CLOCKWISE FROM TOP LEFT: On March 29th, in Portland, celebrated its expansion opening with a new retail pavilion and an expanded Saks Fifth Avenue. The Company’s new in-line Premier Customer Service Centers debuted at in , and at Exton Square in Exton, . A new Class-A office building, 3993 Howard Hughes Parkway, at Hughes Center in , was nearly 100% leased by year-end. On May 3rd, Exton Square, in the northern suburbs of , celebrated its grand re-opening. On November 18th, a new Burdines joined Oviedo Marketplace in the growing suburbs of Northeastern Orlando. Ranking first nationally in home sales for the eighth time in the last nine years, the community of Summerlin in Las Vegas, boasted 3,173 total new homes sold in 2000. The official groundbreaking for the expan- sion of Fashion Show was held on May 22nd, highlighted by a Randolph Duke fashion extravaganza in Las Vegas. ’s cel- ebrated its 20th Anniversary on July 2nd, with a week of events and fes- tivities. The legendary Tiffany & Company opened at Pioneer Place in Portland, Oregon on November 17th. , in the affluent suburbs of , opened its pedestrian-friendly, streetscape-style expansion of retailers and restaurants on July 14th. Columbia, , one of the nation’s most successful large-scale planned communities is now home to 90,000 residents. On November 15th, completed its latest expansion with quality retailers, many new to the Columbia area, and a new food court. YEAR IN REVIEW THE ROUSE COMPANY HIGHLIGHTS

2000 1999 OPERATING RESULTS Total Segment Revenues (note 1) $ 1,064,177,000 $1,031,327,000 Funds from Operations (note 2) $ 252,578,000 $ 223,432,000 Net Earnings $ 170,485,000 $ 135,297,000

FINANCIAL POSITION Total Segment Assets (note 1) $ 5,025,251,000 $5,084,260,000 Debt and Capital Leases (note 1) $ 3,779,715,000 $3,863,470,000 Shareholders’ Equity $ 630,468,000 $ 638,580,000

PER SHARE DATA Earnings Per Share—Diluted $ 2.24 $ 1.69 Funds from Operations Per Share—Diluted $ 3.30 $ 2.82 Dividends Per Share: Common stock $ 1.32 $ 1.20 Preferred stock $ 3.00 $ 3.00

OTHER SELECTED DATA Weighted Average Common Shares Outstanding Used in Diluted Per Share Calculations: Earnings Per Share 72,064,000 74,199,000 Funds from Operations Per Share 77,374,000 81,097,000 Number of Employees 3,749 4,140

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. The Company’s proportionate share of assets, debt, capital leases and revenues of certain unconsolidated real estate ventures accounted for using the equity method of accounting are included in these amounts. Revenues also include the Company’s share of FFO of other unconsolidated real estate ventures in which it holds a minority interest. See note 2 of the notes to the consolidated financial statements for a description of these ventures. Note 2—Funds from Operations (FFO) represents revenues less operating, interest and certain current income tax expenses. FFO also includes the Company’s share of FFO of unconsolidated real estate ventures. See the "Funds from Operations" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 53 for further discussion of FFO.

2 LETTER TO SHAREHOLDERS

he year 2000 was one of record performance and achievement. Funds From Operations reached $252.6 million, or $3.30 per share, a 17% increase over $2.82 T for 1999. Each of the Company’s three operating lines of business produced record results. In addition, a large number of commercial development projects were opened during the year, and future projects made excellent progress. Net Earnings for 2000 were $170.5 million ($2.24 per share), compared to $135.3 million ($1.69 per share) for 1999. Current Value Shareholders’ Equity, the Company’s internal assessment of the equity value of its assets and liabilities, was estimated to be approximately $2.4 billion, or $36.00 per share, up slightly over 1999.

ANTHONY W. DEERING Chairman of the Board and Chief Executive Officer

3 In the fall of 1999, the Board of Directors authorized a $250 million TABLE 1 program to purchase shares of the Company’s common stock in the open market. Slightly more than $100 million worth of stock has been purchased as Total Regional “A” “B” “C” Retail Centers Centers Centers Centers of the end of 2000. 1993 51 (100%) 5 (10%) 13 (25%) 33 (65%) In recognition of the excellent performance in 2000 and the strong 2000 30 (100%) 16 (54%) 10 (33%) 4 (13%) prospects for the future, the Company’s Board of Directors approved an Note: Excludes urban centers, community centers and projects planned for disposition. increase in the 2001 quarterly common stock dividend to $.355 per share, up 8% over $.33 per share, per quarter in 2000. This annual rate of $1.42 repre- TABLE 2 sents a compound growth rate of 14.2% over the 23 years since the dividend program was initiated in 1978. Sales Per Square Foot Occupancy % of NOI RETAIL CENTERS ACHIEVE NEW RECORDS The Company’s portfolio of retail “A” Centers $ 466 97.8% 60% centers performed very well. Notwithstanding the transfer of the Company’s “B” Centers $ 350 95.4% 33% interest in North Star and a softness nationally in retail sales in the fourth quarter “C” Centers $ 317 94.8% 7% of 2000, Funds From Operations from retail centers reached $163 million, a 5% Note: Excludes urban centers, community centers and projects planned for disposition. Sales per square foot data are for comparable tenants, and exclude spaces over 10,000 sq.ft. Occupancy is increase over 1999. The underlying fundamentals of the retail centers were strong as of December 31, 2000, while sales and NOI are for the full year of 2000. throughout 2000. Comparable space sales of merchants in the Company’s retail centers increased by 2% over 1999, even as sales slowed in the fourth quarter’s Over the past seven years, the Company has made significant progress in weakening economic environment. Comparable tenant sales in the same centers upgrading its retail portfolio. Since 1993, interests in 37 centers have been reached $433 per square foot, while the comparable regional center occupancy disposed of or transferred, and most of the present portfolio has been renovated level finished the year at 97%, once again significantly exceeding that of most and/or expanded. Even without the 37 properties that are no longer companies in our industry. New first year rents on space re-leased during 2000 contributing to the Company’s results, Funds From Operations from the retail averaged $40 per square foot, up 25% over the rent previously being paid. center portfolio have grown at a compound rate of 10% since 1993.

4 Under the Company’s internal methodology, the strongest, most Total Funds Higher occupancy levels and increased rents (particularly on Class- From Operations dominant centers are graded as “A” centers; solid centers with good (in millions) A urban space), improved parking revenues and new buildings in growth prospects are rated “B”; and centers with more limited Las Vegas and Summerlin all contributed to the year’s growth. growth potential are designated “C” (although any centers at the $252.6 Late in the year, the Company transferred its interests in 37

lower end of the “C” level would probably be on their way to $223.4 office/flex/industrial buildings in two Las Vegas business parks to a other uses). As Table 1 illustrates, at the end of 2000, 26 of the new joint venture that now owns and operates them. As a result of $198.2 Company’s centers (87%) were rated “A” or “B” compared to only this transaction, the Company received approximately $85 million

18 centers (35%) at the end of 1993. $178.3 in cash proceeds, some of which were used to fund the common

More importantly, as Table 2 demonstrates, the higher rated $147.1 stock purchase program. In 2001, Funds From Operations from centers have much better productivity. “A” centers have the highest the office and other properties portfolio will decline due to the sales per square foot, the best occupancy levels and generate a transfer of these 37 buildings to the joint venture. The purchase of disproportionately large share of the Company’s regional center Net the Company’s shares, however, should make the transaction bene- 96 97 98 99 00 Operating Income (NOI). Space in these higher quality centers is ficial to Funds From Operations on a per share basis. in greater demand by merchants, and these centers are also much better able EARNINGS FROM COMMUNITY DEVELOPMENT OPERATIONS TOP $60 MILLION to withstand any downturns in the economy, should they occur. The Company’s two major community development projects, Columbia, The retail centers currently in development (beginning page 8), both new projects Maryland and Summerlin, Nevada, each had an exceptional year, with total oper- and expansions/renovations, will further bolster the high quality level of the ations producing $63.8 million of Funds From Operations, an increase of 33% Company’s portfolio. By 2004, 70% of the Company’s regional retail centers should over 1999. Prior to 2000, the Company’s strategy was to regulate land sales to be “A” rated, and the “B” and “C” properties will be strong and solid producers. produce level, recurring results. Coming into 2000, it was clear that, in both OFFICE AND OTHER PROPERTIES UP 16% The Company’s office and other communities, demand significantly exceeded planned supply, providing the properties portfolio achieved another year of exceptional performance. Funds opportunity to generate additional cash as well as to add to the critical mass of From Operations reached $52.0 million, up 16% from $44.8 million a year ago. population, particularly in Summerlin. As announced in early 2000, the strategy

5 was modified to respond to these opportunties, and each of these Total Funds FIVE EXPANSIONS OPEN; MORE NEW PROJECTS UNDERWAY From Operations objectives was realized in 2000. Cash flows generated from commu- (per share diluted) During the year, five projects were completed at existing retail nity development activities reached $94 million, and Summerlin’s centers. In March, a new Lord & Taylor store opened at Moorestown $3.30 population approached 60,000 people while Columbia’s reached Mall in , and the highly successful Pioneer Place, in the approximately 90,000. heart of downtown Portland, Oregon, added 104,000 square feet of $2.82 Columbia is the second largest “city” in Maryland and is the space. May saw the addition of three department stores, 120,000 $2.60 commercial core of the Baltimore- corridor. It has almost square feet of new mall space and the remerchandising of 115,000

70,000 jobs, excellent schools and a wide array of cultural, recre- $2.43 square feet of existing space at Exton Square west of Philadelphia, ational, entertainment, religious and medical facilities and programs. $2.27 Pennsylvania. At Perimeter Mall in Atlanta, , a 78,000 square Summerlin’s builders sold 3,173 new houses in 2000 and, for foot expansion that included a pedestrian friendly promenade and the eighth time in nine years, it was the best selling master-planned signature restaurants opened in July. In October and November, community in the . Late in 2000, the portion of the new and Burdines department stores opened at Oviedo 96 97 98 99 00 Las Vegas Beltway that connects Summerlin to McCarran Airport Marketplace in Orlando, . and the southern end of (the “Strip”) was opened. As 2001 Looking forward, in May 2001, The Mall in Columbia, in downtown begins, Summerlin has a 15% share of the new home market in Las Vegas, Columbia, Maryland, will open its latest expansion, which will include a free- excellent transportation access and a plentiful supply of fully entitled land. The standing L.L. Bean store as well as Z´ Tejas and P.F. Chang’s restaurants. Addi- openings of two new villages, The Ridges and The Vistas, will provide needed tional shops, including J. Crew and another restaurant will follow in the Fall. land for high end custom lot sales. With the completion of these projects, much of the Company’s focus will Both communities are recognized as superior environments for living and shift to major new projects. A special section of this report, beginning on working, and indications are that their desirability will only increase. Prospects page 8, highlights three of the most advanced: Village of Merrick Park in Coral for 2001 for community development operations are excellent and could Gables, Florida; Fashion Show in Las Vegas, Nevada; and produce results even greater than those of 2000. in San Antonio, . These projects will each include and Neiman

6 Marcus stores, as well as a number of other premier department Common Stock Dividend shares of common stock outstanding, thereby producing increased (per share) stores, and all three projects will soon be recognized as being among per share results. the most desirable and fashionable retail addresses in America. Development projects opened successfully, and exciting new $1.42 In addition to these three projects, new retail centers are projects are under construction with more to follow. The quality of $1.32 moving forward in Minneapolis, , the West Kendall these developments, as well as that of the properties in the existing $1.20 area of Dade County, Florida and Summerlin, Nevada, and expan- portfolio, should insulate them from a potential economic slow- sions are advancing at in , and $1.12 down. Marginal properties could face difficulties, but they have

Bridgewater Commons in New Jersey. $1.00 largely been eliminated from the Company’s portfolio; conversely, In Summerlin, Center Pointe Plaza, a 143,000 square foot the most productive properties are always in demand. community retail center, and Corporate Pointe, 110,000 square We are pleased with our progress and expect that 2001 will be feet of flex office space, are under construction. At Hughes another excellent year. As opportunities arise, we would expect to Center in Las Vegas, two new restaurants are under construction sell or transfer interests in other assets and use the proceeds to 97 98 99 00 01 and two office buildings are in design. Finally, in Columbia, reduce debt, to purchase stock in the open market and/or to invest another downtown office building will begin construction this Summer. in new projects, depending upon which alternative provides the most beneficial Over the next few years, the Company’s already premier portfolio will be signif- return to shareholders. The increase in stock price during 2000, combined with icantly enhanced by these new projects. Shareholders should expect to see substan- the cash dividend, produced an excellent total return to shareholders. We believe tial increases in Funds From Operations and value as these projects come on stream. the Company is positioned to continue delivering strong returns in the future. SUMMARY The results for the year 2000 were gratifying. The financial performance for each of the three business lines was outstanding, even as the Company sold or transferred interests in various shopping centers, office build- ings and land assets. Cash proceeds from these transactions enabled the ANTHONY W. DEERING Company to maintain its strong financial position while reducing the number of Chairman of the Board and Chief Executive Officer

7

Neiman Nordstrom Marcus

With Neiman Marcus and Nordstrom

t the gateway to Coral Gables, Florida’s most exclusive and prestigious commu- A nity, a retail village of unprecedented quality and luxury is taking shape—with Neiman Marcus and Nordstrom at its heart. Ideally situated in one of the most lucrative trade areas in the nation, the finest retailers and restaurants have responded with great enthusiasm to this unmatched mixed-use project. Construc- tion is well underway on both department stores; 435,000 square feet of smaller retail shops; 110,000 square feet of Class-A office space; and 120 premium residential units, all clustered A new, luxury retail village in affluent Coral Gables, Florida, around a distinctive urban garden. the Village of Merrick Park, marked the kick-off of its retail leasing with a benefit gala fashion show at the famed Biltmore Hotel, The Village of Merrick Park will debut to featuring a special showing of the Badgley Mischka Spring 2001 Collection. South Florida in September of 2002.

Nordstrom Robinsons-May Lord & Taylor

Dillard’s

Bloomingdale’s Saks Home Fifth Macy’s Avenue Neiman Marcus

With Neiman Marcus, Saks Fifth Avenue, Macy’s, Dillard’s, Robinsons-May, Bloomingdale’s Home, Lord & Taylor and Nordstrom.

estined to become the premier retail site in America, Fashion Show promises to D reinvent the way fashion is experienced, by seamlessly uniting retailing, media and enter- tainment under one incredible roof. Located at the center of the country’s fastest growing city, and positioned directly on one of the world’s top tourist destinations, Fashion Show will offer shoppers the widest choice of merchandise ever assembled—with 500,000 square feet of the world’s best known retailers connecting Neiman Marcus, Saks Fifth Avenue, Macy’s, Dillard’s, Robinsons-May, Blooming- dale’s Home, Lord & Taylor and Nordstrom. With the most powerful fashion anchor lineup in the world This two million square foot center will and ideally situated on the world-famous Las Vegas “Strip,” Fashion Show will soon be the scene of multi-media fashion events, debut new fashion anchors in 2002 and cele- staged beneath a breathtaking 200-foot tall cloud canopy that towers above a new public plaza. brate its grand re-opening in October of 2003.

Neiman Marcus

Nordstrom

Dillard’s Foley’s

With Neiman Marcus, Nordstrom, Dillard’s and Foley’s

estled at the foot of Texas Hill Country, The Shops at La Cantera will be remi- N niscent of a lively mercado, filled with the richness, panache and abundance of retail offerings from Neiman Marcus, Nordstrom, Dillard’s and Foley’s. Located in northwest San Antonio, an area known for its wealthy international visitors and high-income residents, The Shops at La Cantera will enjoy unparalleled access to a metropolitan area of explosive growth. A bustling main street, naturally landscaped courtyards, shaded arcades and meandering water features will serve as an enchanting backdrop for retail shops and world- class restaurants. A preeminent open-air retail marketplace in exclusive Texas Hill Country, Construction on this 1.3 million square foot The Shops at La Cantera will combine authentic southwestern architectural features with the atmosphere of a vibrant gathering project commences in 2001, and opening is place, filled with shops and restaurants along shaded galleries and trellised13 pathways. scheduled for spring of 2004. OFFICE AND OTHER PROPERTIES

he Company’s Class-A office projects, in Columbia, Las Vegas and in the T downtowns of Baltimore, Phoenix, Portland and , achieved another year of remarkable growth. High quality buildings in the best locations in major metropolitan areas continue to be in great demand by tenants. Rents and occu- pancies are at record high levels across the Company’s portfolio. During 2000, interests in a number of build- ings were transferred to joint ventures, enabling the company to generate more than $85 million. These cash proceeds were used to reduce debt, CLOCKWISE FROM TOP LEFT: Pioneer Tower is a part of the highly successful mixed-use project, Pioneer Place invest in new projects and purchase the in downtown Portland, Oregon. Hughes Center in Las Vegas, Nevada now encompasses nine Class-A Company’s stock in the open market. office buildings and six premier restaurants. Center is the nucleus for the growing new downtown business district of Phoenix, Arizona. An exceptional business environment, 70 Corporate Going forward, the quality of the portfolio’s Center is located in the heart of Columbia’s downtown. buildings and their prime locations should undergird future results, and the addition of new projects in Las Vegas, Summerlin and Columbia should ensure strong growth. COMMUNITY DEVELOPMENT

olumbia, Maryland and Summerlin, Nevada, the Company’s two major C planned communities, recorded excep- tional performance in 2000. Not only were financial results outstanding, but both Columbia

CLOCKWISE FROM TOP LEFT: The Home Finding Center in the Summerlin community in the booming and Summerlin have become recognized as being . Homes in Columbia’s Village of River Hill. Columbia is home to 27 schools among the most successful large-scale commu- and a myriad of recreational activities. Columbia’s Pheasant Ridge neighborhood nity developments ever conceived. Columbia’s residential neighborhoods are designed to increase the amount of surrounding open space and to promote community activity. Construction is flourishing on new luxury The achievements of Columbia and estate homes in the Red Rock Country Club community in Summerlin. Summerlin have been assisted by their prime locations—both at the center of dynamic growth areas—Columbia, directly situated in the expanding Washington, DC and Baltimore corridor and Summerlin, at the edge of America’s fastest growing city, the entertain- ment capital of Las Vegas. In addition to location and access, both communities offer educational, cultural, enter- tainment, recreational and other institutional facilities and programs unmatched by cities many times their sizes. Columbia and Summerlin have substantial entitled acreage available and overwhelming credibility in their markets. They should both continue to generate excellent results in 2001 and for many years to come. FUTURE DEVELOPMENT PROJECTS

SUMMERLIN TOWN CENTER THE MALL IN COLUMBIA HUGHES CENTER Las Vegas, Nevada Columbia, Maryland Las Vegas, Nevada Corporate Pointe Office Building New L.L.Bean Two New Office Buildings Center Pointe Plaza Retail Nordstrom Two New Restaurants Fall 2001 Lord & Taylor Fall 2001 / 2002 Hecht’s JCPenney Sears New Premier Restaurants New Expansion Retail Space Fall 2001

COLUMBIA TOWN CENTER MAPLE GROVE CENTER Columbia, Maryland Bridgewater, New Jersey Minneapolis, Minnesota 80 Corporate Center New Bloomingdale’s Nordstrom Fall 2002 New Bloomingdale’s Home Marshall Field’s Lord & Taylor Retail and Restaurant Space Macy’s Additional Anchor Store New Retail and Restaurant Space Spring 2004 Fall 2003

FASHION PLACE KENDALL TOWN CENTER SUMMERLIN CENTER Salt Lake City, Utah , Florida Las Vegas, Nevada New Dillard’s Burdines Macy’s New Nordstrom Dillard’s Lord & Taylor New Meier & Frank Sears Dillard’s Sears Retail and Restaurant Space Robinsons-May New Retail Space Additional Anchor Store Retail and Restaurant Space New Food Court Fall 2004 Two Additional Anchor Stores Additional Anchor Store Spring 2005 Fall 2004

16 MANAGEMENT’S STATEMENT ON RESPONSIBILITIES FOR ACCOUNTING, AUDITING AND FINANCIAL REPORTING

The financial statements and other information included in the financial review section of this annual report to shareholders have been prepared by management of the Company. Financial information presented elsewhere in this report is consistent with the data presented in the financial review section. The consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America considered appropriate in the circumstances. Preparation of the financial statements and other financial information requires a certain amount of estimation and judgment. Management has made these estimates and judgments based on extensive experience and substantive understanding of relevant events and transactions. The primary objective of financial reporting is to provide users of financial statements with sufficient, relevant information to enable them to evaluate the financial strength and profitability of the Company. Consistent with this objective, this annual report includes a measurement of operating results (Funds from Operations) which supplements net earnings. In fulfilling its responsibility for the reliability and integrity of financial information, manage- ment has established and maintains a system of internal control. Management believes that this system provides reasonable assurance regarding achievement of the Company’s objectives with respect to the reliability of financial reporting, the effectiveness and efficiency of operations and compliance with applicable laws and regulations. This system is supported by the Company’s business ethics policy and is regularly tested by internal auditors. 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 Directors is composed of directors 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 review the work and conclu- sions of each. The internal auditors and the independent auditors have full and free access to the Audit Committee and meet with it, with and without management present, to discuss accounting, auditing and financial reporting matters. The Audit Committee recommends, and the Board of Directors appoints, the Company’s independent auditors.

The financial review section of this annual report to shareholders contains the following sections: 17 Management’s Statement on Responsibilities for Accounting, Auditing and Financial Reporting 18 Independent Auditors’ Report 19 Consolidated Financial Statements 24 Notes to Consolidated Financial Statements 47 Management’s Discussion and Analysis of Financial Condition and Results of Operations 58 Five Year Summary of Funds from Operations and Net Earnings

17 INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders The Rouse Company:

We have audited the accompanying consolidated balance sheets of The Rouse Company and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of oper- ations and comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signifi- cant estimates made by management, as well as evaluating the overall financial statement presen- tation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of The Rouse Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

Baltimore, Maryland February 22, 2001

18 THE ROUSE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

December 31, 2000 and 1999 (in thousands, except share data) 2000 1999 Assets Property: Operating properties: Property and deferred costs of projects $3,779,193 $3,594,316 Less accumulated depreciation and amortization 608,061 527,737 3,171,132 3,066,579 Properties in development 115,243 282,751 Properties held for sale 4,548 11,388 Total property 3,290,923 3,360,718 Investments in and advances to unconsolidated real estate ventures 541,845 523,135 Prepaid expenses, receivables under finance leases and other assets 260,615 238,685 Accounts and notes receivable 44,567 59,752 Investments in marketable securities 22,846 23,321 Cash and cash equivalents 14,742 27,490 Total assets $4,175,538 $4,233,101

Liabilities Debt: Property debt not carrying a Parent Company guarantee of repayment $2,264,799 $2,339,589 Parent Company debt and debt carrying a Parent Company guarantee of repayment: Property debt 98,531 161,585 Other debt 682,439 643,275 780,970 804,860 Total debt 3,045,769 3,144,449 Accounts payable, accrued expenses and other liabilities 362,336 313,107 Company-obligated mandatorily redeemable preferred securities of a trust holding solely Parent Company subordinated debt securities 136,965 136,965 Commitments and contingencies Shareholders’ equity Series B Convertible Preferred stock with a liquidation preference of $202,500 41 41 Common stock of 1¢ par value per share; 250,000,000 shares authorized; issued 67,880,405 shares in 2000 and 70,693,789 shares in 1999 679 707 Additional paid-in capital 735,669 808,277 Accumulated deficit (103,015) (169,974) Accumulated other comprehensive income (loss) (2,906) (471) Total shareholders’ equity 630,468 638,580 Total liabilities and shareholders’ equity $4,175,538 $4,233,101

The accompanying notes are an integral part of these statements. 19 THE ROUSE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Years ended December 31, 2000, 1999 and 1998 (in thousands, except per share data) 2000 1999 1998 Revenues $ 633,738 $635,878 $613,801 Operating expenses, exclusive of provision for bad debts, depreciation and amortization 294,040 291,855 313,160 Interest expense 236,744 233,866 201,343 Provision for bad debts 6,683 7,972 7,042 Depreciation and amortization 90,307 94,532 77,660 Other provisions and losses, net 131 8,607 5,065 Earnings (loss) before income taxes, equity in earnings of unconsolidated real estate ventures, gains (losses) on operating properties, net, extraordinary items and cumulative effect of change in accounting principle 5,833 (954) 9,531 Current income tax benefit (provision) (254) (214) 91 Equity in earnings of unconsolidated real estate ventures 129,556 101,171 101,663 Earnings before gains (losses) on operating properties, net, extraordinary items and cumulative effect of change in accounting principle 135,135 100,003 111,285 Gains (losses) on operating properties, net 33,150 41,173 (6,109) Earnings before extraordinary items and cumulative effect of change in accounting principle 168,285 141,176 105,176 Extraordinary gains (losses), net 2,200 (5,879) 4,355 Cumulative effect at January 1, 1998 of change in accounting for participating mortgages — — (4,629) Net earnings 170,485 135,297 104,902 Other items of comprehensive income (loss) – minimum pension liability adjustment (2,435) 1,355 (1,826) Comprehensive income $ 168,050 $136,652 $103,076 Net earnings applicable to common shareholders $ 158,335 $123,147 $ 92,752

Earnings per share of common stock Basic: Earnings before extraordinary items and cumulative effect of change in accounting principle $ 2.24 $ 1.79 $ 1.36 Extraordinary items .03 (.08) .07 Cumulative effect of change in accounting principle — — (.07) Total $2.27 $ 1.71 $ 1.36 Diluted: Earnings before extraordinary items and cumulative effect of change in accounting principle $ 2.21 $ 1.77 $ 1.34 Extraordinary items .03 (.08) .07 Cumulative effect of change in accounting principle — — (.07) Total $ 2.24 $ 1.69 $ 1.34

The accompanying notes are an integral part of these statements. 20 THE ROUSE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2000, 1999 and 1998 (in thousands, except per share data)

Accumulated other Series B Additional Accumulated comprehensive Preferred stock Common stock paid-in capital deficit income (loss) Total Balance at December 31, 1997 $ 41 $ 669 $ 686,976 $(222,171) $ — $ 465,515 Net earnings — — — 104,902 — 104,902 Other comprehensive income (loss) — — — — (1,826) (1,826) Dividends declared: Common stock — $1.12 per share — — — (77,101) — (77,101) Preferred stock — $3.00 per share — — — (12,150) — (12,150) Purchases of common stock — (21) (65,412) — — (65,433) Conversion of convertible subordinated debentures — 1 1,484 — — 1,485 Common stock issued pursuant to Contingent Stock Agreement — 21 65,002 — — 65,023 Other common stock issued — 50 143,378 — — 143,428 Proceeds from exercise of stock options — 3 484 — — 487 Lapse of restrictions on common stock awards — — 4,596 — — 4,596 Balance at December 31, 1998 41 723 836,508 (206,520) (1,826) 628,926 Net earnings — — — 135,297 — 135,297 Other comprehensive income (loss) — — — — 1,355 1,355 Dividends declared: Common stock — $1.20 per share — — — (86,601) — (86,601) Preferred stock — $3.00 per share — — — (12,150) — (12,150) Purchases of common stock — (29) (66,491) — — (66,520) Conversion of convertible subordinated debentures — — 30 — — 30 Common stock issued pursuant to Contingent Stock Agreement — 13 34,478 — — 34,491 Proceeds from exercise of stock options — — 32 — — 32 Lapse of restrictions on common stock awards — — 3,720 — — 3,720 Balance at December 31, 1999 41 707 808,277 (169,974) (471) 638,580 Net earnings — — — 170,485 — 170,485 Other comprehensive income (loss) — — — — (2,435) (2,435) Dividends declared: Common stock — $1.32 per share — — — (91,376) — (91,376) Preferred stock — $3.00 per share — — — (12,150) — (12,150) Purchases of common stock — (51) (126,264) — — (126,315) Common stock issued pursuant to Contingent Stock Agreement — 18 42,612 — — 42,630 Proceeds from exercise of stock options — 5 8,056 — — 8,061 Lapse of restrictions on common stock awards — — 2,988 — — 2,988 Balance at December 31, 2000 $41 $679 $735,669 $(103,015) $(2,906) $630,468

The accompanying notes are an integral part of these statements. 21 THE ROUSE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2000, 1999 and 1998 (in thousands) 2000 1999 1998 Cash flows from operating activities Rents and other revenues received $ 619,552 $ 616,741 $ 594,191 Proceeds from land sales and notes receivable from land sales 14,553 24,754 80,017 Interest received 6,686 8,549 14,038 Operating expenditures (282,582) (312,507) (305,493) Interest paid (233,714) (230,495) (194,255) Dividends, interest and other operating distributions from unconsolidated majority financial interest ventures 91,816 59,170 45,907 Operating distributions from other unconsolidated real estate ventures 36,605 26,317 24,893 Net cash provided by operating activities 252,916 192,529 259,298

Cash flows from investing activities Expenditures for properties in development and improvements to existing properties funded by debt (192,280) (213,248) (281,079) Expenditures for property acquisitions (22,245) — (882,404) Expenditures for improvements to existing properties funded by cash provided by operating activities (17,370) (16,576) (21,095) Proceeds from dispositions of properties and other investments 221,864 255,218 130,070 Payments received on loans (advances made) to unconsolidated majority financial interest ventures, net 24,410 (49,304) 47,483 Expenditures for investments in other unconsolidated real estate ventures (10,704) (5,924) (24,881) Other distributions from other unconsolidated real estate ventures — 67,500 13,750 Other 4,374 (4,278) (117) Net cash provided (used) by investing activities 8,049 33,388 (1,018,273)

Cash flows from financing activities Proceeds from issuance of property debt 155,863 248,782 650,987 Repayments of property debt: Scheduled principal payments (55,467) (49,599) (49,411) Other payments (186,679) (140,103) (347,725) Proceeds from issuance of other debt 54,750 200,000 588,250 Repayments of other debt (15,811) (316,948) (15,287) Proceeds from issuance of common stock 8,061 32 43,915 Purchases of common stock (126,315) (66,520) (65,433) Dividends paid (103,526) (98,751) (89,251) Other (4,589) (14,282) 4,566 Net cash provided (used) by financing activities (273,713) (237,389) 720,611 Net decrease in cash and cash equivalents (12,748) (11,472) (38,364) Cash and cash equivalents at beginning of year 27,490 38,962 77,326 Cash and cash equivalents at end of year $ 14,742 $ 27,490 $ 38,962

The accompanying notes are an integral part of these statements. 22 2000 1999 1998 Reconciliation of Net Earnings to Net Cash Provided by Operating Activities Net earnings $170,485 $135,297 $ 104,902 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 90,307 94,532 77,660 Undistributed earnings of majority financial interest ventures (31,654) (32,450) (42,532) Undistributed earnings of other unconsolidated real estate ventures (4,803) (12,030) (12,483) Losses (gains) on operating properties, net (33,150) (41,173) 6,109 Extraordinary (gains) losses, net (2,200) 5,879 (4,355) Cumulative effect of change in accounting principle — — 4,629 Participation expense pursuant to Contingent Stock Agreement 35,322 30,180 44,075 Provision for bad debts 6,683 7,972 7,042 Decrease (increase) in: Accounts and notes receivable 10,392 1,071 32,816 Other assets (18,021) (6,556) 4,793 Increase (decrease) in accounts payable, accrued expenses and other liabilities 16,274 (192) 9,455 Other, net 13,281 9,999 27,187 Net cash provided by operating activities $252,916 $192,529 $ 259,298

Schedule of Noncash Investing and Financing Activities Common stock issued pursuant to Contingent Stock Agreement $ 42,630 $ 34,491 $ 65,023 Capital lease obligations incurred 4,189 3,196 2,743 Property and other assets contributed to unconsolidated real estate ventures 184,926 825,673 — Mortgage debt, other debt and other liabilities related to property and other assets contributed to unconsolidated real estate ventures 76,577 423,387 — Mortgage and other debt assumed or issued in acquisitions of property interests 23,823 — 599,795 Other debt repaid on formation of an unconsolidated real estate venture — 271,233 — Mortgage debt assumed by purchaser of a property — 40,000 — Common stock issued in acquisition of property interests — — 100,000 Mortgage debt extinguished on dispositions of interests in properties — — 19,875 Termination of capital lease obligation — — 46,387 Common stock issued on conversion of convertible subordinated debentures — 30 1,485

23 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998

(1) Summary of significant accounting policies useful lives of assets subject to depreciation or amortization, evaluation of collectibility of (a) Description of business accounts and notes receivable and measurement of pension and postretirement obligations. Through its subsidiaries and affiliates, the Company acquires, develops and manages income- Actual results could differ from those and other estimates. producing properties located throughout the United States and develops and sells land for resi- In the fourth quarter of 2000, the Company adopted the Emerging Issues Task Force dential, commercial and other uses. The income-producing properties consist of retail centers, consensus on Issue 00-1, “Investor Balance Sheet and Income Statement Display under the office and industrial buildings and mixed-use and other properties. The retail centers are Equity Method for Investments in Certain Partnerships and Other Ventures” (EITF 00-1). primarily regional shopping centers in suburban market areas, but also include specialty The consensus requires that the proportionate share method of accounting (under which an marketplaces in certain downtown areas and several village centers, primarily in Columbia, entity records its share of the assets, liabilities, revenues and expenses of partnerships and other Maryland. The office and industrial properties are located primarily in the Columbia, ventures in which it has joint interest and control) be discontinued, except in limited circum- Baltimore and Las Vegas market areas or are components of large-scale mixed-use properties stances. As a result of adopting this consensus, the Company’s share of the net assets of (which include retail, parking and other uses) located in other urban markets. Land develop- ventures in which it has joint interest and control is carried in investments in and advances to ment and sales operations are predominantly related to large-scale, long-term community unconsolidated real estate ventures in the balance sheets and its share of their net earnings is development projects in Columbia and Summerlin, Nevada. carried in equity in earnings of unconsolidated real estate ventures in the statements of operations and comprehensive income. (b) Basis of presentation The adoption of EITF 00-1 affected previously reported balances as follows The consolidated financial statements include the accounts of The Rouse Company, all (in thousands): subsidiaries and partnerships in which it has a majority voting interest and control. Invest- 1999 ments in other ventures are accounted for using the equity or cost methods as appropriate in Decrease in assets: the circumstances. Significant intercompany balances and transactions are eliminated in Total property $164,271 consolidation. Investment in and advances to unconsolidated The preparation of financial statements in conformity with accounting principles generally real estate ventures 8,775 accepted in the United States of America requires management to make estimates and judg- Other assets 22,478 ments that affect the reported amounts of assets and liabilities and disclosures of contingencies Total $195,524 at the date of the financial statements and revenues and expenses recognized during the Decrease in liabilities: reporting period. Significant estimates are inherent in the preparation of the Company’s finan- Total debt $189,971 cial statements in a number of areas, including evaluation of impairment of long-lived assets Other liabilities 5,553 (including operating properties and properties held for development or sale), determination of Total $195,524

24 1999 1998 are generally depreciated using composite lives of 40 years, producing an effective annual rate Decrease in: of depreciation for such properties of 2.5%. Revenues $64,583 $64,964 If events or circumstances indicate that the carrying value of an operating property to be Operating expenses, exclusive of depreciation held and used may be impaired, a recoverability analysis is performed based on estimated and amortization 24,269 25,192 undiscounted future cash flows to be generated from the property. If the analysis indicates that Interest expense 11,833 9,642 the carrying value is not recoverable from future cash flows, the property is written down to Depreciation and amortization 4,597 4,983 estimated fair value and an impairment loss is recognized. Fair values are determined based on Current income tax provision 72 65 estimated future cash flows using appropriate discount and capitalization rates. Increase in equity in earnings of Properties held for sale are carried at the lower of their carrying values (i.e., cost less accu- unconsolidated real estate ventures $23,812 $25,082 mulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. The net carrying values of operating properties are classified as proper- In addition to reclassifications attributable to the adoption of EITF 00-1, certain other ties held for sale when the properties are actively marketed for sale. Depreciation of these amounts for prior years have been reclassified to conform to the presentation for 2000. properties is discontinued at that time, but operating revenues, interest and other operating expenses continue to be recognized until the date of sale. If active marketing ceases, the (c) Property properties are reclassified as operating, depreciation is resumed and deferred selling costs, if Properties to be developed or held and used in operations are carried at cost reduced for any, are expensed. Generally, revenues and expenses related to property interests acquired with impairment losses, where appropriate. Properties held for sale are carried at cost reduced for the intention to resell are not recognized. valuation allowances, where appropriate. Acquisition, development and construction costs of properties in development are capitalized including, where applicable, salaries and related (d) Sales of property costs, real estate taxes, interest and preconstruction costs. The preconstruction stage of devel- Gains from sales of operating properties and revenues from land sales are recognized using the opment of an operating property (or an expansion of an existing property) includes efforts and full accrual method provided that various criteria relating to the terms of the transactions and related costs to secure land control and zoning, evaluate feasibility and complete other initial any subsequent involvement by the Company with the properties sold are met. Gains or tasks which are essential to development. Provisions are made for potentially unsuccessful revenues relating to transactions that do not meet the established criteria are deferred and preconstruction efforts by charges to operations. Development and construction costs and recognized when the criteria are met or using the installment or cost recovery methods, as costs of significant improvements, replacements and renovations at operating properties are appropriate in the circumstances. For land sale transactions under the terms of which the capitalized, while costs of maintenance and repairs are expensed as incurred. Company is required to perform additional services and incur significant costs after title has Direct costs associated with financing and leasing of operating properties are capitalized as passed, revenues and cost of sales are recognized on a percentage of completion basis. deferred costs and amortized using the interest or straight-line methods, as appropriate, over Cost of land sales is generally determined as a specified percentage of land sales revenues the periods benefited by the expenditures. recognized for each land development project. The cost percentages used are based on Depreciation of operating properties is computed using the straight-line method. The estimates of development costs and sales revenues to completion of each project and are revised annual rate of depreciation for most of the retail centers is based on a 55-year composite life periodically for changes in estimates or development plans. The specific identification method and a salvage value of approximately 10%, producing an effective annual rate of depreciation is used to determine cost of sales of certain parcels of land. for new properties of 1.6%. The other retail centers, all office buildings and other properties

25 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(e) Leases (g) Investments in marketable securities and cash and cash equivalents Leases which transfer substantially all the risks and benefits of ownership to tenants are consid- The Company’s investment policy defines authorized investments and establishes various limi- ered finance leases and the present values of the minimum lease payments and the estimated tations on the maturities, credit quality and amounts of investments held. Authorized invest- residual values of the leased properties, if any, are accounted for as receivables. Leases which ments include U.S. government and agency obligations, certificates of deposit, bankers transfer substantially all the risks and benefits of ownership to the Company are considered acceptances, repurchase agreements, commercial paper, money market mutual funds and capital leases and the present values of the minimum lease payments are accounted for as prop- corporate debt and equity securities. erty and liabilities. Investments with maturities at dates of purchase in excess of three months are classified as In general, minimum rent revenues are recognized when due from tenants; however, marketable securities and carried at amortized cost as it is the Company’s intention to hold estimated collectible minimum rent revenues under leases which provide for varying rents over these investments until maturity. Short-term investments with maturities at dates of purchase their terms are averaged over the terms of the leases. of three months or less are classified as cash equivalents, except that any such investments purchased with the proceeds of loans which may be expended only for specified purposes are (f) Income taxes classified as investments in marketable securities. Investments in marketable equity securities The Company elected to be taxed as a real estate investment trust (REIT) pursuant to the are classified as trading securities and are carried at market value. Internal Revenue Code of 1986, as amended, effective January 1, 1998. In general, a corpora- tion that distributes at least 90% of its REIT taxable income to shareholders in any taxable (h) Derivative financial instruments year and complies with certain other requirements (relating primarily to the nature of its assets The Company makes limited use of interest rate exchange agreements, including interest rate and the sources of its revenues) is not subject to Federal income taxation to the extent of the caps and swaps, to manage interest rate risk associated with variable rate debt. The Company income which it distributes. Management believes that the Company met the qualifications may also use other types of agreements to hedge interest rate risk associated with anticipated for REIT status as of December 31, 2000 and intends for it to meet the qualifications in the project financing transactions. These instruments are designated as hedges and, accordingly, future and to distribute at least 90% of its REIT taxable income (determined after taking into changes in their fair values are not recognized in the financial statements, provided that they account any net operating loss deduction) to shareholders in 2001 and subsequent years. As meet defined correlation and effectiveness criteria at inception and thereafter. Instruments that discussed in note 9, the Company will elect to treat certain subsidiaries as taxable REIT cease to qualify for hedge accounting are marked-to-market with gains or losses recognized subsidiaries (TRS), which will be subject to Federal and state income taxes beginning in 2001. in income. As of December 31, 2000, most states in which the Company operates have enacted legisla- Under interest rate cap agreements, the Company makes initial premium payments to tion that would permit a REIT to own TRS. The Company expects that the states that have the counterparties in exchange for the right to receive payments from them if interest rates not enacted the legislation will do so during 2001 and thus, conform their state laws to the on the related variable rate debt exceed specified levels during the agreement period. Federal tax code that permits a REIT to own TRS. In addition, the Company expects that this Premiums paid are amortized to interest expense over the terms of the agreements using legislation will be made retroactive to January 1, 2001. However, if conforming legislation is the interest method and payments receivable from the counterparties are accrued as reduc- not enacted, the Company will be taxed as a C-Corporation and may be required to provide tions of interest expense. Under interest rate swap agreements, the Company and the for current and deferred taxes for those states. Any required provisions for income taxes would counterparties agree to exchange the difference between fixed rate and variable rate be insignificant to the Company’s consolidated results of operations. Except with respect to the interest amounts calculated by reference to specified notional principal amounts during TRS, management does not believe that the Company will be liable for significant income the agreement period. Notional principal amounts are used to express the volume of these taxes at the Federal level or in most of the states in which it operates in 2001 and future years. transactions, but the cash requirements and amounts subject to credit risk are substan- tially less. Amounts receivable or payable under swap agreements are accounted for as adjustments to interest expense on the related debt.

26 Parties to interest rate exchange agreements are subject to market risk for changes in (k) Stock-based compensation interest rates and risk of credit loss in the event of nonperformance by the counterparty. The The Company applies the intrinsic value-based method of accounting prescribed by Company does not require any collateral under these agreements, but deals only with highly Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to rated financial institution counterparties (which, in certain cases, are also the lenders on the Employees,” and related interpretations including FASB Interpretation No. 44, “Accounting related debt) and does not expect that any counterparties will fail to meet their obligations. for Certain Transactions involving Stock Compensation (an interpretation of APB Opinion On January 1, 2001, the Company will adopt Statement of Financial Accounting No. 25),” issued in March 2000, to account for stock-based employee compensation plans. Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Under this method, compensation cost is recognized for awards of shares of common stock or Information related to this accounting change is provided in note 17. stock options to directors, officers and employees of the Company and consolidated subsidiaries only if the quoted market price of the stock at the grant date (or other measure- (i) Other information about financial instruments ment date, if later) is greater than the amount the grantee must pay to acquire the stock. Fair values of financial instruments approximate their carrying values in the financial Information concerning the pro forma effects on net earnings and earnings per share of statements except for debt for which fair value information is provided in note 6. common stock of using an optional fair value-based method, rather than the intrinsic value method, to account for stock-based compensation plans is provided in note 13. (j) Earnings per share of common stock Basic earnings per share (EPS) is computed by dividing income available to common share- (l) Participating mortgages holders by the weighted-average number of common shares outstanding. Diluted EPS is Effective January 1, 1998, the Company adopted the American Institute of Certified Public computed after adjusting the numerator and denominator of the basic EPS computation for Accountants’ Statement of Position 97-1 “Accounting by Participating Mortgage Loan the effects of all dilutive potential common shares during the period. The dilutive effects of Borrowers.” This Statement prescribes borrowers’ accounting for participating mortgage loans convertible securities are computed using the “if-converted” method and the dilutive effects of and requires, among other things, that borrowers recognize liabilities for the estimated fair options, warrants and their equivalents (including fixed awards and nonvested value of lenders’ participations in the appreciation in value (if any) of mortgaged real estate stock issued under stock-based compensation plans) are computed using the “treasury projects and record such participations as interest over the terms of the related loans. The stock” method. Company had not previously recognized lenders’ participations in the appreciation in value of mortgaged properties. The cumulative effect of this accounting change at January 1, 1998 was to reduce net earnings by approximately $4.6 million ($.07 per share basic and diluted). The effect of this change, excluding the cumulative effect of initial adoption, was not material (approximately $.01 per share basic and diluted) in 1998.

27 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2) Unconsolidated real estate ventures Relying on the REIT Modernization Act (as more fully discussed in note 9), the Investments in and advances to unconsolidated real estate ventures at December 31, 2000 and Company negotiated an agreement to reacquire the voting stock of the ventures owned by 1999 are summarized, based on the level of the Company's financial interest, as follows the Trust and on January 2, 2001, the Company exchanged 137,928 shares of common (in thousands): stock for the Trust’s shares of voting common stock in the ventures. The voting shares 2000 1999 acquired by the Company constitute all of the Trust’s interests in the ventures. The fair Majority financial interest ventures $ 333,541 $350,081 value of the consideration exchanged was approximately $3.5 million. As a result of this Other unconsolidated real estate ventures 208,304 173,054 transaction, the Company owns 100% of the voting common stock of the ventures and, Total $541,845 $523,135 accordingly, the ventures will be consolidated in the Company’s financial statements from the date of the acquisition. The equity in earnings of unconsolidated real estate ventures is summarized, based on the The combined balance sheets of these ventures at December 31, 2000 and 1999 are level of the Company's financial interest, as follows (in thousands): summarized as follows (in thousands): 2000 1999 2000 1999 1998 Majority financial interest ventures $ 88,148 $ 62,824 $ 64,287 Assets: Other unconsolidated real estate ventures 41,408 38,347 37,376 Operating properties, net $337,005 $332,234 Total $129,556 $101,171 $101,663 Properties in development 23,582 26,920 Land held for development and sale 250,510 257,773

The majority financial interest ventures were initiated on December 31, 1997, when Investments in and advances to unconsolidated certain wholly owned subsidiaries issued 91% of their voting common stock to The Rouse real estate ventures 106,892 112,039 Company Incentive Compensation Statutory Trust (the Trust), an entity which is neither Prepaid expenses, receivables under finance owned nor controlled by the Company. These sales were made at fair value and as part of leases and other assets 95,803 96,603 the Company's plan to meet the qualifications for REIT status. The Company retained the Accounts and notes receivable 64,269 88,549 remaining voting stock of the ventures and held shares of nonvoting common and/or Cash and cash equivalents 15 7,784 preferred stock and, in certain cases, mortgage loans receivable from the ventures which, Total $878,076 $921,902 taken together, comprised substantially all (at least 98%) of the financial interest in them. As a result of its disposition of the majority voting interest in the ventures, the Company Liabilities and shareholders’ deficit: began accounting for its investment in them using the equity method effective December Loans and advances from the Company $450,710 $514,792 31, 1997. Due to the Company's continuing financial interest in the ventures, it recognized Mortgages payable and other long-term debt 326,290 310,103 no gain on the sales of stock for financial reporting purposes. The assets of the ventures Other liabilities 101,887 117,622 consist primarily of land to be developed and sold as part of community development proj- Redeemable Series A Preferred stock 50,000 50,000 ects in Columbia and Summerlin, other investment land, primarily in Nevada, certain office Shareholders’ deficit (50,811) (70,615) and retail properties primarily in Columbia, investments in properties owned jointly with Total $878,076 $921,902 the Company and contracts to manage various operating properties.

28 The combined statements of operations of these ventures are summarized as follows In December 2000, one of the ventures partially repaid a loan from the Company (in thousands): prior to its scheduled maturity. The Company charged the venture a prepayment penalty 2000 1999 1998 of $22.1 million and this amount, less related deferred income tax benefits of $8.8 Revenues, excluding interest on million, is classified as an extraordinary loss in the combined statement of operations of loans to the Company $ 312,056 $278,437 $248,801 the ventures. The effect of the transaction is eliminated in the Company’s equity in earn- Interest income on loans to the Company — 2,647 9,067 ings of majority financial interest ventures. The 1998 extraordinary loss is related to the Operating expenses (159,691) (160,497) (142,550) extinguishment of debt with other lenders. The Company’s share of this extraordinary loss Interest expense, excluding interest on is reflected in extraordinary gains (losses), net in the Company’s consolidated financial borrowings from the Company (10,470) (7,504) (11,884) statements. Interest expense on borrowings The Company’s share of the net earnings of these ventures is summarized as follows from the Company (52,449) (57,535) (53,340) (in thousands): Depreciation and amortization (15,804) (11,957) (9,541) 2000 1999 1998 Equity in earnings (loss) of Share of net earnings based on unconsolidated real estate ventures 3,736 (1,905) 2,164 ownership interest $35,520 $24,382 $ 35,055 Gains on operating properties, net — 2,635 15,879 Participation by others in the Income taxes, primarily deferred (28,150) (19,693) (22,060) Company’s share of earnings (35,322) (28,796) (24,152) Extraordinary losses, net (13,349) — (1,127) Interest on loans and advances, net 52,449 54,888 44,273 Net earnings $ 35,879 $ 24,628 $ 35,409 Prepayment penalty on loan from the Company 22,082 — — Eliminations and other, net 13,419 12,350 9,111 Equity in earnings of majority financial interest ventures $88,148 $62,824 $ 64,287

29 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The other unconsolidated real estate ventures are accounted for using the equity or cost (3) Property method, as appropriate. Most of these properties are managed by affiliates of the Company. Operating properties and deferred costs of projects at December 31, 2000 and 1999 are Certain agreements relating to these properties provide for preference returns to the Company summarized as follows (in thousands): when operating results or sale or refinancing proceeds exceed specified levels. At December 31, 2000 1999 2000 and 1999, these ventures were primarily partnerships and corporations which own retail Buildings and improvements $3,294,225 $3,138,519 centers. These ventures also include a joint venture formed in December 2000 in connection Land 371,537 370,943 with the Company’s contribution of its ownership interest in a development project and a joint Deferred costs 102,494 74,719 venture formed in February 1999 in connection with the Company’s contribution of its Furniture and equipment 10,937 10,135 ownership interests in four retail centers. The condensed, combined balance sheets of other Total $3,779,193 $3,594,316 unconsolidated real estate ventures at December 31, 2000 and 1999 and their condensed, combined statements of operations are summarized as follows (in thousands): Depreciation expense for 2000, 1999 and 1998 was $81.6 million, $83.0 million and $69.0 million, respectively. Amortization expense for 2000, 1999 and 1998 was $8.7 million, 2000 1999 Total assets, primarily property $1,905,264 $1,757,809 $11.5 million and $8.7 million, respectively. Liabilities, primarily long-term debt $1,355,984 $1,266,945 Properties in development include construction and development in progress and precon- Venturers’ equity 549,280 490,864 struction costs. Construction and development in progress includes land and land improve- Total liabilities and venturers’ equity $1,905,264 $1,757,809 ments of $40.2 million and $53.5 million at December 31, 2000 and 1999, respectively. Properties held for sale at December 31, 2000 and 1999 are summarized as follows (in thousands): 2000 1999 1998 2000 1999 Revenues $334,582 $365,518 $336,213 Retails centers $ — $11,388 Operating and interest expenses 233,242 247,442 214,218 Office and other properties 4,548 — Depreciation and amortization 35,217 45,982 46,549 Total $4,548 $11,388 Gains on operating properties — 33,121 38,915 Net earnings $ 66,123 $105,215 $114,361

30 Revenues relating to properties held for sale at December 31, 2000 were $.5 million Credit risk with respect to receivables from tenants is not highly concentrated due to the in each of 2000 and 1999. Operating income from these properties was $.4 million in 2000 large number of tenants and the geographic diversification of the Company’s operating prop- and $.3 million in 1999. The properties were purchased at the end of 1998 and, accordingly, erties. The Company performs credit evaluations of prospective new tenants and requires the revenues and operating income amounts for 1998 were insignificant. The properties held security deposits in certain circumstances. Tenants’ compliance with the terms of their leases is for sale at December 31, 2000 are expected to be sold in 2001. monitored closely, and the allowance for doubtful receivables is established based on analyses Revenues relating to properties held for sale at December 31, 1999 were $2.9 million in of the risk of loss on specific tenant accounts, historical trends and other relevant information. 1999 and $3.1 million in 1998. Operating income from these properties was $.2 million in Notes receivable from sales of land were primarily due from builders at the community devel- 1999 and they incurred an operating loss of $.9 million in 1998. opment project in Summerlin. The Company ceased financing land sales in 1998 when the In January 2001, management reviewed its disposition plans and decided to cease actively Company’s majority interest ventures began conducting land sales operations. The Company marketing certain properties which had been classified as held for sale during 2000. Accord- performed credit evaluations of the builders and generally required substantial down payments ingly, these properties, with a net carrying value of $170.2 million, were reclassified to (at least 20%) on all land sales that it financed. These notes and notes from sales of operating operating at December 31, 2000. properties are generally secured by first liens on the related properties.

(4) Accounts and notes receivable (5) Pension, postretirement and deferred compensation plans Accounts and notes receivable at December 31, 2000 and 1999 are summarized as follows The Company has a defined benefit pension plan (the “funded plan”) covering substantially (in thousands): all employees and employees of certain affiliates and separate, nonqualified unfunded retire- 2000 1999 ment plans (the “unfunded plans”) covering directors and participants in the funded plan whose defined benefits exceed the plan’s limits. Benefits under the pension plans are based on Accounts receivable, primarily accrued rents and the participants’ years of service and compensation. The Company also has a retiree benefits income under tenant leases $64,008 $65,025 plan that provides postretirement medical and life insurance benefits to full-time employees Notes receivable from sales of properties 3,167 3,744 and employees of certain affiliates who meet minimum age and service requirements. The Notes receivable from sales of land — 14,553 Company pays a portion of the cost of participants’ life insurance coverage and makes contri- 67,175 83,322 butions to the cost of participants’ medical insurance coverage based on years of service, subject Less allowance for doubtful receivables 22,608 23,570 to a maximum annual contribution. Total $44,567 $59,752

Accounts and notes receivable due after one year were $2.5 million and $10.4 million at December 31, 2000 and 1999, respectively.

31 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information relating to the obligations, assets and funded status of the plans at December 31, 2000 and 1999 and for the years then ended is summarized as follows (in thousands):

Pension Plans Postretirement Plan Funded Unfunded 2000 1999 2000 1999 2000 1999 Change in benefit obligations: Benefit obligations at beginning of year $ 41,433 $ 58,829 $ 11,886 $ 13,515 $ 14,895 $ 15,887 Service cost 3,568 3,648 851 945 484 666 Interest cost 3,631 3,812 1,314 993 1,312 1,086 Plan amendment 2,283 — 4,293 — — — Actuarial loss (gain) 8,856 (7,297) 1,768 (350) 2,718 (1,892) Benefits paid (4,291) (625) (255) (4,550) (938) (852) Benefit obligations before special events 55,480 58,367 19,857 10,553 18,471 14,895 Settlements — (17,364) — (3,315) — — Special terminations — 430 — 4,648 — — Benefit obligations at end of year 55,480 41,433 19,857 11,886 18,471 14,895 Change in plan assets: Fair value of plan assets at beginning of year 59,532 54,984 — — — — Actual return on plan assets (1,217) 12,199 — — — — Employer contribution 3,477 10,338 255 7,865 938 852 Benefits paid (4,291) (625) (255) (4,550) (938) (852) Settlements — (17,364) — (3,315) — — Fair value of plan assets at end of year 57,501 59,532 — — — — Funded status 2,021 18,099 (19,857) (11,886) (18,471) (14,895) Unrecognized net actuarial (gain) loss 17,051 2,333 4,177 2,554 909 (1,809) Unamortized prior service cost 4,790 3,230 6,441 3,012 — — Unrecognized transition obligation 332 398 136 271 3,998 4,331 Net amount recognized $ 24,194 $ 24,060 $ (9,103) $ (6,049) $(13,564) $(12,373)

Amounts recognized in the balance sheets consist of: Prepaid benefit cost $ 24,194 $ 24,060 $ — $ — $ — $ — Accrued benefit liability — — (18,586) (9,803) (13,564) (12,373) Intangible asset — — 6,577 3,283 — — Accumulated other comprehensive income items — — 2,906 471 — — Net amount recognized $ 24,194 $ 24,060 $ (9,103) $ (6,049) $(13,564) $(12,373)

Weighted-average assumptions as of December 31: Discount rate 7.50% 8.00% 7.50% 8.00% 7.50% 8.00% Expected rate of return on plan assets 8.00 7.25 — — — — Rate of compensation increase 4.50 4.50 4.50 4.50 4.50 4.50

32 The assets of the funded plan consist primarily of fixed income and marketable equity Because the Company’s contributions to the cost of the majority of the participants’ securities. The amendment to the pension plans in 2000 changed the compensation base on medical insurance coverage are fixed, health care cost trend rates do not significantly affect the which pension benefits are calculated. benefit obligation or service cost under the postretirement plan. The net pension cost includes the following components (in thousands): Affiliates that participate in the pension and postretirement plans reimburse the Company for their share of the annual benefit cost of the plans. The affiliates’ share of the benefit cost 2000 1999 1998 Service cost $4,419 $ 4,593 $4,609 for 2000, 1999 and 1998 was $2.1 million, $3.9 million and $3.1 million, respectively. Interest cost on projected benefit obligations 4,945 4,805 4,549 The Company also has a deferred compensation program which permits directors and Expected return on funded plan assets (4,737) (4,049) (3,479) certain management employees of the Company and certain affiliates to defer portions of Prior service cost recognized 1,587 1,410 1,410 their compensation on a pretax basis. Compensation expense related to this program was not Net loss recognized 237 1,408 1,281 significant in 2000, 1999 and 1998. Amortization of transition obligation 201 201 201 Net pension cost before special events 6,652 8,368 8,571 (6) Debt Settlement loss — 1,691 — Debt is classified as follows: Special termination loss — 5,078 — (a) “Property debt not carrying a Parent Company guarantee of repayment” which is Net pension cost $6,652 $15,137 $8,571 subsidiary company debt having no express written obligation which would require the Company to repay the principal amount of such debt during the full term of the loan

The settlement and special termination losses in 1999 relate to the organizational changes (nonrecourse loans); and and early retirement program more fully discussed in note 10. (b) “Parent Company debt and debt carrying a Parent Company guarantee of repayment” The net postretirement benefit cost includes the following components (in thousands): which is debt of the Company and subsidiary company debt with an express written obligation of the Company to repay the principal amount of such debt during the full term of 2000 1999 1998 the loan (Company and recourse loans). Service cost $ 484 $ 666 $ 718 With respect to nonrecourse loans, the Company has in the past and may in the future, Interest cost on accumulated under some circumstances, support those subsidiary companies whose annual expenditures, benefit obligations 1,312 1,086 1,024 including debt service, exceed their operating revenues. At December 31, 2000 and 1999, Amortization of transition obligation 333 333 333 nonrecourse loans include $162.8 million and $233.7 million, respectively, of subsidiary Net postretirement benefit cost $2,129 $2,085 $2,075 companies’ mortgages and bonds which are subject to agreements with lenders requiring the Company to provide support for operating and debt service costs, where necessary, for defined periods or until specified conditions relating to the operating results of the related properties are met.

33 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt at December 31, 2000 and 1999 is summarized as follows (in thousands): At December 31, 2000, approximately $897.4 million of the mortgages and bonds and 2000 1999 $58 million of the other loans were payable to one lender. Mortgages and bonds $2,281,299 $2,382,526 The agreements relating to various loans impose limitations on the Company. The most Medium-term notes 81,500 91,500 restrictive of these limit the levels and types of debt the Company and its affiliates may incur Credit facility borrowings 198,000 174,000 and require the Company and its affiliates to maintain specified minimum levels of debt Other loans 484,970 496,423 service coverage and net worth. The agreements also impose restrictions on the dividend Total $3,045,769 $3,144,449 payout ratio and on sale, lease and certain other transactions, subject to various exclusions and limitations. These restrictions have not limited the Company’s normal business activities. Mortgages and bonds are secured by deeds of trust or mortgages on properties and The annual maturities of debt at December 31, 2000 are summarized as follows general assignments of rents. This debt matures at various dates through 2019 and, at (in thousands): Nonrecourse Company and December 31, 2000, bears interest at a weighted-average effective rate of 7.96%, including Loans Recourse Loans Total lender participations in operations. At December 31, 2000 and 1999, approximately 2001 $ 171,407 $ 55,127 $ 226,534 $84.5 million and $309.1 million, respectively, of this debt provided for payments of 2002 209,824 43,855 253,679 additional interest based on operating results of the related properties in excess of stated levels. 2003 192,952 313,886 506,838 The Company has registered unsecured, medium-term notes which may be issued to the 2004 301,386 32,872 334,258 public from time to time. The notes may be issued, subject to market conditions, for varying 2005 325,576 64,881 390,457 terms (nine months to 30 years) and at fixed or variable interest rates based on market indices Subsequent to 2005 1,063,654 270,349 1,334,003 at the time of issuance. The notes outstanding at December 31, 2000 mature at various dates Total $2,264,799 $780,970 $3,045,769 from 2001 to 2015, bear interest at a weighted-average effective rate of 8.09% (including an average rate of 7.53% on $10 million of variable rate notes) and have a weighted-average The annual maturities reflect the terms of existing loan agreements except where refi- maturity of 3.2 years. At December 31, 2000, an additional $29.7 million of the notes are nancing commitments from outside lenders have been obtained. In these instances, maturities issuable under the related registration statement. are determined based on the terms of the refinancing commitments. In December 2000, the Company obtained a credit facility with a group of lenders that At December 31, 2000, the Company had interest rate cap agreements which effectively provides for unsecured borrowings of up to $375 million. This credit facility replaced a limit the average interest rate on $36 million of variable rate LIBOR debt maturing in 2002 previous credit facility obtained in 1998. Advances under the facility bear interest at a variable to 9.1% and the average rate on $5 million of variable rate LIBOR debt maturing in 2010 to rate of LIBOR plus 1% (7.6% at December 31, 2000). The facility is available to December 8.7%. Interest rate exchange agreements did not have a material effect on the weighted-average 2003, subject to a one-year renewal option. Payment of borrowings under the credit facility is effective interest rates on debt at December 31, 2000 and 1999 or interest expense for 2000, guaranteed by certain of the majority financial interest ventures. 1999 and 1998. The fair values of interest rate exchange agreements were insignificant at Other loans include $114.2 million of 8.5% unsecured notes due in 2003, $200 million December 31, 2000 and 1999. of 8% Senior Debt due in 2009, various property acquisition loans and certain other borrow- Total interest costs were $256.4 million in 2000, $253.6 million in 1999, and ings. These loans include aggregate unsecured borrowings of $460.8 million and $220.8 million in 1998, of which $19.7 million, $19.7 million and $19.5 million were $472.1 million at December 31, 2000 and 1999, respectively, and at December 31, 2000, bear capitalized, respectively. interest at a weighted-average effective rate of 8.0%.

34 In 2000, the Company recognized net extraordinary gains of $2.2 million related to Company on the debentures. Compliance by the Company with its undertakings, taken the substantial modification of terms of certain property debt and to the extinguishment of together, would have the effect of providing a full, irrevocable and unconditional guarantee of other debt prior to scheduled maturity. The Company recognized net extraordinary losses of the trust’s obligations under the preferred securities. $5.9 million in 1999 and net extraordinary gains of $3.7 million (before deferred income Distributions on the preferred securities are payable from interest payments received on the tax benefits of $.7 million) in 1998 related to the extinguishment of debt prior to scheduled debentures and are due quarterly at an annual rate of 9.25% of the liquidation amount, subject maturity. The sources of funds used to pay the debt and fund the prepayment penalties, where to deferral for up to five years under certain conditions. Distributions payable are included in applicable, were refinancings of properties and the 8% Senior Debt issued in 1999. operating expenses. Redemptions of the preferred securities are payable at the liquidation The estimated fair value of debt is determined based on quoted market prices for publicly- amount from redemption payments received on the debentures. traded debt and on the discounted estimated future cash payments to be made for other debt. The Company may redeem the debentures at par at any time after November 27, 2000, The discount rates used approximate current market rates for loans or groups of loans with but redemptions at or prior to maturity are payable only from the proceeds of issuance of similar maturities and credit quality. The estimated future payments include scheduled prin- capital stock of the Company or of securities substantially comparable in economic effect to cipal and interest payments, and lenders’ participations in operating results, where applicable. the preferred securities. During 1998, the Company repurchased 21,400 of the preferred secu- The carrying amount and estimated fair value of the Company’s debt at December 31, rities for approximately $.5 million. 2000 and 1999 are summarized as follows (in thousands): (8) Segment information 2000 1999 Carrying Estimated Carrying Estimated The Company has five reportable segments: retail centers, office and other properties, land Amount Fair Value Amount Fair Value sales operations, development and corporate. In 2000, the Company reclassified segment oper- Fixed rate debt $2,425,583 $2,436,623 $2,620,668 $2,511,649 ating results and assets of the retail components of its five mixed-use projects to retail centers. Variable rate debt 620,186 620,186 523,781 523,781 In connection therewith, the office, mixed-use and other properties segment was renamed Total $3,045,769 $3,056,809 $3,144,449 $3,035,430 office and other properties. Segment information for 1999 and 1998 has been restated to reflect this change. In addition to the retail components of mixed-use projects, the retail Fair value estimates are made at a specific point in time, are subjective in nature and involve centers segment also includes the operation and management of other retail centers, including uncertainties and matters of significant judgment. Settlement of the Company’s debt regional shopping centers, downtown specialty marketplaces and village centers. The office obligations at fair value may not be possible and may not be a prudent management decision. and other properties segment includes the operation and management of office and industrial properties and the nonretail components of the mixed-use projects. The land sales operations (7) Company-obligated mandatorily redeemable preferred securities segment includes the development and sale of land, primarily in large-scale, long-term The redeemable preferred securities consist of 5,500,000 Cumulative Quarterly Income community development projects in Columbia and Summerlin. The development segment Preferred Securities (preferred securities), with a liquidation amount of $25 per security, which includes the evaluation of all potential new projects (including expansions of existing proper- were issued in November 1995 by a statutory business trust. The trust used the proceeds of ties) and acquisition opportunities and the management of them through the development or the preferred securities and other assets to purchase at par $141.8 million of junior subordi- acquisition process. The corporate segment is responsible for cash and investment manage- nated debentures (debentures) of the Company due in November 2025, which are the sole ment and certain other general and support functions. The Company’s reportable segments assets of the trust. offer different products or services and are managed separately because each requires different Payments to be made by the trust on the preferred securities are dependent on payments operating strategies or management expertise. that the Company has undertaken to make, particularly the payments to be made by the

35 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment operating results are measured and assessed based on a performance measure accounting principles generally accepted in the United States of America. It is not necessarily referred to as Funds from Operations (FFO). The Company defines FFO as net earnings indicative of cash available to fund cash needs and should not be considered as an alterna- (computed in accordance with accounting principles generally accepted in the United States tive to cash flows as a measure of liquidity. of America), excluding cumulative effects of changes in accounting principles, extraordinary The accounting policies of the segments are the same as those of the Company described items, gains (losses) on operating properties, depreciation and amortization and deferred in note 1, except that: income taxes. Additionally, equity in earnings of unconsolidated real estate ventures and real estate ventures in which the Company holds substantially all (at least 98%) of the finan- minority interests are adjusted to reflect FFO on the same basis. The Company revised its cial interest but does not own a majority voting interest (majority financial interest ventures) definition of FFO in 2000 to include deductions for other provisions and losses and, accord- are accounted for on a consolidated basis rather than using the equity method; ingly, FFO for prior periods has been presented in conformity with the revised definition. real estate ventures in which the Company has joint interest and control and certain other The exclusion of deferred income taxes results in the Company’s definition differing from minority interest ventures (proportionate share ventures) are accounted for using the propor- the definition adopted by the National Association of Real Estate Investment Trusts. Also, tionate share method rather than the equity method; the Company’s definition of FFO may differ from those used by other REITs. FFO is the Company’s share of FFO of other unconsolidated minority interest ventures (other not a measure of operating results or cash flows from operating activities as measured by ventures) is included in revenues. Operating results for the segments are summarized as follows (in thousands):

Office and Land Sales Retail Centers Other Properties Operations Development Corporate Total 2000 Revenues $631,014 $216,756 $215,459 $ — $ 948 $1,064,177 Operating expenses* 283,858 81,076 148,679 7,701 17,130 538,444 Interest expense 184,254 83,687 2,941 — 2,273 273,155 FFO $162,902 $ 51,993 $ 63,839 $(7,701) $(18,455) $ 252,578 1999 Revenues $626,596 $205,896 $197,159 $ — $ 1,676 $1,031,327 Operating expenses* 286,852 77,936 146,097 3,707 28,234 542,826 Interest expense 184,276 83,164 3,151 — (5,522) 265,069 FFO $ 155,468 $ 44,796 $ 47,911 $ (3,707) $ (21,036) $ 223,432 1998 Revenues $586,410 $162,938 $198,786 $ — $ 2,789 $ 950,923 Operating expenses* 277,903 67,367 150,749 7,383 22,841 526,243 Interest expense 165,786 64,871 4,201 — (8,405) 226,453 FFO $ 142,721 $ 30,700 $ 43,836 $ (7,383) $ (11,647) $ 198,227

*Operating expenses include provisions for bad debts, current income taxes and other provisions and losses, net and exclude depreciation and amortization.

36 Reconciliations of the total revenues and expenses reported above to the related effect of change in accounting principle in the consolidated financial statements are amounts in the consolidated financial statements and of FFO reported above to earnings summarized as follows (in thousands): before gains (losses) on operating properties, net, extraordinary items and cumulative 2000 1999 1998 Revenues: Total reported above $ 1,064,177 $ 1,031,327 $ 950,923 Revenues of majority financial interest ventures, excluding interest on advances to the Company (312,056) (278,437) (248,801) Share of revenues of proportionate share ventures (110,126) (108,474) (80,067) Company’s share of Funds from Operations of other ventures (8,531) (8,538) (9,743) Other 274 — 1,489 Total in consolidated financial statements $ 633,738 $ 635,878 $ 613,801

Operating expenses, exclusive of depreciation and amortization: Total reported above $ 538,444 $ 542,826 $ 526,243 Operating expenses of majority financial interest ventures (159,691) (160,497) (142,550) Share of operating expenses of proportionate share ventures (39,788) (43,038) (31,216) Provision for bad debts (6,683) (7,972) (7,042) Other provisions and losses, net (131) (8,607) (5,065) Current income taxes (254) (214) 91 Participation by others in Company’s share of earnings of majority financial interest ventures (35,322) (28,796) (24,152) Other (2,535) (1,847) (3,149) Total in consolidated financial statements $ 294,040 $ 291,855 $ 313,160

Interest expense: Total reported above $ 273,155 $ 265,069 $ 226,453 Interest expense of majority financial interest ventures, excluding interest on borrowings from the Company (10,470) (7,504) (11,884) Share of interest expense of proportionate share ventures (25,941) (23,699) (13,226) Total in consolidated financial statements $ 236,744 $ 233,866 $ 201,343

Operating results: FFO reported above $ 252,578 $ 223,432 $ 198,227 Depreciation and amortization (90,307) (94,532) (77,660) Depreciation and amortization, gains on operating properties, net and deferred income taxes of unconsolidated real estate ventures, net (27,136) (28,897) (9,282) Earnings before gains (losses) on operating properties, net, extraordinary items and cumulative effect of change in accounting principle in consolidated financial statements $ 135,135 $ 100,003 $ 111,285

37 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The assets by segment at December 31, 2000, 1999 and 1998 are summarized as follows Approximately $149.2 million, $171.5 million and $196.7 million of the additions (in thousands): in 2000, 1999 and 1998, respectively, relate to property owned by unconsolidated real 2000 1999 1998 estate ventures. Retail centers $3,372,114 $3,286,590 $3,887,943 Office and other properties 1,086,187 1,214,125 1,214,718 (9) Income taxes Land sales operations 374,668 436,863 448,444 At December 31, 2000, the income tax bases of the Company’s assets and liabilities were Development 72,673 33,371 5,593 approximately $3.6 billion and $3.8 billion, respectively. The net operating loss carryforward Corporate 119,609 113,311 77,419 at December 31, 2000 for Federal income tax purposes aggregated approximately Total $5,025,251 $5,084,260 $5,634,117 $254 million and will expire from 2005 to 2011. In connection with its election to be taxed as a REIT, the Company has also elected to be Total segment assets exceeds total assets reported in the financial statements primarily subject to the “built-in gain” rules. Under these rules, taxes will be payable at the time and to because of the consolidation of the majority financial interest ventures and the inclusion of the the extent that the net unrealized gains on the Company’s assets at the date of conversion to Company’s share of the assets of the proportionate share ventures. REIT status are recognized in taxable dispositions of such assets in the ten-year period Additions to long-lived assets of the segments are summarized as follows (in thousands): following conversion. Such net unrealized gains were approximately $2.5 billion. Management 2000 1999 1998 believes that the Company will not be required to make significant payments of taxes on built- Retail centers: in gains throughout the ten-year period due to the availability of its net operating loss carry- Expansions and renovations $143,874 $172,993 $ 231,607 forward to offset built-in gains which might be recognized and the potential for the Company Improvements for tenants and other 23,893 23,682 18,576 to make nontaxable dispositions, if necessary. It may be necessary to recognize a liability for Acquisitions 13,569 — 1,042,846 such taxes in the future if management’s plans and intentions with respect to asset dispositions, 181,336 196,675 1,293,029 or the related tax laws, change. The REIT Modernization Act (“RMA”) was included in the Tax Relief Extension Act of Office and other properties: 1999 (“the Act”), which was enacted into law on December 17, 1999. RMA includes Expansions and renovations — 27,893 24,390 numerous amendments to the provisions governing the qualification and taxation of REITs, Improvements for tenants and other 15,962 17,931 10,688 and these amendments are effective January 1, 2001. One of the principal provisions Acquisitions 8,676 — 288,694 included in the Act provides for the creation of taxable REIT subsidiaries (“TRS”). TRS are 24,638 45,824 323,772 corporations that are permitted to engage in nonqualifying REIT activities. A REIT is Land sales operations: permitted to own up to 100% of the voting stock in a TRS. Previously, a REIT could not Development expenditures 95,156 73,240 82,656 own more than 10% of the voting stock of a corporation conducting nonqualifying activi- Acquisitions — — 16,993 ties. Relying on this legislation, in January 2001, the Company acquired all of the voting 95,156 73,240 99,649 stock of the majority financial interest ventures owned by the Trust. Information related to Development: the acquisition is included in note 2. The Company and these subsidiaries will make a joint Costs of new projects 81,614 71,890 112,184 election to treat the subsidiaries as TRS for Federal and certain state income tax purposes Total $382,744 $387,629 $1,828,634 beginning January 2, 2001.

38 (10) Other provisions and losses, net (12) Preferred stock In 1999, other provisions and losses, net relates primarily to the Company’s consolidation of The Company has authorized 50,000,000 shares of Preferred stock of 1¢ par value per share the management and administration of its Retail Operations and Office and Mixed-Use Oper- of which (a) 4,505,168 shares have been classified as Series A Convertible Preferred; (b) ations divisions into a single Property Operations Division during the second quarter and the 4,600,000 shares have been classified as Series B Convertible Preferred; (c) 10,000,000 shares integration of certain operating, administrative and support functions of the Hughes Division have been classified as Increasing Rate Cumulative Preferred; and (d) 37,362 shares have been into other divisions. The costs relating to these organizational changes, primarily severance and classified as 10.25% Junior Preferred, Series 1996. other benefits to terminated employees, aggregated approximately $6.6 million. Also, in The shares of Series B Convertible Preferred stock have a liquidation preference of $50 per October 1999, the Company adopted a voluntary early retirement program in which share and earn dividends at an annual rate of 6% of the liquidation preference. At the option employees who met certain criteria were eligible to participate. The Company recorded a of the holders, each share of the Series B Convertible Preferred stock is convertible into shares provision of approximately $2.5 million for costs associated with this program for employees of the Company’s common stock at a conversion rate of approximately 1.311 shares of who accepted early retirement prior to December 31, 1999. common stock for each share of Preferred stock, subject to adjustment in certain circumstances. In 1998, other provisions and losses, net relates primarily to a fourth quarter loss of In addition, beginning April 1, 2000, the shares of Preferred stock are redeemable for shares of $6.4 million on a treasury lock contract that no longer qualified for hedge accounting because common stock at the option of the Company, subject to certain conditions. There were the Company determined that the related anticipated financing transaction would not occur 4,050,000 shares of Preferred stock issued and outstanding at December 31, 2000 and 1999. under the terms and timing originally expected. Shares of the Increasing Rate Cumulative Preferred stock are issuable only to former Hughes owners or their successors pursuant to the Contingent Stock Agreement described in (11) Gains (losses) on operating properties, net note 13. These shares are issuable only in limited circumstances and no shares have been The net gains on operating properties in 2000 relate primarily to the transfer to a joint venture issued. There were no shares of the Series A Convertible Preferred stock or 10.25% Junior (in which the Company maintains a minority interest) of the Company’s ownership interest Preferred stock, Series 1996, outstanding at December 31, 2000 and 1999. in a retail center in the third quarter ($37.1 million). The Company deferred recognition of approximately $25 million of gain on this transaction and approximately $15 million in (13) Common stock connection with an unrelated transaction due to its continuing involvement with the ventures. At December 31, 2000, shares of authorized and unissued common stock are reserved as This gain was partially offset by an impairment provision recorded by the Company on its follows: (a) 13,756,658 shares for issuance under the Contingent Stock Agreement discussed investment in a retail center that the Company and the other venturer intend to dispose below; (b) 13,570,446 shares for issuance under the Company’s stock option and stock bonus ($6.9 million). plans; (c) 5,309,955 shares for conversion of the Series B Convertible Preferred stock; and (d) The net gains on operating properties in 1999 relate primarily to a gain on a retail center 1,608,000 shares for conversion of convertible property debt. sold in the fourth quarter ($61.9 million) and a gain on another property sold in the second In connection with the acquisition of The Hughes Corporation (Hughes) in 1996, the quarter ($6.4 million), partially offset by impairment losses on two retail centers ($28.1 Company entered into a Contingent Stock Agreement (“Agreement”) for the benefit of the million). During the fourth quarter, the Company changed its plans and intentions as to the former Hughes owners or their successors (the beneficiaries). Under terms of the Agreement, manner in which these two centers would be operated in the future and revised estimates of additional shares of common stock (or in certain circumstances, Increasing Rate Cumulative the most likely holding periods. As a result, the Company evaluated the recoverability of the Preferred stock) are issuable to the beneficiaries based on the appraised values of four defined carrying amounts of the centers, determined that the carrying amounts of the centers were not groups of acquired assets at specified “termination dates” from 2000 to 2009 and/or cash flows recoverable from future cash flows and recognized impairment losses. generated from the development and/or sale of those assets prior to the termination dates (the The net losses on operating properties in 1998 relate primarily to a loss on disposal of a “earnout periods”). The distributions of additional shares, based on cash flows, are payable retail center.

39 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

semiannually as of June 30 and December 31. At December 31, 2000, approximately 817,000 In 1999, the Board of Directors authorized the repurchase of common shares for up to shares ($20.7 million) were issuable to the beneficiaries, representing their share of cash flows $250 million, subject to certain pricing restrictions. During 2000 and 1999, the Company and the appraised value of certain parcels of land with a December 31, 2000 termination date. repurchased approximately 2.8 million and 1.6 million shares, respectively, for $66 million and The Agreement is, in substance, an arrangement under which the Company and the bene- $35 million, respectively. The average per share repurchase price was $23.57 in 2000 and ficiaries will share in cash flows from development and/or sale of the defined assets during their $21.88 in 1999. respective earnout periods and the Company will issue additional shares of common stock to Under the Company’s stock option plans, options to purchase shares of common stock and the beneficiaries based on the value, if any, of the defined asset groups at the termination dates. stock appreciation rights may be awarded to directors, officers and employees of the Company Substantially all of the remaining assets in the four defined asset groups were owned by and certain affiliates. Stock options are generally granted with an exercise price equal to the subsidiaries in which the Company sold a majority voting interest to The Rouse Company market price of the common stock on the date of grant, typically vest over a three- to five-year Incentive Compensation Statutory Trust on December 31, 1997. However, the Company period, subject to certain conditions, and have a maximum term of ten years. The Company retained full responsibility for its obligations under the Agreement and, accordingly, it has not granted any stock appreciation rights. Changes in options outstanding under the plans accounts for the beneficiaries’ share of earnings from the assets as a reduction of its equity in are summarized as follows: the earnings of the related ventures. The Company will account for any distributions to the 2000 1999 1998 beneficiaries as of the termination dates as an additional investment in the related assets (i.e., Weighted- Weighted- Weighted- average average average contingent consideration). At the time of acquisition of Hughes, the Company reserved Exercise Exercise Exercise 20,000,000 shares of common stock for possible issuance under the Agreement. The number Shares Price Shares Price Shares Price of shares reserved was determined based on estimates in accordance with the provisions of Balance at beginning the Agreement. The actual number of shares issuable will be determined only from events of year 6,263,228 $25.54 5,434,214 $25.91 4,670,138 $24.90 occurring over the term of the Agreement and could differ significantly from the number Options granted 2,576,499 22.00 1,125,641 22.90 1,210,402 29.06 of shares reserved. Options exercised (758,904) 20.67 (128,232) 16.89 (263,076) 19.48 Options expired or cancelled (238,942) 27.76 (168,395) 26.38 (183,250) 30.36 Balance at end of year 7,841,881 $24.78 6,263,228 $25.54 5,434,214 $25.91

40 Information about stock options outstanding at December 31, 2000 is summarized If the Company had applied a fair value-based method to recognize compensation cost for as follows: stock options, net earnings and earnings per share of common stock would have been adjusted Options Outstanding Options Exercisable as indicated below (in thousands): Weighted- Weighted- Weighted- 2000 1999 1998 average average average Range of Remaining Exercise Exercise Net earnings: Exercise Prices Shares Life (Years) Price Shares Price As reported $170,485 $135,297 $104,902 $13.50 to $19.88 1,134,813 3.9 $19.25 1,034,813 $19.18 Pro forma 163,108 129,763 99,653 $20.94 to $31.38 6,369,870 7.6 25.36 1,864,930 28.30 Earnings per share of common stock: $31.50 to $32.88 337,198 7.1 32.71 35,164 32.22 Basic: 7,841,881 7.0 $24.78 2,934,907 $25.18 As reported 2.27 1.71 1.36 Pro forma 2.17 1.63 1.28 At December 31, 1999 and 1998, options to purchase 2,982,732 and 1,930,918 shares, Diluted: respectively, were exercisable at per share weighted-average prices of $23.77 and $21.56, As reported 2.24 1.69 1.34 respectively. Pro forma 2.14 1.62 1.27 The per share weighted-average estimated fair values of options granted during 2000, 1999 and 1998 were $3.46, $3.15, and $3.17, respectively. These fair values were estimated on Under the Company’s stock bonus plans, shares of common stock may be awarded to the dates of each grant using the Black-Scholes option-pricing model with the following officers and employees of the Company and certain affiliates. Shares awarded under the plans assumptions: are typically subject to forfeiture restrictions which lapse at defined annual rates. Awards 2000 1999 1998 granted in 2000 and 1998 aggregated 89,700 and 164,850 shares, respectively, with a Risk-free interest rate 6.6% 5.4% 4.6% weighted-average market value per share of $21.62 and $27.54, respectively. No awards were Dividend yield 5.5 5.5 6.0 granted in 1999. In connection with certain stock bonus plan awards, the Company makes Volatility factor 20.0 20.0 21.8 loans to the recipients for the payment of related income taxes, which loans are forgiven in Expected life in years 6.6 6.7 6.6 installments subject to the recipients’ continued employment. The total loans outstanding at December 31, 2000, 1999 and 1998 were $1.3 million, $2.5 million and $4.0 million, The option prices were greater than or equal to the market prices at the date of grant for respectively. The Company recognizes amortization of the fair value of the stock awarded, any all of the options granted in 2000, 1999 and 1998 and, accordingly, no compensation cost has forgiven loan installments and certain related costs as compensation costs on a straight-line been recognized for stock options granted to directors, officers and employees of the Company. basis over the terms of the awards. Such costs amounted to $3.9 million in 2000, $5.1 million Expense recognized for stock options granted to employees of certain nonconsolidated in 1999 and $5.6 million in 1998. affiliates of the Company was not material.

41 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) Earnings per share Information relating to the calculations of earnings per share of common stock is summarized as follows (in thousands):

2000 1999 1998 Basic Diluted Basic Diluted Basic Diluted Earnings before extraordinary items and cumulative effect of change in accounting principle $168,285 $168,285 $141,176 $141,176 $105,176 $105,176 Dividends on unvested common stock awards and other (437) (321) (466) (909) (622) (427) Dividends on Preferred stock (12,150) (12,150) (12,150) (12,150) (12,150) (12,150) Interest on convertible property debt — 3,076 — — — — Interest on convertible subordinated debentures — — — 3,222 — — Adjusted earnings before extraordinary items and cumulative effect of change in accounting principle used in EPS computation $155,698 $158,890 $128,560 $131,339 $ 92,404 $ 92,599

Weighted-average shares outstanding 69,475 69,475 71,705 71,705 67,874 67,874 Dilutive securities: Options, warrants and unvested common stock awards — 659 — 563 — 985 Convertible property debt — 1,930 — — — — Convertible subordinated debentures — — — 1,931 — — Adjusted weighted-average shares used in EPS computation 69,475 72,064 71,705 74,199 67,874 68,859

Effects of potentially dilutive securities are presented only in periods in which they are dilutive.

42 (15) Leases Minimum rents to be received from tenants under operating leases in effect at The Company, as lessee, has entered into operating leases expiring at various dates through December 31, 2000 are summarized as follows (in thousands): 2076. Rents under such leases aggregated $10.8 million in 2000, $10.5 million in 1999 and $7.1 million in 1998, including contingent rents, based on the operating performance of the 2001 $ 348,802 related properties, of $3.8 million, $4.5 million and $1.6 million, respectively. In addition, real 2002 308,583 estate taxes, insurance and maintenance expenses are obligations of the Company. Minimum 2003 266,025 rent payments due under operating leases in effect at December 31, 2000 are summarized as 2004 229,268 follows (in thousands): 2005 192,097 Subsequent to 2005 560,902 2001 $ 6,823 Total $1,905,677 2002 6,854 2003 6,835 Rents under finance leases aggregated $7.8 million in 2000, $8.5 million in 1999 and 2004 6,466 $8.7 million in 1998. The net investment in finance leases at December 31, 2000 and 1999 2005 6,011 is summarized as follows (in thousands): Subsequent to 2005 241,088 2000 1999 Total $274,077 Total minimum rent payments to be received over lease terms $120,442 $128,219 Space in the Company’s operating properties is leased to tenants primarily under operating Estimated residual values of leased properties 788 788 leases. In addition to minimum rents, the majority of the retail center leases provide for Unearned income (50,238) (56,112) percentage rents when the tenants’ sales volumes exceed stated amounts, and the majority of Net investment in finance leases $ 70,992 $ 72,895 the retail center and office leases provide for other rents which reimburse the Company for certain of its operating expenses. Rents from tenants are summarized as follows (in thousands): Minimum rent payments to be received from tenants under finance leases in effect at December 31, 2000 are summarized as follows (in thousands): 2000 1999 1998 Minimum rents $403,088 $398,520 $349,119 2001 $ 8,655 Percentage rents 10,895 10,970 11,683 2002 8,719 Other rents 183,903 186,240 177,718 2003 8,719 Total $597,886 $595,730 $538,520 2004 8,916 2005 8,955 Subsequent to 2005 76,478 Total $120,442

43 THE ROUSE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(16) Other commitments and contingencies (17) New financial accounting standards not yet adopted Commitments for the construction and development of properties in the ordinary course of In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Finan- business and other commitments not set forth elsewhere amount to approximately $80 million cial Accounting Standards No. 137 (Statement 137), an amendment to Statement of Finan- at December 31, 2000. cial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging At December 31, 2000, subsidiaries of the Company have contingent liabilities of Activities” (Statement 133), issued in June 1998. Statement 137 deferred the adoption date of approximately $17.5 million with respect to future minimum rents under long-term lease obli- Statement 133 for the Company to no later than January 1, 2001. In June 2000, the FASB gations of certain unconsolidated real estate ventures, approximately $11.1 million with issued Statement of Financial Accounting Standards No. 138, which provides additional guid- respect to bank letters of credit issued to secure their obligations under certain agreements and ance with respect to and amends Statement 133. The Company’s use of derivative instruments approximately $29 million with respect to mortgage obligations of certain unconsolidated real has consisted primarily of interest rate cap and swap agreements related to specific debt financ- estate ventures. ings. The Company will adopt Statement 133, as amended, effective January 1, 2001. Deriv- At December 31, 2000, the Company had a shelf registration statement for the future sale ative instruments held by the Company at December 31, 2000 consisted solely of interest rate of up to an aggregate of $1.9 billion (based on the public offering price) of common stock, cap and swap agreements used to hedge interest rate risk associated with specific variable rate Preferred stock and debt securities. Securities may be issued pursuant to this registration loans. The cap agreements have been designated as hedges of specific loans, and the fair values statement in amounts and on terms to be determined at the time of offering. of derivative instruments were not significant at December 31, 2000. Adoption of Statement The Company and certain of its subsidiaries are defendants in various litigation matters 133, as amended, will result in a cumulative effect at January 1, 2001 of a change in arising in the ordinary course of business, some of which involve claims for damages that are accounting for derivative instruments and hedging activities of approximately $.6 million substantial in amount. Some of these litigation matters are covered by insurance. In the ($.01 per share basic and diluted). opinion of management, adequate provision has been made for losses with respect to litigation matters, where appropriate, and the ultimate resolution of such litigation matters is not likely to have a material effect on the consolidated financial position of the Company. Due to the Company’s fluctuating net earnings, it is not possible to predict whether the resolution of these matters is likely to have a material effect on the Company’s net earnings and it is, therefore, possible that the resolution of these matters could have such an effect in any future quarter or year.

44 THE ROUSE COMPANY AND SUBSIDIARIES FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA

Years ended December 31, (in thousands, except per share data) 2000 1999 1998 1997 1996 Operating results data: Revenues from continuing operations $ 633,738 $ 635,878 $ 613,801 $ 916,771 $ 821,036 Earnings from continuing operations 168,285 141,176 105,176 189,892 17,886 Basic earnings from continuing operations applicable to common shareholders per share of common stock 2.24 1.79 1.36 2.70 .13 Diluted earnings from continuing operations applicable to common shareholders per share of common stock 2.21 1.77 1.34 2.59 .12 Balance sheet data: Total assets 4,175,538 4,233,101 5,033,331 3,483,650 3,545,559 Debt and capital leases 3,058,038 3,155,312 3,943,902 2,586,260 2,801,885 Shareholders’ equity 630,468 638,580 628,926 465,515 177,149 Shareholders’ equity per share of common stock (1) 8.61 8.40 8.11 6.45 2.65 Other selected data: Funds from Operations (2) 252,578 223,432 198,227 178,336 147,134 Net cash provided (used) by: Operating activities 252,916 192,529 259,298 182,989 166,765 Investing activities 8,049 33,388 (1,018,273) (326,051) (182,157) Financing activities (273,713) (237,389) 720,611 180,878 (35,764) Dividends per share of common stock 1.32 1.20 1.12 1.00 .88 Dividends per share of convertible Preferred stock 3.00 3.00 3.00 2.65 2.44 Market price per share of common stock at year end 25.50 21.25 27.50 32.75 31.75 Market price per share of convertible Preferred stock at year end 36.63 32.63 43.38 50.50 — Weighted-average common shares outstanding (basic) 69,475 71,705 67,874 66,201 54,913 Weighted-average common shares outstanding (diluted) 72,064 74,199 68,859 76,005 55,311

Notes: (1) For 2000, 1999, 1998 and 1997, shareholders’ equity per share of common stock assumes conversion of the Series B Convertible Preferred stock issued in 1997. (2) Funds from Operations (FFO) is not a measure of operating results or cash flows from operating activities as defined by accounting principles generally accepted in the United States of America. Additionally, FFO is not necessarily indicative of cash available to fund cash needs, including the payment of dividends, and should not be considered as an alternative to cash flows as a measure of liquidity. See the “Funds from Operations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 53 for further discussion of FFO.

45 THE ROUSE COMPANY AND SUBSIDIARIES

Interim Financial Information (Unaudited) Interim consolidated results of operations are summarized as follows (in thousands, except per share data):

Quarter ended December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2000 2000 2000 2000 1999 1999 1999 1999 Revenues $166,698 $ 163,285 $ 150,719 $ 153,036 $161,952 $156,496 $157,590 $ 159,840 Operating income 30,715 32,628 35,733 36,059 22,932 26,635 23,104 27,332 Earnings before extraordinary items 32,228 70,180 34,509 31,368 56,631 26,657 29,962 27,926 Net earnings 31,230 74,100 33,787 31,368 51,665 26,654 29,052 27,926

Earnings per common share Basic: Earnings before extraordinary items $ .42 $ .96 $ .45 $ .40 $ .75 $ .33 $ .37 $ .34 Extraordinary gains (losses) (.01) .06 (.01) — (.07) — (.01) — Total $ .41 $ 1.02 $ .44 $ .40 $ .68 $ .33 $ .36 $ .34 Diluted: Earnings before extraordinary items $ .42 $ .91 $ .45 $ .40 $ .73 $ .32 $ .37 $ .34 Extraordinary gains (losses) (.01) .05 (.01) — (.07) — (.01) — Total $ .41 $ .96 $ .44 $ .40 $ .66 $ .32 $ .36 $ .34

Note—Extraordinary gains (losses) relate to early extinguishments and substantial modification of terms of debt. Net earnings for the third quarter of 2000 includes a gain on the transfer of substantially all of the Company’s interest in a retail center of $37,082,000 ($.53 per share basic, $.51 per share diluted). Net earnings for the fourth quarter of 1999 includes a gain on sale of a retail center of $61,970,000 ($.86 per share basic, $.84 per share diluted) and provisions for impairment losses on two retail centers of $28,142,000 ($.39 per share basic, $.38 per share diluted).

Price of Common Stock and Dividends The Company’s common stock is traded on the Stock Exchange. The prices and dividends per share were as follows:

Quarter ended December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2000 2000 2000 2000 1999 1999 1999 1999 High $26.56 $27.13 $25.69 $22.94 $23.25 $25.19 $27.06 $27.44 Low 24.19 23.63 20.88 20.31 19.88 22.56 21.25 21.94 Dividends .33 .33 .33 .33 .30 .30 .30 .30

Number of Holders of Common Stock The number of holders of record of the Company’s common stock as of February 22, 2001 was 2,409.

46 THE ROUSE COMPANY AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General from these and other transactions to repurchase approximately $66 million (2.8 million shares) Through its subsidiaries and affiliates, the Company acquires, develops and manages a diver- of its common stock. Since 1999, the Company has repurchased approximately $101 million sified portfolio of retail centers, office and industrial buildings and mixed-use and other prop- (4.4 million shares) of its common stock. In January 2001, the Company ceased actively erties located throughout the United States and develops and sells land for residential, marketing substantially all of the remaining buildings in the Baltimore-Washington corridor commercial and other uses, primarily in Columbia, Maryland and Summerlin, Nevada. as a result of the Company pursuing other strategies to obtain additional liquidity. However, A primary business strategy of the Company is to own and operate premier operating prop- the Company may dispose of these and other properties as opportunities arise. Disposition erties—shopping centers, major mixed-use projects, and geographically concentrated office decisions and related transactions may cause the Company to recognize gains or losses that and industrial buildings (principally complementing community development activities) in could have material effects on reported net earnings in future quarters or fiscal years, and, major markets across the United States. In order to achieve this objective, management is taken together with the use of sales proceeds, may have a material effect on the overall consol- continually evaluating opportunities to acquire properties and evaluating the outlook for prop- idated financial position of the Company. erties in its portfolio. This includes considering opportunities to expand and/or renovate the The Company believes that space in high quality, dominant retail centers in densely popu- properties and assessing whether particular properties are meeting or have the potential to meet lated, affluent areas will continue to be in demand by retailers, and that these retail centers the Company’s investment criteria. The Company plans to continue making substantial invest- are better able to withstand difficult conditions in the real estate and retail industries. In ments to expand and/or renovate leasable mall space and/or add new department stores and/or 2000, 1999 and 1998, the Company and its affiliates completed several acquisitions and other anchor tenants to its existing properties to meet its objective. Also, the Company is sale/transfer/exchange (collectively, “disposition”) transactions designed to upgrade the overall continually evaluating opportunities to acquire or develop operating properties it believes have quality of the property portfolio. This acquisition and disposition activity is summarized prospects consistent with its objectives. The Company has disposed of interests in more than as follows: 40 projects since 1993 and intends to continue to dispose of properties that are not meeting and/or are not considered to have the potential to continue to meet its investment criteria. Acquisitions The Company and its affiliates have significant experience in developing and managing Retail Centers Date Acquired large scale land development projects, including the communities of Columbia, Maryland and Park Meadows (1) August 1998 Summerlin, Nevada. The Company’s objective is to deploy funds provided by land sales oper- Fashion Place (1) October 1998 ations to support other activities. Also, the Company is continually evaluating opportunities Fashion Show (3) October 1998 for new land development projects. (1) October 1998 In September 1999, the Company announced that it would pursue developing a strategy Governor’s Square (3) November 1998 (1) to sell interests in certain office and industrial properties and land parcels, and use the proceeds Bridgewater Commons December 1998 (4) to repay debt, fund development costs and repurchase (subject to certain price restrictions) up August 2000 to $250 million of the Company’s common stock. In January 2000, the Company completed Office and Other disposition and transaction structuring plans and began marketing interests in the identified Inglewood Business Center (2) December 1998 properties. In 2000, the Company sold several of the identified buildings in the Baltimore- Hunt Valley Business Center (2) December 1998 Washington corridor and contributed its ownership interests in industrial properties in two Las Rutherford Business Center (2) December 1998 Vegas business parks to a real estate venture for which the Company received a cash distribu- Senate Plaza (2) December 1998 tion and a minority interest in the venture. The Company used a portion of the cash proceeds

47 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Dispositions In 2000, 1999 and 1998, the Company and its affiliates/partners completed a number

Retail Centers Disposition Date of development projects to enhance the operating property portfolio. These development Eastfield Mall April 1998 projects are summarized as follows: June 1998 Development projects (5) College Square June 1998 Retail Centers Date Opened Marshall Town Center (5) June 1998 Summerlin Village Centers February 1998 Muscatine Mall (5) June 1998 Perimeter Mall Expansion February 1998 North Grand (5) June 1998 Expansion March 1998 Westland Mall (5) June 1998 Oviedo Marketplace March 1998 Greengate Mall August 1998 Expansion July 1998 St. Louis Union Station September 1998 White Marsh Expansion September 1998 Northwest Mall (5) December 1998 Echelon Mall Expansion October 1998 October 1999 Mall St. Matthews Expansion October 1998 North Star (6) July 2000 The Mall in Columbia Expansion—Phase I November 1998 Midtown Square October 2000 Owings Mills Expansion November 1998 The Grand Avenue November 2000 Plymouth Meeting Expansion December 1998 Columbia Village Center Redevelopment Various 1998 Office and Other Expansion March 1999 Columbia Inn March 1998 The Mall in Columbia Expansion—Phase II September 1999 Cross Keys Inn March 1998 Exton Square Expansion—Phase I November 1999 Howard Hughes Center (1 building) March 1998 Expansion—Phase I November 1999 Gateway Commerce Center (2 buildings) June 1998 Moorestown Mall Expansion—Phase II March 2000 Lucky’s Center June 1999 Pioneer Place Expansion March 2000 Hunt Valley Business Center (1 building) June 2000 Exton Square Expansion—Phase II May 2000 Midtown Office October 2000 Perimeter Mall Expansion July 2000 Owen Brown I & II November 2000 Oviedo Marketplace Expansion October 2000 Hughes Airport Center (34 buildings) (6) December 2000 (6) Hughes Cheyenne Center (3 buildings) December 2000 Office and Other Hunt Valley Business Center (2 buildings) December 2000 Hughes Airport Center (2 buildings) February 1998 Notes: Cinema March 1998 (1) Properties were contributed to a joint venture in which the Company retained a 35% ownership interest in Summerlin Commercial (2 buildings) March 1998 February 1999. (2) Properties are primarily office and industrial buildings (64 in total) in the Baltimore-Washington metropolitan Hughes Center (3 buildings) May 1998 area which were acquired from an entity in which the Company held a 5% ownership interest. Park Square, Columbia Office January 1999 (3) The Company purchased partners’ ownership interests. Hughes Airport Center (1 building) May 1999 (4) The Company acquired a 65% interest in August 2000, increasing its interest to 85%. Summerlin Commercial (3 buildings) September 1999 (5) The Company held a 5% ownership interest in these properties. (6) The Company contributed its interests to entities in which it retained minority interests. Hughes Center (1 building) October 1999

48 Funds from Operations (“FFO”), which is defined and discussed below, increased 13% in followed by the Company for internal reporting to management. These policies are the same each of 2000 and 1999, including increases of 5% and 9%, respectively, from retail centers, as those followed for external reporting except that: 16% and 46%, respectively, from office and other properties and 33% and 9%, respectively, real estate ventures in which the Company holds substantially all (at least 98%) of the from land sales operations. These results are attributable to several factors, including: financial interest but does not own a majority voting interest (majority financial interest the acquisition, disposition and development activities referred to above; ventures) are accounted for on a consolidated basis rather than using the equity method; high occupancy levels in retail and office properties; real estate ventures in which the Company has joint interest and control and certain other higher rents on re-leased space; real estate ventures (proportionate share ventures) are accounted for using the proportionate strong demand for land in Columbia and Summerlin; share method rather than the equity method; and corporate cost reduction measures; the Company’s share of FFO of other unconsolidated real estate ventures (other ventures) is refinancings of project-related debt at lower interest rates; and included in revenues. repayments of certain project-related and corporate debt. These differences affect only the reported revenues and operating and interest expenses of Management believes the outlook is for continued growth in FFO in 2001. The prospects the segments, and have no effect on the reported net earnings or FFO of the Company. for retail center growth remain positive as the Company should benefit from properties Revenues and operating and interest expenses reported for the segments are reconciled to the expanded in 2000 and 1999, and continued high occupancy levels in existing projects. The related amounts reported in the consolidated financial statements in note 8. Company expects results from the office and other properties segment to decline as a result of dispositions of interests in properties completed in 2000. Results from land sales should Operating Properties: The Company reports the results of its operating properties in two remain strong in 2001, assuming continued favorable market conditions in Columbia segments: retail centers and office and other properties. The Company’s tenant leases provide and Summerlin. the foundation for the performance of its operating properties. In addition to minimum rents, the majority of retail and office tenant leases provide for other rents which reimburse the Operating results Company for certain of its operating expenses. Substantially all of the Company’s retail leases This discussion and analysis of operating results covers each of the Company’s five business also provide for additional rent (percentage rent) based on tenant sales in excess of stated levels. segments as management believes that a segment analysis provides the most effective means of As leases expire, space is re-leased, minimum rents are generally adjusted to market rates, understanding the business. Note 8 to the consolidated financial statements and the informa- expense reimbursement provisions are updated and new percentage rent levels are established tion relating to revenues and expenses in the Five Year Summary of Funds from Operations for retail leases. and Net Earnings on page 58, should be referred to when reading this discussion and analysis. Most of the Company’s operating properties are financed with long-term, fixed rate, As discussed in note 8, segment operating data are reported using the accounting policies nonrecourse debt and, accordingly, their operating results are not directly affected by changes in interest rates. Although the interest rates on this debt do not fluctuate, certain loans provide for additional payments to the lenders based on operating results of the related properties in excess of stated levels.

49 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Centers: Operating results of retail centers are summarized as follows (in millions): Office and Other Properties: Operating results of office and other properties are summa-

2000 1999 1998 rized as follows (in millions): Revenues $ 631.0 $626.6 $586.4 2000 1999 1998 Operating expenses, exclusive of Revenues $216.8 $205.9 $162.9 depreciation and amortization 283.9 286.8 277.9 Operating expenses, exclusive of Interest expense 184.2 184.3 165.8 depreciation and amortization 81.1 77.9 67.3 162.9 155.5 142.7 Interest expense 83.7 83.2 64.9 Depreciation and amortization 78.9 79.5 64.3 52.0 44.8 30.7 Operating income $ 84.0 $ 76.0 $ 78.4 Depreciation and amortization 35.9 40.3 29.9 Operating income $ 16.1 $ 4.5 $ .8 Revenues increased $4.4 million in 2000 and $40.2 million in 1999. The increase in 2000 was attributable primarily to properties opened or expanded (approximately $19.0 million) Revenues increased $10.9 million in 2000 and $43.0 million in 1999. The increase in and acquired (approximately $3.9 million) in 2000 and 1999 and higher rents on re-leased 2000 was attributable primarily to new properties opened in 2000 and 1999 (approximately space. These increases were partially offset by dispositions of interests in properties in 2000 and $3.7 million) and higher rents on re-leased space. These increases were partially offset by dispo- 1999 (approximately $27.8 million) and slightly lower average occupancy levels at comparable sitions of properties in 2000 and 1999 (approximately $1 million). The increase in 1999 was properties (94.0% in 2000 as compared to 94.3% in 1999). The increase in 1999 was attrib- attributable primarily to properties acquired in 1998 (approximately $38.0 million). utable primarily to properties opened or expanded (approximately $16.8 million) and acquired Total operating and interest expenses (exclusive of depreciation and amortization) (approximately $32.0 million) in 1999 and 1998, higher average occupancy levels in compa- increased $3.7 million in 2000 and $28.9 million in 1999. The increase in 2000 was attrib- rable properties (94.5% in 1999 as compared to 92.5% in 1998) and higher rents on re-leased utable primarily to new properties opened in 2000 and 1999 (approximately $3.1 million). space. These increases were partially offset by dispositions of interests in properties in 1999 and These increases were partially offset by dispositions of properties in 2000 and 1999 (approxi- 1998 (approximately $18.1 million). mately $.2 million). The increase in 1999 was attributable primarily to the properties acquired Total operating and interest expenses (exclusive of depreciation and amortization) in 1998 (approximately $32.0 million) and opened (approximately $5.0 million) in 1999 and decreased $3.0 million in 2000 and increased $27.4 million in 1999. The decrease in 2000 1998. These increases were partially offset by dispositions of properties in 1999 and 1998 was attributable primarily to dispositions of interests in properties in 2000 and 1999 (approx- (approximately $6.0 million) and by lower expenses due to the integration of certain oper- imately $22.0 million). These decreases were partially offset by properties opened or expanded ating, administrative and support functions of the Hughes Division into other divisions. (approximately $18.2 million) and acquired (approximately $3.0 million) in 2000 and 1999. Depreciation and amortization expense decreased $4.4 million in 2000 and increased The increase in 1999 was attributable primarily to properties opened and expanded (approxi- $10.4 million in 1999. These changes were attributable primarily to the net effect of the mately $19.8 million) and acquired (approximately $22.9 million) in 1999 and 1998. These changes in the Company’s portfolio of office and other properties referred to above, including increases were partially offset by dispositions of interests in properties in 1999 and 1998 the effect of classifying a number of properties as held for sale in 2000. (approximately $17.7 million). Depreciation and amortization expense decreased $.6 million in 2000 and increased $15.2 million in 1999. These changes were due primarily to the net effect of changes in the Company’s portfolio of retail centers referred to above.

50 Land Sales Operations: Land sales operations relate primarily to the communities of The increases in revenues and operating income in 1999 relating to Summerlin were attrib- Columbia, Maryland, and Summerlin, Nevada. Generally, revenues and operating income utable to higher levels of land sold for residential purposes. The decreases in revenues and oper- from land sales are affected by such factors as the availability to purchasers of construction and ating income relating to other Hughes land holdings in 1999 were attributable to lower levels permanent mortgage financing at acceptable interest rates, consumer and business confidence, of land sales at master planned business parks. availability of salable land for particular uses and decisions to sell, develop or retain land. The Revenues and operating income from land sales in Columbia and other land holdings Company expects to accelerate its land development and sales activities in 2001, particularly increased $19.7 million and $19.0 million, respectively, in 2000 and $18.6 million and in Summerlin, in order to meet high demand for land for residential and other uses. $8.6 million, respectively, in 1999. The increases in 2000 were attributable primarily to higher Operating results from land sales operations are summarized as follows (in millions): levels of sales of land in New Jersey and in Columbia at higher profit margins. There is no

2000 1999 1998 remaining salable land at the New Jersey site. The increases in 1999 were attributable prima- Hughes Land Operations: rily to higher levels of land sales for commercial purposes. Revenues: Summerlin $114.3 $111.3 $ 99.6 Development: Development expenses were $7.7 million in 2000, $3.7 million in 1999 and Other 17.3 21.8 53.7 $7.4 million in 1998. These costs consist primarily of preconstruction expenses and new Operating costs and expenses: business costs. Summerlin 95.5 90.5 82.5 Preconstruction expenses relate to retail and mixed-use property development opportuni- Other 15.7 19.0 42.6 ties which may not go forward to completion. Preconstruction expenses were $4.7 million in Interest expense .1 .2 .3 2000, $1.9 million in 1999 and $1.7 million in 1998. The higher level of expenses in 2000 Operating income $ 20.3 $ 23.4 $ 27.9 was primarily attributable to higher costs for new retail projects which are not likely to go Columbia and Other: forward to completion. New business costs relate primarily to the initial evaluation of poten- Revenues $ 83.8 $ 64.1 $ 45.5 tial acquisition and development projects in preconstruction. These costs were $3.0 million in Operating costs and expenses 37.5 36.6 25.7 2000, $1.8 million in 1999 and $5.7 million in 1998. The higher levels of new business costs Interest expense 2.8 3.0 3.9 in 2000 and 1998 were attributable to the Company’s focus on acquisition efforts. Operating income $ 43.5 $ 24.5 $ 15.9 Total Land Sales Operations: Corporate: Corporate revenues consist primarily of interest income earned on short-term Revenues $215.4 $197.2 $198.8 investments, including investments of unallocated proceeds from refinancings of certain prop- Operating costs and expenses 148.7 146.1 150.8 erties. Corporate interest income was $.9 million in 2000, $1.7 million in 1999 and Interest expense 2.9 3.2 4.2 $2.8 million in 1998. Operating income $ 63.8 $ 47.9 $ 43.8 Corporate expenses consist of certain interest and operating expenses, as discussed below, reduced by costs capitalized or allocated to other business segments. Interest is capitalized on The increase in operating costs and expenses in 2000 relating to Summerlin was attribut- corporate funds invested in projects under development, and interest on corporate borrowings able primarily to slightly higher levels of land sales and higher current Federal income taxes. and distributions on the Company-obligated mandatorily redeemable preferred securities which are used for other segments are allocated to those segments. Corporate interest expense

51 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

consists primarily of interest on the 8% Senior Debt issued in the second quarter of 1999, the Gains (Losses) on Operating Properties, Net: Gains (losses) on operating properties, net, convertible subordinated debentures retired in the second quarter of 1999, the unsecured including the Company’s share of those recorded by unconsolidated real estate ventures, was 8.5% notes, the medium-term notes, credit facility borrowings and unallocated proceeds from $33.2 million in 2000, $44.0 million in 1999 and $12.3 million in 1998. refinancings of certain properties, net of interest capitalized on development projects or allo- The net gains on operating properties in 2000 consisted primarily of a gain on the dispo- cated to other segments. Corporate operating expenses consist primarily of general and sition of an interest in a retail center ($37.1 million), partially offset by an impairment provi- administrative costs, distributions on the redeemable preferred securities and other provisions sion recorded by the Company on its investment in a retail center that the Company and the and losses, net. other venturer intend to dispose ($6.9 million). Corporate operating expenses were $17.1 million in 2000, $28.2 million in 1999 and The net gains on operating properties in 1999 consisted primarily of a gain on a retail $22.8 million in 1998. In the second quarter of 1999, the Company announced and initiated center sold in the fourth quarter ($61.9 million) and gains on three other properties sold the consolidation of the management and administration of its Retail Operations and Office during the year ($8.9 million), partially offset by impairment losses on two retail centers and Mixed-Use divisions into a single Property Operations Division and the integration of ($28.1 million). During the fourth quarter, the Company changed its plans and intentions as certain operating, administrative and support functions of the Hughes Division into other to the manner in which these centers would be operated in the future and revised estimates of divisions. The costs relating to these organizational changes, primarily severance and other the most likely holding periods. As a result, the Company evaluated the recoverability of the benefits to terminated employees of the Company and its affiliates, aggregated approximately carrying amounts of the centers, determined that the carrying amounts were not recoverable $7.4 million in 1999. Also, in October 1999, the Company and its affiliates adopted early from future cash flows and recognized impairment losses. retirement programs in which employees who met certain criteria were eligible to participate. The net gains on operating properties in 1998 consisted primarily of gains on a hotel and The Company and its affiliates recognized expenses of approximately $4.0 million for costs industrial properties sold by an affiliate ($15.9 million) and a gain on the sale of an interest in associated with this program for employees who accepted early retirement prior to December a portfolio of retail centers ($2.7 million), partially offset by a loss on the disposal of a retail 31, 1999. There were no similar costs in 2000. In 1998, corporate operating expenses included center ($7.7 million). a loss on a treasury lock contract ($6.4 million) that no longer qualified for hedge accounting because the Company determined that the related anticipated financing transaction would not Extraordinary Items, Net of Related Income Tax Benefits: The extraordinary gains occur under the terms and timing originally expected. resulting from extinguishments or substantial modification of terms of debt were $2.2 million Corporate interest costs were $21.3 million in 2000, $8.8 million in 1999 and $6.5 million and $3.7 million in 2000 and 1998, respectively, before deferred income tax benefits of in 1998. Interest of $19.0 million, $14.3 million, and $14.9 million was capitalized in 2000, $.7 million in 1998. In 1999, the Company recognized net extraordinary losses from 1999 and 1998, respectively, on funds invested in development projects. The increases in extinguishment of debt of $5.9 million. corporate interest costs in 2000 and 1999 were attributable primarily to interest expense incurred on the 8% Senior Debt issued in May 1999, partially offset by lower interest expense Net Earnings: The Company had net earnings of $170.5 million in 2000, $135.3 million on the convertible subordinated debentures that were repaid using a portion of the proceeds in 1999 and $104.9 million in 1998. The Company’s operating income (after depreciation from the issuance of the 8% Senior Debt. In addition, allocations of interest costs to other and amortization) was $135.1 million in 2000, $100.0 million in 1999 and $111.3 million segments were lower in 2000 as a result of certain dispositions of property interests. in 1998. The changes in operating income were due primarily to the factors discussed above. Net earnings for each year was also affected by unusual and/or nonrecurring items discussed above in corporate, gains (losses) on operating properties, net, and extraordinary items, net of related income tax benefits.

52 Funds from Operations: The Company uses a supplemental performance measure along Financial condition, liquidity and capital resources with net earnings to report its operating results. This measure is referred to as Funds from Management believes that the Company’s liquidity and capital resources are adequate for Operations (“FFO”). The Company defines FFO as net earnings (computed in accordance near-term and longer-term requirements. Shareholders’ equity decreased to $630.5 million with accounting principles generally accepted in the United States of America), excluding at December 31, 2000 from $638.6 million at December 31, 1999. The decrease was due cumulative effects of changes in accounting principles, extraordinary items, gains (losses) on primarily to net repurchases of common stock and the payment of regular quarterly dividends operating properties, depreciation and amortization and deferred income taxes. Additionally, on the common and Preferred stocks, partially offset by net earnings. equity in earnings of unconsolidated real estate ventures and minority interests are adjusted to The Company had cash and cash equivalents and investments in marketable securities reflect FFO on the same basis. The definition used by the Company to compute FFO excludes totaling $37.6 million and $50.8 million at December 31, 2000 and 1999, respectively. deferred taxes, which causes it to differ from the definition adopted by the National Associa- Net cash provided by operating activities was $252.9 million, $192.5 million and tion of Real Estate Investment Trusts (NAREIT). Additionally, the Company’s definition may $259.3 million in 2000, 1999 and 1998, respectively. The changes in net cash provided by differ from those used by other REITs. During 2000, the Company revised its definition of operating activities were due primarily to the factors discussed above in the analysis of FFO to include other provisions and losses, net; and FFO for prior periods has been presented operating results. The level of net cash provided by operating activities is also affected by the in conformity with this revision. FFO is not a measure of operating results or cash flows from timing of receipt of rents and other revenues (including proceeds of land sales financed by the operating activities as defined by accounting principles generally accepted in the United States Company prior to 1998) and distributions from unconsolidated real estate ventures and the of America. Additionally, FFO is not necessarily indicative of cash available to fund cash needs payment of operating and interest expenses. The level of cash provided by operating distribu- and should not be considered as an alternative to cash flows as a measure of liquidity. However, tions from unconsolidated real estate ventures is affected by the timing of receipt of their land the Company believes that FFO provides relevant information about its operations and is sales and other revenues, payment of operating and interest expenses and other sources and necessary, along with net earnings, for an understanding of its operating results. uses of cash. The Company excludes deferred income taxes from FFO because payments of income The Company relies primarily on fixed rate nonrecourse loans from private institutional taxes have not been significant. Current Federal and state income taxes are included as reduc- lenders to finance its operating properties and expects that it will continue to do so in the tions of FFO. FFO is reconciled to net earnings in the Five Year Summary of Funds from future. The Company has also made use of the public equity and debt markets to meet its Operations and Net Earnings on page 58. capital resource needs principally to repay or refinance corporate and project-related debt and FFO was $252.6 million in 2000, $223.4 million in 1999 and $198.2 million in 1998. to provide funds for project development and acquisition costs and other corporate purposes. The increases in FFO in 2000 and 1999 were due primarily to the property acquisitions, In December 2000, the Company obtained a credit facility with a group of lenders that expansions and dispositions referred to above, higher occupancy levels, higher rents from provides for unsecured borrowings of up to $375 million. This credit facility replaced a re-leased space, and higher levels of land sales. The reasons for significant changes in revenues previous credit facility obtained in 1998. The facility is available until December 2003 and is and expenses comprising FFO by segment are discussed above. subject to a one-year renewal option. The Company is continually evaluating sources of capital and management believes that there are satisfactory sources available for all requirements without necessitating sales of operating properties. However, selective dispositions of properties are expected to provide capital resources in 2001 and may also provide them in subsequent years.

53 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Most of the Company’s debt consists of mortgages collateralized by operating properties. exceed $200 million in 2001. A substantial portion of these expenditures relates to new retail Scheduled principal payments on property debt were $55.5 million, $49.6 million and properties or retail center expansions and it is expected that a majority of these costs will be $49.4 million in 2000, 1999 and 1998, respectively. financed by debt, including property-specific construction loans and/or credit facility borrow- The annual maturities of debt for the next five years are as follows (in millions): ings. The Company will also develop certain of these projects in joint ventures, with the other

Scheduled Balloon venturers funding a portion of development costs. Payments Payments Total Cash expenditures for acquisitions of interests in properties were $22.2 million in 2000 2001 $ 51 $ 176 $ 227 and $882.4 million in 1998. The acquisitions in 2000 consisted primarily of commercial 2002 55 199 254 properties adjacent to a development project and department store sites. The acquisitions in 2003 59 448 507 1998, consisting of the interests in the retail centers, office and industrial buildings and the 2004 61 273 334 land assets referred to above, had combined purchase prices of approximately $1.58 billion, 2005 60 330 390 including approximately $492 million of mortgage debt secured by the acquired properties $286 $1,426 $1,712 and assumed by the Company. The Company issued $100 million of common stock, $108 million of mortgage and other debt and $882.4 million of cash to the sellers as payment. The balloon payments due in 2001 consist of a $104 million construction loan on an The cash payments were funded by approximately $234 million of additional mortgage debt expanded retail center, a $52 million mortgage on a retail center and $20 million of medium- secured by the acquired properties, proceeds of $91 million from the sale of three of the term notes. The Company expects to refinance the construction loan and mortgage at or acquired office buildings and by borrowings under bridge loan and credit facilities. before their scheduled maturity dates. The Company expects to repay the medium-term notes In addition to its unrestricted cash and cash equivalents and investments in marketable from proceeds from property refinancings, credit facility borrowings or other available securities, the Company has other sources of capital. Availability under the Company’s credit corporate funds. facility was $177 million at December 31, 2000. This credit facility can be used for various Cash expenditures for properties in development and improvements to existing properties purposes, including land and project development costs, property acquisitions, liquidity and funded by debt were $192.3 million, $213.2 million and $281.1 million in 2000, 1999 and other corporate needs. In addition, under an effective registration statement, the Company 1998, respectively. These expenditures relate primarily to project development activity, prima- may issue additional medium-term notes of up to $29.7 million. Also, the Company has a rily new retail properties, retail property expansions and development of new office and indus- shelf registration statement for the sale of up to an aggregate of approximately $2.25 billion trial properties in Las Vegas. A substantial portion of the costs of properties in development is (based on the public offering price) of common stock, Preferred stock and debt securities. At financed with construction or similar loans and/or credit facility borrowings. In some cases, December 31, 2000, the Company had issued approximately $358 million of common stock long-term fixed rate debt financing is arranged concurrently with the construction financing and debt securities under the shelf registration statement, with a remaining availability of or before completion of construction. approximately $1.9 billion. Improvements to existing properties funded by debt consist primarily of costs of renova- Proceeds from sales of operating properties and other investments were $221.9 million in tion and remerchandising programs and other tenant improvement costs. The Company’s 2000, $255.2 million in 1999 and $130.1 million in 1998. Proceeds from these transactions share of these costs has been financed primarily from proceeds of refinancings of the related in 2000 consisted primarily of cash distributions from ventures to which the Company properties or other properties and credit facility borrowings. contributed ownership interests in a retail center, industrial buildings in two business parks Due to the size and number of projects in development, the Company anticipates that the and a property under development. The Company also received minority interests in the level of capital expenditures for new development and improvements to existing properties will ventures. Proceeds from these transactions in 1999 consisted primarily of cash received from

54 the sales of two retail centers, one of which the Company purchased in 1998 with the intent In January 2001, the Company issued 137,928 shares of common stock to The Rouse to sell. Proceeds from these transactions in 1998 consisted primarily of cash received from the Company Incentive Compensation Statutory Trust (the Trust) in exchange for the Trust’s sales of certain acquired office properties. shares of the voting stock of the majority financial interest ventures. The shares acquired by At December 31, 2000, the Company is holding an industrial property for sale and may the Company constitute all of the Trust’s interests in the ventures. As a result of this transac- sell interests in other operating properties as opportunities arise. The Company and its affili- tion, the Company owns 100% of the voting common stock of the ventures. ates also consider certain investment and other land assets as significant sources of cash flows The agreements relating to various loans impose limitations on the Company. The most and may decide to accelerate sales in order to provide cash for other purposes, including the restrictive of these limit the levels and types of debt the Company and its affiliates may incur funding of development activities. and require the Company and its affiliates to maintain specified minimum levels of debt Excluding scheduled principal payments, the net repayments of property debt were service coverage and net worth. The agreements also impose restrictions on the dividend $30.8 million in 2000, and consisted primarily of repayments associated with the sales of the payout ratio, and on sale, lease and certain other transactions, subject to various exclusions and properties securing the debt and repayments associated with the substantial modification of limitations. These restrictions have not limited the Company’s normal business activities and terms of certain loans. These repayments were partially offset by borrowings on construction are not expected to do so in the foreseeable future. loans on retail properties in development. Net proceeds of property debt were $108.7 million in 1999 and $303.3 million in 1998. The net proceeds in 1999 consisted primarily of borrow- Market risk information ings on construction loans and mortgages on properties in development. The net proceeds in The market risk associated with financial instruments and derivative financial and commodity 1998 consisted primarily of additional mortgage debt secured by acquired properties as instruments is the risk of loss from adverse changes in market prices or rates. The Company’s discussed above. market risk arises primarily from interest rate risk relating to variable rate borrowings used to Net proceeds from the issuance of other debt were $38.9 million in 2000 and $573.0 maintain liquidity (e.g., credit facility advances) or finance project development costs million in 1998. The net proceeds in 1998 consisted primarily of borrowings under bridge (e.g., construction loan advances). The Company’s interest rate risk management objective is loan and other credit facilities used to fund certain of the property acquisitions described to limit the impact of interest rate changes on earnings and cash flows. In order to achieve this above. Net repayments of other debt in 1999 were $116.9 million and consisted primarily of objective, the Company relies primarily on long-term, fixed rate nonrecourse loans from insti- the repayment of the convertible subordinated debentures and outstanding bridge loan tutional lenders to finance its operating properties. The Company also makes limited use of borrowings, partially offset by the issuance of the 8% Senior Debt. interest rate exchange agreements, including interest rate swaps and caps, to mitigate its As discussed above, the Company has approval to repurchase, subject to certain pricing interest rate risk on variable rate debt. The Company does not enter into interest rate exchange restrictions, up to $250 million of common stock. As of December 31, 2000, the Company agreements for speculative purposes and the fair value of these and other derivative financial had repurchased approximately 4.4 million shares under this program for approximately instruments is insignificant at December 31, 2000. $101 million, including purchases of approximately 2.8 million shares for approximately $66 million in 2000. The average per share repurchase price was $23.57 in 2000 and $21.88 in 1999. Other common stock purchased in 2000, 1999 and 1998 was subsequently issued pursuant to the Contingent Stock Agreement.

55 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s interest rate risk is monitored closely by management. The table below December 31, 2000. Information relating to debt maturities is based on expected matu- presents the annual maturities, weighted-average interest rates on outstanding debt at the rity dates which consider anticipated refinancing or other transactions and is summarized end of each year and fair values required to evaluate the expected cash flows of the as follows (dollars in millions): Company under debt and related agreements and its sensitivity to interest rate changes at

2001 2002 2003 2004 2005 Thereafter Total Fair Value Fixed rate debt $120 $119 $ 305 $ 277 $ 283 $1,322 $2,426 $ 2,437 Average interest rate 7.8% 7.8% 7.8% 7.8% 7.6% 7.6% 7.7%

Variable rate LIBOR debt $107 $135 $ 202 $ 57 $ 107 $ 12 $ 620 $ 620 Average interest rate 8.2% 8.0% 8.6% 8.6% 8.4% 8.4% 8.1%

At December 31, 2000, approximately $112.4 million of the Company’s variable rate As the table incorporates only those exposures that exist as of December 31, 2000, it debt relates to borrowings under project construction loans. The borrowings under does not consider exposures or positions which could arise after that date. As a result, the project construction loans are expected to be repaid from proceeds of long-term, fixed rate Company’s ultimate realized gain or loss with respect to interest rate fluctuations will loans in 2001 to 2002 when construction of the related projects is scheduled to be depend on the exposures that arise after December 31, 2000, the Company’s hedging completed. At December 31, 2000, the Company had interest rate cap agreements which strategies during that period and interest rates. effectively limit the average interest rate on $36 million of the variable rate LIBOR debt maturing in 2002 to 9.1% and the average interest rate on $5 million of the variable rate LIBOR debt maturing in 2010 to 8.7%.

56 New accounting standards not yet adopted Information relating to forward-looking statements In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Finan- This Annual Report to Shareholders of the Company includes forward-looking statements cial Accounting Standards No. 137 (Statement 137), an amendment to Statement of Finan- which reflect the Company’s current views with respect to future events and financial perform- cial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging ance. These forward-looking statements are subject to certain risks and uncertainties, including Activities,” (Statement 133), issued in June 1998. Statement 137 defers the adoption date of those identified below which could cause actual results to differ materially from historical Statement 133 for the Company to no later than January 1, 2001. In June 2000, the FASB results or those anticipated. The words “believe”, “expect”, “anticipate” and similar expressions issued Statement of Financial Accounting Standards No. 138, which provides additional guid- identify forward-looking statements. Readers are cautioned not to place undue reliance on ance with respect to and amends Statement 133. The Company’s use of derivative instruments these forward-looking statements, which speak only as of their dates. The Company under- has consisted primarily of interest rate swap and cap agreements related to specific debt financ- takes no obligation to publicly update or revise any forward-looking statements, whether as a ings. The Company will adopt Statement 133, as amended, effective January 1, 2001. Deriv- result of new information, future events or otherwise. The following are among the factors that ative instruments held by the Company at December 31, 2000 consisted of interest rate cap could cause actual results to differ materially from historical results or those anticipated: (1) agreements used to hedge interest rate risk associated with specific variable rate loans and an real estate investment trust risks; (2) real estate development and investment risks; (3) liquidity interest rate swap agreement. The cap agreements have been designated as hedges of specific of real estate investments; (4) dependence on rental income from real property; (5) effect of loans, and the fair values of derivative instruments were not significant at December 31, 2000. uninsured loss; (6) lack of geographical diversification; (7) possible environmental liabilities; Adoption of Statement 133, as amended, will result in a cumulative effect at January 1, 2001 (8) difficulties of compliance with Americans with Disabilities Act; (9) competition; (10) of a change in accounting for derivative instruments and hedging activities of approximately changes in the economic climate; and (11) changes in tax laws or regulations. For a more $.6 million ($.01 per share basic and diluted). detailed discussion of these and other factors, see Exhibit 99.2 of the Company’s Form 10-K for the fiscal year ended December 31, 2000. Impact of inflation The major portion of the Company’s operating properties, its retail centers, is substantially protected from declines in the purchasing power of the dollar. Retail leases generally provide for minimum rents plus percentage rents based on sales over a minimum base. In many cases, increases in tenant sales (whether due to increased unit sales or increased prices from demand or general inflation) will result in increased rental revenue to the Company. A substantial portion of the tenant leases (retail and office) also provide for other rents which reimburse the Company for certain of its operating expenses; consequently, increases in these costs do not have a significant impact on the Company’s operating results. The Company has a significant amount of fixed rate debt which, in a period of inflation, will result in a holding gain since debt will be paid off with dollars having less purchasing power.

57 THE ROUSE COMPANY AND SUBSIDIARIES FIVE YEAR SUMMARY OF FUNDS FROM OPERATIONS AND NET EARNINGS

Years ended December 31, (in thousands) 2000 1999 1998 1997 1996 Revenues: Retail centers: Minimum and percentage rents $ 368,810 $ 362,747 $336,158 $294,629 $ 277,007 Other rents and other revenues 262,204 263,849 250,252 232,118 255,556 631,014 626,596 586,410 526,747 532,563

Office and other: Minimum and percentage rents 167,476 159,644 116,209 110,329 87,027 Other rents and other revenues 49,280 46,252 46,729 57,957 59,168 216,756 205,896 162,938 168,286 146,195

Land sales operations 215,459 197,159 198,786 204,394 139,498 Corporate interest income 948 1,676 2,789 4,485 3,495 1,064,177 1,031,327 950,923 903,912 821,751

Operating expenses, exclusive of depreciation and amortization: Retail centers 283,858 286,852 277,903 265,281 267,835 Office and other 81,076 77,936 67,367 76,370 70,956 Land sales operations 148,679 146,097 150,749 155,199 108,523 Development 7,701 3,707 7,383 4,747 4,964 Corporate 17,130 28,234 22,841 14,442 (283) 538,444 542,826 526,243 516,039 451,995

Interest expense: Retail centers 184,254 184,276 165,786 138,785 145,622 Office and other 83,687 83,164 64,871 67,299 62,181 Land sales operations 2,941 3,151 4,201 4,287 1,658 Development — — — — 361 Corporate 2,273 (5,522) (8,405) (834) 12,800 273,155 265,069 226,453 209,537 222,622 Funds from Operations (2) $ 252,578 $ 223,432 $198,227 $178,336 $ 147,134

58 Years ended December 31, (in thousands) 2000 1999 1998 1997 1996 Funds from Operations by segment: Retail centers $162,902 $ 155,468 $142,721 $122,681 $119,106 Office and other 51,993 44,796 30,700 24,617 13,058 Land sales operations 63,839 47,911 43,836 44,908 29,317 Development (7,701) (3,707) (7,383) (4,747) (5,325) Corporate (18,455) (21,036) (11,647) (9,123) (9,022) Funds from Operations $252,578 $ 223,432 $198,227 $178,336 $147,134

Reconciliation to net earnings: Funds from Operations $252,578 $ 223,432 $198,227 $178,336 $147,134 Depreciation and amortization (90,307) (94,532) (77,660) (77,685) (75,041) Deferred income taxes applicable to operations — — — 124,203 (25,596) Certain current income taxes (3) — — — (4,929) — Gains (losses) on operating properties, net 33,150 41,173 (6,109) (22,426) (25,903) Depreciation and amortization, gains on operating properties and deferred income taxes of unconsolidated real estate ventures, net (27,136) (28,897) (9,282) (7,607) (2,708) Extraordinary gains (losses), net 2,200 (5,879) 4,355 (21,342) (1,453) Cumulative effect at January 1, 1998 of change in accounting for participating mortgages — — (4,629) — — Cumulative effect at October 1, 1997 of change in accounting for business process reengineering costs — — — (1,214) — Net earnings $170,485 $ 135,297 $104,902 $167,336 $ 16,433

Notes: (1) Operating and Funds from Operations (FFO) data included in this five-year summary are presented by segment. Consistent with the requirements of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” segment data are reported using the accounting policies followed by the Company for internal reporting to management. These policies are the same as those used for external reporting, except that real estate ventures in which the Company holds a majority financial interest but does not own a majority voting interest are reported on a consolidated basis rather than using the equity method. Additionally, real estate ventures in which the Company has joint interest and control and certain other minority interest ventures are accounted for using the proportionate share method rather than the equity method. The Company’s share of FFO of other unconsolidated minority interest ventures is included in revenues. These differences affect the revenues and expenses reported in the reconciliation of FFO to net earnings, however, they have no effect on the Company’s net earnings or FFO. (2) FFO is not a measure of operating results or cash flows from operating activities as defined by accounting principles generally accepted in the United States of America. Additionally, FFO is not necessarily indicative of cash available to fund cash needs, including the payment of dividends and should not be considered as an alternative to cash flows as a measure of liquidity. See the “Funds from Operations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 53 for further discussion of FFO. (3) FFO for 1997 excludes current income taxes arising from transactions completed by the Company in connection with its determination to elect to be taxed as a REIT.

59 THE ROUSE COMPANY, ITS SUBSIDIARIES AND AFFILIATES

Anthony W. Deering, Chairman of the Board M. Lucinda Motsko, Senior Assistant Sally S. Hebner, Director, Development Account Managers and Chief Executive Officer General Counsel and Capital Accounting Gale M. Burton Douglas A. McGregor, Vice Chairman and Daniel P. Kelliher, Senior Attorney Shelly L. Lara, Director, Land Development Frances R. Connelly Chief Operating Officer and Operations Accounting Gabrielle Koeppel, Senior Attorney Wendy G. Crawford Jeffrey H. Donahue, Executive Vice President Stephen M. Levin, Accounting Director Cynthia L. Stewart, Senior Attorney Jill D. Creps and Chief Financial Officer Deborah A. Maskell, Accounting Director Dodie Stewart Gaudry, Manager, Legal Operations R. Shereen Fuqua Jerome D. Smalley, Executive Vice President and Administration Deborah L. Mathews, Accounting Director and Director, Development Michael T. Mitcham Craig A. Mellendick, Director, Human Resources and Administrative Consolidated Accounting and Reporting Robert H. O’Brien Finance Division Services Division Lisa M. Schenk, Manager, Information Robert L. Quarles, Jr. Patricia Herald Dayton, Vice President and Treasurer Kathleen M. Hart, Vice President and Director, Systems Audit Marlene F. Weinberg, Vice President Andrew B. Bolton, III, Vice President Human Resources and Administrative Services Michelle M. Shaver, Accounting Director Anthony Mifsud, Vice President Debbie H. White, Associate Director, Winston L. Smith, Director, Business Systems Senior Area Leasing Managers David L. Tripp, Vice President and Director, Human Resources Administration Steven L. Balazs Investor Relations and Corporate Communications Pamela F. Feldman, Director, Employment Services M. Ellen Wickham, Director, Financial Analysis Andrew J. A. Chriss Timothy J. Lordan, Assistant Director, Investor Jon J. Yoder, Director, New Business Accounting Michael L. Podracky, Vice President Relations and Senior Financial Analyst Controllers Division Robert E. Rubenkonig, Jr., Associate Director, Melanie M. Lundquist, Vice President New Business Area Leasing Managers Corporate Communications and Corporate Controller Robert Minutoli, Senior Vice President Michael A. Khouri Elizabeth A. Hullinger, Vice President Holly G. Edington, Vice President and Eric E. Litz and Director, Taxes Operations Controller B. Owen Williams, Vice President and Director, Acquisitions Thomas Rindos Martin P. Lutsky, Director, Property Taxes Frederick A. Fochtman, Division Controller, Commercial Development Paul J. Schiffer David W. Lee, Assistant Director, Retail Leasing Tax Projections & Compliance Jack R. Greenberg, Vice President and Director, Jeffrey G. Sneddon Internal Audit and Management Services Robert D. Riedy, Senior Vice President and Julie M. Yungmann, Assistant Director, REIT Director, Retail Leasing and Acquisition Planning Monty C. Leonard, Vice President and Division Property Operations Thomas M. Fitzpatrick, Vice President and Controller, Land Accounting Duke S. Kassolis, Senior Vice President Joseph H. Schnitzer, Associate Director, Assistant Director, Retail Leasing Property Taxes Rodney W. Lewis, Director, Technology and Director, Property Operations R. Edwards Taylor, Vice President and Jody L. Clark, Vice President and Associate Gary M. Rivers, Vice President and Director, Assistant Director, Retail Leasing Legal Division Corporate Accounting Director, Property Operations Clarke B. Aburn, Vice President, Janice A. Fuchs, Vice President and Associate Gordon H. Glenn, Vice President, General Counsel Patricia J. Scarff, Director, Business Systems National Leasing Director, New Business and Secretary Management Director, Property Operations Philip A.V. Genovese, Vice President, John G. McLaughlin, Vice President and Richard E. Galen, Vice President and Deputy Cynthia N. Bond, Manager, Internal Audit Area Leasing Director General Counsel Associate Director, Property Operations Jeanette L. Daymude, Assistant Division Controller, William Y. Hecht, Vice President, Karen C. Weir, Vice President and Director, Kathleen E. Barry, Vice President and Associate Operating Properties National Leasing Director Retail Marketing General Counsel Randall A. Shields, Assistant Division Controller, James D. Lano, Vice President and Associate Operating Properties National Leasing Managers General Counsel Group Directors Gregory J. Thor, Director, Financial Accounting Michael L. Bench Donna M. Sills, Vice President and Associate and Reporting J. Patrick Done, Vice President Nick P. Dialynas General Counsel Michael S. Biemer, Director, Business F. Scott Ball, Vice President W. Wallace Lanahan, III, Vice President John W. Steele, III, Vice President and Associate Systems Analysis Paul C. Fickinger, Vice President Mary E. McFeeley General Counsel Derward A. Brooks, Accounting Director Mary Catherine Bryant Jeffrey C. Palkovitz, Associate General Counsel Patricia A. Campanile, Accounting Director Kimberle S. Menz, Vice President Nancy E. Everett, Senior Assistant General Counsel Robert E. Carroll, Director, Land Development Mark W. Polivka, Vice President E. Bernard Justis, Senior Assistant General Counsel and Operations Accounting Charles N. Quisenberry Arianne H. Monroe, Senior Assistant Janet F. Delaney, Director, Business Systems Analysis Catherine S. Redden General Counsel Matthew D. Dowling, Director, Joint Venture Accounting and Reporting

60 Senior Asset Managers Scot D. Vallee, Franklin Park, RPMI George H. Hayne, III, Senior Project Manager William R. Byrd, Senior Project Manager Wayne A. Christmann, Columbia Office and Retail Janell K. Vaughan, Bridgewater Commons Albert E. Edwards, Director, Environmental Compli- Charles D. Coleman, Senior Project Manager Brian G. Lade, Oakwood Center, Riverwalk Patrick J. Walsh, The Mall in Columbia ance and Development Director Gregory A. Goins, Senior Project Manager Raul D. Tercilla, Jr., , RPMI, Nancy W. Wieland, Paramus Park Dennis Miller, Development Director Clarence G. Jackson, Jr., Senior Project Manager Town and Country Center, RPMI Craig S. White, Harborplace and The Gallery Alvis H. Hagelis, Vice President and Director, William T. Rowe, Senior Project Manager Planning and Design, HRD Edward J. Vasconcellos, Jr., , Sandra M. Sadler, Director, Capital Management Moorestown Mall D. Dennis Dunn, Senior Design Manager Andrew C. Tilmont, Director, Laura Preston, Manager, Research Operations Administration Neil B. Lang, Senior Design Manager General Managers of Subsidiary Corporations George H. Fambro, Project Manager or Affiliates Eric C. Buckner, Associate Director, Paul L. Janyska, Project Manager Operations Administration Commercial and Office Development John A. Badagliacco, Arizona Center Frank M. Noto, Director, Landscaping Steven A. Crumrine, Director, Corporate Ruben A. Roca, Vice President and Director, William J. Baker, Jr., Oviedo Marketplace Security and Safety Retail Strategies Thomas H. Francis, Tenant Project Manager Amy S. Bellisano, Kurt R. Ivey, Associate Director, Retail Marketing Laurence A. Brocato, Vice President and Associate Elizabeth B. Angelella, Tenant Project Manager Division Director, Commercial Development Charles A. Breidenbach, Willowbrook, RPMI Gary A. Yanosick, Associate Director, Retail Jill Callahan, Tenant Project Manager Ronald D. Buhider, Collin Creek Marketing Michael J. Bryant, Vice President and Associate Dennis Gavelek, Tenant Project Manager Division Director, Commercial Development Charles P. Crerand, Owings Mills Cathy A. Case, Director, Retail Marketing, Harvey Harrigan, Manager, Project Management Marketplace Centers John R. Ragland, Vice President and Associate Kevin M. Davies, Randhurst, RPMI Division Director, Commercial Development Arleen Dalton, Director, Retail Marketing The Howard Hughes Corporation (THHC) Dennis E. Deehan, Echelon Mall Warren W. Wilson, Vice President and National Accounts Daniel C. Van Epp, President, THHC; Senior Vice Deanne D. Desjardin, , RPMI Director, New Business Katherine M. Standon, Director, National President of The Rouse Company, West Coast Mark S. Dunbar, Southland Center, RPMI Advertising and Events John A. Pattillo, Jr., Vice President Community Development and Director, Construction James M. Easley, Mall Elizabeth Barczak-Smith, Regional Manager, W. Stewart Gibbons, Executive Vice President, Ann M. Esposito, The ExecuCentre Retail Marketing Robert M. Byrne, Vice President, Summerlin, THHC, Vice President of Senior Development Director Martin D. Fortes, Perimeter Mall, RPMI Margaret M. Calvert, Regional Manager, The Rouse Company Rita G. Brandin, Vice President, Scott A. Freshwater, Fashion Show Retail Marketing Kevin T. Orrock, Executive Vice President Development Director and Treasurer, THHC, Vice President of Brian K. Gardiner, Mondawmin/Metro Plaza Susan E. Houck, Regional Manager, Retail Marketing Christopher B. Carlaw, Vice President, The Rouse Company Francis X. Gildea, Plymouth Meeting Development Director Erin M. McCarthy, Regional Manager, John T. Potts, Senior Vice President, Summerlin Linda B. Hardin, Augusta Mall Retail Marketing Gregory E. Zimmerman, Vice President, Development, THHC Paul G. Harnett, Development Director Michelle B. Washington, Regional Manager, Venetta F. Appleyard, Vice President, Financial Larry K. Howard, The Gallery at Market East Retail Marketing Frank R. Beck, Development Director Services and Assistant Treasurer, THHC Scott M. Howe, Mall St. Matthews David L. Shapiro, Senior Area Leasing Manager Charles W. Blenkhorn II, Development Director John F. Cahlan, Vice President and Associate General Counsel, THHC Michael Kelleher, Faneuil Hall Marketplace Joseph Eugenio, Sr., Director, Maintenance Services Ann E. Walters-Pope, Development Director Judy S. Cebulko, Vice President, Property John E. Kiddy, The H. Kimberly Potember, Development Director Terrence L. Wieber, Assistant Director, Management, THHC Luanne E. Lenberg, Governor’s Square, RPMI Administration Roy D. Vice, Development Director Jeffery S. Geen, Vice President and Associate Clinton L. Lewis, III, , RPMI Mark G. Thompson, Assistant Director, Research General Counsel, THHC Community Development Michael J. McCue, Westdale, RPMI Ardis S. Bond, Senior Manager, Research Gregory J. Tobias, Assistant General Counsel, THHC Jill M. Noack, , RPMI Alton J. Scavo, Senior Vice President, Director, Stanley C. Burgess, Associate Director, Design Community Development and General Manager Charles A. Kubat, Vice President, Planning Timothy P. Radigan, of Columbia Thomas S. Brudzinski, Associate Director, Design and Design, THHC Allyson Reed, Pioneer Place David E. Forester, Vice President and Senior C. Lawrence Whitman, Associate Director, Design Thomas G. Warden, Vice President, Polly L. Richman, Exton Square Development Director Stephen E. Popisil, Director, Creative Content Community Relations, THHC Christopher S. Schardt, Towson Town Center Edward A. Ely, Vice President and Director, Robin A. Rossetti, Director, Tenant Services Pamela J. Schenck, Park Meadows Business Land Sales and Marketing Catherine K. Swartz, Development Manager RPMI—Rouse Property Management, Inc. Michelle J. Schiffer, Joseph H. Necker, Jr., Vice President and Director, Frank W. Ziegler, Development Manager HRD—The Howard Research and Engineering Development Corporation Bryan K. Touchstone, Fashion Place James B. Brickell, Senior Project Manager Robert A. Jenkins, Vice President and Director, THHC—The Howard Hughes Corporation Construction

61 PROJECTS OF THE ROUSE COMPANY

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

Augusta Mall, Augusta, GA 8/78 Rich’s; Macy’s; JCPenney; Sears; Dillard’s 1,066,000 317,000

The Shops at Arizona Center, Phoenix, AZ 11/90 — 230,000 230,000

Bayside Marketplace, Miami, FL 4/87 — 227,000 227,000

Beachwood Place, Cleveland, OH 8/78 Saks Fifth Avenue; Dillard’s; Nordstrom 914,000 350,000

Cherry Hill Mall, Cherry Hill, NJ 10/61 Strawbridge’s; Macy’s; JCPenney 1,283,000 534,000

The Mall in Columbia, Columbia, MD 8/71 Nordstrom; Hecht’s; JCPenney; Sears; Lord & Taylor 1,262,000 450,000

Echelon Mall, Voorhees, NJ 9/70 Strawbridge’s; JCPenney; Boscov’s; Sears (a) 1,140,000 429,000

Exton Square, Exton, PA 3/73 Strawbridge’s; Boscov’s; Sears; JCPenney 974,000 361,000

Faneuil Hall Marketplace, , MA 8/76 — 198,000 198,000

Fashion Place, Salt Lake City, UT 10/98 Dillard’s; Nordstrom; Sears 886,000 320,000

Fashion Show, Las Vegas, NV 6/96 Neiman Marcus; Saks Fifth Avenue; Macy’s; Dillard’s; Robinsons-May 773,000 213,000

The Gallery at Harborplace, Baltimore, MD 9/87 — 139,000 139,000

The Gallery at Market East, Philadelphia, PA 8/77 Strawbridge’s; JCPenney; Kmart 1,009,000 193,000

Governor’s Square, Tallahassee, FL 8/79 Burdines; Dillard’s; Sears; JCPenney 1,043,000 339,000

Harborplace, Baltimore, MD 7/80 — 143,000 143,000

Hulen Mall, Ft. Worth, TX 8/77 Foley’s; Montgomery Ward (b); Dillard’s 938,000 327,000

The Jacksonville Landing, Jacksonville, FL 6/87 — 125,000 125,000

Mall St. Matthews, Louisville, KY 3/62 Dillard’s (two stores); JCPenney; Lord & Taylor 1,110,000 361,000

Mondawmin Mall / Metro Plaza, Baltimore, MD 1/78; 12/82 — 442,000 442,000

Moorestown Mall, Moorestown, NJ 12/97 Strawbridge’s; Boscov’s; Sears; Lord & Taylor 1,033,000 339,000

Oakwood Center, Gretna, LA 10/82 Sears; Dillard’s; JCPenney; Mervyn’s 947,000 349,000

Oviedo Marketplace, Orlando, FL 3/98 Dillard’s; Regal Cinema; Burdines; Sears 955,000 335,000

Owings Mills, Baltimore, MD 7/86 Macy’s; Hecht’s; JCPenney; Lord & Taylor; Sears (a); General Cinema 17 1,223,000 410,000

Paramus Park, Paramus, NJ 3/74 Macy’s; Sears 779,000 312,000

Pioneer Place, Portland OR 3/90 Saks Fifth Avenue 374,000 314,000

Plymouth Meeting, Plymouth Meeting, PA 2/66 Strawbridge’s; Boscov’s; General Cinema 12 822,000 365,000

Riverwalk, New Orleans, LA 8/86 — 197,000 197,000

South Street Seaport, New York, NY 7/83 — 261,000 261,000

Tampa Bay Center, Tampa, FL 8/76 Sears 569,000 325,000

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

Village of Cross Keys, Baltimore, MD 9/65 — 81,000 81,000

Westdale Mall, Cedar Rapids, IA 10/98 JCPenney; Von Maur; Younkers; Montgomery Ward (a) 912,000 383,000

Westlake Center, Seattle, WA 10/88 — 111,000 111,000

White Marsh, Baltimore, MD 8/81 Macy’s; JCPenney; Hecht’s; Sears; Lord & Taylor 1,156,000 367,000

Woodbridge Center, Woodbridge, NJ 3/71 Lord & Taylor; Sears; Stern’s (d); Fortunoff; JCPenney 1,546,000 560,000

Village Centers in Columbia, MD (12) — — 1,223,000 1,223,000

Total Consolidated Centers in Operation 26,091,000 11,630,000

Proportionate Share Retail Centers (note 2)

Bridgewater Commons, Bridgewater, NJ 12/98 Lord & Taylor; Macy’s; Stern’s (c) 888,000 385,000

Collin Creek, Plano, TX 9/95 Dillard’s; Foley’s; JCPenney; Sears; Mervyn’s California 1,121,000 331,000

Franklin Park, Toledo, OH 7/71 Marshall Field’s; JCPenney; Jacobson’s; Dillard’s; JCPenney Home Store 1,109,000 323,000

Highland Mall, Austin, TX 8/71 Dillard’s (two stores); Foley’s; JCPenney; 1,086,000 368,000

Park Meadows, Littleton, CO 7/98 Dillard’s; Foley’s; Lord & Taylor; Nordstrom; JCPenney 1,557,000 606,000

Perimeter Mall, Atlanta, GA 8/71 Rich’s; JCPenney; Macy’s; Nordstrom 1,482,000 502,000

Towson Town Center, Baltimore, MD 10/98 Hecht’s; Nordstrom 968,000 538,000

Willowbrook, Wayne, NJ 9/69 Lord & Taylor; Macy’s; Stern’s (c); Sears 1,528,000 500,000

Village Centers in Summerlin, NV (2) — — 238,000 238,000

Total Proportionate Share Centers in Operation 9,977,000 3,791,000

Other/Managed Retail Centers

Randhurst, Mt. Prospect, IL 7/81 Carson, Pirie, Scott; JCPenney (a); Montgomery Ward (a); Kohl’s 1,404,000 681,000

Ridgedale Center, Minneapolis, MN 1/89 Dayton’s Women’s; JCPenney; Sears; Dayton’s Men & Home 1,036,000 343,000

Southland Center, Taylor, MI 1/89 Hudson’s; Mervyn’s California; JCPenney 905,000 322,000

Staten Island Mall, Staten Island, NY 11/80 Sears; Macy’s; JCPenney 1,229,000 622,000

Town & Country Center, Miami, FL 2/88 Sears; Marshalls 597,000 344,000

Total Other/Managed Centers in Operation 5,171,000 2,312,000

Total Retail Centers in Operation 41,239,000 17,733,000

Department Store Notes: (a) Department store closing announced subsequent to December 31, 2000. (b) This store will be converted to Sears. (c) These stores will be converted to Bloomingdale’s. (d) This store will be converted to Macy’s.

63 PROJECTS OF THE ROUSE COMPANY

Office and Other Properties in Operation

Consolidated Office and Other Properties (note 1) Location Square Feet Arizona Center Phoenix, AZ Garden Office Pavilion 33,000 One Arizona Center Office Tower 330,000 Two Arizona Center Office Tower 449,000 The Gallery at Harborplace Baltimore, MD Office Tower 265,000 Renaissance Hotel 622 rooms Pioneer Place Portland, OR Office Tower 283,000 The Village of Cross Keys Baltimore, MD Village Square Offices 69,000 Quadrangle Offices 109,000 Seattle, WA Office Tower 342,000

Columbia Office (12 buildings) Columbia, MD 1,135,000

Columbia Industrial (6 buildings) Columbia, MD 306,000

Hughes Center (15 buildings) Las Vegas, NV 1,180,000

Summerlin Commercial (25 buildings) Summerlin, NV 927,000

Owings Mills Town Center (4 buildings) Baltimore, MD 732,000

Inglewood Business Center (7 buildings) Prince George’s County, MD 538,000

Hunt Valley Business Center (21 buildings) Baltimore, MD 1,556,000

Rutherford Business Center (20 buildings) Baltimore, MD 783,000

Other Office Projects (5 buildings) Various 305,000

Total Consolidated Office and Other Properties 9,342,000

Note 1—Includes projects wholly owned by subsidiaries of the Company, projects in which the Company has a majority 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. Note 2—Includes projects owned by joint ventures or partnerships in which the Company’s interest is at least 30%.

64 Project Square Footage Projects Under Construction or in Development Department Stores/Anchor Tenants Total Tenant Space

The Mall in Columbia Expansion, Columbia, MD L.L. Bean and restaurants 52,000 52,000 Fashion Show Expansion, Las Vegas, NV Neiman Marcus; Nordstrom; Saks Fifth Avenue; Macy’s; 1,000,000 290,000 Robinsons-May; Lord & Taylor; Dillard’s; Bloomingdale’s Home

Bridgewater Commons Expansion, Bridgewater, NJ Bloomingdale’s, Bloomingdale’s Home 300,000 150,000

Fashion Place Expansion, Salt Lake City, UT Nordstrom; Dillard’s; Meier & Frank 525,000 130,000

Summerlin Center, Summerlin, NV Robinsons-May; Lord & Taylor; Dillard’s; Macy’s 1,050,000 350,000

The Shops at La Cantera, San Antonio, TX Neiman Marcus; Nordstrom; Dillard’s; Foley’s 1,300,000 400,000

Maple Grove Center, Minneapolis, MN Dayton’s; Nordstrom 1,000,000 350,000

Kendall Town Center, Miami, FL Dillard’s; Sears; Burdines 1,200,000 350,000

Office 100,000 100,000

Center Point Plaza, Summerlin, NV Community Center 143,000 143,000

Village of Merrick Park, Coral Gables, FL Neiman Marcus; Nordstrom 795,000 435,000

Office 110,000 110,000

Corporate Pointe, Summerlin, NV Office/Industrial 110,000 110,000

80 Columbia Corporate Center, Columbia, MD Office 150,000 150,000

Total Projects Under Construction or in Development 7,835,000 3,120,000

65 THE ROUSE COMPANY

Board of Directors Directors Emeriti Annual Meeting David H. Benson, (a) George M. Brady The Annual Meeting of Shareholders of The Chairman, Charter European Trust plc Former Chairman of The National Corporation Rouse Company will be held on Thursday, for Housing Partnerships May 10, 2001 at 11:00 a.m. at the Company’s Jeremiah E. Casey, (b,c) headquarters in Columbia, Maryland. Retired Chairman of the Board of Albert Keidel, Jr. First Maryland Bancorp Retired Senior Vice President of the Company Annual Report Form 10-K Platt W. Davis, III, (a) Samuel E. Neel Readers who wish a copy of Form Partner, Vinson & Elkins, L.L.P. President of the Neel Foundation; 10-K as filed with the Securities and Exchange Retired attorney at law Commission should contact the Director of Anthony W. Deering, (b) Investor Relations, The Rouse Company, Chairman of the Board of Directors and Chief Thomas Schweizer Columbia, Maryland 21044, or use the corporate Executive Officer of the Company Real estate investor web site to link to EDGAR filings with the Rohit M. Desai, (b,c) Securities and Exchange Commission. Chairman of the Board and President of Desai Capital Management, Incorporated Dividend Reinvestment Mathias J. DeVito, (b) Shareholders of record who wish information on Chairman Emeritus of the Board of Directors The Rouse Company Dividend Reinvestment of the Company and Stock Purchase Plan should write to: The Bank of New York Juanita T. James, (b,c) Dividend Reinvestment Vice President and General Manager of P.O. Box 1958 Pitney Bowes Professional Services, Inc. Newark, New Jersey 07101-1958 Thomas J. McHugh, (b,c) Chairman of the Board and Chief Executive Registrar and Transfer Agent Officer of McHugh Associates, Inc. The Bank of New York 101 Barclay Street Hanne M. Merriman, (a) New York, New York 10286 Retail Business Consultant, Hanne 1-800-524-4458 Merriman Associates Roger W. Schipke, (a) Counsel Private investor; Former Chairman of the Boards Piper Marbury Rudnick & Wolfe L.L.P. and Chief Executive Officer of The Sunbeam Baltimore, Maryland 21209 Corporation and The Ryland Group, Inc. Auditor Gerard J. M. Vlak (a) KPMG LLP Former member Executive Board Rabobank Baltimore, Maryland 21202 Nederland; Former General Manager North America Amsterdam-Rotterdam Bank Corporate Headquarters The Rouse Company Columbia, Maryland 21044 (a) Audit Committee Photo on page 13 by W. Scott Mitchell 410/992-6000 (b) Executive Committee from the book The New Hacienda, (c) Personnel Committee published by Gibbs-Smith, Salt Lake City Web Site http://www.therousecompany.com

66 OPERATIONS COMMITTEE

MICHAEL J. BRYANT JODY L. CLARK PATRICIA H. DAYTON ANTHONY W. DEERING JEFFREY H. DONAHUE THOMAS M. FITZPATRICK Vice President and Vice President and Vice President and Treasurer Chairman of the Board and Executive Vice President and Vice President and Assistant Associate Division Director, Associate Division Director, Chief Executive Officer Chief Financial Officer Director, Retail Leasing Commercial Development Property Operations

JANICE A. FUCHS GORDON H. GLENN KATHLEEN M. HART DUKE S. KASSOLIS MELANIE M. LUNDQUIST DOUGLAS A. MCGREGOR Vice President and Vice President, General Counsel Vice President and Director, Senior Vice President and Vice President and Vice Chairman and Associate Division Director, and Secretary Human Resources and Director, Property Operations Corporate Controller Chief Operating Officer Property Operations Administrative Services

JOHN G. MCLAUGHLIN ROBERT MINUTOLI ROBERT D. REIDY ALTON J. SCAVO JEROME D. SMALLEY DANIEL C. VAN EPP Vice President and Senior Vice President and Senior Vice President and Senior Vice President Executive Vice President Senior Vice President Associate Division Director, Director, New Business Director, Retail Leasing and Director, Community and Director, Development and Director, West Coast Property Operations Development and General Community Development Manager of Columbia THE ROUSE COMPANY COLUMBIA, MARYLAND 21044