ...... $ 66 6 , 0 8 0 $ 71 4 , 7 8 4 $ 68 5 , 9 9 0 Proceeds from land sales and on notes rec e i v able from land sales ...... 80 , 0 1 7 15 9 , 9 3 2 12 2 , 2 4 5 Net earnings...... $10 4 , 9 0 2 $ 16 7 , 3 3 6 $ 16 , 4 3 3 Int e r est rec e i ve d ...... 14 , 0 3 8 11 , 8 7 7 11 , 9 3 9 Land development expenditures ...... — (9 7 , 8 6 8 ) (5 4 , 3 4 3 ) Adjustments to reconcile net earnings to net cash Operating expenditures ...... (3 3 9 , 9 6 2 ) (3 9 5 , 5 2 8 ) (3 8 1 , 0 6 1 ) pr ovided by operating activities: Int e r est paid ...... (2 0 4 , 8 9 7 ) (2 0 7 , 6 8 1 ) (2 1 6 , 6 4 4 ) Dep r eciation and amorti z a t i o n ...... 84 , 0 6 8 82 , 9 4 4 77 , 4 1 4 Dividends, interest and other operating distributions Undistributed earnings of majority financial interest ven t u re s ...... (4 1 , 7 2 0 ) —— fr om unconsolidated majority financial interest ven t u re s ...... 45 , 9 0 7 — — Loss on dispositions of assets and other provisions, net ...... 11 , 1 7 4 23 , 4 8 4 16 , 4 9 9 —— — — — —— — — — — ———— Ext r a o rd i n a r y (gain) loss, net ...... (4 , 3 5 5 ) 21 , 3 4 2 1, 4 5 3 Net cash provided by operating activities ...... 26 1 , 1 8 3 18 5 , 5 1 6 16 8 , 1 2 6 Cum u l a t i v e effect of changes in accounting principle, net ...... 4, 6 2 9 1, 2 1 4 — —— — — — —— — — — — ———— Additions to prec o n s t r uction res e r ve...... 1, 7 0 0 2, 8 0 0 2, 7 0 0 Par ticipation expense pursuant to Contingent Stock Agree m e n t ...... 44 , 0 7 5 35 , 8 3 2 28 , 8 4 4 Cash flows from investing activities Provision for bad debts ...... 7, 7 3 5 5, 7 6 6 3, 6 8 8 Exp e n d i t u r es for prop e r ties in development and improvements to Dec r ease (increase) in: existing prop e r ties funded by debt ...... (3 0 6 , 9 5 0 ) (2 8 3 , 4 0 1 ) (1 2 3 , 9 8 5 ) Accounts and notes rec e i va b l e ...... 32 , 5 0 7 (7 0 , 0 4 5 ) (2 6 , 8 6 2 ) Exp e n d i t u r es for acquisition of The Hughes Corporation, net of acquired cash...... — — (3 6 , 3 3 1 ) Other assets ...... 1, 8 4 5 (2 , 3 1 2 ) (5 , 6 9 4 ) Exp e n d i t u r es for prop e r ty acquisitions ...... (8 8 2 , 4 0 4 ) (7 9 , 4 2 0 ) (1 8 , 1 5 2 ) Inc r ease in accounts payable, accrued expenses Exp e n d i t u r es for improvements to existing prop e r ties funded and other liabilities ...... 8, 8 5 2 48 , 7 8 3 25 , 8 8 5 by cash provided by operating activities: Def e r r ed income taxes ...... — (1 2 4 , 2 0 3 ) 25 , 5 9 6 Oth e r , net ...... 5, 7 7 1 (7 , 4 2 5 ) 2, 1 7 0 Tenant leasing and rem e rc h a n d i s i n g ...... (7 , 9 5 5 ) (5 , 9 6 4 ) (8 , 0 9 5 ) —— — — — — —— — — — — —— — — — — Building and equipment ...... (1 3 , 8 7 3 ) (1 5 , 9 3 3 ) (1 2 , 6 9 1 ) Proceeds from sales of operating prop e rt i e s ...... 13 0 , 0 7 0 81 , 2 8 1 26 , 3 4 5 Net cash provided by operating activities ...... $26 1 , 1 8 3 $ 18 5 , 5 1 6 $16 8 , 1 2 6 Payments rec e i v ed on loans and advances to unconsolidated majority financial interest ven t u re s ...... 47 , 4 8 3 —— —— —— —— Oth e r ...... 1, 4 2 9 (1 9 , 0 4 2 ) (1 0 , 0 8 6 ) —— — — — —— — — — — ———— Schedule of Noncash Investing and Financing Activities 1998 1997 1996 Net cash used by investing activities ...... (1 , 0 3 2 , 2 0 0 ) (3 2 2 , 4 7 9 ) (1 8 2 , 9 9 5 ) —— — — — — —— — — — — —— — — — — —— — — — —— — — — — ————

Cash flows from financing activities Common stock issued pursuant to Contingent Sto c k Proceeds from issuance of prop e r ty debt ...... 65 0 , 9 8 7 69 3 , 5 2 5 29 1 , 3 7 3 Ag r eement (note 13) ...... $ 65 , 0 2 3 $ 23 , 3 1 3 $ 5, 0 2 5 Repayments of prop e r ty debt: Common stock and other noncash consideration issued Scheduled principal payments ...... (5 0 , 6 8 9 ) (4 6 , 2 8 2 ) (3 9 , 0 4 8 ) in acquisitions of prop e r ty interests (note 4) ...... 10 0 , 0 0 0 5, 3 2 3 13 , 5 2 0 Other payments ...... (3 4 7 , 7 2 5 ) (5 7 2 , 1 3 9 ) (2 5 1 , 8 0 7 ) Mor tgage and other debt assumed or issued in acquisitions of Proceeds from issuance of other debt ...... 60 2 , 0 0 0 11 , 8 6 8 31 , 6 5 2 pro p e r ty interes t s ...... 59 9 , 7 9 5 — 21 , 0 9 0 Repayments of other debt ...... (1 5 , 2 8 7 ) (1 , 5 2 0 ) — Mor tgage debt extinguished on dispositions Proceeds from issuance of Series B Pref e r r ed stock...... — 19 6 , 8 2 8 — of interests in prop e rt i e s ...... 19 , 8 7 5 —— Proceeds from issuance of common stock ...... 43 , 4 2 8 —— Termination of capital lease obligation ...... 46 , 3 8 7 —— Pur chases of common stock ...... (6 5 , 4 3 3 ) (2 6 , 3 6 5 ) (7 , 0 0 7 ) Common stock issued on conversion of Dividends paid ...... (8 9 , 2 5 1 ) (7 7 , 1 4 0 ) (6 0 , 9 1 7 ) co n ve r tible subordinated debentures ...... 1, 4 8 5 —— Oth e r ...... (6 , 4 1 9 ) 1, 5 2 2 (5 3 3 ) Capital lease obligations incurred ...... 2, 7 4 3 1, 1 0 1 3, 7 8 9 —— — — — —— — — — — ———— Debt assumed by purchasers of land ...... 2 21 , 9 2 8 16 , 9 9 1 Net cash provided (used) by financing activities ...... 72 1 , 6 1 1 18 0 , 2 9 7 (3 6 , 2 8 7 ) Mor tgage and other debt of subsidiaries in —— — — — —— — — — — ———— which a majority voting interest was sold to an affiliate (note 3) ...... — 28 0 , 5 9 5 — Net increase (decrease) in cash and cash equival e n t s ...... (4 9 , 4 0 6 ) 43 , 3 3 4 (5 1 , 1 5 6 ) Prop e r ty of subsidiaries in which a majority vot i n g Cash and cash equivalents at beginning of yea r ...... 87 , 1 0 0 43 , 7 6 6 94 , 9 2 2 in t e r est was sold to an affiliate (note 3)...... — 54 7 , 2 9 5 — —— — — — —— — — — — ———— Debt and other liabilities assumed in acquisition of The Hug h e s Cash and cash equivalents at end of yea r ...... $ 37 , 6 9 4 $ 87 , 1 0 0 $ 43 , 7 6 6 Corporation, net (note 2) ...... — — 33 4 , 1 5 5 —— ÐÐÐ ÐÐÐ Common stock issued in acquisition of The Hug h e s Corporation (note 2)...... — — 17 8 , 0 8 6 The accompanying notes are an integral part of these statements. Notes rec e i v ed from sales of operating prop e rt i e s ...... —— — —— — ——8, 4 4 0 30 31 The Rouse Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STA T E M E N T S December 31, 1998, 1997 and 1996

(1) Summary of significant (a) Description of business If events or circumstances indicate that the carrying value of an operating prop e r ty to be accounting policies Th r ough its subsidiaries and affiliates, the Company acquires, develops and/or manages held and used may be impaired, a rec o verability analysis is performed based on estimated in c o m e - p r oducing prop e r ties located throughout the United States and develops and sells land nondiscounted future cash flows to be generated from the prop e rt y . If the analysis indicates for residential, commercial and other uses. The income-producing prop e r ties consist of ret a i l that the carrying value is not rec o verable from future cash flows, the prop e r ty is written down centers, office and industrial buildings and mixed-use and other prop e r ties. The retail centers to estimated fair value and an impairment loss is rec o g n i ze d . ar e primarily regional shopping centers in suburban market areas, but also include specialty Prop e r ties held for sale are carried at the lower of their carrying values (i.e., cost less accu- ma r ketplaces in certain down t o wn areas and several village centers, primarily in Columbia, mulated depreciation and any impairment loss rec o g n i z ed, where applicable) or estimated fair Mar yland. The office and industrial prop e r ties are located primarily in the Columbia, values less costs to sell. The net carrying values of operating prop e r ties are classified as prop - Bal t i m o r e and Las Vegas market areas or are components of large-scale mixed-use prop e rt i e s er ties held for sale when marketing of the prop e r ties for sale is authorized by management. (which include retail, parking and other uses) located in other urban markets. Land devel o p - Dep r eciation of these prop e r ties is discontinued at that time, but operating rev enues, interes t ment and sales operations are predominantly related to large-scale, long-term community and other operating expenses continue to be rec o g n i z ed until the date of sale. Rev enues and de v elopment projects in Columbia and Summerlin, Neva d a . expenses related to prop e r ty interests acquired with the intention to resell are not rec o g n i ze d .

(b) Basis of pres e n t a t i o n (d) Sales of prop e rt y The consolidated financial statements include the accounts of The Rouse Company, all sub- Gains from sales of operating prop e r ties and rev enues from land sales are rec o g n i z ed using the sidiaries and partnerships in which it has a majority voting interest and control and the full accrual method provided that various criteria relating to the terms of the transactions and Co m p a n y ’s prop o r tionate share of the assets, liabilities, rev enues and expenses of unconsolidat- any subsequent invol v ement by the Company with the prop e r ties sold are met. Gains or rev - ed real estate ven t u r es in which it has joint interest and control with other ven t u r ers. Inve s t m e n t s enues relating to transactions that do not meet the established criteria are deferred and rec o g - in other ven t u r es are accounted for using the equity or cost methods as appropriate in the cir- ni z ed when the criteria are met or using the installment or cost rec o ver y methods, as appro- cumstances. Significant intercompany balances and transactions are eliminated in consolidation. priate in the circumstances. For land sale transactions under the terms of which the Company The preparation of financial statements in conformity with generally accepted accounting is req u i r ed to perform additional services and incur significant costs after title has passed, rev - principles req u i r es management to make estimates and judgments that affect the rep o rt e d enues and cost of sales are rec o g n i z ed on a percentage of completion basis. amounts of assets and liabilities and disclosures of contingencies at the date of the financial Cost of land sales is generally determined as a specified percentage of land sales reve n u e s statements and rev enues and expenses rec o g n i z ed during the rep o r ting period. Significant esti- rec o g n i z ed for each land development project. The cost percentages used are based on esti- mates are inherent in the preparation of the Company’s financial statements in a number of mates of development costs and sales rev enues to completion of each project and are rev i s e d ar eas, including evaluation of impairment of long-lived assets (including operating prop e rt i e s periodically for changes in estimates or development plans. The specific identification method and prop e r ties held for development or sale), determination of useful lives of assets subject to is used to determine cost of sales of certain parcels of land. de p r eciation or amortization, evaluation of collectibility of accounts and notes rec e i v able and me a s u r ement of pension and postret i r ement obligations. Actual results could differ from those (e) Leases and other estimates. Leases which transfer substantially all the risks and benefits of ownership to tenants are con- Ce r tain amounts for prior years have been reclassified to conform to the presentation for si d e r ed finance leases and the present values of the minimum lease payments and the esti- 19 9 8 . mated residual values of the leased prop e r ties, if any, are accounted for as rec e i v ables. Leases which transfer substantially all the risks and benefits of ownership to the Company are con- (c) Prop e rt y si d e r ed capital leases and the present values of the minimum lease payments are accounted for Prop e r ties to be developed or held and used in operations are carried at cost reduced for impair- as prop e r ty and debt. ment losses, where appropriate. Prop e r ties held for sale are carried at cost reduced for val u a t i o n In general, minimum rent rev enues are rec o g n i z ed when due from tenants; howeve r , esti- al l o wances, where appropriate. Acquisition, development and construction costs of prop e rt i e s mated collectible minimum rent rev enues under leases which provide for var ying rents over in development are capitalized including, where applicable, salaries and related costs, real estate their terms are averaged over the terms of the leases. ta x es, interest and prec o n s t r uction costs. The prec o n s t r uction stage of development of an oper- ating prop e r ty (or an expansion of an existing prop e r ty) includes efforts and related costs to (f) Income taxes se c u r e land control and zoning, evaluate feasibility and complete other initial tasks which are In December 1997, the Company determined that it would elect to be taxed as a real estate essential to development. Provision is made for potentially unsuccessful prec o n s t r uction efforts in v estment trust (REIT) pursuant to the Internal Rev enue Code of 1986, as amended, effec- by charges to operations. Dev elopment and construction costs and costs of significant ti v e Jan u a r y 1, 1998. In general, a corporation that distributes at least 95% of its REIT tax- im p r ovements, replacements and ren o vations at operating prop e r ties are capitalized, while able income to shareholders in any taxable year and complies with certain other req u i re m e n t s costs of maintenance and repairs are expensed as incurred . (r elating primarily to the nature of its assets and the sources of its rev enues) is not subject to Dir ect costs associated with financing and leasing of operating prop e r ties are capitalized as Federal income taxation to the extent of the income which it distributes. Management believes de f e r r ed costs and amorti z ed over the periods benefited by the expenditures. Eff e c t i v e that the Company met the qualifications for REIT status as of December 31, 1998 and Mar ch 19, 1998, the Company adopted a policy of charging internal staff costs associated with intends for it to continue to meet the qualifications in the future and to distribute at least acquisitions of operating prop e r ties to expense as incurred as req u i r ed by a consensus of the 100% of its REIT taxable income (determined after taking into account any net operating loss Emerging Issues Task For ce of the Financial Accounting Sta n d a r ds Board. Prior to that date, deduction) to shareholders in 1999 and subsequent years. As discussed more fully in note 10, such costs wer e capitalized as part of the cost of prop e r ties acquired. This change did not have management also does not expect that the Company will pay significant taxes on “built-in a material effect on net earnings for 1998. ga i n s ” on its assets. Based on these considerations, management does not believe that the Dep r eciation of operating prop e r ties is computed using the straight-line method. Th e Company will be liable for income taxes at the Federal level or in most of the states in which annual rate of depreciation for most of the Company’s retail centers is based on a 55-year com- it operates in 1998 and future years. Acc o rd i n g l y , the Company eliminated substantially all of posite life and a salvage value of approximately 10%, producing an effective annual rate of its existing deferred tax assets and liabilities at December 31, 1997, and does not expect to de p r eciation for new prop e r ties of 1.6%. The other retail centers, all office buildings and other pr ovide for deferred income taxes in future periods except in certain states. pro p e r ties are generally depreciated using composite lives of 40 years producing an effective annual rate of depreciation for such prop e r ties of 2.5%.

32 33 Wh e r e req u i r ed, deferred income taxes are accounted for using the asset and liability the effects of all dilutive potential common shares outstanding during the period. The dilu- method. Under this method, deferred income taxes are rec o g n i z ed for temporary differen c e s ti v e effects of conver tible securities are computed using the “if-convert e d ” method and the be t w een the financial rep o r ting bases of assets and liabilities and their res p e c t i v e tax bases and di l u t i v e effects of options, warrants and their equivalents (including fixed awards and non- for operating loss and tax credit carryf o rw a r ds based on enacted tax rates expected to be in vested stock issued under stock-based compensation plans) are computed using the “tre a s u r y effect when such amounts are rea l i z ed or settled. Howeve r , deferred tax assets are rec o g n i ze d st o c k ” method. only to the extent that it is more likely than not that they will be rea l i z ed based on consider- ation of available evidence, including tax planning strategies and other factors. (k) Stock-based compensation The Company uses the intrinsic value method to account for stock-based employee compen- (g) Inv estments in marketable securities and cash and cash equival e n t s sation plans. Under this method, compensation cost is rec o g n i z ed for awards of shares of com- The Company’s investment policy defines authorized investments and establishes various lim- mon stock or stock options to employees only if the quoted market price of the stock at the itations on the maturities, credit quality and amounts of investments held. Aut h o r i z ed inves t - grant date (or other measurement date, if later) is greater than the amount the employee must ments include U.S. government and agency obligations, certificates of deposit, bankers ac- pay to acquire the stock. Information concerning the pro forma effects on net earnings and ceptances, rep u r chase agreements, commercial paper, money market mutual funds and cor- earnings per share of common stock of using an optional fair value-based method, rather than porate debt and equity securities. the intrinsic value method, to account for stock-based compensation plans is provided in Inv estments with maturities at dates of purchase in excess of three months are classified as note 13. ma r ketable securities and carried at amorti z ed cost as it is the Company’s intention to hold these investments until maturity. Sho r t-term investments with maturities at dates of purch a s e (l) Business process reengineering costs of three months or less are classified as cash equivalents, except that any such investments pur- Eff e c t i v e October 1, 1997, the Company adopted a policy of charging costs of business chased with the proceeds of loans which may be expended only for specified purposes are clas- pr ocess reengineering activities to expense as incurred as req u i r ed by a consensus of the sified as investments in marketable securities. At December 31, 1998 and 1997, inves t m e n t s Emerging Issues Task For ce of the Financial Accounting Sta n d a r ds Board. Prior to that date, in marketable securities consist primarily of U.S. government and agency obligations with such costs wer e deferred and amorti z ed over the period benefited by the expenditures. Th e maturities of less than one year which are held for restricted uses. cu m u l a t i v e effect at October 1, 1997 of this accounting change was to reduce net earnings for 1997 by $1,214,000 ($.02 per share), net of related income tax benefits of $654,000. Th e (h) Der i va t i v e financial instrum e n t s effect of this change on earnings before extraordi n a r y losses and net earnings for 1997, excl u d - The Company makes limited use of interest rate exchange agreements, including interest rate ing the cumulative effect of the change, was not material and application of the new policy in caps and swaps, to manage interest rate risk associated with variable rate debt. The Company 1996 would not have had a material effect on rep o r ted earnings before extraordi n a r y losses, may also use other types of agreements to hedge interest rate risk associated with anticipated net earnings or related per share amounts. pr oject financing transactions. These instruments are designated as hedges and, accordi n g l y , changes in their fair values are not rec o g n i z ed in the financial statements, provided that they (m) Par ticipating mortg a g e s meet defined correlation and effectiveness criteria at inception and therea f t e r . Ins t r uments that Eff e c t i v e Jan u a r y 1, 1998, the Company adopted the American Institute of Certified Pub l i c cease to qualify for hedge accounting are marke d - t o - m a r ket with gains or losses rec o g n i z ed in Acc o u n t a n t s ’ Statement of Position 97-1 “Accounting by Par ticipating Mor tgage Loan in c o m e . Bo r r owers.” This Statement prescribes borrower s ’ accounting for participating mortgage loans Under interest rate cap agreements, the Company makes initial premium payments to the and req u i r es, among other things, that borrowers rec o g n i z e liabilities for the estimated fair co u n t e r p a r ties in exchange for the right to rec e i v e payments from them if interest rates on the value of lenders’ participations in the appreciation in value (if any) of mortgaged real estate related variable rate debt exceed specified levels during the agreement period. Premiums paid pr ojects and rec o r d such participations as interest over the terms of the related loans. Th e ar e amorti z ed to interest expense over the terms of the agreements using the interest method Company had not previously rec o g n i z ed lenders’ participations in the appreciation in value of and payments rec e i v able from the counterparties are accrued as reductions of interest expense. mo r tgaged prop e r ties. The cumulative effect of this accounting change at Jan u a r y 1, 1998 was Under interest rate swap agreements, the Company and the counterparties agree to exch a n g e to reduce net earnings by approximately $4,629,000 ($.07 per share basic and diluted). Th e the difference between fixed rate and variable rate interest amounts calculated by ref e r ence to effect of this change, excluding the cumulative effect of initial adoption, was not material specified notional principal amounts during the agreement period. Notional principal (a p p r oximately $.01 per share basic and diluted) in 1998. amounts are used to express the volume of these transactions, but the cash req u i r ements and amounts subject to credit risk are substantially less. Amounts rec e i v able or payable under swap (n) Com p re h e n s i v e income ag r eements are accounted for as adjustments to interest expense on the related debt. Eff e c t i v e Jan u a r y 1, 1998, the Company adopted Statement of Financial Acc o u n t i n g Par ties to interest rate exchange agreements are subject to market risk for changes in inter- Sta n d a r ds No. 130, “Rep o r ting Compreh e n s i v e Income.” This Statement establishes stan- est rates and risk of credit loss in the event of nonperformance by the counterparty . Th e da r ds for rep o r ting and presentation of compreh e n s i v e income and its components in finan- Company does not req u i r e any collateral under these agreements, but deals only with highly cial statements. Compreh e n s i v e income includes all changes in shareh o l d e r s ’ equity during a rated financial institution counterparties (which, in certain cases, are also the lenders on the period, except those relating to investments by and distributions to shareholders. Th e related debt) and does not expect that any counterparties will fail to meet their obligations. Co m p a n y ’s compreh e n s i v e income consists of net earnings and adjustments to minimum pen- sion liability and is presented in the statements of operations and compreh e n s i v e income. (i) Other information about financial instrum e n t s Accumulated other compreh e n s i v e income is displayed as a separate component of share- Fair values of financial instruments approximate their carrying values in the financial state- ho l d e r s ’ equity. No amounts wer e req u i r ed to be reclassified to other compreh e n s i v e income ments except for debt and related interest rate exchange agreements for which fair value infor- for 1997 and 1996. mation is provided in note 7. (o) Pension and other postret i r ement plans (j) Ear nings per share of common stock Eff e c t i v e Jan u a r y 1, 1998, the Company adopted Statement of Financial Acc o u n t i n g Basic earnings per share (EPS) is computed by dividing income available to common share- Sta n d a r ds No. 132, “Emp l o yer s ’ Dis c l o s u r es about Pension and Other Pos t re t i re m e n t holders by the wei g h t e d - a v erage number of common shares outstanding. Diluted EPS is Benefits.” This Statement revises disclosure req u i r ements about pension and other postret i r e- computed after adjusting the numerator and denominator of the basic EPS computation for ment benefit plans, but does not change the method of accounting for them.

34 35 (2) The Hughes On June 12, 1996, the Company acquired all of the outstanding equity interests in Th e (3) Unconsolidated real Inv estments in and advances to unconsolidated real estate ven t u r es at December 31, 1998 and Corporation acquisition Hughes Corporation and its affiliated partn e r s h i p , Howa r d Hughes Prop e r ties, Limited estate ventures 1997 are summarized, based on the level of the Company’s financial interest, as follows (in and related matters Par tnership (together, “Hug h e s ”). In connection with the acquisition, the Company issued th o u s a n d s ) : 19 9 8 19 9 7 7,742,884 shares of common stock valued at $178,086,000 and incurred or assumed debt and ——— — — — — — —— ——— — — — — — — other liabilities of $370,486,000 (net of certain rec e i v ables and other current assets acquired ) . Majority interest ven t u re s ...... $27 0 , 0 8 5 $25 9 , 3 2 0 As discussed in note 13, additional shares of common stock (or, in certain circu m s t a n c e s , Joint interest and control ven t u re s ...... 1, 1 4 0 3, 4 1 2 Inc r easing Rate Cum u l a t i v e Pref e r r ed stock) have been and may continue to be issued to the Minority interest ven t u re s ...... 50 , 8 4 1 75 , 9 6 0 former Hughes owners or their successors pursuant to terms of a Contingent Sto c k —— — — — — — — —— — — — — — — Ag r eement. The acquisition was accounted for using the purchase method. The total purch a s e Tot a l ...... $32 2 , 0 6 6 $33 8 , 6 9 2 cost approximated the aggregate fair values of the assets acquired which consisted primarily of ———— a regional shopping center in Las Vegas, a large-scale, master-planned community in The equity in earnings of unconsolidated real estate ven t u r es for the years ended Summerlin, Nev ada, and four large-scale, master-planned business parks and various other December 31, 1998, 1997 and 1996 is summarized, based upon the level of the Company’s pro p e r ties in Nev ada and Southern . financial interest, as follows (in thousands): 19 9 8 19 9 7 19 9 6 The consolidated statement of operations and compreh e n s i v e income for the year ended —— — — —— — — —— — — December 31, 1996 includes rev enues and costs and expenses from the date of acquisition. Majority interest ven t u re s ...... $63 , 4 7 5 $ — $ — The Company’s unaudited pro forma consolidated results of operations for the year ended Minority interest ven t u re s ...... 12 , 2 9 4 6, 8 1 5 8, 9 1 7 —— — — —— — — —— — — December 31, 1996, assuming the acquisition of Hughes occurred on Jan u a r y 1, 1996, are su m m a r i z ed as follows (in thousands, except per share data): Tot a l ...... $Ð75 , Ð 7 6 9 Ð$6, Ð8 1 5 $ÐÐ8, 9 1 7 The ven t u r es in which the Company has majority financial interests wer e initiated on Reve n u e s ...... $87 2 , 8 0 5 December 31, 1997, when certain wholly owned subsidiaries issued 91% of their voting com- Earnings before extraordi n a r y items ...... 20 , 9 9 0 mon stock to The Rouse Company Inc e n t i v e Compensation Sta t u t o r y Trust, an entity which Net earnings...... 19 , 5 3 7 is neither owned nor controlled by the Company, for an aggregate consideration of Earnings per share of common stock: $1,400,000. These sales wer e made at fair value and as part of the Company’s plan to meet the Bas i c : qualifications for REIT status. The Company retained the remaining voting stock of the ven - Earnings before extraordi n a r y items...... 1 6 tu r es and holds shares of nonvoting common and/or pref e r r ed stock and, in certain cases, Net earnings ...... 1 4 mo r tgage loans rec e i v able from the ven t u r es which, taken together, comprise substantially all Dil u t e d : (at least 98%) of the financial interest in them. As a result of its disposition of the majority vot - Earnings before extraordi n a r y items ...... 1 6 ing interest in the ven t u r es, the Company began accounting for its investment in them using Net earnings ...... 1 4 the equity method effective December 31, 1997. Due to the Company’s continuing financial ÐÐÐ Ð in t e r est in the ven t u r es, it rec o g n i z ed no gain on the sales of stock for financial rep o r ting pur- The unaudited pro forma rev enues and earnings summarized above are not necessarily poses and the ven t u r es retained the Company’s cost basis of the assets acquired and liabilities in d i c a t i v e of the results that would have occurred if the acquisition had been consummated assumed. The assets of the ven t u r es consist primarily of land to be developed and sold as part on Jan u a r y 1, 1996. of community development projects in Columbia and Summerlin, other investment land, pri- marily in Nev ada, certain office and retail prop e r ties in Columbia and contracts to manage var - ious operating prop e rt i e s . The condensed, combined balance sheets of these ven t u r es at December 31, 1998 and 1997 are summarized as follows (in thousands): 19 9 8 19 9 7 ——— — — — — — —— ——— — — — — — — As s e t s : Operating prop e r ties, net ...... $24 4 , 4 7 0 $21 1 , 3 8 5 Prop e r ties in devel o p m e n t ...... 66 , 4 4 2 23 , 1 4 4 Land held for development and sale ...... 23 6 , 9 9 9 23 1 , 5 3 0 Inv estment land ...... 41 , 1 5 6 34 , 9 4 7 Prop e r ties held for sale ...... — 46 , 2 8 9 Adv ances to the Company ...... 11 2 , 3 1 0 13 1 , 8 3 2 Oth e r ...... 19 2 , 4 3 7 16 9 , 8 7 6 ——— — — — — — —— ——— — — — — — — Tot a l ...... $————89 3 , 8 1 4 $84 9 , 0 0 3 Liabilities and shareh o l d e r s ’ deficit: Loans and advances from the Company ...... $48 8 , 3 6 3 $53 8 , 5 8 6 Mor tgages payable and other long-term debt ...... 33 2 , 9 4 5 28 0 , 5 9 5 Other liabilities ...... 11 6 , 2 4 4 10 4 , 1 1 9 Redeemable Series A Pref e r r ed stock ...... 50 , 0 0 0 50 , 0 0 0 Sha re h o l d e r s ’ deficit ...... (9 3 , 7 3 8 ) (1 2 4 , 2 9 7 ) ——— — — — — — —— ——— — — — — — — Tot a l ...... $————89 3 , 8 1 4 $84 9 , 0 0 3 36 37 The condensed combined statement of operations of these ven t u r es for 1998 is summarized The ven t u r es in which the Company holds minority interests are accounted for using the as follows (in thousands): equity or cost methods, as appropriate. Most of these prop e r ties are managed by affiliates of the Company and the agreements relating to them generally provide for pref e r ence returns to Rev enues, including interest on loans to the the Company when operating results or sale or refinancing proceeds exceed specified levels. At Company of $9,067 ...... $28 2 , 0 1 0 December 31, 1998, these ven t u r es are primarily partnerships and corporations which own Operating expenses...... (1 6 1 , 3 5 0 ) retail centers. Prior to December 1998, these ven t u r es also included a corporate joint ven t u r e Int e r est expense, including interest on loans from which owned various office and industrial prop e r ties. The Company acquired the interest of the Company of $53,340...... (6 8 , 1 4 6 ) the other ven t u r er in the corporate joint ven t u r e on November 30, 1998. Dep r eciation and amorti z a t i o n ...... (1 0 , 5 8 5 ) The condensed, combined balance sheets of these ven t u r es at December 31, 1998 and 1997 Equity in earnings of unconsolidated rea l and their condensed, combined statements of earnings for 1998, 1997 and 1996 are summa- estate ven t u re s ...... 81 1 ri z ed as follows (in thousands): Gain on dispositions of assets, net ...... 15 , 8 5 6 19 9 8 19 9 7 Income taxes ...... (2 2 , 0 6 0 ) –—— — — —— — —— Ext r a o rd i n a r y losses, net ...... (1 , 1 2 7 ) — Total assets, primarily prop e rt y ...... $54 6 , 1 3 0 $1, 1 0 1 , 1 6 3 Net earnings ...... $ 35 , 4 0 9 ÐÐ Ð ÐÐÐ — Liabilities, primarily long-term debt ...... $36 9 , 8 4 7 $ 49 1 , 4 3 6 Ven t u re r s ’ equity ...... 17 6 , 2 8 3 60 9 , 7 2 7 The Company’s share of the net earnings before extraordi n a r y losses of these ven t u r es for ...... —— — — ——— — — 1998 is summarized as follows (in thousands): Total liabilities and ven t u re r s ’ equity...... $Ð54 Ð6 , Ð1 30 $Ð1, 1 ÐÐ0 1 , 1 6 3 Sha r e of net earnings based on ownership interes t ...... $35 , 0 5 5 19 9 8 19 9 7 19 9 6 Sha r e of extraordi n a r y losses ...... 1, 1 1 6 –– – – – – – – – –––––––––– – –– – – ––– – Par ticipation by others in the Company’s share Reve n u e s ...... $18 9 , 3 6 1 $21 2 , 6 1 4 $20 1 , 7 6 9 of earnings ...... (2 4 , 1 5 2 ) Operating and interest expenses ...... 13 4 , 4 1 1 14 8 , 0 6 5 13 8 , 4 6 0 Int e r est on loans and advances, net ...... 44 , 2 7 3 Dep r eciation and amorti z a t i o n ...... 32 , 0 4 1 37 , 4 2 3 35 , 6 3 4 Eliminations and other, net...... 7, 1 8 3 Gain (loss) on dispositions of assets...... 38 , 9 1 5 (1 1 , 0 9 7 ) 1, 1 1 0 —— — — — –– – – – – – – – –– – – – – – – – – –– –– – ––– – – $63 , 4 7 5 — Net earnings ...... Ð $Ð6Ð1 ,Ð8 2 4 Ð$ 1Ð6 , ÐÐ0 2 9 $ 2Ð8 , Ð7 85 The ven t u r es in which the Company has joint interest and control are accounted for using The Company’s share of net earnings of these ven t u r es was $12,294,000, $6,815,000, and the prop o r tionate share method. These ven t u r es are partnerships that own various retail cen- $8,917,000 in 1998, 1997 and 1996, res p e c t i ve l y . ters which are managed by affiliates of the Company. The consolidated financial statements include the Company’s prop o r tionate share of its historical cost of these prop e r ties and depre- (4) Property Operating prop e r ties and deferred costs of projects at December 31, 1998 and 1997 are sum- ciation based on the Company’s depreciation policies which differ, in certain cases, from those ma r i z ed as follows (in thousands): of the ven t u re s . 19 9 8 19 9 7 ––– – – – – – – – –– – – – – – – – The condensed, combined balance sheets of these ven t u r es and the Company’s prop o r - Buildings and improvem e n t s ...... $4, 1 1 3 , 6 5 4 $2, 7 2 9 , 9 0 8 tionate share of their assets, liabilities and equity at December 31, 1998 and 1997 and the con- La n d ...... 48 8 , 1 1 4 23 1 , 9 3 5 densed, combined statements of earnings of these ven t u r es and the Company’s prop o rt i o n a t e sh a r e of their rev enues and expenses for 1998, 1997 and 1996 are summarized as follows (in Def e r r ed costs ...... 10 6 , 3 8 5 11 1 , 4 5 5 Fur n i t u r e and equipment ...... 10 , 5 7 4 6, 6 6 4 th o u s a n d s ) : ––– – – – – – – – –– – – – – – – – Tot a l ...... $4, 7 1 8 , 7 2 7 $3, 0 7 9 , 9 6 2 Co m b i n e d Prop o r tionate Sha r e —— — — — — — — — — — —— — — — — — — — — — ÐÐÐ ÐÐÐ 19 9 8 19 9 7 19 9 8 19 9 7 –– – – – – – – – – – – –– – – – – – – – – – – –– – – – – – – – – – – –– – – – – – – – – – – Dep r eciation expense for 1998, 1997 and 1996 was $73,646,000, $70,751,000, and Total assets, primarily prop e rt y ...... $31 5 , 5 7 6 $35 3 , 1 3 2 $14 0 , 9 8 3 $15 3 , 3 9 9 $64,113,000, res p e c t i ve l y . Amortization expense for 1998, 1997 and 1996 was $10,422,000, ÐÐÐ Ð ÐÐÐ Ð ÐÐÐ Ð ÐÐÐ Ð $12,193,000, and $13,301,000, res p e c t i ve l y . Liabilities, primarily long-term debt ...... $2 0 7 , 3 8 6 $24 7 , 9 4 9 $ 90 , 0 3 4 $10 9 , 8 5 2 On April 6, 1998, the Company and Westfield America, Inc. agreed to purchase a port- Ven t u re r s ’ equity ...... 10 8 , 1 9 0 10 5 , 1 8 3 50 , 9 4 9 43 , 5 4 7 –– – – – – – – – – – – –– – – – – – – – – – – –– – – – – – – – – – – –– – – – – – – – – – – folio of interests in retail centers from TrizecHahn Centers Inc. (TrizecHahn). Under terms Total liabilities and ven t u re r s ’ equity ...... $31 5 , 5 7 6 $35 3 , 1 3 2 $14 0 , 9 8 3 $15 3 , 3 9 9 of the agreement, the Company purchased ownership interests in seven retail centers in a ÐÐÐ Ð ÐÐÐ Ð ÐÐÐ Ð ÐÐÐ Ð series of transactions completed in the third and fourth quarters of 1998. The aggregate purchase price of the interests in the retail centers was approximately $1,154,981,000, Co m b i n e d Prop o r tionate Sha r e —— — — — — — — — — — – – – – – – – – – – – – – – – – —— — — — — — — — — — —–– – – – – ––– – – – – – – including $352,529,000 in mortgage and other debt assumed. The net purchase price was 19 9 8 19 9 7 19 9 6 19 9 8 19 9 7 19 9 6 –– – – – – – – – – – – –– – – – – – – – – – – –– – – – – – – – – – – –– – – –– – – –– – – –– – – – – – – – – – – –– – – – – – – – – – – funded primarily by new mortgage debt secured by the properties and borrowings under Reve n u e s ...... $11 9 , 0 2 3 $12 3 , 8 0 2 $11 8 , 3 6 0 $52 , 3 9 0 $55 , 4 7 7 $56 , 1 0 5 the Company’s revolving credit and bridge loan facilities. In February 1999, the Company Operating and interest expenses...... 58 , 3 1 1 69 , 8 2 5 65 , 8 6 2 25 , 6 2 1 31 , 5 2 8 29 , 5 3 5 contributed its ownership interests in four of the retail centers to a joint venture and Dep r eciation and amorti z a t i o n ...... 11 , 9 1 5 12 , 0 1 3 11 , 2 5 7 3, 8 7 6 3, 6 5 7 2, 5 8 8 –– – – – – – – – – – – –– – – – – – – – – – – –– – – – – – – – – – – –– – – –– – – –– – – –– – – – – – – – – – – –– – – – – – – – – – – received a 35% ownership interest in the joint venture. The joint venture assumed obliga- Net earnings ...... $ÐÐ4Ð8 , Ð7 9 7 Ð$ Ð4Ð1 , Ð9 6 4 Ð$ Ð4Ð1 , Ð2 4 1 Ð$2Ð2 Ð, Ð8 9 3 $Ð2Ð0 Ð , 2 Ð 9 2 $Ð2Ð3 Ð, 9 Ð8 2 tions under the bridge loan facility of $271,000,000 which were subsequently repaid using 38 39 cash contributed by the other venturers. Notes rec e i v able from sales of land are primarily due from builders at the community devel - On November 30, 1998, the Company purchased a portfolio of office and industrial prop - opment project in Summerlin. The Company stopped financing land sales in 1998 and does er ties and certain land parcels from a corporate joint ven t u r e in which the Company held a not anticipate financing any future land sales. The Company performed credit evaluations of 5% ownership interest. The portfolio consisted of 41 office buildings and 26 industrial build- the builders and generally req u i r ed substantial down payments (at least 20%) on all land sales ings. The purchase price of the prop e r ties was approximately $373,000,000, including that it financed. These notes and notes from sales of operating prop e r ties are generally secured ap p r oximately $112,000,000 of mortgage debt assumed. The net purchase price was funded by first liens on the related prop e rt i e s . by issuing $100,000,000 of common stock (3,525,782 shares), a $50,000,000 note secured by certain of the prop e r ties, a $58,000,000 unsecured note and by borrowings under the (6) Pension, postretirement The Company has a defined benefit pension plan (the “funded plan”) covering substantially all Co m p a n y ’s rev olving credit facility. In December 1998, the Company sold three of the office and deferred em p l o yees and employees of certain affiliates and separate, nonqualified unfunded ret i re m e n t buildings to Tri ze c H ahn for approximately $91,000,000. compensation plans plans (the “unfunded plans”) covering directors and participants in the funded plan whose Prop e r ties in development include construction and development in prog r ess and prec o n - defined benefits exceed the plan’s limits. Benefits under the pension plans are based on the par- st r uction costs, net. Construction and development in prog r ess includes land and land improve- ti c i p a n t s ’ years of service and compensation. The Company also has a ret i r ee benefits plan that ments of $63,737,000 and $41,951,000 at December 31, 1998 and 1997, res p e c t i ve l y . pr ovides postret i r ement medical and life insurance benefits to full-time employees and employ- Prop e r ties held for sale are generally those that, for various reasons, management has deter- ees of certain affiliates who meet minimum age and service req u i r ements. The Company pays mined do not meet the Company’s investment criteria or that the Company acquired with the a portion of the cost of parti c i p a n t s ’ life insurance coverage and makes contributions to the cost intention to sell. Prop e r ties held for sale at December 31, 1998 and 1997 are summarized as of parti c i p a n t s ’ medical insurance coverage based on years of service, subject to a maximum fo l l o ws (in thousands): annual contribution. Information relating to the obligations, assets and funded status of the plans at Dec e m b e r 19 9 8 19 9 7 –– – – – – – – – –– – – – – – – – 31, 1998 and 1997 and for the years then ended is summarized as follows (in thousands): centers (two prop e r ties in 1998 and Pen s i o n Pos t re t i re m e n t Pla n s Pla n th r ee prop e r ties in 1997) ...... $16 3 , 3 0 7 $10 , 4 9 9 ——— —— — Office and other prop e rt i e s ...... 2, 5 8 7 9, 5 5 3 19 9 8 19 9 7 19 9 8 19 9 7 –– – – – – – – – –– – – – – – – – — — —— Tot a l ...... $16 5 , 8 9 4 $20 , 0 5 2 Change in benefit obligations: —— —— Benefit obligations at beginning of yea r . . $57 , 4 4 0 $42 , 8 9 0 $ 14 , 6 6 8 $ 13 , 2 0 2 In 1998, the Company acquired the interests in the retail centers held for sale at Ser vice cost ...... 4, 6 0 9 3, 3 7 3 71 8 57 8 December 31, 1998, with the intention of selling them. Acc o rd i n g l y , rev enues of $6,395,000 Int e r est cost...... 4, 5 4 9 3, 7 0 2 1, 0 2 4 99 0 and operating losses of $723,000 relating to them are not included in the consolidated state- Am e n d m e n t — r evision to benefit formula. — 6, 5 0 4 —— ment of operations and compreh e n s i v e income. Rev enues relating to other prop e r ties held for Actuarial loss ...... 17 , 1 9 4 8, 5 1 5 28 2 53 9 Benefits paid ...... (1 1 , 4 4 8 ) (7 , 5 4 4 ) (8 0 5 ) (6 4 1 ) sale wer e $1,405,000 in 1998, $17,642,000 in 1997 and $29,600,000 in 1996 and these prop - — — — — er ties had operating income of $859,000 in 1998 and incurred operating losses of $3,558,000 Benefit obligations at end of yea r . . . . . 72 , 3 4 4 57 , 4 4 0 15 , 8 8 7 14 , 6 6 8 in 1997 and $811,000 in 1996. All of the prop e r ties held for sale at December 31, 1998 are — — — — expected to be sold in 1999. Change in plan assets: Fair value of plan assets (5) Accounts and Accounts and notes rec e i v able at December 31, 1998 and 1997 are summarized as follows (in at beginning of yea r ...... 47 , 0 8 3 38 , 9 9 1 —— notes receivable th o u s a n d s ) : Actual return on plan assets ...... 7, 9 0 0 7, 8 7 0 —— Emp l o yer contribution...... 11 , 4 4 9 7, 7 6 6 80 5 64 1 19 9 8 19 9 7 Benefits paid ...... (1 1 , 4 4 8 ) (7 , 5 4 4 ) (8 0 5 ) (6 4 1 ) –– – – – – – – – –– – – – – – – – — — — — Accounts rec e i v able, primarily accrued rents Fair value of plan assets at end of yea r . . 54 , 9 8 4 47 , 0 8 3 —— and income under tenant leases ...... $5 4 , 2 6 1 $ 49 , 4 2 4 — — — — Notes rec e i v able from sales of prop e rt i e s ...... 5, 4 9 7 10 , 1 5 4 Funded status ...... (1 7 , 3 6 0 ) (1 0 , 3 5 7 ) (1 5 , 8 8 7 ) (1 4 , 6 6 8 ) Unre c o g n i z ed net actuarial (gain) loss. . . . 23 , 7 8 4 12 , 2 9 2 83 (1 9 9 ) Notes rec e i v able from sales of land ...... 35 , 9 8 7 76 , 0 3 3 ––– – – – – –– – – – – – – – Una m o rt i z ed prior service cost ...... 7, 6 5 2 9, 0 6 2 —— Unre c o g n i z ed transition obligation...... 87 0 1, 0 7 1 4, 6 6 4 4, 9 9 8 95 , 7 4 5 13 5 , 6 1 1 — — — — Less allowance for doubtful rec e i va b l e s ...... 19 , 8 2 8 21 , 3 1 1 —— — — — —— — — Net amount rec o g n i ze d ...... $14 , 9 4 6 $12 , 0 6 8 $(1 1 , 1 4 0 ) $ (9 , 8 6 9 ) Tot a l ...... $7 5 , 9 1 7 $1 1 4 , 3 0 0 — — — — ÐÐ ÐÐÐ Amounts rec o g n i z ed in the balance sheets Accounts and notes rec e i v able due after one year wer e $23,197,000 and $54,180,000 at consist of: December 31, 1998 and 1997, res p e c t i ve l y . Prepaid benefit cost ...... $20 , 1 8 9 $15 , 3 7 8 $ — $ — Credit risk with respect to rec e i v ables from tenants is not highly concentrated due to the Acc r ued benefit liability ...... (1 1 , 3 8 2 ) (8 , 8 1 8 ) (1 1 , 1 4 0 ) (9 , 8 6 9 ) large number of tenants and the geographic diversification of the Company’s operating prop - Intangible asset ...... 4, 3 1 3 5, 5 0 8 —— er ties. The Company performs credit evaluations of pros p e c t i v e new tenants and req u i r es secu- Accumulated other compreh e n s i v e income it e m s ...... 1, 8 2 6 ——— rity deposits in certain circumstances. Ten a n t s ’ compliance with the terms of their leases is — — — — mo n i t o r ed closely, and the allowance for doubtful rec e i v ables is established based on analyses Net amount rec o g n i ze d ...... $1 4 , 9 4 6 $12 , 0 6 8 $(1 1 , 1 4 0 ) $ (9 , 8 6 9 ) of the risk of loss on specific tenant accounts, historical trends and other rel e v ant information. — — — —

40 41 Pen s i o n Pos t re t i re m e n t mo r tgages and bonds which are subject to agreements with lenders requiring the Company Pla n s Pla n ——— —— — to provide support for operating and debt service costs, where necessary, for defined periods —19 9 8 —19 9 7 ——19 9 8 19 9 7 or until specified conditions relating to the operating results of the related prop e r ties are met. Wei g h t e d - a v erage assumptions as of December 31: Debt at December 31, 1998 and 1997 is summarized as follows (in thousands): Discount rate...... 7. 0 0 % 7. 2 5 % 7. 0 0 % 7. 2 5 % 19 9 8 19 9 7 Expected rate of return on plan assets. . . . 7. 2 5 8. 0 0 —— –– ––– – – – – – – –– – – – – – – – Rate of compensation increa s e ...... 4. 5 0 4. 5 0 —— Mor tgages and bonds ...... $2, 9 4 8 , 3 2 4 $2, 1 5 9 , 4 1 8 Co n ve r tible subordinated debentures ...... 12 8 , 5 1 5 13 0 , 0 0 0 The assets of the funded plan consist primarily of pooled separate accounts with an insur- Medium-term notes ...... 97 , 5 0 0 11 0 , 3 0 0 ance company and marketable equity securities. Because the Company’s contributions to the Bank credit facility borrowi n g s : cost of parti c i p a n t s ’ medical insurance coverage are fixed, health care cost trend rates do not Bridge facility ...... 30 4 , 0 0 0 — affect the benefit obligation under the postret i r ement plan. Rev olving credit facility ...... 29 8 , 0 0 0 — The net pension cost includes the following components (in thousands): Other loans ...... 28 2 , 4 8 1 22 9 , 8 3 1 –––– – – – – – – – – – –– – – – – – – – 19 9 8 19 9 7 19 9 6 –– – – – – –– – – – – – – –– – – – – – – Tot a l ...... $4, 0 5 8 , 8 2 0 $2, 6 2 9 , 5 4 9 Ser vice cost ...... $4 , 6 0 9 $3 , 3 7 3 $2 , 9 8 9 ÐÐÐÐ ÐÐÐ Int e r est cost on projected benefit obligations...... 4, 5 4 9 3, 7 0 2 3, 1 0 7 Mor tgages and bonds are secured by deeds of trust or mortgages on prop e r ties and gener- Expected return on funded plan assets...... (3 , 4 7 9 ) (3 , 2 3 9 ) (2 , 8 0 7 ) al assignments of rents. This debt matures at various dates through 2024 and, at Dec e m b e r Prior service cost rec o g n i ze d ...... 1, 4 1 0 1, 4 1 0 75 6 31, 1998, bears interest at a wei g h t e d - a v erage effective rate of 7.65%, including lender par- Net loss rec o g n i ze d ...... 1, 2 8 1 43 6 87 5 ticipations in operations. At December 31, 1998, approximately $312,008,000 of this debt Am o r tization of transition obligation ...... 20 1 20 1 20 1 pr ovides for payments of additional interest based on operating results of the related prop e r - –— – – – – –– – – – – –– – – – – ties in excess of stated level s . Net pension cost ...... $8 , 5 7 1 $5 , 8 8 3 $5 , 1 2 1 The conver tible subordinated debentures bear interest at 5.75% and mature in 2002. Th e ÐÐ ÐÐ — de b e n t u r es are conver tible at the option of holders into one share of common stock for each The net postret i r ement benefit cost includes the following components (in thousands): $28.63 of par value and are redeemable at the option of the Company at any time at a price equal to par value plus accrued interes t . 19 9 8 19 9 7 19 9 6 –– – – – – –– – – – – –– – – – – The Company has reg i s t e r ed $150,000,000 of unsecured, medium-term notes which may be issued to the public from time to time. The notes may be issued, subject to market con- Ser vice cost ...... $ 71 8 $ 57 8 $ 64 0 ditions, for var ying terms (nine months to 30 years) and at fixed or variable interest rates Int e r est cost on accumulated benefit obligations . . . 1, 0 2 4 99 0 93 2 based on market indices at the time of issuance. The notes outstanding at December 31, Am o r tization of transition obligation ...... 33 3 33 3 33 3 —— — —— — —— — 1998, mature at various dates from 1999 to 2015, bear interest at a wei g h t e d - a v erage effec- Net postret i r ement benefit cost ...... $2 , 0 7 5 $1 , 9 0 1 $1 , 9 0 5 ti v e rate of 7.6% (including an average rate of 6.01% on $26,000,000 of variable rate notes) and have a wei g h t e d - a v erage maturity of 4.5 yea r s . ——— The Company has credit facilities with a group of lenders that provide for aggregate unse- Affiliates that participate in the pension and postret i r ement plans reimburse the Company cu r ed borrowings of up to $800,000,000, including $450,000,000 under a rev olving cred i t for their share of the annual benefit cost of the plans. The affiliates’ share of the benefit cost for facility and $350,000,000 under a bridge facility. Adv ances under the facilities bear interes t 1998 was $3,091,000. at a variable rate based on LIBOR (6.52% on the rev olving credit facility and 6.61% on the The Company also has a deferred compensation program which permits directors and cer- bridge facility at December 31, 1998). The rev olving credit facility is available to July 2001, tain management employees of the Company and certain affiliates to defer portions of their subject to a one-year ren e wal option. The bridge facility was available solely for specified compensation on a pretax basis. The participants designate the investment of the deferred funds pro p e r ty acquisitions that wer e completed in 1998 and related borrowings are due on or based on various alternatives and, under certain of the plans, the Company’s contributions are be f o r e Jul y 30, 1999. In Feb ru a r y 1999, approximately $271,000,000 of the outstanding bor- made in common stock. The Company rec o g n i z ed deferred compensation expense related to rowings under the bridge facility wer e repaid by a joint ven t u r e formed to own four of the this program of $189,000, $73,000 and $84,000 in 1998, 1997 and 1996, res p e c t i ve l y . ac q u i r ed retail centers. At December 31,1998, availability under the bridge loan facility had been fully utilized and, until it is repaid in full, the net proceeds of any equity transactions (7) Debt In recognition of the various characteristics of real estate financing, debt is classified as follows : and project refinancings must be applied to reduce the balance. Payment of borrowings under ( a )“ Prop e r ty debt not carrying a Par ent Company guarantee of rep a y m e n t ” which is subsidiary the credit facilities is guaranteed by certain of the unconsolidated real estate ven t u r es in which company debt having no express written obligation which would req u i r e the Company to rep a y the Company has a majority financial interest, and the Company has pledged its stock in the the principal amount of such debt during the full term of the loan (nonrecourse loans); an d ven t u r es to the lenders under the credit facilities. (b )“ Pa r ent Company debt and debt carrying a Par ent Company guarantee of rep a y m e n t ” Other loans include $120,000,000 of 8.5% unsecured notes due in 2003, various prop - which is debt of the Company and subsidiary company debt with an express written obliga- er ty acquisition loans and certain other borrowings. These loans include aggregate unsecured tion of the Company to repay the principal amount of such debt during the full term of the bo r r owings of $258,213,000 and $208,019,000 at December 31, 1998 and 1997, res p e c - loan (Company and recourse loans). ti ve l y , and at December 31, 1998, bear interest at a wei g h t e d - a v erage effective rate of 8.28%. With respect to nonrecourse loans, the Company has in the past and may in the future, At December 31, 1998, approximately $1,376,844,000 of the mortgages and bonds and under some circumstances, support those subsidiary companies whose annual obligations, $58,000,000 of the other loans wer e payable to one lender. including debt service, exceed their operating rev enues. At December 31, 1998 and 1997, non- recourse loans include $185,574,000 and $416,335,000, res p e c t i ve l y , of subsidiary companies’

42 43 The agreements relating to various loans impose limitations on the Company. The most (8) Company-obligated The redeemable pref e r r ed securities consist of 5,500,000 Cum u l a t i v e Qua r terly Inc o m e res t r i c t i v e of these limit the levels and types of debt the Company and its affiliates may incur mandatorily redeemable Pref e r r ed Securities (pref e r r ed securities), with a liquidation amount of $25 per security, which and req u i r e the Company and its affiliates to maintain specified minimum levels of debt ser- preferred securities wer e issued in November 1995 by a statutory business trust. The trust used the proceeds of the vice coverage and net worth. The agreements also impose restrictions on the dividend payou t pre f e r r ed securities and other assets to purchase at par $141,753,000 of junior subordi n a t e d ratio, and on sale, lease and certain other transactions, subject to various exclusions and limi- de b e n t u r es (debentures) of the Company due in November 2025, which are the sole assets of tations. These restrictions have not limited the Company’s normal business activities. the trus t . The annual maturities of debt at December 31, 1998 are summarized as follows (in thou- Payments to be made by the trust on the pref e r r ed securities are dependent on payments sa n d s ) : that the Company has undertaken to make, particularly the payments to be made by the Non re c o u r s e Company and Company on the debentures. Compliance by the Company with its undertakings, taken Lo a n s Recourse Loans Total —— — — — — — — —— — — — — — — —— — — — — — — to g e t h e r , would have the effect of providing a full, irrev ocable and unconditional guarantee of the trus t ’s obligations under the pref e r r ed securities. 19 9 9 ...... $ 15 9 , 4 0 7 $ 33 7 , 0 5 8 $ 49 6 , 4 6 5 Distributions on the pref e r r ed securities are payable from interest payments rec e i v ed on the 20 0 0 ...... 57 , 0 8 0 10 4 , 6 2 2 16 1 , 7 0 2 de b e n t u r es and are due quarterly at an annual rate of 9.25% of the liquidation amount, sub- 20 0 1 ...... 17 1 , 2 4 1 35 8 , 1 8 9 52 9 , 4 3 0 ject to deferral for up to five years under certain conditions. Distributions payable are includ- 20 0 2 ...... 12 1 , 0 5 1 16 3 , 4 4 0 28 4 , 4 9 1 ed in operating expenses. Redemptions of the pref e r r ed securities are payable at the liquidation 20 0 3 ...... 43 9 , 6 9 6 12 0 , 0 9 2 55 9 , 7 8 8 amount from redemption payments rec e i v ed on the debentures . Subsequent to 2003 ...... 1, 9 7 4 , 6 4 4 52 , 3 0 0 2, 0 2 6 , 9 4 4 —— — — — — — — ——— —— — —— — — — — — — The Company may redeem the debentures at par at any time after November 27, 2000, but Tot a l ...... $2, 9 2 3 , 1 1 9 $1, 1 3 5 , 7 0 1 $4, 0 5 8 , 8 2 0 redemptions at or prior to maturity are payable only from the proceeds of issuance of capital stock of the Company or of securities substantially comparable in economic effect to the pre- —— — fe r r ed securities. During 1998, the Company rep u r chased 21,400 of the pref e r r ed securities for At December 31, 1998, the Company had interest rate cap agreements which effectivel y ap p r oximately $535,000. limit the average interest rate on $70,538,000 of mortgages to 8.9% through May 2002. Th e in t e r est rate swap agreements outstanding at December 31, 1998 wer e not material. Int e re s t (9) Segment information In 1998, the Company adopted Statement of Financial Accounting Sta n d a r ds No. 131, rate exchange agreements did not have a material effect on the wei g h t e d - a v erage effective inter- “Di s c l o s u r es about Segments of an Enterprise and Related Information.” This Statement estab- est rates on debt at December 31, 1998 and 1997 or interest expense for 1998, 1997 and 1996. lishes standards for rep o r ting financial information about operating segments in interim and Total interest costs wer e $229,478,000 in 1998, $231,098,000 in 1997, and $230,960,000 annual financial rep o r ts and provides for a “management approa c h ” to identifying the in 1996, of which $19,914,000, $23,608,000, and $10,579,000 we re capitalized, rep o r table segments in place of the industry segment approach used prev i o u s l y . res p e c t i ve l y . The Company has five rep o r table segments: retail centers, office, mixed-use and other prop - In 1998, the Company rec o g n i z ed net extraordi n a r y gains related to extinguishments of er ties, land sales operations, development and corporate. The retail centers segment includes debt prior to scheduled maturity of $3,626,000, and in 1997 and 1996 incurred extraordi n a r y the operation and management of retail centers, including regional shopping centers, down - losses on such transactions of $32,834,000, and $2,236,000, res p e c t i ve l y , before deferred to wn specialty marketplaces and village centers. The office, mixed-use and other prop e rt i e s income tax benefits of $729,000, $11,492,000, and $783,000, res p e c t i ve l y . The sources of segment includes the operation and management of office, industrial and mixed-use prop e r - funds used to pay the debt and fund the prepayment penalties, where applicable, wer e ref i - ties. The land sales operations segment includes the development and sale of land, primarily in nancings of prop e r ties, the Series B Pref e r r ed stock issued in 1997, the medium-term notes and large-scale, long-term community development projects in Columbia and Summerlin. Th e the Company-obligated mandatorily redeemable pref e r r ed securities issued in 1995. de v elopment segment includes the evaluation of all potential new projects (including expan- The estimated fair value of debt is determined based on quoted market prices for publicly- sions of existing prop e r ties) and acquisition opportunities and the management of them traded debt and on the discounted estimated future cash payments to be made for other debt. th r ough the development or acquisition process. The corporate segment is responsible for cash The discount rates used approximate current market rates for loans or groups of loans with and investment management and certain other general and support functions. The Company’s similar maturities and credit quality. The estimated future payments include scheduled princi- rep o r table segments offer different products or services and are managed separately because pal and interest payments, and lenders’ participations in operating results and residual val u e s each req u i r es different operating strategies and management experti s e . of the related prop e r ties, where applicable. Segment operating results are measured and assessed based on a performance measure The carrying amount and estimated fair value of the Company’s debt at December 31, ref e r r ed to as Funds from Operations (FFO). The National Association of Real Estate 1998 and 1997 are summarized as follows (in thousands): Inv estment Trusts defines FFO as net earnings (computed in accordance with generally accept- 19 9 8 19 9 7 ed accounting principles), excluding cumulative effects of changes in accounting principles, —— — — — — — — — — — — — — —— — — — — — — — — — — — — ex t r a o rd i n a r y or unusual items and gains or losses from debt res t r ucturings and sales of prop - Ca r ry i n g Es t i m a t e d Ca r ry i n g Estimated Am o u n t Fair Val u e Am o u n t Fair Val u e er ties, plus depreciation and amortization, and after adjustments for minority interests and to —— — — — — — —— — — — — — —— — — — — — —— — — — — — rec o r d unconsolidated partnerships and joint ven t u r es on the same basis. The Company also Fix ed rate debt ...... $3, 0 9 9 , 9 4 9 $3, 1 9 8 , 6 4 1 $2, 3 9 0 , 5 9 0 $2, 5 2 8 , 2 1 5 ex cludes deferred income taxes from its computation of FFO. The method used by the Variable rate debt ...... 95 8 , 8 7 1 95 8 , 8 7 1 23 8 , 9 5 9 23 8 , 9 5 9 Company to compute FFO may differ from methods used by other REITs. FFO is not a —— — — — — — —— — — — — — —— — — — — — —— — — — — — $4, 0 5 8 , 8 2 0 $4, 1 5 7 , 5 1 2 $2, 6 2 9 , 5 4 9 $2, 7 6 7 , 1 7 4 me a s u r e 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. Fair value estimates are made at a specific point in time, are subjective in nature and invol v e The accounting policies of the segments are the same as those of the Company described un c e r tainties and matters of significant judgment. Settlement of the Company’s debt obliga- in note 1, except that real estate ven t u r es in which the Company holds substantially all (at least tions at fair value may not be possible and may not be a prudent management decision. 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 ven t u r es in which it holds a minority interest is included in reve n u e s .

44 45 Reconciliations of the total rev enues and expenses rep o r ted above to the related amounts in the Operating results for the segments are summarized as follows (in thousands): financial statements and of FFO rep o r ted above to earnings before income taxes, extraordi n a r y losses and cumulative effect of changes in accounting principle in the financial statements are Office, Mixe d - Ret a i l Use and Oth e r Land Sal e s su m m a r i z ed as follows (in thousands): Ce n t e r s Prop e rt i e s Ope r a t i o n s Deve l o p m e n t Co r p o r a t e Tot a l —— — — — —— — — — — —— — — – – – —— — — — — —— — — — —— — — 19 9 8 19 9 7 19 9 6 19 9 8 –– – – – – – –– – – – – – –– – – – – – – Reve n u e s ...... $55 9 , 8 2 1 $21 5 , 9 1 9 $19 7 , 7 0 6 $ — $ 3, 7 9 7 $97 7 , 2 4 3 Reve n u e s : Operating expenses, excl u s i v e of depreciation Total rep o r ted above...... $97 7 , 2 4 3 $92 7 , 9 3 0 $83 1 , 9 1 7 and amortization, and current income taxes . . . . 26 8 , 8 5 1 10 2 , 9 5 6 14 4 , 7 3 2 7, 3 8 3 24 , 1 0 9 54 8 , 0 3 1 Rev enues of majority financial interest ven t u r es Int e r est expense ...... 15 0 , 8 8 9 77 , 8 9 4 4, 2 0 1 — (8 , 6 1 4 ) 22 4 , 3 7 0 –––––––– –––––––– –––––––– ––––––– ––––––– –––––––– ex cluding interest on advances to the Company ...... (2 7 2 , 9 4 3 ) —— FF O ...... $14 0 , 0 8 1 $ 35 , 0 6 9 $ 48 , 7 7 3 $ (7 , 3 8 3 ) $(1 1 , 6 9 8 ) $20 4 , 8 4 2 Rev enues rep r esenting the Company’s share of FFO ÐÐÐ ÐÐÐÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ of minority financial interest ven t u re s ...... (1 2 , 7 5 3 ) (1 1 , 1 5 9 ) (1 0 , 8 8 1 ) Oth e r ...... 1, 0 2 4 —— 19 9 7 –– – – – – – –– – – – – – –– – – – – – – Reve n u e s ...... $50 3 , 6 5 5 $21 6 , 5 7 1 $20 3 , 2 1 9 $ — $ 4, 4 8 5 $92 7 , 9 3 0 Total in financial statements...... $69 2 , 5 7 1 $91 6 , 7 7 1 $82 1 , 0 3 6 Operating expenses, excl u s i v e of depreciation ÐÐÐ ÐÐÐ ÐÐÐ and amortization, and current income taxes . . . . 25 8 , 2 2 9 10 8 , 1 0 4 15 1 , 8 4 2 4, 7 4 7 16 , 1 2 8 53 9 , 0 5 0 Operating expenses, excl u s i v e of depreciation and amorti z a t i o n : Int e r est expense ...... 12 2 , 3 2 5 81 , 9 0 5 4, 2 8 7 — (1 , 0 2 7 ) 20 7 , 4 9 0 –––––––– –––––––– –––––––– ––––––– ––––––– –––––––– Total rep o r ted above...... $54 8 , 0 3 1 $53 9 , 0 5 0 $47 2 , 1 7 7 FF O ...... $12 3 , 1 0 1 $ 26 , 5 6 2 $ 47 , 0 9 0 $ (4 , 7 4 7 ) $(1 0 , 6 1 6 ) $18 1 , 3 9 0 Operating expenses of majority financial interest ven t u re s ...... (1 6 1 , 3 5 0 ) —— ÐÐÐ ÐÐÐÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ Cur r ent income taxes applicable to operations...... 24 (3 , 2 0 8 ) (1 2 3 ) Par ticipation by others in the Company’s share 19 9 6 of earnings of majority financial interest ven t u re s ...... (2 4 , 1 5 2 ) —— Reve n u e s ...... $50 8 , 4 1 5 $18 2 , 1 5 4 $13 7 , 8 5 3 $ — $ 3, 4 9 5 $83 1 , 9 1 7 Oth e r ...... (4 , 1 7 1 ) —— Operating expenses, excl u s i v e of depreciation –– – – – – – –– – – – – – –– – – – – – – and amortization, and current income taxes . . . . 26 0 , 0 2 7 89 , 6 4 3 10 7 , 7 9 1 4, 9 6 4 9, 7 5 2 47 2 , 1 7 7 Total in financial statements...... $35 8 , 3 8 2 $53 5 , 8 4 2 $47 2 , 0 5 4 Int e r est expense ...... 12 9 , 0 9 1 76 , 6 5 9 1, 6 5 8 36 1 12 , 6 1 2 22 0 , 3 8 1 ÐÐÐ ÐÐÐ ÐÐÐ –––––––– –––––––– –––––––– ––––––– ––––––– –––––––– Int e r est expense: FF O ...... $11 9 , 2 9 7 $ 15 , 8 5 2 $ 28 , 4 0 4 $ (5 , 3 2 5 ) $(1 8 , 8 6 9 ) $13 9 , 3 5 9 Total rep o r ted above...... $22 4 , 3 7 0 $20 7 , 4 9 0 $22 0 , 3 8 1 ÐÐÐ ÐÐÐÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ Int e r est expense of majority financial interest ven t u re s ex cluding interest on borrowings from the Company ...... (1 4 , 8 0 6 ) —— –– – – – – – –– – – – – – –– – – – – – – Total in financial statements...... $ÐÐ20 9 , Ð5 6 4 Ð$2ÐÐ0 7 , 4 9 0 Ð$2ÐÐ2 0 , 3 8 1 Operating res u l t s : FFO rep o r ted above...... $20 4 , 8 4 2 $18 1 , 3 9 0 $13 9 , 3 5 9 Dep r eciation and amorti z a t i o n ...... (8 4 , 0 6 8 ) (8 2 , 9 4 4 ) (7 7 , 4 1 4 ) Loss on dispositions of assets and other provisions, net ...... (1 1 , 1 7 4 ) (2 3 , 4 8 4 ) (1 6 , 4 9 9 ) Dep r eciation and amortization, gain on dispositions of assets and de f e r r ed income taxes of unconsolidated real estate ven t u r es, net . . . . (4 , 3 8 0 ) (4 , 3 4 4 ) (1 , 9 6 4 ) Cur r ent income taxes (benefit) applicable to operations ...... (2 4 ) 3, 2 0 8 12 3 Other ...... (4 4 ) —— –– – – – – – –– – – – – – –– – – – – – – Earnings before income taxes, extraordi n a r y items and cumulative effect of changes in accounting principle...... $ÐÐ10 5 , Ð1 5 2 Ð$ÐÐ73 , 8 2 6 Ð$ÐÐ43 , 6 0 5

46 47 The assets by segment at December 31, 1998, 1997 and 1996 are as follows (in thousands): (10) Income taxes Income tax expense (benefit) for 1997 and 1996 is reconciled to the amount computed by applying the Federal corporate tax rate as follows (in thousands): 19 9 8 19 9 7 19 9 6 –– – – – – – – – ––– – – – – – – – ––– – – – – – – – 19 9 7 19 9 6 Retail centers ...... $3, 6 3 6 , 8 7 4 $2, 1 4 4 , 3 3 4 $2, 3 7 4 , 1 6 2 –– – –– – Office, mixed-use and other Tax at statutory rate on earnings before pro p e rt i e s ...... 1, 4 1 7 , 6 2 2 1, 1 2 7 , 6 4 0 79 6 , 3 2 9 income taxes, extraordi n a r y items and Land sales operations ...... 60 9 , 7 0 1 61 5 , 8 8 7 30 8 , 0 1 4 cu m u l a t i v e effect of changes in accounting Deve l o p m e n t ...... 61 , 1 6 6 16 5 , 1 0 1 92 , 0 3 0 pr i n c i p l e ...... $ 25 , 8 3 9 $15 , 2 6 2 Co r p o r a t e ...... 57 , 9 3 3 12 6 , 5 9 3 72 , 9 1 7 State income taxes, net of Federal income –– – – – – – – – ––– – – – – – – – ––– – – – – – – – tax benefit ...... 3, 1 4 7 1, 0 2 3 Tot a l ...... $5, 7 8 3 , 2 9 6 $4, 1 7 9 , 5 5 5 $3, 6 4 3 , 4 5 2 Nondeductible portion of distributions ÐÐÐ ÐÐÐ ÐÐÐ under Contingent Stock Agree m e n t ...... 13 , 3 8 1 9, 4 3 4 Total segment assets exceeds total assets rep o r ted in the financial statements primarily Reduction of net deferred tax liabilities ...... (1 5 8 , 4 3 3 ) — because of the consolidation of the majority financial interest ven t u r es for segment rep o rt i n g –– – –– – pu r p o s e s . Income tax expense (benefit) ...... Ð $ (1 Ð1 6 , Ð0 6 6 ) $Ð25 , Ð7 1 9 Additions to long-lived assets of the segments are summarized as follows (in thousands): As discussed in note 1, the Company qualified to be taxed as a REIT beginning in 1998. 19 9 8 19 9 7 19 9 6 Management believes that the Company continued to meet the qualifications for REIT status –– – – – – – – – –– – – – – – – –– – – – – – – as of December 31, 1998, and intends for it to continue to meet the qualifications in the Retail centers: fu t u r e. Management does not expect the Company will be liable for significant income taxes Acq u i s i t i o n s ...... $1 , 0 4 2 , 8 4 6 $ 83,985 $1 9 1 , 5 6 4 at the Federal level or in most states in 1998 and future years. Acc o rd i n g l y , the Company elim- Expansions and ren o vat i o n s ...... 23 1 , 6 0 7 13 9 , 6 0 8 47 , 4 4 9 inated substantially all of its existing deferred tax assets and liabilities at December 31, 1997 Imp r ovements for tenants and other ...... 18 , 1 0 5 15 , 9 6 0 13 , 7 9 6 and no longer provides for Federal or most state deferred income taxes . ––– – – – – – – – –– – – – – – – –– – – – – – – At December 31, 1998, the income tax bases of the Company’s assets and liabilities wer e 1, 2 9 2 , 5 5 8 23 9 , 5 5 3 25 2 , 8 0 9 ––– – – – – – – – –– – – – – – – –– – – – – – – ap p r oximately $4,338,000,000 and $4,422,000,000, res p e c t i ve l y . The net operating losses car- ried forwa r d from December 31, 1998 for Federal income tax purposes aggregate approxi - Office, mixed-use and other prop e rt i e s : mately $281,000,000, and will expire from 2005 to 2011. Acq u i s i t i o n s ...... 28 8 , 6 9 4 55 0 30 2 , 7 7 3 In connection with its election to be taxed as a REIT, the Company will also elect to be sub- Expansions and ren o vat i o n s ...... 24 , 3 9 0 97 5 6, 1 7 6 ject to the “built-in gain” rules. Under these rules, taxes may be payable at the time and to the Imp r ovements for tenants and other ...... 10 , 6 8 8 7, 6 6 7 7, 4 2 1 ––– – – – – – – – –– – – – – – – –– – – – – – – extent that the net unrea l i z ed gains on the Company’s assets at the date of conversion to REIT status are rec o g n i z ed in taxable dispositions of such assets in the ten-year period following con- 32 3 , 7 7 2 9, 1 9 2 31 6 , 3 7 0 ––– – – – – – – – –– – – – – – – –– – – – – – – version. Such net unrea l i z ed gains wer e approximately $2,100,000,000 at Jan u a r y 1, 1998. Land sales operations: Management believes that the Company will not be req u i r ed to make significant payments of Acq u i s i t i o n s ...... 16 , 9 9 3 — 11 8 , 7 6 4 ta x es on built-in gains throughout the ten-year period due to the availability of its net operat- Dev elopment expenditures ...... 82 , 6 5 6 13 1 , 3 1 0 48 , 4 7 4 ing loss carryf o rw a r d to offset built-in gains which might be rec o g n i z ed and the potential for ––– – – – – – – – –– – – – – – – –– – – – – – – the Company to make nontaxable dispositions, if necessary (e.g., like-kind exchanges of prop - 99 , 6 4 9 13 1 , 3 1 0 16 7 , 2 3 8 ––– – – – – – – – –– – – – – – – –– – – – – – – er ties). At December 31, 1998, the net regular tax operating loss carryf o rw a r d is sufficient to Dev elopment: offset built-in gains on assets the Company has identified for disposition and no net deferred Co n s t r uction and development tax liability for built-in gains taxes has been rec o g n i z ed. It may be necessary to rec o g n i z e a lia- costs of new proj e c t s ...... 11 2 , 1 8 4 15 3 , 6 2 0 58 , 5 8 1 bility for such taxes in the future if management’s plans and intentions with respect to asset dis- ––– – – – – – – – –– – – – – – – –– – – – – – – positions, or the related tax laws, change. Tot a l ...... $1, 8 2 8 , 1 6 3 $5 3 3 , 6 7 5 $7 9 4 , 9 9 8 ÐÐÐ ÐÐ Ð ÐÐ Ð (11) Loss on dispositions Loss on dispositions of assets and other provisions, net, is summarized as follows (in thousands): App r oximately $169,860,000 of the additions in 1998 relate to prop e r ty owned by the of assets and other 19 9 8 19 9 7 19 9 6 majority financial interest ven t u re s . provisions, net –– – – ––– – ––– – – Net loss on operating prop e rt i e s ...... $ (6 , 1 0 9 ) $( 2 2 , 4 2 6 ) $(2 6 , 5 1 5 ) Litigation judgment ...... — — 8, 7 1 6 Oth e r , net ...... (5 , 0 6 5 ) (1 , 0 5 8 ) 1, 3 0 0 –– – – ––– – ––– – – Tot a l ...... $ÐÐ(1 1 , 1 7 4 ) $Ð( 2 3 Ð, 4 8 4 ) $ ÐÐ(1 6 , 4 9 9 ) The net loss on operating prop e r ties in 1998 relates primarily to a loss on disposal of a ret a i l ce n t e r . The other net loss for 1998 includes a fourth quarter loss of $6,396,000 related to a tre a s u r y lock contract that no longer qualified for hedge accounting because the Company determined that the related anticipated financing transaction will not occur under the terms and timing originally expected.

48 49 The net loss on operating prop e r ties in 1997 relates primarily to provisions for losses rec - utions of additional shares, based on cash flows, are payable semiannually as of June 30 and og n i z ed on several retail centers, an industrial prop e r ty and a hotel the Company decided to December 31. At December 31, 1998, a distribution of approximately 589,000 shares sell, including additional provisions of $3,653,000 related to retail centers held for disposition ($16,207,000) was payable to the beneficiaries. prior to 1997. These provisions wer e partially offset by gains on dispositions of five office The Agreement is, in substance, an arrangement under which the Company and the bene- buildings ($4,704,000). ficiaries will share in cash flows from development and/or sale of the defined assets during their The net loss on operating prop e r ties in 1996 relates primarily to provisions for losses res p e c t i v e earnout periods and the Company will issue additional shares of common stock to rec o g n i z ed on five retail centers the Company decided to sell. the beneficiaries based on the value, if any, of the defined asset groups at the termination dates. The litigation judgment relates to a matter involving a former tenant at the Riverw a l k Substantially all of the remaining assets in the four defined asset groups wer e owned by sub- Shopping Center. In 1995, an appellate court substantially affirmed a trial court judgment sidiaries in which the Company sold a majority voting interest to The Rouse Company against the Company and certain of its affiliates in an action in which the former tenant alleged Inc e n t i v e Compensation Sta t u t o r y Trust on December 31, 1997. Howeve r , the Company various breaches of its lease agreement and claimed damages for lost future profits. Th e retained full responsibility for its obligations under the Agreement and, accordi n g l y , it accounts Company rec o r ded a provision for the full amount of the appellate award ($12,321,000) at for the beneficiaries’ share of earnings from the assets as a reduction of its equity in the earn- that time. In 1996, a portion of the provision rec o r ded in 1995 was rev ersed following a nego- ings of the related ven t u r es. Prior to 1998, the Company accounted for the beneficiaries’ share tiated settlement of the matter. of earnings from the assets as an operating expense. The Company will account for any distri- butions to the beneficiaries as of the termination dates as an additional investment in the rel a t - (12) Preferred stock The Company has authorized 50,000,000 shares of Pref e r r ed stock of 1¢ par value per share ed ven t u r es (i.e., contingent consideration). At the time of acquisition of Hughes, the of which (a) 4,505,168 shares have been classified as Series A Conver tible Pref e r r ed; (b) Company res e r ved 20,000,000 shares of common stock for possible issuance under the 4,600,000 shares have been classified as Series B Conver tible Pref e r r ed, (c) 10,000,000 shares Ag r eement. The number of shares res e r ved was determined based on conservat i v e estimates in ha v e been classified as Inc r easing Rate Cum u l a t i v e Pref e r r ed; and (d) 37,362 shares have been ac c o r dance with the provisions of the Agreement. The actual number of shares issuable will be classified as 10.25% Junior Pref e r r ed, Series 1996. determined only from events occurring over the term of the Agreement and could differ sig- The Company sold 4,050,000 shares of the Series B Conver tible Pref e r r ed stock in a pub- nificantly from the number of shares res e r ved . lic offering in the first quarter of 1997. The shares have a liquidation pref e r ence of $50 per Under the Company’s stock option plans, options to purchase shares of common stock and sh a r e and earn dividends at an annual rate of 6% of the liquidation pref e r ence. At the option stock appreciation rights may be awarded to directors, officers and employees. Stock options of the holders, each share of the Series B Conver tible Pref e r r ed stock is conver tible into shares ar e generally granted with an exer cise price equal to the market price of the common stock on of the Company’s common stock at a conversion rate of approximately 1.311 shares of com- the date of grant, typically vest over a three- to five- y ear period, subject to certain conditions, mon stock for each share of Pref e r r ed stock, subject to adjustment in certain circumstances. In and have a maximum term of ten years. The Company has not granted any stock apprec i a t i o n addition, beginning April 1, 2000, the shares of Pref e r r ed stock are redeemable for shares of rights. Changes in options outstanding under the plans are summarized as follows : common stock at the option of the Company, subject to certain conditions. 19 9 8 19 9 7 19 9 6 The Company sold 4,025,000 shares of the Series A Conver tible Pref e r r ed stock in a pub- –––– – ———— — ——— Wei g h t e d - Wei g h t e d - Wei g h t e d - lic offering in 1993 and issued 480,168 shares in 1994 in connection with a modification of ave r a g e ave r a g e ave r a g e terms of a debt agreement related to a retail center. The shares of Series A Conver tible Pref e r re d Exerc i s e Exerc i s e Exerc i s e Sha re s Pri c e Sha re s Pri c e Sha re s Pri c e stock had a liquidation pref e r ence of $50 per share and earned dividends at an annual rate of –––––––– –– – – –– – ———— — ——— ————— — —— — 6.5% of the liquidation pref e r ence. Each share was conver tible into shares of the Company’s Balance at beginning of yea r ...... 4, 6 7 0 , 1 3 8 $2 4 . 9 0 2, 7 6 5 , 7 7 9 $2 0 . 1 8 2, 2 2 7 , 4 0 0 $1 9 . 8 9 common stock at a conversion rate of approximately 2.35 shares of common stock for each Options granted ...... 1, 2 1 0 , 4 0 2 29 . 0 6 2, 1 5 5 , 9 0 1 30 . 4 5 65 4 , 0 0 0 21 . 0 9 sh a r e of Pref e r r ed stock, subject to certain conditions. On September 30, 1996, the Company Options exerc i s e d ...... (2 6 3 , 0 7 6 ) 19 . 4 8 (2 3 9 , 9 4 2 ) 20 . 1 6 (8 7 , 3 7 1 ) 18 . 6 1 redeemed all of the then outstanding shares of Series A Conver tible Pref e r r ed stock. In 1996, Options expired or cancelled ...... (1 8 3 , 2 5 0 ) 30 . 3 6 (1 1 , 6 0 0 ) 28 . 7 6 (2 8 , 2 5 0 ) 22 . 8 2 the Company issued 10,598,721 shares of common stock in exchange for 4,504,579 shares of –– –– –– –– ––– –– – – –– – ———— — ——— ————— — —— — Series A Conver tible Pref e r r ed stock. Balance at end of yea r ...... 5, 4 3 4 , 2 1 4 $2 5 . 9 1 4, 6 7 0 , 1 3 8 $2 4 . 9 0 2, 7 6 5 , 7 7 9 $2 0 . 1 8 Sha r es of the Inc r easing Rate Cum u l a t i v e Pref e r r ed stock are issuable only to former Hug h e s owners or their successors pursuant to the Contingent Stock Agreement described in note 13. These shares are issuable only in limited circumstances and no shares have been issued. Th e r e Information about stock options outstanding at December 31, 1998 is summarized as wer e also no shares of 10.25% Junior Pref e r r ed stock, Series 1996, outstanding at Dec e m b e r fo l l ow s : 31, 1998 and 1997. Options Out s t a n d i n g Options Exerc i s a b l e – – – – – – – – – – – – – – – – – – – —–– – – – – – – – – – – – – – – – – – —–– – – – – – – – – – – – – – – – – – – – – – – – – – —– (13) Common stock At December 31, 1998, shares of authorized and unissued common stock are res e r ved as fol- Wei g h t e d - Range of ave r a g e Wei g h t e d - Wei g h t e d - lo ws: (a) 16,843,281 shares for issuance under the Contingent Stock Agreement discussed Exe rc i s e Rem a i n i n g ave r a g e ave r a g e be l o w; (b) 7,678,776 shares for issuance under the Company’s stock option and stock bonus Pri c e s Sha re s Life (Yea r s ) Exer cise Pri c e Sha re s Exer cise Pri c e plans; (c) 4,489,607 shares for conversion of the conver tible subordinated debentures; and (d) –– – – – – – – – – – – – – –– – –– –– – – –––– – ––– –– – –– – – – – – – – ––– –– – 5,309,955 shares for conversion of the Series B Conver tible Pref e r r ed stock. $13.50 to $19.875 1, 6 4 5 , 9 6 1 5. 6 $1 8 . 6 8 1, 1 3 0 , 9 9 5 $1 8 . 3 7 $23.75 to $32.875 3, 7 8 8 , 2 5 3 7. 7 29 . 0 4 79 9 , 9 2 3 26 . 0 8 In connection with the acquisition of Hughes, the Company entered into a Contingent –– – –– –– – – –– – –– – – – – –– – – – – – – – –– – – – – Stock Agreement (“Ag re e m e n t ”) for the benefit of the former Hughes owners or their succes- 5, 4 3 4 , 2 1 4 7. 0 $2 5 . 9 1 1, 9 3 0 , 9 1 8 $2 1 . 5 6 sors (the beneficiaries). Under terms of the agreement, additional shares of common stock (or in certain circumstances, Inc r easing Rate Cum u l a t i v e Pref e r r ed stock) are issuable to the ben- eficiaries based on the appraised values of four defined groups of acquired assets at specified “termination dates” from 2000 to 2009 and/or cash flows generated from the devel o p m e n t At December 31, 1997 and 1996, options to purchase 1,594,705 and 1,449,844 shares , and/or sale of those assets prior to the termination dates (the “earnout periods”). The distrib- res p e c t i ve l y , wer e exer cisable at per share wei g h t e d - a v erage prices of $21.07 and $20.84, res p e c t i ve l y .

50 51 The per share wei g h t e d - a v erage estimated fair values of options granted during 1998, 1997 (14) Earnings per share Information relating to the calculations of earnings per share of common stock for 1998, 1997 and 1996 wer e $3.17, $8.34, and $5.44, res p e c t i ve l y . These fair values wer e estimated on and 1996 is summarized as follows (in thousands): the dates of each grant using the Black-Scholes option-pricing model with the followi n g 19 9 8 19 9 7 19 9 6 as s u m p t i o n s : —— – —— – —— – Bas i c Dil u t e d Bas i c Dil u t e d Bas i c Dil u t e d 19 9 8 19 9 7 19 9 6 —– —– —– —– —– —– –– – – –– – – –– – – Earnings before extraordi n a r y items and Ri s k - f r ee interest rate ...... 4. 6 % 6. 0 % 6. 0 % cu m u l a t i v e effect of changes in Dividend yield ...... 6. 0 3. 5 4. 0 accounting principle ...... $10 5 , 1 7 6 $10 5 , 1 7 6 $18 9 , 8 9 2 $18 9 , 8 9 2 $ 17 , 8 8 6 $ 17 , 8 8 6 Volatility factor ...... 21 . 8 28 . 0 28 . 0 Dividends on Pref e r r ed stock ...... (1 2 , 1 5 2 ) (1 2 , 1 5 2 ) (1 0 , 3 1 3 ) — (1 0 , 5 3 3 ) (1 0 , 5 3 3 ) Expected life in yea r s ...... 6. 6 6. 9 7. 0 Dividends on unvested common stock awards . . . . (6 2 0 ) (4 2 5 ) (6 3 2 ) (5 5 2 ) (6 5 9 ) (6 5 9 ) ÐÐÐ Int e r est on conver tible subordinated debentures . . . — — — 7, 4 7 5 —— The option prices wer e greater than or equal to the market prices at the date of grant for —– —– —– —– —– —– all of the options granted in 1998, 1997 and 1996 and, accordi n g l y , no compensation cost Adjusted earnings before extraordi n a r y items and has been rec o g n i z ed for stock options in the financial statements. cu m u l a t i v e effect of changes in accounting If the Company had applied a fair value-based method to rec o g n i z e compensation cost for principle used in EPS computation ...... $ 92 , 4 0 4 $ 92 , 5 9 9 $17 8 , 9 4 7 $19 6 , 8 1 5 $ 6, 6 9 4 $ 6, 6 9 4 stock options, net earnings and earnings per share of common stock would have been adjust- ed as indicated below (in thousands): 19 9 8 19 9 7 19 9 6 Wei g h t e d - a v erage shares outstanding ...... 67 , 8 7 4 67 , 8 7 4 66 , 2 0 1 66 , 2 0 1 54 , 9 1 3 54 , 9 1 3 –– – – – – – –– – – – – – –– – – – – – Dil u t i v e securities: Net earnings: Co n ve r tible subordinated debentures ...... — — — 4, 5 4 2 —— As rep o r ted ...... $10 4 , 9 0 2 $16 7 , 3 3 6 $16 , 4 3 3 Co n ve r tible Pref e r r ed stock ...... — — — 4, 5 0 9 —— Pro forma ...... 99 , 6 5 3 16 4 , 4 4 5 15 , 3 9 7 Options, warrants and unvested common Earnings per share of common stock: stock awards ...... — 98 5 — 75 3 — 39 8 ––– – – –– – – – –– ––– –– –– – –– –– – – – –– – –– – –– – –– – – –– –– – – – – – –– ––– ––––– – Bas i c : Adjusted wei g h t e d - a v erage shares used in As rep o rt e d ...... 1. 3 6 2. 3 6 .1 0 EPS computation ...... 67 , 8 7 4 68 , 8 5 9 66 , 2 0 1 76 , 0 0 5 54 , 9 1 3 55 , 3 1 1 Pro forma ...... 1. 2 8 2. 3 2 .0 8 Dil u t e d : As rep o rt e d ...... 1. 3 4 2. 2 9 .0 9 Pro forma ...... 1. 2 7 2. 2 5 .0 8 Effects of potentially dilutive securities are presented only in periods in which they are ÐÐÐ ÐÐÐ ÐÐ di l u t i ve . The pro forma amounts reflect only options granted after 1994. Th e re f o r e, the full impact of calculating compensation cost for stock options under a fair value-based method is not (15) Leases The Company, as lessee, has entered into operating leases expiring at various dates throu g h reflected in the pro forma amounts because compensation cost is reflected over the options’ 2076. Rents under such leases aggregated $8,096,000 in 1998, $9,147,000 in 1997, and vesting periods and compensation cost for options granted prior to Jan u a r y 1, 1995 is not $9,648,000 in 1996, including contingent rents, based on the operating performance of the req u i r ed to be considered . related prop e r ties, of $2,330,000, $3,158,000, and $3,844,000, res p e c t i ve l y . In addition, rea l Under the Company’s stock bonus plans, shares of common stock may be awarded to offi- estate taxes, insurance and maintenance expenses are obligations of the Company. Min i m u m cers and employees. Sha r es awarded under the plans are typically subject to forfe i t u r e res t r i c - rent payments due under operating leases in effect at December 31, 1998 are summarized as tions which lapse at defined annual rates. Awa r ds granted in 1998, 1997 and 1996 aggreg a t - fo l l o ws (in thousands): ed 164,850, 49,000 and 415,000 shares, res p e c t i ve l y , with a wei g h t e d - a v erage market val u e per share of $27.54, $31.25 and $20.99, res p e c t i ve l y . In connection with the stock bonus 19 9 9 ...... $ 6, 1 1 4 plan awards, the Company typically makes loans to the recipients for the payment of rel a t e d 20 0 0 ...... 5, 9 6 2 income taxes, which loans are forgiven in installments subject to the rec i p i e n t s ’ continued 20 0 1 ...... 5, 9 9 6 em p l o yment. The total loans outstanding at December 31, 1998, 1997 and 1996 wer e 20 0 2 ...... 6, 0 1 5 $4,012,000, $5,710,000, and $6,565,000, res p e c t i ve l y . The Company rec o g n i z es amorti z a - 20 0 3 ...... 5, 9 8 4 tion of the fair value of the stock awarded, any forgiven loan installments and certain rel a t e d Subsequent to 2003...... 21 8 , 7 9 9 costs as compensation costs on a straight-line basis over the terms of the awards. Such costs –– –– – – –– – amounted to $5,572,000 in 1998, $5,807,000 in 1997, and $4,923,000 in 1996. Tot a l ...... $ 24 8 , 8 7 0

52 53 Space in the Company’s operating prop e r ties is leased to approximately 6,000 tenants. In matters, where appropriate, and the ultimate resolution of such litigation matters is not like- addition to minimum rents, the majority of the retail center leases provide for percentage ren t s ly to have a material effect on the consolidated financial position of the Company. Due to the when the tenants’ sales volumes exceed stated amounts, and the majority of the retail center Co m p a n y ’s fluctuating net earnings, it is not possible to predict whether the resolution of and office leases provide for other rents which reimburse the Company for certain of its oper- these matters is likely to have a material effect on the Company’s net earnings and it is, there- ating expenses. Rents from tenants are summarized as follows (in thousands): fo r e, possible that the resolution of these matters could have such an effect in any future quar- ter or yea r . 19 9 8 19 9 7 19 9 6 –– – – – – – – – –– – – – – – – –– – – – – – – – Minimum ren t s ...... $ 38 3 , 9 7 4 $38 7 , 4 8 8 $ 34 8 , 2 9 6 (17) New accounting In Mar ch 1998, the American Institute of Certified Public Accountants issued Statement of standards not Per centage ren t s ...... 13 , 0 7 1 14 , 9 9 9 14 , 8 3 0 Position 98-1, “Accounting for the Costs of Computer Sof t w a r e Dev eloped or Obtained for yet adopted Internal Use ” (SOP 98-1) which is req u i r ed to be adopted by the Company no later than Other ren t s ...... 20 4 , 8 6 2 21 3 , 0 0 5 22 3 , 9 4 9 –– – – – – – – – –– – – – – – – –– – – – – – – – Jan u a r y 1, 1999. SOP 98-1 provides guidance as to whether costs incurred relating to inter- Tot a l ...... $ 60 1 , 9 0 7 $61 5 , 4 9 2 $ 58 7 , 0 7 5 nal-use software should be expensed or capitalized. The guidance in SOP 98-1 is req u i r ed to ÐÐÐ ÐÐÐ ÐÐÐ be applied to costs incurred subsequent to adoption and may not be applied to costs incurred The minimum rents to be rec e i v ed from tenants under operating leases in effect at prior to initial application. The Company intends to adopt SOP 98-1 effective Jan u a r y 1, December 31, 1998, excluding leases of prop e r ties held for sale and of retail centers con- 1999, and does not believe that adoption will have a material effect on its results of operations. tributed to a joint ven t u r e in Feb ru a r y 1999, are summarized as follows (in thousands): In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, “Rep o r ting on the Costs of Sta r t-up Act i v i t i e s ” (SOP 98-5) which is req u i re d 19 9 9 ...... $ 39 3 , 8 8 2 to be adopted by the Company no later than Jan u a r y 1, 1999. SOP 98-5 req u i r es that start- 20 0 0 ...... 35 8 , 2 3 2 up costs and organization costs, not otherwise addressed in existing authoritative literature, be 20 0 1 ...... 31 3 , 2 0 8 expensed as incurred. The Company intends to adopt SOP 98-5 effective Jan u a r y 1, 1999, and 20 0 2 ...... 27 1 , 1 9 2 the initial application will be rep o r ted as the cumulative effect of a change in accounting prin- 20 0 3 ...... 22 0 , 0 9 7 ciple. The Company does not believe that adoption will have a material effect on its results of Subsequent to 2003 ...... 70 8 , 4 5 3 operations in future periods. –– – – – – – – – In June 1998, the Financial Accounting Sta n d a r ds Board issued Statement of Fin a n c i a l Tot a l ...... $2 , 2 6 5 , 0 6 4 Accounting Sta n d a r ds No. 133, “Accounting for Der i va t i v e Ins t r uments and Hed g i n g ÐÐÐÐ Activities,” (Statement 133) which is req u i r ed to be adopted by the Company no later than Rents under finance leases aggregated $9,332,000 in 1998, $9,316,000 in 1997, and Jan u a r y 1, 2000. The Company’s use of derivat i v e instruments has consisted primarily of inter- $9,645,000 in 1996. The net investment in finance leases at December 31, 1998 and 1997 is est rate swap and cap agreements related to specific debt financings. While the Company has su m m a r i z ed as follows (in thousands): not completed its analysis of Statement 133 and has not made a decision reg a r ding the timing 19 9 8 19 9 7 of adoption, it does not believe that adoption will have a material effect on its financial posi- –– – –– – – – –– – – – – – – – tion and results of operations based on its current use of derivat i v e instrum e n t s . Total minimum rent payments to be rec e i v ed over lease terms ...... $15 7 , 3 7 4 $16 6 , 7 0 6 Estimated residual values of leased prop e rt i e s ...... 5, 6 9 5 5, 6 9 5 Unearned income ...... (7 5 , 7 1 7 ) (8 3 , 2 3 7 ) –– – – – – – – – –– – – – – – – – Net investment in finance leases $ÐÐÐÐ87 , 3 5 2 $Ð8Ð9 , 1 Ð 64 Minimum rent payments to be rec e i v ed from tenants under finance leases in effect at December 31, 1998 are $9,304,000, $9,365,000, $10,190,000, $10,164,000, and $10,261,000 for 1999, 2000, 2001, 2002 and 2003, res p e c t i ve l y .

(16) Other commitments Commitments for the construction and development of prop e r ties in the ordi n a r y course of and contingencies business and other commitments not set forth elsewh e r e amount to approxi m a t e l y $129,000,000 at December 31, 1998. At December 31, 1998, subsidiaries of the Company have contingent liabilities of approx- imately $17,791,000 with respect to future minimum rents under long-term lease obligations of certain unconsolidated real estate ven t u r es and approximately $10,795,000 with respect to bank letters of credit issued to secure their obligations under certain agreements. At December 31, 1998, the Company had a shelf registration statement for future sale of up to an aggregate of $2.1 billion (based on the public offering price) of common stock, Pref e r r ed stock and debt securities. Securities may be issued pursuant to this registration state- ment in amounts and on terms to be determined at the time of offering. The Company and certain of its subsidiaries are defendants in various litigation matters arising in the ordi n a r y course of business, some of which invol v e claims for damages that are substantial in amount. Some of these litigation matters are cover ed by insurance. In the opin- ion of management, adequate provision has been made for losses with respect to litigation

54 55 Five Year Comparison of Selected Financial Data Interim Financial Inf o r mation (Una u d i t e d ) Year ended December 31 (in thousands, except per share data) Interim consolidated results of operations are summarized as follows (in thousands, except per share data): 19 9 8 19 9 7 1996 1995 1994 Qua r ter ended —— –– – – – – — — — — —— — –– – – – – — — — —— –– – – – – – — — — — —— –– – – — — — — —— — –– – — — — —— — — — — — — — — — — — — — — — — — — — — — — — — ——— —— — —— — — — — — — — — — — — — — — — — — — — — — — — Operating results data: Dec e m b e r Sep t e m b e r Jun e Marc h Dec e m b e r Sep t e m b e r Jun e Marc h 31, 1998 30, 1998 30, 1998 31, 1998 31, 1997 30, 1997 30, 1997 31, 1997 Rev enues from continuing operations ...... $ 69 2 , 5 7 1 $ 91 6 , 7 7 1 $ 82 1 , 0 3 6 $ 67 2 , 8 2 1 $ 67 1 , 1 7 1 —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — Earnings from continuing operations...... 10 5 , 1 7 6 18 9 , 8 9 2 17 , 8 8 6 5, 8 5 0 6, 6 0 6 Reve n u e s ...... $1 9 3 , 7 1 4 $16 4 , 3 1 8 $15 5 , 3 7 7 $1 7 9 , 1 6 2 $24 0 , 0 9 6 $2 2 9 , 3 3 1 $23 9 , 6 0 2 $20 7 , 7 4 2 Basic earnings (loss) from continuing operations Operating income ...... 25 , 5 6 2 28 , 9 3 8 29 , 1 2 3 32 , 7 0 3 29 , 1 0 3 27 , 7 8 1 22 , 8 8 6 16 , 2 8 8 applicable to common shareholders per share Earnings before extraordi n a r y items ...... 19 , 8 6 8 21 , 5 1 2 29 , 2 6 4 34 , 5 3 2 16 2 , 0 8 6 16 , 2 7 1 3, 1 2 5 8, 4 1 0 of common stock ...... 1. 3 6 2. 7 0 .1 3 (. 1 9 ) (. 1 4 ) Net earnings (loss) ...... 19 , 5 4 9 19 , 6 1 1 36 , 7 5 5 28 , 9 8 7 15 1 , 8 5 2 16 , 1 6 4 (6 , 9 6 1 ) 6, 2 8 1 Diluted earnings (loss) from continuing operations —— —— —— —— —— —— —— —— applicable to common shareholders per share Ea r nings (loss) per common share: of common stock ...... 1. 3 4 2. 5 9 .1 2 (. 1 9 ) (. 1 4 ) Bas i c : Balance sheet data: Earnings before extraordi n a r y iems ...... $ .2 4 $ .2 7 $ .3 8 $ .4 7 $ 2. 4 0 $ .2 0 $ — $ .1 0 Total assets ...... 5, 1 5 4 , 6 4 3 3, 5 8 9 , 7 6 8 3, 6 4 3 , 4 5 2 2, 9 8 5 , 6 0 9 2, 9 1 5 , 8 6 0 Ext r a o rd i n a r y gains (losses) ...... — (. 0 3 ) .1 1 (. 0 1 ) (. 1 4 ) — (. 1 5 ) (. 0 3 ) Cum u l a t i v e effect of accounting changes . . — — — (. 0 7 ) (. 0 2 ) ——— Debt and capital leases ...... 4, 0 6 8 , 4 5 9 2, 6 8 4 , 1 4 0 2, 8 9 5 , 4 4 7 2, 5 3 8 , 3 1 5 2, 5 3 2 , 9 2 0 —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — Sha re h o l d e r s ’ equity ...... 62 8 , 9 2 6 46 5 , 5 1 5 17 7 , 1 4 9 42 , 5 8 4 95 , 0 2 6 Tot a l ...... $ .2 4 $ .2 4 $ .4 9 $ .3 9 $ 2. 2 4 $ .2 0 $ (. 1 5 ) $ .0 7 Sha re h o l d e r s ’ equity per share of —— —— —— —— —— —— —— —— common stock (note 1)...... 8. 1 1 6. 4 5 2. 6 5 .7 3 1. 6 3 Dil u t e d : Other selected data: Earnings before extraordi n a r y items ...... $ .2 4 $ .2 7 $ .3 7 $ .4 6 $ 2. 1 2 $ .2 0 $ — $ .1 0 Funds from Operations (note 2) ...... 20 4 , 8 4 2 18 1 , 3 9 0 13 9 , 3 5 9 10 8 , 3 6 0 94 , 7 1 0 Ext r a o rd i n a r y gains (losses) ...... — (. 0 3 ) .1 1 (. 0 1 ) (. 1 1 ) — (. 1 5 ) (. 0 3 ) Cum u l a t i v e effect of accounting changes . . — — — (. 0 7 ) (. 0 2 ) ——— Net cash provided (used) by: —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — Operating activities ...... 26 1 , 1 8 3 18 5 , 5 1 6 16 8 , 1 2 6 10 7 , 0 0 1 11 3 , 7 7 5 Tot a l ...... $ .2 4 $ .2 4 $ .4 8 $ .3 8 $ 1. 9 9 $ .2 0 $ (. 1 5 ) $ .0 7 Inv esting activities...... (1 , 0 3 2 , 2 0 0 ) (3 2 2 , 4 7 9 ) (1 8 2 , 9 9 5 ) (6 4 , 9 9 5 ) (1 7 8 , 5 5 1 ) —— —— —— —— —— —— —— —— Financing activities ...... 72 1 , 6 1 1 18 0 , 2 9 7 (3 6 , 2 8 7 ) 3, 5 1 8 40 , 6 1 8 Not e — Ext r a o rd i n a r y gains (losses) relate to early extinguishments of debt. Net earnings for the fourth quarter of 1998 includes a loss of $6,396,000 Dividends per share of common stock...... 1. 1 2 1. 0 0 .8 8 .8 0 .6 8 ($.09 per share) related to a trea s u r y lock contract that no longer qualified for hedge accounting. Net earnings for the third quarter of 1998 Dividends per share of convert i b l e includes a loss of $7,653,000 ($.11 per share) on disposal of a retail center. Net earnings for the first quarter of 1998 includes the Company’s Pref e r r ed stock ...... 3. 0 0 2. 6 5 2. 4 4 3. 2 5 3. 2 5 equity in gains on disposition of operating prop e r ties of an unconsolidated real estate ven t u r e of $12,315,000 ($.18 per share). Net earnings for the fourth quarter of 1997 includes the effect of eliminating substantially all ($158,433,000) of the net deferred income tax liability ($2.39 per Mar ket price per share of common stock sh a r e basic, $2.05 per share diluted) due to the Company’s determination to elect to be taxed as a REIT. Net earnings (loss) for the second and at year end ...... 27 . 5 0 32 . 7 5 31 . 7 5 20 . 1 3 19 . 2 5 fo u r th quarters of 1997 include provisions for losses on operating prop e r ties of $8,964,000 ($.14 per share) and $8,229,000 ($.13 per share basic, Mar ket price per share of convert i b l e $.10 per share diluted), res p e c t i ve l y . Pref e r r ed stock at year end ...... 43 . 3 8 50 . 5 0 — 51 . 6 3 48 . 5 0 Price of Common Stock and Div i d e n d s Wei g h t e d - a v erage common shares The Company’s common stock is traded on the New Yor k Stock Exchange. The prices and dividends per share wer e as follows : Qua r ter ended outstanding (basic) ...... 67 , 8 7 4 66 , 2 0 1 54 , 9 1 3 47 , 3 7 5 47 , 2 5 8 —— — — — — — — — — — — — — — — — — — — — — — — — — ——— —— — —— — — — — — — — — — — — — — — — — — — — — — — — Wei g h t e d - a v erage common shares Dec e m b e r Sep t e m b e r Jun e Marc h Dec e m b e r Sep t e m b e r Jun e Marc h 31, 1998 30, 1998 30, 1998 31, 1998 31, 1997 30, 1997 30, 1997 31, 1997 outstanding (diluted) ...... 68 , 8 5 9 76 , 0 0 5 55 , 3 1 1 47 , 3 7 5 47 , 2 5 8 —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — —— — — — — Hig h ...... $2 8 . 8 8 $3 2 . 1 9 $3 2 . 8 1 $3 4 . 6 9 $3 3 . 0 0 $3 1 . 5 0 $2 9 . 5 0 $3 2 . 0 0 Note 1—For 1998 and 1997, shareh o l d e r s ’ equity per share of common stock assumes conversion of the Series B Conver tible Pref e r r ed stock issued in Lo w ...... 23 . 6 3 24 . 8 1 28 . 8 8 29 . 7 5 27 . 2 5 28 . 4 4 25 . 7 5 28 . 8 8 1997. For 1995 and 1994, shareh o l d e r s ’ equity per share of common stock assumes the conversion of the Series A Conver tible Pref e r r ed stock. Div i d e n d s ...... 2 8 .2 8 .2 8 .2 8 .2 5 .2 5 .2 5 .2 5 The Series A Conver tible Pref e r r ed Stock was issued in 1993 and redeemed for common stock in 1996. Number of Holders of Common Sto c k Note 2—Funds from Operations (FFO) is not a measure of operating results or cash flows from operating activities as defined by generally accepted The number of holders of rec o r d of the Company’s common stock as of Feb ru a r y 18, 1999 was 2,105. accounting principles. Add i t i o n a l l y , FFO is not necessarily indicative of cash available to fund cash needs, including the payment of dividends, and should not be considered as an alternative to cash flows as a measure of liquidity. See the "Funds from Operations" section of Man a g e m e n t ’s Discussion and Analysis of Financial Condition and Results of Operations on page 64 for a full discussion of FFO.

56 57 The Rouse Company and Subsidiaries MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERA T I O N S

General Th r ough its subsidiaries and affiliates, the Company acquires, develops and manages a diver - of f i c e / m i x ed-use prop e r ties and 4% and 66%, res p e c t i ve l y , from land sales. These results are sified portfolio of retail centers, office and industrial buildings and mixed-use and other attributable to several factors, including: pro p e r ties (office/mixed-use prop e r ties) located throughout the United States and devel o p s • the acquisition of The Hughes Corporation and its affiliated partn e r s h i p , Howa r d and sells land for residential, commercial and other uses, primarily in Columbia, Mary l a n d , Hughes Prop e r ties, Limited Par tnership (together “Hug h e s ”) in June 1996, and Summerlin, Neva d a . • other changes in the Company’s portfolio of prop e r ties, In December 1997, the Company determined that it would elect to be taxed as a real estate • expansions of certain retail prop e r ties, in v estment trust (“REIT”) effective Jan u a r y 1, 1998 and, on December 31, 1997, completed ce r tain transactions that enabled it to meet the qualifications for REIT status. As a REIT, the • openings of new retail centers and office buildings, Company has greater flexibility in acquisition and merger opportunities and its corporate • higher occupancy levels in retail and office prop e r ties, income taxes will be substantially lower in future periods. • refinancings of proj e c t - r elated debt at lower interest rates and, One of the Company’s primary objectives is to own and operate premier prop e rt i e s — s h o p - • repayments of certain proj e c t - r elated and corporate debt. ping centers, office and industrial buildings and major mixed-use projects—in major marke t s Management believes the outlook is for continued solid growth in FFO in 1999. Th e ac r oss the United States. In order to achieve this objective, management is continually eval u - Company will continue to focus considerable effort and res o u r ces on leasing and rem e rc h a n - ating opportunities to acquire prop e r ties owned by others that may have future prospects con- dising existing retail centers. The prospects for growth from retail centers and office/mixed - u s e sistent with the Company’s long-term investment criteria and is continually evaluating the pro p e r ties are excellent as the Company should benefit from a full year of operations of prop - fu t u r e outlook for prop e r ties in its portf o l i o . This includes considering opportunities to expand er ties acquired and/or opened in 1998 and continued strong occupancy levels in existing pro- and/or ren o vate the prop e r ties and assessing whether particular prop e r ties are meeting or have jects. FFO from land sales should also remain strong in 1999, assuming continued good mar- the potential to meet the Company’s investment criteria. The Company plans to continue ket conditions in Columbia and Sum m e r l i n . making substantial investments to expand and/or ren o vate leasable space and/or add new de p a r tment stores to its existing prop e r ties to meet its objective. The Company is also contin- Operating results This discussion and analysis of operating results covers each of the Company’s five business ually evaluating opportunities for new operating prop e r ties and/or land development proj e c t s segments as management believes that a segment analysis provides the most effective means it believes have future prospects consistent with its objectives. The Company has sold a num- of understanding the business. Note 9 to the consolidated financial statements and the infor- ber of prop e r ties over the last several years and intends to continue to dispose of prop e r ties that mation relating to rev enues and expenses in the Fiv e Year Sum m a r y of Funds from ar e not meeting and/or are not considered to have the potential to continue to meet its inves t - Operations and Net Earnings (Loss) on page 70, should be ref e r r ed to when reading this dis- ment criteria. While disposition decisions may cause the Company to rec o g n i z e gains or loss- cussion and analysis. As discussed in note 9, the Company adopted Statement of Fin a n c i a l es that could have material effects on rep o r ted net earnings (loss) in future quarters or fiscal Accounting Sta n d a r ds No. 131, “Dis c l o s u r es about Segments of an Enterprise and Rel a t e d years, they are not anticipated to have a material effect on the overall consolidated financial Inf o r m a t i o n ” in 1998. As req u i r ed by the Statement, segment operating data are rep o rt e d position or operating income of the Company. using the accounting policies followed by the Company for internal rep o r ting to manage- In 1998, the Company completed several transactions designed to upgrade the overall qual- ment. These policies are the same as those followed for external rep o r ting except that rea l ity of its portfolio of operating prop e r ties. In the third and fourth quarters, the Company pur- estate ven t u r es in which the Company holds substantially all (at least 98%) of the financial chased ownership interests in eight retail centers, including the interests of partners in two cen- in t e r est, but does not own a majority voting interest, are rep o r ted on a consolidated basis ters (The Fashion Sho w and Gover n o r ’s Squ a r e) in which the Company now holds 100% rather than using the equity method, and the Company’s share of FFO of unconsolidated ownership interests. In Feb ru a r y 1999, the Company contributed its ownership interests in real estate ven t u r es in which it holds a minority interest is included in rev enues. These dif- four of the acquired centers (Bri d g e water Commons, Fashion Place Mall, Par k Mea d o ws and fe r ences affect only the rep o r ted rev enues and operating and interest expenses of the seg- Towson Town Center) to a joint ven t u r e in which it retained a 35% ownership interest. Th e ments, and have no effect on the rep o r ted net earnings of the Company. Rev enues and oper- Company acquired the other two ownership interests with the intent to sell them. Th e ating and interest expenses rep o r ted for the segments are reconciled to the related amounts Company disposed of four retail centers (Eastfield Mall, Greengate Mall, and rep o r ted in the financial statements in note 9. St. Louis Union Station) and its 5% ownership interests in six retail centers. In the fourth quar- te r , the Company also acquired a portfolio of office and industrial prop e r ties and salable land Op e r ating Prop e rt i e s : The Company rep o r ts the results of its operating prop e r ties in two of an entity in which the Company previously held a 5% ownership interest. The acquired segments: retail centers and office/mixed-use prop e r ties. The Company’s tenant leases pro- assets consisted of 64 buildings (excluding three which wer e subsequently sold) and approxi - vide the foundation for the performance of its retail centers and office/mixed-use prop e rt i e s . mately 100 acres of land. Substantially all of the acquired assets are in the Bal t i m o re - In addition to minimum rents, the majority of retail and office tenant leases provide for Washington metropolitan area. The Company and its affiliates disposed of their interests in other rents which reimburse the Company for most of its operating expenses. Sub s t a n t i a l l y two hotels and certain industrial buildings in Bal t i m o r e and Columbia and their office prop - all of the Company’s retail leases also provide for additional rent (percentage rent) based on er ties in Los Angeles. tenant sales in excess of stated levels. As leases expire, space is released, minimum rents are The Company has continued to achieve strong financial results in recent years, despite the generally adjusted to market rates, expense reimbursement provisions are updated and new rapidly changing environment for retail businesses. Funds from Operations (“FFO”), which is pe r centage rent levels are established for retail leases. defined and discussed in detail below, increased 13% in 1998 and 30% in 1997, including Most of the Company’s operating prop e r ties are financed with long-term, fixed rate, non- in c r eases of 14% and 3%, res p e c t i ve l y , from retail centers, 32% and 68%, res p e c t i ve l y , from recourse debt and, accordi n g l y , their operating results are not directly affected by changes in in t e r est rates. Although the interest rates on this debt do not fluctuate, certain loans provi d e for additional payments to the lenders based on operating results of the related prop e r ties in ex cess of stated level s .

58 59 Retail Cen t e r s : Operating results of retail centers are summarized as follows (in millions): Rev enues from office/mixed-use prop e r ties decreased $0.7 million in 1998 and increa s e d 19 9 8 $34.4 million in 1997. The decrease in 1998 was attributable primarily to dispositions of Maj o r i t y Min o r i t y ce r tain prop e r ties in Los Angeles and Las Vegas, and certain industrial and hotel prop e rt i e s Co n s o l i d a t e d Int e re s t Int e re s t in Bal t i m o r e and Columbia (approximately $21 million). These decreases wer e substantial- Prop e rt i e s Ven t u re s Ven t u re s Tot a l 19 9 7 19 9 6 –– – – – – – – – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – ly offset by the acquisition of the 64 office and industrial buildings ref e r r ed to above (a p p r oximately $5 million), the openings of new office prop e r ties in Las Vegas in 1998 and Reve n u e s ...... $48 9 . 3 $ 58 . 7 $11 . 8 $55 9 . 8 $50 3 . 6 $50 8 . 4 1997 (approximately $7 million), the addition of a cinema to in 1998 Operating expenses, excl u s i v e of (a p p r oximately $2 million) and higher occupancy levels (96.3% in 1998 and 93.4% in de p r eciation and amorti z a t i o n ...... 23 7 . 7 31 . 1 — 26 8 . 8 25 8 . 2 26 0 . 0 1997) at comparable prop e r ties. The increase in 1997 was attributable primarily to a full Int e r est expense ...... 13 8 . 3 12 . 6 — 15 0 . 9 12 2 . 3 12 9 . 1 –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – year of operations of the prop e r ties acquired in the Hughes transaction, openings of new 11 3 . 3 15 . 0 11 . 8 14 0 . 1 12 3 . 1 11 9 . 3 office and other prop e r ties in Las Vegas and higher occupancy levels at hotel and Columbia Dep r eciation and amorti z a t i o n ...... 55 . 8 4. 9 2. 4 63 . 1 51 . 2 50 . 1 office prop e r ties. –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – Total operating and interest expenses (excl u s i v e of depreciation and amortization) for Operating income...... $ 57 . 5 $ 10 . 1 $ 9. 4 $ 77 . 0 $ 71 . 9 $ 69 . 2 of f i c e / m i x ed-use prop e r ties decreased $9.2 million in 1998 and increased $23.7 million in ÐÐÐ ÐÐÐ ÐÐÐ ÐÐ ÐÐÐ Ð ÐÐÐ Ð 1997. The decrease in 1998 was attributable primarily to the dispositions of prop e rt i e s ref e r r ed to above (approximately $18 million) and to the repayment and refinancing of cer- Rev enues from retail centers increased $56.2 million in 1998 and decreased $4.8 million tain prop e r ty debt. These decreases wer e partially offset by the project openings (approxi - in 1997. The increase in 1998 was attributable primarily to prop e r ties opened or expanded mately $5 million) and the acquisitions (approximately $4 million) ref e r r ed to above. Th e (a p p r oximately $25 million) or acquired (approximately $38 million) in 1998 and 1997, in c r ease in 1997 was attributable primarily to a full year of operations of the prop e rt i e s higher average occupancy levels (92.5% in 1998 as compared to 90.8% in 1997) and high- ac q u i r ed in the Hughes transaction, the effects of higher occupancy levels and the openings er rents on re-leased space. These increases wer e partially offset by dispositions of interests in of new prop e r ties ref e r r ed to above. pro p e r ties in 1998 and 1997 (approximately $25 million), and lower tenant lease termina- tion payments. The decrease in 1997 was attributable primarily to dispositions of interes t s Land Sales Operations: Land sales operations relate primarily to the communities of in prop e r ties in 1997 and 1996 and lower tenant lease termination payments. This decrea s e Columbia, Mar yland, and Summerlin, Nev ada. Gen e r a l l y , rev enues and operating income was partially offset by the effects of slightly higher average occupancy (90.8% in 1997 as fr om land sales are affected by such factors as the availability to purchasers of construc t i o n co m p a r ed to 90.2% in 1996), the operations of two prop e r ties which wer e opened or and permanent mortgage financing at acceptable interest rates, consumer and business expanded in 1997 and a full year of operations of two prop e r ties in which the Company confidence, availability of salable land for particular uses and decisions to sell, develop or ac q u i r ed interests in 1996. retain land. Total operating and interest expenses (excl u s i v e of depreciation and amortization) for Operating results from land sales operations are summarized as follows (in millions): retail prop e r ties increased $39.2 million in 1998 and decreased $8.6 million in 1997. Th e in c r ease in 1998 was attributable primarily to the prop e r ties opened or expanded (approxi - 19 9 8 Maj o r i t y mately $19 million) or acquired (approximately $37 million) in 1998 and 1997. Th e s e Co n s o l i d a t e d Int e re s t in c r eases wer e partially offset by dispositions of interests in prop e r ties in 1998 and 1997 Prop e rt i e s Ven t u re s Tot a l 19 9 7 19 9 6 –– – – – – – – – – – – – – – – –– – – – ––– – –– –– ––– – – – – – – –– –– – – – – ––– –– – –– – –– – – – (a p p r oximately $24 million). The decrease in 1997 was attributable primarily to the dispo- Hughes Land Ope r a t i o n s : sitions of interests in prop e r ties ref e r r ed to above and refinancings and repayments of pro- Reve n u e s ...... $33 . 7 $11 8 . 5 $15 2 . 2 $16 3 . 2 $ 98 . 4 je c t - r elated debt. These decreases wer e partially offset by the effects of a full year of opera- Operating costs and expenses...... 24 . 2 96 . 3 12 0 . 5 13 0 . 0 83 . 4 tions of the prop e r ties in which the Company acquired interests in 1996. Dep r eciation and Int e r est expense...... 2 .1 .3 .5 .7 am o r tization expense for retail prop e r ties increased $11.9 million in 1998 and $1.1 million –– – – – – – – – – – –– – – – ––– – – – –– ––– – – – – – – –– –– – – – – –– – –– – –– – –– – – – in 1997. These changes wer e due primarily to the net effect of changes in the Company’s Operating income ...... $ 9. 3 $ 22 . 1 $ 31 . 4 $ 32 . 7 $ 14 . 3 po r tfolio of retail prop e r ties ref e r r ed to above. ÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ Columbia and Oth e r : Office, Mi xe d - Use and Other Prop e rt i e s : Operating results of office/mixed-use prop e rt i e s Reve n u e s ...... $ — $ 45 . 5 $ 45 . 5 $ 40 . 0 $ 39 . 5 ar e summarized as follows (in millions): Operating costs and expenses...... — 24 . 2 24 . 2 21 . 8 24 . 4 Int e r est expense...... 8 3. 1 3. 9 3. 8 1. 0 19 9 8 –– – – – – – – – – – –– – –– – – – –– – –– – ––– – – – – – –– – ––– – – – – – –– – – – – –– – – – Maj o r i t y Min o r i t y Operating income (loss) ...... $ (. 8 ) $ 18 . 2 $ 17 . 4 $ 14 . 4 $ 14 . 1 Co n s o l i d a t e d Int e re s t Int e re s t Prop e rt i e s Ven t u re s Ven t u re s Tot a l 19 9 7 19 9 6 ÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ –– – – – – – – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – Total Land Sales Ope r a t i o n s : Reve n u e s ...... $16 6 . 6 $ 48 . 2 $1. 1 $21 5 . 9 $2 1 6 . 6 $18 2 . 2 Reve n u e s ...... $33 . 7 $16 4 . 0 $19 7 . 7 $20 3 . 2 $13 7 . 9 Operating expenses, excl u s i v e of Operating costs and expenses...... 24 . 2 12 0 . 5 14 4 . 7 15 1 . 8 10 7 . 8 Int e r est expense...... 1. 0 3. 2 4. 2 4. 3 1. 7 de p r eciation and amorti z a t i o n ...... 70 . 5 32 . 4 — 10 2 . 9 10 8 . 1 89 . 6 –– – – – – – – – – – –– – – ––– – – – – –– – – – ––– – – – –– – – – ––– – – – –– – –– – – – –– – Int e r est expense ...... 68 . 6 9. 3 — 77 . 9 81 . 9 76 . 7 Operating income ...... $ 8. 5 $ 40 . 3 $ 48 . 8 $ 47 . 1 $ 28 . 4 –– – – – – – – – – – –– – – – – – – – – – –– – – – –– – –– – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – 27 . 5 6. 5 1. 1 35 . 1 26 . 6 15 . 9 ÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ ÐÐÐ Dep r eciation and amorti z a t i o n ...... 27 . 9 5. 5 .8 34 . 2 34 . 8 29 . 9 –– – – – – – – – – – –– – – – – – – – – – –– – – – –– – –– – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – Operating income (loss) ...... Ð $ÐÐ (. 4 ) Ð$ÐÐ1 . 0 $ÐÐÐ .3 $ÐÐÐ Ð .9 $ÐÐÐ( Ð8 . 2) $ÐÐ(Ð1 Ð4 . 0 )

60 61 Rev enues and operating income from Hughes land operations for 1998 include $99.6 unallocated proceeds from refinancings of certain prop e r ties, net of interest capitalized on million and $20.7 million, res p e c t i ve l y , relating to Summerlin and $52.6 million and $10.7 de v elopment projects or allocated to other segments, and corporate operating expenses con- million, res p e c t i ve l y , relating to other land holdings. Rev enues and operating income from sist primarily of general and administrative costs and distributions on the redeemable pre- Hughes land operations for 1997 include $128.8 million and $27.1 million, res p e c t i ve l y , fe r r ed securities. relating to Summerlin and $34.4 million and $5.6 million, res p e c t i ve l y , relating to other Corporate interest costs wer e $6.3 million in 1998, $13.9 million in 1997 and $18 mil- land holdings. Rev enues and operating income from Hughes land operations for 1996 lion in 1996. Int e r est of $14.9 million, $14.9 million and $5.4 million was capitalized in include $93.1 million and $14.2 million, res p e c t i ve l y , relating to Summerlin and $5.3 mil- 1998, 1997 and 1996, res p e c t i ve l y , on funds invested in development projects. The decrea s - lion and $.1 million, res p e c t i ve l y , relating to other land holdings. The decreases in reve n u e s es in corporate interest costs in 1998 and 1997 wer e attributable primarily to allocations of and operating income in 1998 relating to Summerlin wer e attributable primarily to lower debt to other segments to fund prop e r ty acquisitions and certain capital expenditures. Th e le v els of land sold for residential purposes. The increases in rev enues and operating income higher level of interest capitalized in 1998 and 1997 reflects the higher level of corporate in 1997 relating to Summerlin wer e attributable primarily to a full year of Hughes land oper- funds invested in projects in devel o p m e n t . ations. The increase in operating income in 1997 also reflects higher margins on sales, pri- marily because land on which development was completed or in prog r ess at the time of the Gain (Loss) on Dispositions of Assets and Other Provisions, Net : The loss on dispositions acquisition of Hughes (which carried lower profit margins) comprised a smaller prop o rt i o n of assets and other provisions, net, for 1998 consisted primarily of a loss on the disposal of of sales in 1997 than in 1996. The increases in rev enues and operating income relating to a retail prop e r ty ($7.7 million) and a loss related to a trea s u r y lock contract ($6.4 million) other land holdings in 1998 wer e attributable to higher levels of land sales at the Company’s that no longer qualified for hedge accounting because the related anticipated financing master planned business parks, including all of the remaining land at Howa r d Hug h e s transaction will not occur under the terms and timing originally expected. Unc o n s o l i d a t e d Center in Los Angeles, California. These increases wer e partially offset by lower levels of sales real estate ven t u r es in which the Company holds substantially all of the financial interes t of investment land. The increases in rev enues and operating income in 1997 relating to rec o r ded a net gain on disposition of assets of $19 million relating primarily to the sale of a other land holdings wer e attributable primarily to sales of various investment land parce l s , hotel in Columbia. pa r ticularly holdings in Neva d a . The loss on dispositions of assets and other provisions, net, for 1997 consisted primarily Rev enues and operating income from land sales in Columbia increased $5.5 million and of provisions for losses rec o g n i z ed on several retail prop e r ties, an industrial prop e rt y , and a $3.0 million, res p e c t i ve l y , in 1998 and $.5 million and $1.3 million, res p e c t i ve l y , in 1997. hotel the Company decided to sell, including additional provisions of $3.7 million rel a t e d The increases in rev enues and operating income in 1998 wer e attributable primarily to high- to retail prop e r ties held for disposition prior to 1997. These provisions wer e partially offset er levels of land sales for commercial purposes. by gains on dispositions of five office prop e r ties ($4.7 million). The loss on dispositions of assets and other provisions, net, for 1996 consisted primarily Deve l o p m e n t : Dev elopment expenses wer e $7.4 million in 1998, $4.7 million in 1997 and of provisions for losses totaling $25.9 million rec o g n i z ed on five retail prop e r ties the $5.3 million in 1996. These costs consist primarily of additions to the prec o n s t ru c t i o n Company decided to sell. These losses wer e partially offset by the rev ersal of a portion ($8.7 res e r ve and new business costs. million) of a 1995 provision for loss on a tenant litigation judgment following a negotiated The prec o n s t r uction res e r ve is determined on a proj e c t - by - p r oject basis and is maintained settlement of the matter. to provide for costs of projects in the prec o n s t r uction phase of development, including ret a i l and mixed-use prop e r ty ren o vation and expansion opportunities, which may not go forwa r d Ext ra o rd i n a r y Items, Net of Related Income Tax Ben e f i t s : The net extraordi n a r y gains in to completion. Additions to the prec o n s t r uction res e r ve wer e $1.7 million in 1998, $2.8 1998, and extraordi n a r y losses in 1997 and 1996 resulted from early extinguishments of million in 1997 and $2.7 million in 1996. New business costs relate primarily to the initial debt and aggregated $3.6 million, $32.8 million and $2.2 million, res p e c t i ve l y , before ev aluation of potential acquisition and development opportunities. These costs wer e $5.7 de f e r r ed income tax benefits of $.7 million, $11.5 million and $.8 million, res p e c t i ve l y . million in 1998, $1.9 million in 1997 and $1.8 million in 1996. The lower level of pre- co n s t r uction res e r ve additions in 1998 was due to the prog r ess of several significant ret a i l Net Earn i n g s : The Company had net earnings of $104.9 million in 1998, $167.3 million center projects. The higher level of new business costs in 1998 was attributable to the in 1997 and $16.4 million in 1996. The Company’s operating income (after deprec i a t i o n Co m p a n y ’s focus on acquisition efforts . and amortization) was $116.3 million in 1998, $97.3 million in 1997 and $60.1 million in 1996. The improvements in operating income wer e due primarily to the factors described Cor p o ra t e : Corporate rev enues consist primarily of interest income earned on short- t e r m ab o ve. Net earnings for each year was affected by unusual and/or nonrecurring items dis- in v estments, including investments of unallocated proceeds from refinancings of certa i n cussed above in gain (loss) on dispositions of assets and other provisions, net, and extraordi - pro p e r ties. Corporate interest income was $3.8 million in 1998, $4.5 million in 1997 and na r y items, net of related income tax benefits. In addition, net earnings for 1997 was affect- $3.5 million in 1996. The changes in income during these years wer e attributable primarily ed by the rev ersal of substantially all ($158.3 million) of the rec o r ded deferred income tax to changes in the average investment balances, including in 1997, temporary investment of assets and liabilities at December 31, 1997 as a result of the Company’s decision to be taxed the unused proceeds of the Series B Conver tible Pref e r r ed stock issued in the first quarte r . as a REIT effective Jan u a r y 1, 1998. The deferred income taxes wer e rev ersed because man- Corporate expenses consist of certain interest and operating expenses, as discussed below, agement believes that the Company met the qualifications for REIT status as of Dec e m b e r reduced by costs capitalized or allocated to other business segments. Int e r est is capitalized on 31, 1997, intends for it to continue to meet the qualifications in the future and does not corporate funds invested in projects under development, and interest on corporate borrow- expect that the Company will be liable for income taxes or taxes on “built-in gains” on its ings and distributions on the Company-obligated mandatorily redeemable pref e r r ed securi- assets at the Federal level or in most states in future years. The Company’s effective tax rate ties which are used for other segments are allocated to those segments. Acc o rd i n g l y , corpo- was (157.2)% in 1997 and 58.9% in 1996. The effective rate in 1997 was affected by the rate interest expense consists primarily of interest on the conver tible subordinated deben- rev ersal of deferred tax assets and liabilities discussed above. Excluding the effect of the tu r es, the unsecured 8.5% notes, the medium-term notes, credit facility borrowings and rev ersal, the effective rate for 1997 was 57.4%. The effective rates wer e high in 1997 and

62 63 1996 because a portion of the distributions payable to the former Hughes owners (or receipt of rev enues (including proceeds of land sales financed by the Company) and the pay- their successors) under the Contingent Stock Agreement was not deductible for income ment of operating and interest expenses and land development costs. tax purposes. The Company relies primarily on fixed rate nonrecourse loans from private institutional lenders to finance its operating prop e r ties and expects that it will continue to do so in the Funds from Operat i o n s : The Company uses a supplemental performance measure along fu t u r e. The Company has also made use of the public equity and debt markets to meet its with net earnings (loss) to rep o r t its operating results. This measure, ref e r r ed to as Fun d s capital res o u r ce needs principally to repay or refinance corporate and project related debt fr om Operations (“FFO”). The National Association of Real Estate Inv estment Trus t s and to provide funds for project development and acquisition costs and other corporate pur- defines FFO as net earnings (loss) (computed in accordance with generally accepted poses. In 1998, the Company obtained a $450 million rev olving credit facility, which is accounting principles), excluding cumulative effects of changes in accounting principles, av ailable until July 2001, subject to a one year ren e wal option, and a $350 million bridge ex t r a o rd i n a r y or unusual items and gains or losses from debt res t r ucturings and sales of prop - loan facility from a group of lenders. The rev olving credit facility replaced a $250 million er ties, plus depreciation and amortization, and after adjustments for minority interests and line of credit facility previously maintained by the Company. The bridge loan facility was to rec o r d unconsolidated partnerships and joint ven t u r es on the same basis. The Company av ailable to fund certain prop e r ty acquisitions made in the third and fourth quarters of also excludes deferred income taxes from its computation of FFO. The method used by the 1998. The Company is continually evaluating sources of capital and management believes Company to compute FFO may differ from methods used by other REITs. FFO is not a that there are satisfactory sources available for all req u i r ements without necessitating sales of me a s u r e of operating results or cash flows from operating activities as defined by generally operating prop e r ties. Howeve r , selective dispositions of prop e r ties are expected to provi d e accepted accounting principles. Add i t i o n a l l y , FFO is not necessarily indicative of cash avai l - capital res o u r ces in 1999 and may also provide them in subsequent yea r s . able to fund cash needs and should not be considered as an alternative to cash flows as a mea- Most of the Company’s debt consists of mortgages collateralized by operating prop e rt i e s . su r e of liquidity. Howeve r , the Company believes that FFO provides rel e v ant information Scheduled principal payments on prop e r ty debt wer e $50.7 million, $46.3 million and about its operations and is necessary, along with net earnings, for an understanding of its $39.0 million in 1998, 1997 and 1996, res p e c t i ve l y . The increase in 1997 was attributable operating res u l t s . primarily to principal payments on debt assumed in the Hughes transaction. The Company excludes deferred income taxes from FFO because payments of income ta x es have not been significant and are not anticipated to become significant in the future. The annual maturities of debt for the next five years are as follows (in millions): Cur r ent Federal and state income taxes are included as reductions of FFO; howeve r , in 1997, cu r r ent income taxes incurred as a result of transactions completed to enable the Company Sc h e d u l e d Bal l o o n Pay m e n t s Pay m e n t s Tot a l to meet the qualifications for REIT status are excluded. Management believes this excl u s i o n –––––– –––––– –––––– is appropriate as these taxes wer e nonrecurring and wer e not related to operations. Gai n 19 9 9 ...... $ 49 $ 44 7 $ 49 6 (loss) on dispositions of assets and other provisions, net, and extraordi n a r y losses, net of 20 0 0 ...... 57 10 5 16 2 related income tax benefits, rep r esent unusual and/or nonrecurring items and are theref o r e 20 0 1 ...... 62 46 7 52 9 ex cluded from FFO. FFO is reconciled to net earnings (loss) in the Fiv e Year Sum m a r y of 20 0 2 ...... 64 22 0 28 4 Funds from Operations and Net Earnings (Loss) on page 71. 20 0 3 ...... 73 48 7 56 0 FFO was $204.8 million in 1998, $181.4 million in 1997 and $139.4 million in 1996. –– –– – –– The increase in FFO in 1998 was due primarily to prop e r ty acquisitions, expansions and dis- $30 5 $1, 7 2 6 $2, 0 3 1 positions in 1998 and 1997, higher occupancy levels and higher rents from re-leased space. Ð ÐÐ ÐÐ The increase in FFO in 1997 was due primarily to the acquisition of Hughes. The results in Balloon payments due in 1999 include $304 million of borrowings under the bridge 1997 wer e also affected by refinancings of project debt at lower interest rates, debt rep a y - loan credit facility which is due on or before July 30, 1999. In Feb ru a r y 1999, the Company ments from proceeds of the Series B Conver tible Pref e r r ed stock offering in the first quarte r contributed to a joint ven t u r e four of the retail centers acquired in 1998. These acquisitions and openings and dispositions of projects in both 1997 and 1996. The reasons for signifi- wer e financed, in part, by borrowings under the bridge loan credit facility. The Company cant changes in rev enues and expenses comprising FFO by segment are described above. retained a 35% interest in the joint ven t u r e and, in connection with this transaction, the joint ven t u r e repaid approximately $271 million of outstanding borrowings under the Financial condition, Management believes that the Company’s financial position is sound and that its liquidity bridge loan facility. liquidity and capital and capital re s o u rces are adequate for near-term and longer-term re q u i re m e n t s . Balloon payments due in 1999 also include $40 million due on a mortgage securing a resources Sha re h o l d e r s ’ equity increased to $628.9 million at December 31, 1998 from $465.5 mil- pro p e r ty the Company expects to sell in the second quarter of 1999. The Company expects lion at December 31, 1997. The increase was due primarily to the issuance of common the buyer to assume the mortg a g e . stock, including $43 million issued to a unit investment trust and $100 million issued in the The remaining balloon payments, including payments under the bridge loan cred i t acquisition of the 64 office and industrial prop e r ties in the fourth quarter of 1998, and net fa c i l i t y , due in 1999 are expected to be paid at or before the scheduled maturity dates of the earnings for the yea r , partially offset by the payment of regular quarterly dividends on the related loans from proceeds of the sale of the prop e r ty interest ref e r r ed to above, prop e rt y common and Pref e r r ed stocks. refinancings or credit facilities or other available corporate funds. The Company had cash and cash equivalents and investments in marketable securities Cash expenditures for prop e r ties in development and improvements to existing prop - totaling $41.9 million and $90.6 million at December 31, 1998 and 1997, res p e c t i ve l y . er ties funded by debt wer e $306.9 million, $283.4 million and $124 million in 1998, 1997 Net cash provided by operating activities was $261.2 million, $185.5 million and $168.1 and 1996, res p e c t i ve l y . The increases in 1998 and 1997 wer e due to increased project devel - million in 1998, 1997 and 1996, res p e c t i ve l y . The changes in cash provided by operating opment activity, primarily new retail prop e r ties, retail prop e r ty expansions and devel o p m e n t activities wer e due primarily to the factors discussed above in the analysis of operating of new office and industrial prop e r ties in Las Vegas. A substantial portion of the costs of results. The level of net cash provided by operating activities is also affected by the timing of

64 65 pro p e r ties in development is financed with construction or similar loans and/or credit line ad v ances). The Company’s interest rate risk management objective is to limit the impact of bo r r owings. Typ i c a l l y , long-term fixed rate debt financing is arranged concurrently with the in t e r est rate changes on earnings and cash flows. In order to achieve this objective, the co n s t r uction financing or before completion of construction. Company relies primarily on long-term, fixed rate, nonrecourse loans from institutional Imp r ovements to existing prop e r ties funded by debt consist primarily of costs of ren o - lenders to finance its operating prop e r ties. In addition, long-term, fixed rate financing is typ- vation and rem e r chandising programs and other capital improvement costs. The Company’s ically arranged concurrently with or shortly after a variable rate project acquisition or con- sh a r e of these costs has been financed primarily from proceeds of refinancings of the rel a t e d st r uction loan is negotiated. The Company also makes limited use of interest rate exch a n g e pro p e r ties or other prop e r ties and credit line borrowi n g s . ag r eements, including interest rate swaps and caps, to mitigate its interest rate risk on var i - Due to the large number of projects under construction or in development, the able rate debt. The Company does not enter into interest rate exchange agreements for spec- Company anticipates that the level of capital expenditures for new development (excl u d i n g ul a t i v e purposes and the fair value of these and other derivat i v e financial instruments is land development) and improvements to existing prop e r ties will be over $300 million in insignificant at December 31, 1998. 1999. A substantial portion of these expenditures relates to new prop e r ties or retail center The Company’s interest rate risk is monitored closely by management. The table below pre- expansions and it is expected that most of these costs will be financed by debt, including sents the principal amounts, wei g h t e d - a v erage interest rates, fair values and other data pro p e r ty-specific construction loans and/or credit line borrowi n g s . req u i r ed to evaluate the expected cash flows of the Company under debt and related agree - Cash expenditures for acquisitions of interests in prop e r ties wer e $882.4 million in ments and its sensitivity to interest rate changes. The information relating to debt maturi- 1998, $79.4 million in 1997 and $18.1 million in 1996. The acquisitions in 1998, consist- ties (in millions) is based on expected maturity dates which consider anticipated ref i n a n c i n g ing of interests in the eight retail centers, 67 office and industrial buildings and the land or other transactions: assets ref e r r ed to above, had combined purchase prices of approximately $1.58 billion, including approximately $492 million of mortgage debt secured by the acquired prop e rt i e s Fai r and assumed by the Company. The Company issued $100 million of common stock, $108 19 9 9 20 0 0 20 0 1 20 0 2 20 0 3 Th e re a f t e r Tot a l Val u e million of mortgage and other debt and $882.4 million of cash to the sellers as payment. –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – – – – – – – – –– – – – – – – – – – –– – – – – – – – – – The req u i r ed cash payments wer e funded by approximately $234 million of additional Fix ed rate debt $1 4 5 $ 54 $1 6 0 $2 1 5 $5 5 4 $1 , 9 7 2 $3 , 1 0 0 $3 , 1 9 9 mo r tgage debt secured by the acquired prop e r ties, proceeds of $91 million from the sale of Average interest rate 7. 8 % 7. 8 % 7. 9 % 8. 0 % 8. 0 % 8. 0 % 7. 8 % th r ee of the acquired office buildings and by borrowings under the Company’s bridge loan Variable rate LIBOR debt $3 5 1 $1 0 8 $3 6 9 $ 69 $ 6 $ 56 $ 95 9 $ 95 9 and rev olving credit facilities. The acquisitions in 1997 consisted primarily of a purchase of Average interest rate 6. 4 % 6. 4 % 5. 6 % 5. 3 % 5. 1 % 5. 1 % 6. 6 % a retail center. The acquisitions in 1996 consisted of purchases of partn e r s ’ interests in two retail centers, one of which was financed in part by the seller. Acquisition cash req u i re m e n t s in 1997 and 1996 wer e financed primarily by nonrecourse debt. At December 31, 1998, approximately $304 million of the Company’s variable rate Cash expenditures for the acquisition of Hughes wer e $36.3 million in 1996 and wer e debt relates to borrowings under its acquisition bridge loan facility and approx i m a t e l y financed primarily by credit line borrowi n g s . $84.2 million relates to borrowings under project construction loans. Ap p rox i m a t e l y In addition to its unrestricted cash and cash equivalents and investments in marke t a b l e $271 million of the borrowings under the bridge loan credit facility we re repaid in securities, the Company has other available sources of capital. The Company has a line of Fe b ru a ry 1999 as discussed above. The borrowings under project construction loans are cr edit with a group of lenders that provides for aggregate unsecured borrowings of up to expected to be repaid from proceeds of long-term fixed rate loans at dates from 1999 to $450 million, of which $152 million was available at December 31, 1998. This line of cred - 2001 when construction of the related projects is scheduled to be completed. At it can be used for various purposes, including land and project development costs, pro p e rt y December 31, 1998, the Company had interest rate cap agreements which effectively limit acquisitions, liquidity and other corporate needs. In addition, under an effective reg i s t r a t i o n the average interest rate on all of the variable rate LIBOR debt maturing in 2002 to 8.9%. statement, the Company may issue additional medium-term notes of up to $29.7 million. As the table incorporates only those exposures that exist as of December 31, 1998, it Also, the Company has a shelf registration statement for the sale of up to an aggregate of does not consider exposures or positions which could arise after that date. As a result, the ap p r oximately $2.25 billion (based on the public offering price) of common stock, Pref e r re d Co m p a n y ’s ultimate rea l i z ed gain or loss with respect to interest rate fluctuations will depend stock and debt securities. At December 31, 1998, the Company had issued approxi m a t e l y on the exposures that arise after December 31, 1998, the Company’s hedging strategies dur- $158 million of common stock and debt securities under the shelf registration statement, ing that period and interest rates. with a remaining availability of approximately $2.1 billion. The agreements relating to various loans impose limitations on the Company. The most The year 2000 issue The year 2000 issue relates to whether computer systems will properly rec o g n i z e date sensi- res t r i c t i v e of these limit the levels and types of debt the Company and its affiliates may incur ti v e information to allow accurate processing of transactions and data relating to the yea r and req u i r e the Company and its affiliates to maintain specified minimum levels of debt ser- 2000 and beyond. In addition, the year 2000 issue relates to whether non-Inf o r m a t i o n vice coverage and net worth. The agreements also impose restrictions on the dividend pay- Technology (IT) systems that depend on embedded computer technology will rec o g n i z e the out ratio and on sale, lease and certain other transactions, subject to various exclusions and year 2000. Systems that do not properly rec o g n i z e such information could generate erro- limitations. These restrictions have not limited the Company’s normal business activities and neous data or fail. ar e not expected to do so in the foreseeable future. In 1996, the Company adopted a plan to replace virtually all of its management infor- mation and accounting systems. This plan was adopted in the context of the Company’s Market risk information The market risk associated with financial instruments and derivat i v e financial and com- long-term Information Systems strategy. In accordance with this plan, all mission-critical IT modity instruments is the risk of loss from adverse changes in market prices or rates. Th e systems are being replaced with systems that have been certified by the vendors as year 2000 Co m p a n y ’s market risk arises primarily from interest rate risk relating to variable rate bor- compliant. The Company has implemented new financial accounting, accounts payable, rowings used to maintain liquidity (e.g., rev olving credit facility advances) or finance proj e c t pro p e r ty management, human res o u r ces, payroll and leasing management systems that are acquisition or development costs (e.g., acquisition bridge loan facility or construction loan year 2000 compliant except for certain legacy systems that are still in use by Hughes. Th e

66 67 Company is in the process of migrating Hughes from its legacy general ledger, accounts In June 1998, the Financial Accounting Sta n d a r ds Board issued Statement of Fin a n c i a l payable and prop e r ty management systems to the Company’s new systems. This migration Accounting Sta n d a r ds No. 133, “Accounting for Der i va t i v e Ins t r uments and Hed g i n g is scheduled to be completed no later than October 1, 1999. Also, the Company is in the Activities,” (Statement 133) which is req u i r ed to be adopted by the Company no later than pr ocess of implementing a new cash management system, which is expected to be opera- Jan u a r y 1, 2000. The Company’s use of derivat i v e instruments has consisted primarily of tional by June 1, 1999 and will be year 2000 compliant. The Company has commenced test- in t e r est rate swap and cap agreements related to specific debt financings. While the ing of its new IT systems for year 2000 compliance and expects testing and analysis of the Company has not completed its analysis of Statement 133 and has not made a decision results to be completed in the second quarter of 1999. In addition, in connection with the reg a r ding the timing of adoption, it does not believe that adoption will have a material effect Co m p a n y ’s normal upgrade and replacement process, all network and desktop equipment on its financial position and results of operations based on its current use of derivat i v e instru- meet the req u i r ements for the year 2000. As a result, the Company expects that the costs to me n t s . specifically remediate year 2000 IT issues will be minimal. For non-IT systems, the Company has completed a compreh e n s i v e rev i e w of computer hardw a r e and software in Impact of inflation The major portion of the Company’s operating prop e r ties, its retail centers, is substantially mechanical systems and has developed a program to repair or replace non-IT systems that pr otected from declines in the purchasing power of the dollar. Retail leases generally provi d e ar e not year 2000 compliant. It is anticipated that the program will be completed in the for minimum rents plus percentage rents based on sales over a minimum base. In many th i r d quarter of 1999. Costs to specifically remediate non-IT systems (e.g., escalators, eleva- cases, increases in tenant sales (whether due to increased unit sales or increased prices from tors, heating, ventilating and cooling systems, etc.) that are non-compliant are not expected demand or general inflation) will result in increased rental rev enue to the Company. A sub- to exceed $2 million. Management does not believe that the year 2000 issue will pose sig- stantial portion of the tenant leases (retail and office) also provide for other rents which rei m - nificant problems in its IT or non-IT systems, or that any resolution of any potential prob - burse the Company for certain of its operating expenses; consequently, increases in these lems with respect to these systems will have a material effect on the Company’s financial con- costs do not have a significant impact on the Company’s operating results. The Company dition or results of operations. has a significant amount of debt which, in a period of inflation, will result in a holding gain It is ver y difficult to identify "the most reasonably likely worst-case scenario." Th e since debt will be paid off with dollars having less purchasing power . Co m p a n y ’s exposure is widely spread, with no known major direct exposure. The Company be l i e v es that the most likely worst-case exposure is at the indirect level, involving ven d o r s , Information relating This Annual Rep o r t to Sha r eholders of the Company includes forwa r d-looking statements suppliers and tenants. For example, there could be failures in the information systems of cer- to forward-looking which reflect the Company’s current views with respect to future events and financial per- tain tenants that may delay the payment of rents. While it is not possible at this time to statements formance. These forwa r d-looking statements are subject to certain risks and uncerta i n t i e s , determine the likely impact of these potential problems, the Company is evaluating these including those identified below which could cause actual results to differ materially from risks based on public disclosures and, if desirable, direct contacts with certain major ven d o r s , historical results or those anticipated. The words “believe”, “ex p e c t ”, “an t i c i p a t e ” and simi- suppliers and tenants of key Company prop e r ties. Based on this evaluation, the Company lar expressions identify forwa r d-looking statements. Readers are cautioned not to place will determine during the second quarter of 1999 whether specific contingency plans should undue reliance on these forwa r d-looking statements, which speak only as of their dates be devel o p e d . The Company undertakes no obligation to publicly update or revise any forwa rd - l o o k i n g statements, whether as a result of new information, future events or otherwise. The follow- New accounting standards In Mar ch 1998, the American Institute of Certified Public Accountants issued Statement of ing are among the factors that could cause actual results to differ materially from historical not yet adopted Position 98-1, “Accounting for the Costs of Computer Sof t w a r e Dev eloped or Obtained for results or those anticipated: (1) real estate investment trust risks; (2) real estate devel o p m e n t Internal Use ” (SOP 98-1) which is req u i r ed to be adopted by the Company no later than and investment risks; (3) liquidity of real estate investments; (4) dependence on ren t a l Jan u a r y 1, 1999. SOP 98-1 provides guidance as to whether costs incurred relating to inter- income from real prop e r ty; (5) effect of uninsured loss; (6) lack of geographical diver s i f i c a - nal-use software should be expensed or capitalized. The guidance in SOP tion; (7) possible environmental liabilities; (8) difficulties of compliance with Americans 98-1 is req u i r ed to be applied to costs incurred subsequent to adoption and may not be with Disabilities Act; (9) competition; (10) changes in the economic climate; and (11) applied to costs incurred prior to initial application. The Company intends to adopt SOP changes in tax laws or regulations. For a more detailed discussion of these and other factors, 98-1 effective Jan u a r y 1, 1999, and does not believe that adoption will have a material effect see Exhibit 99.2 of the Company’s Form 10-K for the fiscal year ended December 31, 1998. on its results of operations. In April 1998, the American Institute of Certified Public Accountants issued Sta t e m e n t of Position 98-5, “Rep o r ting on the Costs of Sta r t-up Act i v i t i e s ” (SOP 98-5) which is req u i r ed to be adopted by the Company no later than Jan u a r y 1, 1999. SOP 98-5 req u i re s that start-up costs and organization costs, not otherwise addressed in existing authoritative li t e r a t u r e, be expensed as incurred. The Company intends to adopt SOP 98-5 effective Jan u a r y 1, 1999, and the initial application will be rep o r ted as the cumulative effect of a change in accounting principle. The Company does not believe that adoption will have a material effect on its results of operations in future periods.

68 69 The Rouse Company and Subsidiaries FIVE YEAR SUMMARY OF FUNDS FROM OPERATIONS AND NET EARNINGS (LOSS) (NOTE 1) (in thousands)

Year ended December 31, Year ended December 31, —— — — — — — — — — — — — — — — — — ————— — — — — — — ——— — — —— — — — — — — — — — — — — — — — — ————— — — — — — — ——— — — 19 9 8 19 9 7 19 9 6 19 9 5 19 9 4 19 9 8 19 9 7 19 9 6 19 9 5 19 9 4 ———— — — ———— — — ———— — — ———— — — ———— — — ———— — — ———— — — ———— — — ———— — — ———— — — Reve n u e s : Retail centers: Funds from Operations by segment: Minimum and percentage ren t s ...... $30 8 , 9 0 0 $27 1 , 7 4 3 $25 6 , 8 8 0 $24 5 , 1 9 2 $23 8 , 2 2 2 Retail centers ...... $14 0 , 0 8 1 $12 3 , 1 0 1 $11 9 , 2 9 7 $11 6 , 1 3 5 $10 3 , 9 7 8 Other rents and other reve n u e s ...... 25 0 , 9 2 1 23 1 , 9 1 2 25 1 , 5 3 5 24 6 , 4 8 8 24 8 , 2 5 3 Office, mixed-use and other ...... 35 , 0 6 9 26 , 5 6 2 15 , 8 5 2 5, 8 3 9 4, 2 7 3 ———— — — ———— — — ———— — — ———— — — ———— — — Land sales...... 48 , 7 7 3 47 , 0 9 0 28 , 4 0 4 10 , 5 0 2 10 , 3 3 0 55 9 , 8 2 1 50 3 , 6 5 5 50 8 , 4 1 5 49 1 , 6 8 0 48 6 , 4 7 5 ———— — — ———— — — ———— — — ———— — — ———— — — Deve l o p m e n t ...... (7 , 3 8 3 ) (4 , 7 4 7 ) (5 , 3 2 5 ) (7 , 6 4 6 ) (6 , 9 8 9 ) Co r p o r a t e ...... (1 1 , 6 9 8 ) (1 0 , 6 1 6 ) (1 8 , 8 6 9 ) (1 6 , 4 7 0 ) (1 6 , 8 8 2 ) Office, mixed-use and other: ———— — — ———— — — ———— — — ———— — — ———— — — Minimum and percentage ren t s ...... 13 7 , 1 1 8 13 0 , 7 4 4 10 6 , 2 4 6 80 , 3 1 9 82 , 3 4 7 Funds from Ope r a t i o n s ...... $20 4 , 8 4 2 $18 1 , 3 9 0 $13 9 , 3 5 9 $10 8 , 3 6 0 $ 94 , 7 1 0 Other rents and other reve n u e s ...... 78 , 8 0 1 85 , 8 2 7 75 , 9 0 8 64 , 6 4 7 64 , 2 2 5 ———— — — ———— — — ———— — — ———— — — ———— — — —————————— 21 5 , 9 1 9 21 6 , 5 7 1 18 2 , 1 5 4 14 4 , 9 6 6 14 6 , 5 7 2 Reconciliation to net earnings (loss): ———— — — ———— — — ———— — — ———— — — ———— — — Funds from Ope r a t i o n s ...... $20 4 , 8 4 2 $18 1 , 3 9 0 $13 9 , 3 5 9 $10 8 , 3 6 0 $ 94 , 7 1 0 Dep r eciation and amorti z a t i o n ...... (8 4 , 0 6 8 ) (8 2 , 9 4 4 ) (7 7 , 4 1 4 ) (7 3 , 0 6 2 ) (7 4 , 1 8 6 ) Land sales...... 19 7 , 7 0 6 20 3 , 2 1 9 13 7 , 8 5 3 33 , 4 0 3 35 , 2 3 2 Def e r r ed income taxes applicable to operations ...... — 12 4 , 2 0 3 (2 5 , 5 9 6 ) (3 , 6 9 9 ) (5 , 9 9 5 ) Corporate interest income ...... 3, 7 9 7 4, 4 8 5 3, 4 9 5 2, 7 7 2 2, 8 9 2 ———— — — ———— — — ———— — — ———— — — ———— — — Ce r tain current income taxes (note 3) ...... — (4 , 9 2 9 ) ——— 97 7 , 2 4 3 92 7 , 9 3 0 83 1 , 9 1 7 67 2 , 8 2 1 67 1 , 1 7 1 Loss on dispositions of assets and ———— — — ———— — — ———— — — ———— — — ———— — — other provisions, net ...... (1 1 , 1 7 4 ) (2 3 , 4 8 4 ) (1 6 , 4 9 9 ) (2 5 , 7 4 9 ) (7 , 9 2 3 ) Operating expenses, excl u s i v e of deprec i a t i o n Dep r eciation and amortization, gain on disposition and amorti z a t i o n : of assets and deferred income taxes Retail centers ...... 26 8 , 7 8 6 25 7 , 8 4 8 26 0 , 0 2 7 24 6 , 7 4 7 25 3 , 0 9 5 of unconsolidated real estate ven t u r es, net ...... (4 , 3 8 0 ) (4 , 3 4 4 ) (1 , 9 6 4 ) —— Office, mixed-use and other ...... 10 2 , 9 4 5 10 8 , 0 6 3 89 , 5 2 4 70 , 0 9 6 74 , 3 6 8 Ext r a o rd i n a r y gain (loss), net...... 4, 3 5 5 (2 1 , 3 4 2 ) (1 , 4 5 3 ) (8 , 6 3 1 ) (4 , 4 4 7 ) Land sales...... 14 4 , 7 0 9 15 1 , 8 0 0 10 7 , 7 8 7 17 , 8 2 7 19 , 8 7 7 Cum u l a t i v e effect at Jan u a r y 1, 1998 of change in Deve l o p m e n t ...... 7, 3 8 3 4, 7 4 7 4, 9 6 4 7, 2 8 8 6, 4 9 4 accounting for participating mortg a g e s ...... (4 , 6 2 9 ) ———— Co r p o r a t e ...... 18 , 8 1 3 13 , 3 8 4 9, 7 5 2 8, 9 2 0 8, 3 0 9 ———— — — ———— — — ———— — — ———— — — ———— — — Cum u l a t i v e effect at October 1, 1997 of change in accounting for business process reengineering costs . . . — (1 , 2 1 4 ) ——— 54 2 , 6 3 6 53 5 , 8 4 2 47 2 , 0 5 4 35 0 , 8 7 8 36 2 , 1 4 3 ———— — — ———— — — ———— — — ———— — — ———— — — Oth e r ...... (4 4 ) ———— ———— — — ———— — — ———— — — ———— — — ———— — — Int e r est expense: Net earnings (loss)...... $10 4 , 9 0 2 $16 7 , 3 3 6 $ 16 , 4 3 3 $ (2 , 7 8 1 ) $ 2, 1 5 9 Retail centers ...... 15 0 , 8 8 9 12 2 , 3 2 5 12 9 , 0 9 1 12 8 , 2 1 5 12 8 , 7 9 8 Office, mixed-use and other ...... 77 , 8 9 4 81 , 9 0 5 76 , 6 5 9 69 , 0 3 4 67 , 8 9 2 —————————— Land sales...... 4, 2 0 1 4, 2 8 7 1, 6 5 8 5, 0 7 1 5, 0 2 8 Deve l o p m e n t ...... — — 36 1 35 8 49 5 Co r p o r a t e ...... (8 , 6 1 4 ) (1 , 0 2 7 ) 12 , 6 1 2 10 , 2 8 5 11 , 3 7 0 ———— — — ———— — — ———— — — ———— — — ———— — — Note 1—Operating and Funds from Operations (FFO) data included in this five- y ear summary are presented by segment. Consistent with the req u i r e- 22 4 , 3 7 0 20 7 , 4 9 0 22 0 , 3 8 1 21 2 , 9 6 3 21 3 , 5 8 3 ments of Statement of Financial Accounting Sta n d a r ds No. 131, “Dis c l o s u r es about Segments of an Enterprise and Related Information,” seg- ———— — — ———— — — ———— — — ———— — — ———— — — ment data are rep o r ted using the accounting policies followed by the Company for internal rep o r ting to management. These policies are the same as those used for external rep o r ting, except that real estate ven t u r es in which the Company holds a majority financial interest but does not Cur r ent income taxes applicable to operations (note 3). . . 5, 3 9 5 3, 2 0 8 12 3 62 0 73 5 ———— — — ———— — — ———— — — ———— — — ———— — — own a majority voting interest are rep o r ted on a consolidated basis rather than using the equity method, and the Company’s share of FFO of unconsolidated real estate ven t u r es in which it holds a minority interest is included in rev enues. These differences affect the rev enues and 72 2 , 4 0 1 74 6 , 5 4 0 69 2 , 5 5 8 56 4 , 4 6 1 57 6 , 4 6 1 ———— — — ———— — — ———— — — ———— — — ———— — — expenses rep o r ted in the summary of FFO to net earnings (loss), howeve r , they have no effect on the Company’s net earnings or FFO. Funds from Operations (note 2) ...... $20 4 , 8 4 2 $18 1 , 3 9 0 $13 9 , 3 5 9 $10 8 , 3 6 0 $ 94 , 7 1 0 Note 2—FFO is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles. Add i t i o n a l l y , FFO is not necessarily indicative of cash available to fund cash needs, including the payment of dividends and should not be con- —————————— si d e r ed as an alternative to cash flows as a measure of liquidity. See the “Funds from Ope r a t i o n s ” section of Man a g e m e n t ’s Discussion and Analysis of Financial Condition and Results of Operations on page 64 for a full discussion of FFO.

Note 3—FFO for 1997 excludes current income taxes arising from transactions completed by the Company in connection with its determination to elect to be taxed as a REIT.

70 71 THE ROUSE COMP A N Y , ITS SUBSIDIARIES AND AFFILIA T E S

Anthony W. Deering, Chairman of the Board and Chief Executive Officer Douglas A. McGregor, Vice Chairman and Chief Operating Officer Jef f r ey H. Donahue, Exec u t i v e Vice President and Chief Financial Off i c e r Jer ome D. Sma l l e y , Exec u t i v e Vice President and Di re c t o r , Deve l o p m e n t

Finance Div i s i o n Monty C. Leonard, Vice President and Direc t o r , Catherine S. Red d e n Mall General Managers of Subsidiary Joseph H. Necker, Jr., Vice President and James B. Brickell, Senior Project Manager Patricia Herald Dayton, Vice President and Land Acc o u n t i n g Paul J. Schiffer Corporations or Affiliates, continued Director, Engineering, HRD Robert W. Richardson, Senior Project Manager Trea s u re r Stephen M. Levin, Accounting Direc t o r James M. Easely, Hugh A. Oesterreicher, Vice President and William T. Rowe, Senior Project Manager Ar ea Leasing Man a g e r s Anthony Mifsud, Assistant Trea s u re r Mar tin P. Lut s k y , Di re c t o r , Prop e r ty Taxe s Martin D. Fortes, Perimeter Mall, RPMI Director, Construction, HRD David R. Zastrow, Senior Project Manager Ste v en L. Bal a z s Kenneth M. Ma rt y, Vice President and Direc t o r , Deborah A. Maskell, Accounting Direc t o r Scott A. Freshwater, Rob e r t A. Jenkins, Senior Project Man a g e r , HRD Frank M. Noto, Director, Landscaping Project Fin a n c e Stephen H. Brower Deborah L. Mat h e ws, Accounting Direc t o r Noah B. Gens, Beachwood Place George H. Hayne, III, Senior Project Manager, William R. Byrd, Project Manager An d r ew B. Bolton, III, Assistant Direc t o r , Proj e c t Michelle A. Melka, Di re c t o r , Financial Serv i c e s An d r ew J. A. Chriss Francis X. Gildea, Plymouth Meeting HRD Fin a n c e Gregory A. Goins, Director, Capital Lisa M. Schenk, Man a g e r , Inf o r mation Sys t e m s Philip T. Duf f y , Vice Pres i d e n t J. Alex Hallien, Fashion Place Gregory R. Klar, Assistant Director, Engineering, Management David L. Tri p p , Vice President and Direc t o r , Aud i t Philip A.V. Gen o ves e HRD Inv estor Relations and Corporate Communications Linda B. Hardin, Clarence G. Jackson, Jr., Project Manager Michelle M. Sha ve r , Accounting Direc t o r Michael Mit c h a m Paul G. Harnett, South Street Seaport Albert F. Edwards, Director, Environmental Bob Rubenkonig, Jr., Associate Director, Compliance and Assistant Director, Paul L. Janyska, Project Manager Corporate Communications Randall A. Shields, Assistant Division Control l e r , Michael L. Pod r a c k y , Vice Pres i d e n t Charles M. Hood, Town & Country Center, Robin A. Rosetti, Director,Tenant Services Ope r ating Prop e rt i e s Engineering, HRD Stephen E. Pospisil, Associate Director, Corporate Thomas Rindos RPMI Communications Winston L. Smith, Di re c t o r , Lease Adm i n i s t ra t i o n Marlene F. Weinberg, Vice Pres i d e n t Lawrence K. Howard, The Gallery at Office and Mixed-Use Operations The Howard Hughes Corporation (THHC) and Accounting Serv i c e s Market East Duke S. Kassolis, Senior Vice President and John A. Kilduff, Executive Vice President, Legal Div i s i o n Greg o r y J. Th o r , Di re c t o r , Financial Acc o u n t i n g Human Res o u r ces and Adm i n i s t r a t i v e Scott M. Howe, Mall St. Matthews Director, Office and Mixed-Use Operations Director,West Coast Commercial Development, and Rep o rt i n g Ser vices Div i s i o n Bruce I. Rothschild, Vice President, Gen e ra l Michael A. Khouri, Owings Mills Jody L. Clark, Vice President and Group Vice President of The Rouse Company Janice A. Fuchs, Vice President and Direc t o r , Counsel and Sec re t a r y Kathy M. Geil, Di re c t o r , Financial Sys t e m s John E. Kiddy, The Director Daniel C. Van Epp, Executive Vice President, Adm i n i s t ra t i o n Human Res o u r ces and Adm i n i s t ra t i v e Serv i c e s Kathleen E. Bar r y, Vice President and Ass o c i a t e Brian G. Lade, Riverwalk J. Patrick Done, Group Director Director,West Coast Community Development, Gen e r al Counsel Jon J. Yod e r , Man a g e r , Joint Ven t u r e Acc o u n t i n g Ronald W. Cox, Associate Division Director and Vice President of The Rouse Company and Rep o rt i n g Di re c t o r , Adm i n i s t ra t i v e Serv i c e s Kevin P. Lent, Franklin Park, RPMI Anthony T. Hawkins, Vice President and Group Ri c h a r d E. Galen, Vice President and Ass o c i a t e Director Mark E. Brown, Senior Vice President, Corporate Gen e r al Counsel Angela F. Mease, Man a g e r , Corporate Acc o u n t i n g Kathleen M. Har t, Associate Division Direc t o r Clinton L. Lewis, III, , RPMI and Government Relations John Campbell, General Manager, Arizona Gor don H. Glenn, Vice President and Ass o c i a t e and Rep o rt i n g and Direc t o r , Compensation and Org a n i z a t i o n a l Eric E. Litz, Governor’s Square, RPMI Kevin T. Orrock, Vice President and Treasurer Eff e c t i ve n e s s Center Gen e r al Counsel Julie M. Har dnock, Tax Man a g e r , REIT and John V. Massey, Sherway Gardens John F. Cahlan, Associate General Counsel James D. Lano, Vice President and Ass o c i a t e Acquisition Pla n n i n g Robin S. Bra d l e y , Di re c t o r , HR Ser vice Cen t e r Amy H. McQueeney, Woodbridge Center Wayne Christmann, General Manager, Columbia Village Centers, HRD Jeffery S. Geen, Associate General Counsel Gen e r al Counsel Rob e r t E. Carroll, Tax Man a g e r , Planning and E. Regina G. Sor r ell, Di re c t o r , Emp l o yee Benefits William B. Murray, Midtown Square David R. Schwiesow, Vice President and Ass o c i a t e Res e a rc h Michael A. Gaines, Sr., General Manager, Venetta F. Appleyard, Director of Financial Jill M. Noack, , RPMI Planning Gen e r al Counsel David W. Lee, Tax Man a g e r , Fed e r al and Sta t e Retail Operations Harborplace and The Gallery Polly L. Richman, Exton Square Brian K. Gardiner, General Manager, John W. Steele, III, Vice President and Ass o c i a t e Co m p l i a n c e Paul I. Latta, Jr., Senior Vice President and Summerlin Gen e r al Counsel Director, Retail Operations Christopher S. Schardt, Towson Town Center Mondawmin/Metro Plaza W. Stewart Gibbons, Senior Vice President, Nancy E. Ever ett, Senior Assistant Gen e r al Counsel New Bus i n e s s Pamela J. Schenck, Samantha E. Ostertag, General Manager, Rob e r t Minutoli, Senior Vice Pres i d e n t Vice Presidents and Group Directors, Retail George R. Schmid, Willowbrook, RPMI Columbia Office Properties, HRD Community Development Vicki B. Finkelstein, Senior Assistant Gen e ra l Operations Nancy L. Cook, Vice President, Controller Co u n s e l B. Owen Williams, Vice President and Direc t o r , Jeffrey G. Sneddon, The Mall in Columbia Susan S. Plummer, General Manager,Westlake Acquisitions Peter J. Gruber Raul D. Tercilla, Bayside Marketplace, RPMI Center Charles A. Kubat, Vice President, Planning Jef f r ey C. Pal k o vitz, Senior Assistant Gen e ra l and Design Co u n s e l War r en W. Wilson, Vice President and Direc t o r , John G. McLaughlin Andrew C. Tilmont, The Grand Avenue Allyson Reed, General Manager, Pioneer Place Donna M. Sills, Senior Assistant Gen e r al Counsel Site Stra t e g y Perry C. Page Sandra M. Sadler, General Manager, Hunt John T. Potts, Jr. Vice President, Scot D. Vallee, Westdale, RPMI Land Development Bev erly J. White, Senior Assistant Gen e r al Counsel John R. Ragland, Vice President and Direc t o r , Ronald C. Wickwire Janell K. Vaughan, Bridgewater Commons Valley Office Properties Res e a rc h Arianne H. Mon r oe, Senior Assistant Gen e ra l Nancy Wieland, Paul D. Puma, Senior Leasing Representative Co m m e r cial Ar dis S. Bond, Senior Man a g e r , Res e a r ch David C. Creighton, Vice President and Co u n s e l Director, Operational Standards and Policies Jeffrey J. Williams, , RPMI David L. Shapiro, Senior Leasing Representative Frank R. Beck, Vice President, Development Joel A. Man f r edo, Vice President and Direc t o r , M. Lucinda Motsko, Senior Assistant Gen e ra l Karen C. Weir, Vice President and Director, Ann M. Esposito, General Manager, The Director Co u n s e l Inf o r mation Stra t e g i e s Specialty Retail and Marketing Eric C. Buckner, Director, Administration ExecuCentre, HRD Rita G. Brandin, Vice President, Development Greg o r y E. Zimmerman, Senior Assistant Gen e ra l Rod W. Lewis, Di re c t o r , Inf o r mation Sys t e m s Director Co u n s e l Regional Managers and Vice Presidents of Cathy A. Case, Group Director, Sales and Commercial and Office Development Retail Leasing Marketing/Western Region Gregory E. Jones, Vice President, Controller E. Ber n a r d Justis, Assistant Gen e r al Counsel Subsidiary Corporations Ruben A. Roca, Vice President and Direc t o r , Rob e r t D. Riedy, Senior Vice President and Richard E. Myers, Vice President, Leasing F. Scott Ball Steven A. Crumrine, Director, Corporate Retail Stra t e g i e s Gabrielle Koeppel, Senior Att o rn e y Di re c t o r , Retail Leasing Security and Sales Cynthia L. Stew a r t, Att o rn e y Thomas M. Fitzpatrick, Vice President and Paul C. Fickinger La u r ence A. Brocato, Vice President and Direc t o r , Joseph Eugenio, Sr., Director, Maintenance Co n s t ru c t i o n Michael E. Newman, Vice President, Dodie Stew a r t Gau d r y, Man a g e r , Legal Assistant Direc t o r , Retail Leasing John A. Johnson Services Leasing and Sales Ope r ations and Adm i n i s t ra t i o n R. Edw a r ds Tay l o r , Vice President and Ass i s t a n t Joseph E. Ochs Anthony F. Albanese, Vice President and Senior Robin S. Higgins, Group Director, Sales and Development Director, Mark T. Zachman, Vice President, Planning Di re c t o r , Retail Leasing Edward J. Vasconcellos, Jr. and Design Co n t r ollers Div i s i o n Marketing/Eastern Region Michael J. Bryant, Vice President and Senior Holly G. Edington, Vice President and Ass i s t a n t National Leasing Man a g e r s Development Director Judith S. Cebulko, General Manager, Mall General Managers of Subsidiary Community Development Las Vegas Properties Co n t ro l l e r , Ope r ating Prop e rt i e s Cl a r ke B. Abu r n Corporations or Affiliates Alton J. Scavo, Senior Vice President, Director, Robert M. Byrne, Vice President and Senior Jack R. Greenberg, Vice President and Direc t o r , William Y. Hec h t David B. Altman, Development Director Int e r nal Audit and Management Serv i c e s Community Development and General W. Wallace Lanahan, III, Vice President John A. Badagliocco, North Star, RPMI Manager of Columbia Theresa A. Burt, Development Director Elizabeth A. Hul l i n g e r , Vice President and Mar k W. Pol i v k a , Vice President Christopher B. Carlaw, Development Director RPMI—Rouse Property Management, Inc. Di re c t o r , Taxe s William J. Baker, Jr., Oviedo Marketplace Gerald E. Brock, Vice President and Senior Charles N. Qui s e n b e r r y Michael S. Boden, Development Director, HRD Linda T. Lo Cascio, Development Director HRD—The Howard Research And Melanie M. Lundquist, Vice President and Development Corporation Mary C. Bryant, White Marsh David E. Forester, Vice President and Senior H. Kimberly Potember, Development Director Assistant Control l e r , Dev elopment and Land Account Man a g e r s THHC—The Howard Hughes Corporation Ronald D. Buhidar, Collin Creek Development Director, HRD Laurin B. Askew, Jr., Vice President and Gar y M. Rivers, Vice President and Ass i s t a n t Debra S. Bra n d o n Co n t ro l l e r , Corporat e John P. Cochran, Burlington Center Edward A. Ely, Vice President and Director, Director, Design Jill D. Crep s Business Land Sales and Marketing, HRD Cynthia N. Bond, Man a g e r , Int e r nal Aud i t Joseph “Ski p ” Coppola, Faneuil Hall Mark e t p l a c e C. Lawrence Whitman, Associate Director, R. She r een Fuq u a Randall W. Bart h o l o m e w, Di re c t o r , Fin a n c i a l Wendy C. Crawford, The Fashion Show, RPMI Alvis H. Hagelis, Director, Planning and Design, Design Mar y E. McFe e l e y HRD Ana l y s i s Charles P. Crerand, , RPMI Stanley C. Burgess, Di re c t o r , Design Man a g e m e n t Kimberle S. Men z D. Dennis Dunn, Senior Design Manager, HRD Jeanette L. Daymude, Assistant Division Melinda R. Crossland, Oakwood Center Anthony F. Albanese, Vice President and Co n t ro l l e r , Ope r ating Prop e rt i e s Lynda B. Newm a n Neil B. Lang, Senior Design Manager, HRD Director, Construction Kevin M. Davies, Randhurst, RPMI Mat t h e w D. Dowling, Accounting Direc t o r Rob e r t H. O’Bri e n Elizabeth B. Angelella, Design Manager, HRD John A. Pattillo, Development Manager Dennis E. Deehan, Echelon Mall Frederick A. Fochtman, Accounting Direc t o r Rob e r t L. Quarles, Jr. George H. Fambro, Design Manager, HRD Frank W. Ziegler, Development Manager Mark S. Dunbar, Southland Center, RPMI

72 73 PROJECTS OF THE ROUSE COMP A N Y

Retail Centers in Operation Retail Centers in Operation

Date of Opening Retail Square Footage Date of Opening Retail Square Footage Consolidated Centers (note 1) or Acquisition Department Stores/Anchor Tenants Total Center Mall Only Consolidated Centers (note 1) or Acquisition Department Stores/Anchor Tenants Total Center Mall Only

Augusta Mall, Augusta, GA (a) 8/78 Rich’s; Macy’s; JCPenney; Sears; Dillard’s 1,081,000 332,000 Willowbrook, Wayne, NJ (b) 9/69 Lord & Taylor; Macy’s; Stern’s; Sears 1,530,000 502,000 Bayside Marketplace, , FL (b) 4/87 — 223,000 223,000 Woodbridge Center,Woodbridge, NJ (a) 3/71 Lo r d & Taylor; Sears; Ste r n ’s; For tunoff; JCPen n e y 1,546,000 560,000 Beachwood Place, Cleveland, OH (a) 8/78 Saks Fifth Avenue; Dillard’s; Nordstrom 912,000 348,000 Community Centers in Columbia, MD (12) (e) —— 890,000 890,000 Bridgewater Commons, Bridgewater, NJ (f ) 12/98 Lord & Taylor; Macy’s; Stern’s 875,000 372,000 Community Centers in Summerlin, NV (2) (b) —— 238,000 238,000 Cherry Hill Mall, Cherry Hill, NJ (a) 10/61 Strawbridge’s, Macy’s; JCPenney 1,292,000 543,000 Total Consolidated Centers in Operation* 35,218,000 14,838,000 The Mall in Columbia, Columbia, MD (e) 8/71 Hecht’s; JCPenney; Sears; Lord & Taylor 1,235,000 423,000 Date of Opening Retail Square Footage Echelon Mall, Voorhees, NJ (a) 9/70 Strawbridge’s; JCPenney; Boscov’s; Sears 1,140,000 429,000 Nonconsolidated/Managed Centers or Acquisition Department Stores/Anchor Tenants Total Center Mall Only Exton Square, Exton, PA (a) 3/73 Strawbridge’s 434,000 253,000 Burlington Center, Burlington, NJ (d) 8/82 Strawbridge’s; Sears; JCPenney 666,000 242,000 Faneuil Hall Marketplace, Boston, MA (a) 8/76 — 215,000 215,000 Collin Creek, Plano, TX (d) 9/95 Dillard’s; Foley’s; JCPenney; Sears; Fashion Place, Salt Lake City, UT (f ) 10/98 Dillard’s; Nordstrom; Sears 966,000 400,000 Mervyn’s California 1,123,000 333,000 The Fashion Show, Las Vegas, NV (a) 6/96 Neiman Marcus; Saks Fifth Avenue; Randhurst, Mt. Prospect, IL (d) 7/81 Carson, Pirie, Scott; JCPenney; Macy’s; Dillard’s; Robinsons-May 840,000 308,000 Ward’s; Kohl’s 1,304,000 581,000 Franklin Park, Toledo, OH (b) 7/71 Marshall Fie l d ’s; JCPenney; Jac o b s o n ’s; Lion (Dil l a r d’s) 1,099,000 313,000 Ridgedale Center, Minneapolis, MN (d) 1/89 Dayton’s; JCPenney; Sears; Dayton’s Men & Home 1,027,000 334,000 The Gallery at Market East, , PA(a)(c) 8/77 Strawbridge’s; JCPenney; KMart 1,179,000 363,000 Sherway Gardens, Toronto, ONT (c) 12/78 Eaton’s; The Bay; Holt Renfrew; Sporting Life 972,000 444,000 Governor’s Square, Tallahassee, FL (a) 8/79 ; Dillard’s; Sears; JCPenney 1,044,000 340,000 Southland Center,Taylor, MI (d) 1/89 Hudson’s; Mervyn’s California; JCPenney 903,000 320,000 The Grand Avenue, Milwaukee, WI (a) 8/82 The Boston Store 492,000 242,000 Staten Island Mall, Staten Island, NY (d) 11/80 Sears; Macy’s; JCPenney 1,229,000 622,000 Harborplace, Baltimore, MD (a) 7/80 — 136,000 136,000 Town & Country Center, Miami, FL (c) 2/88 Sears; Marshalls 642,000 421,000 Highland Mall, Austin, TX (b) 8/71 Dillard’s; Foley’s; JCPenney 1,085,000 367,000 Hulen Mall, Ft. Worth, TX (a) 8/77 Foley’s; Ward’s; Dillard’s 938,000 327,000 Total Nonconsolidated/Managed Centers in Operation 7,866,000 3,297,000 The Jacksonville Landing, Jacksonville, FL (a) 6/87 — 128,000 128,000 Total Retail Centers in Operation* 43,084,000 18,135,000 Mall St. Matthews, Louisville, KY (a) 3/62 Dillard’s; JCPenney; Lord & Taylor 1,102,000 363,000 Midtown Square, Charlotte, NC (a) 10/59 Burlington Coat Factory 235,000 190,000 Date of Opening Retail Square Footage Properties Held for Sale or Acquisition Department Stores/Anchor Tenants Total Center Mall Only (a)/Metro Plaza (b), 1/78; 12/82 — 496,000 496,000 Baltimore, MD Retail Centers Moorestown Mall, Moorestown, NJ (a) 12/97 Strawbridge’s; Boscov’s; Sears 823,000 264,000 Valley Fair, San Jose, CA (f) 7/98 Macy’s; Nordstrom 1,138,000 469,000 North Star, San Antonio, TX (b) 9/60 Dillard’s; Foley’s; Saks Fifth Avenue; Macy’s; Mervyn’s California 1,251,000 462,000 Westdale, Cedar Rapids, IA (d) 10/98 JCPenney; Ward’s; Oakwood Center, Gretna, LA (a) 10/82 Sears; Dillard’s; (JC Penney); Von Maur; Younker’s 912,000 383,000 Mervyn’s California 991,000 362,000 Total Retail Centers Held for Sale 2,050,000 852,000 Oviedo Marketplace, Orlando, FL (a) 3/98 Dillard’s; Parisian 820,000 340,000 Office/Mixed-Use Properties Owings Mills, Baltimore, MD (a) 7/86 Macy’s; Hecht’s; JCPenney; Lord & Taylor; Sears; General Cinema 17 1,165,000 352,000 Lucky’s Center, Los Angeles, CA (a) 6/96 — 142,000 142,000 Paramus Park, Paramus, NJ (a) 3/74 Macy’s; Sears 761,000 382,000 Park Meadows, Denver, CO (f) 7/98 Dillard’s; Foley’s; Joslins (Lord & Taylor); Total Properties Held for Sale 2,192,000 994,000 Nordstrom; JC Penney 1,640,000 594,000 Perimeter Mall, Atlanta, GA (b) 8/71 Rich’s; JCPenney; Macy’s; Nordstrom 1,424,000 444,000 *Not including 691,000 square feet of retail space in five mixed-use properties listed on the following page. Plymouth Meeting, Plymouth Meeting, PA (a) 2/66 Strawbridge’s; Boscov’s; IKEA; General Cinema 12 944,000 390,000 Riverwalk, , LA (a) 8/86 — 179,000 179,000 Santa Monica Place, Santa Monica, CA (a) 10/80 Macy’s; Robinsons-May 570,000 287,000 South Street Seaport, New York, NY (a) 7/83 — 259,000 259,000 Tampa Bay Center,Tampa, FL (b) 8/76 Burdines; Sears; Ward’s 895,000 325,000 Towson Town Center, Baltimore, MD(f ) 10/98 Hecht’s; Nordstrom 997,000 538,000 White Marsh, Baltimore, MD (b) 8/81 Macy’s; JCPenney; Hecht’s; Sears; IKEA; Lord & Taylor 1,148,000 359,000

74 75 Office, Mixed-Use and Other Properties in Operation Retail Centers Under Construction Retail Square Footage or in Development Department Stores/Anchor Tenants Total Center Mall Only Consolidated Mixed-Use Properties (note 1) Location Square Feet The Mall in Columbia Expansion, Columbia, MD Nordstrom 270,000 110,000 Arizona Center (a) Phoenix, AZ The Shops at Arizona Center 151,000 Exton Square Expansion, Exton, PA Sears; Boscov’s; JCPenney 569,000 120,000 Garden Office Pavilion 33,000 One Arizona Center Office Tower 330,000 Oviedo Marketplace Expansion, Orlando, FL Sears 125,000 — Two Arizona Center Office Tower 449,000 Moorestown Mall Expansion, Moorestown, NJ Strawbridges; Lord & Taylor 321,000 — AMC Cinemas 90,000 Perimeter Mall Expansion, Atlanta, GA — 75,000 75,000 The Gallery at Harborplace (a) Baltimore, MD The Gallery 141,000 The Fashion Show Expansion, Las Vegas, NV Neiman Marcus; Saks Fifth Avenue; Office Tower 265,000 Macy’s; Robinsons-May; Lord & Taylor; Renaissance Hotel 622 rooms Dillard’s; Bloomingdale’s 800,000 250,000 Ft. Myers, Ft. Myers, FL Dillard’s; Sears 900,000 350,000 Pioneer Place (a) Portland, OR Saks Fifth Avenue 60,000 Bridgewater Commons Expansion, Bridgewater, NJ Bloomingdale’s 400,000 150,000 Retail Pavillion 147,000 Fashion Place Expansion, Salt Lake City, UT Nordstrom; Dillard’s; ZCMI 300,000 70,000 Office Tower 283,000 Summerlin Town Center, Summerlin, NV Robinsons-May; Lord & Taylor; The (a) Baltimore, MD Dillard’s 1,050,000 350,000 Village Shops 74,000 West Kendall, Dade County, FL Dillard’s; Sears 1,200,000 350,000 Village Square Offices 79,000 Quadrangle Offices 110,000 Total Retail Centers Under Construction or in Development 6,010,000 1,825,000 Westlake Center (a) Seattle, WA Office, Mixed-Use and Other Properties Under Retail Pavillion 118,000 Construction or in Development Type of Space Square Feet Office Tower 342,000 Pioneer Place Expansion, Portland, OR Saks Fifth Avenue; Sundance Cinemas 150,000 Consolidated Office and Other Properties (note 1) Arizona Center Expansion, Phoenix, AZ Embassy Suites 350 rooms Columbia Office (11 buildings) (a) (e) Columbia, MD 993,000 The Village of Merrick Park, Coral Gables, FL Neiman Marcus; Nordstrom 360,000 Columbia Industrial (9 buildings) (e) Columbia, MD 623,000 Specialty retail shops 424,000 Office 80,000 Hughes Center (13 buildings) (a) Las Vegas, NV 1,005,000 Hughes Center (1 building), Las Vegas, NV Office 171,000

Hughes Airport Center (31 buildings) (a) Las Vegas, NV 1,575,000 Hughes Airport Center (3 buildings), Las Vegas, NV Industrial 168,000

Hughes Cheyenne Center (3 buildings) (a) Las Vegas, NV 377,000 Park Square, Columbia, MD Office 100,000

Summerlin Commercial (13 buildings) (a) Summerlin, NV 815,000 Summerlin Commercial (1 building), Summerlin, NV Office 71,000

Owings Mills Town Center (4 buildings) (b) Baltimore, MD 731,000 Total Office, Mixed-Use and Other Properties Under Construction or in Development 1,524,000 Inglewood Business Center (7 buildings) (a) Prince George’s County, MD 538,000 Notes: Hunt Valley Business Center (24 buildings) (a) Baltimore, MD 1,834,000 (a) Projects are wholly owned by subsidiaries of the Company. (b) Projects are owned by joint ventures or partnerships and are managed by affiliates of the Company for a fee. The Company’s ownership interest, through its sub- 1 Rutherford Business Center (24 buildings)(a) Baltimore, MD 877,000 sidiaries, is at least 50% (except for North Star and Willowbrook, in which the Company has 37 ⁄2% interests. (c) Projects are managed by affiliates of the Company for a fee plus a share of cash flow. Other Office Projects (5 buildings) (a) Various 501,000 (d) Projects are owned by partnerships or by subsidiaries of the Company (Burlington Center, Randhurst and Staten Island Mall) and are managed by affiliates of the Company for a fee plus a share of cash flow and a share of proceeds from sales or refinancings. The Company’s ownership interest in the partnerships is less than 20%, Total Office, Mixed-Use and Other except for in which the Company has a 30% interest. (e) Projects are owned and managed by affiliates in which the Company holds substantially all (at least 98%) of the financial interest, but does not own a majority voting Properties in Operation** 12,541,000 interest. (f) Projects were wholly owned by subsidiaries of the Company as of December 31, 1998, and contributed to a joint venture in February, 1999. The Company retains a ** Including 691,000 square feet of retail space in the mixed-use properties. 35% interest in the joint venture. Note 1—Includes projects wholly owned by subsidiaries of the Company, projects in which the Company has joint interest and control and projects owned by affiliates in which the Company holds substantially all (at least 98%) of the financial interest, but does not own a majority voting interest.

76 77 CX_Rouse Pg78 4/20/99 12:12 PM Page 1

O P E R A TIONS COMMITTEE

AN T H O N Y W. DE E R I N G JE F F R EY H. DO N A H U E JA N I C E A. FU C H S DU K E S. KA S S O L I S Chairman and Executive Vice President and Vice President and Director, Senior Vice President and Chief Executive Officer Chief Financial Officer Human Resources and Director, Office and Administrative Services Mixed-Use Operations

JO H N A. KI L D U F F PAU L I. LATTA, JR. DO U G LA S A. MCGR E G O R Vice President, West Coast Senior Vice President and Vice Chairman and Commercial Development and Director, Retail Operations Chief Operating Officer Executive Vice President, The Howard Hughes Corporation

RO B E RT MI N U TO L I RO B E RT D. RI E DY BRU C E I. ROT H S C H I L D ALTO N J. SC AVO Senior Vice President and Senior Vice President and Vice President, General Counsel Senior Vice President Director, New Business Director, Retail Leasing and Secretary and Director, Community Development and General Manager of Columbia

JE RO M E D. SM A L L EY DA N I E L C. VA N EP P Executive Vice President, Vice President, West Coast Commercial and Office Community Development and Development Executive Vice President, The and New Business Howard Hughes Corporation CX_Rouse Cover 4/14/99 3:03 PM Page V

THE ROUSE COMP A N Y

Bo a r d of Dire c t o r s Dir ectors Eme ri t i Annual Mee t i n g Anthony W. Deering, (b) George M. Bra d y The Annual Meeting of Sha re h o l d e r s Ch a i r man of the Board of Direc t o r s For mer Chairman of The Nat i o n a l of The Rouse Company will be held and Chief Exec u t i v e Officer of the Co r p o r ation for Housing Pa rt n e r- on Th u r s d a y , May 13, 1999 at 11:00 Co m p a n y sh i p s a.m. at the Company’s headquarte r s David H. Benson, (a) Al b e r t Keidel, Jr. in Columbia, Mary l a n d . Ch a i r man, Charter Eur opean Ret i r ed Senior Vice President of Trust, plc the Company Annual Rep o r t For m 10-K Readers who wish a copy of Form Jer emiah E. Casey, (b,c ) Samuel E. Nee l 10-K as filed with the Securities and Ch a i r man of the Board of First Mar y- President of the Neel Fou n d a t i o n ; Exchange Commission should con- land Ban c o r p Ret i r ed attorney at law tact the Dir ector of Inv estor Rel a - Rohit M. Desai, (a,b) Thomas Schwei ze r tions, The Rouse Company, Ch a i r man of the Board and Pres i d e n t Real estate inves t o r Columbia, Mar yland 21044, or use of Desai Capital Man a g e m e n t , the corporate web site to link to Inc o r p o ra t e d EDGAR filings with the Sec u r i t i e s and Exchange Commission. Mathias J. DeV ito, (b) Ch a i r man Emeritus of the Board of Dividend Rei n ve s t m e n t Di r ectors of the Company Sha r eholders of rec o r d who wish Juanita T. James, (b,c ) information on The Rouse Com- President, JJ Mar keting Ven t u re s pany Dividend Rei n v estment and Stock Pur chase Plan should write to: William R. Lummis, (a,b) The Bank of New Yor k For mer Chairman of the Board of Dividend Rei n ve s t m e n t Di r ectors and Chief Exec u t i v e Off i - P.O. Box 1958 cer of The Howa r d Hughes Corpo- Newa r k, New Jersey 07101-1958 rat i o n Thomas J. McH ugh, (b,c ) Registrar and Transfer Agent Ch a i r man of the Board and Chief The Bank of New Yor k Exec u t i v e Officer of McHugh Ass o - 101 Bar clay Stre e t ciates, Inc . New Yor k, New Yor k 10286 Hanne M. Merriman, (a) 1- 8 0 0 - 5 2 4 - 4 4 5 8 Retail Consultant, Hanne Mer r i m a n Ass o c i a t e s Co u n s e l Piper & Mar b u r y L.L.P. Roger W. Schipke, (a) Bal t i m o r e, Mar yland 21201 Pri v ate investor; For mer Senior Vic e President of the Gen e r al Ele c t r i c Aud i t o r Company and Chairman of the KPMG LLP Bo a r ds and Chief Exec u t i v e Off i c e r Bal t i m o r e, Mar yland 21202 of The Sunbeam Corporation and The Ryland Group, Inc . Corporate Hea d q u a rt e r s Alexander B. Trowbridge, (b,c ) The Rouse Company For mer President of National Ass o c i a - Columbia, Mar yland 21044 tion of Man u f a c t u re r s 41 0 / 9 9 2 - 6 0 0 0

Ger a r d J. M. Vlak (a) Web Sit e For mer member Exec u t i v e Board ht t p : / / w w w. t h e ro u s e c o m p a n y. c o m Rabobank Ned e r land; For mer Gen e r al Manager Nor th America Ams t e rd a m - Ro t t e r - dam Ban k

(a) Audit Committee (b ) E xec u t i v e Committee (c ) P ersonnel Committee EPrinted on Rec y cled Pap e r CX_Rouse Cover 4/14/99 3:03 PM Page II

THE RO U SE CO MPANY C O LUMBIA, MARY LAND 21044